Daimler Truck Holding AG
XETRA:DTG
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Daimler Truck Holding AG
Earnings Call Analysis
Q2-2024 Analysis
Daimler Truck Holding AG
In the second quarter, Daimler Truck experienced a decline in revenue by 4%, amounting to EUR 13.3 billion. Group EBIT dropped by 22% to EUR 1.08 billion, and adjusted EBIT declined by 18% to EUR 1.17 billion. This quarter was significantly impacted by a one-time non-cash impairment of EUR 120 million due to the weak market performance of their joint venture in China, BFDA .
Free cash flow from the Industrial Business was negative at EUR 285 million, mainly due to timing effects, high net investments, and increased tax payments. However, the first half of the fiscal year saw an improvement of around 70% in free cash flow compared to the previous year, largely due to large cash inflows in Q1 from earlier-than-usual prepayments and customer mix . Net industrial liquidity at the end of Q2 stood at EUR 7.2 billion .
The Industrial Business segment saw a 6% decrease in revenue year-over-year, now at EUR 12.5 billion. Adjusted EBIT also dropped by 15% from EUR 1.4 billion to EUR 1.2 billion. Trucks North America had a stellar quarter, with EBIT adjusted to EUR 875 million, resulting in a record return on sales of 14.5%. However, Mercedes-Benz saw its adjusted EBIT fall dramatically from EUR 554 million to EUR 299 million due to declining volumes, particularly in Germany .
The persistent weak market in China resulted in the full impairment of their joint venture, BFDA. This, coupled with weak market performance in Asia, particularly Indonesia, dragged down the overall results. In Europe, declining sales volumes in core markets like Germany further put pressure on margins. Despite improved net pricing and functional cost control, these negative effects were substantial .
Trucks North America had an impressive quarter with a record return on sales adjusted of 14.5%, driven by better sales mix and improved aftersales business. This was despite inflation-related costs and a supplier issue that was well-managed to meet delivery timelines .
Daimler Truck bolstered its zero-emission vehicle portfolio by selling 1,461 battery-electric trucks and buses in the first half of 2024, more than double the number sold during the same period last year. Orders for zero-emission vehicles also rose by almost 80%. The long-haul zero-emission truck, the eActros 600, completed extensive testing and exceeded expectations .
Given the challenges in the Asian and European markets, Daimler Truck has updated its full-year guidance. They now expect revenues between EUR 53 billion and EUR 55 billion and a significant decrease in both EBIT and adjusted EBIT. Specifically, they anticipate unit sales between 460,000 and 480,000 units, with revenue ranging from EUR 50 billion to EUR 52 billion. Adjusted return on sales is expected to be between 8% and 9.5% .
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Good morning, ladies and gentlemen. This is Christian Herrmann speaking. On behalf of Daimler Truck, I'd like to welcome you on both telephone and the Internet to our Q2 results global conference call. We are very happy to have with us today Martin Daum, our CEO; and Eva Scherer, our CFO. Martin and Eva will begin with an introduction directly followed by a Q&A session. We expect the presentation can be found on the Daimler Truck IR website. At our request, this conference will be recorded. The replay of the conference call will also be available as an on-demand audio webcast in the Investor Relations section of the Daimler Truck website.
I would like to remind you that this telephone conference is governed by the safe harbor wording you will find in our published [ recent ] documents.
Please note our presentation contains forward-looking statements that reflect management's current views with respect to future events. Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made.
With this, now I would like to hand over to you, Martin.
Yes. Thank you, Christian [Technical Difficulty] sorry, my fault. So first of all, thank you, Christian. And let's ji- jump right into our business topics of the past quarter. As always, let's start with an overview of our key figures and the key topics.
Our second quarter was impacted by a onetime noncash impairment of EUR 120 million of our Chinese joint venture, BFDA, driven by the persistent weak market development in China. Excluding this impact, adjusted EBIT for the Industrial Business would have amounted to EUR 1.3 billion with an adjusted return on sales of 10.2%. As reported, we achieved an adjusted group EBIT of EUR 1.2 billion and adjusted return on sales in our Industrial Business of 9.3%, earnings per share of EUR 0.93, the free cash flow in our Industrial Business of EUR [Technical Difficulty] million and a net Industrial liquidity of EUR 7.2 billion.
The main takeaway is that, excluding the impairment impact, in total, we had another solid second quarter with a double-digit performance. Therefore, I would like to thank our entire Daimler Truck team for their contribution. It is really important to me to do this very frequently in our earnings calls because the dedication of all our colleagues around the globe is the basis of everything we do. What does that mean? Another solid quarter, double-digit margins on [ the ] Industrial Business level, record margins with 14.5% at Trucks North America and 9.1% at Daimler Buses, for both an excellent performance, a solid performance in a very weak market in Trucks Asia, adjusted return on sales of 4.7%, excluding the full impact of the Chinese business. To make it clear, 6.5% return on sales from Mercedes Truck is nothing which satisfies us. We are fully aware that we as a team now have to work even harder to close the gap to our competition.
Let me now briefly highlight the various -- a few specific developments in the past quarter. We will discuss some of them in more detail later on.
Our unit sales decreased by 15% compared to prior year, at Mercedes-Benz by more than 20% with Brazil up by more than 50% and Europe down by around 40% and at Trucks Asia by close to 30%. Especially in Asia, we saw also in Q2 weak markets in Indonesia leading to this very low sales level. Incoming orders and order backlog [indiscernible] while sales of zero-emission vehicles continued to grow. Our long-haul zero-emission truck, eActros 600, completed the most extensive testing tour we ever did at Mercedes-Benz Trucks. 2 vehicles drove more than 13,000 kilometers each across all of Europe. Test results show that our eActros 600 exceeds our expectations in terms of range and energy consumption. We have even successfully tested megawatt charging with this truck. This enables us to boost the charging levels of the batteries from 20% to 80% in just 30 minutes.
Regarding [ hydrogen power ] drives, we have now reached an advanced development stage. Just last week, we started initial customer trials of our fuel cell trucks with 5 customers for testing in everyday operation. We unveiled the first autonomous battery-electric Freightliner eCascadia to explore the potential [Technical Difficulty] when these technologies come together. Our joint venture, Greenlane, announced its first charging corridor for electric commercial vehicles between Los Angeles and Las Vegas. Our new diesel Actros now can be ordered since April and will go into production in December. It features our new ProCabin, which not only looks nice and futuristic, but is, above all, very aerodynamic and enables fuel savings of 3%.
We announced that we intend to form a joint venture with The Volvo Group to jointly develop a software-defined vehicle platform. Our goal is to accelerate the digital transformation and to unlock its potential regarding driver comfort, safety and productivity.
The rating agency Standard & Poor's Global Ratings has raised its long-term rating for Daimler Truck from BBB-plus to A-minus, which underlines the financial strength of our company.
I now want to give a quick update on key market developments in the second quarter. In North America, demand in the Heavy Duty segment has normalized. Year-to-date, the Class 8 market amounted to 145,000 units. This is a decrease by 22,000 units compared to last year, but still a solid level. Our market share remains on a strong level of 40.3%. We continue to remain the undisputed market leader.
Going forward, my message from last quarter is still valid. We remain committed to go from strong to stronger in North America. For example, we are not yet done with taking full advantage of our all-new Western Star vocational trucks.
In Europe, demand has weakened as well. By end of June, demand in the Heavy Duty market came to 174,000 units. This is decreased by 1,500 units compared to last year. Our market share amounted to 18.5%.
When we move to our unit sales and order intake, our numbers for Q2 in total are below Q2 last year. As in Q1, the development is very different across our segments. At Truck Asia, unit sales are well below prior year by 29%, similar to Q1. As mentioned, many of the core markets of Trucks Asia continue to show a significant decline. This is especially true of Indonesia. And as a market leader there, this weakness hits us particularly hard. However, orders increased at Trucks Asia by 4%, so market demand is stabilizing.
At Mercedes-Benz, unit sales are well below prior year by 22% with Europe down by around 40%. In North America, sales are down as well by only -- but only by 5%. Incoming orders are down by 11%. Our new vocational strategy is paying off.
Vocational vehicles are making up for a large part of the reduced on-highway volume. I also want to point out that the absolute volume level in North America is still very solid, if not to say very good.
At Daimler Buses, the business continues to grow with an increase in sales by 7.5% and an even stronger increase in orders by 17%. The comeback of bus continues.
Now let's look at our progress in zero-emission vehicles. Here, I'm happy to report that the development remains as positive as in the last quarters. In the first half of 2024, we sold 1,461 battery-electric trucks and buses, more than twice as many as in the first half of last year. Orders for our zero-emission vehicles increased significantly as well by almost 80% compared to last year.
What remains positive and encouraging as well is the great feedback we get for our zero-emission vehicles. This is particularly true for our new Actros e600 (sic) [ eActros 600 ], our first zero-emission truck for the European long-haul segment. Series production of this truck will start in November this year.
Another great example is our Fuso eCanter, a light truck that we first launched back in 2017. Today, we sell it in more than 100 variants and in more than 40 countries around the globe.
In total, our product portfolio already compri- comprises 10 different battery-electric product lines. Our zero-emission vehicles, therefore, are clearly ready. However, it is also true that the absolute numbers are still low. We will not get tired to point out the missing charging infrastructure more and more is becoming the crucial [ road plug ] on the path to sustainable transportation. We therefore continue to help kick-start things with respect to infrastructure, also together with partners and policymakers. At Daimler Truck, we remain fully committed to decarbonization and to keep leading this way.
With that, I hand over to you, Ev- Eva, for a deep dive into our financials.
Thank you, Martin, and hello, everyone. As you are aware, we already pre-released the results for the second quarter on July 16, and I will now go through some more details on our Q2 financial performance.
On group level, revenue in the second quarter decreased by 4% to EUR 13.3 billion. Group EBIT decreased by 22% to EUR 1.08 billion, and group EBIT adjusted declined by 18% to EUR 1.17 billion. The adjusted items from M&A amounted to slightly less than EUR 100 million. As in previous quarters, they were still mainly related to the spin-off.
Free cash flow for the Industrial Business was at minus EUR 285 million. The main reasons for this negative free cash flow were, firstly, a reversal of the timing effects that drove the strong free cash flow in the first quarter, namely the earlier collection of receivables driven by customer mix and earlier than usual received prepayments. Secondly, a specific issue with a supplier shifted North American truck deliveries to the end of the second quarter, which caused a temporary increase of working capital by around EUR 150 million. In the meantime, the cash has been collected and the working capital has been reduced accordingly. Thirdly, high net investments driven by transformational projects; and lastly, high tax payments, as usual, in Q2. This negative cash flow result in Q2 balances out with the respective high cash flow in Q1. And for the first half of fiscal year '24, we see an improvement of free cash flow versus prior year of around 70%, or EUR 379 million, mainly due to the dividend payment in Q2 of EUR 1.5 billion as well as the continuing share buyback. Net industrial liquidity at the end of Q2 stood at EUR 7.2 billion, which is around EUR 2.2 billion lower than the level at the end of this year's first quarter.
Second quarter EBIT adjusted for the group declined from EUR 1.4 billion 1 year ago to EUR 1.2 billion now. As Martin mentioned, this includes a onetime noncash impact of EUR 120 million related to the full impairment of our Chinese joint venture, BFDA, in the Trucks Asia segment. Positive contributions came from improved net pricing as well as a favorable [ functional ] cost development driven by lower accruals for incentives and share-based compensation and temporarily lower IT costs. Lower volumes, the impairment loss and the negative industrial performance driven mainly by variable overhead costs could not be compensated by the aforementioned positive effects. With minus EUR 53 million, Financial Services also had a negative impact on EBIT.
With regard to the EBIT adjustments, negative M&A cost effects of EUR 91 million were mainly related to IT costs from the spin-off.
Year-over-year, Q2 revenue of the Industrial Business declined from EUR 13.2 billion by 6% to EUR 12.5 billion. EBIT adjusted of the Industrial business saw a decline of 15% from EUR 1.4 billion to EUR 1.2 billion with return on sales adjusted decreasing from 10.3% to 9.3%. Mercedes-Benz and Trucks Asia, including the impact of the BFDA impairment, year-over-year burdened the Industrial Business adjusted EBIT by EUR 245 million and EUR 172 million, respectively, whereas Trucks North America and Daimler Buses had each a positive contribution with EUR 92 million and EUR 83 million. Excluding the onetime impact of the impairment of our joint venture in China, return on sales adjusted for the Industrial Business would amount to 10.2%.
Looking at the segments, Trucks North America [ created ] a strong EBIT adjusted of EUR 875 million, resulting in a record return on sales adjusted of 14.5%. Both KPIs improved year-over-year as well as quarter-over-quarter. The team dealt extraordinarily well with a supplier issue relating to mirrors and managed to deliver all units as planned. Hence, unit sales in Q2 declined only by 5% compared to last year's second quarter, supported by strong growth of our Western Star vocational truck sales.
Year-over-year, continuous pricing enforcement, a positive sales mix, as well as an improved aftersales business were the main positive EBIT contributors. Negative effects came from inflation-related cost increases. Overall, an outstanding quarter for Trucks North America.
Our vocational strategy is paying off. We are reducing the dependency on the on-highway [ cycles ]. We continue to translate our market leadership into profitability.
EBIT adjusted at Mercedes-Benz declined from EUR 554 million to EUR 299 million, resulting in a decline of return on sales adjusted from 9.8% to 6.5% in the recent second quarter. Clearly, this result does not meet our expectations. Volumes came down more than expected with sales in Germany declining by approximately 50%, which was partially compensated by increases in Latin America. This led to significantly lower production volumes at our world plant compared to our forecast.
While the team has already done a lot to improve the cost structure, it has become clear that we require additional measures to optimize our cost base for both fixed and variable costs to better handle the down-cycle. Year-over-year, the biggest burden to quarter 2 EBIT was volume and market mix. While our sales volume only declined slightly, we faced significant shifts away from our core Central European markets and Germany in particular. We expect these headwinds to continue for the rest of the year. This results in a negative mix effect since the relative weight of less-profitable markets increases.
Another significant burden to our profitability was underutilization and production. The team has adjusted production capacity already over the last few months, and we will implement additional measures to adjust capacity and, accordingly, our cost base as of September. Pricing and service business remains strong in Europe but could not compensate the aforementioned negative effects. Foreign exchange, material costs, selling and G&A expenses each had a slight positive contribution. We benefited from a onetime release of warranty provisions related to a legacy quality issue.
Our restructuring efforts in Brazil are paying off and contributing positively to EBIT. We are, therefore, well-positioned to benefit from the market recovery. However, the positive development in Brazil does not compensate for the challenges in the European business.
At Trucks Asia, EBIT adjusted came in with minus EUR 82 million and a negative return on sales adjusted of 5.8%. Similar to Q1, in Q2, volumes were down 29% year-over-year, driven by the still-weak Asian and surrounding markets, particularly in Indonesia. As disclosed, with the pre-released Q2 results 2 weeks ago, the persistent weak market development in China caused us to fully impair the equity book value of our joint venture, Beijing Foton Daimler Automotive, or BFDA. We are reviewing the market perspectives together with our joint venture partner. Potential further financial impacts cannot be fully assessed at this point in time.
The noncash onetime impairment of EUR 120 million, combined with the low sales volume and unfavorable foreign exchange effects, led to the negative Trucks Asia results. Positive effects from an improved net pricing, good after-sales development and a favorable development of functional costs could not offset these headwinds. Without the BFDA impairment, the adjusted return on sales of Trucks Asia would have been 2.7%. Excluding the full impact of the China business, the Trucks Asia margin would have been around 4.7%, which reflects the improved resilience in this weak market environment.
Once again, Daimler Buses delivered a strong result with an increase of EBIT adjusted from EUR 33 million in last year's second quarter to EUR 150 million this year. Return on sales adjusted increased from 3.4% to a record Q2 of 9.1%. The main positive impacts on EBIT came from higher volume, a better mix due to increased coach sales, improved net pricing and positive foreign exchange development. Higher manufacturing costs, mainly caused by inflation-related effects in Turkey, had a negative year-over-year EBIT impact, but were more than compensated by the aforementioned positive effects.
Let's move on to our Financial Services business. New business increased by 19% compared to last year's Q2, resulting from significantly higher penetration rates driven by North America and the ramp-up markets in Europe, especially Germany and France. EBIT adjusted significantly decreased year-over-year from EUR 65 million to EUR 12 million and return on equity adjusted decreased to 1.8%. The driver for this decline is cost of risk, which increased substantially compared to previous year's quarter due to the risk of higher credit losses in the Americas, especially due to the U.S. freight recession and the default of one big customer. Additionally, the return on equity was impacted negatively by the first tranche of the additional equity injection required to support our rating.
In contrast to the first quarter of this year, cash generation in Q2 was driven by a negative effect from working capital of EUR 229 million, mainly coming from Trucks North America, where the mentioned supplier issue led to a negative cash effect of around EUR 150 million, mainly from temporarily higher inventories and receivables. The earlier collection of receivables in this year's first quarter, driven by customer mix and earlier-than-usual received prepayments, had also a negative cash effect on Q2 from timing.
Net investments in PP&E and intangible assets amounted to EUR 402 million. This resulted in a cash flow before interest and taxes of the Industrial Business of EUR 274 million for the second quarter.
Cash taxes amounted to minus EUR 612 million, leading to a free cash flow of the Industrial Business, without adjustments for M&A transactions and restructuring measures, of minus EUR 285 million. Adjusted free cash flow of the Industrial Business amounted to minus EUR 184 million. As mentioned before, the free cash flow in the second quarter balances out with respective strong cash flow performance in Q1 of EUR 1.2 billion, resulting in a year-to-date free cash flow of EUR 928 million, an increase of around 70%, or EUR 379 million, versus last year. After accounting for the dividend payment of EUR 1.5 billion and the effects from the continuing share buyback program, Industrial net liquidity remains at a high level, standing at EUR 7.2 billion at the end of the second quarter.
Before I move on to our outlook, let me remind you that our outlook is subject especially to further macroeconomic and geopolitical developments. Our market assumptions for the full year 2024 are unchanged. We still anticipate a range of 280,000 to 320,000 units for the Heavy Duty market in North America, a decrease of minus 3% to minus 16% versus 2023. We still see the overall Heavy truck market in Europe in a range of 260,000 to 300,000 units, translating into a decrease versus 2023 of minus 12% to minus 24%, but with Central European markets and especially Germany being over-proportionately affected.
Based on the Q2 results and increased headwinds in Central European and Asian markets, we are updating our full year guidance. Let me start with the updates on group level. Driven by lower volumes in Asia and Europe, we now expect revenues between EUR 53 million and EUR 55 billion. For EBIT, we now expect a significant decrease, and for EBIT adjusted, a slight decrease. We have defined a slight decrease for adjusted EBIT as a decrease between 15% and 5%.
On Industrial Business level, we update the guidance for the following KPIs. We now expect unit sales between 460,000 and 480,000 units with resulting revenue between EUR 50 billion and EUR 52 billion. The adjusted return on sales is expected between 8% and 9.5%, including the EUR 120 million impact from the BFDA impairment. We now expect free cash flow of the Industrial Business on prior year level.
Our underlying segment guidance is as follows. For Trucks North America, we now expect an adjusted return on sales for the full year at the top end of the guidance range. For the second half of the year, we expect similar volumes but with a less favorable sales channel and product mix. Hence, we expect Q2 -- hence, we expect Q3 margin on a similar le- similar level as Q1.
For Mercedes-Benz, unit sales are now expected between 120,000 and 135,000 units. As outlined last quarter, we expect pricing to remain stable with, quarter-over-quarter, the carryover effects -- while quarter-over-quarter, the carryover effects will decrease, and it will take some time to define and implement further structural cost measures. Therefore, we expect adjusted return on sales for the full year between 6% and 8%. Our outlook for MB is based on the assumption that sales volumes in Central Europe will not further decrease. For Q3, we expect an adjusted margin towards the lower end of the updated guidance range.
For Trucks Asia, unit sales are now expected between 120,000 and 140,000 units with an adjusted return on sales between 1.5% and 3.5%, mainly driven by the impact of the noncash full impairment of BFDA in Q2. Due to the expected market recovery, for example in Indonesia and India, for Q3, we assume increasing unit sales resulting in a similar level as Q3 last year and an adjusted return on sales around the Q2 performance, excluding the China and equity result.
For Daimler Buses, we now expect an increased adjusted return on sales between 6.5% and 8.5%. For Q3, we expect another strong quarter with similar unit sales and an adjusted margin around the midpoint of the new guidance range.
For Financial Services, we expect reduced additions to the portfolio, between EUR 10 million and EUR 12 billion. We now expect a return on equity between 6% and 8%, mainly driven by 2 effects, higher cost of risk and the mentioned customer default in the second quarter, and approximately 90 basis points impact from the rating-related equity increase. Assuming no further increases in cost of risk, we expect an adjusted EBIT for Q3 on a similar level as in Q1.
With this, let me now hand over back to Martin for some closing remarks.
Yes. Thank you, Eva. Before our Q&A, let me wrap up with a few concluding remarks.
As you know, I'd like to do so by referring to our 2 strategic ambitions. That is to unlock our profit potential and to lead sustainable transportation.
Regarding sustainable transportation, we are convinced that our eActros 600 is the leading product for European long-haul transportation. It completed the most extensive testing in the history of Mercedes-Benz trucks. Customer feedback is great. Orders are in the 4-digit range, and [ serious ] production is only a few months away.
Regarding profitability, we ended the second quarter on a solid level, but this is a combination of 3 different stories. In North America, on track to make [ a ] record year in the Daimler Buses, we are on the way to exceed our previous expectations. Asia, excluding the BFDA impairment, shows, despite weak markets, a very good resilience.
However, we are not satisfied with the development in China and especially at Mercedes-Benz Trucks. As a consequence, we are working on additional measures to further optimize our cost base in Europe, both for fixed and variable costs.
Because I want to make one thing very clear, at Daimler Truck, we have embarked to unlock our full profit potential, and we remain 100% committed. We do not waiver, not one bit. On the contrary, we will further intensify our efforts, and that explicitly includes the willingness to make difficult decisions.
With this, we are now looking forward to your questions.
Thank you very much, Martin and Eva. Ladies and gentlemen, you may ask your questions now. The operator will identify the questioner by name, but please also introduce yourself and the organization you are representing. A few practical points -- please ask your question in English. And as a matter of fairness, please limit the amount of questions to a maximum of really 2. Now, before we start, the operator will explain the procedure.
Thank you very much. Ladies and gentlemen, we will begin the question-and-answer session. The first question is from Nicolai Kempf from Deutsche Bank.
Nicolai Kempf here from Deutsche Bank. My first one would be actually on Mercedes trucks. You have mentioned that you will implement some more measures, both on the fixed cost side and variable cost side. Can you highlight what those measures are and how much should they yield in terms of improvements? That's my first question.
Nicolai, thank you for your question. I mean, the key is certainly to adjust to the lower production volumes, which, as I alluded, especially for the European business, significantly lower, and it continues in the second half. That means we might not be able to avoid short-term work in German [indiscernible]. So that will be one. We have, on the other side [indiscernible] that more of the variable costs that will be variable. So we have to work here in our factories and started already the respective programs to cut those costs further down. It is necessary to keep with the lower volume that guidance which I just gave. And therefore, there are some really tough months in summer ahead of us in the factories in Germany.
And Nicolai, maybe just to answer your question regarding the impact that would bring, we cannot quantify it at this time. Overall, what we can say is, obviously, we're looking at it from a short and midterm perspective. From a short-term perspective, that means the second half of the year. And there, obviously, we are also taking measures such as spending stops, hiring freezes in order to increase profitability as much as possible for the second half of the year. And as Martin explained, we are about to implement short-term work as of September. Those were the measures that I was referring to that we were planning to basically reduce capacity and bring down the cost base pretty quickly. And then obviously, on a midterm basis, we need some more time to really define and implement more structural measures. And you can understand that we cannot share more at this point in time. But once we are ready to share our plan and the impacts of this, we will, of course, update you as soon as possible.
Okay. Great. And maybe just my second one would be on the visibility. We do appreciate the guidance on the third quarter, but it turned out to [ be behind ] second quarter, the soft guidance was maybe a bit misleading. What improves the visibility that, this time, the kind of soft guidance we have on next quarter would be more reliable than the last one?
Nicolai, that's always a problem with transparency and as more detail you guide. We live in a very volatile and [ fluctual ] world where a lot of things can happen. We try to do it as much as -- and accurate as possible.
I would say the second quarter, we had certainly a lot of hiccups in the production. I can tell you the mirror situation, for example, in the United States, I don't know at what point of time I was sure that we were able to manage that. There was no walk in the park at all for many people involved from the supplier side, but mainly on our side, in our factories in close contact with our customers who get a late but delayed delivery of the trucks. Those things are always part of the normal business. We always -- since the start of our company, we are always trying to be a very transparent company to you on the analyst side. And transparency sometimes has the downside that, if unexpected things happen, then you get surprised. I tell you, we will do everything to make the third qua- and therefore, we are confident with our third quarter numbers, that they will come as they come. It is a huge commitment to everyone in our company to fight for that outcome. So it helps from that side. So yes, I'm very confident that we don't give you any numbers which we have then to correct. And if you go back, how many times we, in the last 2.5 years, had to correct numbers? I would say the hits far, far, far outlast the misses. And I have all the confidence that the third quarter is on the hitting side and not on the miss side.
Our next question is from Miguel Borrega from BNP Paribas.
I've got one on Mercedes-Benz and another one on North America. So the first one on Mercedes-Benz, can you give us a little bit more color on the reasons behind the margin weakness in Q2? You mentioned a very negative mix effect from lower sales volumes in Germany, for example. Was there also an element of extra costs involved? And I ask because, obviously, overall, your deliveries were sequentially flat. And I assume the deliveries were booked 1 or 2 quarters ago. So just want to understand a little bit more the bridge of Mercedes-Benz into Q2 and if you expect anything different in Q3 and Q4? And related to that, how should we think about 2025? I know it's still early, but you can -- can you maybe comment on the progress of the previous fixed cost reduction plan? I believe that was independent of Truck market conditions and to be delivered by next year. Do you still think you can deliver on the 10% margin for Mercedes-Benz?
I'll try to give you as much detail as possible. I mean, first of all, you talked about extra costs that -- whether actual costs were involved in quarter 2 to lead to the profitability of 6.5%. No, there was no major special impact on extra cost. It was really related to mix and to the significant decline in Germany and then a higher sales volume coming from Latin America which could not compensate, from a margin perspective, that shortfall, in particular in Germany. And what you could really see was that under-absorption effect. I mentioned that we had to significantly reduce our production capacities in our German plant, and that really did have a very negative effect on our margin.
When we come to fixed costs, I mean, I made it very clear that we are not satisfied with the result and that we have to do more in order to streamline our cost base, and we will do that in order to also prove more resiliency. What we have done, when you look at our fixed cost program for Mercedes-Benz, we have reduced, since 2019, about 10% of fixed costs. However, that was eaten up then by spin-off-related costs, mainly on the IT side, which is why, overall, on a profitability perspective, it is not helping us right now to the degree that we would have hoped for or expected.
When it comes to 2025, I think, when you look at the overall fixed costs that we had achieved last year, where we were at minus 6% versus 2019, I can tell you that achieving the 15% decrease versus 2019 in next year is more than challenging. I will give you an update how we will look at resiliency and efficiency programs in November with our Q3 disclosure, and then you will get an update of that with some more details. But it is challenging.
About profitability and return on sales expectations for 2025 for Mercedes-Benz, I really cannot comment yet because we're in the middle of our planning for next year, and we have not finalized that. So it is really too early to comment.
And then on Daimler Trucks North America, obviously, the market remains resilient. You mentioned order intake in the market is okay. I presume no price deterioration either. And as a result, you had a record margin in Q2. So what is the reason for the lower implied margin in the second half? You mentioned Q3 a little bit lower sequentially. Aren't you already sold out for the year? Is there any cost step-up we should be aware, or price mix effect? So what explains the second half year margin much lower than, for example, in Q2?
First of all, I would debate whether it's significantly lower. It's slightly lower in the second half than the first half, and that on an extremely high level. The main reason for that is nothing extraordinary. It's just, I would say, accidental product mix. We have a very good visibility of our order backlog. We are very precise in knowing what we earn with each truck by customer, by market size. We'll have, in the second half, a higher mix of medium-duty trucks, which, as you might know, carry the Cummins engine and not the Mercedes engine. That takes -- it's not bad business, but it takes away some percentage margin points. We have, for example, a higher Mexico mix. Mexico is growing very hot this year. We have pushed -- and I would say this is more the accidental on how you schedule your trucks, how the orders come in, who you want to satisfy first. So there is a higher mix of Mexican trucks. But this happens on an extremely high level and therefore is not decisive. We are not sold out for 2024. That is what I said already some calls ago. It's normalizing. Normalizing means you don't know, at the beginning of the year, whom you sell your trucks in November, December. But when I look at the current order intake, that looks really not problematic. The last couple of months compared in historic context have been really right at the midpoint of what we can expect in those months. We all know that June, July, August are the lowest order months, so nothing bad about that order intake. It will pick back up in September, October. So I'm here cautiously optimistic for the end of the year. And as I said, when we end at the top end of that guidance, that will be another record year for Daimler Trucks North America and on a solid pace. So yes.
The next question is from Michael Aspinall from Jefferies.
Michael Aspinall here from Jefferies. Just 2. We've got the order numbers for 2Q. I'm interested in what you're seeing on the front line with your sales force and customers at the moment. Are you seeing subdued activity across the regions? Or if you can give us some insight into what your sales force are seeing and talking about across the globe, that would be great.
I mean, Michael, that is, as always, on our -- in our big trucking world, a mixed picture. I'll start with the most positive one. That is on the Daimler Buses side. I tell you, this is going extremely [ hot ]. It pays off that we invested during the crisis a lot into our product. We have an absolute fantastic product lineup, starting with the city buses, continuing with e-buses and ending with coach buses. We're completely sold out for this year and sold out in many variants already [ big ] into 2025, where we think, how can we increase here and there some of the production. But we all know, in our industry, that has a long tail when it comes then to suppliers and everything else. So it's going really, really well. And it continues to be extremely strong. So [ possibly ] -- we don't do any 2025 forecast, but you see me very positive. Yes, I have to be careful not to do a 2025 forecast, but you see me positive. 2024, really good, we increased it. So bus, no problem.
North America, as I just alluded to Miguel's question, is going as we have expected, normalized markets, normal behavior. The fleet customers in 2025 even a little bit more reluctant to buy an order like we expected. But on the other side, the vocational market much hotter than expected, both on the heavy-duty side where we sell the Western Stars and on the medium-duty side where we sell Freightliner M2s with Cummins engines, much, much better. So overall, we are doing very well with a normal historical average order intake leading to a year with our guidance of the volume where we are really in one of the historical high -- still continued high years.
North America, the big question going forward will be, how will 2025 -- the fleet orders pan out? And we will know that in September, October. We just started the first negotiations and discussions, and we'll certainly inform you in our next quarterly call.
But when I look at the age mix of the fleets now after 2 years of a little bit delayed purchasing, I could see here rather pent-up demand going forward. So yes.
Then Asia, big mix, Japan, India, Indonesia being the large markets with a lot of smaller markets, similarly a normal to rainy scenario. So the overall volume in the first half in Asia would fit to our rainy scenario, which, on the other side, then gives us with the -- the 4.7% was [ semi trucks ] without China, a relative good performance, which shows the profit potential we have when the markets pick up. We are positive and see it in first signs that the second half might be better and then 2025 goes up.
The biggest issue for me is Indonesia. There is no underlying problem in Indonesia overall from my experience with the volatility of truck markets. At one point of time, that shift to higher market should come in with our 50% -- close to 50% market share there. We will benefit big time from that. And similar thing is to India. We thought that this booms in 2024. It didn't. It's more normal. So no problem at all.
But -- so I would say here we are in a -- in -- it will come. Is it now in the second half already. We'll see and let you know when we see it, but we are not so much concerned.
Brazil, similarly strong markets, they have good order intake.
The 2 problem areas are -- and I leave Europe for last. The one is China, and then, therefore, the impairment, an absolute catastrophic market. You'll remember we had [1 million ], [ 1.2 million ]. So our long-term average is [ 800,000 ]. We had now a couple of years below 4- [ 500,000 ]. And in the truck [ theory ] that, after a couple of yea- low years, you should get the next upswing. We didn't. And 2024 is another bad year, below [ 500,000 ]. This comes on top that China moves away from diesel at the moment to natural gas because the country is flooded with cheap natural gas from Russia. And in our portfolio, we don't have a natural gas engine. That means our addressable market has an even bigger slump, and it seems that this real bad market continues for a longer term. And therefore, we decided to completely impair our investment there in China.
Now comes Europe. Europe is -- when I look at my own European story, first, I talked about normalization. We know that the first half will be better, but we were always positive that it will pick up in the second half and then it goes back to a good average year. 3 months ago, we had the feeling it does not pick up, so we don't have an overcompen- compensation in the second half. It goes at the speed of the first half. It didn't. Orders remained low. And so we have that depressed first half when it comes to volume going on into the second half. It's not picking up, and especially in markets where we are especially strong. I mentioned Germany, where our market share is about double of that what we have in the remainder of Europe. Therefore, it impacts us as a market leader in Germany especially hard.
In theory, at one point of time, you need trucks here for the market to rebound. When is this rebound coming? When -- if you would have asked me 6 months ago, I would have said in the third quarter. If you would have asked me 3 months ago, I would have said in the fourth quarter. We don't see it definitely for the third quarter. Therefore, we reduced our production significantly, which we haven't thought of. And we now think it continues throughout the entire 2024. And I'm really curious, when we look at our market research, how then it goes on for 2025. At one point of time, it has to rebound, but the question here is when.
If you look at the overall European market for the first half, unit sales sold, and look then at the industry's -- not just ours, but at the industry's prognosis for the full year, you see that the second half is planned by everyone here as a very low second half. And then what we have always to consider for the better first half is that we had in registrations -- we measure when we do market, we look at registrations. When we look here on the company level, we talk about production and sales, and there is a pipeline in between. And there had been, in the first quarter, a lot of trucks being registered that had been produced and sold last year. So that, I call it the pipeline effect. This pipeline gets now dryer and more empty when the market rebounds. We have just the opposite effect. We produce and sell more than we get registrations, but we are not yet at that point. So I would say we con- we have to -- we will see still the second half and the orders reflect that. And the orders doesn't indicate a rebound in 2024. And because we are on that normalized short order board where we have only a visibility of 3 to 4 months, I can't give any prediction of 2025 at that very moment. [indiscernible]
And a quick one on Financial Services. ROE is back kind of in the 2 [indiscernible]. Is that because you believe the cost of risk will improve in the second half, or was 2Q due to 1 large default?
We assume that the cost of risk will not further deteriorate in the second half. So that will ultimately be a positive effect then when we compare the first half of the year to the second half of the year. And I also mentioned in my speech that we had a negative effect due to the default of one customer in North America. And that, of course, also then happened in the first half of the year, not in the second one. So those are the 2 major impacts versus the improved -- [ totaling ] the improvement in Q3 and Q4.
The next question is from Klas Bergelind from Citi.
So my first one is on [indiscernible] spend. It's obviously mainly mix hurting the margin rather than price cost currently. You still have a good carryover there on pricing in the backlog. We are hearing of more price pressure in Europe though. How should we think, Martin, about pricing on new orders here moving into the backlog for delivery later in the year? And linked to the margin performance here, I think you said that you think you can do a 6% margin for the third quarter, at the low end of the full year range. That's only 50 basis points lower quarter-on-quarter. We have the summer shutdowns there in Europe, a big part of the business. I thought the margin would be down more quarter-on-quarter. I hear you're short-term working, but if you could develop a little bit there?
Pricing is still pos- positive, yes. We - and I tell everyone the pricing is -- was necessary, the price increases in the past, because we had higher costs in every single aspect of our business. So part of the pricing is and was necessary, not just for us but for everyone in the market, to cover those higher costs. So that is what we call inflation normally. And therefore, the good news is we can keep the price level [ moving through ] the year and we keep -- we can keep it. And when we see price pressure we talked about, and we see that in other markets, too, that one of the other player, we called it last year opportunistic -- what I called the opportunistic pricing game, which we never did. So I would say I see a stable price development.
For the orders we have in our order backlog definitely and for the orders to come, no reason to change our po- our strategy and policy.
So what was your second question? Oh, you said the 6% margin, it seems high for you. Thank you. I -- when you look at the volume, our production volume, I would say we are in the third quarter from the production and therefore, sales side, clearly, in the rainy scenario, especially in the European side. So I appreciate that you can see the 6% as a high margin. And yes, we are fighting for that. What helps certainly is that we have a very good Brazilian business. You know, that was one of the drags on our profitability in the past years. We completely turned that around. So we have the capability of turning it around.
And yes, in Europe, we have some homework to do. We have to slash some of the costs, as I said initially, on the variable cost side. And as Eva alluded, we will have a very tight -- we will run a very tight ship when it comes to additional spending everywhere else. And with this, I'm pretty confident that we go for that. Is this a walk in the park? Absolutely no. Does the organization like it? [Technical Difficulty] our organization is fully aware that, with our promises to the capital market, that is a number we have delivered -- to deliver in Q3.
No, I totally appreciate the turnaround in Brazil. That has been, yes, a great achievement. It was just the seasonality there with the business being very heavy on Europe into the third quarter. But okay, that's good to hear [ the ambition ].
My second and final one is on Trucks North America, on orders. You have the supply issue like others there in Mexico on the mirrors, and you had other bottlenecks earlier. Were the orders impacted by this at all? Or is it mainly on unit sales? Or do you see a much higher on-highway business now relative to occasional looking at orders? The reason for asking is that you say vocational is still very strong. And I'm wondering if Heavy Duty on-highway is weaker than you might have thought at the start of the quarter, looking at orders? The reason I ask as well is that, obviously, looking at the [ Finco ], the customer default there in North America looks a little bit concerning.
I would say not -- no surprise at all in the quarter. We -- first of all, the supply issue has nothing to do on the order side, yes. I mean the supply issue, it was an important part, which we got 100% from one supplier where the factory burned down, and there's the part without the [ partner ] mirrors, you can't register a truck. So it was -- from the very moment when we heard about the fire, the entire company very diligently looked for alternative sources. And here, our global sourcing strategy, our commonalities with other regions helped a lot. So we were able then with some delay in the quarter. And Eva showed it. It had some -- the only impact we had ultimately was on the cash flow because we got the trucks out but not the receivable in, which we have by now, yes. So that -- by June 30th, we had the EUR 160 million gap. By December 30th, it's back in our pockets. So -- but that had nothing to do with the order side, yes. So I would say, in total, we don't l- we didn't lose a single unit to that.
The order side itself is -- as I said earlier, when we went into the year, we know that, on the one side, the on-highway side will be difficult in 2024, not a problem for us. We have that great Western Star product that we finally have -- or can play in that market field. We initially produced Western Star tests in one plant. We started last year to open up -- to produce it in a second plant in our extensive network. That plant, meanwhile, is completely booked out by Western Star, something which I would say, even 3 years ago, I thought would have been a fairy tale. We are now opening up a third plant for Western Star, which gives us, next year, increased capability for that brand to even expand further. So that was a very, very positive development parallel. The medium-duty business saw it as well, especially what I call always the [ Baby 8 ] at the higher end of the Medium Duty, which goes into the vocational business. That went very well, better than we expected initially.
And then last but not least, that was then the negative, but we balanced it out, and so we are still on a good pace -- is that, on the on-highway side, the business goes down -- went down in both segments, one of the big fleets where we have very close contacts, where we know their capital plans. And as I said, I'm cautiously optimistic for next year because they have to replace a lot. And then it's what we call the smaller business, and those guys are mainly hit by what we call the freight recession. So we see that on the side of our Financial Services group as well as in our orders. But this is not the decisive segment, so overall, I would say, a very balanced situation in the United States for 2024.
The next question is from Jose Asumendi from JPMorgan.
Just one. And so, Martin and Eva, I'm just thinking about the margin in Europe, which I don't -- I know you don't disclose. But obviously, Germany was down substantially in the second quarter. I assume you're making money in Europe despite volumes down heavily. Excluding aftermarket, probably not. So I'm just thinking, is this not a very good opportunity to go back to the unions and show the numbers and show that you need to take some additional measures to make the business a bit more resilient? This is a wonderful opportunity, in such a downturn in Germany, to show the numbers, show the numbers and show the need to improve the profitability from here.
Thank you, Jose, for your question. I mean, as you rightfully stated, we're not disclosing the profitability on country or market level. But yes, we are making money in Germany and in Europe. I can confirm that. And rest assured that we will now define and implement structural measures. And I think it's also clear that we cannot share this now in detail before it's something that can be communicated on a broader basis. But as Martin has also said, we are not afraid to make tough decisions, and we will do that going forward. I think that's all that we can say at this point to this topic.
Looking forward to it.
The next question is from Daniela Costa from Goldman Sachs.
I just wanted to drill a bit into the U.S. commentary again just to make sure I understood. You clearly seem very confident on the outlook on the U.S., but we're hearing many of the fleets cutting CapEx. Yesterday, I think one of the biggest dealers talking about the market becoming more competitive there on pricing as well. Is it basically that you're fundamentally seeing yourselves just gaining significantly market share in the U.S.? Is that why you're confident in the outlook for the U.S? And then subpoints related to that, maybe how do you think about the [ prebuy ] for EPA now after the Chevron ruling?
And if I can put a final point on the U.S., what is -- if the market situation does change in the U.S., how quickly can you cut costs in the U.S. compared to Europe, for example?
The last one is very easy, much faster, yes, much faster and with systems in place, but [ on really ] the full production costs, very flexible, very fast, and we have shown that in the past several times. And I would say we rather increased here our capabilities than decreased, and I know they were very good in the past. So I'm not concerned about that.
First of all, look, I'm confident on the outlook. We will have -- this year, we guide 180,000 to 200,000 units in the U.S. And if you only take the midpoint of that, it's another very good year in sales for Daimler Trucks North America. So I would say this is -- I hope this shows the confidence.
And in my answers to Class for Miguel, it wa- you see that it's -- we play in every single segment of that market, and we have the flexibility to play. And in the past, for example, we -- like in 2023 when, the fleets are soaring, we had an opportunity to harvest on the strength of our Western Star product. This year, we [ haven't ]. Therefore, we'd rather look and see how can we be flexible even if the fleets come back, that we continue on that high level on the Western Star side. We have a very strong medium-duty product playing both on the lower-end side where the leasing companies are playing and on the higher [ Baby 8 ] side where vocation is playing.
So Daniela, I would say the benefit of the United States is this really brought extremely good product program without any gaps and holes, very modern, always leading. It's always us against someone in the market when a customer decides. And when you are in every single [ sign ] of a decision, you win -- you have a lot of chances to get the deals. And that's exactly what's happening.
Market share, at the end, I would wait until the end of the year. We have so many things, like you can -- you see our -- I know one competitor who has mirror problems [indiscernible] that competitor might gain a little bit. But our trucks that we pushed out in June are not yet registered as well. So there is a huge amount of Freightliner tax in the pipeline to hit the market in the third quarter. I have no clue how that shakes up at the end of the year, but I only know we will produce every single unit we can produce and the result will be satisfactory.
Driving [indiscernible]
And if I tell -- I completely forget about the EPA [27]. You know we were never -- we saw the impact of [ EPA 27 ] lower than other players in the market. And I continue with this. I -- but this is a topic, I would say, we could -- we should rather look after the elections and talk early next year about it. I don't see an immediate impact, definitely not on 2024 and definitely not on the first half of 2025.
The next question is from Virginia Montorsi from Bank of America.
A quick one on my side. Just on free cash flow, could you help us a little bit in terms of how to think about the second half, the reversal of the net working capital headwind? I know you provided a guide for the full year, but could we just have a bit more color on what to expect?
We're not obviously giving too much details on a quarterly basis. But as we said, for the full year, we expect to be on the same level as prior year. And that is what we are working towards. We are very much aware that cash flow focus is absolutely now for the second half of the year. While we will also focus on costs very much, we know that implementing structural cost measures will take a while, which is why we also now reduced our profitability guidance, but we will really diligently focus on free cash flow generation for the second half of the year. And then for the particular quarters Q3 and Q4, I would not be in a position to share any details now, but for the second half of the year, we have given clear guidance.
And if I may, allow me to add. Virginia, when you look at us in the past years, our business is always cash flow leaning more to the end of the year. Therefore, I'm pretty clear that, by half year this year, we are already ahead of last year. So that gives us a certain confidence that our guidance of cash flow on prior year level is despite the EBIT situation coming into play.
[Operator Instructions]
So this seems to be the last question. Ladies and gentlemen, thank you very much for your time, for the questions and for being with us today. Thank you, Martin and Eva, for taking the time and answering today. As always, IR remains at your disposal to answer any further questions you might have. We're looking forward to staying in touch with you. The media call will start in around 15 minutes. Have a great day, and stay healthy. Thank you, and goodbye.