Daimler Truck Holding AG
XETRA:DTG
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Daimler Truck Holding AG
Earnings Call Analysis
Q3-2024 Analysis
Daimler Truck Holding AG
In the third quarter of 2024, Daimler Truck reported a decline in revenues by 5% to €13.1 billion. The Group's adjusted EBIT fell by 12% to €1.19 billion, affected by lower unit sales and a weaker sales mix, particularly in North America. Despite these challenges, the company saw improved pricing and positive operational cost developments, but these were insufficient to offset the declines.【4:1†source】.
The regional performance varied significantly. North America showed resilience with a 4% increase in unit sales, largely driven by the successful deployment of vocational truck models, which surged by 48%. Meanwhile, Europe and the Asia market faced constraints, with Mercedes-Benz experiencing a 28% drop in sales, particularly in Central Europe, where the decrease exceeded 50%. In contrast, sales in Latin America increased by 34%, underpinning the region's growing importance.【4:1†source】.
The return on sales for the Industrial Business was reported at 9.3%, down from earlier figures. Specific pressures included production inefficiencies and underutilization in European facilities, exacerbated by supply chain issues due to external disruptions like Hurricane Helene. Daimler's EBIT adjusted in North America achieved a robust €725 million, reflecting a healthy return on sales of 12.1%. However, Mercedes-Benz's EBIT slumped to €283 million, highlighting the stark contrast in the operational environments across regions.【4:2†source】.
Looking ahead, Daimler Truck aims to stabilize its performance amid these challenges. The company anticipates achieving a return on sales adjusted towards the lower end of guidance for the fourth quarter of 2024, with further inventory reductions planned to offset production inefficiencies. For the upcoming quarters, the focus will also be on enhancing operational efficiency and leveraging the growing demand for electric vehicles, including the eActros 600, which began production recently.【4:5†source】.
Daimler Truck is actively investing in innovation, particularly in electric and software-defined vehicle platforms. Recent product launches, like the Mercedes-Benz Actros L showcasing a 3% reduction in fuel consumption, and the upcoming eActros 600 with a range of 500 km, reflect a strong commitment towards sustainability. The leadership's focus on developing 0-emission vehicles continues to grow, albeit constrained by insufficient charging infrastructure. The need for significant improvements in public charging facilities is evident, with only 600 stations available in Europe today compared to a projected need of 35,000 by 2030.【4:3†source】.
Amidst operational reviews, Daimler Truck is also reassessing its Financial Services segment, which faced challenges such as a 10% decrease in new contract volumes. A transformation program is underway to enhance operational efficiency, with an expectation of ongoing costs impacting results until 2026. However, the company remains confident in achieving a strong cash flow in Q4, supported by targeted inventory reductions【4:4†source】.
In summary, while Daimler Truck faces significant pressures from declining sales in key markets, it is strategically strengthening its position through innovation in electric vehicles, operational efficiency improvements, and addressing infrastructure challenges for sustainable transport. The diverse geographical performance emphasizes both challenges and opportunities that the company will leverage as it navigates the remainder of 2024 and beyond.
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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 Q3 results global conference call. We are very happy to have with us today, Karin Radstrom, our CEO; and Eva Scherer, our CFO. Karin and Eva will begin with an introduction directly followed by a Q&A session.
The respective presentation can be found on the Daimler Truck IR website. On 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'll find in our published results 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 Karin.
Thank you, Christian, and good morning also from my side. Thank you for joining our 2024 Q3 results call. It's a special one for me as it's my first as CEO of Daimler Truck. And I want to start by saying that I'm really proud and honored to take on this role.
To start with, I'd like to share my key priorities for my first 100 days. First of all, working on the Daimler Truck strategy going forward. We're working through the strategy together with the Board of Management. And of course, it's still work in progress, but I'm really happy to share some thoughts already today. Firstly, we want to shape the industry on its path to sustainability. And I believe it's a historic moment in time to be in this industry when we can take decisions which make low-carbon road transport a reality. Secondly, we want to be a true partner for our customers. We're not just a supplier. We help our customers of trucks or buses to improve their business. Thirdly, we want to have engaged and motivated employees. And of course, finally, we are very committed to becoming more robust and resilient and to bring our profitability to benchmark level. Of course, there's much more to consider, and we will come back and share more information throughout next year as we start to shape the strategy.
Secondly, I'm reviewing our business setup and market opportunities. We are in a strong position in all our key markets. We are #1 or #2 in more or less all of them. We have fantastic dealers and great customer relations. So I think there are a lot of strengths to build on. But I think we can also leverage synergies even more, and we can use our global portfolio even better.
Thirdly, important for me as a new CEO is, of course, to connect to the organization, the leadership, values, culture. I really want to get to know people on all levels, and I want to understand how empowered do our people feel. Can they bring their best selves to work? Can they grow in our company? And what can we do even better as leaders to foster a winning culture across the world?
And fourth and very much in my own interest, to finalize the process of the succession as the CEO of Mercedes-Benz Trucks. Together with the Supervisory Board of Daimler Truck, we are doing a thorough selection process, looking at suitable internal and external candidates. And this is a very important recruitment as this role is a major contributor to the success of Daimler Truck.
Now before we get to the quarter, I wanted to start by taking a closer look at Mercedes-Benz Trucks as the next part of my presentation. Since 2019, we've focused on 3 key self-help measures: growing service revenue; reducing fixed costs; and improving quality. And I think we've made significant strides. We've boosted our service revenue. We have cut fixed costs. We've turned around our business in Brazil, and we are currently achieving the best product quality in our history.
And thanks to all of this, in 2023, we achieved our 10% return on sales target in good market conditions, which was the highest return on sales MB Trucks has seen for many, many years. In the current market downturn, it has, however, become evident that we're not yet resilient enough. And I want to be clear, we have made significant improvements in 2019 and 2020, when we had similarly low unit sales as we do this year. Mercedes-Benz Trucks was operating at a loss. And this year, we are targeting, with that similar volume, a return on sales of 6% to 8%.
It's still not satisfying, and I think there is more potential. So we have implemented short-term cost-saving measures like short-term work, spending stops and a hiring freeze. And these measures provide some relief, but it's not yet enough. Our ambition is higher, and I'm convinced that Mercedes-Benz Trucks has far more potential. Therefore, we've launched a major push to strengthen our competitiveness. We're holistically reviewing our complete business setup, and we're fully committed to implementing the necessary changes to deliver financial performance sustainably. We'll give you a comprehensive update early next year. And with that, I would like to continue with the results overview of our third quarter 2024.
Overall, our Q3 group results aligned with expectations. Adjusted group EBIT came to EUR 1.2 billion. Adjusted return on sales in our Industrial Business is 9.3%, and earnings per share amount to EUR 0.77. An important driver has been our continued strong performance in North America. In the Mercedes-Benz segment, our business continues to operate in difficult market conditions in Europe, while in Brazil, our restructuring measures are positioning us well to capitalize on strong markets. The Asian business shows its improved resilience under still challenging market conditions, while our bus business continues its record-setting performance with another excellent quarter.
Free cash flow of the Industrial Business was negative with EUR 41 million, leading to a net industrial liquidity of EUR 6.5 billion. The decrease of the net industrial liquidity includes EUR 300 million spent in Q3 for the ongoing share buyback program. We continue to execute our capital allocation, necessary investment in future businesses while, at the same time, ensuring high cash returns to shareholders. Our full year cash flow guidance remains unchanged with cash generation expected to be strong in Q4 again.
Great products are the foundation of our success, and I'd like to highlight the most important new products. The Mercedes-Benz Actros L shows our commitment to improving diesel trucks. We've reduced fuel consumption of the Actros L by up to 3% with the new aerodynamic ProCabin. This reduces cost for our customers and CO2 emissions for the environment. Production will begin at the end of this month.
Similarly, the fifth generation of our Freightliner Cascadia builds on its legacy as North America's preferred on-highway truck. Here, too, we've significantly improved the aerodynamics and reduced fuel consumption by 1.9%. It's been almost 2 decades since the first Freightliner Cascadia was launched, and with over 1 million units sold, it's currently the most driven Class 8 truck in North America. Production will start in mid-2025.
Finally, the Mercedes-Benz eActros 600. Our battery electric truck for long haul is a game changer, which delivers a range of 500 kilometers on a single charge. And feedback has been really great. This truck was awarded the International Truck of the Year 2025 by industry experts, and we already have over 2,000 firm customer orders. We will start production at the end of this month.
There is another highlight I wanted to point out. Just 2 weeks ago, we signed a binding agreement with the Volvo Group to set up a 50-50 joint venture. Together, we want to build a software-defined vehicle platform and a dedicated truck operating system. This will be the basis on which we at Daimler Truck will then build specific and differentiating applications. At Daimler Trucks, we're convinced that the future of trucking is not only emission free. It's also software based. We want to unlock this potential of software, and we do so in a cost-efficient way. Future software systems will allow for more safety, comfort and efficiency than ever, and this will have huge benefits for our customers and will make our products more attractive than ever.
Let's now take a closer look at the third quarter and start with key market developments. In North America, demand in the heavy-duty segment remains at average levels of recent years. The average annual demand in the Class 8 market has been 300,000 units. For 2024, we expect demand between 280,000 and 320,000 units. Year-to-date, the Class 8 market is at 227,000 units, a 10% decrease from last year but still at a solid level. Our market share is 40.1%, reaffirming our clear market leadership.
In Europe, demand continues to be weak. Average demand in the heavy-duty segment has been about 300,000 units per year. This year, we expect demand in a range from 260,000 to 300,000 units. From January to September, the heavy-duty market demand reached 239,000 units, which is a 9% decrease from last year. Our market share is 17.7%, and our strategy is to maintain price discipline, and we are prioritizing profitability over volume.
Now let's move to unit sales and order intake. Overall, our Q3 2024 numbers are below prior year quarter. However, the picture varies across the segments. In North America, our numbers continue to grow. Sales increased by 4% and incoming orders grew by 4% as well. As mentioned in our Q2 call, this is due to 2 factors. First, overall demand in North America remains solid. And second, our vocational truck strategy is paying off. Vocational trucks help offset the decline in on-highway volumes. We have reduced our dependency on the on-highway market and therefore increased our resilience.
At Mercedes-Benz, unit sales dropped by 28%. The development is very different in the 2 main regions. Unit sales are down 41% in EMEA with our most important market, Germany, being down more than 50%. In Latin America, sales are up 34%. Incoming orders are lower than last year, but book-to-bill ratio has increased to 87%.
At Trucks Asia, unit sales are 15% lower than last year due to the ongoing weakness in key markets like India and Indonesia. However, orders increased by 6%, which is a positive sign for the future. At Daimler Buses, after a strong post-COVID recovery, volumes have stabilized.
Now let's look at our progress with 0-emission vehicles. Year-to-date, we sold 2,127 battery electric trucks and buses, roughly twice as many as in the first 9 months of 2023. Orders for our 0-emission vehicles increased as well, but only by 17% compared to last year. These numbers show that there is still significant growth. However, it's more modest than in the last years. We keep pushing ahead with the transition to sustainable transportation. As of today, we have already 10 emission-free truck and bus models in series production. And in just 2 weeks, we can also add our eActros 600 to our 0-emission portfolio.
So the right products are available, and they do get great customer feedback. It is, therefore, becoming more and more obvious that there is one serious challenge on the road towards sustainable transportation, and that's infrastructure. Today, there are only 600 public charging stations for battery-powered trucks in Europe. By 2030, 35,000 such charging stations will be needed. And this is not some artificial figure. It's derived from the CO2 targets set for our industry.
To achieve this 35,000, around 400 charging stations must be installed every month, and this is a number that Europe is nowhere near reaching today. I therefore want to take this opportunity to again appeal to all stakeholders involved. Let's work together to put a comprehensive green energy infrastructure in place. We are fully committed to provide initial momentum. We've launched pilot infrastructure projects together with partners, both in Europe and in the U.S. And we're in ongoing discussions with partners and with policymakers.
I would now like to hand over to Eva to have a more detailed look at our financials.
Thank you, Karin, and good morning, everyone. And now I'd like to share more details about our financial performance for the third quarter. On group level, Q3 revenues declined by 5% to EUR 13.1 billion. Group EBIT decreased by 28% to EUR 873 million, while group EBIT adjusted declined by 12% to EUR 1.19 billion. Free cash flow for the Industrial Business was negative at EUR 41 million. At the end of the third quarter, net industrial liquidity reached EUR 6.5 billion.
Key factors affecting EBIT included the decline in unit sales and a weaker sales mix driven by North America. I will give more details later. Additionally, we faced ongoing challenges due to underutilization and production in Europe as well as [ foreign ] exchange effects. On the positive side, we had contributions from better net pricing and favorable functional cost developments from reduction of accrual for variable compensation, reduced headquarter spending and lower seasonal R&D spending. But they were not enough to offset the negative EBIT impacts.
Financial Services negatively impacted group EBIT adjusted by EUR 6 million. Total adjusted items amounted to EUR 312 million, with EUR 23 million restructuring, mainly driven by the implementation of a transformation program of Financial Services in North America. EUR 108 million are related to M&A activities, primarily from the spin-off.
As communicated last quarter, we are assessing the future of our China operations. As discussions are still ongoing, we had to book a negative valuation adjustment for receivables in the amount of EUR 180 million in quarter 3, as already communicated via an ad hoc release last week. [ EUR 156 million ] are booked in the Mercedes-Benz segment and EUR 24 million in the Trucks Asia segment. This is a onetime extraordinary and noncash adjusted item.
Revenue for the Industrial Business in quarter 3 decreased by 7% year-over-year to EUR 12.3 billion. EBIT adjusted for the Industrial Business declined by 12% to EUR 1.1 billion with return on sales adjusted decreasing from 9.8% to 9.3%. Mercedes-Benz negatively impacted EBIT adjusted by EUR 253 million year-over-year with positive contributions from Trucks North America of EUR 14 million, Trucks Asia of EUR 37 million and Daimler Buses of EUR 71 million.
In the third quarter, Trucks North America delivered an EBIT adjusted of EUR 725 million and a return on sales adjusted of 12.1%, reflecting a stable performance compared to the same quarter last year. Another strong quarter despite ongoing challenges in the on-highway market.
While total unit sales in quarter 3 increased by 4% year-over-year, we increased unit sales of our vocational models by 48% year-over-year. Q3 clearly underscores the success of our vocational truck strategy, making us more independent from the on-highway business and thereby more resilient.
Pricing continued to contribute positively versus Q3 last year, and net price/cost was positive. Product mix was negative as we are seeing a significant shift from heavy-duty on-highway trucks to vocational medium-duty trucks. We encountered headwinds from the exchange rate in Mexico, one of our core markets, and the decrease in interest rates adversely affected the valuation of some of our provisions.
Hurricane Helene disrupted our operations, leading to closures of our Carolina plants for a few days in September and reduced production capacity due to closures and ongoing supply chain impacts in the following weeks. Therefore, we started quarter 4 with a shortfall of a few thousand units. While we are working hard to mitigate this effect until year-end, it might influence our North American unit sales in the fourth quarter. We expect the product mix effect to continue in the fourth quarter. And combined with the impact from the hurricane, quarter 4 will likely be at the lower end of the guidance corridor when it comes to return on sales. All in all, Daimler Truck North America is on track to deliver another very successful year despite the weakness in the on-highway segment.
At Mercedes-Benz, EBIT adjusted decreased year-over-year from EUR 535 million to EUR 283 million, resulting in a decline in adjusted return on sales from 9.9% to 6.4%. Markets developed as expected, weak in Europe and strong in Latin America. Sales decreased year-over-year by 28%, largely due to a decline in EMEA of 41%, particularly driven by Central Europe and Germany, where sales are down by more than 50%. Latin America increased sales by 34%. In Europe, we are currently not seeing an improvement in order intake. As of today, there are no signs of a recovery.
While our immediate countermeasures such as short-time work have helped to keep the result on last quarter's level amid a persistently weak European market, we are not satisfied with this result. As Karin pointed out, we are working on an extensive efficiency push, which targets closing the gap to our most successful peers. This includes tackling our cost base, portfolio and process complexity as well as identifying additional profit pools.
Regarding EBIT performance, our business in Brazil benefited from some foreign exchange tailwinds. But I would like to highlight that also operationally, Brazil is becoming accretive to the Mercedes-Benz segment. This shows that our significant restructuring efforts are paying off. Brazil clearly has the potential to sustainably generate double-digit margins, and we are on the right track to achieve that.
Price/cost remains neutral compared to last year. While aftersales contributes positively quarter-over-quarter, EBIT development was still heavily burdened by lower volume, resulting in underutilization and production inefficiencies. For Q4, we expect return on sales adjusted at the same level as in quarter 3.
Trucks Asia reported an EBIT adjusted of EUR 82 million with a return on sales adjusted of 5.5%. Unit sales in the Truck Asia segment decreased by 15% compared to last year's Q3. This decline was primarily driven by weaker market demand in India due to the delay of anticipated infrastructure programs and the general ongoing weakness in other Asian markets that we already have seen in previous quarters. Additionally, we have not yet seen the anticipated market recovery in Indonesia.
Despite the significant reduction in unit sales and negative foreign exchange effects, EBIT was supported by improved net pricing, strong aftersales performance and favorable effects in SG&A, leading to a significantly higher profitability. This demonstrates Trucks Asia's further improved resilience in a weak market environment. We expect to build on this once the market environment improves. For quarter 4, we expect a return on sales adjusted around the midpoint of the full year guidance.
Daimler Buses continues to demonstrate strong performance with results improving quarter-over-quarter. Return on sales adjusted stands at 11.4%, backed by an EBIT adjusted of EUR 141 million. This includes a positive impact of approximately 200 basis points from the sale and reevaluation of a noncore shareholding. The underlying result reaffirms that our restructuring efforts at Daimler Buses are making a noticeable impact, elevating the bus business to a higher profitability level.
Unit sales remained flat year-over-year, but we are seeing increasing contributions from the recovering coach segment, where the market has almost reached pre-COVID levels. EBIT was positively impacted by an improved mix in Europe with a higher share of coaches. Strong pricing, positive aftersales and favorable material costs also supported EBIT. For Q4 and full year, we expect return on sales adjusted towards the upper end of the guidance range, which would result in a record year for Daimler Buses in terms of profitability.
Let's take a look at our Financial Services business. DTFS secured new financing and leasing contracts totaling EUR 2.8 billion, reflecting a 10% decrease compared to Q3 2023. Contract volume grew by 6% since year-end 2023, reaching EUR 30 billion, primarily driven by North America and ramp-up markets in Europe.
EBIT adjusted decreased year-over-year from EUR 45 million to EUR 39 million, and return on equity adjusted decreased from 7.7% to 5.7%. Cost of risk increased compared to prior year due to the expectation of higher credit losses in America, especially due to the ongoing freight recession. Positive margin development and lower costs, in particular general administrative expenses, impacted gross profit positively, compensating the above-mentioned credit provisions.
To further drive resilience, Financial Services has started to implement a transformation program in North America, aimed at enhancing operational excellence and strengthening customer relationships, which impacted reported EBIT with EUR 22 million. The remaining program costs will have an additional mid-double-digit million impact until 2026. For Q4, we expect a return on equity adjusted in line with quarter 1 of this year.
Cash generation in quarter 3 was impacted by working capital effects amounting to minus EUR 419 million. Key drivers were a decrease of payables caused by the reduction of production volume and capacity restrictions at body builders in Japan. Inventories are expected to be reduced towards the year-end.
Net investments in property, plant and equipment and intangible assets further weighed on cash generation, totaling EUR 521 million. Significant drivers of the net investments were our investments into new businesses such as the battery cell manufacturing joint venture in the [ U.S. ] producing a truckified LFP cell and our new global parts center in Germany, helping to improve spare parts availability, driving higher customer satisfaction and supporting our push for more service revenue.
As a result, Q3 recorded a cash flow before interest and taxes of the Industrial Business of EUR 269 million. Cash taxes amounted to EUR 380 million, resulting in a free cash flow of the Industrial Business of minus EUR 41 million without adjustments for M&A transactions and restructuring measures. Adjusted free cash flow of the Industrial Business was plus EUR 73 million.
Our full year free cash flow guidance remains unchanged with cash generation expected to be heavily back-end loaded depending on the targeted inventory reductions in the next few weeks. Consequently, industrial net liquidity decreased from EUR 7.2 billion at the end of Q2 to EUR 6.5 billion at the end of quarter 3, which is approximately EUR 700 million lower, of which roughly EUR 100 million were injected into financial services, EUR 200 million coming from foreign exchange, and EUR 300 million have been spent on the ongoing share buyback program, where we have completed the first and started the second tranche. In total, we have spent EUR 1.1 billion on our buyback program from August 2023 until end of September 2024.
Before coming to our outlook, let me remind you that our outlook is subject especially to further macroeconomic and geopolitical developments. Our market assumptions for the rest of the year remain unchanged. We expect a range of 280,000 to 320,000 units for the heavy-duty truck market in North America. And for Europe, we anticipate the overall heavy-duty truck market in a range of 260,000 to 300,000 units with Central European markets and especially Germany being overproportionately affected.
Our guidance KPIs on group and on Industrial Business level for 2024 remain unchanged. As every year, the guidance for 2025 will be published at our annual results conference. The same applies to the current full year 2024 guidance on segment level. No changes.
This concludes our presentation, and we are now ready for your questions. Christian, over to you.
Thank you very much, Karin and Eva. [Operator Instructions]
[Operator Instructions] The first question comes from Nicolai Kempf from Deutsche Bank.
Nicolai here from Deutsche Bank. Welcome, Karin. All the best. My first question would be on Mercedes. You do say that there is -- or there are not much signs of a recovery from a market perspective. But at the same time, you have stopped short-term measures in your -- one of your German plants. How should we think about that?
And my second one is just given the elections we had yesterday in the U.S. And given that 2/3 of your truck production are in Mexico, how would you react in terms of any potential tariffs that would be implemented by the new administration?
I can start with the first question. We have, in Germany, a lot of flexibility measures. We are constantly adjusting. We worked with [ tucked ] output, shift lengths, temporary workers as well as short-term work. And it's right that from 1st of November, we're no longer in short-term work in Wörth. We are ramping up, as I mentioned, these new products, which is very positive. We will ramp up with Actros L, the new cab, the eActros. And at this time, there is no need to stay in short-term work. So consequently, we are not there anymore.
Nicolai, from my side, thank you for your question. Let me just give a general statement on the U.S. elections. I mean obviously, we're one of the leading truck manufacturers in the U.S. We have almost 18,000 U.S.-based employees, and we look forward to continuing to build on our past relationship with the administration towards a prosperous future. And obviously, we have been building products in the U.S. with our brands, Freightliner, Western Star and Thomas Built Buses for over 80 years, and we continue to do that.
When it comes to potential tariffs between the U.S. and Mexico, obviously, it's too early to speculate about the potential impact of the election results on our business. What I can say is that we have a lot of flexibility when it comes to our production footprint in the U.S. and in Mexico. We do have 6 production plants in the U.S. We are able to produce every truck model and bus model in the U.S. and in Mexico.
So there is no single dependency on a particular product on Mexico, and we do have a flexibility in the U.S. to increase hours, add additional shifts and so on. So we do believe that we are well positioned when it comes to the North American market as a whole and expect to continue our strong position there as a market leader.
The next question comes from Klas Bergelind from Citi.
Karin and Eva, Klas at Citi. So my first question is on the cash flow and production levels here into year-end. It looks like a major net working capital release is needed to meet your free cash guide, Eva, and I guess this is inventory and using perhaps December and maybe introducing stop date. Shouldn't that weigh on the margin more here into the fourth quarter?
It looks like you've done EUR 900 million of cash flow year-to-date. You need to go to [ EUR 2.728 billion ] to get to prior level. That's EUR 1.9 billion of a release in the fourth quarter. Just to understand how our production will trend here to sort of drive that inventory release.
Yes, Klas. And thank you for your question. It's obviously a very good one. From a free cash flow perspective, yes, there will be a major push in quarter 4. I did the math as well myself. And a big portion of that working capital release will come out of inventory reduction.
What I can say here is that a production stop in Europe before Christmas will definitely help to reduce inventories. And the reason why we believe that from a profitability perspective and from a net sales perspective we will still be on the level that we guided for quarter 4 is also because we do see a significant reduction of new vehicle stock that we currently have in our books.
So that means we can sell that off, and we have adjusted production capacities accordingly to consider that reduction of new vehicle stock. And we have now given very clear targets that we have aligned with all segments for the reduction of inventories on a monthly and even weekly basis now towards the end of December. And I have already the first free cash flow figures for October, which shows that we're going into the right direction to reach our full year free cash flow guidance. But yes, it will be a very strong push that is required also into December.
Because you say significant new vehicle stock, that typically means under-absorption if you need to lower production to sell out of inventory, and you don't have the short-term working there anymore. But yes, maybe there is some magic here. But it looks like quite an effort. But yes, I trust you.
Maybe to explain that one, Klas, so we had already planned for this shutdown period over Christmas for a while, and this is actually one of the reasons why we're not doing short-term work in November and December because we will be closed for more than 2 weeks. One reason for this is also that we have our OneERP implementation starting January 1, which is why we had originally also planned to have that shutdown period implemented, which now fits to the production capacities and the reduction of new vehicle stock that we are targeting. So we did plan that through, and it aligns with our expectations.
Okay. My second one, Eva, is just to clarify on the indication on the margins there into the fourth quarter. Did you say Trucks North America and Mercedes-Benz at the lower end of the respective full year guide than the midpoint for Trucks Asia? Just so I got that right.
Yes. What I said was for North America, we will be at the end of the full year guide, also attributable to the fact that we have to compensate these effects from Hurricane Helene that I mentioned. For Mercedes-Benz, we expect to be on a similar level as we have been in quarter 3.
Okay. And then Trucks Asia midpoint. I know there is a couple of one-offs. And obviously, you included the one-off in the second quarter. Now you're not including it. But is it 2.5%? Because that's quite a big step-down quarter-on-quarter to the margin in TA. I just want to understand if I understood it correctly.
In Trucks Asia, it's the midpoint. Yes. I had mentioned during the part of my speech that we will have negative effects from a weaker market in India and that we also do not see yet the expected recovery in Indonesia that we have been waiting for now for a couple of quarters. And that is weighing on the results, which is why we expect the Trucks Asia return on sales adjusted to be a bit lower in quarter 4 than it was in quarter 3 on an operational basis.
Okay. Very clear. Absolute final and quick one is on Mercedes-Benz and price/cost. The ASP number is quite big and up quarter-on-quarter. But you say that price cost was neutral in the quarter. Could you help us with how much pure pricing is within that ASP number? It's up double digit year-over-year. And what other drivers you have there on the mix side?
Maybe I take that one. It's -- if you look quarter-over-quarter where we were on pricing last year to this year, it's true that we have generally improved our pricing position. However, I -- there's so many factors going into that. I mean if you do revenue over volume, you also have the aftersales business. So it's -- and then you have different mix between light duty, medium duty, heavy duty. So I would not generalize. I would just say we have a strong pricing still, and we're keeping that pricing, as I mentioned.
The next question comes from Miguel Borrega from BNP Paribas.
A couple of questions from me. The first one, just on North America. Just wondering what specifically led to such sequential margin contraction. Your previous guidance was for in line with Q1, so 12.5%. And I remember you saying no price deterioration and your volumes are actually higher than Q2. So can you perhaps give some quantification on, for example, how mix impacted the margin? How does the margin, for example, in vocational compare to on-highway?
Miguel, thank you for your questions. Yes, I can explain that. So mix is really the major factor here. As I mentioned, we really still have a freight recession going on in the U.S., which means a reduction of the heavy-duty on-highway business, where we sell our Cascadia product. And when we look at vocational and medium duty, which has really compensated that weak on-highway business, we do have a different margin profile there currently this year because our Western Star vocational product is still in the ramp-up phase. So we are still optimizing the costing structure.
And another factor is also that with vocational trucks, you really see a very attractive life cycle profitability over the lifetime of the truck. So obviously, when you sell them, there's an initial margin. But then over the years to come, that's where you really get service and spare parts revenues in, which are very attractive and that we will see in the future.
And then the other part is obviously medium duty, which comes with a lower margin profile than the heavy-duty product. And also with heavy duty, we have a much higher portion of captive engines. So our heavy-duty engine platform that we produce in Detroit, where currently the rate of captive engines in our vocational product range is still lower than on the heavy-duty on-highway side. And that is the reason for that reduction in margins due to mix.
The next question comes from Shaqeal Kirunda from Morgan Stanley.
Shaqeal Kirunda from Morgan Stanley. Could you tell us a bit more about the China operations? Is this all sort of caused by the weakness -- sorry, is all the weakness caused by the strength in the LNG market? And should we expect more adjustments going forward? And will these mainly impact Mercedes-Benz?
Yes. As mentioned in the speech, we are currently assessing how to set up our company for the future. I think we have a good advantage that we have localized Actros that we launched 1 year ago. Of course, we have seen maybe 2 major factors that we had not foreseen in our business plan. The one is the total market, which retracted more than we had expected.
I mean it's more or less half of what it was a few years ago. And at the same time, we have seen that the gas trucks, LNG and CNG are growing a lot in volume, thanks to low gas prices in China. And we have a diesel truck. So that obviously poses some challenges. But we are assessing our setup. And as mentioned also in Q2, I mean, that's one of the priorities for both me and Eva.
And then a follow-up on the Trucks North America margins. How significant is the margin difference between medium duty and heavy duty? Because some of your peers have made comments that it's not really something which significantly impacts the margins. So could you share some detail there, please?
Shaqeal, I mean, we're not disclosing it on a quantitative manner. But what I can say is that it is quite different there also because we have significantly less captive engines in there with heavy duty, with our on-highway product, the Cascadia. We have more than 90% of captive engines in all of our heavy-duty on-highway sales, and that really is significantly lower on the medium-duty side. So you already missed that margin portion from the captive engine. So yes, that is sizable.
The next question comes from Frank Biller from LBBW.
The one question is on Daimler Buses. You talked about a one-off item here increasing the margin here. So maybe you can tell us what was the magnitude of the underlying margin here for the Daimler Buses. And how should we think in the future margins here? Are we still in this 6.5%, 8.5% range, which is much higher than in former times?
The other question is on the tax rate here in Q3. We had 34% in my calculation, much higher than second quarter and also last year. So what are you expecting for the full year? And what was the reason for this high tax rate?
Thank you, Frank, for your question. Let me start with the bus business. As I mentioned during the speech, it was a 200 basis point impact from the -- a portion of a sale of that noncore shareholding and the reevaluation of the remaining shares that we still hold. I can say it's for a noncore activity. It's an investment that we've had for a while.
But that being said, I mean, we were at 11.4%. If you deduct 200 basis points, we're still at 9.4%, which is above the full year guidance range for the bus business. And as I said, we expect our return on sales adjusted for Q4 and the full year towards the upper end of the guidance range. So that means that we are moving to a different and higher profitability level for the bus business, and I do believe that this is a sustainable one.
I agree. The tax rate?
And on the tax rate, we do have an impact of the valuation adjustment on the China receivable. And that has an effect of about 5 percentage points this quarter, which will then obviously -- on a full year basis, you will see that going down.
[Operator Instructions] The next question comes from Jonathan Day from HSBC.
It's Jonathan from HSBC. Just a couple of questions. I was wondering if you could, first of all, talk a little bit about the transformation program that you mentioned for Financial Services, in particular in North America, and just give us an overview of some of the issues you've had there. And then I'll come on to the second one.
Jonathan, yes, I can mention that. So what you have to understand is that at the time of the spin-off, when we build up Financial Services, we only had about 6 months to set up Financial Services for Daimler Truck, and it was more of a lift and shift from the old Daimler AG.
And now we have really been working extensively on optimizing that structure. We've had various locations in the United States, which we are now consolidating into one location. And we are also setting up a shared service structure, which will reduce costs going forward. So we really try to be as efficient as possible, which is why we have introduced these measures to become more competitive for Financial Services in North America, which is our biggest market.
Okay. So it's more about that than it is about credit losses or anything on the credit side?
No, that transformation program has nothing to do with the credit side. And that credit side and the increase of credit provisioning, that is really due to the freight recession and the current difficult market environment in the United States.
Okay. And then the second question was on the EV side and the infrastructure point. And just wondering if you could expand a little bit on how you see that infrastructure becoming effective. And in particular, is there any way that anyone can earn a sensible return on infrastructure for electric vehicles?
Yes, I take that one. Well, I think the challenge is long term, it could be a good business, but it's a little bit chicken and egg that customers are not buying electric trucks if they are not sure that they can charge the electric truck, and companies don't invest in the infrastructure unless there are electric trucks running on the road that ensure that they have a very good utilization of that infrastructure.
I think this is one of the reasons why we founded Milence in Europe and also started in the U.S. to look at investing in infrastructure. The idea is to kickstart the market. It's now really good to see our joint venture, Milence, really starting to build electric infrastructure. But as I mentioned, it's not enough with that company. We need many more initiatives.
What's positive is that there is an AFIR legislation in Europe, which gives countries the guidance on how much heavy-duty infrastructure they have to build, both for electric and hydrogen. We just don't see enough initiative happening yet to have those charge points in place.
Maybe to not be too negative, I think one positive thing is with the eActros 600 and a range of 500 kilometers, we do see that many of our customers can transition to e-mobility without needing to rely on public infrastructure. So they are installing depot charging, and that's actually enough to transition to e-mobility because many of the long-haul trips in Europe, more than half of them are actually shorter than 500 kilometers. But that doesn't take away anything from the fact that I do still see infrastructure as the biggest challenge for really growing the sales of electric trucks and thus also shifting the transport system into more sustainable ways.
The next question comes from Michael Aspinall from Jefferies.
Two for me. One on the U.S. I'm just interested in your thoughts around the impact of the political change in underlying freight markets. I noticed a lot of your listed customers' share prices at least are up 10% to 15% yesterday. So interested in what you think the political change might mean for freight economics in the U.S.?
And then also just your thoughts around the EPA regulations post the election. And the second one on autonomous. I noticed Torc achieved advanced validation of the product in the U.S. in the last few days. Can you just give us a few high-level thoughts on progress we should expect to see from here on the autonomous front?
Maybe I can start. And then. Eva, you fill in with -- if I forget something. I mean on the U.S., for sure, we follow the election as everyone. I think we will collaborate with this administration as we have with the previous ones. And I'm convinced that it will work very well.
What was the second question? Oh, the EPA. On EPA, I don't expect any changes in that legislation. Let's see. I mean it's been consistent over many years. So I think that will stay in place.
And then finally, on autonomous. As you mentioned, we have made very positive progress with autonomous. We had our so-called 0.1 release just a few weeks ago, where we were successfully driving with production-ready hardware/software on a closed course with the driver out and was a very, very big milestone for the team. And we then get some more confidence that we are on the right path with Torc and with our path to hub-to-hub Level 4 autonomous driving.
So ladies and gentlemen, that was the last question. Thank you very much for the time and for being with us today. Thank you very much, Karin and Eva, for answering the questions. Now 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. Have a great day and stay healthy.