ARCHION Corporation (7203) Earnings Call Transcript & Summary

Good afternoon, good morning, ladies and gentlemen. This is Christian Herrmann, Head of Investor Relations and M&A speaking. On behalf of Daimler Truck, I would like to welcome you to today's call. This morning, we announced that Daimler Truck and Toyota has entered into an MoU covering the potential combination of our Mitsubishi FUSO business and Hino Motors. Our CEO, Martin Daum; and our Board member for Truck Asia and CEO of Mitsubishi FUSO, Karl Deppen attended a press conference in Tokyo, together with the Toyota's CEO. Now Jochen Goetz, our CFO, will give you additional background and will be available for questions directly thereafter. Please note that on our request, this call will be recorded. The replay will be available as an on-demand audio webcast in the Investor Relations sections of the Daimler Truck website. I also would like to remind you that this telephone conference is governed by the safe harbor wording you will find in our published documents. The messages in this call contain forward-looking statements that reflects 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 is incorrect, then actual results might be materially different from those expressed or implied by such statements. Forward-looking statements is only to the date on which they are made. With that, Jochen, over to you.

Thanks, Christian. A warm welcome from my side as well. As you are aware, [indiscernible] frequently talked about our active portfolio management, being an important success factor to optimize return on capital at Daimler Truck. With this, we aim to optimize our capital allocation, footprint and product portfolio. We continue to focus on heavy-duty, the market as the biggest profit pool and the most attractive return on investment potential. This already muted results on [indiscernible]. At [indiscernible] portfolio, we are optimizing the relevant situations by outsourcing, monitoring and [indiscernible] activities. At Daimler Truck, we are optimizing our production in Europe by using our [indiscernible] truck for buses to the Czech Republic. In the U.S., we launched our provider in the [indiscernible] approach. In the U.S. truck market, we introduced our Western Star 47X in the location segment. In China, the world's largest truck market, we launched our locally produced Mercedes-Benz trucks. In Europe, we are continuing to further leverage our leading technology with a partnership with [indiscernible] AG. In theory, we are continuously monitoring our overall portfolio to seek opportunities in order to realize value potential for individual locations, products and projects. But this does not stop at small units. We are also continuously analyzing opportunities for complete Daimler Truck segment [ growth ]. Today, we announced that we are further evaluating such an opportunity for Mitsubishi FUSO as a significant part of our Truck Asia sector. During the past several months, Daimler Truck Asia, along with the Daimler Truck Board of management developed a clear strategy for cooperative growth with a clear path to achieve our return on sales targets in Asia, while Daimler Truck is on its way to achieve the 2025 target and unique opportunities in Mitsubishi have been identified and specified over the past few months. Just to remind you of the truck Asia segment structure sector, Truck Asia consists of Mitsubishi FUSO in short, MFTBC located in Japan, our Indian activities under the BharatBenz brand, and our activities in China mainly in the Bfda joint venture. Today's announcement only covers Mitsubishi FUSO and not the other parts of the segment. Today, a leading nonbinding Memorandum of Understanding has been signed between Daimler Truck and Toyota Motor Corporation together with their respective companies, MFTBC and Hino Motors. This MoU covers the further evaluation and negotiation of the transaction and distribution businesses of MFTBC and Hino will be bundled under a holding company. The shares of such holding company will be listed in the prime market of the Tokyo Stock Exchange, and both Toyota and Daimler Truck will become minority shareholders. The new company will have full access to Daimler Truck heavy duty truck technology. The strategic objective of this intended transaction is to combine the scale and capabilities of both MFTBC and Hino to drive the transformation of the commercial vehicle industry in Japan and Asia with the support of 2 extremely strong shareholders. Details of the transaction that covers the structure of the new company, including shareholder ratio and the scope of the combined businesses after defining the agreed-upon and legally-binding definite agreement. We expect that the holding company will not be fully consolidated in Daimler Truck's financial statement. The parties are aware that Hino's engine certification misconduct needs to be managed before entering in definitive agreements. Generally, both parties have agreed that all risks associated with this issue shall be borne by Hino. This is structured as a combination of provisions, which will be taken into account when calculating equity value of Hino and certain mechanisms under which Daimler Truck will be indemnified by Hino. In parallel, the Toyota Motor Corporation and Daimler Truck agree to investigate the potential for a global collaboration potential to accelerate the development and production of zero-emission technology for commercial vehicles, including hydrogen. We see that there's a unique opportunity to shape the future of the Asian truck industry as an even more powerful company than any previously today. However, within the next couple of months, details on directions as well as negotiations on many dimensions are needed to conform to the various potential for all involved parties. Of course, we will put special focus on risk from Hino's engine certification misconduct and mitigation measures, the attractiveness of the combined business plan, value creation for our shareholders and required under trust deployment. Besides this, the transactions are set to [indiscernible] parties involved agreeing on legally-binding definitive agreements, approval of such agreements by their respective Boards, approval of the shareholder meeting of Hino and approved by the relevant authorities, including [indiscernible]. The parties ended up signing the business agreement in the first quarter of 2024 and closing of the transaction by 2024. With that, I'm looking forward to your questions.

Thank you, Jochen. [Operator Instructions] Now before we start, the operator will explain the procedure.

[Operator Instructions] Our first question is from Klas Bergelind from Citi.

So my first one is, obviously, we know roughly the size of Hino, but could you help us with the size of FUSO and profitability. And within that, maybe looking at Japan, I guess that's above average margin. So if you could start there.

Yes. Klas, if you look on the margins of MFTBC, of Mitsubishi FUSO, we do not disclose specific numbers as part of Truck Asia segment. However, what I could say, if you look on the current development on profitability of especially first quarter, it's fair to say that Mitsubishi was above the average of the Truck Asia segment.

My second one then is on the synergies. And are we talking a normal 2% to 3% of combined revenues? Just trying to understand the drivers a bit better. You said that Hino will get access to your heavy-duty technology, and they operate, according to our understanding, lower margins than you would see. But you still go into a 50-50 combination. I'm trying to understand is the value upside because it seems to be a little bit of a skew here in terms of the combination, but if you could talk about that.

Yes. I would say the biggest -- there are 2 big ones. The one is -- as I said in my speech, they are -- Hino is lacking at the moment access to a functional heavy-duty engine, which we can offer, which is also an optimization opportunity for us given the scale on our heavy-duty engine platform we have already today. That's number one. And number two, especially if you look on the transformation and the Japanese but also in the Asia segment towards the emission technology, it will give us the leverage on both sides to develop a state-of-the-art product offering going forward. That's one of the levers we see as synergy potential going forward.

And in terms of -- have you guys thought about like a time line for those synergies?

Klas, please understand we are early on at the moment. I think it's pretty clear where opportunities are. But first of all, as we said that it will take some time until we have the merger clearance, and we will use the time to think more in detail with the due diligence, what are the opportunities going forward. It's simply too early to talk about that today.

Yes. My quick very final one is on India. You obviously have a BharatBenz which is staying, but it looks like FUSO also have some business in India separately. I just want to clarify if that's the case or if total India BharatBenz is staying within Truck Asia. I'm just trying to understand that better.

Yes. The BharatBenz trend -- to the other way around, the Mitsubishi FUSO in India, the Indian market is covered by the trend of Benz and it will stay...

The next question comes from [ Mo Adebayo ] from Goldman Sachs.

I recall that Hino had a memorandum of understanding with TRATON to get engines. I just wanted to find out what the progress here was and how that is different to today's announcement.

You're right. There was a negotiation in the past, but these negations were ended by Hino a couple of months ago. So there is no further collaboration with the TRATON GROUP anymore.

The next question comes from Miguel Borrega from BNP.

The first one, I just want to try to understand your level of confidence in the deal going through from an antitrust perspective. Countries like Indonesia, Japan, the combined entity would have -- as far as I understand, is more than 50% share. So are you confident this will go through? And what kind of remedies would you expect?

Yes. Well, that's also one of the topics we have to clarify, and in deference of other topics which, to your point, Daimler Truck can't just on our own here, we're relying on the Japanese authorities. Our [ alternative ] here is that the Japanese market is not the biggest in size, therefore, it's a question of how many competitors do we really need. One of the remedies we can think about is that both plants and will further exist also in the future. And we will go through market by market and define together with authorities what are the remedies that are needed to get the approval at the end. But also to be very clear that one of the potential deal-breakers is if we don't get their approvals or the remedies are such harsh ones one that it doesn't make sense, that could be a deal-breaker.

And then -- you talked about some of the financial benefits of merging with Hino, basically putting your own engines. And just trying to get a clarification here. It's only for the heavy-duty market, and is that for all of Hino's markets or just in Asia?

It's basically -- it's only heavy-duty, absolutely right. In theory, it's for all heavy-duty trucks, but also this one will be one of the projects we will look, especially in Japan but also in the U.S., it could make a lot of sense, other markets to be discussed over the next couple of months.

Okay. And then one last question. In terms of balance sheet, how are you thinking about the deal? Would this be -- would you allocate some of your cash to the combined entity?