Mercedes Benz Group Ag

Welcome to the Global Conference Call of Daimler. At our customer's 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 website. The short introduction will be directly followed by a Q&A session. If you want to ask a question, please press 0 and 1 on your telephone keypad. To remove the question, please press 0 and 2 on your telephone keypad. Again, for a question, please press 0 and 1 on your telephone keypad and 0 and 2 to withdraw. I would like to remind you that this teleconference is governed by the Safe Harbor wording that you find in our published results documents. Please note that our presentations contain 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. May now hand you over to Steffen Hoffmann, head of Daimler Investor Relations. Thank you very much.

Good morning, ladies and gentlemen. This is Steffen Hoffmann speaking on behalf of Daimler. I'd like to welcome you on both the telephone and the internet to our Q3 results conference call. We're very happy to have with us today Harald Wilhelm, member of the Board of Management of Daimler, responsible for finance and controlling and Daimler mobility. In order to give you maximum time for your questions, Harald will begin with an introduction, directly followed by a Q&A session. The respective presentation can be found on the Daimler IR website. Now, I'd like to hand over to Harald.

Thanks, Stefan, and good morning. Welcome to everybody on that call here. Thanks for joining us. Well, on the 6th of October, I think we had a pretty intense Mercedes-Benz strategy update. So, therefore, I suggest that today we focus on the Q3 performance. and that we will give an update on the outlook for the fourth quarter and the full year 2020. Therefore, please understand that we will not focus on the longer-term perspective nor on 2021 today. As we already informed you last week, the third quarter shows a very strong performance and provides further proof that we are on the right path to reduce the break-even point of our company. At the same time, we continue to size opportunities from improving markets with our great products at Mercedes-Benz cars, Daimler trucks and buses, and Mercedes-Benz vans. This gives us confidence to push ahead with our work, both on the strategic and the operational side of the business. The strategy laid out on the 6th of October, the operational focus, the Q3 achievements, and allow us to look with some confidence ahead into the fourth quarter and therefore to give you that quantitative guidance here for the full year 2020. First, let me turn a bit to the highlights of the third quarter, however, on page number two. Well, I already mentioned in our Mercedes-Benz strategy update three weeks ago, I think you could take away very clearly that we will focus our strategy on profitable growth in the luxury segment and that we also target the leadership in electric drive and car software. At the same time, we are very focused to work diligently to improve our break-even point. Furthermore, in mid-August, we informed you that we have reached another milestone towards the resolution of various diesel proceedings. The US regulatory authorities have approved a settlement of civil and environmental claims in the United States. will not be subject to external monitorship as we have successfully launched our internal technical compliance system that will serve as a blueprint for the wider automotive industry. We are glad that we are making progress in resolving these legacy issues. Then on the quarter three, we have seen a faster than expected market recovery and particular strong September performance. This combined with our diligent cost discipline, extensive cash preservation measures, and further efficiency enhancement have had a significant impact this quarter. We were able to generate a free cash flow of $5 billion. This is reflected in the net liquidity, which amounted to $13 billion at the end of the quarter. But also on the sustainability side, we have been doing some progress. It's clearly in our focus, and you can see that also in the green financing, where we issued the first green bond with a $1 billion ticket in September. So CO2 neutral mobility and production is a clear goal and an integral part of our sustainable business strategy. If we now turn to page three on the key numbers, despite the ongoing COVID-19 pandemic, unit sales and group revenues were only slightly lower than the prior year figure, with minus 8% and minus 7% respectively, whereas in Q2, unit sales were down 34% and revenues were down 29%. Despite these lower revenues, adjusted EBIT was up 11% on prior year quarters at 3.5 billion euros, reflecting the impact of our group-wide cost measures. Earnings adjustment came mainly from the restructuring measures in Mercedes-Benz cars and vans segment. The unusually strong industrial fee cash flow of $5.1 billion reflected in particular extensive cost and cash preservation measures, strong operating performance across all divisions, leading to very favorable cash conversion rate. In addition, the quarter saw the expected receipt of a 1.2 billion euro dividend from our joint venture in China, BBAC, and some seasonal phasing impacts. Let's have a look more in depth on the net industrial liquidity evolution on page four. We start with a Q2 net cash of 9.5 billion. We achieved a healthy level of net cash during the three months, ending with 13 billion. So if you go from the left to the right, earnings and other cash flow impacts amounted to 4.3 billion, driven by a strong net profit from industrial operations. Furthermore, the 1.2 billion euro dividend, as I mentioned already before, helped here. The positive working capital impact came from Mercedes-Benz cars and vans. in the amount of 435 and from trucks and buses of another 184. Those mainly due to favorable development of payables and additional positive inventory development at trucks. In the next column, you can see as well that our effort to limit investment was successful in quarter three with investments now being lower than depreciation and amortization. The net industrial liquidity reflects as well 1 billion euro of the dividend we paid in July to our shareholders after the AGM and some FX effect that is covered in the other column. Besides the cash flow management, we further strengthened our financial flexibility with good access to capital market, our revolving credit facilities, three bonds which we issued this year, and a high level of gross and net industrial liquidity to protect our financial flexibility. And I think it's pretty obvious from this that we therefore see no need for equity rates. We now move to Mercedes-Benz cars and vans on page five. We can see a worldwide recovery of the passenger car sales, which continued in the quarter. We had a favorable model mix, improved pricing, and a significant reduction of fixed cost and accelerating headcount reduction, and all of that obviously helped the profitability. On the sales side, we see an increasing demand for low and zero CO2 emitting cars. Especially in Europe, we received rising orders, and particularly for the plug-in hybrids. At Mercedes-Benz Cars, we delivered more than 45,000 XCVs to our customers from July to September. Current and for quarter four expected XCV sales bring us in striking distance to achieve our CO2 emission target this year. With the Factory 56 at the beginning of September, we opened our first fully CO2 neutral production site. At the same event, we revealed our all-new S-Class, We are glad that we can utilize this new sustainable production facility for serious production of our Mercedes-Benz flagship and for the EQS, which will come to the market in 2021. The new S-Class stands for a new luxury experience from all aspects. Comfort, safety, user interaction, and connectivity through the next generation of our MBUX system. And of course, the new S cars will help us on our path towards higher profitability. And I hope you will all have soon the possibility to enjoy a ride in it. Besides focusing on the Mercedes-Benz car segment, it is also great to see how well the van business has developed lately. At Vans, we go through a massive operational turnaround. The profitability advance in the third quarter was very much in line with the profitability of the Mercedes-Benz cars business. Furthermore, with the EQV, we are setting new standards for electric mobility also in its class. Since September, the first purely battery electric EQV has been driven off the production line. Let's have a look a bit closer into the Sales development in the third quarter, page six, demand from our customers was significantly higher than we had expected earlier. Despite the COVID-19 pandemic, deliveries from July through September benefited from a recovery in many markets. This increased demand was met even at short notice, in particular by reducing dealer inventories. In Europe, the Q3 unit sales were 5% lower compared to last year's figure. Year-to-date, we are at minus 22%. In China, Mercedes-Benz car's largest market, passenger car sales increased by 24%, setting a new record for the third quarter. Year-to-date, unit sales are up 7%. In the United States, Q3 unit sales are minus 31%, year-to-date minus 24%. In general, the third quarter also shows how regionally diverse the situation still was in the markets. We will therefore monitor developments very closely in the fourth quarter and continue the prudent approach in terms of supply of markets that we followed through this year. However, from today's perspective, demand for Q4 is encouraging, higher than Q3, but slightly lower than Q4 2019. One further comment I might like to make here is, as mentioned on the chart, you see group sales. It is important to note that, again, for all three months in the quarter, retail sales were above group sales, indicating that we enjoy a healthy market pull. What goes hand in hand with markets pulling and diligently balancing the supply side are favorable stock levels for new cars, residual value stabilizing, used car stocks being on the low levels. Considering the low levels that we have reached at the moment, we probably need to refill the pipeline slightly in Q4, but carefully. Now, key figures on page 7 for cars and vans. Unit sales, I mentioned already, were 4% lower in that segment compared to prior quarter. Mounted all in all to 673 vehicles. You might remember Q2, we were down minus 30%. So we had a strong run on SUV sales, in particular the GLA, the GLB, and the GLS, which increased by 23% and reached a new record for the third quarter. Advanced, the unit sales increased by 7% to 107,000 units in the quarter, particularly due to positive developments in China and Europe. Supported by strong pricing, revenues at the cars and van segment were down 3% at 26 billion compared to minus 4% on the unit sales side. The division-adjusted EBIT is 2.4, which we'll explain a bit more in a second, 29% up versus last year's quarter. And deceived bid amounted to 4.6 billion, a significant step up. Looking at page 8, the EBIT walk, the EBIT adjusted increased to 2.4 billion. with a return on sales adjusted of 9.4%, sitting above the 7% of the previous year quarter. Model mix and pricing of the vehicles continue to develop well, however not compensating the lower volume and negative volume structure impact from XEVs, which you can see in the minus 337 here. A small and negative impact on earnings came from unfavorable development of foreign exchange currencies. We had a significant positive impact on EBIT on the cost side. The industrial performance was slightly positive. What does it mean? Production efficiencies. And if you see it means slight positive, that also means that we could more or less mitigate production-related fixed cost redundancies. Also, unlike in the second quarter, there was no short-term labor benefit anymore. Furthermore, a significant reduction in all fixed-cost areas, boosted earnings, G&A, R&D, and particular selling expenses were lower than in the same period of last year. In addition... An adjustment to a retirement and health care plan in the U.S. also helped a positive impact on selling expenses. This was in the magnitude of a low triple-digit million figure. Furthermore, EBIT was adjusted by expenses for the initiated personal cost reduction program and restructuring expenses for the adjustment and the realignment of capacities. So in the 297 million euros restructuring measures, the intended sale of the Hamburg plant is included also with additional 68 million. On the cash flow side, we achieved a CFB adjusted of 4.8 billion. Obviously, that includes the enhanced profitability. The working capital change and the BBAC dividend, if we go again a bit from the left to the right, we see $435 million from the change in working capital driven by trade payables. Inventories were slightly restocked in quarter three in order to prepare for the increasing demand and fill lower dealer stocks, as I already mentioned before. In terms of CapEx and R&D, we have presented to you a plan on 6th of October with concrete quantitative commitments how we will lower spending on a year-over-year basis. As you know, last year we have introduced an investment cap. With the COVID-19 unveiling, we initiated further capex saving measures and actually cut back on non-pressing topics. At the same time, we made sure that that the key products like the S-class, the C-class, or the EQS are not compromised, and we continue to invest in the technologies of the future, including electrification and software. So consequently, we have said that going forward, the relative capex reduction will be even stronger than the reduction in R&D. The Q3 figures that you see here confirm these efforts. Net investments went down and were below the DNA level. In the column labeled Others, I wanted to highlight three points here. First, the dividend of $1.2 billion for the full year 2019, which amounted to $1.2 billion and had been cashed in in the third quarter. Second, we have other liabilities. Improving the cash flow by 586 million. This position includes tax provision based on the strong Q3 sales and restructuring measures with an expected cash out in Q4. So some seasonality. And third, there were remaining cash-ins in the third quarter for the short-term work that took place in second quarter. And in terms of the EBIT in Q2, cashed in in the third quarter. Now let's turn to trucks and buses on page 10. We could also see a significant sales recovery compared to the first half of the year on the truck side. Unit sales in the third quarter of 2020 decreased to 99,000 vehicles versus third quarter 2019, primarily due to the ongoing worldwide effects of the COVID-19 pandemic. Nevertheless, the incoming truck orders in most of the key regions in the third quarter were significantly above Q2 numbers and even exceeding the Q3 2019 level, including core markets in Europe and North America. Obviously, also at trucks, we're keeping a strong focus on cash preservation measures. Strict cost control and progressive execution of restructuring activities resulted in a noticeable reduction of fixed cost as well. On the product highlights of the quarter, in trucks was presentation of the hydrogen-based fuel set concept truck for the long distance segment with a range of up to 1,000 kilometers. Additionally, the purely battery electric e-Actros long-haul will be ready for serious production in 2024 with a range of approximately 500 kilometers on one battery charge. Furthermore, we introduced two more new models to the market, the new Western Star 49X in North America and Mercedes-Benz Inturo with active brake assist in five in Europe. With a brand new vocational Western Star truck, we see opportunities to gain market share in the vocational segment, same as we did with the Cascadia in the highway segment. It is the first of its kind that was specifically developed for the vocational segment. On the sales, a bit more in detail on page 11, the major markets improved visibly in the third quarter after the severe losses in the first half of the year. At the same time, the market share increased in almost all markets. In most regions, however, unit sales were still significantly lower than in the third quarter, 2019. We're coming from an extraordinary high level of sales in 2019, as we know. By the end of Q3, we were able to see some signs of normalization in the core markets in North America and Europe. as I mentioned on the order side already. Recovery in the Asian market is somewhat more difficult, as in particular in India and Indonesia, demand slumped and is still suffering from the ongoing severe effects from COVID. So looking at the key numbers on page 12, the revenues decreased by 20% to $9.2 billion. We sold approximately 94,000 trucks, so that's 25% less than the quarter before. Buses even declined by 43% to 5,100 units. The EBIT adjusted is at 603 million. Adjusted return on sales was at 6.5%. Incoming orders exceed the prior year figure by 3%, in particular in North America. The September numbers were strong and more than doubled compared to August numbers. Trucks Asia orders declined, mainly driven by Indonesian and Japanese market cooldown. Book-to-bill was at 105%, coming in particular from Asia and a solid level in Europe and North America. And on the cash flow before interest and tax, we see 1.1 billion, which is an increase of 55% and a pretty decent cash conversion rate. Page 13 on the EBIT walk, we see a negative year-on-year change, obviously, due to the decline in the volume. On the industrial performance, we see a charge, which is actually the 2019 quarter three favorable adjustment on Takata, which obviously we don't have again this year. Without that, we're more or less almost balanced on the industrial side. Cost and capacity adjustment in response to the COVID-19 crisis. pandemic and a significant reduction in fixed costs, especially in selling expenses and reduction of functional and overhead costs, helped to soften the decrease in earnings and to get to 600 million EBIT adjusted and 6.5% return on sales, also with some support of lower R&D. Page 14, on the cash flow walk, So the sales pitch of the third quarter was more or less twice as high as the quarter three EBIT cash conversion rate, therefore increased to 2.1%, which probably cannot be repeated each and every quarter, I would say. One key lever was the working capital development with an impact of 184 million, similar to Mercedes-Benz and cars. Depreciation exceeded the net investments by far and made a positive contribution to cash flow. New vehicle stock levels remain stable compared to prior year. Used vehicle stock could be reduced significantly in the third quarter by 18%. The provisions and other column mainly include the following elements. Contract liabilities in connection with extended warranty contracts increased as more extended warranty volume was added than payout needed. Second, liabilities from signed but not yet paid contracts from the restructuring program were materialized and the affected EBIT already did not lead to a cash out flow so far. And furthermore, there has also been some provisioning which will reverse in Q3. So we have some seasonality between Q3 and Q4. Turning to mobility, page 15. We could see the business stabilizing in the third quarter. In the first half of the year, we supported our customer base with temporary payment holidays to handle the financial burden from the COVID-19. These payment restructuring programs expired in most markets, and the majority of our customers are returning to normal payment modes. We are back to around 95% of expired deferrals in zero days past due. After the fast reaction in the first half of the year, no further increase of credit provision was necessary in quarter three. Actual credit losses were at the normal level. The current level of credit reserves provides adequate coverage for projected net credit losses, taking market and economic uncertainties into consideration. At Daimler Mobility, the execution of our efficiency measures shows a positive impact on the earnings. Absolute OPEX figures go in the right direction. Due to the ongoing pandemic and therefore reduced customer traffic at our dealerships, we were able to further sustainably roll out digital self-service usage by our customers and our dealers. Maybe to say as well that for DMO, we are putting financial services at the front and the center again. We focus on customer loyalty and retention in our core business, financing, leasing, insurance, and fleet management, and we also manage diligently our shareholdings and mobility services. Page 16. If we look at the numbers, I already said that the business stabilized and was 2% up compared to the third quarter last year. So amounting in terms of new business to $18.7 billion. The contract volume is $150 billion by the end of September. That's 8% down. we could see a slight improvement in the insurance business with around 640,000 policies being brokered in the third quarter. The level of acquisitions is slightly higher year over year, mainly driven by the business in China. The EBIT adjusted was up 28% to €601 million. Let's have a look at that on page 17, how we could get there. The development was mainly driven by lower cost of credit risk versus last year due to the quick recovery. So sorry, no, due to the quick response we did to COVID-19 earlier this year in quarter one and two. And obviously, the cost-saving measures which we implemented, we can see the traction. If we move from the left to the right, we see a pretty minor MinFX development. Besides that, in terms of cost of risk, the proactive and conservative approach which we took in H1 means that we did not have any further increase in credit provisions in Quarter 3. As in last year's quarter three, we had a risk provision. The year-on-year effect obviously is positive. In the context of streamlining our IT architecture, this is what you can see in the volume and the margin bucket, and a bit also in G&A bucket. We had an impairment of software assets. And overall, as I emphasized already, we also manage diligently the cost base and the fixed cost in DMO, allowing the 600 million EBIT adjusted. So on the group, page 18, if we sum it up, basically over there, We commented already in the division, so the only other point I would highlight here is that in the recon, we included an impairment for our participation in bike motors of 180 million euros. On the group level, we had adjustments of 409 million altogether, 407 comes from the efficiency restructuring measures. 68 million is another adjustment and alignment for the production network, in particular for the intended sale of our plant in Hember. The total legal proceedings and related measures for the group amounted to a net of 2 million euros. On page 19, if we wrap it up also on the cash flow side for the group, The particularly high pre-cash flow at the group level this quarter came mainly from the various elements we discussed for the divisions in cars and vans and trucks and buses. We see minus 24 million in income taxes, which includes internal tax prepayments. Furthermore, we received tax refunds in the U.S. that were overcompensated by tax payments in other countries. The bucket Other Reconciling Items contains, among others, the reversal of positive non-cash effects in CFBIT of cars and vans from adjustments in the pension and health care plans in the U.S. in the magnitude of a low triple-digit million figure. Well, now let's turn to the short-term future, page 20, in terms of the outlook for the fourth quarter and the guidance. What does it mean now for the remainder of the year? First, I think I really want to emphasize that given the very, very recent events in terms of the pandemic. I mean, somehow coming back was quite a lot of uncertainty, therefore. We assume, and again, it's important, we assume that the economic conditions in most of our important markets continue to normalize in the fourth quarter and that in particular no further setbacks occur or shutdowns as a result of the COVID-19. This is the underlying assumption in this guidance here, please. Furthermore, we assume that the significant sales losses which we recorded in the first nine months due to COVID-19, will only be partially offset by the end of the year. We therefore expect the group revenue in 2020 to be significantly lower than in previous year. Same applies for cars and vans, trucks and buses. In DMO, we anticipate a slight decrease in revenues. On the basis of the expected market development and the current assessment of our divisions, we assume that Group EBIT in 2020 will be at prior year level. At CARS Advanced Division, were adversely affected by substantial special items in 2019. We anticipate EBIT for this division significantly above the prior year level despite the effects of COVID-19. For trucks and buses and DMO, we expect EBIT significantly below prior year. We anticipate a significant increase in the free cash flow of the industrial business compared with the previous year The sweet cash flow of the industrial business does not take into account possible expenses in connection with legal and governmental proceedings. As part of the measures we are taking to safeguard liquidity and cut costs, we are also reducing our investment in PPE and R&D. However, we will continue to maintain the advanced expenditures to serve to secure the future viability of the company. Overall, we assume that investments in PPE will be significantly below prior year and R&D expenditure will be slightly lower than 2019. Page 21, if we look at the outlook for the divisions, again, on the basis of the assumptions I highlighted before for the development of the major markets, The division's current assessment is that we will have total unit sales in all divisions in 2020 significantly below previous year. We expect for Q4 at cars, vans, trucks to be above Q3 2020 but below Q4 2019. Besides positive momentum from the markets, we expect the cost measures that have shown their favorable impact in Q3 to continue in Q4, despite some seasonal ramp-up in cost in Q4. The individual divisions have the following expectations for adjusted returns in 2020 full year. Cars and vans adjusted return on sales 4.5% to 5.5%. Trucks and buses adjusted return on sales 1% to 2%. DMO adjusted return on equity 9% to 10%. On the cash side, we'll continue our cash preservation measures in the fourth quarter. I pointed out earlier, however, there were some favorable cash elements in quarter three that will lead to cash out in quarter four. For the full year 2020, we expect the adjusted cash conversion rate for cars and vans to be at one, target being maybe above. For trucks and buses, the adjusted cash conversion for the full year is at two. So please keep in mind that this assumes the economic conditions in most of the markets to materialize. And again, no further step back from COVID-19. So now it's time, I think, to wrap it up. Page 22. You can see that it was a solid quarter, but we will not rest on that. Some of the cash and the cost measures are one-timers, so some of the costs will return to us, for example, on the marketing side that have been largely kept down this year. Nevertheless, this quarter shows us that we are able to achieve what we are able to achieve as we focus on our core and our strengths. We have communicated the mean strategy for cars, but it is also set for vans, for trucks, for buses, and for DMO and the whole group. We have gone through a target setting. You saw it for passenger cars, but we did the same thing for all of the elements of the group, for trucks and buses, for vans and DMO and the whole group. We presented it, the mean for cars and vans, to you on the 6th of October. We have successfully pushed forward the efforts regarding cost control and cash management. And with this momentum, we are on track to make our business more border-proof. However, the transformation of Daimler is a long-distance race, a multi-year endeavor. We are keeping up the pace with focus and full disciplines. Quarter 3 has shown what we can do in this respect with all hands on deck and hard work. And with this, we tackled quarter four with confidence. And as you can see it in our four-year guidance. I think I was a bit too long today. Apologies. So I'm looking forward for your questions now.