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.

Thank you very much, Harold. Ladies and gentlemen, let's directly start with your questions now. Please ask your questions in English. And as a matter of fairness, please limit the amount of questions to a maximum of two to give sufficient opportunity to ask questions later. The operator will again explain the procedure.

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. If you're using speaker equipment today, please lift the handset before making your selection. The first question is from Ant Ellinghorst of Bernstein. Your line is now open.

Morning, everyone. Thanks for taking the question. One question, please. So you will report a free cash flow of about $4 billion to $5 billion this year, which is amazing, in a year of some of the most historical challenges for your business. Harold and Ola, if you keep and accelerate some of the cash cost savings, And as you said, you're moving to a better managed supply side, so you should strive to have better pricing, more sustainably in your business. What speaks against the conclusion that Daimler should be able to conservatively generate $6 billion to $8 billion of free cash flow in the normal year, if not $8 billion to $10 billion of free cash flow? Thank you.

Well, thanks, Arndt. Is that a question or is it a statement? Well, I like your numbers. And as you can see in the quarter three, we're working hard on it. I think with the quarter four guidance, you see that we want to continue in that direction. Even so, Q3, I have to emphasize, included some seasonality, which we will see the impact of that in the fourth quarter. You could see as well with the margin targets which we announced on the 6th of October for cars and then we're very serious about that. And I think I reminded you as well that we have the objective to convert that into cash at cars at around mean 0.8%. at trucks closer to one, 0.9. So I think for cars and vans, we said 0.7 to 0.9. And that's really what we're working hard. And yeah, I mean, quarter three is a bit of a testimony for that, but certainly a lot of work remains to be done.

Thanks for that.

The next question is from George Gallier of Goldman Sachs. Your line is open.

Thank you for taking my question. Just on the cash flow, I actually wanted to just ask, the lower investments in PPE, can you just help us to understand, is this coming from efficiencies, reduction in complexity and containment of model programs, or has there also been any change in Daimler's approach to investments in vendor tooling, and I'm not sure the extent to which you actually pay for vendor tooling today.

Thanks, George. Well, I mean, in 2020, we started the year with investment cap. We talked about that last year, so we put that into place. But then, I mean, with COVID, we clearly accelerated and took that cap down. And therefore, I mean, in 2020, it's really about prioritization of PPE. What does it mean? Each and every project-related investment on the R&D side as well as on the PPE side, I mean, in essence, has been continued, as you can see, with a timely and successful launch of the S-class. And I mentioned before that we'll not compromise on the new C-class and we'll not compromise on the EQS, nor will we compromise on an investment in software and electric. But non-product-related PPE has been really scrutinized. But we did not change structurally the approach towards the suppliers in terms of them taking the bill and amortizing over the series or in terms of mean pushing payment terms out. Understood.

Thank you. And then just a second question. Obviously, a very strong quarter in China, as you pointed out, and BBAC, I think your share was over $360 million. Just in terms of the opportunity they're going forward, given Chinese dealers are talking about extremely strong order books for your cars and other premium brands, are you facing capacity limits in China today, or is there actually room to increase production and see stronger results through 2021?

Well, let's talk about them in 2020. We gave the outlook for the fourth quarter. I mean, definitely, I mean, you're right. I mean, a very strong quarter also expected in China for the fourth quarter. And definitely, I mean, we are using our global worldwide and industrial network to support the demand, I mean, in China from the local ones, but also, obviously, I mean, from the ones in China. in the U.S. and Europe. On top, I mean, we are ramping up production footprint also in China with an additional plant in the north of Beijing, which will offer us more capacity from next year onwards. So definitely we're getting ready to take our decent sharing.

Great. Thank you very much.

The next question is from Jose Afomendi of JP Morgan. Your line is now open.

Good morning, Jose, JP Morgan, good morning, Harald. A couple of questions, please. The first one, on the labor reduction that you have targeted in terms of euro billion, how far are you through this labor reduction? Maybe 50%, 60% through? And can you comment a bit on the selling expenses, both for Q3 and what kind of magnitude should we expect for the fourth quarter, please? The second question relates to China dividends. Should we expect another inflow in the fourth quarter? Thank you very much.

Thanks, Jose. So first, I mean, on the labor, no, we're not 60%. So you can see that. I mean, the workforce level is turning. So we're coming down at the group level and at the division level. I mean, if you look in the spreadsheet and the fact sheet, I didn't emphasize so much, I mean, the headcount numbers here, but, I mean, it's definitely turning at the group level with a lot of emphasis, obviously, on the white color reduction. But, I mean, the bulk of white color reduction, which we announced last year and which we stepped up in terms of effort, i.e. going beyond that and in terms of size as well as in terms of time, is yet ahead of us. But the momentum we could generate, you can measure it as well in the charges related to the restructuring, in the adjustments, is ramping up. If you compare the numbers I gave on the 6th of October, I think I was talking about 1,100 packages being signed up by the end of August. That number is, as we speak, moving closer, I would say, to 2,000 already. So, I mean, I don't want to overemphasize, but I think we're moving in the right direction here. On selling expenses, I mean, I commented before that we had a really pretty brutal break on it. So we might lose some of it as we will support the key market entrance in terms of products end of year and next year. So we'll not compromise on that. We also had a bit of a favorable impact from the pension stuff in the third quarter in the U.S. at a low three-digit amount, as I commented. So on the run rate basis, I think you need that. You need to add back a bit of cost in the fourth quarter and also in for 2021, obviously. And your third question on China – China dividend, while we cashed in the full dividend for 2019, need to see the phasing of dividend for 2020. Thank you. Thanks very much.

The next question is from Timur Kosta of Deutsche Bank. Your line is now open.

Yeah, good morning. Thank you for taking my question. Harold, a bit into Arndt and George's direction. Obviously, the majority of investors are asking us right now how sustainable this free cash flow generation is. So can you help us understand? Similar type of run rate, volume, pricing, and China dividend-wise, would a normal free cash flow in Q3 been something like $4 billion or even slightly above $4 billion? Or can you at least give us some sense in how much of this was unique to Q3 and probably still a little bit to Q4? And then the second question is, When you do say CO2 targets are in striking distance, is that in Daimler language basically meaning that you're gonna make it or do you see some real risks still that you will miss this and is this related to 2020 only or also 2021? Thank you.

Well, I think my comment was on 2020 on the CO2. If I pick up on this first, I mentioned 45,000 XCVs being sold in the third quarter. If I add the first half to it and we see the level of demand really picking up in the third quarter, it's a matter of product availability, if I may remind you that, the demand for the plug-ins offering, I think, an unmatched autonomy and range availability. It makes us confident that we will see that demand continuing in the fourth quarter, and this altogether brings us in striking distance to the CO2 targets for 2020. Definitely we'll carry on with that momentum in 2021, but I think it's to comment about that at a later point in time. So let's focus now first on 2020. In terms of the cash flow normal run rate, Well, maybe if you look in the quarter three, I think it's pretty obvious if you look at NBC, but also at the group level, that you cannot take the $1.2 billion dividend from China as a run rate. So I would take that off. A net, obviously, you have the reversal of the equity result in the third quarter on the other side. You need to take the net of the two. And you could see as well that there were some seasonality in the quarter three in the other column, which I commented. So all in all, I think in the fourth quarter, you will therefore see a cash conversion rate, both, I would say, for cars and vans, as well as for trucks and buses below one, as we will see the reversal of these impacts. On a normal level moving forward, I make reference to the cash conversion targets which we outlined sitting at 0.7 to 0.9 for cars and vans and the 0.9 for trucks. I think that's what we're striving for. That doesn't mean that we might not catch one or the other one-time working capital opportunity in the future but on a sustainable basis that's what it should be and obviously our margin aspirations should come through in terms of cash flow. Thank you.

The next question is from Horst Schneider of Bank of America, Maryland. Your line is now open.

Yes, good morning, and thanks for taking also my questions. I've got two follow-ups, please. The first one relates to the selling expenses where we continue to see quarter by quarter significant surprises in terms of savings. Can you maybe let us know, I mean I know you talk about this normalization in Q4, you alluded on that. What is the sustainable level of selling expenses as percent of sales that we can assume going forward? Then the second question that I had that was related to a more general one on working capital. I have the impression that you have even not yet started to restructure the working capital significantly so can you maybe explain to us again why you don't do to a large extent for example texturing and then also in general on the working capital to which extent you expect basically the structure level of inventories to come down I mean you want to be more luxury in the future and luxury means to me also that you should increase the build to order basically So can we assume a structural improvement of inventory levels going forward? Thank you.

Thanks, Horst. So maybe on the selling expenses side, yeah, a pretty strong break in 2020. On the 6th of October, we said that we want to take the fixed cost down all in all by more than 20% compared to 2019 levels. So that's what I would assume as the long-term run rate. I mean, therefore, I mean, you depart from 2019. So there was – therefore, see some of the cost compared to the quarters we had now in 2020 coming back a bit. On the other side, other areas, I mean, will step up, obviously. structural cost adjustment in other areas, including the operational side. On the operational side, take a bit longer time to be implemented. So you will see, therefore, the mix of measures changing over time. So more on selling this year, more on others in the quarters and in the years to come. On working capital, Well, if you allow me to say, 2020 was really and is the emphasis on managing diligently production and sales with a huge volatility, as we all know. And I think that worked pretty well so far, as you could see with a quarter two cash flow and even more with a third quarter cash flow and will continue to do so in the four square. And that has very beneficial impact, not only on the inventory side. I commented before, I would also say that the diligent wooden supply of the markets is helpful for pricing, is good for the residual values. And it's also good for the used car level. I commented before that on trucks, we had a good reduction of the used vehicle level in the third quarter. I can say as well that in the cash flow of cars, we have reached a very decent lower level of used vehicles as well. That's the emphasis for 2020, balancing and matching here supply and demand. I clearly still see a potential in terms of further working structural improvements. We'll not lose our focus and an eye on it. But I think that's more for 2021 and beyond to address it. Once market situation hopefully will stabilize again, then I think you can address more structural inventory improvements and also turn back in terms of payment terms. If you think about payables, probably it's not the right moment in time right now. where the supply chain and some of the suppliers are going through quite some stress and pressure, I mean, closer probably to insolvency risk, I mean, to knock at the door for extension of payment terms as well. But definitely it's on our agenda, but I would say more for 2021 and beyond. But you don't consider to do additional factoring, right? We don't consider in the numbers we've reported nor the ones we gave you today any material factoring.

And on SG&A, I think you don't want to comment on the level of reversal in 2021 that you mentioned, right?

I think I said, I mean, at the beginning, let's focus here today on the quarter three and the full year 2020 guidance, and we'll talk about 2021 probably more in February. Okay, thanks very much.

The next question is from Patrick Hummel of UBS. Your line is now open.

Thank you. Good morning, Harald and Steffen. Two questions also from my side. The first one regarding VXEV sales. It's good to hear you're in striking distance. I was wondering, on the contribution margin side for the plug-in hybrids, it really looks like a strong demand environment consumers happily take the incentives granted by the government. So where are we in terms of the contribution margins for the plug-in hybrids relative to conventional gasoline and diesel cars? Any indication would be helpful. And the second question is a bit more high level. I mean, you and Ola are taking really, you know, structural measures, harsh decisions, also correcting things that might have gone in the wrong direction in the past. And I'm just wondering, we haven't heard much about trucks here in a group context. Do you still think that trucks should be 100% owned by Daimler AG, and why do you think that is the best solution for shareholders?

Thank you. Thanks, Patrick. Let me start with the second one. I think with what you see in the third quarter, there is traction also on truck side in terms of cost adjustment. uh next to market recovery in the third quarter uh so really focused on on improving the the operational performance of the business that's our priority and therefore i have nothing new to say with regard to the structure and the shareholding of of trucks here on the xcv into the the plug-in uh margin uh What can I tell you at this stage? We have a positive contribution margin, definitely. That is for sure. But it obviously sits somehow below the conventional, the ICE margin, is the variable cost of the car, due to basically two propulsion systems being on board. is impacted. We'll see how that will develop moving forward. We definitely are working on the contribution margin of the XCVs or the plugins as well on the best moving forward. Clearly, we have an ambition to improve that over time by various levers, in particular, obviously, on the battery side, but not limited to it. So positive contribution margin, but not at the same level as the ISAs of today. In the third quarter, we have some dilution from the step-up to the 45,000 XEVs, as I commented, which is included in the minus 333 in the EBIT walk. But you can see that globally, managing all levers, including cost, obviously, fixed cost, pricing, mix, I think we can deal with it. So I'm looking with more confidence after the quarter three in terms of being able to manage the dilution of XCVs. Great. Thanks, Harald.

The next question is from Steve Muitman of Societe Generale. Your line is now open.

Good morning, Harold and Stefan. I have two questions. Just again, on the subject of meeting the EU CO2 mandate or being close to that in 2020, looking at the last data from the ICCP, which put you at sort of 15% below your target at the end of August on an NEDC basis, with a share of new energy vehicles of about 21% in August alone, how high do you think you have to go in the fourth quarter in order to get closer to the target, and would you rule out joining an emissions pooling scheme? My second question is about the mobility services, and there's been some speculation in the press about Uber being interested in the taxi business. What is Dynas thinking about the future direction of that business, and do you think still this should be part of the diamond route. Thank you.

Thanks. Thanks, Stephen. Well, if you look at quarter three, you see a pretty impressive ramp-up of the XEVs. I I gave the number already several times now, 45,000 altogether, majority of that obviously being plug-ins. So our expectation for the fourth quarter definitely is that the number is going to be higher than the quarter three as it will continue the ramp-up rate, which we could see now decently July to August, August to September. So we'll keep going on that path for the fourth quarter. And again, it's supported by the strong demand for these products with the exceptional range they offer. And I think more and more people are really convinced of that. And therefore, I mean, we enjoy that high level of demand. So the fourth quarter, again, expectation in terms of sales. for the ECVs is in excess of the third quarter. This altogether brings us in that striking distance. We're reviewing, obviously, the grid on a permanent basis, including the phase-in credits and all of the other measures to bring us into the target zone. On mobility services, Well, maybe thanks for the question. We didn't talk during the call so much or not at all about it. In the first half of the year, they had been hard by the COVID-19 as well. I think a good recovery now in the third quarter. On the operational side, they also have been doing, I think, an outstanding job in terms of cost control and discipline here. We don't have time to go much more into that in detail. So they have a clear slope in terms of paths to recovery in 2020. Jointly with B&W, we defined as well the way forward for each of them towards a break-even and beyond. So there is a clear direction from a strategy side as well as from an operational business standpoint. At the same time, I think we said from the very beginning that we are open to partnerships in the various verticals. That was the spirit of the GV, the partnership with BMW, from the very beginning, and this is the same. And in this respect, we are exploring several options. That's what I can tell you on this today.

So, ladies and gentlemen, we're running out of time. Thank you very much for your questions and for being with us today. And also thank you very much to Harald for answering all your questions. Now, Investor Relations remains at your disposal to answer any further questions you might have. To all of you listening in from Internet and on the phone, have a great morning, great afternoon, or great evening. And we obviously look forward to talking to you soon. Thanks and goodbye.