Mercedes Benz Group Ag

Welcome to the global conference call of Mercedes-Benz. 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 Mercedes-Benz website. The short introduction will be directly forwarded 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 document. Please note that our presentations contain forward-looking statements that reflect management's current views with respect to the 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 virtually different from those expressed or implied by such statements. Overlooking statements speak only to the date on which they are made. May I now hand you over to Steffen Hofmann, head of Mercedes-Benz Investor Relations and Tragedy. Thank you very much.

Good morning, ladies and gentlemen. This is Stefan Hoffman speaking. On behalf of Mercedes-Benz, I'd like to welcome you on both the telephone and the internet to our Q1 results conference call. We are very happy to have you with us today. To have with us today Harold Wilhelm, our CFO. In order to give you maximum time for your questions, Harold will begin with an introduction, directly followed by the Q&A session. The respective presentations ...be found on the Mercedes-Benz IR website. Now, I'd like to hand over to Harold.

And good morning, everybody. And we are happy that you find the time this morning, despite all of the other news, to share the update on where we are in 2022. Especially due to the war in Ukraine, this has been a very challenging start into the year. It is obvious that the business challenges are nothing compared to the human tragedy. We at Mercedes-Benz try to support the Ukrainian people with several initiatives, big and small. This being said, now I would like me to switch over to the Q1 results. What can we say if we look at them on the page three? Well, I would say these results reflect resilience and pricing power. If you look at the revenue, they are up despite lower volumes, and that's exactly pricing power and the shift in mix at work. If you look at the group EBIT at $5.2 billion, the reported one, that's obviously solid underlying performance. It also includes benefits from our restructuring of the Grand Prix engagement. as well as a sale of our sales outlet in Canada. But we also took some adjustment on our Russia business, and we'll talk about that a bit later. If you look on the underlying performance, we have it adjusted of $5.3 billion. I mean, that is a reasonable level of profitability that has been driven by good mix, solid pricing, favorable used car performance, but also effective cost measures across all businesses. We didn't stop to put focus on cash generation, continued on that one, and you can see that the nil ended up at 22.7 post the spin by the end of the quarter. What were the key highlights on the Mercedes-Benz car side? Page four, the demand for our products remained extremely strong in the quarter. However, the volume and sales have been impacted on a continued basis by the SEMI constraints. The SEMI capacity has been coming back online, but still, I mean, a high level of volatility and selective bottlenecks among critical components, which did not allow us, I mean, to push all of the demand through in terms of sales. There is still, I mean, limitation in terms of visibility. when exactly these bottlenecks will ease. However, I mean, overall, we do expect some stabilization throughout, I mean, 2022, but probably more in the second half of the year. And obviously, we continued our effort to work directly with the suppliers, but also with the same ease themselves to make the system more robust and resilient. Maybe a few words on the situation in Russia and Ukraine. We strictly comply with all applicable sanctions and embargoes against Russia and person sanctions in this context. That's why we suspended the export of passenger cars, vans, and spare parts to Russia, as well as the local manufacturing activity in Russia. The export freeze was effective immediately. Production salesmen are shut down in an orderly process. It is obvious that we cannot proceed our usual business activities, and therefore we suspended them. Obviously, we continue to monitor the situation on a 24-7 basis. Needless to say that we all hope for a political situation, but I wouldn't wish to speculate further on this. I will come to the Q1 financial impact a minute a bit later on. On Ukraine itself, we are working with the suppliers in Ukraine. to supply some components for our products. We are monitoring the situation here as well very closely and remain in close contact with these suppliers to work on solutions to safeguard the supply chain. That includes, among others, to transfer production to other locations, which progress pretty well in the meantime. Again, in the first quarter, our plans showed a very high level of flexibility and therefore we could avoid downtime as much as possible. So due to the current situation, we had adjusted to mean temporarily some shift plans and some plans but didn't have complete shutdown. What are the other key messages mean on the Q1? Well, we see a shift in the top end vehicles. See it on the next slide in a second. We're moving up also on the EV. As for our strategy, we have important milestones in terms of the EV transition, definitely with the EQXX, I mean, record drive of more than 1,000 kilometers from Stuttgart to Cassis. Well, if you do it with a monster battery, as Markus or Ola, I mean, are saying, that's not probably a record, but, I mean, we did it as a record, as I think, I mean, the number which... really makes a difference here is the average consumption of 8.7 kilowatt per 100 kilometers. That is, I think, the true news in this experience. We opened the battery factory in the US. Quite some of you were with us over there. You could also experience the EQS SUV on-road and off-road. In the meantime, we presented it to the world in April. So a lot of momentum, I would say, on the EV side. Early April, we also did the first holistic comprehensive ESG conference. I hope you appreciated that. And the key message over there was, I would say, that we aim to slash the CO2 emission by more than 50% by the end of this decade. Moving to page five. Again, we hope that you appreciate minute transparency, and these KPIs should demonstrate the progress we're making on the strategic front. Whereas, I mean, total sales decrease, we can see that the top-end vehicles may grow, and also the electric vehicle. So, 5% grow. GROWTH ON THE TOP END VEHICLE SIDE, 19% GROWTH ON THE ELECTRIC VEHICLE SIDE AGAIN, WHEREAS TOTAL SALES MEAN WERE IN DECLINE DUE TO THE SEMI SITUATION AS EXPLAINED BEFORE. HOW WAS IT POSSIBLE IN PARTICULAR IN THE S-CLASS SEGMENT WITH THE S-CLASS BUT ALSO THE EQS THAT FAVORED THE EVOLUTION ON THE TEST SIDE AND ON THE EV SIDE AS WELL AS A DECENT CONTRIBUTION ON MABA. I WOULD SAY YOU CAN SEE THAT THE STRATEGY IS GAINING TRACTION HERE. WE WANTED TO ACCELERATE THIS DEVELOPMENT FURTHER AND WE SHOULD GIVE YOU MORE COLOR ON THAT ON MAY 19TH DURING OUR ECONOMICS OF DESIRE EVENT. PAGE 6 ON THE FINANCIALS. Sales were down by 10%. I mentioned that already. Revenue were up by 8% due to the net pricing and the mix. The ASP, the average sales price, rose by 18% to €70,500. We now calculate that number without the BVAC sales volume and also the BVAC parts-by-parts revenue, so I would say it's a clean, comparable number. EBIT adjusted, went up by 21% compared to the quarter, I mean, a year ago, and on the cash flow side before interest and tax, that was at 1.7. We see some impact from working capital effects, which were chiefly due to the semi-supply constraints, but also now some logistic chain issues related to Ukraine, Russia, and China. As I mentioned, China, maybe a word on the situation there. So far, we have successfully managed all COVID and supply chain-related risks in China. In the first quarter, there was no major impact on our main operations in China. Overall, we have achieved a strong price premium over competitors in China during the first quarter of 2022. Despite COVID and supply chain dynamics, we delivered more than 190,000 passenger cars to customers in China during that quarter. EV saw a steady growth. while plug-ins were even setting a record high. The top-end vehicles, including the AMG, the Maybach, the G-Class, reached double-digit growth, among which the flagship S-Class maintains its segment leadership. Our sales rate of Maybach vehicles has been at over 1,000 cars for almost every month since June 2021. Looking forward, we continue to monitor the COVID and supply chain risk in China closely, and we'll react flexibly if needed. Due to the COVID-related supply shortages, we have flexibly adjusted our local production program in China for April and May. We all know in China there is a risk of continued but even extended lockdowns, think, for example, mean about Beijing, with potential mean additional impacts, which could impact mean local production, but also global supply chains. Looking at the EBIT bridge on the page seven, SO, EVEN WITH THE LOWER VOLUME, THE BUCKET VOLUME STRUCTURE NET PRICING INCREASED SIGNIFICANTLY BY 1.8 BILLION IN ONE QUARTER. THEREIN, I MEAN, THE PURE VOLUME EFFECT IS A NEGATIVE LOWER THREE-DIGIT MILLION FIGURE. THE STRUCTURE, AND HERE IN PARTICULAR THE TOP END VEHICLE SALES, I.E., THE S-CLASS AND THE MAYBAR, AND THE NET PRICING ARE BOTH SIGNIFICANTLY POSITIVE. ON THE NET PRICING, SEE THE COMBINATION OF FURTHER REDUCED MEAN DISCOUNTS, BUT ALSO FURTHER LIST PRICE INCREASES IN MANY COUNTRIES MEAN AT WORK. USE CAR PRICES IN Q1 HAD A POSITIVE LOWER THREE DIGIT MILLION EFFECT FOR THE FULL YEAR 2022. WE EXPECT THE USE CAR PRICING EFFECT TO IMPACT WITH A LOW NEGATIVE THREE MILLION DIGIT AMOUNT. ON THE INDUSTRIAL PERFORMANCE, had to face higher raw material costs on steel, aluminum, copper, lithium, but partly compensated by commercial efficiency. We had some increase in product-related expenses, and then in particular, I mean, the disruption cost in our production network due to the semi-situation, the stop-and-go, the dualistic cost, but also, I mean, a step up in the energy cost created, I mean, a headwind. But overall, you can see in the Q1, we could successfully compensate the raw material cost and the inflation by pricing. You can see as well that the fixed cost, I mean, as a whole, continued to be under the scrutiny of strict cost discipline. The other, I mean, was negative. That was chiefly a Q1 2021 impact from the charge point IPO. The adjustments refer to the restructuring of our Grand Prix activities, as well as the divestment of the own retail in Canada, as already mentioned. And we also took an adjustment on the suspension of our industrial activities in Russia. In this context, we expensed $658 million on the car side in connection with the adjustment of our business activities in Russia. Overall, you can see the EBIT adjusted at 4.2, 16.4% return on sales. Cash flow, page 8, 1.8 on the reported, 1.7 on the adjusted. As I said already before, we have a working capital charge of close to $900 million. That is due to the increase of semi-related unfinished products AND LOGISTIC CHAIN DISRUPTIONS CAUSING HIGHER STOCK. THESE EFFECTS ARE MORE EXPELLED THAN THE POSITIVE ONES FOR AN INCREASE IN THE TRADE PAYABLES. ON THE INVENTORY SIDE, WE EXPECT THAT LEVEL TO CONTINUE IN THE QUARTER TWO, ROUGHLY AT THAT LEVEL, BEFORE THEN IT SHOULD START TO NORMALIZE IN THE SECOND HALF OF THE YEAR. ON THE INVESTMENT SIDE, 400 MILLION FROM THE DIVESTMENT OF THE OWN RETAIL, AS I MENTIONED, The net investment in PPE and intangible asset equals the depreciation and amortization and impairments. I think that is, again, an interesting demonstration in this quarter that we can transform our business. I would do not compromise the investments into the future, into electric, into software, at the same time staying within the ambitious targets we set ourselves. On the other side, you see the payments related to diesel, the BBAC at equity reversal, the outlet, retail outlet sales, and the MB Grand Prix restructuring, as already mentioned several times. And on the adjustments, you find the usual legal proceedings on diesel and the M&A stuff. Over to the van. WHAT WERE THE HIGHLIGHTS ON THE VAN SIDE? ALSO VERY STRONG MARKET DEMAND FOR THE VANS. HERE IT WAS POSSIBLE DESPITE THE SEMI CONSTRAINTS TO KEEP UNIT SALES FLAT YEAR OVER YEAR, WHICH I THINK GIVEN THE CONTEXT WAS A GOOD ACHIEVEMENT. THE FIRST QUARTER IN SHOWCASTS the best-ever sales of the Sprinter and the Matrix. I mean, this is the U.S. name for the Vito in North America, who is more than 17,000 units. We're also progressing on the battery electric van sales, with EV sales being up here, I mean, almost 60 percent year-on-year. But the absolute number is still, I mean, a low one, but great potential there. I have also new products in the small van segment. The T-Class has had its world premiere. The new Citan, with strong customer demand, is pretty refreshing. And in the course of 2022, the EQT and the E-Citan will complete the portfolio of electric van offerings in all segments. THE MARGIN IMPROVED ALSO SIGNIFICANTLY, AND HERE AS WELL WE SEE A HEALTHY MIX IN PRICING. LOOKING ON THE PAGE 10 ON THE FINANCIALS, SALES FLAT, THE REVENUE IS UP BY 9%. THE PROFITABILITY DEMONSTRATING A GOOD PRODUCT MIX AND NET PRICING. SO EBIT ADJUSTED IS AT $466 MILLION. CASH GENERATION WELL EXECUTED. HERE WE WERE SUCCESSFUL TO KEEP THE INVENTORY AT A LOW LEVEL. IF YOU LOOK AT THE BRIDGE ON THE PAGE 11 HERE IN THE BUCKET VOLUME STRUCTURE AND THE NET PRICING, OBVIOUSLY THE VOLUME IS STABLE. SO YOU CAN SEE THAT THE STRUCTURE AND THE PRICING PROVIDED BASICALLY 200 MILLION OF BENEFIT HERE. The used car business, I mean, also had a favorable impact. On the industrial side, you see, as on the car side, that raw materials and the disruption caused in the production network, I mean, triggered, I mean, some headwind. But despite that, the overall, I mean, EBIT adjusted is at 466 and return on sales of 12.6%. ADJUSTMENT ARE 51 MILLION IN PARTICULAR RELATED TO THE BUSINESS ADJUSTMENT IN RUSSIA AS EXPLAINED ALREADY ON THE CAR SIDE. PAGE 12 ON THE CASH FLOW. HERE CASH FLOW IS AT 380 REPORTED, MORE THAN 400 HAVE BEEN ADJUSTED. WORKING CAPITAL MAIN FAVORABLE. I SAID ALREADY THAT DESPITE THE SAME RELATED ISSUES, WE COULD MAINTAIN IT AT A FLAT LEVEL. INVESTMENTS, WE HAD ALSO A SHARE HERE FROM THE SALE OF THE SALES OUTLET. THE DEPRECATION AND ARMORIZATION HERE ON THE VAN SIDE IS HIGHER THAN THE NET INVESTMENTS. THAT IS, I WOULD SAY, SOMEHOW CYCLICAL. EFFECT WE SHOULD SEE FURTHER IN THE YEAR THAT THE INVESTMENT SIDE IS COMING UP AS WE ARE PROGRESSING WITH THE DEVELOPMENT OF THE VAN EA PLATFORM. OVER TO MOBILITY, PAGE 13, KEY HIGHLIGHTS OVER THERE, SUPPLY CONSTRAINTS AND ALSO LOWER MARKET PENETRATION ALSO HAD AN IMPACT IN TERMS OF THE NEW BUSINESS VOLUME. THE INTEREST MARGINS REMAINED ON A VERY SOLID LEVEL. Net credit losses were at a very low level. The new business in Russia has been stopped and we adjusted the credit reserves on the Russian portfolio. At the same time, we continue to mean the strategy execution in the first quarter. Looking at the financials, main page 14, the new business decreased by 13%. The truck spin-off had further to the as I mentioned on the page before, I mean, an impact here. The portfolio increased by just, I mean, 1%, and EBIT adjusted, yeah, increased by 6%. How was that possible? Page 15. On the positive side, we increased WE HAVE MOBILITY SERVICES AND WE HAVE MOBILITY SERVICES AND WE HAVE MOBILITY SERVICES AND FLEET BUSINESS PERFORMANCES, FLEET BUSINESS PERFORMANCES, FLEET BUSINESS PERFORMANCES, WHICH IMPROVED IN THE QUARTER. WHICH IMPROVED IN THE QUARTER. WHICH IMPROVED IN THE QUARTER. THE MARGIN ALSO BENEFITED FROM THE MARGIN ALSO BENEFITED FROM THE MARGIN ALSO BENEFITED FROM LOWER REFINANCING COSTS, LOWER REFINANCING COSTS, LOWER REFINANCING COSTS, I MEAN, IN THE FIRST QUARTER, I MEAN, IN THE FIRST QUARTER, I MEAN, IN THE FIRST QUARTER, AND A BIT OF We had some higher expenses due to project-related costs and a bit of dis-synergies from the truck spin. And we adjusted for the credit reserves on Russian business. All in all, the charges sitting in that number here is around $100 million. Maybe, as you see, 20% return on equity, a word that, I mean, for the full year, we expect the performance to remain strong, but somehow normalizing in the course of the year. Cost of credit risk should return, I mean, come back to kind of a pre-pandemic level, and we should also see some normalization of the interest margin driven by interest rate increases. Looking on the Group side, page 16, well, on the business evolution, I think I commented. So in the recount, we see a slightly negative equity result from Daimler trucks and buses. That is the contribution which we expect, I mean, in the Q1 on an estimate, I mean, has been offset by depreciation of the assets from the PPA. as we explained in our full-year release. With this, the EBIT adjusted stands at $5.3 billion. Then we have the net of the adjustments, diesel-related $280, $700 related to Russia, as explained already several times, and M&A a bit more than $900. So the booked one, EBIT booked, is at $5.2. On the cash flow side, again, on the business, I think I explained, leaves me with cash taxes going up compared to 2021. I mean, higher profitability, less tax carry forwards obviously makes me in the cash taxes go up to $600 million. That makes, I mean, the free cash flow and the industrial side a 1.2. On the net industrial liquidity, based on the cash flow, We debated before in 22.7 in that we also have the benefits from the divestment, also a bit of a dividend internally coming from Mercedes-Benz mobility and a bit of FX effect. I think that is a very strong and healthy level of net industrial liquidity, and I think it's good to have that in such volatile times. BUT ON A VERY SHORT NOTICE, SUBJECT TO AGM APPROVAL ON FRIDAY, WE WILL HAND OVER A GOOD PART OF THAT NET INDUSTRIAL LIQUIDITY OVER TO YOU WITH A DIVY OF 5.3 BILLION. NOW, LET'S HAVE A LOOK FOR THE FULL YEAR 2022. SO HOW DO WE SEE THAT ON THE BASIS OF THE FIRST QUARTER RESULTS? First, on the divisional guidance, I mean, page 20, really please read the assumption chart carefully. What do we say? The macroeconomic and geopolitical conditions continue to be characterized by an exceptional degree of uncertainty. The war in Ukraine with its effects on supply chains, development of prices, and supply of energy and raw materials. remains a source of risk. Further effects due to the rapidly changing situation in Russia and Ukraine are not currently known, but could possibly have substantial negative consequences for our business activities should it escalate beyond its current state. In addition, continuing bottlenecks in the supply of semis and other industrial upstream products and inflationary pressure are another source of risk. and not at least the further cause of the pandemic. In particular, strict countermeasures in China hold uncertainties for the expected development of the market, supply chain, and production. On that basis, we confirmed the forecast for almost all KPIs that were made in our annual report in 2021. So what is the guidance for cars? We continue to expect the sales are slightly up. CONTINUE TO EXPECT THE RETURN SALES ADJUSTED FOR CARS TO BE BETWEEN 11.5% AND 13%. OBVIOUSLY, THE Q1 RESULTS OF 16% GIVES US CONFIDENCE FOR THE FULL YEAR GUIDANCE. ON THE BACK OF THAT, WE SEE THE FULL YEAR RETURN ON SALES ADJUSTED AT THE HIGHER END OF THAT RANGE. LET ME SHORTLY WALK YOU THROUGH HOW WE GET FROM HERE TO THERE We see the price and the mix to stay at a high level. The top-end vehicle's growth is further targeted to be above 10%. Used car business will impact negatively. The tailwind from depreciation, which we had in 2021, should come down. The discontinuing of the non-current provisions, the R&D going slightly up, And finally, with the current macro and the political uncertainties, we want to be prudent and assume a general market environmental protection for the remainder of the year as we see further risk on raw material increases and inflationary trends. It is definitely our target to compensate that by net pricing. However, I think at this stage it is prudent to keep a risk protection. ON THE CASH CONVERSION RATE, UNCHANGED, 0.821. PPE IS NOW AT THE PRIOR YEAR LEVEL COMPARED TO SLIGHTLY ABOVE BEFORE, THANKS TO THE GOOD PROGRESS IN THE FIRST QUARTER. AND ON THE R&D SIDE, IT'S UNCHANGED. ON THE VAN, SALES SLIGHTLY ABOVE, 21, UNCHANGED. ROSS, 8 TO 10. ALSO HERE, I WOULD SAY WE SEE IT RATHER AT THE UPPER. AND OF THE CORRIDOR, THANKS ON THE BASE OF THE Q1 PERFORMANCE. AND ON THE REMAINER, I THINK THAT IS UNCHANGED. ON MOBILITY, WE SEE THE RANGE AT 16 TO 18. SO WHAT DO WE EXPECT IN THE REMAIN OF THE YEAR TO HAPPEN? MARGIN HEADWINDS DUE TO HIGHER REFINANCING COSTS. We expect lower contract volume and normalization of the credit risk. On the group guidance, all KPIs are confirmed as B4. So it brings me to the end on page 2022. We set ourselves strategic priorities on the 24th of February for 2022. So in a nutshell, what is the progress we have been doing so far on scaling the electric mobility? We increased the EV share by 15% in the first quarter. The BEV share even increased by more than 50%. We introduced the EQE. Some of you had the privilege to experience them in a test drive. We have the EQS SUV, world premiere. I commented on the EQX6, so I think a lot of momentum, not only in terms of numbers and financial results, but really laying the foundation for the EV ramp in the future. On the top-end vehicle side, the share is 16%, and stay tuned for our May 19th event for more to come. WE HAVE IMPORTANT SOFTWARE DEVELOPMENT MILESTONES WHICH ARE AHEAD OF US IN 2022. WE KNOW YOUR CURE IS ON IT AND THAT'S WHY WE WILL HOLD A SEPARATE CMD EVENT IN JULY DEDICATED ON SOFTWARE. ON THE SUPPLY CONSTRAINTS, WE CONTINUE TO MEAN THE WORK ON THE SAMIES AS COMMENTED BEFORE. with risk mitigation, with tangible results. The interruption of the supply chain in Ukraine, I think you can see that it was pretty well managed without any material disruption. And we're making further progress in terms of sourcing and deep sourcing. You could see the opening of the battery factory corporation on the sale in the U.S. and many others. IN THE QUARTER AND MORE TO COME. SO IN SUMMARY, ON THE Q1, I WOULD SAY YOU CAN SEE THE PRICING POWER AT WORK COUPLED WITH CONTINUED STRONG MIX SHIFTING GEARS TOWARDS LUXURY SUPPORTED BY CONTINUED MEAN COST DISCIPLINE TRANSLATING INTO MEAN REASONABLE MEAN MARGINS. and, in particular, a much more resilient business. And I think, I mean, that's what matters, I mean, in these days, in this environment, pricing power and resilience. And with this being said, over to the Q&A.

Thank you very much, Harold. Ladies and gentlemen, you may ask your questions now. The operator will identify the questioner by name, and please introduce yourself with your name and the name of the organization. before asking your question. As always, please ask your question in English. And as always, as a matter of fairness, please limit the amount of questions to a maximum of two. Now, before we start, the operator will again explain the procedure.

Ladies and gentlemen, 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.

The first question goes to Tim Rokossoff from Deutsche Bank.

Yeah, thank you very much. Good morning, guys. It's Tim from Deutsche Bank. I would have two questions, please. The first one is, even when you continue to beat results every quarter and you show these impressive numbers, some market participants just want to be negative and they will again say this is peak pricing and mix. And to confirm, they will obviously point to your guidance, no increase despite a much better result in Q1. What do you say to that? Is that just reflecting the risk protection that you just mentioned, Harold, Russia, China, ETC? Or do you actually already see a material slowdown in your EBIT numbers to come? Secondly, When we talk about one of the main ingredients to that, it's obviously pricing. And when we talk about pricing, you already mentioned your view on used cars. I think that's a very prudent assumption. What do you think about list prices and discounts? I assume there are basically no discounts currently. When would be a moment of volume decline where you then allow your dealers again to start moving into discounts? And how much did you increase your list prices already, and is there more to come? Thank you.

Thanks, Tim. Yeah, on the walk, basically, from the Q1 and the full year, I think you could hear it, I mean, before. We see the strong momentum on the demand side, I mean, to continue. We see the mix to continue. We want to grow, I mean, the TEF share even further, the EV share as well. And we do expect, and we do target the pricing to continue. So I would say, again, another quarter. And the bears, maybe they just need to be patient and wait quarter by quarter to see the results coming through. I think that's quarter number six now or so, or maybe even seven. Well, not good at counting. So let's see, quarter by quarter, we will keep going on the pricing side. And I come back to that as part of your second question in a second. However, in the current context of things, we do believe it is appropriate to be more prudent. I think in the risk section, in the assumptions, I outlined a few of them. I guess many of you also look very closely to China in terms of the lockdown and what could happen further there. I don't have a crystal ball for that. But in this context, I think it is just more prudent. Our management ambition is clearly to continue to do what we had been doing in the first quarter again, which means using that pricing power to offset the the inflationary trends and the raw material increases. Other than that, you have a few technical ones. I alluded to them in the remainder of the year, which is next to the used car pricing and the depreciation, which is probably half a percentage point, a bit of discounting of the provisioning, which we had in the Q1. That is a tailwind. Sorry, that is a A headwind of a half a Ross point, the R&D is another, I mean, half of a Ross point. I think that gives you a bit of a color in terms of the size of the risk protection. On your second question, I mean, on the list pricing and on the discounting, yeah, we had adjusted, I mean, list prices, I mean, last year ahead of time compared to what we do normally and also more expelled. In many countries, I mean, in Europe, in the U.S., in Canada, in China, and again now in April as a function, as a response to the inflationary trends which we see. These have a more expelled impact in 2022 compared to what we expected, I mean, even at the end of 21 and at the beginning of 2022. And I don't think that we will walk backwards from here in terms of the list. On the discounts, I mean, they're running, I mean, at a low level. It's not, I mean, the discounts, I mean, the discounts, I mean, special discounts we put at work. I mean, I cannot comment on the discounts the dealers, I mean, the independent retail and dealers, I mean, put at work. I mean, that's their responsibility, but ours are tight. They are not zero, but they are tight. They are not a function of semi. They are a function of a different approach to market, which is not to push the volume into the market. And this is definitely what... We started to do in third and fourth quarter 2020, which we still do in first quarter 2022, and what we intend to do moving forward, and we'll talk about that as well more on the 19th of May.

Thank you. And we continue with Jose Asumendi from JP Morgan.

Good morning, Jose, from JP Morgan. Good morning. Just a couple of questions, please. The first one, Harald, can you speak a little bit around the negative bucket of industrial performance, a little bit the key drivers in the quarter, and how do you expect that to evolve in the coming quarters? And also, if you can remind us, please, when does this GLS electric, when does it hit the market in Europe, US, or China? And second question, you have obviously I'm starting to see a meaningful share of electric vehicles now within your portfolio. Can you comment on the profitability of these electric vehicles? They exceed or at least match the margin contribution you get from your combustion engine vehicles.

Thank you so much. Thanks, Jose. Industrial performance, if you look at the bridge, I think you'll find approximately, I mean, a billion of a headwind in there. I would say probably you can take half of that for raw material mean costing increases. So that is basically on the purchasing side. And the other half is basically split between inefficiencies in our own mean operations due to the stop-and-go, the logistic cost, the higher energy cost, and also some product-related, I mean, higher product-related expenses. On your question on the, if I got it right, I mean, it's the EQS SUV, and this is going to hit the markets in the second half of the year. So probably the contribution to 2022 in terms of volume is... I mean, not at the full run rate. I mean, that we'll see in 2023. The response to the vehicle, which we could feel ourselves in the U.S. during the battery factory opening when we showed the vehicle, and now when we officially have been presented, is extremely strong. So I think this is going to be a true hot seller, a hot car. in the various markets being basically, I think, I mean, the only true EV platform in that size, in that category. In terms of profitability on the BEF vehicles, well, I mean, let me take, I mean, the EQS. I have to say, I mean, looking at now, I mean, the sales, I mean, in the first quarter, what did we have? I think a bit more than 5,000. So it starts to be meaningful. It starts to be, I would say, as well, representative in terms of margin. We positioned the vehicle, I think, on the pricing side where it belongs to, i.e., in the S-class segment. The variable costs are under control. Obviously, with the raw material, I mean, cost that needs to be watched moving forward. I mean, the batteries at this juncture are not getting cheaper, but rather a bit more expensive. But I can calm you down. I'm pleased with the margin on the EQS. And if you would see me, I think you could see a smile on my face.

Thank you. I can confirm that Harold was smiling. Next question goes to George Gallier from Goldman.

Yeah, good morning, and thank you for taking my questions. The first question I had was just on the working capital and obviously the higher inventory of finished goods and work in progress. Should we expect that to unwind in the second quarter, or is this somewhat reflective of the stop-start nature and disruptive supply chain that we see today, and so the results? business as usual going forward will require more finished goods inventory and more WIP. The second question was with respect to Maybach. You mentioned that the monthly sales have been exceeding 1,000 units a month, and obviously in Q1 it looks higher than that. What should we think about as a kind of annualized target for Maybach going forward? Is 12,000 units per annum the right number, or actually than what we saw in Q1, and presumably there will be EQS variance. Perhaps you can do a bit better than that. Thank you.

Thank you, George. I mean, on the working capital side, well, the inventory increase, which we could see in the first quarter, probably we will hold that level roughly in the second quarter. How did we get there? Well, in the first quarter, we decided to build vehicles even with some critical components lacking, as we do expect them to be delivered over the second quarter and then over the third quarter. So basically, there is quite a high number of blocked vehicles. A part of that will then be turned around, i.e., in the second quarter, but there will be new ones coming, i.e., blocked vehicles as the semi-constraints continue to apply in the second quarter. So that is one of the reasons, I mean, for the step-up in the first quarter and why we see that, I mean, still being, I mean, at that level, I mean, in the second. The other one we cannot ignore is is that logistic chains are impacted by the geo and macro political implications, transports, long chains. I mean, you need the trains and the trucks and the ships and the harbors. I mean, they just take longer. And I mean, each and every day is millions of inventory in a second, right? So that is a matter of fact right now. I find it, I mean, honestly, I mean, quite incredible as we've been using, for example, I mean, the train via Russia before that within a few days that has been rerouted, I mean, without coming to a hold. And, I mean, therefore, I mean, we just have to accept, I mean, a more expelled inventory level at this stage. But we definitely target, I mean, the inventory to normalize inventory. They would rather see that in the second half of the year, at least with regard to the semi-situation on the other constraints. Obviously, geopolitically, I cannot make a prediction on that one. On the Maybach, we're happy with the momentum. And we think with the current versions of the Maybach There is solid ground for that. We have other, I think, interesting stuff in mind on what to do on the Maybach, and we're happy to give you more color on the 19th of May on that.

Great. Thank you very much. And we continue with Daniel Riska from Bernstein.

Hi. Morning, gentlemen. It's Daniel from Bernstein. Let me start with a question maybe following on the profitability, some of your peers have started to announce that they will increase the transparency on the EV versus ICE side of the business, kind of looking at breaking up revenues, contribution, and investments more clearly. What's your thinking on this? And maybe more specifically, what's the timeline on this to consider kind of giving some more detail on a regular basis? And then secondly, we're going to talk about premiumization in Monte Carlo, but could I ask for a short update on your digital services business? If I'm not mistaken, the last time you talked about this was late in 2020 with about a $1 billion EBIT target for 2025. So just what have you learned so far? What are you most excited about? And also here, kind of what's the timeline for the next update on your digital service business plans?

Maybe on the second question, well, the one billion, we still see it today. And, I mean, ahead of the update, we want to give you in July on the subject matter. I mean, the learning is I think our conviction that if we look what is happening, I mean, around us, it's even more important, I mean, to accelerate on that side. And that is what happens with important milestones this year in the cooperation with NVIDIA, but many others. So I'm happy to talk about that when we're getting to that event in July. In terms of the EV KPIs, I think we started to give some color with NVIDIA. the chart on TEF and EV and the share of the plugins and the best over there. I would also invite you, Min, to have a look into our EU taxonomy reporting, where on a voluntary basis, Min, we report basically already for 2021, and obviously we'll do so for 2022 as well, how many vehicles being compliant, Min, with the future EU taxonomy rule, i.e. below 50% 50 grams CO2 per kilometer. And you can see the numbers there. In particular, on the investment side, we can see that the capitalized R&D, which are actually in the platforms, already mean 40% of the investment today, and that number will definitely go up. So I think that provides all of the transparency in where we allocate mini capital to.

I'll push back and follow up, right, because given that you're required to do this under EU taxonomy, that's clear, but have you had any discussions in the board whether you want to kind of go down a more, let's say, formulaic route where you really provide transparency between two sides of the business or give us some updates on the profitability of the two sides. I'm sure you're aware of, you know, what peers are thinking about, just wondering where your thinking is in that process.

Yeah, I mean, I'm happy to elaborate on that. I mean, before I respond, I mean, do we break up the profitability on the BEF, on the ICE side? I want to state very clearly we have a very intense debate on how we want to transform Mercedes moving forward. And I can say the board, the management board, and the supervisory board have exactly one opinion. This is one team. This is one Mercedes team. This is one company. And we're transforming the whole company into it. I mean, we are not pursuing a strategy to break up the company into an ice part and into a bad part, or call it into a bad part and a good part, or an old part and a new part. No, we're transforming the whole company and transforming it into the electric world. This is what we had been saying last year in July. This is what we are doing. Why does it make sense? I mean, let me just give you a few data points. Sales of vehicles on ICE and on BEV are coming from the same sales force, from the same team, from the same network. The industrial side of things are in common. If you look on the assembly parts of the plants, they do both, so we have the flexibility in the transition. Yes, the power plant, I mean, is a separate industrial undertaking, but even on the power plant side, I mean, it's one team managing, I mean, the ice, the engine world, and the gearboxes as well as the battery and the EHSs. The engineering side, I mean, suspension, I mean, of the vehicle, is that different on a bath compared to an ice? No, sorry, I mean, in terms of dis-synergies, dis-functioning, it would be absolutely devastating. And the strength of, I mean, this company of more than 130 years to build luxury vehicle, the leading luxury vehicle, you need to take these ones into the future and don't put it in a shell company and call it a bad asset. So this is where we are going. Now, will we spell out what is the profitability on individual vehicles? No, I think you will understand we're not doing it. I think we give you a lot of color how we want to address the transition, how we want to address the margin evolution on the EV vehicles. Jose had the question already before, and we will continue to do so moving forward. I hope that answers it. Perfect.

Thanks for that, Harold. Thank you. And we continue with Harold Hendrickson from Morgan Stanley.

Yes, thank you so much for taking my question this morning. And thank you so much for that answer just now. It's very, very helpful to have clarity in that split conversation. My question, I'm afraid, is back to my usual concerns, which is, firstly, can you just talk a little bit about what has surprised you in the last, maybe even this last three months again, You know, what do you think is fully achievable and sustainable, and what would happen if you had, for example, a normalization of production? Does a full normalization of production and supply chain actually help you, or do you think it would hinder you? And then sort of the same question, but the strategy is obviously working incredibly well. I think the comparison with your major peer in the next few weeks is going to be super interesting. But are there limits to what you can do with this strategy? Is there a limit in terms of volume that you have to produce? And even on affordability, again, your peer has just launched a brand new car. The price of that car is nearly 50% higher than the last generation of the same car. I'm getting a little bit concerned whether there is ever going to be an issue with affordability. Or are your customers happy to continue to pay these higher prices? Are there any real limits to this strategy? Or do you think you can keep going for a long time yet? Thank you.

Thanks. I mean, the first question I think was more maybe on the production side. Well, I mean, let me take, I mean, the Q1 numbers, 488,000, I mean, units in terms of, I mean, the group sales on the car side. I would say definitely we could have sold, I mean, more vehicles than 488 without deteriorating the mix. and without deteriorating, I mean, the pricing, i.e. at the same discount level as we had with 488. So in that respect, it's a shame as a semi-situation puts a constraint as I think there would have been, I mean, a bucket of opportunities which we could have nicely added to it without jeopardizing the strategy in terms of the pricing and the mix. Definitely, we want to take and grab these opportunities moving forward. I mean, with the full year guidance here, you can see slightly above previous year level, I think is a bit more than four times 488. Where is that going to come? Maybe it's more in the second half of the year, given the current ongoing uncertainties, I would say. So that is the perspective we have at this stage. In terms of is there a limit, well, I think it all goes with the substance of the product and the appeal of the product. terms of capital being available and the desire of people, I mean wealthy people, to spend the money for exceptional products, I think there, I would say there's no barrier. There's no limit. At least that's what we can see right now. But it all goes back, I mean, to the substance of the product and the appeal. And in this respect, I mean, the size is not everything. It is the distinguished luxury which matters. and maybe not the too pronounced one. But I think we'll, again, I'm repeating that quite often here this morning, wait for the 19th of May or wait for the July. But maybe that is a good opportunity to talk in more detail about it.

Yeah, perfect. Thank you so much. Thank you, Harold. And we continue with Dorothy Cresswell from Xen.

Yes, hi there. It's Dorothy Cressall from Exam. Thanks for taking my questions. The first one is actually around your distribution strategy. So you've obviously spoken about the plan to move to this agency model. Could you outline a little more where the financial benefits from that comes from? Is it just the fact that you have more control over pricing, and maybe you can generate some synergies by bundling functions, or is it also that you're going to capture a chunk of the dealer margin? And then a very quick one at the end, just on the electrification targets. You said you want to increase the BEV volume significantly this year. Can you tell us where you think the BEV mix will be for the full year 2022? I think you were at 5% in Q1, and I think 4% in 2021. Thank you.

Thank you, Dorothy. Well, what is the benefit of the direct sales model? I mean, very clearly, I mean, better control, I mean, over the pricing. And in the context of the strategy we're talking, i.e., disciplined pricing, obviously, that matters a lot. And, I mean, here we see, I mean, the benefit, and that means that we do expect that, I mean, the implementation of that model will help us also in terms of the progression, I mean, on the pricing side. Next to it, I mean, obviously, there should be also cost benefit, I mean, coming out of it as part of that move. Over time, there should be some consolidation in the network. I don't want to point out only, I mean, the things which are, I mean, beneficial. comes, I mean, with a bit of a bill, which is also, I mean, the inventory side. I mean, dealer inventory, I mean, is coming over on our balance sheet, but we'll have an opportunity to improve, basically, the end-to-end process and probably, therefore, I mean, mitigate, I mean, the impact which is coming out from the working capital and the inventory side. In terms of EV and BEST, 2022, well, overall, we said we want to be, I think, 15% in 2022. We said we should have around 400, more than 400,000 EV vehicles. If you look into the Q1 chart, you can see that in the Q1, the progression on the BEV side is definitely much more expelled. We continue on the plug-in, important transition technology, but the real ramp is now happening on the BEV side. How is it possible? EQS, I mentioned, 5,000 in the first quarter. I think there's a good run rate and maybe hopefully has even more potential. But then in terms of volume, EQE coming in, the sedan, and then EQS SUV later in the year and next year obviously the EQE SUV. These will be really the ones pushing the BEV share to another level.

And the last question goes to Steven Reitman from Societe Generale.

Yes, good morning. A question quite similar on the BEV subject. Congratulations on the run rate you're seeing already on the EQS. Could you comment, now that you've opened the order book for the EQE, what preliminary signs you're seeing on that? And if you'd comment maybe on the cadence you expect for BEV penetration just during the course of this year, presumably very much weighted towards the second half of the year. Thank you.

Yeah. Thanks, Steven. Well, in EQS, as I said, good momentum, more than 5,000 in the first quarter. HUGE, HUGE APPETITE, I MEAN, FOR THE HIGH-END VERSION OF THE VEHICLE, HUGE APPETITE, I MEAN, FOR THE HYPERSCREEN. SO WE NEED TO SEE HOW WE CAN MATCH THAT LEVEL OF DEMAND IN 2022. AND THAT'S WHAT I WOULD SAY, I MEAN, IN THIS RESPECT. ON THE EQE SIDE, The step up in the production will be second half of the year and the true run rate I think is definitely more 2023 subject than 2022. However, I think the experience on the EQS makes us very, very confident that EQE sedan, but also EQE SUV is going to be really, I mean, a hot car. You know, the EQE basically is, I mean, just a little sister or sibling or the shrinked version of the EQS. Therefore, I think that would be very, very attractive in the markets, yeah.

Are there any semiconductor shortages or other issues that are holding you back on your BEVs at the moment, specifically?

As we speak, I'm not aware of any specific semi-constraint on the BEV or on the AFA2 side. I mean, the constraints, I mean, here. they are, I would say, more in common between ICE and BEV, not specific to BEV. Thank you very much.

And with that, ladies and gentlemen, thank you very much for your questions and for being with us today. Thanks a lot to Harold for your answers. As always, IR remains at your disposal. In two days, on Friday, April 29, our virtual AGM will take place. We hope that you, as an investor of Mercedes-Benz, will find the time to join us on that day. To all of you, have a great morning, great afternoon, and great evening, and we look forward to talk to you soon. Thanks and goodbye.