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.