Mercedes Benz Group Ag

Welcome to the global conference call of Mercedes-Benz. At our customer's request, this conference call 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 followed by a Q&A session. If you have difficulties during this conference, please press zero and rhombus on your telephone keypad for operator assistance. If you want to ask a question after the presentation, please press 9 star on your telephone keypad. To remove the question, please press again 9 star on your telephone keypad. Please note that dialing 9 star a second time during the call will automatically withdraw your question. Please refrain from pressing the key combination multiple times during this call. I would like to remind you that this telephone conference 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 I now hand over to Steffen Hoffmann, head of Mercedes-Benz Investor Relations and Treasury. Thank you very much.

Good morning, ladies and gentlemen. This is Steffen Hoffmann speaking. On behalf of Mercedes-Benz, I'd like to welcome you on the telephone and the Internet to our Q3 results conference call. I'm very happy to have with me today Harald Wilhelm, our CFO. To give you maximum time for your questions, as always, Harald will begin with an introduction. directly followed by a Q&A session. The respective presentation can be found on the Mercedes-Benz IR website. Now, I'd like to hand over to Harald.

Hi, everybody, and thanks, Stefan. So, let's jump right into it. Quarter three, I would say, we once again delivered the mean solid financial results. Despite a subdued market environment, despite intensified competition, especially on the EV side, despite high inflation with unprecedented spikes. All in all, according to our weather chart, this would rather call for a rainy macro scenario. And looking at our results, I would say they look rather fair, between fair and sunny, let's say. So in other words, I mean, Q3 underscores the resilience in a subdued market environment. Let's have a look at the numbers on the page three on the group level, stable revenues. Group EBIT at 4.8, solid cash flow at 2.3, and a strong nil of 28. What are the highlights on the car side? Page 4, in terms of the performance, I would like to highlight, I mean, the Maybach sales up 26% in the quarter, the G-Class up 11% in the quarter. On the other side, the G, C, and E-Class, I would say this is pretty much the theme of the day. have been constrained by the 48-volt supply. On the profitability, we see solid results, in particular supported by improved mid-net pricing. On the products, I mean, we had the highlights during the IAA, the auto show, represented in the concept CLA. We also presented this year, I mean, in the quarter, the AMG GT, and all new E-classes stayed in all terrain as well as facelift of EQA and EQB. We also started to mean the sales of the new E-class in Europe and got excellent market feedback on the product. On the technology side, you can see with the concept CLA that this with a range of 750 kilometers, you know, that really manifests some segment leading efficiency. with around 12 kilowatt hours per 100 kilometer and with 800 volt systems charging up to 400 kilometer in 15 minutes. Also, lots of interesting stuff on the customer and experiencing side in terms of over-the-air updates on MBUX to more than 700,000 vehicles. Jumping to page five in terms of more details on the sales side, Q3, Sales at cars, 511,000 units. So year to date, that's a 2% up and therefore, I mean, fully in line with the full year guidance. In essence, I would really like to say we lost around 5% volume in the quarter. And if I look at the full year, probably we could have done 5% volume more overall on sales. However, due to the 48-volt, we are constrained on the GLC and the ECAS. Year-on-year sales in the quarter, lower mainly in China, but the quarter-over-quarter is a positive trend. If you look on the segments, on the entry side, you see our strategy prioritization, prioritizing value over volume at work in a very competitive market environment. The core is flat. That is mainly a result of the supply chain bottleneck on the 48 volts. And the top end, clearly we are in defending, in a leadership position in all markets. Combined, there is a healthy margin and very disciplined pricing. Top end year-to-date is up 6%. And we do expect it to grow on a full-year basis over last year, consistent with our story. Let me give you a few more data points on the top end in the Q3. On the AMG, you see a bit of a lower number, but that is mainly due to model changes like the AMGE class, GLC, and some positions, I mean, on the AMGE. So these models will come in in Q4 and then in 2024. On the S-class, the S-class clearly continues to lead in the segment everywhere in the world. In the S-class, you see a bit lower due to temporarily smaller certification topics, in particular in the US, usual seasonality and a bit of macro. In China, the S-class holds more than 50% of the market share, and are up there in China by 9% year over year in the quarter. And also in the U.S., if you don't look at the group sales, but rather at the retail sales numbers, you see that it's 48% up in the third quarter. I hope this explains that what you see in the quarter three is of temporary nature. Looking on the electric side of things, the transformation into the EV world continues. We can see the XEV share now at 20%. On the best side, the quarter is up 66%. And if you look more specifically to the EQS SUV sales, they more than doubled in the quarter. In total, in this quarter, we had EQE and EQS sedans and SUVs of around 24,000 units. I think that's a good number for a brand-new platform. In the U.S., the BEFs are growing nicely with year-to-date EQS registrations ahead of the relevant top-end competitors. And in China, we were ranked number one in terms of customer experience satisfaction in the survey of NEFs. by the Chinese arm of GD Power. Looking at the financials, page six, revenues are minus four in line with the sales. Year-to-date, revenues are up by 3%. ASP is almost flat year-over-year and slightly up quarter-over-quarter. EBIT adjusted at 3.4 and the CAC EBIT at 2.2. Let's have a look at page seven on the EBIT evolution. coming from 4.1 billion in last year's quarter. The bucket volume structure net pricing net looks small, but what happened behind is a much bigger thing. The arrows on the chart are roughly proportional to real numbers. So what does it mean? Year-on-year net pricing further improved. Net pricing was on similar level as the second quarter, 23%. and overall at a very healthy level. Pricing almost outweighs the slightly lower volume and the Q3 lighter mix effect. Volume and mix, I've explained already before, some on the AMG and the S-Class effect, and the non-availability of the 48 was on GLCs. Used car business was slightly negative year-on-year, coming from a very high level as we guided before. FX very briefly, 330 negative. chiefly from the Turkish lira, which is compensated in pricing, and the remainder is a translation effect from the RMB. Industrial performance minus 400. I mean, here we have now tailwinds from lower raw material prices, but they are outweighed by disproportionate inflation charges and supply chain-related costs compared to previous quarters. This is the main reason for lower profitability in the third quarter compared to H1. And I would like to explain what does disproportionate mean. That means that the charges in the quarter three relate to the first nine months of the year, so to the year-to-date timeframe and performance. Selling expenses are slightly better due to lower marketing expenses. G&A is slightly positive. And in the others, we have on the upside the proceeds from the sale of our operations in Indonesia, and on the other side, the positive impact we had last year on the interest rates, which we don't have anymore. So that leaves us with EBIT at 3.4, return on sales adjusted to 12.4. On the walk, page 8, from EBIT to cash, what can we see? Cash conversion rate, I mean, of 0.7. Working capital is negative around 500. Heavier finished vehicles sitting in the inventory, which I think that underpins, I mean, the softer Q3 top-end sales mix. And therefore, I mean, that should improve in the fourth quarter. So the vehicles are there. I think that explains that the mix in the quarter three is temporary. What else? On the other side, we had a bit of favorable trade payables, which is offsetting the inventory effect in the third quarter. Net financial investments refer to the sale of the operations in Indonesia. The net investments in PPE and intangible assets compared to depreciation are stepping up in line with the guidance, and that refers obviously to the investments in our legal architectures and future technologies. On the other bucket, I mean, you see basically the BVC at equity result and no DV in the third quarter. On the adjustments, these refer to the legal proceedings and M&A. Page 9 on the VANS, on the sales side in terms of the performance at the same level, However, on the profitability side, I would say, I mean, a very strong set of results with solid net pricing, good product mix, balancing supply chain-related costs. On the product side, we had a preview of a new lineup on the EQV, V-Class and V-Class Marco Polo, with more luxurious character, and on the eVito and Vito, a sharpened premium character. Looking at the sales of the vans, page 10, as I said, flat, in particular strong in the NAFTA region. And here the EV sales also doubled, however, coming from a low base. Page 11, in terms of the financials, all numbers are up. Big thanks and kudos to the van team. Outstanding results, I would say. So with flat sales, I mean, the revenues are 15% up. So you can see pricing and mix at work, EBIT adjusted 700 million, and the cash generation of a billion. On the walk, on the van, page 12, volume structure, pricing bucket increased by more than 500 million. That is coming mainly from the strong pricing and the better mix. Industrial performance is negative due to higher inflation supply chain-related costs despite raw material tailwind. In the interest of time, I would say I jump over the remainder. Going to the cash side of things, page 13, we see a $1 billion mean free CFBIT on the vent side. The adjusted cash conversion rate at 1.4. Working capital, I mean, slightly positive with 130. Lower finished vehicle inventories, favorable trade. Payables and receivables. Higher investments as guided in PPE and intangible. That refers to the ramp up of our investment into the VAN EA platform. And in the other buckets, you have several small effects, which are adding up to 160 million. On mobility, key messages, market environment is challenging, remains challenging. In particular, increased competition in China. The overall penetration rates, I mean, are under pressure with a positive trend. However, on the EV side, in particular in the U.S., thanks to the IRA, On the performance side, we see the impact in the margins from higher refinancing rates and intensified competition. In addition, we also see the cost of credit risk stepping up by weakening macroeconomic environment. At the same time, we also ramped up our charging activities, and you might have seen that we opened the first site on the 16th of October, and more will come in Germany and the U.S. in a couple of weeks. Page 15, key numbers, I think I mentioned already, new business increase in Q3, portfolio remains stable, a bit adjusted, decreased. Why? Let's have a look on the page 16. So how did we get there to 360 million and 10% return on equity adjusted, a bit of negative FX, negative cost of credit risk driven by more challenging macro environment. And then the big one is the lower interest margin, which is impacted by the higher refinancing cost and a higher level of competition. On top of that, we see investments for the charging unit in the third quarter. And I would say then a bit of favorable impact from our portfolio on mobility services. Page 17, what does it mean on the group side? The business side, I explained, there leaves the RECON, the reconciliation item, positive with the Dynatruck at equity result. And that gives us an EBIT adjusted of 4.9 reported 4.8. In between, you have the adjustments for legal proceedings. On the cash flow bridge, same thing. Business side, I mean, I explained income taxes are roughly minus 1.1 billion. Cash taxes are going up year over year, also due to lower offset tax loss carry forwards. We've significantly improved interest result due to the higher interest rate levels. And other than that, the recon item includes mainly central function-related topics. The free cash flow, therefore, on the industrial side of the business is at 2.3 billion. And I think with this number year-to-date, 7.9 billion. which is, from memory, I think, almost the level of full year 2022. On the NIL, page 19, 28.5 at the end of the quarter, starting from 26 at the beginning of the quarter. Solid cash flow, as commented before. We bought back shares in line with our share buyback program. of 0.5 billion. And as we speak, or I mean, as of today, we brought all in all roughly 1.3 billion back. That means we are well on track for the 4 billion program, which runs within the up to two years. So I think in terms of timing, we are front loaded. On the other side, FX and also dividend payment from MBM. Now, let's turn to the outlook. First, on the division side, the division guidance, I really would like to invite you to read the assumption charts carefully. In the interest of time, however, I jump over it and go to the CARS division guidance. First, on the sales side, we expect the pace from the first three quarters of 2023 to continue for the remainder of the year. As the 48-volt supply constraints on GLC and E-Class continue, we expect the mean Q4 sales at the same level as Q3 level. Without this supply issue, we would have expected a higher quarter four and the full year of approximately 5% higher. Quarter four expected top end share is expected to be higher than quarter three. And with that all together, we continue to see the full year sales level 23 at prior year level. Looking on the return on sales guidance for cars, for return on sales adjusted cars, we confirmed the 12 to 14% full year range. At the Q2 disclosure, we said that we see ourselves at the upper half of this corridor. What happened since then? The BEV pricing competition has intensified. We have defined our red lines here, but I cannot stay out of it completely. The GLC ramp-up continues to be limited due to the 48-volt supply issues. The GLC is a hot car, an important volume and margin contributor, and we would love to be able to hand over more of these fascinating cars to our customers. Also, the 48-volt supply issue now limits the ramp-up of the new E-Class, the 214. The new E-Class is a great car with fantastic product substance, enjoying great initial customer feedback. We just can't ramp up as planned at the moment. Last but not least, we see inflation-related supplier costs sitting at a higher level than at the beginning of the year and at H1 level. Despite all of these headwinds, we confirm our full-year guidance of 12% to 14% return on sales adjusted, but now see ourselves at the lower half of this range. The remainder cash conversion rate, PPE, as well as R&D remains unchanged. On the VANS side, the sales guidance is confirmed. The margin guidance was a strong margin year-to-date. We see the van adjusted return on sales, I mean, at the upper end of the 13 to 15% guidance range. We continue to see good sales performance, but some higher ramp up project related expenses by the end of the quarter for the van EA. The adjusted CDCR is also confirmed at 0.7 to 0.9. Invest PPE R&D is unchanged. On the mobility side, We're coming from a 12.9% year to date. We see the quarter four at a similar level than Q3. The effects of the deteriorating interest rate margin is likely to see a low point in the fourth quarter. Furthermore, we continue to see OPEX for our branded high power charging network. In the full year, we confirm our guidance, however, at the lower end of the range of 12 to 14%. Without the increased OPEX for charging, Probably we would expect for full year rather at the mid of the range. On the group guidance, page 22, based on the Q3 results and our outlook as provided before on the segments that we confirm all KPIs as before. And with this, let me turn to the last page of the presentation, 23. We are not only defending our leadership position on the top end segment. I think I made it clear that what you saw in the third quarter should be temporary in nature. And if I allow me to have a look into the product momentum for 2024, we see great stuff coming up. What is it I'm talking about? Definitely we'll see the world premiere of the electric G-Class. We see the start of the AMG GT sales, a real cool car. The AMG E53 hybrid, the CL E53 63. So tons of great stuff to fuel momentum in the top end.

And with this, I think we're happy to take your questions now. Absolutely. Thank you very much, Harold. So, ladies and gentlemen, you may ask your questions now. As always, I'll identify the questioner by name. However, please also introduce yourself with your name and the name of the organization before asking your question. Please ask your questions in English, and as a matter of fairness, please try to limit the number of questions to a maximum of two. Now, before we start, the operator will again explain the procedure.

Thank you very much. If you want to ask a question, please press 9 and the star key on your telephone keypad. To remove the question, please press 9 star on your telephone keypad again. Please note that dialing 9 star a second time during the call will automatically withdraw your question. Please refrain from pressing the key combination multiple times during the call. Again, for a question, please press 9 star on your telephone keypad. If you have difficulties of raising a question, please try another conference call telephone number indicated in the invitation you receive or press zero rumbles on your telephone keypad for operator assistance.

And we start the Q&A with from Goldman Sachs.

Good morning and thank you for taking my questions. Obviously, you've seen some disruption in Q3 from the 48 volts, and also I believe you still face high supplier compensation requests. Maybe just thinking a bit further forward to 2024, do you think that this provides you with some volume catch-up opportunity on the vehicles that have been constrained by the 48 volts? In addition, when we think about supplier compensation in 2024 in absolute terms, Would your base case be that this should be substantially lower than it has been in 2023? Thank you.

Thank you, George. Definitely, we do expect and not only expect, I mean, we work hard, I mean, on the 48-volt topic, I mean, with the supplier to cure the problem. and therefore allow ramp up of GLC and the E-Class in 2024. I think I would not give now numbers for 2024 in this respect, but the support review that that should generate mean positive momentum with the GLC being a hot car, E-Class being a hot car, both of them having healthy margins. I think that therefore definitely that should support them in 2020, not only in terms of sales, but also in terms of margin evolution. On the supply chain, inflation-related, I mean, costs step up. We're facing, I mean, this quarter and also, I mean, quarter four. Definitely, I have the expectation that they will come down over time. but would wish to be cautious maybe at this juncture, how and when exactly that is going to happen. Clearly, we do expect each and everybody, including the supply chain, to do their job, fight inflation, fight cost increases, as we are doing. Just to give an example, I mean, our fixed cost trajectory, the journey we laid out in 2020, we didn't change it due to inflation. We kept the target. which just means it's harder. So we expect the same thing from the supply chain. And therefore, we'll take a hard look at that. But again, when it's going to come down, let's see a bit when we enter 2024. Thank you, George.

And we continue with Patrick from UBS.

Hi, good morning. Two questions also from my side. You mentioned at the very beginning that it's getting a bit rainy outside, and that would suggest that you would lean towards a 10 to 12 percent margin rather than the 12 to 14. Now, for the time being, you've done quite well, but if we take a look into already 2024 beyond Q4, There are these headlines about high inventory days in the US, discounts in Europe, etc. Difficult EV situation in the market overall. You called out the pricing pressure and the red lines you defined. You mentioned more cost-cutting that you're working on or intensifying your efforts to reach your absolute targets. What does this all mean for 2024 qualitatively? Would you say we should be prepared for you know, the rainy margin corridor, or are you still confident to stay in that 12 to 14% range going into next year? And my second question, simply against that backdrop, what does this all mean for your cash return and capital allocation? You were on stage in Munich at IAA starting, basically, a debate on stage what kind of net cash level is appropriate for this company, and You clearly left us under the impression that you're sitting on too much net cash and there's flexibility. So how do you think about this against the backdrop of a more rainy weather situation outside? Thank you.

Yeah, thanks, Patrick. Actually, it did rain this morning in Stuttgart. I see a bit of blue sky coming up, but maybe too early. No. Well, I think this is a QC earnings call, so I think giving guidance on 2024 at this juncture is a bit difficult. I mean, so, but I'd like to give a few elements, I would say. Definitely, I think the EV space is an extremely competitive space. I think I said before, we defined our red lines. But overall, as you can see with the Q3 results, in particular on the pricing side, we could materialize the strategy in terms of value over volume and protect the margin overall of the portfolio. And as we have the tactical flexibility to adjust in terms of the EV ramp, the demand from customers, We can bring, I think, the whole product portfolio, the very competitive portfolio. I mentioned the GLC before. I mean, the E-class, the AMGs to come next year at work. And I would expect, I mean, they have a favorable impact in terms of, I mean, the mix for 2024. In terms of, I mean, the overall demand side of things, I commented in the half year, in terms of the volume, i.e. 2024, not to be below 2023. As we speak today, I still have the same view for 2024 when it comes to the volume side of things. And well, supply chain related costs, we already talked about before. So rest assured, our ambition sits also for the future, where it sits for 2023. But now probably my colleagues will stop me from talking before I start to give further guidance on 2024. On the net cash, well, I know you all want to have the $28 billion back now. No, we're not doing that. My point is I think we have a lot of flexibility. I don't see a fundamental change in the cash generation despite a more subdued macro environment and a more rainy scenario may now be there. And as you can see, we're progressing with the SBB program well ahead of the timing, the proportional timing. And we'll continue to think in terms of what does that mean for capital application moving forward. But we still have a bit of time until we complete the program.

Thank you, Patrick. And we go to Frankfurt to Tim from Deutsche Bank.

I was also going to ask you about the weather chart, obviously, but Patrick has already done this, so let's try to approach it in a different way, because obviously it's the key question today to investors. You specifically are known for someone that has things very well under control. You have a very tight grip on the numbers with Mercedes. That's a reputation that you already have at Airbus, and now you certainly have it at Mercedes. Now, can you help us understand how much of what was going on in Q3 and will now go on in Q4 is somewhat of a short-term glitch where we really talk about the GOC issues that are out of your control with your supplier and then the supplier compensation payments. Or is there just so many issues falling on Mercedes right now or the overall industry actually that it's just getting a lot more difficult to control and that we should prepare for an environment where at least there's more volatility on the margin, even if you don't want to point us now towards the 10% to 12% or 8% to 10% in a rainy environment. And how shall we think about the discounts in Germany and the stories that we've seen over the last few days in the press? You obviously introduced the agency model here. The point of that is better pricing control. Now we hear a lot about discounts for also brand new vehicles. Have you overdone it on the ASP side, at least in the market in Germany? Or what was really going on there? Perhaps you can contextualize this. Thank you.

Yeah. Thanks, Tim. I would say let's get the elephant out of the room. So what happened in the third quarter? I mean, commented before that, I mean, the step up in supply chain related cost, in particular, I mean, inflation related cost is a main reason for the margin evolution in the third quarter compared to the H1. And we do expect this to be also at elevated level, maybe even higher level, I mean, in the fourth quarter. And that is, I mean, the main reason why you see the comment on the full year guidance now at the lower half of the range of the 12 to 14, which obviously you guys calculated immediately in terms of what does it mean for the fourth quarter margin, which mechanically, therefore, would sit below 12%. But let me be extremely clear. When I commented before on the disproportionate element in the quarter three of the higher-level supply chain-related cost, it refers to the nine months. And when I say in the fourth quarter, we do expect an even higher charge on this topic, it refers to the full year, not to the fourth quarter. But my message, therefore, you shouldn't look in terms of the run rate on the quarter and but you really need to look on the run rate on the full year, and that is for 2023, the 12% to 14%. To your second question, yes, EV is a very competitive space. I mean, come on. With price discounts of some of the other guys, more than 30%, some of the traditional players selling BEF vehicles below the pricing level of ICE with variable costs probably sitting above, as you know, I would say this is a pretty brutal space. In this context, I think you could see that we had been doing, again, look at the Q3, been pretty well, and overall kept the discipline on the pricing, as you can see in the Q3 print on the chart, which is indicated with the arrow on the chart. Within the portfolio, many have vehicles, hot cars, which do not afford or which do not require, apologies, which do not require, I mean, any particular measures. You have other portfolio positions which require a bit more measures. And I think this article you're referring to, I think that refers probably to some short-term year-end stock measures. I'm a bit speculating here as I didn't write the article. But you should not conclude, I think, from this one on the overall pricing strategy, which has been demonstrated as firm and robust in the third quarter. However, I repeat, on the EV side of things, this is extremely competitive in these days.

Thank you, Tim. And we go to London to Jose Acemendi from JP Morgan.

Thank you very much. Jose from JP Morgan. Two questions, please. As one on the auto bridge, can you go back a little bit to this volume structure pricing category and maybe break down or provide a few more details behind that bucket? And second, can you talk a little bit about your Chinese auto business? Can you provide a bit more details behind volume mix and maybe the ramp up of the facility? Thank you.

Good morning, Jose. Your question, volume structure mix, is referring to quarter three, quarter four, or 24, 25? Q3. Q3, yes. Well, in the bridge, I think you can see volume is now year over year is slightly negative. Mix is negative for the reasons mentioned before on AMG and S-Class chiefly certification temporary impact, whereas the pricing is nicely favorable. And then within the industrial performance, the raw mat now started to be positive. So we're enjoying the tailwind. We were counting for it since a little while, but then offset by this higher level supply chain related cost I addressed already before. So I think this, in essence, I mean, are the mechanics of the quarter three bridge. And maybe I repeat myself, but the supply chain related topics and the non-availability of 48 volts on the GLC and the E-class are the main reasons why you see the quarter three at 12.4 rather than 13.5 of the H1 class. In terms of how should that move and develop further, it tried, I think, to comment before. So we should see a mixed favorable. We should see pricing stable in the fourth quarter. We should see the supply chain related cost picking up as well as some seasonal cost effect in the last quarter. I mean, as we see that basically each and every year, and a bit of the minor things, you know, like the capital gain from the sale of our Indonesia operations. And if you do the math, you're getting, I think, to the numbers I explained before within the 12 to 14, but at the lower end of the range. So I would say under control. On China, in terms of... The China momentum, year over year, I mean, we are down in China, but I would caution maybe to take the third quarter, 22, as a reference. I mean, remember, second quarter, 2022, was heavily impacted by the lockdown. Quarter three came up, I mean, pretty sharply in China. If you compare the evolution in China more quarter over quarter, which may be in this respect more relevant, i.e. quarter three over quarter two 2023, we see momentum picking up, so a positive trend. We see the demand on the top end very strong, commented on Maybach and G-class, and I think that refers to China as well. The macro a bit, I would not hide that, if I may say. The overall, I think, macro situation and the consumer sentiment in China did not come back completely after coming out of the COVID lockdowns since the beginning of the year. And that's probably still, I mean, a sentiment which is hanging out there on the market overall, where also the top end segment is not completely immune. But in the longer term, we do expect or we see the potentials obviously in China. And that's why we're holding the position in the top end of more than 50% with the S-class being the undisputed leader.

Very helpful. Thank you.

Thank you, Jose. We continue with Horst Schneider from Bank of America.

Yeah, good morning. Hope you can hear me. I want to ask another follow-up question on Q4. I hear you, Harald, regarding the bridge. Mathematically, your guidance implies now for Q4 a margin of 7% to 11%, which is, of course, a pretty wide range. When I hear you talking about the bridge items, hard for me to imagine that it should be at the lower end of this range. So maybe could you narrow a little bit the outlook for Q4? If you should think about 7% or 11%. And then again, regarding the reasons, I get the sense that it's mainly related to the supplier costs. Could it be that this is an industry problem? Because basically the whole industry has got a BEF problem, and therefore the sale producers, they are charging basically compensations, which would imply Also for you that potentially the supplier cost issue is an issue also for 2024. Would you agree or disagree to that? Thank you.

Thank you, Horst. I think we can clarify the understanding of the guidance ranges. So when we say 12 to 14 and the 11 and a half would not qualify for the guidance range, So by my math, the very low of the range we're guiding here today, i.e. the 12 to 14 in the lower half of it, means a Q4, which doesn't fall, I mean, in essence, or which doesn't go single digit. Let me call it this way. Yeah. So I think that's what we're talking about when you compare to quarter three performance, so around, I mean, 200 to 300 basis points. And that is, I mean, fully explained by this supply chain related cost and seasonal cost phasing. I think I gave the elements already, I mean, a few times, I mean, before. Looking forward, in the supply chain related cost, I mean, obviously, I mean, cover everything in terms of the relationship, the whole portfolio. Some inflation related, obviously, also in the question in terms of what is in the offtake on given programs. However, I'm not commenting on individual supply relationships nor on individual programs and any charges which might occur from there. Over time, I think, therefore, as I said before, the supply chain related costs should come down. Again, the timing of it, I would remain cautious maybe at this juncture. And I think it's a kind of a law in supply chain management that you get your yearly productivity. And I want to see the yearly productivity back. As I said before, I mean, inflation, yes, it spiked. Energy costs spiked. But, I mean, we are beyond the worst. And, I mean, therefore, the – these spikes on the bill of material within the suppliers should relax over time, and that's what we want to see then coming through as well. So no detailed comment in terms of the tailwind for 2024 here, I would say. But in the longer term, definitely we should try to recover some of the stuff we lost here.

That's great. And last question that I have maybe on order books. The order trend, is that getting negative or order stable?

Order book and order intake is going the right direction. And as I said, I mean, GLC, e-cars are hot cars. Obviously, given the constraints we have, we still have. We probably don't see the full momentum yet in the order intake either. Too many models are unfortunately constrained here. So once we're getting out of that, I think we'll also see then order intake momentum stepping up. Overall, I think I commented before that for 2024 sales, I see from today's point of view, no reason why 2024 should be below 2023.

Okay, great. Thank you. Thank you, Horst. And we continue with Steven Reitman from Societe Generale.

Yes, good morning. I have two questions. First of all, if you could comment on what you've been seeing in Germany with order intake on BEVs after the change in the tax treatments for company cars in the beginning of September. and what your thoughts about how much these sort of like incentives or government bonuses are impacting this market. And secondly, also, if you could comment as well on the agency model. You made some comments already, but I was just wondering if you could maybe talk a little bit about how you've seen pricing, how you've seen price realizations and the degree of satisfaction you're registering with dealers and with your customers. Thank you.

Thanks, Steven. Well, I mean, on the change in legislation end of September, I mean, we are a few days after end of September. I think, I mean, it's a bit early, too early, I mean, to judge on from there. Definitely, I think we can say is that the tax treatment of XEV vehicles is an important element in particular when it comes, I mean, to fleet customers, to corporate fleets. And therefore, I mean, we need to watch that item. But too early, I would say, at this juncture to speculate about it. With regard to the agency model, now when we have it into place in quite a lot of markets, I mean, already, as you know, Germany moved latest, I mean, in summer, in June, UK, beginning of the year. I think all in all, wherever we look at in terms of, I mean, what's the net economic impact, I mean, of the model, I think we can clearly say it's favorable to the pricing, to the net pricing, and definitely supported within the margin bridge we were talking earlier before to also the quarter three pricing performance. It will also help, I think, to consolidate and therefore all in all reduce the spend on the sales and the distribution side. And in terms of, I mean, the working capital, you see, I think, that overall, I mean, the amounts are pretty well digestible. So the step up in inventory in the third quarter is more a function of the mix and a bit of the volume rather than a function of the of the agency model, I would say. Thank you very much.

Thanks, Steven. And we continue with Henning Kussmann from Barclays.

Yeah, thank you. Good morning. Thanks for sort of drawing the floor, I guess, at 10% margin for the fourth quarter in the cast. I'm still trying to fully understand this supplier compensation thing. So, am I right in understanding you said at the Q3 stage, it was over proportionate because you compensated for the entire first nine months? And then in Q4 now, you will have even larger over-proportionate compensations because you will be compensating for the entire full year. And this is compensation negotiations, I guess, that haven't been concluded. If you could just confirm that that's the correct understanding and that you asked us to then still view it on a full-year basis on an overall run rate. So that I guess when we then transition into 2024, everything else equal already from the relief on a normalized basis, it should be a little bit better. If you could just confirm that. And the second question was on mobility. I think you mentioned there was or there would be a low point in passing on of higher interest rates in the fourth quarter. Can we take that as an indication that also the absolute EBIT level is around or will be reaching a low point in the fourth quarter, not too dissimilar from the adjusted EBIT level in the third quarter? And we can see some sort of normalization up in 24 in mobility from that level. Thank you very much.

Thanks, Henning. On your first question, I just can say very smartly analyzed, understood, and commented. So I just can say I do confirm your understanding. On the second question for the mobility, I would say, I mean, there are two things. Number one, the higher level of refinancing cost, which we try to pass on to customers, Obviously, from a customer point of view, constitutes, I mean, a higher level bill, which affects, in essence, all markets, next to the very competitive behavior of some market participants in China. And probably that doesn't go away quickly. I mean, what's the saying? Higher for longer. So I don't want to speculate here in terms of when might rates come down, but as long as the rates are where they are, then that higher-level bill is not a given that you can just pass it on. On top of it, I think you have some temporary issue in it. What do I mean? In some countries, the contracts for the vehicle purchase and the financing attached to it has been done some time ago, call it 18 months ago, and given the supply chain. the semi-related delays, some of these bookings are vintage off, call it 12 or 18 months, and therefore have been concluded at interest rate levels lower than the one we're facing today. So if you deliver the vehicle now, I mean, you're facing refinancing costs which are sitting at a higher level and therefore wait on the interest margin. That doesn't apply to all markets. I mean, it applies to some markets, in particular in the European space. So this impact, I mean, somehow should level out over time. And then, obviously, in the new business, we are trying to step up in the interest rate margin. And I can say in the acquisition rate we're seeing today, we see the trend going the right direction. But it will take a while until, I mean, all of the new business comes through before the old one from the portfolio has been released to the P&L. So, yeah, I would say we should see, therefore, some kind of a bottom line in the fourth quarter, but it will not mean immediate recovery in the quarter thereafter. So, I think we need to be a bit patient, but trying to fight that by efficiency measures, digitalization, all other types of things.

Thank you. Thanks, Henning. Considering the fact that at 9 our time, many of you will have the next OEM call, I think we have time for one more question, which would go to Harald Hendriks from Citi.

Yeah, morning. Thank you so much for taking my question. I'll just go one question. Given you say the EV market is brutal and we understand all of this, I think you've been very, very honest about the development of your own vehicles, and I think we're looking forward to the performance of the CLA in 2024. Does the environment on BEVs make you question the targets that you have, or are these set in stone? I mean, the reality is that these cars are probably now less profitable than you would have hoped. The pricing power in this part of the market is clearly more difficult. You know, does it make you change strategy, or is there really just no choice in moving towards that 2030 target? Thank you.

Yeah, thanks, Howard. Yeah, as I said, I mean, the space today, I think, is very competitive. I mean, you called it brutal. On the other side, we see an adoption rate, a customer adoption rate running at a lower level. So I would say if the margins on the EVs today are sitting at a lower space than assumed maybe some time ago, I mean, there is an outside potential, I think, from the technical flexibility of the portfolio, namely, I mean, a very competitive and margin-healthy ICE portfolio. I think this is exactly the benefit of one company transitioning from ICE into BEF rather than being BEF only. However, we don't take it lightly as we completely stick to the strategy in terms of full electrification. And we're doing all of the investments for the products. Some of you, I mean, you know, could see what is going to come here. And I think, I mean, these products, call it, I mean, kind of, I mean, the second wave after the first wave of early adapters. I mean, grabbed what you can get in the market with heavy discounting. I think there will be a much broader way for, I mean, customer than honoring the value of the products, I mean, moving forward. And, I mean, next to the very competitive space, I mean, today, Probably the current environment is not a healthy and a sustainable one moving forward. I think we'll see some consolidation. We will see some normalization. I don't want to sound naive here, but I can hardly imagine that the current status quo, I mean, is fully sustainable for everybody. So we are doing, I mean, what we have to do, which means we play the long game. We invest into the products. We invest into the charging. So we address the customer concerns. which might still be today, range anxiety, charging anxiety. So we cover all of these, and we therefore completely stick to the strategy, use the tactical flexibility in between, and retain the overall objectives which we outlined.

Thank you, Harold.

Yeah, and with that, ladies and gentlemen, thank you very much for your questions and for being with us today. Also, thank you very much to Harold for answering the questions. As always, IR remains at your disposal for any further questions you might have. Have a great morning, great afternoon, great evening. Thank you very much, and goodbye.