Mercedes Benz Group Ag

Good morning, ladies and gentlemen. This is Christina speaking. On behalf of Mercedes-Benz, I would like to welcome you on both 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, 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 would like to hand over to you, Harald.

Yeah, thanks, Christina, and hello everybody to this call. Before we move into the deck, let me say a few words on the current profit evolution in our company. We are at least as unhappy about Q3 as you are, and we are conscious of that. So how do we move from here? We have the right products with great substance, and we are working on an unprecedented product offensive to come. However, the macro environment deteriorated, and the competitive landscape remains demanding. Q3 results have been impacted by changes in the market environment and product transitions. Rest assured, we are working on all levers to step up the performance to our ambition level. But for today, let's focus on the Q3 results and the outlook for the Q4. And with that, I would jump to the highlights, the key messages for the quarter on page two. If we look on the sales side, we had overall a solid sales number for cars and vans. Sales for our top-end vehicles were impacted by a softer mix. I come back to that a bit later. On the product side, we had some world premieres, such as the Maybach SL, such as the AMG GT Special Edition. As you can see, this beautiful beast here on the chart, the GT 63 Pro. And furthermore, with a limited edition of only 200 vehicles. And furthermore, you may spot the first van EA prototypes on the road, which demonstrates that we are reinventing vans as well. On the profitability side, definitely cars was a weak quarter. It was a lower than expected volume, unfavorable mix, and softer pricing. I'll obviously go in more detail on this later. Then, as expected, a bit lower, but still a very good level. And MBM, as expected, in an environment that remains demanding as well. On the technology side, we are progressing, demonstrated by things like Level 3, now with an increased operating speed up to 95 kilometers. So you can enjoy that on German highways for more than 10,000 kilometers. So a real great customer case. Capital allocation. Shareholder return is top priority for us. We continued strong cash generation. Beside our substantial dividend of $5.5 billion, we added $4.3 billion of share buyback means so far in 2024, that means cash outs, cash returns to you, to shareholders of around 10 billion year to date in 2024. If we look on cars on the group, the key figures, the revenue side have been impacted by sales development and the lower pricing and the mix for cars. The EBIT is at a 2.5, EPS at 181. supported by the accretion effect from the share buyback, but offset by some temporarily higher tax rates. Cash flow at 2.4, whereby we ended the net industrial liquidity at a comfortable 29 billion. Now looking on the car's sales evolution, overall sales level was 504. I would say that's a solid number. Improved product availability, especially in the core, was partially offset by softer demand due to macro situation in Asia. Quarter-to-quarter sales continue to rise, but less than expected. The core segment is up by 4%, driven by full availability of the GLC and market introductions of CLE models. Now on the test side, on the top-end side, You can see the year over year on the chart, but probably more important is to explain what happened between the quarter two and the quarter three this year. So number one, softer market in Asia, in particular in China, as we can observe in industry overall. Against this backdrop, we adjusted wholesale, also nest class in the third quarter. and thereby adjusted the dealer stock level. The underlying customer demand, which I want to emphasize here, for the S-class was rather stable in the third quarter if you look at the retail sales for the S-class in China. Therefore, we can say it demonstrates the undisputed leadership of the S-class in China, but also around the world. Another key impact in the third quarter is product transitioning, in particular on G-class. The previous models running out and the all-new ICE and EV models are becoming available in all markets in the fourth quarter. So to sum it up on the mix, it has been impacted by market environment and product transitioning in the top-end segment. Electrified vehicles are down 15% given the market environment for EVs. which remains subdued. On the other side, the plug-in were nicely up by 10% globally, in particular driven by the U.S. Car financials, page 5, revenues impacted, minus 6. ASP reflect what I just said before. And on the EBIT, on the cash flow, we look on the charts to come. So let's go, page 6, on the profitability evolution in the third quarter. with the EBIT of 1.2 and the ROS of 4.7. I would like to take you through basically three building blocks here. Number one, let me explain first what effects are included in the third quarter. So among these, we have the effects of the BEF stock clearing measure, as we announced mid-September. We have included dealer support in China. We have included some warranty cost phasing in the third quarter. And each of these items I just mentioned before is roughly a low three-digit number. Combined, if you want to say so, they add up to a kind of a mid-three-digit million figure. So that is what is included in absolute in the third quarter numbers. Second building block is looking at the quarter three year-over-year bridge, which you see on the chart, which is in particular impacted by the minus 1.6 billion bucket volume structure pricing, which is mainly headwinds from the product and the market mix I was talking about before. and the negative net pricing effects as we cannot completely detach from the competitive market environment, and it also includes the support measures for the BAF stock clearing. Additionally, we saw a further normalization of the used car business, which is also included in this bucket of 1.6 negative. On the industrial performance overall, I mean, it looks rather balanced, but let me say we're making good progress on the efficiencies, the operational efficiencies in material costs and variable manufacturing costs, offset, however, by the warranty cost phasing I mentioned before. Selling expenses benefited from some further efficiencies. The R&D went up as planned. The main drivers in the other buckets is a lower BVAC profit contribution. I mean, here you see the impact of the dealer support in China. What else? The absence of positive priority one-timers, such as the sales of our CKD operations in Indonesia, and impacts from the changes on the interest rate environment impacting the discounting of provisions. So the third building block I want to take you through is the evolution of the profit and profitability from quarter two to quarter three, i.e. from 10.2 to 4.7. So how to explain that one? A softer mix, which is around, I mean, 2%. Pricing, including effects of the best stock clearing and the dealer support in China, which is around also 2, 2.5. The warranty cost phasing, 4%. and the absence of favorable one-timers and the interest rate changes I just mentioned before for another percent. So I hope that gives you some better color to understand the quarter three profitability evolution, even so the end result is obviously not acceptable. Page number seven on the cash flow side. The CFBIT for cars is at 2.4 with a cash conversion at 2. Let me explain. 400 million of tailwind from the working capital, basically driven by positive receivables. That's deliveries to our GV in China, where we have the reversal of the effect, which we had a negative in Q2. As well in the working capital, we have higher trade payables due to seasonality effects and a bit of higher inventories. Financial investments are positive related to further retail outlet sales in some countries. Net investments in PPE and intangible exceed the depreciation. In the other line, you see the impact of some of the non-cash relevant mean warranty cost phasing investments and the best stock clearing measures, which did not have a cash effect in the third quarter, as well as the adjustment, as usual, of the BBSE at equity result. Moving over to the vans on the sales, total sales are down by 13%, mainly driven by lower demand in service and crafts business, as well as recreational vehicles in Germany and the U.S., Additionally, as we planned, we discontinued the matrix in the US, and in the EU, other than Germany, overall, we see a solid sales development. Best sales are at 4,000, 4,400 units due to the overall decline in demand for electric vehicles, while large van sales for Sprinter and eSprinters are slightly up. We are furthermore rolling out our completely updated product portfolio in all markets. On the Vance financials, revenues developed better than sales due to a very healthy type mix. And on the EBIT and the cash flow, we come on the page 10. So on the Vance bridge, the return on sales decreased from 15% to 13.5%, which is still, I think, a very solid level. What has been... Behind that one, lower volumes partly offset by a favorable mix supported by improved product substance, increased net efficiencies across all buckets, and the others negative mainly driven by a lower FBAC result in China due to model changeover of the V-class. On the cash flow side, the cash flow, the CFBIT for VAN is at 0.9 billion euro. Cash conversion rate 1.4. So supported by working capital, positive of 500 million with lower and lighter inventory, vehicle stock, and a favorable management of payables and receivables. Net investments exceed the amortization and the impairments as we invest into the VAN EA. Moving to mobility, page 12. The new business decreased by 6%, mainly due to the banking competition in China, giving some headwinds also for the future development. The portfolio is roughly on the same level as in the second quarter 2024. If we look at the EBIT evolution, page 13, the EBIT is at $300 million. So year over year, we see cost of credit risk improvement due to some positive one-timers. With respect to the third quarter, the tense risk situation in the U.S. continued. On the volume and the margin side, the portfolio interest margin remains under pressure. However, profitability of new acquisitions stabilizes on a healthy level. Furthermore, we have some negative impacts by a lower remarketing result at ATLO. And additionally, the absence of some positive priori effects. impacting the return on equity. We try to offset by ongoing efficiency measures, as you can also see on the chart. However, all in all, that leads to a return on equity of 8.9%. Looking at the group EBIT, the business side I explained already, and the recon is rather flat, with a bit lower at equity result from Daimler Truck. and thereby the EBIT adjusted as booked is at 2.5. On the free cash flow side, page 15, same thing, business side explained as before. Income taxes are at 1 billion, driven a bit by seasonality effects. The cash flow of the industrial business is at 2.4 billion, which supports our emphasis on strong cash generation. Looking at the evolution of the net industrial liquidity on the page 16, end of the quarter, close to 29 billion euro. The cash flow, obviously, as explained before, was 2.4. Cash out in the quarter for the buyback, share buyback, of around the mean 1.2 billion. Others, buckets slightly negative with FX and some MBM effects. And that means that since the beginning of the share buyback program in March 2023, we have bought back shares in the amount of $6.3 billion by the end of this quarter. We expect the current $7 billion program to finish early. There are basically two thresholds. The one is the $7 billion, which has been authorized by the supervisory board, and the other one is the 10% share capital approval as per the AGM. From today's perspective, the full 10% share capital limit will be reached first. That equals to the maximum we can do. However, we plan to get authorization for another 10% at our next AGM in May 2025. With this, I would come to the outlook on page 18 for the divisional guidances. First, please have a look at the assumption chart. They are unchanged to quarter two. That's why I will not read them out. I would jump to the car division and the sales guidance right away. With year-to-date of close to 1.5 million units, we now see 2024 sales slightly below 2023 level. That implies quarter four sales in the vicinity of quarter three. How does it look like by the regions? In the US, we continue to see a solid momentum for sales. In Europe, I would say overall the demand level is stable also compared to the quarter three. And in China, the market environment remains challenging and competition strong. So here we aim to hold in the fourth quarter the same level as in the third quarter. Globally, on the test side, which is obviously very important, we see positive momentum in the fourth quarter, supported by availability of the G-class, the E-AMG, the GT and the SL, which will be complemented with product offerings with attractive entry versions of the SL and GT43, as well as the respective high-performance hybrid 63 versions in the markets. Furthermore, we see quarter four sales for the S-Class improving, driven by the U.S. and Korea, as well as the model changeover for 2025. On the XCV side, We are year-to-date at 18%-ish. Therefore, we now see that at 18% to 19% for the full year. As announced earlier, the return on sales adjusted guidance is at 7.5% to 8.5%. Year-to-date, we are at 8%. So we expect quarter four to improve versus quarter three. And let me outline what are the changes we see in quarter four compared to quarter three. Volume pricing China dealer support should stay at similar level. We expect the mix to improve slightly as outlined before. We see normalization of the warranty which we had in the quarter three and no best stock measure in quarter four anymore. We see the industrial performance net negative with material cost up due to seasonality and supplier one-timer payments. And we see valuation topics on our participations across the value chain as we debated also four weeks ago during the ad hoc. All in all, with this, we see quarter four at about 6% to 7%. confirming the recently adjusted guidance range. No changes on PPE, R&D, CCR. On the VAND side, VAND stands the year to date at 15.8% ROS in the third quarter, 13 and a half. So what do we expect for fourth quarter? Volumes are expected to be higher than third quarter. Headwinds are coming from seasonality effects and aftersales, as well as material-related effects and expenses related to the preparation for the ramp-up of VAN EA in Yavor and in Vitoria. With this, we expect Q4 to bring us in the full-year guidance range, which remains unchanged at 14% to 15%. Due to the strong cash generation year-to-date, we update our cash conversion rate to 0.821. Similar to cars, we're lowering our guidance for the XEV share to 4% to 5%, PPE and R&D unchanged. On the mobility side, the year-to-date mean was challenging with regards to margin and cost of credit risk. New acquisition margin improved. But that takes time, as I explained before, beyond the quarter four to materialize. So in the quarter four, we expect a similar level as in quarter three with a guidance range of eight and a half to nine and a half unchanged. Before we go into the group guidance, one further remark regarding our reporting. to comply with CSRD ESRS requirements as indicated in our 2023 annual report. There will be changes in the consolidation scope with regard to our headcount starting October 1st this year. Headcount of additional seven entities will be fully consolidated and thereby change Mercedes-Benz Group headcount for 2024 and retrospectively. It does not change anything on the cost side. as these entities work for various functions in the group and are therefore included in the cost base already. And obviously the fixed cost targets remain unchanged as you know. Now on the group guidance, obviously they follow the same premises as the segment guidance. The group revenue slightly below prior year due to the softer mix of the pricing on cars. Vance, MBM unchanged. On the group EBIT and the free cash flow, unchanged compared to the September update. The cash, let me say, with a year-to-date free cash flow of 6.3% in the books and a quarter four to come, I would say you can still expect a solid cash generation for the full year. So before we turn to the Q&A, I would like I mean, to wrap it up and outline the way forward. As I said at the beginning, we are not satisfied with this performance level. And given the tougher environment, we take a prudent view and need to adjust and look beyond what we have considered so far. What does that mean? We have a massive product launch initiative and are very confident that we have the right product portfolio. With this, we can serve the market in flexible manner between ICE and EV moving forward. This builds the foundation for the future into which we are investing heavily. Despite these substantial investments, solid cash generation and capital allocation is expected to continue. We have already achieved a lot over the last years to make Mercedes more resilient, but we will go a step beyond. We'll shift up gear when it comes to material costs, variable costs, fixed costs, and investments. We'll step up all efforts on increasing efficiencies and cost improvement across the business. We'll extract more potential from our most desirable products. while keeping reality in mind, will not lose sight of our ambitions going forward. And we will give you more color on this in Q1 next year. With this, I'm happy to take your questions.

Thank you, Harald. Ladies and gentlemen, you may now ask your questions. I will identify the questioner by name. However, please also introduce yourself with your name and the name of the organization that you're representing before asking the question. a few practical points. Please ask your question in English. As a matter of fairness, please limit the number of questions to a maximum of two. Now, before we start, the operator will explain the procedure.

Thank you. If you want to ask a question, please press nine and the star key on your telephone keypad and you will receive a confirmation that you are now in the queue. To remove the question, please press again nine star on your telephone keypad and you will hear a noise which confirms the removal from the queue. Please note that dialing nine 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 nine star on your telephone keypad. If you have difficulties raising a question, please try another conference call telephone number indicated in the invitation you received, or press zero and the hash key on your telephone keypad for operator assistance.

We start the Q&A, and the first question goes to Tim Rokosa from Deutsche Bank.

Yeah, good morning, Christina and Harold. Thank you for taking my question. Harold, super helpful on all the details that you already gave us for the underlying number in Q4. I think I'll have to listen again in the replay. But just to really understand, given the importance of the 4.7%, it looks quite shocking in Q3 initially. You said a mid-triple-digit Euro million amount in total for the one-offs in Q3. Some of that continued in Q4. When we think about the structure of the industry, do you expect supplier compensations to go away, or is that something that we should continuously expect for dealer compensation in China? Do you feel like these are one-off characters, really, or is it something that we're going to have to live with in the more difficult environment that we are in right now? And thinking about the underlying figure, do you see any stabilization when it comes to order intake and pricing? And the second question, when we think about your shareholder return, super strong, obviously, the $10 billion, the world's getting tougher. You introduced a framework fault. You already said you're going to ask again for the 10%, very strong statements here. Is it right that you intend to see this mechanism as something that you would also do in tougher economic times? And how shall we think about the truck stake in that regard?

Thank you. Yeah, thanks a lot, Tim. Yes, I tried to give you quite a lot of elements, and probably it's a bit difficult to digest, but I'm very happy to come back in any more detail if you want to. But you're absolutely right. I mean, there are quite a lot of moving parts in the third quarter and also in the fourth quarter. You're right all in all in terms of absolute around the mid-three-digit million number included in this third quarter. If your question was, I mean, are supplier compensations and dealer compensations now the underlying, I would say no. In the fourth quarter, we'll have a step up on the material cost due to one-time supplier payments we do expect, which are under discussion. But clearly, if I look forward into 2025 and beyond, I clearly see that coming down. We all know what is the key reason for this discussion with some fundamental shift in demand on the EV side of things. And as we've been dealing with that now throughout 2023 and 2024, I think that will be adjusted and therefore should not repeat as such moving forward. Similar thing I would say on the dealer side or dealer support. over time I think the system needs to recalibrate and demand and supply need to be in balance and check and dealers obviously need to do their homework in terms of efficiencies and adjust footprint when needed so that they are self-sustainable in the mid-term. In terms of the underlying on order intake and the pricing, you heard me saying U.S. is pretty stable with solid momentum. Europe, I mean, is solid. China remains very competitive, one has to say. Probably, therefore, I mean, remains the place with the highest level of uncertainty. But if you look into order intake and order book, I mean, the numbers which we gave here for the quarter four, we see that supported by the demand level. And I hope also the color on retail in quarter three gave you a bit of more background explanation that, I mean, group sales were overly impacted compared to retail. So if you look at retail number, it gives you more view of the underlying demand in the second half of the year. And then, yeah, on the shareholder return, clearly I see the framework which we defined and outlined and communicated and are implementing unchanged by that current situation. I mean, the framework, as you know, is built on the DB policy of around 40% and the excess of the cash flow being used for share buyback. So even if the market environment is more demanding than right now, the framework as such, for me, is not altered, is not changed. Well, I mean, the base comes down, but the framework doesn't change, and therefore it is definitely my intention to go back to supervisory boards to ask for the renewal I mentioned in the intro for AGM in May. Before that, obviously, we run into the technical barrier of the 10% threshold, but then we'll be back and seek for renewal of that for the AGM in May. Thank you very much.

Just how should we think about the truck stake, Harold, from you?

Well, basically, I would say similar statement, comment as so far as well. Obviously, we're coming closer to the soft lockup. You know, I do not see the need for a rush on the subject matter. I think there's still great potential at Daimler Truck. And I think we should see that materializing. I think also expressed at several occasions my preference in terms of, I mean, an exit over time. And I would keep that view for now. Obviously, we look at all alternatives, but for me, still as we speak, this seems to be the prevailing one.

Thank you very much, and thank you for all this detail. That's very unique.

Thank you very much, Tim. We would move on to the next question, and that goes to Stephen Reitman from Bernstein. Stephen, can you hear us?

Hello? Yes, I can hear you. Can you hear me? All right. Thank you. Thank you very much. Thank you very much for the call. I'd like to drill down a bit more into China, please. Again, obviously, we in particular in the top tier in the third quarter. You mentioned that you're seeing, you're more confident about incoming orders for the fourth quarter. Does that cover, so this is also specifically on the S-class as well?

Yeah. If I look at retail demand for the third quarter, if I look at the outlook now on the fourth quarter, and if I look at the momentum, as we speak, also throughout, I mean, October. I see, I mean, that outlook, which we gave, I mean, confirmed. Maybe one additional, or, I mean, digging a bit deeper into it, as we wanted to make sure, I mean, that the supply level, I mean, meets the demand level. We adjusted, I mean, the group sales, I mean, in the third quarter, to manage stock in particular, I mean, at the dealer level, you could say this is value over volume at work and took, I mean, the bullets of the lower group sales, therefore, in the third quarter. But the underlying, I mean, demand level, if you look at the retail in the third quarter, I mean, was higher than that. And that is basically the run rate also moving into the fourth quarter. Nevertheless, I don't want to de-emphasize the demanding market environment globally. You see an impact of the macro situation of China also on the demand level in the top-end segment. I think we made that statement in the middle of the year. That statement is still valid as of today. But the Q3 group sales, this is my point, was not representative enough. on the underlying demand level, and definitely it's not a product issue as the S-Class remains by far the leading product in that segment in China, but also in the rest of the world. Thank you.

Thank you, Steven. We have a next question that goes to Patrick Hummel from UBS, please.

Good morning. Thanks for taking my question. I'm just trying to build a rough bridge going into next year. And in the fourth quarter, basically the exit rate for cars is about 8% margin based on your guidance, right? And if we look at some of the building blocks, volume looks difficult to grow much, to say the least. Pricing under pressure. Mix could get a bit worse with EV compliance in Europe, depending on what happens there in the regulations. So I'm just wondering on the cost element, you talked about, you know, looking at everything and intensifying your efforts. Do you think that those market-related headwinds, you can fully offset them with the additional cost measures you're taking or even overcompensate for them? I appreciate today is not Guidance Day for 25, but any qualitative color you could give on that would be greatly appreciated. Also, in terms of how you think about what is the right capacity to hold in China and And then the B part of the question, how do you actually manage this European CO2 compliance situation? It looks like, you know, the industry is making an effort to change the rules, but the EU hasn't really picked it up. And I guess your production schedule would be affected by depending on what happens to regulation pretty soon, if not almost imminently. So I'm just curious how you're looking at the EV share in the coming quarters. Thank you.

Yeah, thanks, Patrick. Well, you said it. We'll not give, I mean, a guidance for 2025 here today. Yeah. The quarter four guidance, which we gave here today, I think pretty precise, is six to seven. I want to repeat that, as you just gave another number. So our guidance is six to seven. Then I said before, I mean, there are a lot of moving parts, I mean, inside, yeah, improving, I mean, top line in terms of the mix and the cost phasing in the fourth quarter. I do understand it's a bit challenging and demanding to derive a true underlying from it, but I really want to stay absent here to give now more color than that in terms of exit rate for 2024 and therefore guidance for 2025. But definitely, I want to repeat your question. So, I mean, how should we think in terms of what we're doing? Clearly, let me say, we have been working so far within the financial framework we set ourselves, I mean, a couple of years ago. And that did assume a certain level of volume certain volume of pricing, and a certain volume in a certain mix. And obviously, that hasn't been kind of a static thing, but it also ranges left and right. And that's basically what we were talking about in May 2022 with the weather chart. With this evolution in terms of the market environment, I have to say this is outside the boundaries. This is outside, obviously, the most rainy conditions we did assume at that point in time on the weather chart. As we can see, it demonstrated with a quarter three, but also mainly with an outlook of a quarter four. What does that mean? We will definitely look on the cost side and each and every element and stone and turn it around to go beyond, given this tighter market environment. And here, I mean, I would continue to take a prudent approach and a prudent view, not hoping on a short-term recovery. If it comes, great, fine. We have the products. We have the capacities to do so. But if it doesn't come, we are prepared. On the other side, definitely, we also need to go back, as I said in the wrap-up, and see how we can extract more potential out of this massive product offensive we are doing. There is so much value in this. If you look at the vehicles, I mean, it should be good definitely for much more volume, but you know I'm not a volume pusher. I'm a value pusher. and extract more potential out of the positioning of the vehicles into the market with an even tighter cost space. And if we need to adjust capacity somewhere, we will adjust. I mean, we can do. Is it in China? Is it in other places of the world? We can do. But obviously, demand level is a prevailing view. Then we adjust the capacities and not, I mean, the other way around. Your question on CO2 in Europe, our first and foremost priority remains to achieve CO2 targets by stepping up the XEV. We are all conscious that the EV demand, the BEF demand in Europe is running at far lower level than ever expected by industry, by OEMs, as well as, I would say, by regulator. That's why you could wonder whether maintaining these targets for 2025 is the right thing, where the industry should invest the money into building up EVs and products. But I don't want to enter into political debate here. Our priority remains to bring up the XEVs. You could also see, I think, a good momentum on the plug-ins, which I think are a sweet spot where the market is right now. 2025 looks demanding and challenging from a CO2 standpoint for Europe, I would say. But we need to figure out and see exactly what is the volume, obviously, what is the mix in 2025, what is the EV share, what is the XEV share, the plug-in share, and then we'll see what's left. And in case there is exposure left, you know there are tools also such as pooling, I mean, to address any gap which might be left. In the mid to the longer term, with this product offensive, I look very much at 2020 and 2025, 2026, with MMA, CLA to come, electric C-class, GLC in 2026, and all of the others, we should be good to meet targets in the EU.

Thank you, Howard. And sorry, the 8% for Q4 was including some of the adjustments I made in my head. Thank you.

Thank you, Patrick. We will move on to the next question, which goes to George Gallier from Goldman Sachs.

Yeah, good morning and thank you for taking my questions. The first question I had was just with respect to provisioning in the quarter. Harold, you mentioned the provisioning as part of the other bucket when you went through the CARS cash flow walk. It looks like the provisioning at an industrial level was about $560 million in the quarter. Do you expect a similar level of provisioning in Q4? or were there incremental provisions specific to this quarter that are unlikely to repeat? The second question I had was just trying to reconcile the very strong cash conversion to the EBIT reported. And in the interim report, I noticed that there is around a $1 billion positive cash effect in the quarter from vehicles and operating leases and other operating assets and liabilities. Could you just give us a bit of color into what within that other operating assets and liabilities swing that benefited the cash in the quarter? Thank you.

Yeah, thanks, George. So, yeah, if you look at the other buckets, I mean, in the CFB bridge of cars, I mean, you see significant support. I mean, where is that? I think it's a billion. Where is it coming from? Number one, accrual setting. I mean, for expenses to come in the fourth quarter. This is pretty usual at this point in time. It also refers to payment to dealers. It includes also, I mean, warranty. Provisioning is explained, which is included in EBIT in the third quarter, but it will mainly lead to cash out over time. Not necessarily all of that will hit in the quarter four. It includes, I mean, as well, obviously, the BEF stock clearance, which probably will rather, I mean, yeah, impact in quarter four cash or so. So I think these are the key building blocks for the other buckets in the cash flow bridge line. And when I commented before in terms of what do we see as a repeat? No, the warranty I do not see as a repeat and enforce a quarter. The best stock clearance, I don't see that as a repeat in the fourth quarter. The dealer support in China, I see that as a repeat in the fourth quarter, but explained before, not necessarily going into 2025, whereas we'll have a step up on the material cost on supply chain, supply discussions, settlements as answered to me before. Please help me a bit on the operating lease adjustment. I'm not completely sure what you're referring to in the deck here. Otherwise, we can take that question offline as well if you want.

Okay, I will follow up offline. Thank you.

Thank you, George.

Thank you very much, George. And I would hand over the next question to Jose Acemundi from JP Morgan.

Thank you very much. Good morning, Harald. This is Jose from JP Morgan. Two questions, please. The first one on product offensive. You mentioned it several times on the call. Can you please remind us when are these products coming to the market, which products at this point, and which regions do you expect to hit first? And then second, we'd love to dig a bit more into China and BBIC and a little bit, what are the key measures you're taking in the region to protect free cash flow, especially at just some of the capacity, and build on your key strengths, top and hats? Thank you so much.

Yeah, thanks, Jose. Well, on the product offensive, I mean, to come probably can talk two hours. I mean, what are the key ones? Obviously, we're much preparing for next year with the CLA to come. And obviously, being the starter of the new MMA family, you know that this will be a step up in the offering at the lower end of the product portfolio. So that will start in 2025. It will be the technology spare head. When it comes to software, to MBOS, to powertrain in terms of E-ATS, so in terms of the technical features, in terms of range, as I said, I mean, also on infotainment, MBOS, as well as on ADAS, super competitive, I mean, level 2+. And obviously, that will lead the way also, I mean, into the midsize, i.e. C-Class and the GLC electric to come 2026. Well, I mean, I look further, I mean, on the AMG side, with the AMG EA, full electric, with high-performance electric engine, YASA engine. Some of you visited that, so you know what it is about. Super cool EV product. Pretty sure even the hottest V8 supporter would be excited when you have the opportunity to experience that vehicle. And then obviously a lot of very, very significant midlife updates to come in 2026, also in the higher end. If I think about the GLE and then very important, the S-class. Also on the GLE, maybe segue into your second question, long wheelbase version of the GLE for China. I think that should be very good to capture incremental potential in China. So your question, China, first was a bit on BBAC. Well, I mean, BBAC numbers, as you can see here, have been impacted by the dealer support. Obviously, a very good part of that one goes on the nose of the parts-by-parts business. Therefore, it sits in the BBAC. BBC results, I mean, are impacted by the market environment. At the same time, sometimes you lose a bit sight of that, very good momentum on GRC, very good momentum on E-class, I mean, in China. Both of them, I mean, obviously, long-wheelbase versions, very good customer feedback, I mean, on these vehicles. and supporting obviously also BBAC profitability. At the same time, what I said, I mean, on Mercedes as a whole, that we will address, I mean, all elements on the cost base. BBAC is also doing that and also taking benefit, I mean, of the local supply chain in terms of, I mean, further cost potential. and maybe also globally we can do more in this respect than what we're doing today in terms of tapping more into China's supply chain. You will see later, obviously, when it comes to the full year, that with this, BBC profitability remains, I think, at a decent level and has come down, has been impacted by the dealer support, as I mentioned earlier, but it still stays, I mean, in a very comfortable level. I think you can say it's a double-digit number, which I do expect in terms of profitability, I mean, for the full year 2024. And therefore, we'll continue to be, I mean, an important contributor to profit via the ad equity, but also via the DV. I hope, I mean, that covered a bit, I mean, what you wanted to know about BBAC. And other than that, obviously, on the CBU part, so vehicles being exported into China. This is very much the top end side on which I commented before on the quarter four momentum. Definitely, the macro situation impacts also them in the top end side. But we're positioning ourselves against it. and the products in the market and the ones to come, which I reiterated as part of the product offensive, I think should help us to create momentum in the years to come. Thank you very much.

Thank you, Jose. I would move on to the next question to Philippe Pouchoir from Jefferies. Philippe, over to you.

Yes, good morning. It's Philippe Pouchoir, Jefferies. I have a question on we see warranty issues creep up everywhere in the industry, you know, BMW, GM, Ford. Can you be a bit more specific about what is causing that? Is it your engineering issues? Is it the suppliers? Is it new technologies that the industry is struggling to integrate? That would be helpful, and I have another question.

Yeah, thanks, Philippe. While you refer to the warranty phasing, Well, I mean, permanently, obviously, I mean, we watch the portfolio of warranty for our vehicles. And therefore, I mean, you have seasonality. There is not any particular, I mean, issue behind, I mean, this quarter three issue, I mean, I mentioned compared to what has been mentioned by other players, I mean, recently. Quality is the number one priority here at Mercedes. There's not a single board meeting where we don't look at our quality indicators and addressing any issues which are out there. That is in the DNA of the brand, that makes the brand, and that's why this ranks super high. But, I mean, you cannot, given, I mean, the number of vehicles in the fleet, given the number of different variants, obviously from time to time you have some issues which you need to address and fix. That's what we're doing, even beyond the contractual obligation liability as we want to serve and please our customers, I mean, over the lifetime. And that's why we're doing a big, big effort, I mean, on quality. And the normal procedures are that you review the portfolio on a permanent basis and you need to do adjustment if you see the need for it. And that was included in the quarter three as outlined, but not seen to be a repeat in quarter four.

Right. And my other question, and probably it's a bit harsh, but I look at your numbers and I take out the equity income from China, which is not in your revenue, and I take out the net capitalized R&D, and it's a 200 million EBIT. So there's no margin right now. If I think about the consolidated Mercedes-Benz car operations, and I'm just trying to think, as I listen to you, it looks like it's a mix of a fixed cost issue, although you've worked a lot on the fixed cost issue, But the bigger issue may be that this premium strategy doesn't work because the shortfall is very much at a high end. And when you talk about you're going to update us and work on the cost base, what should we expect? Is it just a question of addressing the fixed cost, which you've been doing quite well for some time, or do we have to think about a complete rethink of the premium luxury angle of the strategy?

Thanks, Philippe, to be harsh. Well, you can obviously take a lot of things out or in, as you wish. The only comment I would have is that BBC is an integral part of our business setup with a lot of them in profit pools and streams. So that is a bit simplistic to take that out. We can entertain that debate. No, but you're perfectly right. I mean, a further challenge on fixed cost is not going to do the job. It's paramount. I mean, it's important, I mean, to do it. But as I said, I mean, we need to look at everything, I mean, on the cost and the efficiency side. But we also need to see and have a look at what is, so to say, I mean, the contribution margin composition in terms of volume pricing and mix and how can we extract, I mean, more out of that than what is the case right now. And I said earlier, I mean, the framework, which we set ourselves, we're looking at that and we're adjusting the framework and that has therefore definitely mean a cost side. And again, not only fixed costs, it's a variable cost, it's a production cost, it's a material cost. It's also the investment side, but there's definitely mean also mean a top line side, which we need to see and and rejig, and that takes a bit of time. That's why, I mean, we cannot answer the questions you all want to hear now, but rest assured, we're working very, very hard on that one, and we'll be back with hopefully answers you will like in Q1. Thank you.

Thank you, Philippe, and then we can have time to take one more question, and I would like to hand that over to Henning Kosman from Barclays.

Yeah, thank you. I can make it quick. I just had one left. I wanted to talk about the free cash flow level. I mean, Harold, you already said that some of the cash out will spill over into next year for the provisions that you filled this year. Still guiding for that around 8% cost margin, but I guess still aiming for the $8.5 billion free cash flow, the floor of the previous range. Again, I know it's not 25 guidance day. I think at the time of the profit warning call, you also said we shouldn't be extrapolating at the run rate of H2, rather perhaps somewhere in the vicinity of the full-year guidance range. Anything more perhaps you could say on the structure of pre-cash flow potential? Do you see that as sustainable now, the increased cash conversion? If you were to aim somewhere near the 8%, for the next year again, as you are this year, would that mean you could hold in at sort of eight, nine billion for cash flow level as well? If you could just add some color there in the context of the potential delay in cash flow for the current provisions.

Thank you. Thanks, Henning. Well, obviously, number one, I mean, on the cash flow 2024, 6.3 year-to-date, yes, so we're working on another quarter of cash generation, and therefore, I mean, should complete the year with a decent level of cash, even, I mean, if it is lower than the 2023 level. Looking into 2025, well, as we said before, I will not give a guidance here for 2025 today, But structurally, Andrew, think about cash flow for 2025 and beyond. Well, obviously, number one input into that one is the size of the business in terms of what's the volume of the business, what is the margin we can pull off in 2025, given all of the parameters we were talking about before. And then, I mean, how much of that margin can we convert into cash Here we have, I mean, a cash conversion target of 0.821, as you know, and basically I see no reason why 2025 we should not continue to apply that framework, i.e. the cash conversion of 0.821. Why do I say that? I think, I mean, overall working capital management works in terms of adjusting production into sales level and therefore keeping working capital all in all in check with some seasonality, but it works, I think, on a full year basis. Number two, I would say on the investment side, yes, we are preparing for this unprecedented product offensive, but we keep a very, very tight view on investment prioritization I said at earlier occasions, I think, I mean, that probably in 2024, 2025, I mean, we'll have a peak in terms of investment level, and it will go down with what we're debating here today and the events over the last couple of weeks. I don't see a change to this profile coming from the market situation. No, even more so, I would say, in the midterm. I mean, the emphasis on the investment prioritization and efficiencies will rather step up rather than relax. So we should support the cash conversion. So in a nutshell, yeah, we'll see when we see the key parameters on volume and margin. But definitely the objective to convert that into cash is maintained. for cars as well as for vans.

Thanks. And this comment on Q1 update, we're basically talking a kind of capital market there, yeah?

Details to come, but I think what we are discussing here probably deserves a bit more than just the usual format of an annual press conference. Very good. Thank you very much.

Thank you very much, Henning. Thank you very much, ladies and gentlemen, for your question and for being with us today. And also thank you very much to Harald for answering all of the questions. Now, Investor Relations remains at your disposal to answer any further questions you may have. And now to all of you, have a great morning, a great afternoon, and a great evening. Thank you and goodbye.