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.