Mercedes-Benz Group AG

XETRA:MBG

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the global conference call of Mercedes-Benz. At our customer's request, this conference will be recorded. A replay of the conference call will also be available as an on demand audio webcast in the Investors Relations section of the Mercedes-Benz website. The short introduction will be directly [ followed ] by a Q&A session. [Operator Instructions]

I would like to remind you that this teleconference is governed by the safe harbor wording that you find in our published results document. Please note that our presentations contain forward-looking statements that reflect management's current views with respect to the future events. Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements prove incorrect, then actual results may be 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 you over to Steffen Hoffmann, Head of Mercedes-Benz Investor Relations and Treasury. Thank you very much.

[Steffen Hoffmann, executive]

Good morning, ladies and gentlemen. This is Steffen Hoffmann speaking. On behalf of Mercedes-Benz, I'd like to welcome you on both the telephone and the Internet to our Q1 results conference call. We are very happy to have you with us today -- to have with us today Harald Wilhelm, our CFO. In order to give you maximum time for your questions, Harald will begin with an introduction, directly followed by the Q&A session. The respective presentation [ can ] be found on the Mercedes-Benz IR website.

Now I'd like to hand over to Harald.

[Harald Wilhelm, executive]

And good morning, everybody. And we are happy that you find the time this morning, despite all of the other news, to share the update on where we are in 2022. Especially I mean to the war in Ukraine. This has been a very challenging start into the year. It is obvious that the business challenges are nothing compared to the human tragedy. We at Mercedes-Benz try to support the Ukrainian people with several initiatives, big and small.

This being said, now I would like to switch over to the Q1 results. What can we say if we look at them on the Page 3, well, I would say these results reflect resilience and pricing power. If you look at the revenue, they are up despite lower volumes, and that's exactly pricing power and the shift in mix at work. If you look at the group EBIT at EUR 5.2 billion, the reported one, that's obviously solid underlying performance. It also includes benefits from our restructuring of the Grand Prix engagement as well as the sale of our outlet in -- sales outlet in Canada, but we also took some adjustment on our Russia business, and we'll talk about that a bit later.

If you look on the underlying performance, the EBIT adjusted of EUR 5.3 billion, so I mean that is a reasonable level of profitability. That has been driven by good mix, solid pricing, favorable used car performance, but also effective cost measures across all businesses. We didn't stop to put focus on cash generation, continued on that one. And you can see that the NIL ended up at EUR 22.7 billion plus the spin by the end of the quarter.

What were the key highlights on the Mercedes-Benz Cars side, Page 4. The demand for our products remained extremely strong in the quarter. However, I mean the volume and sales have been impacted on a continued basis by the semi constraints. The semi capacity has been coming back online, but still a high level of volatility and selective bottlenecks among critical components, which did not allow us to push all of the demand through in terms of sales.

There is still limitation in terms of visibility when exactly these bottlenecks will ease. However, overall, we do expect some stabilizations throughout 2022, but probably more in the second half of the year. And obviously, we continued our effort to work directly with the suppliers, but also with the semis themselves, to make the system more robust and resilient.

Maybe a few words on the situation in Russia and Ukraine. We strictly comply with all applicable sanctions and embargoes against Russia and person sanctions in this context. That's why we suspended the export of passenger cars, vans and spare parts to Russia as well as the local manufacturing activity in Russia. The export freeze was effective immediately. Production and sales are shut down in an orderly process. It is obvious that we cannot proceed our usual business activities, and therefore we suspended them. Obviously, we continue to monitor the situation on a 24/7 basis. Needless to say that we all hope for a political situation, but I wouldn't wish to speculate further on this. I will come to the Q1 financial impact a bit later on.

On Ukraine itself, we are working with the suppliers in Ukraine who supply some components for our products. We are monitoring the situation here as well very closely, and remain in close contact with these suppliers to work on solutions to safeguard the supply chain. That includes, among others, to transfer production to other locations, which progressed pretty well in the meantime.

Again in the first quarter, our plants showed a very high level of flexibility and therefore, we could avoid downtime as much as possible. So due to the current situation, we had adjusted temporarily some shift plans at some plants, but didn't have complete shutdown.

What are the other key messages on the Q1? Well, we see a shift in the top-end vehicles. You see it on the next slide in a second. We're moving up also on the EV side, as per our strategy. We have important milestones in terms of the EV transition, definitely with the EQXX record drive of more than 1,000 kilometers from Stuttgart to Cassis. Well, if you do it with a Monster battery, as Marcus or Ola are saying, that's not probably a record, but we did it as a record, as I think the number which really makes a difference here is the average consumption of 8.7 kilowatt 100 kilometers. That is, I think, the true news in this experience.

We opened the battery factory in the U.S.; quite some of you were with us over there. You could also experience the EQS SUV on-road and off-road. In the meantime, we presented it to the world in April. So a lot of momentum, I would say, on the EV side. Early April, we also did the first holistic comprehensive ESG Conference, I hope you appreciated that. And the key message over there was, I would say, that we aim to slash the CO2 emission by more than 50% by the end of this decade.

Moving to Page 5. Again, we hope that you appreciate transparency and these KPIs should demonstrate the progress we're making on the strategic front. Whereas total sales decrease, we can see that the top-end vehicles grow and also the electric vehicle. So 5% growth on the top end vehicle side, 19% growth on the electric vehicle side, again, whereas total sales were declined due to the semi situation, as I explained before. How was it possible? In particular in the S-Class segment, with the S-Class but also the EQS that favored the evolution on the test side and on the EV side, as well as a decent contribution on Maybach. So I would say you can see that the strategy is gaining traction here. We want to accelerate this development further and we should give you more color on that on May 19 during our Economics of Desire event.

Page 6, on the financials. Sales were down by 10%. I mentioned that already. Revenue were up by 8% due to the net pricing and the mix. The ASP, the average sales price rose by 18% to EUR 70,500. We now calculate that number without the BBAC sales volume and also the BBAC part-by-part revenue, so I would say it's a clean comparable number. EBIT adjusted went up by 21% compared to the quarter, I mean a year ago. And on the cash flow side before interest and tax, that was at EUR 1.7 billion. We see some impact from working capital effects, which were chiefly due to the semi supply constraints, but also now some logistic chain issues related to Ukraine, Russia and China.

As I mention China, maybe a word on the situation there. So far, we have successfully managed all COVID and supply chain-related risk in China. In the first quarter, there was no major impact on our main operations in China. Overall, we have achieved a strong price premium over competitors in China during the first quarter of 2022. Despite COVID and supply chain dynamics, we delivered more than 190,000 passenger cars to customers in China during that quarter. EV saw a steady growth while plug-ins were even setting a record high.

The top-end vehicles, including the AMG, the Maybach, the G-Class, reached double-digit growth among which the flagship S-Class maintains its segment leadership. Our sales rate of Maybach vehicles has been at over 1,000 cars for almost every month since June 2021.

Looking forward, we continue to monitor, I mean, the COVID and supply chain risk in China closely, and we'll react flexibly if needed. Due to the COVID-related supply shortages, we have flexibly adjusted our local production program in China for April and May. We all know in China there is a risk of continued but even extended lockdowns, if we think, for example, about Beijing, with potential additional impacts which could impact local production, but also global supply chain.

Looking at the EBIT bridge on Page 7. So even with the lower volume, the bucket volume structure net pricing increased significantly by EUR 1.8 billion in one quarter. Therein, I mean, the pure volume effect is a negative lower 3-digit million figure. The structure, and here in particular the top-end vehicle sales, i.e., the S-Class and Maybach, and the net pricing are both significantly positive. On the net pricing, we see the combination of further reduced discounts, but also further list price increases in many countries at work.

Used car prices in Q1 had a positive lower 3-digit million effect. For the full year 2022, we expect the used car pricing effect to impact with a low negative 3 million-digit amount. On the industrial performance, we had to face higher raw material cost on steel, aluminum, copper, lithium, but partly compensated by commercial efficiency. We had some increase in product-related expenses, and then in particular, I mean, the disruption costs in our production network due to the semi situation, the stop and go, the logisitics cost, but also a step-up in the energy cost, created a headwind. But overall, you can see in the Q1 we could successfully compensate the raw material cost and the inflation by pricing.

You can see as well that the fixed cost, I mean, as a whole continued to be under the scrutiny of strict cost discipline. The other was negative, that was chiefly a Q1 2021 impact from the ChargePoint IPO. The adjustments refer to the restructuring of our Grand Prix activities as well as the divestment of the owned retail in Canada, as already mentioned.

And we also took an adjustment on the suspension of our industrial activities in Russia. In this context, we expensed EUR 658 million on the cars side in connection with the adjustment of our business activities in Russia. Overall, you can see the EBIT adjusted at EUR 4.2 billion, 16.4% return on sales.

Cash flow, Page 8, EUR 1.8 billion on the reported, EUR 1.7 billion on the adjusted. As I said already before, we have a working capital charge of close to EUR 900 million. That is due to the increase of semi-related unfinished products and logistics chain disruptions causing higher stock. These effects are more expelled than the positive ones from an increase in the trade payables. On the inventory side, we expect that level to continue in the quarter 2 roughly at that level before then it should start to normalize in the second half of the year.

On the investment side, EUR 400 million from the divestment of the owned retail, as I mentioned. The net investments in PPE and intangible asset equals the depreciation and amortization and impairments, I think that is, again, an interesting demonstration in this quarter that we can transform our business. [ We ] do not compromise the investments into the future, into electric, into software, at the same time staying within the ambitious targets we set ourselves. On the other side, you see the payments related to diesel, the BBAC at equity reversal, the outlet -- retail outlet sales and the MB Grand Prix restructuring, as already mentioned several times. And on the adjustments, you find the usual legal proceedings on diesel and the M&A stuff.

Over to the Vans. What were the highlights on the vans side? Also very strong market demand for the vans here. I mean it was possible despite the semi constraints to keep unit sales flat year-over-year, so -- which I think given the context was a good achievement. The first quarter [ showcase ] has been the best-ever sales of the Sprinter and the Metris. I mean, this is the U.S. name for the Vito in North America, with more than 17,000 units. We're also progressing on the battery electric van sales with EV sales being up here almost 60% year-on-year, but the absolute number is still a low one. But great potential there.

We have also new products in the small van segment, the T-Class has had its World Premiere. The new Citan with strong customer demand is pretty refreshing. And in the course of 2022, the EQT and the eCitan will complete the portfolio of electric van offerings in all segments. The margin improved also significantly, and here as well, we see a healthy mix and pricing.

Looking on to Page 10 on the financials, sales flat. The revenues up by 9%. The profitability, demonstrating a good product mix and net pricing. So EBIT adjusted is at EUR 466 million, cash generation well executed. Here, we were successful to keep the inventory at a low level.

If you look at the bridge on the Page 11, here in the bucket volume structure and the net pricing, obviously, the volume is stable. So you can see that the structure and the pricing provided basically EUR 200 million of benefit here. The used car business also had a favorable impact. On the industrial side you see, as on the cars side, that raw materials and the disruption cost in the production network triggered some headwind. But despite that, the overall EBIT adjusted is at EUR 466 million and a return on sales of 12.6%. Adjustments are EUR 51 million, in particular related to the business adjustment in Russia, as I explained already on the cars side.

Page 12, on the cash flow. Here, cash flow is at EUR 380 million reported, more than EUR 400 million adjusted, working capital remained favorable. I said already that despite the same related issues, we could maintain it at a flat level.

Investments, I'd also share here from the sale of the sales outlet. The depreciation and amortization here on the vans side is higher than the net investments. That is, I would say, somehow a cyclical effect. We should see further in the year that the investment side is coming up as we are progressing with the development of the VAN.EA platform.

Over to Mobility, Page 13, key highlights over there. Supply constraints and also lower market penetration also had an impact in terms of the new business volume, the interest margins remained on a very solid level. Net credit losses were at a very low level. The new business in Russia has been stopped and we adjusted the credit reserves on the Russian portfolio. At the same time, we continued the strategy execution in the first quarter.

Looking at the financials, Page 14. The new business decreased by 13%. The truck spin-off had, further to the issues I mentioned on the page before, I mean, an impact here. The portfolio increased by just 1%, and EBIT adjusted increased by 6%.

How was that possible? Page 15. On the positive side, we have mobility services and fleet business performances which improved in the quarter. The margin also benefited from lower refinancing costs, I mean, in the first quarter, and a bit of a favorable FX development. On the negative side, the volume reduced due to the truck spin-off and the lower sales -- the lower vehicle availability and the penetration rate as commented, with some higher expenses due to project-related costs and a bit of dissynergies from the truck spin. And we adjusted for the credit reserves on the Russian business. All in all, the charges sitting in that number here is around EUR 100 million.

Maybe as you see 20% return on equity, a word, that for the full year we expect the performance to remain strong, but somehow normalizing in the course of the year. Cost of credit risk should return and come back to kind of a pre-pandemic level. And we should also see some normalization of the interest margin driven by interest rate increases.

Looking on the Group side, Page 16. Well, on the business evolution, I think I commented. So on the recon, we see a slightly negative at equity result from Daimler trucks and buses. That is the contribution which we expect, I mean in the Q1 on an estimate, has been offset by depreciation of the assets from the PPA, as we explained in our full year release.

With this, the EBIT adjusted stands at the EUR 5.3 billion, then we have the net of the adjustments: diesel-related, EUR 280 million; EUR 700 million related to Russia, as explained already several times; and M&A a bit more than EUR 900 million. So the booked one -- EBIT booked is at EUR 5.2 billion.

On the cash flow side, again, on the business, I think I explained, [ leaves me ] with cash taxes going up compared to 2021. I mean higher profitability, less tax carryforwards obviously makes the cash taxes go up to EUR 600 million. That makes the free cash flow in the industrial side of EUR 1.2 billion. On the net industrial liquidity, based on the cash flow, we debated before, I mean, EUR 22.7 billion. In that, we also have the benefits from the divestment, also a bit of a dividend internally coming from Mercedes-Benz mobility and a bit of FX effect. I think that is a very strong and healthy level of net industrial liquidity, and I think it's good to have that in such a volatile times. But on a very short notice, subject to AGM approval on Friday, we will hand over a good part of that net industrial liquidity over to you with a divi of EUR 5.3 [ billion ].

Now let's have a look for the full year 2022. So how do we see that on the basis of the first quarter results. First, on the divisional guidance, Page 20, really please read the assumption chart carefully, what do we say. The macroeconomic and geopolitical conditions continue to be characterized by an exceptional degree of uncertainty. The war in Ukraine, with its effects on supply chains, development of prices and supply of energy and raw materials, remains a source of risk. Further effects due to the rapidly changing situation in Russia and Ukraine are not currently known, but could possibly have substantial negative consequences for our business activities should it escalate beyond its current state.

In addition, continuing bottlenecks in the supply of semis and other industrial upstream products and inflationary pressure are another source of risk. And not at least, the further course of the pandemic, in particular, strict countermeasures in China, hold uncertainties for the expected development of the market, supply chain and production. On that basis, we confirm the forecasts for almost all KPIs that were made in our annual report in 2021.

So what is the guidance for cars? We continue to expect that sales are slightly up. We continue to expect the return on sales adjusted for cars to be between 11.5% and 13%. Obviously, the Q1 result of 16% RoS gives us confidence for the full year guidance. On the back of that, we see the full year return on sales adjusted at the higher end of that range.

Let me shortly walk you through how we get from here to there maybe. We see the price and the mix to stay at a high level, the top-end vehicles growth is further targeted to be above 10%, used car business will impact negatively. The tailwind from depreciation which we had in 2021 should come down, the discontinuing of the noncurrent provisions, the R&D going slightly up.

And finally, with the current macro and the political uncertainties, we want to be prudent and assume a general market environment protection for the remainder of the year as we see further risk on raw material increases in inflationary trends. It is definitely our target to compensate that by net pricing. However, I think at this stage, it is prudent to keep a risk protection.

On the cash conversion rate, unchanged, 0.8:1. PPE is now at the prior year level compared to slightly above before, thanks to the good progress in the first quarter, and on the R&D side it's unchanged. On the van, sales slightly above '21, unchanged, was 8% to 10%. Also here, I would say we see it rather at the upper end of the corridor, thanks on the -- due to the -- on the basis of the Q1 performance. And on the remainder, I think that is unchanged. On mobility, we see the range at 16% to 18%. So what do we expect in the remainder of the year to happen? Margin headwinds due to higher refinancing costs, we expect lower contract volume and normalization of the credit risk. On the group guidance, all KPIs are confirmed as before.

So it brings me to the end on Page 22. We set ourselves strategic priorities on the 24th of February for 2022. So in a nutshell, what is the progress we had been doing so far on scaling the electric and mobility? We increased the EV share by 15% in the first quarter. The BEV share even increased by more than 50%. We introduced the EQE, some of you had the privilege to experience a test drive. We have the EQS SUV World Premiere. I commented on the EQXX, so I think a lot of momentum, not only in terms of numbers and financial results, but really laying the foundation for the EV ramp in the future.

On the top-end vehicle side, the share is 16% and stay tuned for our May 19 event for more to come. We have important software development milestones which are ahead of us in 2022. We know you're curious on it and that's why we will hold a separate CMD event in July dedicated on software. On the supply constraints, we continued the work on the semis as commented before, with risk mitigation, with tangible results. The interruption of the supply chain in Ukraine, I think you can see that it was pretty well managed without any material disruption and we are making further progress in terms of sourcing and deep sourcing, you could see the opening of the battery factory, cooperation on the sale in the U.S. and many others in the quarter and more to come.

So in summary, on the Q1, I would say, you can see the pricing power at work, coupled with continued strong mix, shifting gears towards luxury, supported by continued cost discipline, translating into reasonable margins and in particular a much more resilient business. And I think that's what matters in these days, in this environment, pricing power and resilience.

And with this being said, over to the Q&A.

[Steffen Hoffmann, executive]

Thank you very much, Harald. Ladies and gentlemen, you may ask your questions now. [Operator Instructions].

[Operator]

[Operator Instructions].

[Steffen Hoffmann, executive]

And the first question goes to Tim Rokossa from Deutsche Bank.

[Tim Rokossa, analyst]

It's Tim from Deutsche Bank. I would have two questions, please. The first one is even when you continue to beat results every quarter and you show these impressive numbers, some market participants just want to be negative, and they will again say this is peak pricing and mix. And to confirm, they will obviously point to your guidance, no increase despite a much better result in Q1. What do you say to that? Is that just reflecting the risk protection that you just mentioned, Harald? Russia, China, etc? Or do you actually already see a material slowdown in your EBIT numbers to come?

Secondly, when we talk about one of the main ingredients to that is obviously pricing. And when we talk about pricing, you already mentioned your view on used cars. I think that's a very prudent assumption. What do you think about list prices and discounts? I assume there are basically no discounts currently. When would be a moment of volume decline where you then allow your dealers again to start moving into discounts? And how much did you increase your list prices already? And is there more to come?

[Harald Wilhelm, executive]

Thanks, Tim. Yes, on the walk basically from the Q1 and the full year, I think you could hear it before. We see the strong momentum on the demand side to continue. We see the mix to continue. We want to grow the tech share even further, the EV share as well. And we do expect -- and we do target the pricing to continue.

So I would say, again, another quarter. And the bears, maybe they just need to be patient and wait quarter-by-quarter to see the results coming through. I think that's quarter #6 now or so, or maybe even #7, well, not good at counting. So let's see, quarter-by-quarter, we will keep going on the pricing side, and I'll come back to that as part of your second question in a second.

However, in the current context of things, we do believe it is appropriate to be more prudent. I think in the risk section in the assumptions, I outlined a few of them. I guess many of you also look very closely to China in terms of the lockdown and what could happen further there. I don't have a crystal ball for that. But in this context, I think, it is just more prudent. Our management ambition is clearly to continue to do what we have been doing in the first quarter again, which means using that pricing power to offset the inflationary trends and the raw material increases.

Other than that, you have a few technical ones, I alluded to them, in the remainder of the year, which is, next to the used car pricing and the depreciation, which is probably 0.5 percentage point, a bit of discounting of the provisioning which we had in the Q1. That is a tailwind -- sorry, that is a headwind over half a RoS point, the R&D is another half of a RoS point. I think that gives you a bit of a call-out in terms of the size of the risk protection.

On your second question, on the list pricing and on the discounting, yes, we had adjusted list prices last year ahead of time compared to what we do normally, and also more expels in many countries, in Europe, in the U.S., in Canada, in China, and again, now in April as a function, as a response to the inflationary trends which we see, these have a more expelled impact in 2022 compared to what we expected even at the end of '21 and at the beginning of 2022. And I don't think that we will walk backwards from here in terms of the list.

On the discounts, I mean, they are running at a low level. It's not the discounts, special discounts we put at work. I cannot comment on the discounts the dealers, the independent retailers and dealers, put at work, that's their responsibility, but ours are tight. They are not 0, but they are tight. They are not a function of semi. They are a function of a different approach to market, which is not to push the volume into the market. And this is definitely what we started to do in third and fourth quarter 2020, which we still do in first quarter 2022 and what we intend to do moving forward, and we will talk about that as well more on the 19th.

[Steffen Hoffmann, executive]

And we continue with José Asumendi from JPMorgan.

[Jose Asumendi, analyst]

José from JPMorgan. Just a couple of questions, please. The first one, Harald, can you speak a little bit around the negative bucket of industrial performance, a little bit the key drivers in the quarter? And how do you expect that to evolve in the coming quarters? And also, if you can remind us, please, when does this GLS electric -- when does it hit the market in Europe, U.S. or China?

And second question, you have obviously -- you're trying to see a meaningful share of electric vehicles now within your product portfolio, can you comment on the profitability of these electric vehicles? Do they exceed or at least match the margin contribution you get from your combustion engine vehicles?

[Harald Wilhelm, executive]

Thanks, José. Yes, industrial performance, if you look at the bridge, the EBIT walk, I think you find approximately EUR 1 billion of a headwind in there. I would say probably you can take half of that for raw material costing increases. So that is basically on the purchasing side. And the other half is basically split between inefficiencies in our own operations due to the stop and go, the logistic cost, the higher energy cost and also some product-related -- higher product-related expenses.

On your question on the -- if I got it right, the EQS SUV, this is going to hit the markets in the second half of the year. So probably the contribution to 2022 in terms of volume is not at the full run rate. That we'll see in 2023, the response to the vehicle, which we could see, feel, ourselves in the U.S. during the battery factory opening when we showed the vehicle, and now, when we officially present it, is extremely strong. So I think this is going to be really a true hot seller, a hot car in the various markets, being basically, I think, the only true EV platform in that size, in that category.

In terms of profitability, on the battery vehicles, well, let me take the EQS. I'll just say, looking at now the sales in the first quarter, what did we have, I think, a bit more than 5,000. So it starts to be meaningful. It starts to be, I would say as well, representative in terms of margin. We positioned the vehicle, I think on the pricing side where it belongs to, i.e., in the S-Class segment. The variable costs are under control, obviously, with the raw material cost that needs to be watched moving forward, as the batteries at this juncture are not getting cheaper, but rather a bit more expensive. But I can calm you down. I'm pleased with the margin on the EQS. And if you would see me, I think you could see a smile on my face.

[Steffen Hoffmann, executive]

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

[George Galliers-Pratt, analyst]

The first question I had was just on the working capital and obviously the higher inventory of finished goods and work in progress. Should we expect that to unwind in the second quarter, or is this somewhat reflective of this stop/start nature and disrupted supply chain that we see today, and so, as a result, business as usual going forward? Will it require more finished goods inventory and more way?

The second question was with respect to Maybach. You mentioned that the monthly sales have been exceeding 1,000 units a month, and obviously in Q1 it looks higher than that. What should we think about as the kind of annualized target for Maybach going forward? Is 12,000 units per annum the right number or actually, given what we saw in Q1 and that presumably will be EQS variance, perhaps you can do a bit better than that?

[Harald Wilhelm, executive]

Thank you, George. On the working capital side, well, the inventory increase which we could see in the first quarter, probably we will hold that level roughly in the second quarter. How do we get there? Well, in the first quarter, we decided to build vehicles even with some critical components lacking, as we do expect them to be delivered over the second quarter and then over the third quarter.

So basically, there is quite a high number of blocked vehicles. A part of that will then be turned around, i.e., in the second quarter, but there will be new ones coming, i.e., blocked vehicles, as the semi constraints continue to apply in the second quarter. So that is one of the reasons for the step up in the first quarter and why we see that still being at that level in the second.

The other one we cannot ignore is that logistic chains are impacted by the geo and macro political implications. Transport long chains, you need the trains and the trucks and the ships and the harbors, they just take longer. And each and every day is millions of inventory in a second, right? So that is a matter of fact right now.

I find it -- I mean honestly, quite incredible, as we have been using, for example, a train via Russia before, that within a few days that has been rerouted without coming to a hold. And therefore, we just have to accept a more expelled inventory level at this stage. But we definitely target the inventory to normalize, and I would rather see that in the second half of the year, at least with regards to the semi situation. On the other constraints, obviously, geopolitically, I cannot make a prediction on that one.

On the Maybach, we're happy with the momentum. And we think with the current versions of the Maybach, there is a solid ground for that. We have other, I think interesting stuff in mind on what to do on Maybach and we're happy to give you more color on the 19th of May on that.

[Steffen Hoffmann, executive]

And we continue with Daniel Roeska from Bernstein.

[Daniel Roeska, analyst]

It's Daniel from Bernstein. Let me start with a question maybe following on the profitability. Some of your peers have started to announce that they will increase the transparency on the EV versus ICE side of the business, kind of looking at breaking up revenues, contribution and investments more clearly. What's your thinking on this? And maybe more specifically, what's the time line on this to consider kind of giving some more detail on a regular basis?

And then secondly, we're going to talk about premiumization in Monte Carlo, but could I ask for a short update on your digital services business? If I'm not mistaken, the last time you talked about this was late in 2020 with about a EUR 1 billion EBIT target for '25. So just what have you learned so far? What are you most excited about? And also hear kind of what's the time line for the next update on your digital service business plan?

[Harald Wilhelm, executive]

Maybe on the second question, well, the EUR 1 billion, we still see it today. And I mean, ahead of the update we want to give you in July on the subject matter, the learning is, I think our conviction that if we look what is happening around us, it's even more important to accelerate on that side. And that is what happens with important milestones this year in the cooperation with NVIDIA, but many others. So I'm happy to talk about that when we're getting to that event in July.

In terms of the EV KPIs, I think we started to give some color with the chart on [ tests ] and EV and the share of the plug-ins and the best over there. I would also invite you to have a look into our EU taxonomy reporting where, on a voluntary basis, we report basically already for 2021, and obviously we'll do so for 2022 as well, how many vehicles being compliant with the future EU taxonomy rule, i.e., below 50 grams per kilometer.

And you can see the numbers there, in particular on the investment side. We can see that the capitalized R&D, which are actually in the platforms already mean 40% of the investment today, and that number will definitely go up. So I think that provides all of the transparency in where we allocate the capital to.

[Daniel Roeska, analyst]

Yes, I'll push back and follow up, right? Because given that you're required to do this under EU taxonomy, that's clear, but have you had any discussions in the Board whether you want to kind of go down a more, let's say, formulaic route where you really provide transparency between 2 sides of the business or give us some update on the profitability of the 2 sides? I'm sure you're aware of what peers are thinking about. Just wondering where your thinking is in that process.

[Harald Wilhelm, executive]

Yes. I'm happy to elaborate on that. Before I respond to do we break up the profitability on the BEV and on the ICE side, I want to state very clearly, we have a very intense debate on how we want to transform Mercedes moving forward. And I can say the Board -- the Management Board and the Supervisory Board are of exactly one opinion. This is one team, this is one Mercedes team. This is one company, and we're transforming the whole company into it.

We are not pursuing a strategy to break up the company into an ICE part and into a BEV part or call it into a bad part and a good part or an old part and the new part. We're transforming the whole company and transforming it into the electric world. This is what we had been saying in last year in July. This is what we are doing.

Why does it make sense? Let me just give you a few data points. Sales of vehicles on ICE and on BEV are coming from the same sales force, from the same team, from the same network. The industrial side of things are in common. If you look on the assembly parts of the plants, they do both. So we have the flexibility in the transition. Yes, the power plant is a separate industrial undertaking. But even on the power plant side, it's one team managing, I mean, the ICE, the engine world and the gearboxes as well as the battery and the EHSs.

The engineering side, suspension of the vehicle, is that different on a BEV compared to an ICE? No, sorry. It's -- in terms of dissynergies, dysfunctioning, it would be absolutely devastating. And the strength of this company of more than 130 years to build luxury vehicle, the leading luxury vehicle, you need to take these ones into the future and don't put it in a shell company and call it a bad asset. So this is where we are going.

Now will we spell out, I mean what is the profitability on individual vehicles? No, I think you will understand we're not doing it. But I think we give you a lot of color how we want to address the transition, how we want to address the margin evolution on the EV vehicles. José had the question already before, and we will continue to do so moving forward. I hope that answers.

[Steffen Hoffmann, executive]

Thank you. And we continue with Harald Hendrikse from Morgan Stanley.

[Harald Hendrikse, analyst]

Thank you so much for that answer just now, it's very, very helpful to have clarity in that split conversation. My question, I'm afraid, is back to my usual concerns, which is, firstly, can you just talk a little bit about what has surprised you in the last -- I mean maybe even this last 3 months? Again, what do you think is fully achievable and sustainable? And what would happen if you had, for example, a normalization of production? Does the full normalization of production and supply chains actually help you? Or do you think it would hinder you?

And then sort of the same question, the strategy is obviously working incredibly well. I think the comparison with your major peer in the next few weeks is going to be super interesting. But are there limits to what you can do with this strategy? Is there a limit in terms of volume that you have to produce?

And even on affordability, again, your peer has just launched a brand-new car. The price of that car is nearly 50% higher than the last generation of the same car. I'm getting a little bit concerned whether there is ever going to be an issue with affordability or are your customers happy to continue to pay these higher prices? Are there any real limits to this strategy? Or do you think you can keep going for a long time yet?

[Harald Wilhelm, executive]

Thanks. On the first question, I think, was more maybe on the production side. Well, I mean let me take the Q1 numbers, 488,000 units in terms of the group sales on the cars side. I would say definitely we could have sold more vehicles than 488,000 without deteriorating the mix and without deteriorating the pricing, i.e., at the same discount level as we had with 488,000. So in that respect, it's a shame as the semi situation puts a constraint as we -- I think there would have been a bucket of opportunities which we could have nicely added to it without jeopardizing the strategy in terms of the pricing and the mix.

Definitely, we want to take and grab these opportunities moving forward. With the full year guidance here, you can see, slightly above the previous year level, I think, is a bit more than 4x 488,000. Where is that going to come? Maybe it's more in the second half of the year, given the current ongoing uncertainties, I would say. So that is the perspective we have at this stage.

In terms of is there a limit? Well, I think it all goes with the substance of the product and the appeal of the product. In terms of capital being available and the desire of people -- I mean, wealthy people, to spend the money for exceptional products, I think there -- I would say there's no barrier, there is no limit, at least that's what we can see right now.

But it all goes back to the substance of the product and the appeal. And in this respect the size is not everything. It is the distinguished luxury which matters and maybe not the too pronounced one. But I think we'll -- again, I'm repeating it quite often here this morning, wait for the 19th of May or wait for the July. But maybe that is a good opportunity to talk in more detail about it.

[Steffen Hoffmann, executive]

And we continue with Dorothee Cresswell from Exane.

[Hanna Dorothee Cresswell, analyst]

It's Dorothee Cresswell from Exane. The first one is actually around your distribution strategy. So you've obviously spoken about the plan to move to this agency model. Could you outline a little more where the financial benefit from that comes from? Is it just the fact that you have more control over pricing and maybe you can generate some synergies by bundling functions? Or is it also that you're going to capture a chunk of the dealer margin?

And then a very quick one at the end, just on the electrification target. You said you want to increase the BEV volumes significantly this year. Can you tell us where you think the BEV mix will be for the full year 2022? I think you were at 5% in Q1 and I think 4% in 2021.

[Harald Wilhelm, executive]

Thank you, Dorothee. Well, what is the benefit of the direct sales model? I mean, very clearly, better control over the pricing. And in the context of the strategy we're talking, disciplined pricing, obviously, that matters a lot. And I mean, here we see the benefit and that means that we do expect that the implementation of that model will help us also in terms of the progression on the pricing side. Next to it, obviously, there should be also cost benefit coming out of it, as part of that move over time, there should be some consolidation in the network.

I don't want to point out only the things which are beneficial. It comes with a bit of a bill, which is also the inventory side. Dealer inventory is coming over on our balance sheet, but we'll have an opportunity to improve basically the end-to-end process and probably therefore mitigate the impact which is coming out from the working capital and the inventory side.

In terms of EV and BEV 2022, well, overall, we said we want to be, I think, 15% in 2022. We said we should have around -- I mean, more than 400,000 EV vehicles. If you look into the Q1 chart, you can see that in the Q1 the progression on the BEV side is definitely much more expelled. We continue on the plug-in important transition technology, but the real ramp is now happening on the BEV side. How is it possible? EQS, I mentioned, 5,000 in the first quarter. I think that's a good run rate and maybe hopefully has even more potential. But then in terms of volume, EQE coming in, the sedan, and then EQS SUV later in the year and next year, obviously, the EQE SUV, these will be really the ones pushing the BEV share to another level.

[Steffen Hoffmann, executive]

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

[Stephen Reitman, analyst]

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

[Harald Wilhelm, executive]

Thanks, Stephen. Well, in EQS, as I said, good momentum, more than 5,000 in the first quarter. Huge appetite for the high-end version of the vehicle, huge appetite for the Hyperscreen. So we need to see how we can match that level of demand in 2022. And that's what I would say in this respect.

On the EQE side, the step-up in the production will be second half of the year. And the true run rate, I think, is definitely more a 2023 subject than 2022. However, I think with the experience on the EQS makes us very, very confident that EQE sedan, but also EQE SUV, is going to be really a hot car. The EQE basically is just a little sister or sibling or the shrinked version of the EQS. Therefore, I think that would be very, very attractive in the markets.

[Stephen Reitman, analyst]

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

[Harald Wilhelm, executive]

As we speak, I'm not aware of any specific semi constraint on the BEV or on the EVA2 side. I mean, the constraints here, they are, I would say, more in common between ICE and BEV, not specific to BEV.

[Steffen Hoffmann, executive]

And with that, ladies and gentlemen, thank you very much for your questions and for being with us today. Thanks a lot to Harald for your answers. As always, IR remains at your disposal. In 2 days, on Friday, April 29, our virtual AGM will take place. We hope that you, as an investor of Mercedes-Benz, will find the time to join us on that day. To all of you, have a great morning, great afternoon and great evening, and we look forward to talk to you soon. Thanks, and goodbye.