Mercedes-Benz Group AG

XETRA:MBG

Earnings Call Transcript 2023-Q2

[Operator]

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

I would like to remind you that this telephone conference is governed by the safe harbor wording that you find in our published results documents. Please note that our presentations contain forward-looking statements that reflect management's current views with respect to future events. Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made.

May I now hand over to Steffen Hoffmann, Head of Mercedes-Benz, Investor Relations and Treasury. Thank you very much.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you, and good morning, ladies and gentlemen. On behalf of Mercedes-Benz, I'd like to welcome you on both the telephone and the Internet to our Q2 conference call. I'm very happy to have with me today, Ola Källenius, our CEO; Harald Wilhelm, our CFO. In order to give you maximum time for your questions, Ola and 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 Ola.

[Ola Källenius, Chief Executive Officer]

Thank you, Steffen, and good morning, everyone, and welcome. In Q2, we have delivered again solid financial results and remain on track in executing our strategy, in what we consider a dynamic environment. We increased sales across all the main regions in the first half of this year, especially on the Top-End sales side and dynamic growth of our battery electric vehicles. We, of course, remain vigilant and stand ready to adapt to dynamic macroeconomic and geopolitical events. But for all intents and purposes, we are on track. The reason for our confidence is very attractive, complete and a young portfolio in the market, both for our electrified high-tech ICE products and/or BEVs.

So let's have a look at the numbers on Slide 3 in the deck. The higher car sales, which were plus 6%, and significantly higher van sales plus 90% drove healthy growth of the revenues. And that's then also in combination with the rest of the strategy execution underpinning a better EBIT than the period last year and a very strong increase in the free cash flow to €3.4 billion. And the net industrial liquidity remains also on a very healthy level and considering that we also paid out, of course, a dividend in the second quarter of this year.

If we on the next slide, go into it a little bit in more detail. With regard to the performance here for Mercedes-Benz Cars, the key messages are really that the percentage of Top-End vehicles and the percentage growth of Top-End vehicles, which was 12% developed favorably in this past quarter and our BEV sales more than doubled, so we have picked up momentum on that front.

We have also demonstrated resilience in a challenging environment to you. We come off of, of course, COVID supply restrictions through semiconductors and so on and now on the operational side, things are starting to normalize. So I think that we have navigated through this first half year in terms of operational performance in a very reasonable manner, the new products that we are launching. And I was just down at the press test drive of the new E-Class, speaking to product and business journalist and driving that. We have received a phenomenal – really a phenomenal feedback from customers around the world that are waiting for this vehicle are dealers.

Here we have the precursor really of MB.OS that we will launch shortly. But the infotainment domain is a precursor of MB.OS in the first full digital product as part of that overall operating system. And then we have a couple of dream cars that are about to start production here soon with the CLE Coupe and the CLE Cabriolet, and we also launched the GLC Coupe, the GLC being our best seller in our portfolio.

On the technology side, we are making progress. We now also received Level 3 certification for autonomous drive system in California. So step-by-step, we are building our position here and this is, of course, just the first few steps and much more to come in the next few years. But also the launch of what we call Automatic Lane Change on highways is the function that you really must try. Now I think we are also going to be the first ones that get to launch that in Germany as well after speaking to the German authorities. So that's very positive for our customers.

Since we have our own cloud infrastructure and a cloud layer where we can quickly through our backend add technology to our vehicles, we were the first manufacturer that took the opportunity to do a beta test of ChatGPT in our vehicles in the U.S. And what I have heard from customers so far is that been very positively received and the usage of our infotainment system has gone up even more. But we are also working on the customer experience in general.

As you know, we are expanding our charging options. We think that charging infrastructure is going to be one of the driving enablers for people to adopt BEVs in this marathon towards zero emission driving. And we have now struck a deal where we open up to our customers in the U.S., also the Tesla Supercharger network next year. And as you can see from news this week together with several other OEMs, we are going to put more money into building a very comprehensive charging infrastructure, complimenting the things that we are doing around the world.

We are in the process of changing our business model in go-to-market and moving towards direct sales. And in this past quarter, Germany, which is our third biggest market switched to direct sales. And that went as smooth as you can expect, realizing how big of a market this is. But also in overseas markets, we are pushing ahead. Turkey is a good example. So strategically on many fronts, we are taking Mercedes into the future.

If we jump to the next slide in the deck, you see here the structure of our vehicle sales. And I think I've commented on much of it. Maybe one thing to mention is that, on the core side, we are just in switchover mode of the GLC, which is our best seller. So I would say we should pick up some momentum on the core side in the second half of this year and then going forward.

On the entry side, we had quite a bit of pent-up demand, especially in Europe. That was also brought to waiting customers in the first half of this year. And I've already mentioned the strong results on Top-End vehicles and BEVs. Plug-in hybrids, now I think we have the most comprehensive fleet of plug-in hybrids and literally every new vehicle that we have launched over the last couple of years and are about to launch with a WLTP standard, we have around or more than a 100 kilometers range. So you really get half of an electric vehicle now, more or less. Monday through Friday, going back and forth to work or wherever you go, you can drive electric. But you also have the high-tech combustion engine on board. So the plug-in hybrid will play a role throughout this decade, and I think we have the lineup to take advantage of that.

So with that, I'm going to pass over to Harald, who will give us an update on the financials. Harald, please.

[Harald Wilhelm, Chief Financial Officer]

Thank you, Ola, and hello, good morning to everybody. Let's have a look at Page 6 on the car financials. Sales up, revenues increased by 5%, ASP at 73, EBIT adjusted €3.8 billion, CFBIT adjusted €3.8 billion, which suggests a cash conversion of one. Let's have a look a bit on the margin evolution in the quarter compared to quarter two 2022. What can we see on the Page 7, obviously the bucket volume structure net pricing increased significantly by almost a €1 billion. The majority of that, I mean, comes from improved net pricing, driven by gross price, [indiscernible] list price increases and tight discount management. The increased unit sales and product mix contributed positively as well, whereas the used car business was slightly negative as we guided for.

You further see the FX on the negative side mainly coming from Turkish lira and the U.S. dollar. On the industrial performance, you see in particular one-time commodity charges for semi and inflation-related costs and no tailwind yet from raw material costs. We see various smaller effects from lithium due to a higher EV volume and an elevated spot rate. So please also note that the spot rate changes lead time before they hit the P&L.

Overall, I think, I mean, what to take away from the gross profit evolution is that again, we delivered a net-net pricing year-over-year. But what you cannot see on the chart, what I would like to emphasize is you can also see a net-net pricing quarter-over-quarter, i.e. quarter two over quarter one 2023 outweighing headwinds from material cost and inflation.

Looking at the selling expenses, slightly higher due to marketing expenses volume and selling expenses and agent remuneration from the new direct sales model, the positive counterparts sits in the price bucket. In line with our full-year guidance, we saw higher R&D cost for future platforms and technologies, in particular on MB.OS. The other bucket is €52 million, inside you have a negative effect from the adjustment on our participation in here. There is other very smaller effects from previous year, which we don't have this year. So all-in-all, that's how mean that item turns a positive to €52 million.

So with this, I think, we can move on to Page 8. On the cash flow, CFBIT reported and adjusted at €3.8 billion with a cash conversion of one. The negative €500 million working capital came from slightly heavier vehicles inventory structure. So which means a good mix in the sitting in the inventory with at the same time slightly reduced overall amount of vehicles. €360 million lower trade payables are a function of a lower production volume in Q2. If you look in the deck, you will see that production level was running a bit lower than sales in the second quarter.

Net investment in PPE and intangible assets versus depreciation and amortization are flat. I think that again demonstrates, I mean, how we want to manage the transformation within existing financial envelopes. On the other side, the other line includes the adjustment of the BBAC at equity result of €335 million, which is slightly lower due to dealer support payment in China and the dividend from BBAC of €900 million. The adjustments are for legal proceedings.

Let's move to Page 9 on the vans. Well, great performance, strong sales, order book, almost 120,000 vans sold in quarter two in favorable market conditions that delivered solid profitability from net pricing, higher unit sales, outweighing cost increases and in inflation and also staying on course on the fixed cost trajectory down.

On the product side, we could see the start of the EQT sales and eCitan, and therefore, I mean, the full product portfolio is now electrified in each and every segment, small, mid and large from private to commercial. We also announced them in today, you should see it on the beautiful picture here, the new design of our mid-size van with more luxury in the Private segment and sharpened premium in the Commercial segment. In May, we had van CMD outlining, I mean, the perspective for van in the future is the leading manufacturer of premium light commercial vehicle, and with the ambition to be double digits throughout the decade even in the electric area.

Looking at the numbers of van on the Page 10, total sales up to 19% with privately positioned vans up and the commercial ones even more up. The volume increased in all important markets chiefly in Europe and then in Asia. EV sales are also up by 18% to 5,000 units with eSprinter in model changeover, which means the eSprinter 2.0 is coming later, and that should give some incremental momentum.

Page 11 on the financials, I mean, all figures up, I would just say kudos to the team here. Sales on pretty record level in this quarter, revenues up 25%, EBIT adjusted €800 million and cash generation also €800 million. So do we need to go through the bridge, Steffen?

Page 12. Well, pretty, I think straightforward, 15.5% return on sales adjusted, key driver is the volume structure pricing bucket, also here the solid net pricing is a key driver with list prices up and discounts are spending below last year. The volume obviously helps as well. And also I think on the mix that's very favorable. On the industrial performance, we have basically same thing as I commented on the car side as well as on the selling expenses. In the other, we have also the adjustment of – we have the ad equity result from FBAC.

And with that, I move to the cash flow side to Page 13. So the CFBIT reported €777 million, adjusted €819 million, conversion rate one, working capital charge of €300 million with an increase from inventory of about €200 million, driven by the production ahead of sales here for, I mean, a good second half of the year. As we guided, the investments sit at a higher level now in PPE and intangibles compared to the depreciation, that is a function of increased spend on the EV transformation, namely the Van EA platform. In the others, we reverse the ad equity result and have the dividend from FBAC included. The adjustments are on legal proceedings.

If you look on the key messages on mobility, Page 14, MBM is facing a challenging market environment especially in China. Overall, penetration rates are under pressure with positive trend for battery electric vehicles, in particular in the U.S. due to IRA. Profitability is impacted by lower margins due to higher refinancing rates and intensified competition in the financial services sector. The ramp-up of our new charging business is getting traction, as Ola mentioned before.

With our own branded High-Power Charging Network, the third site is plan to be open in the second half of the year and with the announcement on the Tesla Charging Network, which we join as well as what we announced yesterday in terms of creating another network together with other OEMs in the U.S. And the other line or in the – sorry, furthermore, I mean, we completed the sale of the Russian business activities in second quarter.

Now to the numbers. Page 15, the new business increased in the second quarter. Portfolio on the other side remains stable. The EBIT adjusted decreased, and let's have a look at that on the Page 16. So in the second quarter, EBIT adjusted sits at €450 million, return on equity adjusted 12.8%. How did we get there? Positive effect from normalized cost of credit risk despite a challenging environment, market environment, macroeconomic environment. On the other side, lower interest margin, which is impacted by higher interest rates and increased competition in the financial services sector.

Additionally, we see first investments for ramping up our new charging unit. And in the other positive effect from hyperinflation in Turkey, which was in the last year. The adjustments are on now on the exit of the Russian business at 276, which is now completed. On the Group side, the businesses I explained already leaves the recon, which is the ad equity result of Daimler Trucks that leaves us with an EBIT adjusted of 5.2. Adjustments are a bit more than 200. Again, that is in connection with the sale of the business activities in Russia. Coupe booked EBIT is at €5 billion.

On the cash flow side, same thing, businesses as explained already before. Income taxes are at 1.5 as reflect, I mean, they're going up with the increase in profitability. The improved interest result is obviously – thanks to higher interest rates level. In the other recon item, we see mainly the Daimler Truck divi. With this the free cash flow industrial sits at €3.4 billion, and in the adjustments we see legal proceedings related to diesel.

Page 19 on the NIL, €26 billion by the end of the quarter, starting from €29 billion at the beginning of the quarter. Cash flow, we commented already before we paid the divi of €5.6 billion and we spent €640 million in the second quarter on the share buyback, so proceeding well, I would say with the 4 billion share buyback program. The other item is mainly related to FX.

Now, I think, I mean, let's turn to the outlook for the second half of the year. Let's get started with the divisional guidance on Page 21. First, please read the assumption chart carefully. I rush through it. We see with regional differences, the overall gross momentum of the world economy likely to remain rather subdued in H2. Despite ongoing declining inflation rates, inflation is expected to remain above average in many places, continued restrictive monetary policies at central banks likely to weigh on consumers, companies and economic growth.

In addition, geopolitical imponderables remain uncertainty factor. By contrast, energy prices in H2 are expected to remain at significantly lower level than previous year. The noticeably improved supply chain situation should continue to benefit the automotive market in H2. Also, market demand is expected to remain subdued in important markets. What does it mean for the car guidance – car division guidance on the sales side? We see the order intake, I mean, is stabilizing with a strong product substance that we have in the market, and also considering the product launch is yet to come in H2 and in 2024. On that basis, we expect the pace of sales from the first half of the 2023 to continue for the remainder of the year. Let me clarify, that means that we see sales of H2 at about the same level as H1.

With that, we continue to see full-year 2023 sales, I mean, at prior year level. For 2024, maybe it is obviously too early to tell, but based on today's market sentiment and our product substance that are in the market, and to come from today's perspective, we think that 2024 sales should not be below 2023 sales.

On the cars, return on sales guidance. What does that mean with H1 at 14.1, we had a solid first half of the year. The H1 therefore fits pretty well, I think with the expectation of upper end of the 12% to 14% return on sales range. For H2, we want to take this momentum with us. What are the main moving blocks? I mean, in H2, we expect some easing on raw mats. On the other side, we see continued one-time commodity charges and maybe some headwinds on the used cars. So on that basis, the full-year guidance remains unchanged.

On cash conversion rate and on the R&D and PP&E unchanged. Then, on the sales side, with the tailwinds from H1 and full order books throughout the year, we lift our sales guidance to significantly above prior year level. On the margin side with a strong tailwind from H1 of 15.5, we lift our return on sales adjusted guidance by 200 basis points to the range of 13% to 15%. However, not everything from H1 is taken into our run rate for the full-year compared to H1. We continue to see good sales performance, but also some higher ramp-up-related project expenses, namely EA ramping up. The CCR has been increased as well to 0.7 to 0.9. PP&E, R&D unchanged.

On mobility side, the return on equity remains unchanged in the range of 12% to 14% coming from 14.2%. In H1, we see the following elements for H2, a more competitive environment, especially in China, also related to the BEV ramp up, support deteriorating our interest margin. Furthermore, the increasing OpEx for our own branded high-power charging network leads to H2, rather at 12%, and full-year rather at mid of the range, 12% to 14%. Mid-term, we stay on our target of 14% for MBM.

What does it mean for the group guidance, Page 22, obviously they follow the same premises as the segment guidance. Group revenue confirmed and unchanged on the Group EBIT resulting out of the adjusted van guidance. We lift our Group EBIT guidance to prior year level with the H1 cash flow at 5.5, and a continued strong cash conversion. We also lift our full-year FCF guidance to slightly above prior year level.

And with this, I give back to Ola.

[Ola Källenius, Chief Executive Officer]

Thank you, Harald. On Page 23, let's take a look at the list of priorities that we set out at the beginning of this year within our six pillar strategy that we have been executing over the last years. We talk about safeguarding our operating optimum. So the balanced go-to-market approach to focus on value over volume. And as you can see from Q2 or the first half of the year, we have stayed on that course. Within that we want to continue to scale the BEVs. We are doing this double BEV sales also in the second quarter, in the first half of the year and we will continue working on our BEV rollout.

Over the last few years, we've talked a lot about supply chain management and how we are going to stabilize that. And I think some of the things that are now starting to pay-off is deep sourcing on chips. So multi-year contracts directly with the chip suppliers, but we are also making moves in terms of battery raw materials and locking up that supply chain to set ourselves up for future growth in that area.

On the customer side, there are a whole host of things going on. I mentioned that we are building and accelerating the charging infrastructure as an enabler for electric mobility. We are introducing the direct sales models in more and more markets. So we then enter into a one-to-one relationship with the customers, and we are building our complete digital infrastructure and customer relationship management around that which is working well, getting to know our customers better being able to serve them better.

And in that context, the launch of the next-gen infotainment in the E-Class, as I said, a precursor to MB.OS, which is around the corner, is one piece of that puzzle. So everything fits together and we can serve the customer even better in the future than we have done in the past. In this inflationary environment that we are in, it's extremely important to maintain cost discipline and make sure that we keep the revenue side, the growth of the revenue side in a good relation to what's happening on the cost side. Keep on working on the fixed cost and that has also worked well for us in this first half year underpinning the results, as Harald just mentioned.

If we switch to the next slide, even more important though is setting ourselves up for the future. What is the company going to look like in the second half of this decade? And here we are in a massive transition of our whole product portfolio and working across the Mercedes-Benz Group on no less than four architectures with MMA for our entry vehicles MB.EA, which will be the base for core vehicles. We are going to take our performance brand AMG, also into a dedicated electric future.

And as you know, from the recent Capital Markets Day, for the van division, they are also working on an electric architecture, which will cover all of our mid-size and large vans in an intelligent way. Behind that though are two major technology platform projects that feed these architectures. One is the next-gen E-Drive train, and the other one is the Mercedes-Benz operating System. I invite everybody to join us at the IAA in Munich in only a couple of months time, we will give you a glimpse of the future, what this is going to look like. And although we are very competitive today, we are looking at taking a very big technological step in the next couple or three years.

So there will be some exciting news and previews of what we have in mind in terms of these technologies. So the whole company is focused on executing to put ourselves in a position in the second half of the decade towards the end of the decade to be as strong as we are today.

And with that, I hand back over to you, Steffen.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

Thank you very much, Ola. Thanks a lot, Harald. And ladies and gentlemen, you may ask your questions now. As always, I will identify the question by name, however, please also introduce yourself with the name and the name of the organization that you are representing. A few practical points as always, please ask your questions in English. And as a matter of fairness, please limit the amount of questions to a maximum of two. Now, before we start, the operator will explain the procedure.

[Operator]

Thank you very much. [Operator Instructions] We start the Q&A now, and the first question goes to George Galliers from Goldman Sachs.

[George Galliers, Goldman Sachs Group]

Hi. Thank you for taking my question.

[Ola Källenius, Chief Executive Officer]

Yes. George, we can hear you.

[George Galliers, Goldman Sachs Group]

Great. The first question I had was just with respect to mix. Obviously you mentioned that you've seen your supply chain constraints ease substantially. Would it be fair to say that you are now producing mix on an unconstrained basis, and therefore, you aren't prioritizing the Top-End a more accretive vehicles. And therefore, as we think about the mix going forward, this kind of run rate should be, what investors should expect both at the second half of the year and also as we look to 2024?

The second question I had was more around the brand and the luxury positioning. Obviously when we look at some of your concept cars, like the Vision One-Eleven, these are highly desirable products, which would create a huge halo for Mercedes and demonstrate Mercedes luxury credentials and pricing. Does the company have any intention of bringing these types of products to production? And if yes, over what kind of timeframe? Thank you.

[Ola Källenius, Chief Executive Officer]

Yes. Thank you, George. Let me remind you that with regard to the mix management, even before there were supply restrictions as part of the pillar two of our strategy, we had pivoted towards a value over volume approach, value obviously for our customers, but also value for our shareholders. So nothing has really changed in terms of our policy. One thing also to remember with regard to mix is that some of it is also product launch driven. And I mentioned that on the core, yes, if you have a switch over of a big product like the GLC, you can have from quarter-to-quarter from half-year-to-half-year, some movement there. But we are absolutely focusing on growth of the Top-End. This is our strategic goal. And on the core and on the entry, we are managing this according to our profitable growth paradigm.

With regard to brand luxury vehicles, the Vision One-Eleven, I think it's a fantastic vehicle. We really use that to launch the technology message for what's going to underpin AMG.EA. We will have an incredible dedicated electric performance drive train for AMG.EA. And from time to time, we will also have limited edition vehicles that are really desirable dream cars. We don't have a production goal for the Vision One-Eleven per se, but rest assured, there's a lot of exciting products in the pipeline for Mercedes.

[Harald Wilhelm, Chief Financial Officer]

Just shortly, I mean, George, I mean, maybe in the second quarter, I would say, I mean, whereas if supply chain globally was less constrained, I mean, in the core segment it was constrained on the ramp-up of the GLC. And therefore, at the same time, a good run on the entry segment. However, that has an impact on the mix in the second quarter. On the normalized basis, I think we should see a stronger core moving forward. So therefore, I think some more potential.

[George Galliers, Goldman Sachs Group]

Great. Thank you.

[Operator]

Thanks, George. And we continue with Daniel Roeska from Bernstein.

[Daniel Roeska, Sanford C. Bernstein & Co.]

Good morning, it's Daniel from Bernstein. Good morning, gens. Two, if I may, on kind of the BEV topic. First of all, as you ramp up your BEV sales, we talked about kind of the upstream supply chain before. May I ask you, is there any way to quantify kind of how much of the raw materials you've kind of secured until when? And then I think you mentioned on the previous call you were going through every single link in the chain. Could I ask where you are on refining kind of given the capacity, maybe also the geographic limitations on refining at this point in time? Just any updates to your investigations into the upstream supply chain for the BEV part?

And then secondly, could you talk briefly about China more in the medium term? You had some comments in the press over the past few weeks, and it seems like there's a growing divergence in consumer preferences and demands. How are you reacting to this? What does this do to your platform strategy? And if vehicle designs will become more specific to individual regions, does that drive incremental cost down the road in your mind?

[Ola Källenius, Chief Executive Officer]

So Daniel, let me start with the first one. I think one lessons learned from these past years, especially on the chip side, is for some commodities or some technical verticals, you cannot just rely on a contract with a Tier 1 and not have transparency, what happens below that. That is why we started deep sourcing on the chip side, and also have started deep sourcing on the battery electric raw material side. So what we have done, it's a two-pronged approach. We have literally gone through with every one of our partners for battery cells. The supply chain all the way down to the mine, and making sure that on a contractual basis, we lock up the demand that we need with some flexibility obviously for the future. But on top of that, we have also taken initiatives some of which we have already communicated like an initiative between Canada and Germany to both look at the mining side and the refining side.

So what we want to do is we want to be able to control our destiny in terms of supply chain for battery electric vehicles, and for those raw materials. So many of the pieces of the puzzle are already in place, but it's also work in progress as we, of course, grow the BEV side and then put more architectures into the market. And you're, of course, also aware of our investment into ACC, where we as a shareholder are now part of the battery cell manufacturing space as well. So good progress on that.

With regard to China, if you look at the market as such now just in the short-term, many had expected, let's say a more dynamic Chinese economy coming out of the COVID restrictions that have not yet happened. We're also watching on the policy making, what's happening there. Is the Chinese government going to take measures? So maybe in terms of how the Chinese economy develops, this very quick recovery that many industry watchers had expected has not yet happened. But the actions over the last many years of the government shows that they tried to manage their economy for growth. So for the long-term, we remain with the view that China is absolutely a growth market.

In the split between the different types of products, yes, it is true that for the BEVs, most of the dynamism has been in the Entry/Volume segment, much of which, by the way price driven. So very, very fierce price competition in that segment. And this level of adoption has not yet happened in the premium or in the luxury segment. As we talk to customers, many customers view the S-Class with an electrified high-tech V8, still as the ultimate buy. And we don't want to – we don't want to persuade them not to do that, obviously.

But at the same time, we are carefully organically building our BEV position in China. Here we have decided not to, let's say rush that with price action, like you see it in the Entry segment because we think that long-term that would probably not be the best play. So if we need to apply some strategic patience to this, we will apply some strategic patience to this.

Going forward, for all the architectures that I described in my presentation with regard to China, absolutely we take into account what we think that the Chinese customer wants. And as we have done over many years with regard to the space in the vehicle, but also the look and feel the technology, et cetera, et cetera. So this is built into our plan. It's not like we now have to say, oh, we have to do something completely different. This is part of the plan when we launch the architectures that come mid decade and forward.

[Daniel Roeska, Sanford C. Bernstein & Co.]

Thanks. Maybe a brief follow-up. When you say strategic patience when it comes to China, would that be kind of saying, look, if the BEV penetration and the premium your market, the premium market kind of remains low, you're not worried or even if penetration picks up, but your penetration doesn't pick up, you would still be willing to wait, kind of, and then with newer products on MDA kind of regain that market share later. So is that more common on the market overall or in your position within the premium market?

[Ola Källenius, Chief Executive Officer]

Yes. We think strategically the Chinese market's going towards zero emissions. So let's not have any confusion about what the strategic goal is here. That's where we're going. If it's not a straight line journey, what we don't think that we should do is to temporarily, let's call it by market share, by irrational actions on the pricing side. If other market participants decide to do that, something to watch, but it's not our general policy. But in the – during this decade, we are investing massively into building our position in BEVs in China, and then we will see how things will unfold.

[Daniel Roeska, Sanford C. Bernstein & Co.]

Ola, Thank you.

[Operator]

Thanks, Ola. Thanks, Daniel. And we continue with Tim Rokossa from Deutsche Bank.

[Tim Rokossa, Deutsche Bank AG]

Yes. Good morning, gentlemen. It's Tim from Deutsche Bank. Ola, I'd like to follow-up on your response just to Daniel. We had VW announcing the SAC and specifically the Xpeng Corporation yesterday. We know that local – for local is real, especially in China. [Indiscernible] seems to run better after you guys gave up some control. Smart is running pretty well now as well. EQ as obviously not running so well in China for all the reasons that you just outlined, but also simply because probably design is not exactly what customers were looking for. You had some corporations with Renault in Europe in the past. Would it make sense to perhaps for you deeper cooperate with a partner where that partner has more control of costs and the localized product in China as well for the lower end of your BEV portfolio, or would you rule that out?

And secondly, Harald, perhaps to you, when you say 2024 sales not below 2023 sales, it's pretty powerful statement. Good to hear that at this point in time, particularly with the track record you guys built. Can you help us to contextualize with the value over volume focus that you have, why would you say that already by the end of July, is demand so strong that you see in your order intake? Do you still feel you have quite a few fleets tricked up your fleets for next year? Should things get more so or how should we contextualize this? Thank you.

[Ola Källenius, Chief Executive Officer]

Thank you, Tim. Let me then expand a little bit here, so that you understand what our strategy is. For transformation in China, but around the world. As you know, there are two technological trends that OEMs need to master. It's the e-drive train and it's the digital side of the vehicle. I would like to remind everybody though, that next to those technological trend, what makes a Mercedes-Benz, a Mercedes-Benz is much more than that. It's all the other qualities that, especially Chinese customers also value. It is the quality, it is the longevity, is the ride and the drive. It is that comfortable special cocoon that you get when you're inside a Mercedes. So all of those things need to be taken forward. Also, it's not just about those two technical verticals. And I think no company in the world knows better how to make a Mercedes-Benz than a Mercedes-Benz. And that is why we take control over the engineering of our future products.

But now let me dig deeper into e-drive train and the digital side, and also our partnering strategy. If you read recent product comparisons by prominent product magazines between our e-drive train and e-drive train competitors, including Chinese new competitors, you will see that our current e-drive train is very competitive, objectively measured in all dimensions. Is that then a cause to sit back and relax and say, yes, we have solved the equation in e-drive train, tick in the box, we don't have to do anything? No, we are doing no less in the next two to three years than completely from A to Z overhauling that electric drive train. The inspiration is the EQXX. And when we meet each other in Munich, we will lift the veil on some of the things that we're doing there. But very much improved efficiency, improved cost position as well, of course, across the board, new chemistry, new everything, new inverters, new, new, new.

So whereas we are today, technologically competitive on the e-drive train, we are taking a massive step in the middle of this decade. In the sourcing and cost structure of that for China, we do that locally. So we are sourcing with competent partners in China and taking advantage of the industrial automotive cluster in China in doing so. If we switch to the digital side, and of course, I know that you're intimately familiar with our MB.OS strategy. We said that we want to be the architect of our digital house, and we need to be the ones that are the interface to the customer.

For the Chinese market, specifically, though, we are partnering in the different application fields and every relevant tech partner, many of the of course known big tech companies are our partners in China. So we will have a China fit dedicated digital environment that will delight customers. And this is not something that we're waiting to do. This is happening already in our products today. So the cars that are on the market are in current dynamic development, adding more and more features, even down to maybe a few things that we hadn't considered in the past that you can then sing karaoke in the new E-Class and stuff like that might sound like a peripheral thing, but if some of our customers appreciate that, why shouldn't we do that and we're able to do that. So we are partnering, but we're not handing over the task of creating the Mercedes of the future to another OEM. That task stays with us.

[Harald Wilhelm, Chief Financial Officer]

And Tim, yes, why are we saying that 2024, I mean, should not be below 2023 and with regard to the sales, as you can read and see from the macroeconomic assumption charts, I mean, we stay cautious on the macro side, rest assured. If we look into order intake momentum in Q2, we see some stabilization here. But probably mean from that, it is, I mean, too early to conclude. I mean on the full-year or to say that, I mean, an order book has been built year-to-date for 2024. But we see the perspectives of that momentum continuing, I mean, for the remainder of the year.

But really I think what drives, I mean, the statement, we are departing from a pretty low base, I would say, right. I mean around 2 million units. I mean, this year, if we say about same level as 2022, I think that is a low departure point. And we are at the juncture where we have, I mean, great products, I mean, hitting the market in the second half of the year and full run rate then in 2024, what comes to mind full run rate the GLC, but then in particular, I mean E-Class in 2024. And I think, I mean, we can track that historically, that obviously, the demand level for these great products, I mean, yield also, then sales step up, not limited to that.

You can see, I mean, in 2023 in a difficult macro context that Top-End growth does exist. You can see also whether it be ramping on the BEV, and yes, we talk quite a lot about EQS and EQE, but one thing is for sure, that is an incremental platform creating additional in demand. And so, all-in-all, I mean we want to further increase, obviously the best offering, I mean in 2024.

Finally, however, rest assured, the strategy, the policy for pricing and margin to prevail over volume will continue to exist as you can see again in the second quarter. And if you allow me to repeat the second quarter pricing, net-net pricing was favorable over quarter one 2023. So definitely, I think that demonstrates so that we want to take that also for the remainder of the year as well as into 2024.

[Tim Rokossa, Deutsche Bank AG]

Thank you.

[Operator]

Thanks, Tim. And we continue with Jose Asumendi from JPMorgan.

[Jose Asumendi, JPMorgan Chase & Co.]

Thank you. Good morning, Harald and Ola. Just a couple of questions. Harald, can you comment on the bucket of volume, structure and pricing? Can you give us a bit more color behind those two buckets? And second, can you comment a bit on FX and raw mats, how should we expect that going through in the remaining of the year? And then Ola, please, can you comment a little bit more with regards to your overall competitiveness in China and the opportunity to improve your momentum? Thanks to the ramp-up of the new facility, including the EQE and EQS SUV, which you're ramping up in the second facility in Beijing. Thank you.

[Harald Wilhelm, Chief Financial Officer]

Yes. Jose, on the second quarter, I assume you referred to cars second quarter. Well, I mean, volume was positive as you can see from the sales number. Pricing was by far the biggest lever within the €900 million bucket, mix was favorable compared to second quarter 2022, slightly negative compared to Q1 2023.

On the raw mat side, no relief in the second quarter, we do expect that for the second half of the year, but continued spend on the supplier one-time payment related to inflation and semi. So how should we think about the second half of the year in terms of volume, structure, pricing and mix? I would say, I mean, all-in-all, sales, we said we take the same momentum from H1 into H2. So sales, I mean volume, roughly same level, no fundamental change. I mean, on the mix side, I would say, pricing, I mean, we need to stay, I think, I mean cautious, but all-in-all, net-net pricing should not deteriorate I mean, in the second half of the year. And on the raw mats for the remainder of the year, I mean tailwind, but as I said from the semi and inflation, some headwind and a bit of the use to down.

With this, I mean, we want to take, I think I said that we want to take the momentum of H1 also into H2 that applies for the sales. But I think that applies as well to the margin side of things. As we demonstrated in H1 namely at the upper end, if you look into the group guidance statement and you consider them in the van update, I think if you do the math, you will find out that, I mean the car guidance embedded in there is probably rather sitting at 13% to 14% rather than 12% to 13%. So I think that gives you some confidence how we think anything below or be beyond that, I think is getting to probably a bit of a ridiculous level of granularity.

[Ola Källenius, Chief Executive Officer]

So Jose, if you look at the composition of the Chinese market and also the Chinese BEV market, as I commented before, most of the action has been on the entry and on the volume side. So anything and everything below ¥300,000 and even some of the premium offerings have dropped into that category below to ¥300,000. If you look at kind of ¥400,000 and above, actually our position is quite reasonable. I know that the numbers are in absolute terms for that market, still small. And here is where we said, let's be cautious about the adoption rate and see how this happens and develops organically. But in that segment, we are growing and in fact a significant growth albeit from a low base in the second quarter of this year, and the EQS SUV that we have now also launched, plays a role in that.

So we will continue with the approach that I mentioned before. But to then drop products below the 300,000 threshold to punch a number, I don't think is, maybe the wisest choice in our situation. If you look our overall BEV rate at 11 or so percent of total sales, and you compare it to all manufacturers across the world, all established manufacturers across the world, you will see that we're actually one of the leading companies in terms of adoption percentage wise. Also, compared to some of the prominent volume players that are also attempting to go BEV, so I don't think that we should, let's say, discard what has happened so far. But the investments that are coming into the future that I mentioned before around the middle of the decade to set us up for the second half of the decade, we think that there is much more action to come.

[Operator]

Thanks, Ola. Thanks, Harald. We have time for one more question. Respecting that at 9, there's another OEM presenting their figures. Last question goes to Horst Schneider from Bank of America.

[Horst Schneider, Bank of America Merrill Lynch]

Yes. Good morning, and thanks for taking also my questions. I tried to keep it short. First of all, regarding best sales in Europe, prospectively Germany, we hear some negative press reports here recently, not necessarily related to Mercedes, more related generally to the market. Can you maybe give us an update what you see in terms of order intake on BEVs in Europe, in Germany, and do you think that Germany needs to increase maybe against the subsidies? We know that the leasing subsidies phase out basically in September. And then the other question that I had relates to the agency sales model. We talked a lot about that in Q1 still. Now basically the model has been implemented. Can you maybe tell us what worked well and where you think there's need for improvement? Thank you.

[Ola Källenius, Chief Executive Officer]

So BEV sales and BEV market in Europe, also due to the varying incentives that the different countries do is a very heterogeneous picture. But part of that doubling our BEV sales here in Q2 or really in the first half years, of course, a lot of that has been carried by Europe as well. So the first half of this year has been quite successful for us in BEV sales. If incentives change in different markets, you can see that it does have an effect on those markets. So I think we have to expect a little bit of a dynamic environment, and not only a straight line. And then there's another thing we also have to do, and I think this is the task really of the next three, four, five years that the early adopter phase is over in the BEV business. So every early adopter probably has a BEV now.

Now we need to get that majority that, let's say, silent majority waiting, thinking about it, looking at it, and there are other factors play a role. Is the charging infrastructure going to be there? So some of those concerns, that is why we're putting now more and more money into enabling as well, not just the products and the new architectures that are coming with MMA and MBA and so on, which will of course be very important for the European market.

And also in our discussions with both Brussels and Berlin, what we are saying is, try to be consistent on incentivization, no sudden moves, but put money into infrastructure. The more money we put into infrastructure and build a system around the electric vehicle during this decade, that is what's going to underpin success. So heterogeneous picture, don't expect a straight line, but judging by the first six months, quite solid actually.

[Horst Schneider, Bank of America Merrill Lynch]

Agency sales?

[Ola Källenius, Chief Executive Officer]

Sorry about that. Agency sales, you said that. Well, we went live here now a little over a month ago. What surprised me most, especially now going with our third biggest market in the world, is how smooth that change went. It was almost like pushing a button. I don't do service to the work of the team here over several years. I mean, it was a herculean effort to get that going. Now what you need to do is, and we have built a foundation for it is, as a manufacturer, you also have to act and think like a retailer. So I think there's going to be a learning curve there, but we will gain massive, massive knowledge about our customers and build that. So going forward, I'm more convinced than ever that direct sales is the right path for us.

[Horst Schneider, Bank of America Merrill Lynch]

All right. Thank you.

[Steffen Hoffmann, Head of Investor Relations and Treasury]

So with that, we close the call. We want to thank you very much for attending. Thanks a lot Ola and Harald for answering the questions. As always, IR is at your disposal afterwards. And we are looking forward to seeing you soon hopefully at the IAA in Munich. Thank you very much and good bye.