Mercedes-Benz Group AG

XETRA:MBG

Earnings Call Analysis

Mercedes-Benz Faces Challenges But Remains Committed to Future Growth

In Q3, Mercedes-Benz reported a disappointing EBIT of €2.5 billion and a return on sales of just 4.7%, impacted by weaker demand, especially in China, and a less favorable product mix. Despite this, the company aims for Q4 sales to rise, maintaining its EBIT guidance between 6% to 7%. The focus remains on a significant product offensive and rigorous cost management, targeting a robust shareholder return of approximately €10 billion in 2024, including dividends and share buybacks. Looking ahead, the xEV share guidance has been adjusted to 4% to 5% as demand for electrified vehicles stabilizes.

Navigating a Tough Quarter

The latest earnings call for Mercedes-Benz revealed a challenging environment for the company in the third quarter. While the overall sales for Cars & Vans stood at 504,000 units, reflecting a solid performance, the context was less optimistic with a decline in the sales of Top-End vehicles driven by significant market pressures in Asia, particularly China. Adjustments to wholesales and dealer stock levels were necessary due to an unfavorable mix and price reductions, highlighting the delicate balancing act the company faces amid a deteriorating macroeconomic landscape.

Profitability and Key Performance Metrics

In terms of profitability, Mercedes-Benz reported an EBIT of EUR 2.5 billion, translating to an EPS of EUR 1.81. However, the Return on Sales (ROS) showed a concerning drop to 4.7%, a stark decline from the previous quarter. Notably, the company indicated a mid-triple-digit million euro impact from various provisions, warranty costs, and market adjustments that contributed to this dip in profitability.

Strategic Product Initiatives

Despite these challenges, Mercedes-Benz is gearing up for a robust product offensive. Upcoming launches, including new models in the Top-End segment, such as the Maybach SL and AMG GT special editions, are anticipated to excite the market. This strategic initiative demonstrates the company’s commitment to revamping its product lineup tailored to changing consumer preferences and market demands.

Guidance and Future Outlook

Looking ahead, Mercedes-Benz has provided guidance for a fourth-quarter EBIT margin of 6% to 7%, hoping to recover from the recent setbacks. The company expects volume increases compared to the third quarter, backed by product improvements and a stabilization of dealer stocks. Short-term headwinds remain, especially in the context of the ongoing material cost increases and seasonal factors influencing the after-sales market.

Managing Costs Amid Challenges

Cost management will be crucial moving forward, as the leadership emphasized the need to enhance operational efficiencies across all areas—be it material, variable, or fixed costs. The company is also expected to adjust its production capacity based on changing market demands, particularly in China, where competition remains fierce while managing CO2 compliance requirements in Europe.

Strong Cash Flow and Shareholder Focus

Despite the challenges, cash generation remains strong, with year-to-date cash returns to shareholders reaching approximately EUR 10 billion in 2024, which includes a substantial dividend and share buyback program totaling EUR 4.3 billion. This focus on shareholder returns reflects a healthy balance between investing in new products and returning capital to investors, even in tough economic times.

Conclusion: Strategic Adaptability Required

In summary, Mercedes-Benz’s third-quarter results highlight the need for strategic adaptability in a competitive and evolving marketplace. The company’s proactive measures in product innovation and cost management are pivotal for navigating current challenges and achieving its future financial objectives. As it works to stabilize performance and reclaim market strength, continued oversight on operational efficiencies and responsiveness to market dynamics will be essential.

Earnings Call Transcript 2024-Q3

[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's 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 will 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 Christina Schenck, Head of Mercedes-Benz Investor Relations & Treasury. Thank you very much.

[Christina Schenck, executive]

Good morning, ladies and gentlemen. This is Christina speaking. On behalf of Mercedes-Benz, I would like to welcome you on both the telephone and the Internet to our Q3 results conference call.

I'm very happy to have with me today, Harald Wilhelm, our CFO.

To give you maximum time for your questions, Harald will begin with an introduction directly followed by a Q&A session. The respective presentation can be found on the Mercedes-Benz IR website. Now I would like to hand over to you, Harald.

[Harald Wilhelm, executive]

Yes. Thanks, Christina, and hello everybody, to this call. Before we move into the deck, let me say a few words on the current profit evolution in our company.

We are, at least, as unhappy about Q3 as you are and we are conscious of that.

So how do we move from here? We have the right products with great substance, and we are working on an unprecedented product offensive to come. However, the macro environment deteriorated and the competitive landscape remains demanding. Q3 results have been impacted by changes in the market environment and product transitions.

Rest assured, we are working on all levers to step up the performance to our performance -- to our ambition level.

But for today, let's focus on the Q3 results and the outlook for the Q4. And with that, I would jump to the highlights, the key messages for the quarter on Page 2.

If we look on the sales side, we had overall a solid sales number for Cars & Vans. Sales for our Top-End vehicles were impacted by a softer mix, I come back to that a bit later.

On the product side, we had some world premieres such as the Maybach SL, such as the AMG GT special edition, as you can see, this beautiful beast here on the chart, the GT 63 PRO. And furthermore, with a limited number of -- with a limited addition of only 200 vehicles. And furthermore, you may spot first VAN.EA prototypes on the road, which demonstrates that we are reinventing vans as well.

On the profitability side, definitely Cars was a weak quarter with a lower-than-expected volume, unfavorable mix and softer pricing and obviously go in more detail on this later. Van, as expected, a bit lower but still a very good level. And MBM, as expected, in an environment that remains demanding as well.

On the technology side, we are progressing demonstrated by things like the Level 3 now with an increased operating speed up to 95 kilometers. So you can enjoy that on German highways for more than 10,000 kilometers. So a real great customer case.

Capital allocation. Shareholder return is a top priority for us. We continued strong cash generation. Besides our substantial dividend of EUR 5.5 billion, we added EUR 4.3 billion of share buyback. So far, in 2024, that means cash out -- cash returns to you, to shareholders, of around EUR 10 billion year-to-date in 2024.

If we look on Cars -- on the group key figures, the revenue side have been impacted by sales development and the lower pricing and the mix for Cars. The EBIT is at EUR 2.5 billion EPS at EUR 1.81, supported by the accretion effect from the share buyback but offset by some temporarily higher tax rates. Cash flow at EUR 2.4 billion, why we ended the net industrial liquidity at a comfortable EUR 29 billion.

Now looking on the Cars sales evolution. Overall, sales level was 504,000. I would say that's a solid number. Improved product availability, especially in the core was partially offset by softer demand due to macro situation in Asia. Quarter-over-quarter sales continued to rise, but less than expected.

The core segment is up by 4%, driven by full availability of the GLC and market introductions of CLE models.

Now on the TEV side -- on the Top-End side, you can see the year-over-year on the chart, but probably more important is to explain what happened between the quarter 2 and the quarter 3 this year. So number one, softer market in Asia, in particular, in China as we can observe in industry overall. Against this backdrop, we adjusted wholesale also in S-Class in the third quarter and thereby adjusted dealer stock level.

The underlying customer demand, which I want to emphasize here for the S-Class was rather stable in the third quarter if you look at the retail sales for the S-Class in China. Therefore, we can say it demonstrates the undisputed leadership of the S-Class in China, but also around the world.

Another key impact in the third quarter is product transitioning, in particular on G-Class, the previous models running out and the all-new ICE and EV models are becoming available in all markets in the fourth quarter.

So to sum it up on the mix, it has been impacted by market environment and product transitioning in the Top-End segment.

Electrified vehicles are down 15%, given the market environment for EVs, which remains subdued. On the other side, the plug-in were nicely up by 10% globally, in particular, driven by the U.S.

Car financials, Page 5. Revenues impacted, minus 6%. ASP reflect what I just said before. And on the EBIT, on the cash flow, we look on the charts to come.

So let's go Page 6 on the profitability evolution in the third quarter with the EBIT of 1.2 billion and a ROS of 4.7%.

I would like to take you through basically 3 building blocks here. Number one, let me explain first what effects are included in the third quarter. So among these, we have the effects of the BEV stock clearing measure as we announced mid-September. We have included dealer support in China. We have included some warranty cost phasing in the third quarter. And each of these items I just mentioned before is roughly a low 3-digit number. If combined, if you want to say so, they add up to a kind of a mid-3-digit million figure. So that is what is included in absolute in the third quarter numbers.

Second building block is looking at the quarter 3 year-over-year bridge, which you see on the chart, which is, in particular, impacted by the minus EUR 1.6 billion bucket volume/structure/pricing, which is mainly headwinds from the product and the market mix I was talking about before and the negative net pricing effects as we cannot completely detach from the competitive market environment. And it also includes the support measures for the BEV stock clearing.

Additionally, we saw a further normalization of the used car business, which is also included in this bucket of EUR 1.6 billion negative.

On the industrial performance overall, it looks rather balanced. But let me say we're making good progress on the efficiencies, the operational efficiencies; in material costs and variable manufacturing costs, offset, however, by the warranty cost phasing I mentioned before.

Selling expenses benefited from some further efficiencies. The R&D went up as planned.

The main drivers in the other buckets is a lower BBAC profit contribution. Here, you see the impact of the dealer support in China. What else, the absence of positive prior year onetimers, such as the sales of our CKD operations in Indonesia and impacts from the changes on the interest rate environment impacting the discounting of provisions.

So the third building block I want to take you through is the evolution of the profit and profitability from quarter 2 to quarter 3, i.e., from 10.2% to 4.7%. So how to explain that one? A softer mix, which is around 2%; pricing, including effects of the BEV stock clearing and the dealer support in China, which is around also 2%, 2.5%; the warranty cost trading, 4%; and the absence of favorable onetimers and the interest rate changes I just mentioned before for another 1%.

So I hope that gives you some better color to understand the quarter 3 profitability evolution. Even so, the end result is obviously not acceptable.

Page #7 on the cash flow side. The CFBIT for cars is at EUR 2.4 billion with a cash conversion at 2. Let me explain, EUR 400 million of tailwind from the working capital, basically driven by positive receivables, that's deliveries to our JV in China where we have the reversal of the effect, which we had a negative in Q2. As well in the working capital, we have higher trade payables due to seasonality effects and a bit of higher inventories.

Financial investments are positive related to further retail outlet sales in some countries. Net investments in PPE and intangible exceeded depreciation. In the other line, you see the impact of some -- of the noncash-relevant -- warranty cost phasing and the BEV stock clearing measures so which have -- did not have a cash effect in the third quarter as well as the adjustment as usual of the BBAC at equity result.

Moving over to the Vans. On the sales, total sales were down by 13%, mainly driven by lower demand in service and crafts business as well as recreational vehicles in Germany and the U.S. Additionally, as we planned, we discontinued the Metris in the U.S. And in the EU, other than Germany, overall, we see a solid sales development. BEV sales are at 4,400 units due to the overall decline in demand for electric vehicles, while large van sales for Sprinter and eSprinters are slightly up.

We are furthermore rolling out our completely updated product portfolio in all markets.

On the Vans financials, revenues developed better than sales due a very healthy type mix.

And on the EBIT and the cash flow we come on Page 10. So on the Cars -- on the Vans bridge, the return on sales decreased from 15% to 13.5%, which is still, I think, a very solid level. What has been behind that one, lower volumes partly offset by a favorable mix, supported by improved product substance; increased net efficiencies across all buckets; and the others negative mainly driven by a lower FBAC results in China due to a model changeover of the V-Class.

On the cash flow side, the cash flow -- the CFBIT for Vans is at EUR 0.9 billion. Cash conversion rate of 1.4%. So supported by working capital positive of EUR 500 million with lower and lighter inventory vehicle stock and a favorable management of payables and receivables. Net investments exceed the amortization and the impairments is -- we invest into the VAN.EA.

Moving to Mobility, Page 12. The new business decreased by 6%, mainly due to the banking competition in China, given some headwinds also for the future development. The portfolio is roughly on the same level as in the second quarter 2024.

If we look at the EBIT evolution, Page 13. The EBIT is at EUR 300 million. So year-over-year, we see cost of credit risk improvement due to some positive onetimers. With respect to the third quarter, the tense risk situation in the U.S. continued.

On the volume and the margin side, the portfolio interest margin remains under pressure. However, profitability of new acquisition stabilizes on a healthy level.

Furthermore, we have some negative impact by a lower remarketing result at Athlon, and additionally, the absence of some positive prior year effects impacting the return on equity.

We tried to offset by ongoing efficiency measures, as you can also see on the chart. However, all in all, that leads to a return on equity of 8.9%.

Looking at the group EBIT. The business side, I explained already in the recon. It's rather flat with a bit lower at equity result from Daimler Truck, and thereby, the EBIT adjusted as booked is at EUR 2.5 billion.

On the free cash flow side, Page 15, same thing. Business side explained as before. Income taxes are at EUR 1 billion, driven a bit by seasonality effects. The cash flow of the industrial business is at EUR 2.4 billion, which supports our emphasis on strong cash generation.

Looking at the evolution of the net industrial liquidity on Page 16. End of the quarter, close to EUR 29 billion. The cash flow, obviously, as explained before, with EUR 2.4 billion. Cash out in the quarter for the buyback -- share buyback of around EUR 1.2 billion. Other buckets slightly negative with FX and some MBM effects.

And that means that since the beginning of the share buyback program in March 2023, we have bought back shares in the amount of EUR 6.3 billion by the end of this quarter. We expect the current EUR 7 billion program to finish early. There are basically 2 thresholds. The one is the EUR 7 billion, which has been authorized by the Supervisory Board and the other one is a 10% share capital approval as per the AGM. From today's perspective, the full 10% share capital limit will be reached first. That equals to the maximum we can do. However, we plan to get authorization for another 10% at our next AGM in May 2025.

With this, I would come to the outlook on Page 18. For the divisional guidance, first, please have a look at the assumption chart. They are unchanged to quarter 2, that's why I will not read them out. We jump to the Car division and the sales guidance right away.

With year-to-date of close to 1.5 million units, we now see 2024 sales slightly below 2023 level. That implies quarter 4 sales in the vicinity of quarter 3.

How does it look like by the regions? In the U.S., we continue to see a solid momentum for sales. In Europe, I would say, overall, the demand level is stable also compared to the quarter 3. And in China, the market environment remains challenging and competition is strong. So here, we aim to hold in the fourth quarter, the same level as in the third quarter.

Globally, on the TEV side, which is obviously very important, we see positive momentum in the fourth quarter, supported by availability of the G-Class, the E, AMG, the GT and the SL, which will be complemented with product offerings with attractive entry versions of the SL and GT 43 as well as respective high-performance hybrid 63 versions in the markets. Furthermore, we see quarter 4 sales for the S-Class improving, driven by the U.S. and Korea as well as the model changeover for 2025.

On the xEV side, we are year-to-date at 18%-ish. Therefore, we now see that at 18% to 19% for the full year.

As announced earlier, the return on sales adjusted guidance is at 7.5% to 8.5%. Year-to-date, we are at 8%. So we expect quarter 4 to improve versus quarter 3.

And let me outline what are the changes we see in quarter 4 compared to quarter 3. Volume, pricing, China dealer support should stay at a similar level. We expect the mix to improve slightly, as outlined before. We see normalization of the warranty, which we had in the quarter 3 and no BEV stock measure in quarter 4 anymore. We see the industrial performance net negative with material cost up due to seasonality and supplier onetime payments. And we see the valuation topics on our participations across the value chain as we debated also 4 weeks ago during the ad hoc.

All in all, with this, we see quarter 4 at about 6% to 7%, confirming the recently adjusted guidance range.

No changes on PPE, R&D, CCR.

On the Vans side, Vans and the year-to-date at 15.8%, ROS in the third quarter, 13.5%.

So what do we expect for fourth quarter? Volumes are expected to be higher than third quarter. Headwinds are coming from seasonality effects in after-sales as well as material-related effects and expenses related to the preparation for the ramp-up of VAN.EA in Jawor and in Vitoria. With this, we expect Q4 to bring us in the full year guidance range, which remains unchanged at 14% to 15%.

Due to the strong cash generation, year-to-date we update our cash conversion rate to 0.8% to 1%. Similar to Cars, we are lowering our guidance for the xEV share to 4% to 5%. PPE and R&D unchanged.

On the Mobility side, the year-to-date was challenging with regards to margin and cost of credit risk. New acquisition margin improved, but that takes time, as I explained before, beyond quarter 4 to materialize. So in the quarter 4, we expect a similar level as in quarter 3 with a guidance range of 8.5% to 9.5%, unchanged.

Before we go into the group guidance, one further remark regarding our reporting to comply with CSRD, ESRS requirements, as indicated in our 2023 Annual Report. There will be changes in the consolidation scope with regard to our head count starting October 1 this year. Head count of additional 7 entities will be fully consolidated and thereby change Mercedes-Benz Group head count for 2024 and retrospectively. It does not change anything on the cost side as these entities work for various functions in the group and are therefore included in the cost base already. And obviously, the fixed cost targets remain unchanged, as you know.

Now on the group guidance. Obviously, they follow the same premises as the segment guidance. The group revenue slightly below prior year due to the softer mix of the pricing on Cars, Vans. MBM unchanged.

On the group EBIT and the free cash flow, unchanged compared to the September update.

On the cash, let me say, with the year-to-date free cash flow of 6.3% in the books and the quarter 4 to come, I would say you can still expect a solid cash generation for the full year.

So before we turn to the Q&A, I would like to wrap it up and outline the way forward. As I said at the beginning, we are not satisfied with this performance level. And given the tougher environment, we take a prudent view and need to adjust and look beyond what we have considered so far.

What does that mean? We have a massive product launch initiative and are very confident that we have the right product portfolio. With this, we can serve the market in a flexible manner between ICE and EV moving forward. This builds the foundation for the future into which we are investing heavily. Despite these substantial investments, solid cash generation and capital allocation is expected to continue.

We have already achieved a lot over the last years to make Mercedes more resilient, but we will go a step beyond. We'll shift up gear when it comes to material costs, variable costs, fixed costs and investments. We'll step up all efforts on increasing efficiencies and cost improvement across the business. We'll extract more potential from our most desirable products.

While keeping reality in mind, we'll not lose sight of our ambitions going forward. And we will give you more color on this in Q1 next year.

With this, I'm happy to take your questions.

[Christina Schenck, executive]

Thank you, Harald. [Operator Instructions] Now before we start, the operator will explain the procedure.

[Operator]

[Operator Instructions]

[Christina Schenck, executive]

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

[Tim Rokossa, analyst]

Harald, super helpful on all the details that you already gave us for the underlying number in Q4. I think I'll have to listen again this in the replay. But just to really understand, given the importance and the 4.7% looks quite shocking in Q3 initially. You said a mid-triple-digit euro million amount in total for the one-offs in Q3, some of that continued in Q4.

When we think about the structure of the industry, do you expect supplier compensations to go away? Or is that something that we should continuously expect for dealer compensation in China? Do you feel like these are one-off characters really? Or is that something that we're going to have to live with in a more difficult environment that we are in right now? And thinking about the underlying figure, do you see any stabilization when it comes to order intake and pricing?

And the second question when we think about your shareholder return, super strong, obviously, the EUR 10 billion. The world is getting tougher. You introduced a framework [ for it ]. You already said you're going to ask again for the 10%, very strong statements here. Is it right that you intend to see this mechanism as something that you would also do in tougher economic times? And how should we think about the truck stake in that regard?

[Harald Wilhelm, executive]

Yes. Thanks a lot, Tim. Yes, I tried to give you quite a lot of elements and probably it's a bit difficult to digest that. I'm very happy to come back in any more detail, if you want to. But you're absolutely right in the -- there are quite a lot of moving parts in the third quarter and also in the fourth quarter, right? All in all, in terms of absolute, around 3 -- mid-3-digit million number included in this third quarter.

If your question was our supplier compensations and dealer compensations now the underlying, I would say no. In the fourth quarter, we'll have a step-up on the material cost due to onetime supplier payments we do expect or which are under discussion. But clearly, if I look forward into 2025 and beyond, I clearly see that coming down.

We all know what is the key reason for this discussion with some fundamental shift in demand on the EV side of things. And as we have been dealing with that now throughout 2023 and 2024, I think that will be adjusted and therefore should not repeat as such, moving forward.

Similar thing, I would say, on the dealer side -- or dealer support. Over time, I think the system to recalibrate and demand and supply need to be in balance and check. And dealers, obviously, need to do their homework in terms of efficiencies and adjust footprint when needed, so that they are self-sustainable in the midterm.

In terms of the underlying on order intake and the pricing, you heard me saying U.S. is pretty stable with solid momentum. Europe is solid. China remains very competitive, one has to say probably, therefore, remains the place with the highest level of uncertainty.

But if you look into order intake and order book, the numbers which we gave here for the quarter 4 we see that supported by the demand level. And I hope also the color on retail in quarter 3 gave you a bit of more background explanation that group sales were overly impacted compared to retail. So if you look at retail number, it gives you more view of the underlying demand in the second half of the year.

And then, yes, on the shareholder return, clearly, I see the framework, which we defined and outlined and communicated and are implementing unchanged by that current situation.

The framework, as you know, is built on the divi policy of around 40% and the excess of the cash flow being used for share buyback. So even if the market environment is more demanding right now, the framework as such, for me, is not altered, it's not changed. Well, the base comes down, but the framework doesn't change. And therefore, it is definitely my intention to go back to Supervisory Board to ask for the renewal I mentioned in the intro for AGM in May. Before that, obviously, we run into the technical barrier of the 10% threshold, but then we'll be back and seek for a renewal of that in -- for the AGM in May.

[Tim Rokossa, analyst]

Just how should we think about the truck stake, Harald, from here?

[Harald Wilhelm, executive]

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

[Christina Schenck, executive]

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

[Stephen Reitman, analyst]

Yes, I can hear you. Can you hear me? I'd like to drill down a bit more into China, please. Again, obviously, you've highlighted the weakness of the S-Class, in particular in the top tier in the third quarter. You mentioned that you're seeing -- you're more confident about incoming orders for the fourth quarter. Does that cover -- so this is also specifically on the S-Class as well?

[Harald Wilhelm, executive]

Yes. If I look at retail demand for the third quarter, if I look at the outlook now in the fourth quarter and if I look at the momentum, as we speak, also throughout October, I see that outlook, which we gave confirmed.

Maybe one additional or digging a bit deeper into it, as we wanted to make sure that the supply level meets the demand level, we adjusted the group sales in the third quarter to manage stock in particular at the dealer level. You could say this is value over volume at work and took the bullet of the lower group sales, therefore, in the third quarter.

But the underlying demand level, if you look at the retailer in the third quarter, was higher than that. And that is basically the run rate also moving into the fourth quarter.

Nevertheless, I don't want to deemphasize the demanding market environment globally. You see an impact of the macro situation of China also on the demand level in the Top-End segment. I think we made that statement in the middle of the year. That statement is still valid as of today. But the Q3 group sales, this is my point, was not representative on the underlying demand level. And definitely, it's not a product issue as the S-Class remains by far the leading product in that segment in China, but also in the rest of the world.

[Christina Schenck, executive]

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

[Patrick Hummel, analyst]

I'm just trying to build a rough bridge going into next year. And in the fourth quarter, basically, the exit rate for Cars is about 8% margin based on your guidance, right?

And if we look at some of the building blocks, if volume looks difficult to grow much, to say the least, pricing under pressure, mix could get a bit worse with EV compliance in Europe depending on what happens there in the regulation, so I'm just wondering on the cost element. You talked about looking at everything and intensifying your efforts.

Do you think that those market-related headwinds, you can fully offset them with the additional cost measures you're taking or even overcompensate for them? I appreciate today is not guidance for '25, but any qualitative color you could give on that would be greatly appreciated.

Also in terms of how you think about what is the right capacity to hold in China?

And then the B part of the question, how do you actually manage this European CO2 compliance situation? It looks like the industry is making an effort to change the rules, but the EU hasn't really picked it up. And I guess, your production schedule would be affected by depending on what happens to regulation pretty soon, if not almost imminently. So I'm just curious how you're looking at the EV share in the coming quarters?

[Harald Wilhelm, executive]

Yes. Thanks, Patrick. Well, you said that we'll not give a guidance for 2024 -- 2025 here today. The quarter 4 guidance, which we gave here today, I think, pretty precise is 6% to 7%. I want to repeat that as you just gave another number, so our guidance is 6% to 7%.

Then as I said before, there are a lot of moving parts inside, improving top line in terms of the mix and the cost phasing in the fourth quarter. I do understand it's a bit challenging and demanding to derive a true underlying from it, but I really want to stay absent here to give now more color than that in terms of exit rates for 2024 and therefore guidance for 2025.

But definitely, I want to repeat your question, so I mean how should we think in terms of what we are doing? Clearly, let me say, we have been working so far within the financial framework we set ourselves a couple of years ago. And that did assume a certain level of volume, certain volume of pricing and a certain volume at a certain mix. And obviously, that hasn't been kind of a static thing, but had also ranges left and right. And that's basically is what we were talking about in May 2022 with the weather chart.

With this evolution in terms of the market environment, I have to say this is outside the boundaries. This is outside. Obviously, the most rainy conditions, we did assume at that point in time on the weather chart as we can see demonstrated with quarter 3, but also with an outlook over quarter 4.

What does that mean? We will definitely look on the cost side, each and every element and stone, and turn it around to go beyond given this tighter market environment. And here, I would continue to take a prudent approach and a prudent view not hoping on a short-term recovery. If it comes, great, fine. We have the products. We have the capacities to do so. But if it doesn't come, we are prepared.

On the other side, definitely, we also need to go back, as I said in the wrap-up, and see how we can extract more potential out of this massive product offensive we are doing. There is so much value in this. And if I look at the vehicles, it should be good definitely for much more volume, but you know I'm not a volume pusher, I'm a value pusher and extract more potential out of the positioning of the vehicles into the market with an even tighter cost base. And if we need capacity somewhere, we will adjust. We can do. Is it in China? Is it in other places of the world? We can do. But obviously, demand level is a prevailing view, then we adjust the capacities and not the other way around.

Your question on CO2 in Europe, our first and foremost priority remains to achieve CO2 targets by stepping up the xEV. We are all conscious that the EV -- the BEV demand in Europe is running at far lower level than ever expected by industry, by OEMs as well as, I would say, by regulator.

That's why you could wonder whether maintaining these targets for 2025 is the right thing where the industry should invest the money into building up EVs and products, but I don't want to enter into political debate here.

Our priority remains to bring up the xEVs. You could also see, I think, a good momentum on the plug-ins, which I think are sweet spot in the -- where the market is right now.

2025 looks demanding and challenging from a CO2 standpoint for Europe, I would say, but we need to figure out and see exactly what is the volume, obviously, what is the mix in 2025, what is the EV share, what is the xEV share, the plug-in share and then we'll see what's left. And in case there is exposure left, there are tools also such as pooling to address any gap, which might be left.

In the mid- to the longer term with this product offensive, I look very much 2025, 2026 with MMA, CLA to come, electric C-Class, GLC in 2026 and all of the others, we should be good to meet the targets in the EU.

[Patrick Hummel, analyst]

I'm sorry, yes, the 8% for Q4 was including some of the adjustments I made in my head.

[Christina Schenck, executive]

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

[George Galliers-Pratt, analyst]

First question I had was just with respect to provisioning in the quarter. Harald, you mentioned the provisioning as part of the other bucket when you went through the cash flow walk. It looks like the provisioning at an industrial level was about EUR 560 million in the quarter. Do you expect a similar level of provisioning in Q4? Or were the incremental provisions specific to this quarter that are unlikely repeat?

The second question I had was just trying to reconcile the very strong cash conversion to the EBIT reported. And in the interim report, I noticed that there is around EUR 1 billion positive cash effect in the quarter from vehicles and operating leases and other operating assets and liabilities. Could you just give us a bit of color into what was in that other operating assets and liability swing that benefited the cash in the quarter?

[Harald Wilhelm, executive]

Yes. Thanks, George. So yes, if you look at the other buckets, indeed, CFBIT bridge of Cars, you see a significant maintenance support. Where is that, I think it's EUR 1 billion.

Where is it coming from? Number one, accrual setting for expenses to come in the fourth quarter. That is pretty usual at this point in time. It also refers to payment to dealers. It includes also warranty provisioning, as I explained, which is included in EBIT in the third quarter, but it will lead to cash out over time. Not necessarily all of that will hit the quarter 4. It includes as well, obviously, the BEV stock clearance, which probably will rather mean, yes, impact in quarter 4 cash also.

So I think these are the key building blocks for this other bucket in the cash flow bridge.

And I commented before in terms of what do we see as a repeat. No, the warranty, I do not see as a repeat fourth quarter. The BEV stock clearance, I don't see that as a repeat in the fourth quarter. The dealer support in China, I see that as a repeat in the fourth quarter, but explained before not necessarily going into 2025, whereas we'll have a step-up on the material cost, on supply chain, supply discussions settlements as answered before.

Please help me a bit on the operating lease adjustment. Not completely sure what you're referring to in the deck here. Otherwise, we can take that question off-line as well if you want, yes.

[George Galliers-Pratt, analyst]

Okay. I will follow up off-line.

[Christina Schenck, executive]

Thank you very much, George. And I would hand over the next question to Jose Asumendi from JPMorgan.

[Jose Asumendi, analyst]

It's Jose from JPMorgan. Two questions, please. The first one on product offensive, you mentioned it several times on the call. So can you please remind us when are these products coming to the market? Which products at this point? And which regions do you expect to hit first?

And then second, would love to dig a bit more into China BBAC and a little bit what are the key measures you're taking in the region to protect free cash flow, potentially adjust some of the capacity and build on your key strengths Top-End has?

[Harald Wilhelm, executive]

Yes. Thanks, Jose. Well, on the product offensive to come, probably we can talk 2 hours. But what are the key ones? Obviously, very much preparing for next year with the CLA to come and obviously being the startup of the new MMA family, you know that this will be a step-up in the offering in the -- at the lower end of the product portfolio. So that will start in 2025.

It will be the technology spearhead when it comes to software, to MB.OS, to Powertrain in terms of eATS. So in terms of the technical features, in terms of range, as I said, also on infotainment, MB.OS as well as on ADAS, supercompetitive, Level 2 plus.

And obviously, that will lead the way also into the midsized, i.e, the C-Class and the GLC electric to come 2026.

Well, I look further on the AMG side or with the AMG.EA full electric with high-performance electric engine, YASA engine. Some of you visited that, so you know what it is about. Super cool EV product, pretty sure even the hottest V8 supporter will be excited when you have the opportunity to experience that vehicle.

And then obviously, a lot of very, very significant midlife updates to come in 2026, also in the higher end if I think about the GLE and then very important the S-Class.

Also on the GLE, maybe segue into your second question, long wheel-based version of the GLE for China, I think that should be very good to capture incremental potential in China.

So your question on China, first was a bit on BBAC. Well, the BBAC numbers, as you can see here, have been impacted by the dealer support. Obviously, a very good part of that one goes on the nose of the part-by-part business, therefore, it sits in the BBAC. BBAC results are impacted by the market environment. At the same time, sometimes we lose a bit sight of that.

Very good momentum on GLC, very good momentum on E-Class in China. Both of them, obviously, long wheel-based versions. Very good customer feedback on these vehicles and supporting obviously also BBAC profitability.

At the same time, what I said on Mercedes as a whole that we will address all elements on the cost base, BBAC is also doing that and also taking benefit of the local supply chain in terms of further cost potential. And maybe also globally, we can do more in this respect than what we're doing today in terms of tapping more into China supply chain.

You will see latest, obviously, when it comes to the full year that with this, BBAC profitability remains, I think, at a decent level and it has come down, has been impacted by the dealer support, as I mentioned, but it still stays in a very comfortable level. I think you can say it's a double-digit number, which I do expect in terms of profitability for the full year 2024. And therefore, will continue to be an important contributor to profit via the equity but also via the divi.

I hope that covered a bit what you wanted to know about BBAC. And other than that, obviously, on the CBU part. So vehicles being exported into China, this is very much the Top-End side on which I commented before on the quarter 4 momentum. Definitely, the macro situation impacts also the Top-end side, but we're positioning ourselves against it and the products in the market and the ones to come, which I reiterated as part of the product offensive, I think, should help us to create momentum in the years to come.

[Christina Schenck, executive]

Thank you, Jose. I will move on to the next question to Philippe Houchois from Jefferies.

[Philippe Houchois, analyst]

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

[Harald Wilhelm, executive]

Yes. Thanks, Philippe. You refer to the warranty phasing. Well, permanently, obviously, we watch the portfolio warranty for our vehicles. And therefore, you have seasonality. There is not any particular issue behind them in this quarter 3 issue I mentioned compared to what is mentioned by the other players recently.

Quality is the #1 priority here at Mercedes. There's not a single board meeting where we don't look at our quality indicators and they're addressing any issues, which are out there. That is in the DNA of the brand that makes the brand, and that's why this ranks super high.

But you cannot -- given the number of vehicles in the fleet, given the number of different variants, obviously, from time to time, you have some issues which you need to address and fix. That's what we are doing even beyond the contractual obligation liability as we want to serve and please our customers over the lifetime. And that's why we're doing a big, big effort on quality. And the normal procedures are that you review the portfolio on a permanent basis and then you need to do adjustment if you see the need for it. And that was included in the quarter 3 as outlined, but not seen to be a repeat in quarter 4.

[Philippe Houchois, analyst]

Right. And my other question and probably this is a bit harsh, but I look at your numbers and I take out the equity income from China, which is not in your revenue, and I take are the net capitalized R&D, and it's EUR 200 million EBIT. So there's no margin right now if I think about the consolidated Mercedes-Benz Car operations.

And I'm just trying to think -- as I listened to you, it looks like it's a mix of a fixed cost issue, although you've worked a lot on the fixed cost issue. But the bigger issue maybe that this premium strategy doesn't work because the shortfall is very much at the high end. And when you talk about you're going to update us and work on the cost base, what should we expect? Is it just a question of addressing the fixed costs, which you've been doing quite well for some time? Or do we have to think about -- completely rethink of the premium luxury angle of the strategy?

[Harald Wilhelm, executive]

Thanks, Philippe, to be harsh. Well, you can obviously take a lot of things out or in, as you wish. The one -- the only comment I would have is BBAC is an integral part of our business setup with a lot of profit pools and streams. So that is a bit simplistic to take that out. We can entertain that debate.

No, but you're perfectly right. A further challenge on fixed cost is not going to do the job. It's paramount, it's important to do it. But that's why I said we need to look at everything on the cost, on the efficiency side, but we also need to see and have a look at what is, so to say, the contribution margin composition in terms of volume, pricing and mix and how can we extract more out of that and what is the case right now.

And as I said earlier, the framework which we set ourselves, we're looking at that and we're adjusting the framework and that has, therefore, definitely a cost side. And again, not only fixed cost, it's the variable cost, it's the production costs, it's the material cost. It's also the investment side. But there's definitely also a top line side, which we need to see and rejig. And that takes a bit of time. That's why we cannot answer the questions you all want to hear now. But rest assured, we're working very, very hard on that one. And we'll be back with hopefully answers that you would like in Q1.

[Christina Schenck, executive]

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

[Henning Cosman, analyst]

I can make it quick, I just had one left. I want talk about the free cash flow level. I mean, Harald you already said that some of the cash out will spill over into next year for the provisions that you filled this year. Still guiding for that around 8% cost margin, but I guess still aiming for the EUR 8.5 billion free cash flow, the floor of the previous range.

And I know -- again, I know it's not '25 guidance today. I think at the time of the profit warning call, you also said we shouldn't be extrapolating off the run rate of H2, rather perhaps somewhere in the synergy of the full year guidance range. Anything more perhaps you could say on the structure of free cash flow potential? Do you see that as sustainable now with the increased cash conversion? If you were to end somewhere near 8% for the next year again as you are this year, would that mean you could hold in at sort of EUR 8 billion, EUR 9 billion free cash flow level as well? If you could just add some color there in the context of the potential delay in cash out for the current provisions?

[Harald Wilhelm, executive]

Yes. Thanks, Henning. Well, obviously -- or number one, on the cash flow 2024 EUR 6.3 billion year-to-date, yes. So we're working on another quarter of cash generation, and therefore, should complete the year with a decent level of cash even if it is lower than the 2023 level.

Looking into 2025, well, as we said before, we will not give a guidance here for 2025 today. But structurally, when we think about cash flow for 2025 and beyond, well, obviously, number one, input into that one is a sizable business in terms of what's the volume of the business, what is the margin where we can pull off in 2025 given all of the parameters we were talking about before.

And then how much of that margin can we convert into cash? Here, we have cash conversion target of 0.8 to 1, as you know. And basically, I see no reason why 2025 we should not continue to apply that framework, i.e., the cash conversion of 0.8 to 1. Why do I say that? I think, overall, working capital management works in terms of adjusting production into sales level, and therefore, keeping working capital, all in all, in track with some seasonality, but it works, I think, on a full year basis.

Number two, I would say, on the investment side, yes, we are preparing for this unprecedented product offensive, but we keep a very, very tight view on investment prioritization. I said at earlier occasions, I think, that probably in 2024, 2025, we'll have a peak in terms of investment level and it will go down with what we are debating here today and the events over the last couple of weeks, I don't see a change to this profile from -- coming from the market situation.

No, even more so, I would say, in the midterm the emphasis on the investment prioritization and efficiencies will rather step up rather than relax, so we should support the cash conversion.

So in a nutshell, yes, we'll see when we see the key parameters on volume and margin, but definitely, the objective to convert that into cash is maintained for Cars as well as for Vans.

[Henning Cosman, analyst]

And this comment on Q1 update, we're basically talking a kind of Capital Market Day, yes?

[Harald Wilhelm, executive]

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

[Christina Schenck, executive]

Thank you very much, Henning. Thank you very much, ladies and gentlemen, for your questions and for being with us today. And also thank you very much to Harald for answering all the questions.

Now Investor Relations remains at your disposal to answer any further questions you may have.

And now to all of you, have a great morning, a great afternoon and a great evening. Thank you, and goodbye.