Mercedes-Benz Group AG (MBG) Earnings Call Transcript & Summary

Welcome to the Global conference call of Daimler. At our customer's 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 Daimler website. The short introduction will be directly followed by a Q&A session. [Operator Instructions] I would like to remind you that this teleconference is governed by the safe harbor wording that you find in our published results 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 Daimler Investor Relations. Thank you very much.

Good morning, ladies and gentlemen. This is Steffen Hoffmann speaking. On behalf of Daimler, I'd like to welcome you on both the telephone and the Internet to our Q4 and full year results conference call. We are very happy to have with us today Ola Källenius, our CEO; Martin Daum, Board member for Daimler Trucks & Buses; and Harald Wilhelm, our CFO. You probably all joined our presentation right before. Just as a quick reminder, in advance to our upcoming Q&A session, the respective presentation with all 2020 figures and the outlook for 2021 can be found on the Daimler IR website. Ladies and gentlemen, you may ask your questions now. [Operator Instructions] Now before we start, the operator will again explain the procedure.

[Operator Instructions] The first question is from Tim Rokossa, Deutsche Bank.

That would be Tim from Deutsche Bank. I have 2, please. The first one is, Ola, after the industry has collectively talked down for a while, it now really seems that 2021 is the year where OEMs are all trying to outrun each other on the way to be 100% electrified. You also indicated in the Handelsblatt interview overnight that you could see increased EV targets for you guys from the sort of 50% level that we know by the end of this decade. Could you envision to also be at 100% electrified by 2030 or would you rule that out? And also related to that, how confident are you that there are enough cells that you have secured on a way to be above the so-far announced 50% target? And then perhaps, I mean, this is addressing Ola and Harald, obviously, but perhaps Harald, it's for you rather. You say that people have to stay disciplined. And historically, whenever the market bounced back and your numbers did become better, Daimler had this problem that they always found a way to spend the money they made. Can you explain us how you assure that people will indeed remain more disciplined now that your numbers are looking as good as they do?

Okay. Tim. Yes, there is no doubt that the momentum for electrification is picking up, both on the battery electric vehicle side as well as on the plug-in hybrid side. But we have a very heterogeneous picture around the world. And what are the factors that will decide what type of adoption rate that we will see in 2030? Well, one is one that we can control ourselves, it's our products. And the product pipeline is very attractive and we have some big plans, to say the least, for these next 5 to 10 years. But we also have regulation. We have infrastructure. I think that's going to be crucially important how quickly we, as a society, can build up infrastructure, not just across Europe, which seems to take a lead now, but really across the world. So many things need to come together here. We are going to put ourselves in a position with our electric-first strategy that we can be on the forefront of that movement. I think it's too early to definitively say what the market is going to look like in 2030. But it's our job to put ourselves in a position to address that market. You know we're in a ramp-up of many new battery electric vehicles, the plug-in hybrids with 100 kilometers range on a WLTP side. They are, in some markets, really selling like hotcakes. And also not to forget the whole combustion lineup from Mercedes is brand new and it's fully electrified with mild hybrids. I don't think there's any manufacturer that is as deep in terms of that basis right now, which is still the major market for the next years. So we will be ready, but I think it's a tad too early to say exactly what 2030 is going to look like because of those other factors.

And Tim, on your second question, well, I mean, what did we do in 2020 and why do we believe we can keep that discipline moving forward beyond just meeting 2020 numbers as you could see? I would highlight 3 issues. Number one, we defined in 2020 the midterm targets, where we're going to go on cost, cash and investment side. We talked about them on October 6 and they are carved in stone, which means that people know exactly what they have to achieve by 2020, '21, '22, '23, '24 and '25. We will not change these targets as a function of the markets moving a bit more favorably. That is fundamental, and I think that got the -- I mean has been well understood among the teams. Second key point, the performance management, I would say, maybe we were a bit more budget oriented or I mean work against the plan. Obviously, we do that. But deliver year-on-year improvement is coming on the top of the agenda. And the third point I would say as well is on cash flow focus. There's a budget focus, and what do I mean by it? From a cultural standpoint, it means would you spend the money privately as you do in business? So always bear that in mind. The target, therefore, is not to consume the budget, but whether you're doing something good for the company. And these 3 key elements, I do see, are gaining traction throughout the company. That's why we'll keep going with the momentum we injected in 2020.

Okay. Great. If I just follow up on the first answer, Ola. I appreciate that you don't want to give us a proper number now. But is it then fair to assume that you would have a material flexibility should demand really surprise as much to the upside as it does right now? And I can only confirm your PHEV comment. I tried to order the GLE plug-in, and the waiting time is too long for us to really get this as a corporate car. So very much demand seems to be quite strong.

Yes. The SUVs, in particular, are literally sold out. And of course, we're looking at what can we do. I mean the Tuscaloosa factory is running at capacity, but we're looking at what we can do there, and I shall try to get that car to you as quickly as possible. But you mentioned the supply chain. And of course, we're looking at the supply chain and how we can give ourselves the necessary flexibility to tackle scenarios that might be above what we have been thinking in the past. So we're certainly looking into that.

Okay. Good to see that you put down the 10% at the high end of the corridor, by the way.

The next question is from Patrick Hummel, UBS.

And just following up on Tim's point about the battery sourcing. If you maybe have a couple of senses on that as well because it seems increasingly tight and that sounds like it could become an issue if the EV demand curve remains very steep. But coming to my questions, two, please. First one, you seem to be very confident and much more confident than many others right now on the impact of the chip shortage or your ability to catch up the lost volume later in the year. Other OEMs are also talking about the shortage to continue in Q2, and you seem to be optimistic that Q2 will already look better. So I'm just trying to better understand where you take that confidence from? What type of conversations you have with your suppliers? And also, if you can help us understand how that shortage will affect your mix in the near term? Are your flagship products, such as the new S-Class, going to be fine? Can you hold on to the EV production volumes? Are these unaffected by the chip shortage? And my second question relates to software. You had the -- also when you announced the spin, you emphasized the importance of software and we see a lot of movement there happening. There are tech companies or auto companies with a tech angle getting massive valuations that are certainly related to software. And there are speculations about Apple entering the market. How can a company like Daimler that after all is still a relatively small carmaker with 2 million units that puts luxury and quality of margins over volume, how can you make sure you stay competitive without spending a fortune on software? And it really seems to be essential to you to win there and it's part of your core strategy. And I know you have that collaboration with NVIDIA, but I'm still trying to get my head around how you can manage that as a relatively small car company?

Maybe just first, one more side note because you asked about the battery. I think there's no question that the whole supply chain, from the raw materials all the way up to the battery systems, is something that is going to require massive, massive investment in production capacity across the whole chain in these next 10 to 20 years. So depending on how that demand situation develops, of course, there can be temporary shortages there. We are working with our suppliers to mitigate that as best we can. But I think this is something that the whole car industry is facing or whole of society and all industries in a way. But let's get to the chip situation. As I mentioned in the presentation, it is a volatile and day-to-day management type of situation where you cannot make a 100% firm prediction as we sit here today. The information that we have from our suppliers now allow us to make up for the shortage that we are expecting in the first quarter during the rest of the year. So that's what we're basing our plan on. I don't know what I don't know. Should there be a material shift in their position vis-à-vis us, we will be flexible to react. But we can only use the information that we have at hand. And in this -- at this moment, we have put together a plan to make the first quarter minus into to an equilibrium by the end of the year. But we're watching this, and it's day-to-day management. How have we dealt with this inside the company? If you watched closely on the plants that we idled in January and also idled partly in February, we tried to as best we can move the shortage to the lower end of our portfolio. So as best we can, we have protected our SUV production like the GLE and the GLS. We have protected our S-class production, and we have been largely successful doing so. Not on every single individual part can you do that, but largely we have done it. And this, of course, also includes the xEVs, which have a very high priority for us. I think one thing is interesting when I get this software question is that I never hear anybody asking that question to any one start-up that enters into the car industry and has practically the same strategy that we have, that you want to be at the center of the architecture and the brain of your vehicle and that you certainly want to keep the customer interface in your ecosystem. So anybody that starts new never gets that question. But if you have been in the business for 135 years, you do get the question. And we are committed to being the architect of that operating system and of that software architecture. We're also committed to keeping the customer and the data that the customer generates in our ecosystem and make sure that we take care of the customer. We are not going to do everything ourselves, even though in the last 4 or 5 years have massively ramped up our staff in this area with digital hubs around the world from Berlin via Bangalore to Beijing to Seattle and Tel Aviv and what have you. We have, in the meantime, a relatively big team. We are also going to work with others. One of the prominent strategic partnerships is, of course, the one that we announced in the summer of last year with NVIDIA in the domain of driving assistance and autonomous drive. But behind the scenes, for the infrastructure layer, also the middle ware software, we are working with partners. But we are the director of the orchestra.

Our next question is from Horst Schneider, Bank of America. And we will go on with José Asumendi, JPMorgan.

José, JPMorgan. A few questions, please. Ola, can you comment a little bit more, please, around the cadence of your EV launches in 2021? You mentioned -- I'm pleased both across cars and vans, if possible. I was very interested by those in van EV launches. And also if you could comment a little bit around the -- your strategy around the vertical integration you want to have within the electric car with regards to electric motor or cell manufacturing. Has anything changed since we discussed this theme last year? Second question, please, Martin, on Trucks. Very, I think, interesting margin targets for the year. Can you help us a little bit understand what has been done in terms of restructuring in 2020? What are you looking to do in 2021? And then, please, any details around the electric truck launch, whether you can give us any guidance around when you plan to launch the truck? Which regions are you prioritizing, et cetera?

With regard to EV launches, if I start on the car side, the car side has 4 launches this year. We started with the EQA. So compact city SUV, which is actually coming into the market this month of February. So we did the world premier and more or less the market introduction at the same time, which is unusual. And we will show the EQS in -- at the beginning of the second quarter, and it will come into the market in the summer. That will be followed by the EQB in the fall, and we will finish off the year with the smaller brother of the EQS, the EQE. And that we will show at the Frankfurt -- no, Munich auto show this year. So that's quite a busy year. But we shouldn't forget that the new C-Class, which we're presenting to the world next week and will come into the market in the early summer, that new C-Class will also, in its segment, have a plug-in hybrid with around 100 kilometers WLTP range. So we think that is ideally positioned for what's happening not only in Europe, in particular, in Europe, but in other places as well. On the van side, we now have the large van and the midsized segment covered with the eSprinter and with eVito and the EQV, which we entered into the market in the second half of 2020 and kind of coming into its own in 2021. The new Citan, and that will be a fantastic entry van position, will be presented this year. And the electric version -- the fully electric version of the new Citan is coming about 12 months after the market launch of the combustion-based one. And then we have a full electrification of the van division. But as I mentioned in my presentation, already in a couple of years, it comes the next generation and we have already started the concept engineering of the third-generation. I believe strongly that the van segment in some parts of the van market could see electrification perhaps even quicker than passenger cars. So that's an exciting space. With regard to vertical integration. We are fully vertically integrated on the R&D side and we have deepened those activities in the last 12, 18 months. We have also struck some strategic cooperation agreements on the R&D side with some of our supply partners, so we are basically co-inventing what the future is going to look like on the electric side. And we are in the process of now doing the serious engineering and preparing the industrialization of our own e-axles as well. So we have taken a step there. But we're very carefully watching the economics of this thing. It's not like it's a dogmatic religion here, what you do in-house and what you do outside. You look at the financial situation in every one situation. But in terms of knowing, controlling the technology and developing the technology, there we want to be in the driver seat.

Okay, José. And the question about restructuring. Restructuring here was there was not that one golden bullet, that one big mistake. So if you just close that, everything is fine. This is a million things, or let's say, a thousand individual initiatives that all started at the Capital Market Day in 2019 when we promised on fixed cost and variable cost and market positioning. And we translated that in actions and those actions got traction, and especially in Europe. So there are -- we are well underway what we promised. We will continue. We'll see full year impacts. We have to do -- we have to make some of the gains we did in the second half of this year, sometimes supported by COVID to make permanent and just not a onetime event. But we have a good tracking system in place. We have a transformation office established that track that and keep the organization honest. We have shown in the second half that we can keep our cost level even with higher volumes. And so I'm pretty positive that we can run that momentum into 2021. And that is not just Mercedes Trucks in Europe. That is on the bus side. For example, I told you the difficult situation on the coach bus, but yet bus delivered last year a positive result despite those really huge impacts on the production side on a very big pillar of that business. So I would say the fighting spirit is really high in the organization all around the world. And so I'm really confident for 2021. When it goes to electric truck launches. The biggest launch or the most significant launch is certainly the eActros in the second half in 2021 when we go to serious production with this product. That means no prototype, no single handmade trucks, but trucks rolling down the line in our factory in Wörth for the markets on the electric Actros. Parallel, we ramp up significantly our electric school bus production in the United States. We come with more variants with higher volumes on the bus side, city bus side. In Europe, there are many cities around Europe, not just Germany, have decided to make Mercedes eCitaro their majority brand and product for their urban transportation. And you can continue with Asia. We continue what we do with the medium-duty truck in the United States. You can continue what we are doing on the refuse side with the Econic. And you see trucks always goes down in small batches, focused applications, and we'll provide with our customers here a huge host of product in 2021.

And the next question is from Horst Schneider, Bank of America.

It's Horst here. I have got 2, please. The first one is on Slide 11 in your presentation, where you talked about this 4% head count reduction, and 14% fixed cost reduction in 2020. I want to get a feeling in which direction we are heading in 2021 on these items. Especially regarding the head count reduction, I don't know if you can quantify. What is more to come, not just in '21, but more in general, because you started several initiatives. And on the fixed cost reduction, I remember, you targeted 20% reduction by 2025. We are now at 14% already. So does that mean there is not any more a lot to come or we see first reversal in '21 and thereafter the more significant step down? Forgive me, that was already more than one question. But on Trucks, the last question I have, that is on -- to Martin Daum, if you see here the need for any potential structural change because you have got this FUSO business, you do more emerging markets. We know from Volvo that they, for example, disposed the UD Truck brand. Wouldn't that be also an option for you?

So should I do head count maybe, and I'll leave the fixed cost for you.

You want to address the head count.

Horst, as you know, the bulk of our personnel is in Germany. In Germany, we have 2 main methods of addressing the head count. It's not replacing fluctuation and it's also offering severance packages. We started that in the summer of 2020, and we're continuing through this year. So that is a gradual process. That is why on the head count target, we set ourselves a longer target, kind of a midpoint in 2022 at the end and then also for 2025 as a part of the strategy presentation that we gave to you in the fall. So we're more or less staying on that trajectory. One thing though I wanted to mention is, in one area, we have made a conscious decision to increase vertical integration and that's in software. So the software side sits outside of this, and we are aggressively hiring software engineers. From a financial point of view, though, that may actually even be better than buying it from suppliers. So there's not an adverse financial impact from that.

Well, Horst, if I take the remainder of the Page 11, in terms of the KPIs over there. Well, I would say, overview in fixed cost in 2021 should be at about the same level in 2020. Now you might call that a bit lazy. No, it's not as 2020 had the benefit of short-term working. All in all, short-term working in all categories had a EUR 500 million impact that Mercedes-Benz made in 2020. And that means that -- I mean, this is what we lose in '21 and we have to replenish by more underlying measures. So it's not a walk in the park, but we're committed on that. On the R&D side, we'll see a bit of a pickup of investment in software, MBUX, NVIDIA Corporation. And on the investment side, we will be at about, I mean, the same level. I said it in the presentation, I repeat it: we were committed to the 2025 targets. Also answered, I mean, as part of Tim's question what is the culture when we fix these targets. So they are signed to mean to the people. They can optimize. They can orientate, I mean, their activity, their portfolio of activity and their respective cost structures accordingly. If we can do faster, if we can go faster, we'll try. But that's our commitment.

And Horst, to your question about potential restructuring. No plans. I can't comment Volvo. I like the information, I don't know what their motivation was. I don't know the situation of their business. But they know our business. And our business in Asia is profitable. Our business in Asia is on a really good path to be a benchmark business for that region. This region -- and it's not just Japan. I mentioned Indonesia, one, the second largest truck market outside -- if you add China, the third largest. China, United States, Indonesia, a good market. And we have a 50% share in that market. We have a good, healthy, profitable business there, a business that generates cash. And I would say, the near focus on return on sales is the wrong one. The real focus is the absolute profit, the absolute cash flow a business generates and the amount of investment it would need. And in all categories, our Asian business is in a really great and very good track. And it's a very, very good supplement to our overall portfolio.

Okay. That's great. Just quickly, the order of profitability is still U.S. or North America then Europe and then Asia, right? Asia is the least profitable part of the truck business. Is that right?

Yes. But profitable. Least profitable looks always bad. These -- our bus business is a 6% business in normal years and it's a benchmark in the entire world. It's definitely less profitable than North America, but it is profitable and it generates a healthy cash flow.

The next question is from Arndt Ellinghorst, Bernstein.

It's Arndt from Bernstein. Ola, a quick question on your view how the premium EV market should shape out over the next 5 years or so. Obviously, we have this situation completely unprecedented where brands are coming to the market fully loaded up with equity at most. The list of brands doesn't have -- this doesn't end. And also the recent pricing action that Tesla has taken in key markets. So all the companies are coming into the market with this product. The valuation is designed for growth, growth, growth. They're not expected to make money. What's happening to this market really? Will we see endless price cuts? Will we see an avalanche of high-end EV product? And then how will traditional OEMs compete in that market? I think it's the multibillion-dollar question also on your multiple. So how is that market-shaping out for you?