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

[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.

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 Kallenius, 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 presentations can be found on the Mercedes-Benz IR website. Now I would like to hand over to Ola.

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 the 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're 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 our 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 the significantly higher van sales, plus 90%, drove a 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 EUR 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're 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. 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're launching, and I was just down at the press test drive of the new E-Class, speaking to product and business journalists and driving that, we have received a phenomenal -- really a phenomenal feedback from customers around the world that are waiting for this vehicle, our 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 green cars that are about to start production here soon with the Sealy Coupe and the Sealy Cabrale, and we also launched the GLC Coupe, the GLC being our best seller in our portfolio. On the technology side, we're making progress. We now also received Level 3 certification for autonomous drive system in California. So step by step, we're 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 a function that you really must try. Now I think we're 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 back-end 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've heard from customers so far has that been very positively received. And the usage of our infotainment system has gone up even more. But we're also working on the customer experience in general. As you know, we're 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're going to put more money into building a very comprehensive charging infrastructure, complementing the things that we're doing around the world. We're 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're 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're 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 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 100 kilometers range. So you really get half 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.

Thank you, Ola, and hello, good morning to everybody. Let's have a look at Page 6 on the cars financials. Sales up. Revenues increased by 5%, ASP at 73%, EBIT adjusted, EUR 3.8 billion. CFBIT adjusted EUR 3.8 billion, which suggests a cash conversion of 1x. Let's have a look a bit on the margin evolution in the quarter compared to quarter 2 2022. What can we see on the Page 7? Obviously, the bucket volume structure net pricing increased significantly by almost EUR 1 billion. The majority of that comes from improved net pricing, driven by gross price -- gross 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 effects on the negative side, mainly coming from Turkish lira and the U.S. dollar. On the industrial performance, you see, in particular, onetime commodity charges for semi and inflation-related costs, and no tailwind yet from raw material costs. We see various smaller effects, e.g. from lithium due to a higher EV volume and an elevated spot rate. So please also note that the spot rate changes the 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 2 over quarter 1, '23, outweighing headwinds from material costs and inflation. Looking at the selling expenses, slightly higher due to marketing expenses, volume and use selling expenses and agent remuneration, from the new direct sales model. The positive counterpart sits in the price bucket. In line with our full year guidance, we saw higher R&D costs for future platforms and technologies, in particular, on MB.OS. The other bucket is EUR 52 million in sight. 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 that item turns positive to EUR 52 million. So with this, I think we can move on to Page 8. On the cash flow, CFBIT. Reported and adjusted at EUR 3.8 billion with a cash conversion of 1x. The negative EUR 500 million working capital came from slightly heavier vehicles inventory structure, so -- which means good mix in sitting in the inventory with, at the same time, slightly reduced overall amount of vehicles. EUR 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 with an existing financial envelopes. On the other side, the other line includes the adjustment of the BBAC at equity result of EUR 335 million, which is slightly lower due to dealer support payment in China and the dividend from BBAC of EUR 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 2. In favorable market conditions, that delivered solid profitability from net pricing, higher unit sales, outweighing cost increases and 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 the 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 today, and you should see it on the beautiful picture here. The new design of our midsized van with more luxury in the private segment and sharpened premium in the commercial segment. In May, you know we had advanced CMD, outlining the perspective for van in the future as a leading manufacturer of premium light commercial vehicle and with the ambition to be double digits throughout the decade even in electric area. Looking at the numbers of then on Page 10. Total sales, up 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 that 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, sits on a pretty record level. In this quarter, revenue was up 25%. EBIT adjusted EUR 800 million and cash generation also EUR 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, However, also here, the solid net pricing is a key driver, This price is up and discounts 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 the 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 at equity result from SPAC. And with that, I move to the cash flow side, to Page 13. So the CFBIT reported EUR 777 million, adjusted EUR 819 million, conversion rate 1. Working capital charge of EUR 300 million with an increase from inventory of about EUR 200 million driven by the production ahead of sales here for, I mean, a good second half of the year. As we guided the investment stood 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 reversed the at equity result and have the divi from SPAC 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 lodging network with third sites are planned to be opened in the second half of the year and with the announcement on the Tesla charging network, which we joined 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 -- no, 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 other side remained 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 EUR 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, a 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 EUR 276 million, which is now completed. On the group side, the businesses I explained already, leaves the recon, which is the equity result of Daimler Trucks. That leaves us with an EBIT adjusted of EUR 532 million. Adjustments are a bit more than EUR 200 million. Again, that is in connection with the sale of the business activities in Russia. Group book EBIT is at EUR 5 billion. On the cash flow side, same thing, businesses, as I explained already before, Income taxes are at EUR 1.5 billion. As we flagged, they are going up with the increase in profitability. The improved interest result is obviously thanks to higher interest rate level. In the other recon item, we see mainly the Daimler Truck divi. With this, the free cash flow industrial sits at EUR 3.4 billion. And in the adjustments, we see legal proceedings related to diesel. Page 19 on the NIL, EUR 26 billion by the end of the quarter, starting at, from EUR 28.9 billion at the beginning of the quarter. Cash flow, we commented already before. We paid the divi of EUR 5.6 billion. And we spent EUR 640 million in the second quarter on the share buyback, so proceeding well, I would say, with the EUR 4 billion share buyback program. The other is -- 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 rushed with. We see with regional differences, the overall growth 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 bank is likely to weigh on consumers, companies and economic growth. In addition, geopolitical and ponderables remain uncertainty factor. By contrast, energy prices in H2 are expected to remain at significantly lower level than previous year. The notice to be 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 is stabilizing with a strong product substance that we have in the market and also considering the product launches yet to come in H2 and in 2024. On that basis, we expect the pace of sales from the first half of 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 '23 sales 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 moving blocks? I mean in H2, we expect some easing on raw mats. On the other side, we see continued onetime 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 PPE unchanged. Then on the sales side with the tailwinds from H1 and full order book 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 the VAN.EA ramping up. The CCR has been increased as well to 0.7 to 0.9. PPE 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% in full year rather at mid of the range, 12% to 14%. Midterm, we stay on our target of 14% for MBM. What does it mean for the Group guidance? Page 22. Obviously, they follow the same [indiscernible] as a 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 the 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 you, Ola.

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 6-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're doing this. Doubled BEVs 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 have 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 our deep sourcing on chips. So multiyear contracts directly with the chip suppliers, but we're 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're 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're 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're 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 4 architectures with MMA for our entry vehicles, MB.EA, which will be the base for core vehicles. We're 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 midsize and large vans in an intelligent way. Behind that, though, major technology platform projects that feed these architectures. One is the next-gen eDrive 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're very competitive today, we are looking at taking a very big technological step in the next couple or 3 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.

Thank you very much, Ola. Thanks a lot, Harald. And ladies and gentlemen, you may ask your questions now. [Operator Instructions] As always, a few practical points, please ask your question 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 Instructions].

We start the Q&A now. And the first question goes to George Galliers from Goldman Sachs.

The first question I had was just with respect to mix. Obviously, you mentioned that you've seen your supply chain constraint 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 and 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 for the second half of the year and also as we look to 2024? The second question I had was more around the brands 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 time frame?

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 2 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 switchover 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 drivetrain 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.

Just shortly, I mean, George, maybe in the second quarter, I would say, where the 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 impact on the mix in the second quarter. On a normalized basis, I think we should see a stronger core moving forward. So therefore, I think some more potential.

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

It's Dan from Bernstein. Two for me 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. 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 investigation 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 demand. 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 costs down the road in your mind?

So Daniel, let me start with the first one. I think on 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 policymaking 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 try to manage their economy for growth. So for the long term, we remain with a 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 are 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 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 and the vehicles, 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.