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

Welcome to the annual results press conference call 2023 of Mercedes-Benz. At our customers' request, this conference will be recorded. The replay of conference call will also be available as an on-demand audio webcast in the Investor Relations section of the Mercedes-Benz website. The short introduction will be directly followed by a Q&A session. [Operator Instructions] I would like to remind you that this telephone conference is governed by the safe harbor wording that you 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 Steffen Hoffmann, Head of Mercedes-Benz Investor Relations and Treasury. Thank you very much.

Good morning, everyone. On behalf of Mercedes-Benz, I'd like to welcome you on both the telephone and the Internet to our End Results Conference Call 2023. I'm very happy to have with me today, Ola Kallenius, our CEO; and Harald Wilhelm, our CFO. You probably all joined our presentation right before. Just as a big reminder, the respective capital market presentation with all '23 figures and the outlook for '24 can be found on our IR website. You may ask your questions now. I will identify the question by name. However, please also introduce yourself with the name and the name of the organization that you are representing, before asking your question. A few practical points. Please ask the questions in English. And as a matter of fairness, please try to limit the number of questions to a maximum of two. And before we start, as always, the operator will explain the procedure.

[Operator Instructions]

And we start the Q&A. First question goes to Tim Rokossa from Deutsche Bank.

Yes. Thank you very much. Tim from Deutsche Bank. Very well done, first of all, on the share buyback program. Harald, you [indiscernible] discussed about the structures for many years now. [indiscernible] what you just return in your market [indiscernible] it was a really strong commitment though, exactly the right message. And secondly, there are two questions, please. Harald, some of those things in the numbers were not so great. The Mercedes margin is now down several quarters in a row. They were fairly high [indiscernible] ratios. The full year outlook suggests that it's down a little bit at least over last year at the midpoint, Q1 starting weaker. There are reasons for that. But how confident are you that the 48-[volt] issue is indeed fixed in Q2? How do you intend to keep prices stable and ultimately turn around the margin development? And then secondly, Ola, this is perhaps for you. You already discussed about the slower-than-expected EV ramp. There's all sorts of reasons for that. Do you expect it to result in a further softening of the regulation, we already discussing that in the U.S. do you also see happening in Europe? And given that your investments now need to stay elevated for a longer period of time, would you also think about partnering up with guys like it's been discussed in the European mass market?

Yes. Thank you, Tim. So let me get started with the first question on the margin evolution. I think we -- when we talked about the quarter 4 for the first time at the end of the quarter 3, we said we would expect the fourth quarter to be about 10%. I think that's what we delivered. However, we also said, I mean, that the fourth quarter should not be a proxy for 2024. And I think with the guidance you heard I mean today, of 10% to 12%, that's exactly what it says. If the fourth quarter would be a proxy, we wouldn't not have guided 10% to 12%. Can we get there? You heard that we have the ambition to keep the pricing stable. The backbone [though] is obviously the product and the product substance with a lot of great vehicles in the market and others to come. So that supports it. And overall, our policy is, as you can also see in the sales guidance, we definitely mean prefer the value over the volume. So here, I would say you see the response on that. So what else? Third and fourth quarter last year was impacted by charges on the supply chain side, on inflation related capacity adjustments and so forth. We said that, I mean, they basically refer also to the full year 2023. So now I mean, with the raw mats turning and the efficiency efforts Ola emphasized on the material cost, I mean, at large, we want to gain a tailwind on material cost in 2024. So I think all of that, I mean supports that the fourth quarter, with the 10% should not be the proxy. However, one point I alluded to, I would say, in the call before or in the presentation before is the first quarter, the [48-volt], back to your question. It still lasts into H1. I think operationally, although it's improving, but it's still impacting availability of vehicles and some other issues, I mean, in the first half, in particular in the first quarter. And that's why we said the first quarter mean should probably be below quarter 1 '23 in terms of sales unit, which, by the way, was I think, 490,000 units. So that would suggest that the fourth quarter, I mean would be a difficult one. If we look at the ambitions we have, if we look at the cost phasing, I would say the first quarter probably should come in at the lower end of the guidance range for the full year, but still within the range. And given a pretty low number there in terms of sales, that's an indicator of change, I would say. So definitely, we want to restore the margin starting with the Q1, but then obviously, with higher volumes in the quarters to come, take it to the level of the guidance range of 10% to 12%.

With regard to policymaking supporting or not supporting the EV ramp, it's very, very difficult to make a prediction. You can see that sometimes policymakers make abrupt decisions. Germany casing point, on a Friday afternoon, the government decided to cut the incentivization -- for electric vehicles for the following Monday, pretty unprecedented. So to have a firm prediction of what's going to happen there is difficult. I would say this, though, as far as Europe is concerned, there is a review coming up in 2026 that is baked into the policy decision of going CO2-free in 2035. For a big system like transport and mobility to turn and literally switch energy source, that is a Herculean task. That is a systemic task, an industrial task. And many things need to fall in to play for that to happen, not just the product. That's the thing that I'm most confident about because we're putting our money where our mouth is, and we're investing tens of billions into very attractive electric vehicles coming up, not just us, the industry as a whole. We're also investing into infrastructure. But the consumers are not going to accept is to limit or lessen their convenience in terms of mobility and certainly not where it's used for business purposes. So if the enabling factors cannot keep step with the ambition, I'm sure a rational discussion would need to be had to assess, are we progressing on the trajectory that we need to go on or are we not. At least as far as Mercedes is concerned, we're doing everything we can to create attractive products, but also to tell our customers, we got your back investing infrastructure and other things, working with our supply base and so on, as I mentioned in my speech. But I want to be cautious with predictions here because it's very difficult to know what the political landscape will look like in a couple of years from now.

Thank you, Tim, and we go to London. Next question goes to George Galliers from Goldman.

I would like to start with a question around the introduction of the MMA platform. In the slide deck, Ola mentioned that it will redefine what customers should expect from an entry point product from Mercedes which, if the case should hopefully manifest itself in higher price points. With this in mind and obviously notwithstanding the economic challenges around xEVs, what do you see as the indications for price mix within Mercedes from the introduction of the MMA platform and the phaseout of some of today's entry luxury products? The second question I had was around the free cash flow, which I think takes some much more significance in light of yesterday's announcement. Over the last four years, you've generated more than EUR 35 billion of industrial free cash flow. So a run rate in excess [as of] EUR 8 billion per annum. And obviously, the guidance for this year implies free cash flow again in excess of EUR 8 billion. Clearly, the future is unpredictable, and you don't have a crystal ball, but do you think EUR 8 billion is a reasonable kind of a floor to assume for cash flow over the next four years? And hence, should there be potential to generate another EUR 30 billion plus over that time frame?

George, I'll start with MMA. What we're executing with the MMA platform is what we set out to do, and I think it's really three things that are happening here. On the one hand, we have made a portfolio optimization decision. So we're focusing our portfolio. As you know, from seven models to four models in this segment. We have selected the four models that we believe will perform the best in -- from a worldwide market perspective. We're significantly elevating the technological substance of our product in that segment. So the customer compared to the very attractive products that they get today will get so much more and we'll have a thoughtful and customer-friendly approach towards the refinement of those products within the segment to make sure that it is a Mercedes experience through and through. But what we're not going to try to do is to completely leave the segment because then actually you're doing a C-class and you're not doing a CLA. So whereas this means a migration or a nudging north inside the segment, we want to stay in the segment. And especially, as you can see on the BEV development so far across the world, it has been small and medium that has been the growth factors for BEVs and this would be our play in the entry side of the medium, if you will, then followed by MB.EA, which is just a year behind within the electric GLC and the C-class, and you got to keep those product positions apart. So stay within the segment, but nudge up in that segment.

Yes. George, on the cash flow, yes, I think the share buyback as a capital allocation framework is a statement of confidence in continued cash generation. Otherwise, probably would not have been -- wouldn't have made sense to come out with the framework and the policy of continued share buyback over time. But well, without giving a guarantee on cash generation moving forward, but what -- let's go back to basics. What makes the cash flow? It's a margin, right? So I mean, here, you have a pretty good indication for the margin in 2024 with the product portfolio now and to come '25, '26. I think we feel very good to defend the market position with the substance of the product and at the pricing level, I mean, we mentioned shortly before in Tim's question. So definitely all in all, with the cost focus, we have the objective, I mean to protect margin moving forward. Second point on the cash flow, obviously, is the investment side of things. We're doing a lot on the investment side, but we have a very, very clear view of the portfolio in which we are investing. We have to invest. And I mean, that number, I mean, it doesn't go through roof. We set ourselves [caps], I reiterated the point on the investment adjustment over time, maybe a bit longer in the second half of the decade, but not going through the roof. And on the working capital side, I think you can see that there is a good level of discipline to manage working capital so that in essence, working capital, I mean isn't a drain on cash flow too much. That means cash conversion targets. You see them in the range of 0.8 to 1. Not only, I would say, for 2024, but moving forward for the Van side, given the step-up in longer life cycle investment on the Van at 0.6 to 0.8 for years, I mean, to come probably mid '26, '27 until, I mean the vehicle will hit the market, but then a pretty good potential to come back to higher level cost conversion ratios. And I think that should frame your thoughts on the size and the stability of cash generation moving forward, which will then fuel, obviously, the share buyback potential after [ BEV ]. But maybe there are some opportunities also. Well, some might think about M&A. You know that at least on my side, I'm not a big fan of lab-scale M&A. But maybe M&A also consists of not only acquisitions, but the divestitures. And over time, that means -- I mean, we could consider after the lockup period to divest from the Daimler Truck stake. I said, I mean, we could -- I didn't say we do, but we could. Obviously, that would support the free cash flow and take it even to a higher level on which then the new policy would apply. So I hope that answers your perspectives on future cash flows.

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

Good morning, gentlemen. I'll go back to the ICE and BEV question. Would you expect your market shares in combustion engine and electric vehicles ultimately to approach similar levels kind of independently of the BEV share in the market, so kind of isolating yourself a bit from that progression? And if your market shares in BEV would be lower than in ICE, what conclusions should investors take from that? And then secondly, what does it take to bring some of the product excitement you have around MBA to the combustion engine side? If you think about combustion engine cars in the 2030s, well, you need a new platform or at least a refresh on the ICE side, kind of what do you need to do kind of to bring MB.OS, some of the design [language] you have now over back to the commercialization side?

Daniel. If you look at the development of BEV market shares as a percentage of the total car market up until this point, it is evident that the highest share is kind of coming from below going up and not the other way around in the segment, much of which is driven by policymaking in China and the dynamics of the Chinese market, where a lot of small intermedium is where the BEV action is. On large, if we take our EQE and EQS right now, actually we have a pretty good market share. It's just that the market is not that big yet, and that many customers in that segment, they view the S-class and the sibling cars as kind of the non-plus Ultra that they want to have, and we don't mind. Now, if we look at the timing of our launches, we start launching next year, the CLA, and it's 1 of 4, as I mentioned before. So over the coming then about 24, 30 months, there'll be a family of cars there that then becomes the entry point for Mercedes and followed up by -- which is probably in premium luxury biggest segment, C-class and GLC, we will launch those products in 2026. So we come into in terms of meeting the market and the market structure, as you can see it today, we come into a full swing then by the year 2027. So we have not made any plans for any artificial market shares lower or higher on ICE or BEV. We want to exploit in a value over volume approach, as Harald mentioned, the maximum potential for those products. When it comes then to the ICE siblings, think it's also key here, and I tried to portray that in my presentation just before that if you walk into a Mercedes showroom, you expect the Mercedes to be a Mercedes to be a Mercedes, and maybe don't think so much about if it's BEV or an ICE. So the technologies that we're developing now on MB.OS, next-generation driving assistance systems, next-generation infotainment, I don't know if you have driven the new E-class. And I know I'm ever so slightly biased, but I haven't found a car that has a more exciting infotainment offering than that car. I don't think our ICE customers long term would accept if that is like then when the next gen comes a BEV story only. And the E-Class is, of course, a combustion-based vehicle. So we're going to have to cross breed between the two as we go along. Do we need a complete new architecture as in ripping up the playbook and starting from fresh on the combustion side? No, I don't. And the reason why I don't believe that is twofold. On the one hand, through [ EU 7, China 7 ] and the emissions loss in the United States, primarily California, we are updating all of our relevant ICE powertrain combinations for the 2027 time frame. So it's almost like we will have a whole new fresh lineup in 2027 that can carry us well into the 2030s. And we're also, together with our partner developing a brand-new entry level 4 cylinder engine that will also about 9 months or so, maybe 12 months or so after the electric vehicle on MMA, also be a very competitive, good hybrid powertrain that is literally brand-new then starting whatever, '26 and forward. So we got that power train line up, and we have the infrastructure to continue to produce. And are architecture then on the larger vehicles that we call inside the company, MRA 2, it's literally brand-new D-class sits on that architecture. We believe that we can with the technologies that we are developing use that to underpin any and every update that we would need to do to those vehicles along the way on that journey into the 2030s. And if we need to do more on the optical side, at the right time, we will do so.

So if we think about the upcoming C-class on MB.EA kind of [indiscernible] thesis that the MRA2 could support kind of similar or kind of equivalent combustion engine version, right? Because the MB.EA C-class is distinctive in its own way.

That is true, as is the combustion version of the C-class and the GLC, which is actually our best seller. But stay tuned, Daniel. And you'll see what we have out for up our sleeve.

Thanks, Daniel. And we continue with Patrick Hummel from UBS.

Yes. Thank you. First of all, congratulations to your capital allocation policy decisions. I really think that's benchmark for the industry. My question relates to an update on the medium-term plan that you had laid out at the economics of desire, CMD and then before already when it comes to the investment budget, the fixed costs, et cetera. Correct me if I'm wrong, if you think I will be wrong, the volume assumptions you took for core -- for the core segment, core luxury segment look a little bit ambitious from today's perspective for 2025 perspective. So can you just, first of all, give us an update on how you think about the three buckets, entry, core and top end with a medium-term view, now that the reality has deviated probably slightly from the plans laid out back then? And what is the conclusion of maybe the core segment being a little bit smaller than expected a couple of years back when it comes to CapEx or investments overall, including R&D and the fixed cost side of the business. If you could just update us on those building blocks because that all feeds into the free cash generation of the business offers.

Yes. Thank you for that question, Patrick. Let me start with kind of the composition of the pyramid or the diamond that we showed. We can run up on the top end level to the percentage a little bit quicker than we thought. And you're right that the core side did not grow as fast as I talked about two years ago, although some of that is product and launch related as we have discussed. So our two main products, the GLC and the E-Class in that core segment, well, one is in full launch now. So we're in switch over, that's the E-class. And the other one was indeed restricted in the second half and into this year, as has been discussed. So I think that in terms of the relative importance inside that segmentation, we're looking at a little bit of a comeback of core. And then we will, as described before, with MMA, carefully manage the entry side. So I think the composition of the pyramid or of the diamond is pretty solid, and we're following what we had said. But then you look at the macro environment in the market, and I think you have to write the market. And we have, in a disciplined way as possible, always try to find the right equilibrium between pricing, protecting value, protecting residual values for our customers as well as volume. And coming out of this restricted era there with the semiconductors and everything, the macroeconomic and the market conditions are different now than perhaps some people had thought. So you also have to ride the macro market, and that is where we just try to adjust volume to what the market supports. So maybe in absolute numbers, we're a little bit behind. But in the composition, I think we are doing reasonably well .

In the top end was 16%. We said we want to get there over time. And actually, we are there. 2022 or 2023, just bear in mind as well that I mean the top end obviously has a fuel for the best as well, which are developing at a bit of a slower pace compared to the expectation maybe at a point -- back at the point in time in spring 2022. On your question, what does it mean for fixed costs and investments, Patrick, while fixed cost or the fixed cost, I would say almost no matter what happens around, so we don't see that as a percentage of revenue. It's an absolute number we're driving year-on-year down, with a 60% down by 2023. I mean you can see that. So we're not that far off, I would say, of the 20%, which we ambition for 2025. So on track to deliver that, and we are not stopping then 2025. Definitely, we have the ambition -- mean to keep going with each and every efficiency possible in each and every department. On the investment side, compared to what we said at the point in time, 20% down compared to 2019 by the end of the decade. We added definitely portfolio positions, AMG, EA portfolio on MB.EA and MB.OS. So, I think that is running at a higher level. And you see exactly at the same time the increase of the BEV share doesn't go maybe exactly in line with the previous predictions, we stick to the investments on this side. Very, very important, but we have a very precise view of the portfolio, what needs to be done. And that fits in the envelope, and I mentioned before in George's question. But with the 20% of the cash of the investments down, sitting more in the second half of the decade. As Ola said before, when we need to use [tactical] flexibility, I mean, on the ICE side. But the BEV investment profile for us is pretty clear. And we see definitely, I mean the potential for the investments. I mean, to come down over time. So confirmed not for 2025, but for the second half of the decade.

Thanks, Patrick. And next gentleman in line is Jose Asumendi from Morgan.

Thank you very much. Congratulations on the capital allocation program. Two questions, please. Harald, can you discuss with regards to the guidance on the auto margin for 2024? What are the planning assumptions in the Chinese market when it comes to volume and earnings contribution from the region? And second, Ola, can you talk a little bit about the plan to hit the CO2 emission targets in Europe and can you maybe comment around the share of test that you're planning in 2024 and 2025?

Yes. Thanks, Jose. So overall, I mean, as we said before, we take a prudent view on sales in 2024. Supply constraints are still being there, in particular in the H1 and the Q1 is emphasized in the first question, that has an impact. But I mean, beyond that, we also take a prudent view given the macro environment. And obviously, I mean, in the very heated BEV competition in China, where we participate, but not by all means. And therefore, I would say, all in all, for China within the sales flat guidance. China is also rather flattish, I mean, in there, such as Europe is and maybe a bit of an upside potential, I mean, from the U.S. and maybe flat or slightly down in the remainder of the world. So I think that is how the sales guidance is composed.

With regard to CO2 guidance for Europe. You could see the chart in the presentation. So the backbone of it is obviously the xEV share, we will continue to build the xEV share. We're now changing smart. So smart used to sit inside Mercedes, obviously from a legal entity point of view. Now that is entered into the pot via the joint venture that we formed some years ago. So you have a method change there. As I described before, we launched the CLA in 2025, and we really get kind of the bulk of the vehicles in 2026 and 2027. So if I look at that midterm run-up of the xEV share, that looks healthy. In the course of year 2025 and into 2026, I'm sure we'll look carefully at that and it will be underpinned by xEV share should we have to use other options above that. We will keep an open mind, but it is growth of xEV share that ultimately solves that issue.

Thank you, Jose, and we continue with Stephen Reitman from Societe Generale. Stephen, can you hear us?

Yes, can you hear me?

We can.

I have three questions, please. You highlighted logistics as being one of the headwinds you've had in 2023, which I think is seen generally across the industry. But we are seeing logistics costs falling quite dramatically, particularly in terms shipping. How do you see that in terms of influencing your [leverage] in 2024? Could you also comment on [indiscernible]. Now we've had a year a bit in the U.K. and half year in Germany, what it's doing to transaction prices? And thirdly, you showed us, obviously, [steep] review of the facelift of the EQS, which is obviously said is much more than a facelift, a very substantial refresh of the vehicle, styling of the vehicle. Is that -- which is more -- which seems to suggest more traditional approach on the front end. Is that an option? Or is that the way that all the vehicles will look? And also, could you give us some idea on the timing of the customer deliveries of that vehicle?

Yes, Stephen, to your first question, and of the headwinds. Yes, I mean the previous years, logistic, logistic costs for the mean definitely a headwind in the course of 2023. You can see overall logistic cost may have been turning and came the other way. And I mean next to the cost per unit on the logistics. I mean, we're obviously trying as well, I mean to challenge and improve the overall demand side of the logistics side, in particular, I mean, if you think about outbound. At this stage, as we speak, however, I mean, some of the geopolitical constraints, like the Red Sea may get that obviously ships are going a bit for longer, longer mean it's more expensive. So temporarily, maybe a bit of a headwind. But globally, we're trying to [take all] opportunities also from tailwind on logistics in 2024. On the Model D and the benefit on transaction pricing. Well, in the meantime, quite a lot of markets which we switched, right. I mean, starting with Sweden, South Africa, Australia, Austria and now in 2023, obviously, U.K. and Germany. And if we look into each and every of these markets, what we can observe is when we compare basically the pricing, the discounting in the situation before compared to mean thereafter, there is a net pricing benefit that varies quite a lot in the individual markets. I mean, therefore, I mean, it is not very meaningful to give any number here. But obviously, it helped the pricing performance, which again was significantly positive in 2023, as you can see in the margin bridge on cars and by the [indiscernible] same thing on the van side, which is also means supporting me in the pricing. And for what is yet to come, I mean, we do expect to mean the same thing. Obviously, intra-brand competition goes away, transparency. And all in all, I mean, we therefore see that as a favorable support to the pricing strategy.

With regard to the model year update on the EQS, not just the star on the hood and that more traditional Mercedes like panel in the front, but the executive seating, the new battery chemistry. Some of the other measures that we have taken to improve efficiency and improve range. That will be available in the market as of June. Actually, we're sneaking in the battery. We're actually sneaking in the battery update before that. But as a complete package it's available in the market in June starting in Europe, obviously, and then you have some shipping times. And if I look at the feedback that we received from our customers, from the EQS and the EQE around the world, it is some of the highest customer satisfactions [ course ] we have anywhere. Actually, a little over a year ago when JD Power did a study in China, actually we scored the highest of any brand, any vehicle. So the people that drive these vehicles, they love it. Some of them want to keep more sporty look and have the star integrated in the panel and some we believe will want to have the more traditional look. So you will be able to get both. If you sit in the back, you can still [order] the regular backseat, but this executive seating and also available of June. I'm 195cm tall. I sit in the back of an EQS. I can sit there very comfortably.

Thanks, Stephen, and we continue with Horst Schneider from Bank of America.

Yes, can you hear me?

Loud and clear.

Okay. Excellent. First question again on pricing because it seems to me that surprisingly, pricing has got stronger in Q4 even versus Q3. So Harald, can you maybe explain what has driven that? And with the assumption for 2024 that you aim prices to hold up, can you provide a little bit color by region, by segment? Because I think not everything is up or stable. Some will be down, something will be upward as the driver? And does now basically stable pricing means and value over volume means that you rather focus from here, really not any more on market share [that we should] expect basically market share losses also beyond 2024? And the last one is on Ola, regarding best price policy, we see in the mass market at the moment that basically best prices get down to a level where also the ICE prices are. I think that is not yet the case in the premium market. What is your working assumption basically on pricing going forward on BEVs. When you expect BEV prices to go down to ICE level also in the premium market? Or you expected that all ever to happen?

Yes. Thanks, Horst. So on the first one on pricing. No, I think you said in the presentation earlier today, full year pricing was healthy, was solid. I think in the previous quarters, we gave some color on what is the pricing in itself, I mean, in the bucket. I think we reach a bit. I mean, the limits, I see what other people are doing. I'm happy to comment on a qualitative basis. And that means in the fourth quarter, pricing quarter over -- quarter 4 '23 over quarter 4 '22 was still positive. But I would not say that, I mean quarter 4 in terms of pricing was sitting above quarter 3 2023, But for the year and year-over-year in fourth quarter, was very supportive, as you can see in the margin bridge. Looking into 2024, I mean we said we hit the target. We have the ambition to keep pricing stable. Stable, I mean obviously means flattish. How do we think we can get there? I mean, number one, as you know, pricing is composed of several elements, discount management, base pricing and escalation. So we'll work on all levers. We'll keep flexibility, obviously, on discounting to stay competitive in the market, but not to the extent that we want to buy market that we want to buy share as some others might do. That is not our policy. Again, value over volume and applies. We think market share should be defended by product substance and not necessarily by aggressive pricing measures and actions. That's probably the latter one are not sustainable, whereas the product's [substance] is sustainable.

But Harald, that means that you have got in your guidance also a range included, right? So upper end of the range could be then like flat and the lower end of the range would mean negative pricing. Is that correct?

Well, we're in a guidance, you have many building blocks. So pricing is one, obviously. I mean the material cost is one. Logistics, we talked about before. So many things we look at. And then we take a judge to you as -- and then obviously, we build from there, I mean, the guidance range. And as I said before, it's 10% to 12%, which means Q4 is not the proxy for 2024.

With regard to the BEV pricing policy going forward, if you look at those MMA and MB.EA vehicles and so on going forward, we think, first of all, that we're putting attractive and competitive vehicles into the market. So of course, we want to exploit that. If you then look at what should be the premium on a like-for-like from a combustion to a BEV, and it is true, and I mentioned in my speech that the variable cost of the like-for-like electric vehicle is higher than the ICE. So in those business cases, we're assuming a moderate price differential, where I don't think we're going to be too aggressive or too optimistic, but we do assume that we can have a price differential going forward. And from a total cost of ownership point of view for the customer mind you that for them over time, the cost of energy fueling up with electricity as opposed to gasoline or diesel and so on and so forth. And depending on which market that you're in taxation, et cetera, some of that comes back. So the total cost of ownership differential might be much smaller. And in some cases, it might be the same.

Okay. That's great.

Thanks, Horst, and we continue with Michael Raab from Kepler.

Mike Raab from Kepler Cheuvreux. When you just said that you want to keep flexibility in your discount management, I guess the key question is, where is a fine line to walk on the line of discrimination beyond which you're compromising your value over volume strategy? I guess what I'm out for is, to what extent are you willing to ratchet out discounts here? And then secondly, when it comes to BEV pricing, while the general and competitive framework for BEVs, are you still happy with your residual values? Or have you already seen impact on the RV so far?

Yes. Thanks, Mike. Just to answer on the second question, for sure. Mean we look at the residuals and any exposure and obviously, not only us, but our external auditors, and this is being done at each and every quarterly close and any charge, which would need to be taken when I would sit in the books. And obviously, we have been going through the procedures even if the audit is not ultimately completed, but I have no indication. I mean there would be a change to that, and there is not any material mean adjustment in the books and records for EVs in the 2023 numbers, which we published on flex discounting, I think it's a bit difficult to give a general statement. You need to look at, I mean, obviously, the individual product segments. You need to look at the individual markets, I mean, the timing of the products, I mean in the market, the life cycles. Obviously, you look at what is the margin contribution of the individual ones and this is, I think, I mean, tactically day by day job. I mean not the sales team in close cooperation, obviously, with a few finance guys looking over the shoulder and the end result, you see basically then in the quarterly bridges, I mean, again, where we give, I think, a lot of details in terms of the bucket volume, mix and pricing. But the three levers, I think, are important to be seen in conjunction product-based pricing, which is going with the product substance, escalation updates year-on-year and discounting. And again, on discounting is probably, I mean, the flex tool in a competitive market environment.

Thank you, Michael, and we continue with Mike Tyndall from HSBC.

Just a couple, if I may. Just thinking about the slight change to strategy in terms of xEVs versus previous ambition. And just in 2023, it felt as if there was a penalty from your supply side because you didn't quite achieve the level of volumes that you were aiming for. So I'm wondering to what degree you've got a flexibility with your suppliers if it turns out that BEV penetration is lower than you previously thought. Had that changed at all such that perhaps what happened in '23 won't happen again? And then second question is on capitalization. I just wonder if you could talk a little bit what's inside that. Curious to know whether or not MB.OS is inside that. And does -- if it is, does the rising capitalization sort of suggests that you're getting closer to the point of saying we're ready to go on that?

Yes. Thanks, Mike. So on the first point, I mean we're not commenting on individual contractual relations with the suppliers. But when we talk about supply chain related charges, inflation-related and capacity adjustment related charges in 2023 lower an EV adoption rate in place somehow a role in it. I think that is fair to say. And I'm pretty sure that applies not only to us, but to other market participants as well. However, I mean, in the discussions, I think, I mean can go as far as saying that one, we take at our end, I mean, a longer-term view in terms of the supply relationship and I mean, that doesn't go for 12 months. That goes for the product life cycle, that goes for multiple products, that goes over many, many years. And so we want to have constructive relationship and discussion with the suppliers, which means, I mean, if there are charges to be considered, I mean we were ready to do so if we feel that goes beyond and other elements are sneaked in will push back hard and we'll consider in the overall relationship with suppliers with respect to consequences over time. On the second question, capitalization rate, yes, went up in the fourth quarter, I mean, how it comes, several elements. Yes, absolutely. We are approaching maturity on MB.OS. Ola said earlier, however, not a walk in the park and still I mean, a lot of things which need to be done. But these vehicles are on the street they are being tested. Features are coming up. I think that is encouraging progress. What else is in there? I mean lots of products in the pipeline. MMA, obviously, MB.EA, AMG EA also lots of stuff and another new come to another, I mean, [indiscernible] town on the capitalization is the electric G-class. Well, I mean, as per the IFRS rules, you don't have the choice you have to capitalize. If you have a product which is supposed to generate value, earn more [than the] cost of capital. And with all of this stuff, this is very much the case. So in this respect, I should say, capitalization in 2023 and in the fourth quarter has not been a function of helping the EBIT. It is a function of value creation ahead for the future. And probably will stay at an elevated level and also in 2024 around that level as we had it in 2023.

Thanks, Mike, and we continue with Henning, Henning Cosman from Barclays.

I have a slightly longer one and a shorter one. The longer one is around the volume dynamics. So you're guiding for flat volumes. You said you missed about 100,000 units last year. I appreciate it's not all coming back immediately. You're looking more for the second half. But you would take out the 100. It almost implies you're guiding down 50 to 100, everything else equal. So I just wanted to understand that why you wouldn't expect that to fully come back. And then related to that, from an EBIT perspective not to go over all the individual [indiscernible] again. But I guess in my estimate, maybe missing out EUR 1.5 billion on EBIT also because of the 100,000 unit portfolio that [indiscernible]. So I just obviously grow a little bit [indiscernible] what you got [indiscernible]. Could just comment on how you see the structural margin potential here, you said 10% for this year. Would you then in the context of the ongoing [indiscernible] also say 10% to 12% is not a proxy for going forward. So that's the first question. And the second one, much for the [indiscernible].

We are about to lose you. So if you have any chance to get closer to a window or so it would be helpful we almost cannot hear you.

Is that better now, Steffen, can you hear me now?

Yes, yes.

Yes. Sorry about that. So the second much shorter one was just on the dividend. Thanks for saying there's upside potential given the buyback. Would you be prepared to say it's fair to assume in absolute terms, a stable or rising dividend from here, even if it would mean exceeding a 40% payout ratio?

Yes. So thanks, Henning. Let me try to cover, I mean the multiple questions, within the question number one. Well, I don't think you can take the approximately 100,000 units, which we lost, so to say, in 2023 and we nailed them on top in 2024 is probably you cannot demonstrate that the customers have been saying, okay, thank you. I wait another 8 or 9 or 12 months. And by the way, I don't know for how long I have to wait. And therefore, you nail them on top in 2024. I think that's not the way it works. So probably you need to assume that the lion's share of the 1,000, I mean, you lost and will not recoup in 2024. And therefore, I think you heard said, I mean, we take important view in 2024. It's still constrained by supply in the first half. I think everything has been said in this regard, I would say. I'm totally sure on your margin question, and I mean, the margin associated, obviously, to -- approximately 100,000 units is a pretty substantial amount, but I stay away from commenting how much, I mean, that is. On the EV margin, not exactly sure, I mean, the line was cut out a bit. But in terms of the quality of the EV margin, what can we say at this juncture? And definitely, it's sitting below the ICE. We also had to take adjustments. It started somehow in fall 2022, I mean that was some repositioning in China. We took some further action in 2023 to stay in the ballpark to stay competitive. But we're definitely not going as far as other competitors in terms of trying to push the EV products into the market by all means. So in other words, I would say we defined, I mean, the line in the sand, the boundaries, which obviously fit into the objectives, the overall financial objectives, 12% to 14% we said for 2023. We made 12.4%, and that is the same now what we baked into for 2024. Maybe I go as far as saying, I mean that the margin contribution of the EVs is positive. And if you think about, I mean, contribution margin, not EBIT margin, but contribution margin, i.e., margin per unit, I can say that this is double digit. On the [ DV ] question. Well, I'm not making projections on the future dividends as such. But as you can see with the [indiscernible] proposal of EUR 5.30, the share buyback accretion offers DPS upside potential of approximately 2% if you compare to the EUR 5.20 at [ISO] net profit. And now completing the remaining EUR 2 billion in '24 adding the EUR 3 billion until May quarter 2, 2025. That should suggest, I mean, a further accretion potential on EPS and also on DPS. Assuming, I mean if you depart from the same level. Obviously, I mean, with the guidance, you need to factor in probably a bit of a lower EPS and DPS as well. But therefore, the share buyback definitely serves as stabilizing and upside potential for EPS and DPS.

Thank you, Henning. And the last question goes to Harald Hendrikse from Citi Group.

Again, congratulations. I'm very happy you've done this on the cash side, not least because it will obviously compete with some other investments and stuff that we have looked at historically. Just one really quick question, I'll keep it to just one. Can you just talk a little bit more about China? [Porsche] has been very vocal about top end in China yourselves. The Chinese market clearly has been more difficult. So can we talk about overall time demand, how you see that developing? It feels like German market share is definitely under pressure now, even with your brands. And then secondly, given tariffs and stuff may come up again this year, what are we thinking about China as a production base if we do have spare capacity. I think we're all looking to make EVs for the global market from China. Is that viable? And how are you looking at in terms of future investments and stuff?

Thank you, Harald. As you could see in 2023, we had a solid year in China in spite of the fact that the Chinese market did not develop the dynamics that many people had hoped post the pandemic. And we take a prudent view. Harald alluded to it before for 2024. So we're not going to put over optimism into China. But we are launching now the new E-Class, which is one of the core models there, and it's industrialized in China. So that will -- once we ramp that volume, I would say, latest by Q2 will give us some momentum. So China, as is the case with its economy, it's more going sideways than it's going upwards. There is a high level of competitive intensity in the EV market, much of which is, of course, below the segment that we're generally represented in and we're trying to stay as disciplined as possible not to be sucked into those dynamics and then might flex with the volumes instead. With regard to potential protectionism and the discussion that is going on between the EU and China, I think we have stated our position very, very clearly. Any move by the EU or other party to raise protectionism is a value destruction move, especially for an economic region like Europe and Germany, that is a big exporter. So we're participating in that study and making our opinion very, very clear.

Thanks, Harald. And with that, ladies and gentlemen, thank you very much for your questions for being with us today. Thanks a lot to Ola and Harald for answering the questions. As always, IR remains at your disposal. And before I close today's call, I'd like to remind you of our upcoming Mercedes-Benz's ESG conference, which will take place virtually on March 20. There we'll provide you an update on the progress and the achievements in the relevant feeds of ES&G. Stay tuned. And now to all of you, have a great morning, great afternoon or great evening. Thank you and goodbye.