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

Welcome back to our analyst and investor Q&A. I'm very happy to have with me Ola Kallenius, our CEO; Harald Wilhelm, CFO; and Markus Schafer, CTO. Please bear with me, I will take you through the safe harbor wording for a minute before we start. I would like to remind everyone that presentation and Q&A are governed by the safe harbor wording that you find in our published documents. Please note that our presentations and comments 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. Now just a few practical points. Please ask your questions in English. And as a matter of fairness, please limit it to 2 questions. Please state your name when I call you and the name of the institution and then ask your questions. For representatives of the media, please understand we have the analysts and the investor Q&A first. Yours will follow straight after. To the investors and analysts following us online, you're welcome to send us questions to the e-mail address you will see on the screen. We've also shared it this morning. And now for the participants in the room, please raise your hand if you want to ask a question, and I will call you up. Once it's your turn, please unmute yourself, clicking the speaking button and once you're finished, please also mute yourself again. Ladies and gentlemen, I don't have to ask you to raise your hand. So I see lots of hands here. I will start with you, Tim, over to you.

Yes. Thank you very much. This works. Tech is amazing here, Ola. That's good. I have 2 questions, please. The first one, probably go to you, Ola. You said it's about distilling the DNA of the brand in many of the things that you are deciding to do. Can you help us distilling the essence of today? You left us with a lot of information, a bit we already knew. You made it sound like a very logical continuation of what we learned in Monaco 3 years ago, yet the world has totally changed. You're taking out capacity, you're reversing back from the BEV focus towards more ICE focus again. So you're actually changing quite a few things, which is pretty difficult. I assume. I think most of us left Monaco thinking you want to do luxury and you want to do BEV. What are the 2 things you can leave us with today? And then secondly, Harald, perhaps more to you. We already had the discussion post Monaco that we find it very difficult to judge how much you can control internally, if you don't give us a reference number for things like fixed costs, investment numbers we kind of know, right, but that sort of stuff. It's kind of the same today. I think most people would assume your assumption that pricing is stable sounds quite ambitious with everything that's going on in the world, or the more important it is for us to understand the cost side. Can you help us to drill down on that a little bit more? Is there any net number that you want to leave us with that you want to achieve in terms of cost savings?

Yes. Thanks, Tim. I'll start with answering your question. So whereas the market conditions are indeed different now and the landscape is different, and I would say we all agree that transformation is not a linear thing and probably in many markets, it's going to take longer. What are the 2 things that you need to take with you. In terms of the product portfolio, we said we wanted to elevate ourselves in the different segments that we operate in, Top-End, Core and Entry. So this product that we're launching now this year, I think, is the first proof point of that. In the Entry, narrowing the portfolio to the positions that we think are going to be most successful on a worldwide basis, elevating the substance of the product but also the appearance of the product and trying to gain a healthy margin development in that segment. At the same time, we said we want to grow the Core, we had, let's say, a gap in the portfolio, the biggest volume position for BEVs in core is clearly the GLC segment and the C-Class segment. That is about to be filled next year and we said we wanted to grow organically in core. And then we wanted to put more emphasis on the Top-End. If you remember the chart in my presentation with a number of models in the next 3 years, you could clearly see that the highest number of models is in the Top-End, not only to defend, I think you said that also had to defend our position with this, which is strong there, but also try to build it and venture into new things like AMG EA, where we want to kick off an electric chapter also in the Performance segment in an authentic and credible way. So from that point of view, even though the market conditions have shifted significantly, even though China is a different place now than it was maybe 3 or 4 years ago, I would say that we're staying the course. And if somebody would be looking at saying, well, you could sell more cars, if you do a car that is smaller than this car, yes, we could. But would it really be profitable growth? We don't think so. And with the brand that we have, the cost structure that comes together with that brand, honing that, I think we used the [ Diamond ] as a honing that, we're largely staying the course. One thing has changed even though we had the insurance policy built in, we thought some years ago that the progression towards EV on a worldwide basis would go faster. We had said we will be able to serve markets by the end of this decade, fully electrically, comma, where market conditions allow. If you don't believe that market conditions will be dominant electric in 2030, 70%, 80% or more percent it would not make economic sense to just cut off your very healthy and profitable ICE business. So a little over a year ago, we made a decision to do a dual track. To activate the insurance policy, you saw the new V8 yesterday at AMG. I mean we never stopped readying the engines and transmission combinations for the next generation, but we're now adding the vehicles to it. So yes, there is a change but it's a change that does not lead to disruption. It's not like we stopped and it's like, oh my goodness, let's dust off the room, Markus, and start again. It is happening in a flow. It has an impact on our investment profile. But in spite of that, I think what Harald showed, we're managing this in a sensible way. So we're staying the course. But if the world changes, you cannot be so stubborn that you're not willing to adapt, you have to adapt as well. And that's what we're doing on the BEV ICE dual track.

On your second question, I mean, Tim, Well, may -- I think we give quite a lot of data points. You will understand that we're not giving the pricing objective for June 2025 on a given product. There, we said, we want to stay disciplined, which means the strategy in terms of value over volumes absolutely still applies. However, I mean, we'll be competitive as well. So where we deem appropriate, it means we can also strike. But this is case by case, market by market, product by product. I think on this one, one cannot give an absolute reference. Definitely, the product momentum to come will use a part of that momentum and the step-up of the product also to step up competitiveness of the offering further. But altogether, therefore, I think the assumption to go for a stable pricing moving forward, if you take all of that into account, I think is a fair one. When it comes to absolute references on production cost, on material cost. I think it's a bit difficult, as you know by heart, that there's volume mix structure. So giving a number doesn't mean anything but you see the percentage improvements, which we did, which we want to do moving forward, which I think are very ambitious in a pretty short period of time. You did see in the bridge for 2024 already how much that yields in terms of year-on-year performance, EUR 1 billion industrial performance, underlying even higher, as I said, as you have onetime inside. And for fixed cost and investment, actually, you have actual references. On the investment side, clearly, you did see EUR 12.1 billion for cars in R&D and PPE in 2024. So it goes up by EUR 1 billion and it comes down in '26, and it will be 10% below 2024 in 2027, and that means 20% below 2029. So I think you have the references here. And on the fixed cost, let me say, and I say it's going to be more than 10%. You do not -- you cannot retrieve all of the fixed cost, I mean from the P&L statement as a part is obviously in SG&A, a part is in COGS. But let me say, if we achieve the incremental 10% by 2027, fixed cost will be at the edge of a single to a double-digit billion number which I think is quite meaningful guide.

Patrick, you were very fast. So you go next.

Two questions from my end. First one is regarding the growth you envisage in the Top-End segment. There seems to be a significant increase in that bridge for 2027, and I'm curious to understand how the split between BEV and ICE would look like for that year within the Top-End segment? And also how you think about it by region? I just generally think we have a lot of evidence in the market that BEVs in the Top-End segment are not an easy sell when it comes to residual values, when it comes to consumers that expect roaring the 8 engines, et cetera. So I'm just trying to better understand how much optimism or aggressiveness you've baked into your [ TAF ] share growth driven by BEV? And my second question regarding Daimler Trucks. You had it on a slide, Harald, but if I look at the authorization, the EUR 5 billion share buybacks you're going to do or plan to do over the next 24 months, you would just max out that 10% authorization without any potential for returning even more in case of a Daimler Truck stake sale. So I'm wondering, does that mean we should think about another spin of Daimler Truck shares or a special dividend in case you sell down your Daimler Truck stake? Or how would you go about it?

So I think I'll start with the first one. If I double-click on the chart with all the cars on it and you could see that there were a lot of positions on the Top-End, some of which I referred to. So you get a major, major refresh of the S-Class and the equivalent Maybach next year. You get a major refresh of the GLS also next year. So here you have the main vehicles that carry the ICE side of that operation. You saw last night at AMG that maybe we're kind of plugging some holes. So the resurrection of the V8, the brand-new flat crank V8, I mean, who is insane enough to do something like this at this day and age? Well, the AMG people are. And if you carefully looked at the chart that Michael showed yesterday, you could see that there were other ICE variants also in the AMG portfolio coming. So I would say on the ICE side, we are refreshing, renewing and maybe tidying up the picture a bit. Now to your question on the BEV, we're investing into this AMG EA architecture. I remember when we went to our test track down in Immendingen in the fall. And it was the first like real drive I had driven the AMG EA early prototypes up in the north of Sweden on ICE, but it's not the same thing. And I drove this thing, and again, like holy s***, this -- sorry, for the expression. This is what performance should feel like. And the guys had even programmed and we will most likely launch that. They had even programmed what they call the V8 mode. So I turn on the V8 mode, and it sounded like a V8 on the inside, on the outside, and software emulated the gear shifts, a good job there of the team, even if you don't need it, technically speaking, on an electric car. So I was thinking to myself, this is insane performance. It's proprietary technology so when do we break the psychological barrier of the customer saying, "Wow, this is so good, I desire this and I want it." That is the attempt that we are going to make. But even the AMG version of this year, 400-kilowatt plus with those same features and everything, they're going to be a blast to drive. So we will do our utmost to change the perception or maybe create the perception of a valuable performance electric vehicle as well. Is there some uncertainty? Sure. There is some uncertainty. But the technological package will be the real deal, and that is part of the growth. And I did not take out my yard stick here to measure exactly on the graph. But I think we were a little bit more cautious on what that absolute number is going to be like in 2027 than we thought some years ago when the market conditions were different. So we were now at 280-ish and I think it's reasonable to believe that we can climb above the 300 again and then build upon that.

With regard to your second question, I think there are 2 elements to answer. I mean number one is a more technical, as by corporate law, you know it, I mean you can only seek 10% authorization from the AGM. So given the market cap, well, this is maybe slightly above EUR 5 billion, but it is not EUR 10 billion or is not EUR 8 billion -- would be different, I mean if you would have a different view. But I mean, as of today, it is what it is. So therefore, I mean the authorization is a precondition. And obviously, what we proposed, I mean, to the Supervisory Board and what got approved needs to be in sync with that authorization. That's why it is an envelope. Also technically in the order of EUR 5 billion, supported by cash flow and monetization of the Daimler Truck stake. To your second question, I mean, could we expect something else on the DT stake? No, we checked it carefully from a legal point of view, there is no precedent of minority spin in corporate law. It would be a pretty complex operation with lots of uncertainty. It would require lots of approvals. It would also constitute probably tax risk or I mean, tax burden for many of the investors, which you don't want to see. And frankly, I think we're not in a hurry. I always said it, it's a great performance evolution of DT over time. There is more potential to come. So careful market-friendly monetization, I mean, over time, and you know what the liquidity can absorb, may know that better than me. I think this is a way to go, and that will support, I mean, the cash generation in '24, 2025, and we'll use EUR 5 billion of that to buy back shares, and that's what it is.

George, over to you.

Great. George Galliers from Goldman Sachs. The first question I wanted to start with is, what do you think is the benchmark today in China for a premium car player with respect to Level 2 ADAS? Is it point-to-point driving operating 98% of the time with minimal need for the driver to intervene? Is it lower than that? And how is the CLA going to perform relative to that benchmark? The second question I had was just with respect to the net liquidity. EUR 30 billion plus is a very big number. Why is that required? Some of your global peers are saying they need effectively close to 0. I think in the past, Daimler talked about a number of EUR 10 billion when you're a larger company with trucks. Is this level of liquidity required because there might be M&A you have to pursue from a technology perspective? Is it required because the earnings in China could be red at some point? Is it required because maybe if the Europe keeps the 2035 ban on internal combustion engines, we'll go into a period of very low volume in Europe? I think the market really wants to understand why that security blank is needed.

Markus, do you want to start?

Yes. I think you're hitting the point. I think one of the great customer benefits that customers enjoy in China right now is assisted driving and especially what we call Level 2++ driving. And this is really an additional help and assistance to the customer. The clear goal we have to be at benchmark levels with this car, with this AI, with the supercomputer and the car, with the sensor set that we have in the car, with the compute algorithm to hit this benchmark level point to point, driving in very, very dense urban traffic and the key of the system was developed, especially in busy, busy China streets. So that's exactly what we're targeting. What are we doing in terms of even topping the competition there, is reducing the hardware set there. So we are driving a high-definition mapless, we're not using a high-definition map. And our development with our algorithms, we were able also [ delete ] the LiDAR in the car. So we are able to perform on the same level as benchmark in China with less hardware. Plus, and we should elaborate in another workshop, what we call functional safety. So we have a long, long history of developing ADAS system. 25 years we are working on that in-house, especially when it comes to functional safety which is a key requirement from our point of view there to put you in a safe space there. I think also we're going to define a benchmark when it comes to functional safety Third point is cooperative steering. Typically, when you interfere in a system in China and start to move the steering wheel, then you kick out the system and we have a long tradition that you can do both at the same time. And this gives you even additional feel of safety and security and that you are in control if you want to be. So I think we are adding additional flavor here defining really, really top when it comes to assisted driving, especially in China, but also in the U.S. then in Europe, as you know, is not allowed yet. But you will drive this car this afternoon even here in Germany in Sindelfingen. So you'll get the experience in Sindelfingen. So we are able to scale the system also globally if legally and regulatorily allowed.

George, your question on the NIL. I agree with you, EUR 30 billion is a very comfortable number. But there -- is there any hidden agenda behind the EUR 30 billion in terms of retain them, clearly, no. How to illustrate that. Well, I mean if we would see the risk of China basically turning into red. I think I wouldn't stand here and talk about the objective to retain BBAC in double-digit territory. If we would see the risk of volume collapsing globally as a function of market ICE, EV, whatever, I think we would not stand here and give a margin target for 2027 as we did. And if we would have any material M&A in mind, I think we would not stand here and say that we intend to generate free cash flow from the organic business and then use the DT stake, I mean to do the EUR 5 billion share buyback. It will be just totally inconsistent, wouldn't it be? So yes, it is a very healthy balance sheet. It's -- I think it's good to have it. But I think there is, at the same time, a very generous return policy to shareholders as demonstrated and I think earlier today with my little math in terms of total shareholder return of 100% or the EUR 100 or EUR 200 example. And I think with the EUR 5 billion and the dividend of EUR 4.30, you see the commitment to continue in that direction.

Jose?

Jose from JPMorgan. A couple of questions. I was very impressed with the China margin. So would love to hear a little bit more around the material cost and the fixed cost initiatives in the region to sustain the margin in the double-digit level. Is there also maybe tactically an option to maybe take down some of the capacity in the region. I think you mentioned on the slides, optionality. So how do we think about that maybe in '25 and '26? And then second, on the sale of the Daimler Truck stake, do you have any KPIs, any margins you would like to see? Any elements you would like to see from Daimler Truck to maybe judge a little bit better the timing of the sale.

Yes. Thanks, Jose. Maybe very quickly on the DT stake. I think we said everything which has to be said on the subject matter. So we intend to -- we would consider, I mean, monetization in the doses in the way I described it before, and do that in a market-friendly manner. But I think any other indication, I think we know -- I mean let's see as we go along. We have 2 years as part of the SPB program as obviously, that is going hand-in-hand. So nothing to be added, I think, in this respect. On the China margin, and first, I mean, let me say yes, 15% is a good departure point, but it's a competitive environment. You saw all of the initiatives to protect that moving forward. I would say if we're able to retain the BBAC at a healthy margin level in the super competitive environment with having the right products in the market, adjusting the cost base down, grabbing into the opportunities also for more local sourcing. This is the fitness check which then I think makes, I mean, BBAC super robust and maybe it's even an opportunity, I mean to take some of that opportunities over to rest of world. And I would also say maybe I'm talking about BBAC 15% here today, 2024. This is BBAC result only. I think you all know by heart that we're doing supply business, which has a decent margin. And there are other profit pools, I mean on top of it. So the entirety, I think, is good. and demonstrated in a super competitive environment, 2024, that it is resilient, and we will make it even more resilient moving forward. Jointly with a partner, jointly with [ Bike ], absolutely determined also, I think, pretty clear is they have a joint interest with us to make BBAC successful in the future in terms of its products, but also in terms of its bottom line.

But maybe also to add partnerships. I mean we were proving with our 4-cylinder engine to have a local development of components there with local specification with local partners could take us to cost levels that we have not seen before. So follow the source was the typical approach in the -- actually in the present, but doing more localization with local partners there. This is the key focus right now of the R&D and procurement team in China and elaborating on further partnerships also when it comes to components.

Henning?

Yes. First one, perhaps for Harald to come back to the pricing. I appreciate you don't want to give us price points for '26, but I just wanted to check with you if you agree that -- well, I think we gave a very reasonable guide overall, right, for 2025? Would you agree that within that pricing is perhaps the most volatile or uncertain assumption and indeed, whether it's stable or not stable, could make the difference between the 8% and the 6%. Would you agree with that? And I think in previous calls, you've gone through the elements of pricing, list price discounts, dealer compensation, residual values. If you could touch on that and how you see that the stability element. And the second question is also a little bit geared to the 2027 and maybe to bring in Markus again. On the slide, you had the 30% xEV penetration. If we assume the increment comes from BEVs is double of what it is today. How do we think about that in terms of margin parity? Because if you double the EVs, you go to 20% EV alone, while you have the 10% margin ambition, does that necessitate getting close to parity? Is that an assumption that's baked in?

Yes. On the pricing, I think it's fair to say, as you do, that probably is one of the most volatile assumptions in any outlook at this juncture. We have a determination to be disciplined in this respect, but we are not the only one in town, right? So it also depends obviously what's happening in other places by other people. So we do consider, I mean, some volatility in any outlook, obviously. But I mean, considering either a massive step-up or a massive step down, where do you put the line? So -- but I mean the backbone is disciplined approach and product, product, product is at the end. I think the product makes a pricing and nothing else. On the margin side or -- basically, we're bringing the cost of the EV down by more than 15%. We do not assume price premium on the EV over the ICE. That means that we can narrow the gap, but I say it also loud and clear, any statement that you can close the gap, we find that a difficult statement and we don't want to promise things we cannot do. So all of the effort is on getting the right products out and getting the cost down by more than 15%, the variable cost of the product, thereby the margin gap will narrow and the higher for longer ICE obviously builds a nice bridge to absorb that moving forward.

Stephen, yes?

Could I ask about the CLA again? First of all, maybe a simpler one. You talked -- you're saying the public introduction of the vehicle will be in a month's time. Are you going to open the order book at that time as well? And when will the first customer deliveries start for this vehicle? And if you give maybe by geography as well? And secondly, you mentioned about that you understand that BEVs cannot command a premium to their ICE vehicles. When this vehicle was first introduced to us, I think we saw this in May 2022. I think the thinking afterwards was that it would have a -- with all the technologies would command a premium. Now you've mentioned the 15% reduction in BEV costs that are coming in with this, but that would have probably been baked in already into some of your thinking. So could you describe some of the other steps you've taken to bring the cost of this vehicle down in order to reach the sort of the new realities of how you can price this in today's market.

So I'll start with the timing. We will have what we call the -- we are following our normal procedure here. We'll have what we call the World Premiere in about 4 weeks' time, which will be at a big event in Europe, invite the world to look at the car. Then we take the camouflage off, we show all the details of the technology. We have teased a lot of the things today. Then usually, some weeks after that, we have what we call a sales release. So that happens later in the spring on the way towards early summer, then you can actually go in and order. We start in Europe first. The production of this vehicle starts in our plant here in Rastatt. Then we kick off production in the fall in China. We usually have this gap 4, 5, 6 months roughly historically. And we also start production in the summer then late summer for the United States, but then we have the shipping. So China and the United States then come in the Fall, and it's kind of then the rest of the world. So that's how it's going to unfold.

On the margin side, let's not confuse things, please. So let me clarify. So when you say we do not assume price premium of an EV over an ICE product, it means this EV product should have roughly similar pricing than the respective combustion ICE sibling of that product, right? When we say the margin gap between -- or the margin improvement with a 15% cost down we're doing, we're comparing with predecessor product. So which means if you compare -- we don't have predecessor GLAs, but let me take a GLA. So a future GLA electric be compared with an EQA today will have a definitely better margin, thanks to the cost work we're talking about. So please let's separate the 2.

And maybe one thing to mention. I think Markus actually mentioned it. Markus and his team have done a sensational job on the combustion one. So on the combustion side, our powertrain, I would say, by our standards, cost-wise is very competitive.

Okay. Anthony, over to you.

Yes. Three questions on my side. The first is on CO2 compliance. So thanks for providing the kind of indication of the impact on the cars business. On the Vans business, could you just remind us what would be the impact? I just noted it would be higher. And then could you also break down a little bit how that splits between potential mix dilution and also any kind of costs that you would pay out to your pooling partner? And then lastly, on the -- on this kind of topic, if we were to get some relief on the regulation front from the EU maybe in a couple of weeks, how would that impact your estimate for this compliance cost in 2025? Then my second question is on China. Just wondering how, considering what we're seeing the very high levels of price discounting in that market, how you're balancing value and volume. Are you targeting a specific market share or defending our market share in China? And then the last question is on investments. Could you maybe talk us a bit about ICE investments for the year to come, again, considering that the lifetime basically of the ICE has likely been extended with what we've seen in the market over the last couple of months and years?

Maybe quickly, I get started on the CO2, and you pick up on the regulatory and maybe the partner framework. And I mentioned that, the number on the car side is a low 3-digit number in the walk from '24 to '25. Maybe let me do it, I mean, the following way. It's a very low 3-digit number, which sits in there. And the absolute number which sits in the Van bridge year-over-year is maybe a bit less than double of that amount, which sits on the car side for the reasons Ola explained before. given the higher CO2 footprint, obviously, off of a Van vehicle compared to a passenger car vehicle. I hope that it explains, number one on the car side. But number two, that actually also the work on the margin from 2024 to 2025, a quite significant chunk of the margin deterioration or dilution still holding at a nice 10% to 12%, however, is coming from that CO2 impact in 2025.

On the regulatory side, at the kickoff dialogue, the so-called strategic automotive industry dialogue at the end of January, pretty much every single industry representative at that meeting. And certainly, the auto industry association that I happened to lead this year as well as the supplier association said loud and clear 5 or 6 years ago when the targets were set, certain assumptions were made. It's very clear that in terms of natural demand in the market, proliferation of charging infrastructure, et cetera, some of those assumptions have not come to fruition. So it is wholly reasonable from a regulatory point of view to review this and think about some relief especially in the context of what's going on in the global economics. So you have 2 other strong economic regions, North America, United States, North America and China, they're not taking money away from the auto industry, actually doing the other thing around. They are putting money into the auto industry. Is it the most rational thing for Europe right now to rigidly stick to that or have some flexibility and pragmatism in mind? That's what we're advocating for. Whether or not the EU Commission will decide to change 2025, that is unknown. So I don't think it would be serious to put a number to it. We have just said it is a sensible thing to do. If they do it, though, the way we have structured our agreements is we can flex. So indeed, if they create relief, we would have some relief, and we'll see what happens. Maybe on the market share for every single car, you look at your relative market share, you look at your relative pricing. It should come as no surprise as we have done the same calculation for this car in China. So we have a hypothesis. But you said it, Harald. We're not alone in the market, and the market is a dynamic place. You have to be able to calibrate that in your mind as you get closer to market introduction. But of course, we have a hypothesis. We're not going to name individual volume targets on individual vehicles here, we never have, but that is in place. And it's a balanced approach, value over volume is our general philosophy, but it's not no volume. So it is also volume in a market that we have discussed is highly competitive.

And the investment profile, I think we touched base on that one. Clearly, what you saw in product portfolio and on component evolution serves the ICE portfolio very well far into the and the investments needed for that on vehicle side, on component side, on software side, are embedded in the investment plan we laid out here today. How can it work, however, then with an investment coming down. You heard, I mean, the streamlining of the drivetrain components on the ICE side and I think largely accomplished is they meet EU 7 targets, so I mean you need to be there anyhow. So the investments are largely behind us. And so we can really leverage that, I mean, well into the future and many other components, not ICE related, but EV and ICE, [ CMBS ], I think, is the most prominent example, obviously can be leveraged. So what's left, so to say, on a pure ICE platform is not nothing, but obviously a much lower effort which is needed to get the competitive products into the well, the 30s. And all of that is embedded in the investment plan.

Okay. I see some red flashes on the screen. So I think we're running out of time. For everyone in the room, thank you so much for asking your questions. Of course, thank you to you also for answering all of the questions and for everyone joining us online. We will now take a quick break and take a few minutes until the media Q&A will continue.