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

[Audio Gap] call of Mercedes Benz. At the request of our customers, this conference call will be recorded. A replay of the call will be available as an on-demand audio webcast in the Investor Relations section of the Mercedes-Benz website. The short introduction will be followed directly by a Q&A session. [Operator Instructions] I would like to remind you that this teleconference is governed by the safe harbor wording included in our published results documents. Please note that our presentation contains forward-looking statements which reflect management's current views with respect to future events. Such statements are subject to various risks and uncertainties. If any of the assumptions underlying these statements prove to be incorrect, actual results may differ materially from those expressed or implied. Forward-looking statements speak only to the date on which they are made. With that, I would now like to hand over to Christina Schenck, Head of Mercedes-Benz Investor Relations, Digital and Communications. Thank you very much.

Good morning, ladies and gentlemen. This is Christina speaking. On behalf of Mercedes-Benz, I would like to welcome you both on the telephone and online to our Q2 results conference call. I'm very pleased to have with me today Ola Kallenius, our CEO; and Harald Willem, our CFO. To allow more time for your questions, Ola will give a brief introduction and Harald will walk you through our financials. We will then move directly into our Q&A session. The corresponding presentation is available on the Mercedes-Benz Investor Relations website and can also be accessed via the webcast in the web interface. And with that, I will now hand over to Ola.

Thank you, Christina, and good morning, everybody. Welcome. We delivered solid results in the second quarter in spite of a dynamic business environment for macro and geopolitical headwinds to softer consumer sentiment and intense competition in China. You can see this reflected in the financial results. Nevertheless, we remained on track in the first half of the year. And I think all in all, we have shown the ability to adapt, execute and succeed as a team. We will definitely carry this mindset into the second half of the year. Let's have a quick look at what happened in Q2. Our product and technology launch program is gaining momentum. The latest premieres that we have shown to the world was the AMG GT 4-door Coupe as well as the GLS Maybach. We have started the sales of the C-class battery electric vehicle, the GLE, one-of-a-kind VLE and also that AMG GT has now also started sales. And if we look at the feedback and response so far, very positive, not only from product media experts, dealers, but primarily in the community and amongst Mercedes fans. And if you read test results from comparison test on products, most of those in the established product media are won by Mercedes. And we want to seize also next to our automotive business some opportunities in the defense sector. If you look at the technology that is underpinning this launch offensive, I want to highlight 3 things. To start with on the powertrain side, we have now started the production of the new axial flux motor that really redefines BEV performance. It is a USP that no other manufacturer in the world possesses. We're also the ones that ventured out developing a -- from the ground up brand new V8 -- high-tech electrified V8 EU 7 ready that will take that technology to the next level. So on the Powertrain side, we're well positioned for both BEV growth and maintain our strong position on ICE. MBOS is coming to fruition. The beauty of MBOS, it is a platform. We can roll it out in all our vehicles. Not just on the BEV side, I think that's what people expect -- but I believe that the new S class that we have also just brought into the market is the first fully software-defined vehicle on the high-tech eye side. So MBS will be in every single Mercedes going forward. One highlight of that MBS is ADAS. We already last year introduced our AI-based point-to-point assisted driving in China. We then continued with the U.S. and are rolling out step by step in the U.S. And we believe that by the end of this year, beginning of next year, we can bring this point-to-point technology also within the new European legislation. So here, in terms of a global play on ADAS, we are at the forefront of what's happening on the technological side. If we switch to the industrial side, at the same time, we're strengthening our resilience and our competitiveness. We have launched a global productivity initiative with a special focus on Germany. We want to significantly speed up processes, streamlined structures and improve the competitive cost position. One good example of that is the opening of our expanded plant in Kecskemet in Hungary, which we did only a couple of weeks ago, doubling the capacity of that plant. And that allows us to shift products to this attractive site, new electric C class, new electric GLC and also the upcoming compact G. It is our goal to make the production network more resilient, efficient and competitive. Moving over to the numbers for the group, revenue slightly below last year at EUR 32 billion and an EBIT as booked, and Harald will get into the financials in more detail here in a minute -- at EUR 1.5 billion, which is 22% above last year. I want to highlight that in spite of the dynamic challenging environment that I described, we generated EUR 1.1 billion in free cash flow, which is a combination of the operating activities as well as M&A. And in spite of giving shareholders EUR 5 billion in return as a combination of dividend and share buybacks, the net industrial liquidity is still sitting at a healthy EUR 30 billion. If we drill down a little bit on the sales side, I think it's a tale of 2 worlds. On the one hand, we saw the Chinese market as a whole, dropped by about 20%, which is, of course, a significant reset in the world's biggest market. This affected us. So in China, we had a significant reduction of our sales in the period. But we could in the first half of the year in all markets without China increase our sales by 2%, which certainly wasn't given, considering the business environment and in relative terms, I think we're doing well there. You can see a clear sign here in these numbers of the second-generation battery electric vehicles which were up 51%, driven by Europe, up 87%. And we have an extremely strong order intake, particularly in Europe on this side. and are looking forward to ramping those BEVs in the second half of the year. And with that, I'm going to hand over to Harald, who will dig deeper into the financials. Over to you, Harald.

Thank you, Ola, and hello, everybody. So let's continue now with the core financials or I explained to sales already before. The revenue developed slightly better than the sales that was supported by growth outside China. On the ASP, we see a lower than prior year quarter. That's driven by net pricing and unfavorable return on sales adjusted at 4%, and we'll go into that in more detail on the next page on the EBIT bridge. In the quarter 2, cars delivered an adjusted EBIT of around EUR 900 million and an adjusted return on sales of 4% within our full year guidance range of 3% to 5%. Globally, the volume effect was fairly neutral and the main headwinds within the top line bucket were the following: in order of magnitude, net pricing, higher costs for product life cycle measures, lower part supplies to our joint venture in China. So basically, you can see that the majority of the items are related to the development in China in the second quarter. On the other side, you can see on the chart very well, the industrial performance was clearly positive as we continue to see operational efficiencies in purchasing and manufacturing, while raw mats were fairly neutral. The selling expenses reflect effects from the rollout of our direct sales model in Korea, as well as campaigns in line with our ongoing product launches. The R&D contributed positively following our funding peak in 2025. The other bucket includes a risk provision related to shareholder commitments and a lower BBAC at equity result. And on the sizable adjustments on the page here, they mainly reflect valuation adjustments related to our investments in China in line with the market development we could observe in the second quarter. The remainder of the adjustment refers to the update on legal restructuring and M&A transactions. Looking at the cash flow. Following a strong quarter 1, Cars achieved an adjusted sit of EUR 0.5 billion. Net working capital was a headwind. That was a result of heavier inventory as we're equipping our sales network with recently launched products such as the S-Class. So it's basically the structure within the inventory, which went up. On the other side, payables benefited from the production ramp-up of the new products. Investments and depreciations are rather balanced and then on the other bucket, you can see that besides the BBAC dividend, the other bucket includes the reversal of the BBAC at equity result and the valuation adjustments I just mentioned before, as well as cash-out for bonus payments. Looking on the Van side. Sales developed mean rather stable at around 94,000 units. The overall market environment remained competitive and volatile in quarter 2 with continued softer consumer demand for midsize vans in China. These headwinds were largely offset by strong sales development across our core regions with a healthy growth in Europe and a strong momentum in North America, particularly the U.S. Events remained a key growth factor, up 46% year-on-year, lifting the global XEV share to 11%. Revenue are slightly up at EUR 4.5 billion. EBIT adjusted stands at around EUR 450 million. We go into that as well in the bridge on the next page. On the cash flow side, we see the adjusted cash flow developed in line with our expectation and continues to reflect our planned investments into the new Van architecture. As anticipated, investments are expected to peak this year strategically preparing the business for the future. With this, we are currently executing the largest product investment program in the history of our Vans business. A key milestone in that respect, there was a start of series production of the all new electric VLE in Victoria in June. The VLE is now available for order in selected markets and marks the beginning of a new generation of vans. Looking ahead, we will further expand the lineup with the VLS and the VLS Maybach along a broad range of private and commercial derivatives built on this highly flexible architecture. Now coming to the EBIT bridge for Vans. So the EBITDA adjusted at EUR 450 million, once again, a benchmark double-digit return on sales of 10.2%. Let me guide you briefly through the buckets. So the volume structure pricing is a function of higher ex China sales, the positive contribution from after sales as well as positive effects from the leasing portfolio. That was partially offset by a lighter product mix driven by the end of life cycle sales for Citan and T-Class as well as a strong eSprinter sales in the lower V-class volumes. In the bucket, we also have a softer net pricing on the industrial performance we can see ramp-up costs for the new van, architecture and product-related measures. Positive effects come from R&D driven by further efficiencies and optimize spending for our existing model range. Looking at Financial Services. First, I would like to say the new setup with one integrated customer unit on the sales side has been in place since the beginning of the year and is proving to work really well. As a result, we saw new business flat year-on-year as the higher penetration rate offset lower car sales. The portfolio remained rather stable. Profit-wise, MBFS delivered a strong result with adjusted EBIT increasing 70% to close to EUR 500 million and adjusted return on sales of 15.3%. This was driven by a continued positive development in the portfolio margin, lower cost of credit risk supported by a stronger portfolio quality and further efficiency gains on the integrated setup and our personal cost program. If we look now on the group side, let's bring the divisional results and the group together in terms of the group EBIT. So Cars, Vans, Financial Services, I explained already before. So what's inside the recon, that's positively driven by the Daimler Truck at equity gains and positive effects from the first disposals, which we did in quarter 2. This results in a solid EBIT adjusted of EUR 2.3 billion. And then we had some major adjustments in the second quarter. I mentioned already the valuation adjustments related to our China investments. On top of that, we had further adjustments for some restructuring charges associated with our personnel cost reduction program as well as legal proceedings. As well on the M&A side, we had some adjustments mainly related to the sale of our own operations in Germany and Athlon following its reclassification as asset held for sale and that makes the group EBIT at EUR 1.5 billion reported. Looking on the cash flow, Cars & Vans, we're explained already before income taxes at EUR 170 million. Interest contribution, EUR 350 million. So the other recon is positive, and that mainly reflects the first monetization of Daimler Trucks stake contributing EUR 417 million as well as the Daimler Truck TV of EUR 338 million after tax. And with that, we have a free cash flow at a solid EUR 1.1 billion in that quarter. Looking at the balance sheet. Overall, I mean, solid cash generation in the first half of EUR 3 billion. Following the AGM in April, we paid the divi of EUR 3.3 billion. In June, we completed the share buyback with approximately EUR 1.7 billion in H1, there of 1.3% in the second quarter. And with that, the total cash return to shareholders sits at EUR 5 billion for H1 and even after that, the n is healthy at EUR 30 billion. Now looking forward, we started with the divisional guidances for 2026. Please refer to the disclaimer regarding forward-looking statements at the end of this presentation in relation to the outlook. The conflict in the Middle East continues to add uncertainty to an already highly uncertain global economic and automotive market environment. With respect to potential impacts on material, raw material and energy prices, inflation and market demand. The outlook assumes that the conflict will not fully reescalate in the second half of the year. Assumptions are based on today's regulatory framework regarding tariffs. Now on the cars outlook. First, on the sales guidance for 2026, we'll retain our constructive view with targeted growth ex China. Our product launch program is progressing well, with most of the order intake realized in Europe so far. We continue to expect further momentum as production of our new model ramp-ups and additional markets are launched. While we took a cautious view on China at the beginning of the year, market conditions have proved more challenging than expected. Despite the year-on-year growth ex China in the first half, total sales declined by 7%, including China. As a result, we are lowering our sales guidance and now expect full year 2026 sales to be slightly below 2025 levels. Reflecting the strong momentum of our BEV portfolio, we are raising our full year XEV share guidance to 23% to 25%. On the profitability side, in H1, Cars achieved an adjusted return on sales of 4%. For H2, we continue to expect further benefits, so tailwinds coming from product momentum, lower product-related expenses. On the downside, so in terms of headwinds, we expect cost increases such as energy and freight, increasing cost pressures from raw materials, and cost seasonality, such as fixed cost capitalization and higher depreciation following the numerous product launches. In addition, the higher than previously expected, I mean, that share pays some toll, but that's included in what I said, I mean, above as well as some normalization of the tariffs in H2 versus H1. With this, we confirm our full year adjusted return on sales guidance of 3% to 5%, while expecting to be in the lower half of the range for the full year. PPE, R&D and CCR remain unchanged. Now on the Vans division. Sales guidance is unchanged. As usual, we see a stronger H2 versus H1 xEV share unchanged. In terms of profitability in H1, Vans achieved a healthy 10.1% double-digit return on sales adjusted at the upper end of the guidance range. For H2, we see the following effects compared to H1, positive effects from higher volume and a better mix higher costs. However, due to the ramp-up of the new BLE and factories and also headwinds from the raw materials. With this, we see H1 below H2 below H1. For the full year, we continue to see the return on sales adjusted between 8% to 10%, no change to PPE, R&D and CCR. On the Financial Services side, we had an adjusted return on equity of 14.4% in H1, mainly driven by higher portfolio margin. We see some headwinds in H2, mainly through the volatile geo and macro environment, reflecting in a potentially higher cost of credit risk based on the strong H1, we are, however, raising our full year guidance now to 12% to 14%. And with that, I turn to the group guidance that obviously follows the same premises as a segment guidance. Following the adjustments on the divisional guidance, we now see revenue slightly below previous year due to softer sales developments at Cars. We continue to see group EBIT significantly above the previous year. Looking at the cash flow side, we confirm the free cash flow in Industrial guidance and continue to see the full year slightly below prior year. This -- let me give you a bit more color on that. This includes for the H1 cash flow of EUR 3 billion after restructuring cash outs of EUR 1.1 million. And the outlook includes for the H2, some M&A next to the organic cash flow. Let me give a bit more color on the M&A side. In July, we materialized already another EUR 600 million from divestments of Daimler Truck shares. In the guidance, we do not include any further potential truck disposals. In addition, however, we intend to close the Athlon transaction in H2 which is technically not included in the free cash flow industrial, but will have a positive impact on net cash and on the basis of capital allocation. And on that back, on the back of that cash generation, which has been achieved in H1 and which is expected in H2, we continue our share buyback activity of up to EUR 1 billion to be completed prior to the AGM 2027. And with this, I hand back to you, Ola.

Thank you, Harald. As you can see, we're navigating through a challenging business environment with discipline and a clear plan. We will retain our realistic view of the challenges and opportunities ahead, and we will maintain this approach. At the same time, we're preparing for a successful future. Our focus is on 2 priorities: product and tech plan, and our performance. We believe that strong product is the best answer in any market environment. And that's why we continue to build on our strong momentum. Next up is the premier of the new GLA tomorrow and in the fall, we will unveil our electric AMG SUV. Our focus is on ensuring smooth ramp-ups and successful market introductions worldwide. For example, our S class, the GLE and GLS will be available worldwide by the end of this year. All the new products will carry the next generation of Mercedes technology, and there's much more to come. So please stay tuned. We remain confident in the strength of our product pipeline. The full impact will unfold beyond 2026, and we want to capitalize on this great potential. And at the same time, we're fully committed to optimizing our productivity resilience and competitiveness. We have taken important steps over the past years with tangible effects. Now we're launching a productivity initiative, particularly the Ford Germany. We must continue to work flat out to reduce cost so that we can remain competitive on the prices of our products. Our plans for our global footprints are equally ambitious. In Europe, we will continue to ramp up our Kecskemet plant and China. We're taking on competition with tailored models and deeper localization. And in the U.S., over time, we're expanding local production and strengthening partnerships. Our direction is clear, outstanding products strong performance and disciplined execution. The Mercedes team is fully committed to keeping the pace high. Thank you.

Thank you, Ola. Ladies and gentlemen, we will now move on to our Q&A session. Before asking your question, please also state your name and the organization you represent. A few practical points, as usual, please ask your question in English. And for reasons of fairness, please limit yourselves to a maximum of 2 questions. Before we begin, the operator will now briefly explain the procedure once again.

[Operator Instructions]

Thank you. We will start the Q&A. And our first question goes to Philippe Houchois from Jefferies.

Two questions -- if I ask to possible. The first one, you've taken a charge on the China valuation. Does it mean there's -- is the cost done? Or is the measures -- the actual measure of downsizing or reducing capacity, et cetera, already done in the China operations is my first question. And the second one, maybe more strategically, you're clearly rebalancing your footprint more globally. What's missing in North America is more content. At one point, does it make sense to actually localize engines in North America to try to be SMC compliance? Or is that too much of a restructuring or change in the organization of the group?

Thanks, Philippe. Maybe I take the first one on the charges related to the China ventures. Well, I mean, that these charges, I mean, are a function of obviously an impairment testing. I mean, we have to do it each and every quarter. basically, that takes into account all elements within the scope of the various joint ventures, which we have, which is obviously market development, cost development, so it includes, I mean, basically forward-looking perspective. And given the market dynamics, which we could see on the basis of the scope of the joint venture and the existing terms. These adjustments had to be recorded. So it indicates a lower profit contribution of these joint ventures in the future compared to the assumptions and the visibility and the perspective we had on these ventures so far.

With regard to localization in the United States, the option of localizing engines as well in the United States, it's not something that we have decided at this point. It's certainly something that we will look at when we also see how USMCA roles develop. We always have to weigh, of course, the scale effects of the investments that you have already made versus the benefits of going local on any one component and that goes for engines as well. So no decision made at this time and we will see how things unfold.

Thanks, Philippe. I'll move on to the next question, and this one goes to Tim Rokossa from Deutsche Bank.

I have 2 questions as well. The first one also goes to the China impairment in the market is perhaps both of you, actually. I gathered from your previous answer, Harald, that you probably don't want to give us much more details, but I try anyway, is this really like a reset for the strategic ambition in the Chinese market? Or is this just something that, I mean, with this market development, it's pretty clear that it did go in line with your expectations. That was just something that you just had to do at this point. It doesn't really strategically change anything. And is there any way that this can become cash relevant, Harald, it's an equity, so I assume not, but just to ask for that for the group, obviously, in the statement. And Ola related to that, your current view on China, will this come back? Are there more drastic actions needed? What are you discussing with [indiscernible] you just recently sent there basically with this very difficult task. Second question on the DTG placement and cash return. Great to see that you continue to cash return. I think that's very much appreciated. Harald, do you intend to do this through what we've seen so far, i.e., smaller sales in the actually pretty big sales as you just said in July through the market. No big ABB rather opportunistically at any given point in time? And should we see the EUR 1 billion as a maximum? Or is this just a commitment to your continuation, which once again is very much appreciated.

Thanks. Maybe I take, I mean, the DT first, and then we come back to the China-related questions. So on the DT stake, yes, I think we had a pretty good run by tripling in quarter 2 in actually April and June to be a bit more precise. And most recently, I mean, in July. And so even if you didn't see the one transaction from an ABB that is a sizable amount of EUR 1 billion divestment materialized. So I would say at this juncture, given also the favorable evolution on the DT side, which you could see recently, assuming that is going to hold for later in the year, I think I would not exclude the distinct possibility that we would continue but we definitely reserve all options in terms of how we're going to do that. I mean, is that wire dribbling or why is it ABB Market conditions will tell such as also competitive environment when it comes to discounting. So you see we take benefit of the full tool set. Maybe I respond shortly on the more technical side of the China situation and Ola, you want to take the more strategic side of things. I think definitely, these adjustments are not a function of change of strategy. They are just a function of the commercial environment, as I just pointed out before, which we have to recognize and taking into account all elements. And that is a noncash charge. I mean that is very clear. But I cannot exclude saying that obviously, it also demonstrates that there is a lower profit contribution expected from these ventures in China compared to the assumptions we took before. I would also like to emphasize, however, that these adjustments are not representative of the entire profit pool we are having in China, and over to you for the strategic dimension.

Tim, we remain strategically fully committed to China. Everybody can see the intensity of the competition there at the moment. as well as the domestic market development. But it is and remains the biggest car market in the world. It is an ecosystem that you need to be in -- and China is not just a game in China for China. China is also going into the world. So if you want to be a global player, you got to be in that space. How do you do it? Tech products, localization, partnerships, of course, adjusting your cost structures to the market environment and what's going on there? And making sure that you find those places in the market to compete that are most beneficial to you. And we're committed to all of those. We have strengthened our partnerships in China, especially on the tech side. We work very well together with our joint venture partner and make decisions together on how to tackle this. And we have also strengthened our R&D footprint in China, which works hand-in-hand with mission control over here in Germany. So you got to take the long view on China, not just focus on today or tomorrow. Maybe it's also the day after tomorrow that you have to have in mind. We have the strength and resilience as a company to see through this phase. So that is why China very much remains one of the strategic pillars of our play. And the rest, Harald answered.

I will move on to the next question, and that goes to Jose Asumendi from JPMorgan.

Two questions, please. Ola, can you comment please on the task to improve the profitability at the German plant? And which big actions are you considering in Germany, which ones have you already announced or you are in discussions as with the unions. If you could give us some insights? And then also, other do you plan to leverage the cost efficiency of the plant in Hungary. And then second for Harald, can you comment a little bit more with regards to the profitability for Mercedes Benz cars in the second half a little bit the seasonality second versus the first half and some of the positives and negatives revolving the profitability in H2.

Yes. Good morning, Jose. If we look at the expansion in Hungary, what does it allow us to do by weighting more of our overall European volume in a more cost attractive production setup, of course, lowers that weighted average of our production cost for the whole portfolio. So this is not something that we have just started now. Of course, we have worked in Eastern Europe for many years. Hungary is a prominent example where powertrain activities in Romania. And as you know, we're in the process right now of converting one of our ICE power plants in Poland to a future production site for our vans. So it is a strategic imperative to take the production cost down and we need to use these cost attractive locations to get that weighted average further down. But we cannot leave Germany alone. That is why we started an initiative some weeks ago that we call productivity initiative for Germany, comma, it starts with us. We chose that title consciously because we believe that Germany as an economy to improve its competitiveness as a whole. We have unbelievable strengths in terms of our ingenuity innovation power engineers and the people working in our factories. But if you look at the net working hours vis-a-vis the cost I think it was one of the politicians that said the costs are now starting to become higher than we're better. And if you're in that position, you absolutely have to tackle your relative cost position. You're not going to turn Germany into Eastern Germany -- to Eastern Europe and certainly not into China. But compared to ourselves, we can make a step forward. This is happening on 3 levels. What we can do inside Mercedes that we're doing anyway. I commented on it in my presentation, streamlining processes doubling down on efficiency measures and looking at every single bit of the operations and making it more both effective and efficient. But there is also a general union and political level to this where we have announced that we think it's time for Germany to rethink some of its positions, whether it's working time or other things. We are in negotiations with the appropriate people on this. The outcome, we cannot know at this stage. But we're fully committed to pushing hard and making sure that we all in Germany, realized that the global competition has become tougher, especially in light of the Chinese and the Chinese going global. And we're hopeful, but not certain that those parties on the other side will pick up on that in the negotiations.

On the H2 profitability, let me give you a bit more color, maybe in detail. clearly, on the volume structure pricing side, we see a tailwind in H2 as a function of the new models coming into the markets. it's more centered on the fourth quarter than the third quarter, I would say. So that is, I think, clearly, not only the expectation, but that's supported also by a lot of the market demand, as we can see in the order intake for the new vehicles. So that is basically, I mean, on the tailwind side, then in terms of what is on the headwind side, the parts by parts business with all of the elements attached and associated to it. So the supply of parts as well as the equity result coming from the GV, that is a headwind in the second half compared to H1. We further have a bit of normalization of the tariffs. As in the quarter 1, we had the AEP refund included. Number 4 is definitely raw materials, which we see as a headwind in the second half of the year as well as higher level depreciation following the start of production of numerous new models. And we're trying to mitigate that by stepping up the efficiency in the second half of the year even over and above, I mean what we could accomplish in H1, as you could see in the bridge on the quarter 2 that was not maybe too bad. But clearly, I mean, we have the ambition to go on the extra mile. And with that, we target to bring H2 which allows to stay within the guidance corridor of 3% to 5%, but H2 is expected to be below H1 and that is on the back of what I said. I mean it should be in the lower half on the full year in terms of loss adjusted for cars. I hope that helps.

I will move on to the next question, and it goes to Christian Frenes from Goldman Sachs.

Hello, everyone. Can you hear me?