Mercedes-Benz Group AG

XETRA:MBG

Q3-2025 Earnings Call

[Operator]

Welcome to the global conference call of Mercedes-Benz. At our customers' request, this conference will be recorded. The replay of the conference call will also be available as an on-demand audio webcast in the Investor Relations section of the 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 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 Christina Schenck, Head of Mercedes-Benz Investor Relations, Digital and Communications. Thank you very much.

[Christina Schenck, executive]

Good morning, ladies and gentlemen. This is Christina Schenck speaking. On behalf of Mercedes-Benz, I would like to welcome you both on the telephone and the Internet to our Q3 results conference call. I'm very happy to have with me today Ola Kallenius, our CEO; and Harald Wilhelm, our CFO. To give you more time for your questions, Ola will provide a brief introduction, followed by Harald, who will detail our financials as usual. After that, we will move directly into the Q&A session. The respective presentation can be found on the Mercedes-Benz IR website.

Before Ola kicks off his presentation, let's relive our IAA highlights 1 more time.

[Presentation]

[Ola Kallenius, executive]

Welcome, everybody. This morning, we published our third quarter results. And I guess you've already skimmed through the numbers. So we'll be happy to give you a little context now. We're managing, as you know, a highly dynamic business environment from tariffs and political disruptions to intense competition in China and to heterogeneous BEV adoption around the world. And as you can see in our results, we're navigating through it with prudence and a plan.

From the beginning of the year, we took a realistic view about the challenges and opportunities ahead, and we will maintain this approach. So our first message is this, Q3 is in line with our 2025 guidance. All Q3 key performance indicators match full year expectations. Yes, the current challenges need a lot of management attention. And while we're a 100% focused preparing for the future, we will most definitely take our long-term goals into account. And the best answer in any market environment is customer orientation and product substance. And recently, we made a lot of progress.

With the CLA, we kicked off our biggest ever product launch program. The CLA is elevating its segment. It's our first software-defined car and the first Mercedes to run on MBOS and its efficiency is unparalleled. That's not just what I'm saying. Maybe you saw it a couple of days ago, one of Germany's most renowned car magazines basically wrote, it's the best car we have ever tested. And I mean, they've been evaluating cars for almost 80 years, and the CLA has just raised the bar.

We now see this great feedback translating into customer orders. The CLA is gaining traction in the European market, and we're just at the beginning of a global rollout.

We have also launched the new CLA Shooting Brake. It offers the same product substance as the CLA and adds even more room and its very popular model amongst fleet customers, important for Europe. Both these cars also now in the next weeks start production of the hybridized ICE version.

We met many of you guys in Munich in September. You saw the new electric GLC with your own eyes. It supports the new face of the Mercedes-Benz brand combining iconic Mercedes elements with the latest technology, and that car can be ordered as of today. I'm sure the new GLC is about to continue the success story of our best seller in the electric era. With the new VLE and VLS models, we're expanding and elevating our range of grand limousines. We began pre-series production of the VLE in the third quarter. The next steps will follow soon. I recently drove 1 of those prototypes, watch this space.

In that context, let me say a few things about our product strategy at this point. As announced, all added up, we plan to launch more than 40 new models by the end of 2027. And we want to spark desire wherever we choose to play. This includes a significant expansion in the top end segment over the next 2 years. That's where Mercedes comes from. That's what we do best. And that's also what fuels our financial firepower. So the focus on the top end segment remains a cornerstone of our strategy. In addition, the core segment is where most of our volume is. It's the backbone of our business. Here, we'll complete our offering across all powertrains BEV, plug-in hybrid and ICE. The electric GLC marks the start and the C class and more will follow. In the entry segment, you will witness a complete reskinning of our offering. Soon, the new CLA and CLA Shooting Brake will be followed by 2 SUVs. As you can see, we make sure to keep providing an accessible entry point into the world of Mercedes-Benz. This is particularly important for the European market. So we have this in mind.

All these new products will carry the next generation of exceptional Mercedes technologies. So we're keeping up the pace. In electric drives, we showcased a new dimension of performance with the concept AMG GT XX. The car has shattered a whole series of records. It traveled around the world in less than 8 days, covering over 40,000 kilometers. Some might say that was a nice PR stunt. But in reality, it was the most demanding test drive of all time because the very technology that made this possible is going into series production already next year. This includes axial flux motors and directly cooled batteries. Regarding software, we have entered the era of software-defined cars with MBOS. We'll roll out MBOS across our entire portfolio, BEV and ICE and see constant evolution, thanks to over-the-air updates. Our advancements in ADAS are elevating customer experience and increasing safety, will launch our point-to-point assisted driving system for urban traffic next week in China, so I'll call it Level 2++.

I'll be happy to talk a little bit more about our way forward in a minute. But first, Harald will guide you through the numbers and give you our financial outlook. Harald, please?

[Harald Wilhelm, executive]

Thank you, Ola, and hello, everybody. Let's continue with the group financials on the Page 6. Revenues are at EUR 32 billion due to lower sales volume. However, partially offset by a better structure. The EBIT adjusted sits at EUR 2.1 billion. Obviously, we'll dive into that a bit more in detail. If you look at the EBIT book, that's significantly lower due to 2 effects: the restructuring program, the NLP, as we call it, and the legal proceedings at [ NBM ], also more on that a bit later. EPS is at EUR 1.22. Also, we will give a bit more color on that in the section a bit later.

In the third quarter, you might have noticed that we had a healthy cash generation with EUR 1.4 billion in the quarter, yielding a total year-to-date of EUR 5.6 billion free cash flow and that brings us to a comfortable net industrial liquidity of EUR 32 billion by the end of the Q3.

Looking on the car sales, Page 7, in July, we expected H2 sales in the vicinity of H1 with Q3 slightly lower and Q4 slightly higher. And I would say this is exactly what happened for quarter 3, if you look at the 441,000 units sold. Overall, sales were influenced by the market environment in China and continued diligent stock management to mitigate U.S. tariffs and adjust the dealer inventory.

Also worthwhile to notice, I would say, top end actually increased year-over-year by 10%, driven by G-Class, S-Class, AMGs, and all in all, I mean, that leads to a higher tax share of 15.4% in the quarter. Also interesting to see in China, the top end sales increased by 13% year-over-year.

On the electrified vehicles, we could notice a 10% year-on-year increase, driven by our plug-ins. Sequentially, our best sales increased by 22% in the third quarter versus the second quarter driven by first deliveries of the electric CLA in Europe. Overall, we reached an xEV share of 22% in the quarter.

On the cars financial sales I just explained, revenue developed a bit better, thanks to a higher CBU share and top end share. The ASP remained stable. EBIT sits at an adjusted value of $1.1 billion. Cash conversion above 1. Let's look a bit more in detail on the Page 9 on the profit evolution.

In quarter 3, we achieved an EBIT adjusted of EUR 1.1 billion with a return on sales adjusted of EUR 4.8 billion, respectively, 6.3% ex tariffs. On an overall note, if you look on the chart, you'll see that through our work on cost levers, we were able to offset the impacts of a dynamic market environment, including tariffs, the situation in China, and effects from FX.

Let me guide you a bit more in detail through the bars on the chart, volume structure net pricing, what is inside lower unit sales that were nearly offset by a better structure due to a higher CBU and top end share, flat net pricing, lower contributions from China. And overall, the effects from tariffs, which amounted to roughly 150 bps in the quarter, slightly lower due to the stock management and lower U.S. group sales. The largest single part of the FX effect you see on the chart is Turkish lira, which we maintained pricing compensation. The remainder is driven by Korean won and Japanese yen. The industrial performance is meaningfully positive, driven by the material cost savings and efficiencies in our operations. Similarly, we achieved cost savings in the other cost categories, including reduced direct selling expenses and lower noncapitalized R&D cost. Altogether, these buckets contributed to over EUR 1 billion positively in 1 quarter.

Looking on the cash flow for cars. See a bit adjusted at EUR 1.5 billion. So we had some tailwind from the working capital, positive contribution coming from trade receivables due to lower part supplies to BBAC at higher inventories, but also higher payables which offset each other. The net investments in PPE equal almost a depreciation level. And on the others, we have the adjustment for the noncash effect of the NLP charges, not yet cashed out, dealer provisions and the reversal of the BBAC equity result.

Moving to the vans, Page 11. Sales are at 84,000 units due to a competitive market environment. In Europe, we see the competition in the fleet business continuing. At the same time, we could double the xEV share to 10%, thanks to improved availability of our events. In Europe, we achieved a best share of 14%. Revenues reached EUR 4 billion, driven by the sales development and unfavorable mix and a softer net pricing also impacting EBIT. More on that next page, and on the cash flow side, you see reduced stock levels, which had a tailwind in terms of working capital. However, that was more than offset by the investments into our new land architecture and the ramp-up of the respective PPE. With that, we ended with EUR 300 million of EBIT adjusted for vans.

Looking on the vans profitability evolution, Page 12. Volume structure net pricing, I already explained before. Additionally, we saw a lower aftersales business and an impact from provisions for achieving CO2 targets. On the cost side, vans benefited mainly from operational efficiencies, onetime valuation effects and lower SG&A costs, R&D and others are wash. That leaves us with EUR 412 million EBIT adjusted, EUR 10.2 million in a dynamic market environment, which is, I think, a good achievement.

Page 13 on the mobility. The penetration rate increased. The new business volume decreased versus previous year, mainly due to the development of the unit sales and the FX effects. Portfolio remained stable over the quarter. Quarter 3, EBIT adjusted is at EUR 313 million with a return on equity adjusted at 9.6%. The main drivers of the improvement versus previous year are positive development in the portfolio margin, continuously healthy acquisition margin, which are in line with our target returns. The improved cost position for SG&A expenses are also supporting the margin improvement. These positive effects were partially offset by higher cost of credit risk due to a softer global economic outlook.

In the U.K., the FCA recently published a draft redress scheme concerning Motor Finance Commission models. Based on this development, we provisioned a mid-3-digit million euro amount in the third quarter, driving the significantly lower EBIT booked at minus EUR 180 million. We are currently reviewing the FCA's consultation paper and are considering our response to the FCA.

Page 14 on the group EBIT, cars, vans mobility, I explained already. In the recon mainly you have the at equity result of Daimler Truck, EBIT adjusted is therefore at EUR 2.1 billion. The adjustments refer to the restructuring and the legal proceedings at [ NBM ] on the restructuring charges.

Let me give you a bit more color. Please refer to our NLP personnel cost program, cost reduction program. So we had an effect of roughly EUR 1.4 billion in the first 9 months of this year. As you can see that we were making good progress on this topic. Please expect also some further progress in the fourth quarter on the NLP program, however, lower than in quarter 2. Thereby, the group EBIT booked sits at EUR 750 million. The EPS is at EUR 1.22, which includes positive effects from revaluation of deferred taxes due to a lower corporate income tax in Germany starting in 2028.

If you look on the cash flow, we already talked about cars and vans, so you see cash taxes at minus EUR 300 million, significantly lower than in previous years. The rest, I would say, is a wash with that. We achieved a solid EUR 1.4 billion free cash flow with adjustments of EUR 200 million due to the first cash outs for the NLP program.

Page 16, comfortable, healthy net industrial liquidity at EUR 32 billion.

And obviously, that brings us to the Page 17, the stuff you, I think, eagerly expected, anticipated share buyback. You know we have that capital allocation framework in place. You know what it means. So we are, therefore, honoring our commitment to return free cash flow generated to shareholders. We stated earlier this year that we would initiate a new share buyback once we had better visibility on the cash generation. Now we generated EUR 5.6 million in cash in the first 9 months of the year. And we paid out at the same time EUR 4.1 billion of a divi. That means we have generated roughly EUR 1.5 billion year-to-date after the divi and we anticipate further positive cash flow for the remainder of the year. Therefore, we've decided to initiate a new share buyback program with a volume of up to EUR 2 billion plan to start next Monday, 3rd of November, and the program is expected to run for up to 12 months. As we said, we remain committed to our capital allocation framework, and we are pleased to be in a position to execute it now.

With that, I mean I would come to the outlook section, Page 18 on the divisional guidance. I mean first, and please consider the disclaimer regarding forward-looking statements at the end of this presentation in relation to the outlook. On the cars division on the sales guidance with 1.3 million units year-to-date, we continue to see 2025 significantly below 2024, mainly due to China. H2 sales are expected in vicinity of H1, with quarter 4 slightly higher than quarter 3. On the U.S. side, we see underlying customer demand higher in quarter 3 than in Q3 and continue to manage stock levels to target, Q4 group sales are expected slightly higher than quarter 3.

In Europe, we expect solid momentum in the fourth quarter. The customer order intake is on a healthy level, which takes us into 2026. And in China, the market environment remains challenging and the competition intense. Therefore, we expect quarter 4 in the similar ballpark as quarter 3.

On the global test share for the full year, we expect this to be well within the 14% to 15% range. Quarter 4 is expected in the ballpark of quarter 3. The xEV share is at 21% year-to-date. Therefore, we continue to see full year between 20% and 22%. On the return on sales, I mean, adjusted with 5.7%, including tariffs and 6.7% underlying year-to-date with a slightly higher volume in quarter 4, continued dynamic pricing environment, a stable mix, cost seasonality, including fixed cost capitalization as well as higher tariffs, we do confirm the guidance range of 4% to 6% and expect to be well within this range for the full year. With the cash conversion rate year-to-date now at 1.4. We raised our CCR guidance by 1 notch to a range of 0.9% to 1.1%, no change on PPE and R&D.

On the van side, sales usually come in higher in quarter 4, and this is expected to be the strongest sales quarter of the year with the sales development in line with earlier expectations. Consequently, we're keeping the sales and the xEV guidance as unchanged.

On the return on sales adjusted, in the first 9 months, we achieved a healthy 10.7% return on sales adjusted against the year-to-date run rate we expect for the fourth quarter a positive impact from higher volumes. Commercial dynamics to continue, headwinds from seasonality of material cost one-timers and the ramp-up of the transformation of factories for the next generation of vans. We expect the impact from the tariffs to be less than 100 bps on the van side. This aligns well with our previous assumptions. And I mean, therefore, we confirm the full year guidance range of 8% to 10%, including tariffs and expect the full year to finish at the upper end of the range.

With the CCR year-to-date, at 0.9%, we raised the CCR guidance also by 1 notch here.

On the mobility, we are at 9.1% return on equity adjusted year-to-date and we expect the full year unchanged in the range of 8% to 9%, also rather at the upper end.

And leaves me to comment on the group guidance, Page 19, a follows obviously same assumptions as a segment guidance. On top of the divisional guidance, the group EBIT will be impacted by the restructuring and the legal proceedings, as I commented before, and with EUR 5.6 billion of cash generation year-to-date, we are well on track with regard to the cash generation for the full year.

And with this, I hand back to you, Ola.

[Ola Kallenius, executive]

Thanks, Harald. I think this environment will remain dynamic, and I can say this, we're very aware of the challenges ahead of us. And that's why our fundamental priorities are firm, desirable products, technological leadership, customer focus, profitable growth and, of course, attractive shareholder returns. We have a plan. And I think that the results of the first 3 quarters clearly demonstrate our execution focus. At the same time, we're not afraid to adapt when circumstances change. The animal that is able to adapt is the one that survives and thrives in evolution. So going forward, we'll offer our customers the full range from BEVs and hybrids to high-tech ICE all the way to V8, because customers decide what suits them best and we will continue to listen to the customer.

We can respond to market demand with new products because our architectures allow technologically convincing and cost-efficient solutions. No technical compromises in terms of the packaging of the cars for the customer. We're constantly readjusting our go-to-market strategy because the operating optimum of a business is a moving target, certainly in the market that we're in right now. We're taking on the challenge in the Chinese market with China fit tech and products and a new approach to fundamentally improve product costs because the hyper competition in China is not going away anytime soon. This is certainly a multiyear task.

Looking ahead, we expect the market environment to remain challenging, and we retain a realistic view. But we also remain confident in the strength of our product pipeline and the upcoming ramp-ups, which will have their full impact beyond 2026 and will unfold fully during 2027.

Mercedes is driven by a management team also with new minds, fresh ideas and a lot of energy. We'll jointly press ahead with our product and tech launch program. And of course, we will remain focused on enhancing the customer experience. And we'll continue to drive efficiency across our company, and we're committed to generating attractive returns for our shareholders. We are determined. Thank you.

[Christina Schenck, executive]

Thank you very much, Ola and Harald. Ladies and gentlemen, you may now ask your questions. I will identify the questioner by name. However, please also introduce yourself with your name and the name of the organization that you're representing before asking your question. A few practical points. [Operator Instructions]

[Operator]

[Operator Instructions]

[Christina Schenck, executive]

We start the Q&A and the first question goes to José Asumendi from JPMorgan.

[Jose Asumendi, analyst]

Jose Asumendi from JPMorgan. Congratulations on the results today. Two questions, please, Ola. The first 1 is maybe to you. I'm seeing very rapid developments on robotaxi and autonomous driving. Jensen at NVIDIA yesterday mentioned Mercedes as one of their key partners in this journey. I was thinking if you could please talk about this top down and bottom up transition when it comes to ADAS. So increasing the level of autonomy and ADAS features on the entry vehicles and then also testing that robotaxi. And then specifically, if you could also speak about the partnership with Momenta.

And then for Harald, if you could maybe speak about the auto division, when we think about the fourth quarter and you talked a bit about the restructuring charges you see in Q4 in the Auto division as well as the impact of tariffs that you have in the budget in Q4 and any mitigation measures you're planning to implement?

[Ola Kallenius, executive]

So good morning, Jose. With regard to ADAS, you can now very much see the benefits of the platform that MBOS gives us. So we do now have a very, very strong digital foundation to stand on, where we can also integrate and work with different partners. As I mentioned in my speech, and you know this, of course, we're launching L2++ in China now. And in terms of software and also the hardware capability of the cars, in essence, the sky is the limit. If you want to take this beyond level 2++ into level 3 and level 4 territory, then you need to have more redundancy on board. This we have already proven with the current S-Class that we know how to do this. And it goes without saying that this journey will continue.

The push forward by NVIDIA yesterday to announce that they want to take on the full scale L4 challenge is something that we very much welcome. And having worked together with NVIDIA now for more than 4 years, establishing the foundation for this whole tech stack. I mean it's a natural choice that when L4 comes to fruition that Mercedes is part of that game. That doesn't mean that we're now going to turn ourselves into a mobility services company. That's not the message. But we have, I think, the best technical foundation with our vehicles, both hardware and software to do this. We will work as part of this consortium on that task.

In China, we know that China has its own digital ecosystems in many respects. And that is how ADAS is developing in China. That's why I'm very happy that many years ago now in kind of the first seating round or second round when Momenta was even just a small start-up. We spotted them. We were 1 of the very early investors, and we have worked with them ever since and that now has come to fruition with the launch of a whole generation of cars that we're launching here in the next 24, 30 months in China. So with Momenta, we can take this journey as well because that foundation that I mentioned that the MBOS gives us that works in the East, and it works in the West.

[Harald Wilhelm, executive]

Your second question on quarter 4. First, maybe on the tariff side, you can see in the third quarter, we had a tariff impact of 150 basis points in the quarter. commented before that on the quarterly run rate, that was a bit lower due to lower U.S. group sales. As said before, we expect quarter 4 group sales to be at a bit higher level. Therefore, expect a bit of a higher charge on the tariffs in the fourth quarter. I think that also explains the guidance which we're giving here for the full year and the fourth quarter.

On the restructuring program, the NLP program, well, that's 1 -- that's an adjusted element. I think I commented before on the group level, basically, you had EUR 800 million of a charge in the third quarter. That makes it a year-to-date of 1.4%. I said, I expect some more in the fourth quarter, but less than in the second quarter. Second quarter, it was EUR 600 million. So I think you can roughly make the math, what that should be at group level. If you look on the Page 9 of the deck, you will find the car numbers in the third quarter, 666. So I think it gives an idea compared to the EUR 800 million, what the share for cars can be in the fourth quarter. Again, it's adjusted item. But let me emphasize the payback of that, I mean, it's rather spontaneous and fast is that quite a lot of the people will leave until the end of the year or at the beginning of 2026. So that will lead to some significant head count down. And obviously, that will lower the personnel cost charges, in 2026. So we do expect payback of that one in the vicinity of 2 years or less.

[Christina Schenck, executive]

Thank you very much, Jose. And my next question goes to Tim Rokossa from Deutsche Bank.

[Tim Rokossa, analyst]

It's Tim from Deutsche Bank. I'd like to reiterate what Jose just said that analysts get marked for saying that, but that was a great quarter. I think you are clearly delivering on what you had promised us, also with the share buyback program, Harald. 2 questions. First one, just very quickly, a follow-up to what you just said. Are there going to be more charges on restructuring next year? Or will you largely be done in '25?

And then my 2 questions. When we think about the cost savings coming in and all sorts of other moving items that we know so far, the implied run rate for [ costs ] of like 4.5% to 5% for H2, is that a good run rate that we should think about as an exit run rate into next year? And what are the moving items on the cash flow side that we already know about today? You have the FCA charge that will be cash out next year. You probably have some cash out for the restructuring at the same time, there's probably some cost savings coming in. What is that you can already share with us?

And secondly, Ola, probably to you, when we think about the supply chain, Nexperia being a very prominent example, do you see any immediate production risk out there at the moment? Or is everything sort of stretched but manageable?

[Harald Wilhelm, executive]

Yes, Tim. So on restructuring, I think, when -- whatever we have in mind that we want to do, I think that's basically considered in the books. Any further evolution in terms of footprint, what is not yet in our minds today would be another item for 2026, but I don't want to speculate on that one. So I would say from today's point of view, everything is either recorded in the books year-to-date or in the outlook for the remainder of the year.

In terms of the cost savings, I think, we made good progress in the third quarter. I'd emphasize, I think, the EUR 1 billion improvement in the third quarter compared to a year ago at the second quarter, where I think we commented that is roughly EUR 800 million. So that makes us think, if you take a year-to-date approach, I think, it's a pretty sizable number. But we will not rest there. I mean, we'll continue as commented just before. The benefits of the NLP program, will kick in, in 2026.

As we know that the market environment is tough, and we assume that to remain challenging. And as we take a realistic view, I think, we are trying to prepare ourselves for that one. So that also in 2026, we can make further progress on cost savings. In terms of cash generation, I think, it's a bit too early to speculate now about 2026. Of course, sure, I mean what is provisioned today should normally lead to a cash out at a later point in time, the majority of the cash charges. We're talking here in the third quarter, SCA as well as NPP and NLP, I mean, will therefore fall into 2026. I mean that is for sure. But I think you might confirm that we have a track record that we'll try to stretch cash generation by all means and we'll approach 2026 with this in mind.

[Ola Kallenius, executive]

Tim. Let's just take a step back and look at this situation from a distance first. In a modern high-tech car, you have pretty much all 5 continents inside that modern car. And there are many nodes across many components and technologies that provide a large share, in some case, the full share of what modern cars need. Nexperia happens to be 1 of those nodes, albeit with relatively straightforward components, but components that you find in many, many, many subassemblies, ECUs, et cetera.

There is a significant difference between this situation and what we were talking about only a couple of years ago when we were dealing with the chip crisis. This is a politically induced situation, where one of those nodes have been hit, which means that the solution to this or the resolution to this resides in the political space, primarily between the United States and China, in this case with Europe kind of caught in the middle. And I know that there are intense talks going on, on pretty much all levels to see if this can be resolved. It's not the same as we had during the chip crisis. For the short term, we're covered, and it goes without saying that we're scurrying around the world to look for alternatives. But I don't want to make a prediction at this stage how the whole thing plays out. So I'll leave it at that.

[Christina Schenck, executive]

Thanks very much, Tim. And the next question goes to Patrick Hummel from UBS.

[Patrick Hummel, analyst]

Patrick from UBS. Well done on the share buyback. Basically, my questions have been asked by Tim, I'll focus on China. Can you talk a little bit about what your expectations are for the market in the next few months, next couple of quarters with all the low visibility that we always have to deal with when it comes to China, you said the market remains challenging. I think there is no fresh product in China for a little while. At the same time, you're working on your dealer network to streamline that. If we put it all together, volume, pricing, dealer compensation, are you reasonably confident that things are not going to deteriorate in the coming quarters? Or is it fair to assume that 2026 will probably see another year of decline in China?

[Ola Kallenius, executive]

So Patrick, whereas the call today is not the call where we make guidance or projections specifically for 2026. Of course, you know that. Let me just talk about what is affecting the Chinese situation. And that's why I also said in my speech that these fundamental premises that affect the Chinese market are not changing anytime soon. We still have an economy that is trotting along, and where you can see that this cautiousness on behalf of the consumer also in the upper segments, that cautiousness has remained for more than 2 years now, and there's no fundamental change in the immediate future that we think will change this. The hyper competition that we're seeing in China with significantly more than 100 players vying for this market, and the -- what I believe eventual consolidation of that market, it's not something that happens overnight, but it's a process that probably takes several years.

So what do you have to do in that situation? I mean, it always starts with the customer. It's kind of the gist of my speech. The product rollout that we are now starting which, of course, also affects China in the next 24 to 36 months. Every one of those products that we have in the pipeline, we are talking nothing less than almost like a reskinning of our whole portfolio here in 3 years' time. We have very, very carefully thought through what do we think the Chinese customer wants. I mean, beyond the obvious things that you need more space, but a perfect smart cockpit infotainment offering, an ADAS offering that meets the expectation of the market. But next to that, product focus and product offensive that yes, we'll roll out over a couple of years now. It's also about the cost structure and how do we rejig our setup in China. And this is what we have said before, kind of become more Chinese. So eventually, at the end of that process, we are more or less 100% China for China.

Part of that is, of course, looking at your cost structure in the immediate term as well, looking at capacities, making sure that you manage that. Thank goodness, we have a very flexible production system set up there. So we are adjusting. And also the dealer body, focus on the strength -- strong ones, if they're underperforming ones. Now is the time to adjust that. So we are pulling all the levers in China. And I don't want to make a prediction, as I said, for 2026. But it's clear that this is something that is not a short-term issue.

[Christina Schenck, executive]

Thank you, Patrick. And the next question goes to Mike Tyndall from HSBC.

[Michael Tyndall, analyst]

It's Mike Tyndall from HSBC. I wonder if we could talk about CLA a little bit. So we've now got that product in the market. You've now probably got a better sense of where production cost is. Should we be thinking about -- this is the book end of all of the refresh. Is it notably more profitable to produce than the predecessor? Are we seeing significant drop in supply compensation because the expectation on BEV is now married to the reality. I wonder if you could talk a bit about that.

And then, Harald, I guess the obvious question is, you've kept the return on sales ranges for the full year, but it certainly looks like you could have tightened them up. Is there something you're seeing that makes you want to say, look, I need that space? Or is it just a question of being conservative?

[Harald Wilhelm, executive]

Yes, Mike, well, if you look on the CLA right now, first, I would say, great market endorsement. Ola mentioned, I think, the test results, but also if we look into the order intake, which I think is another good indicator in terms of market acceptance. So we're very happy with the order book building up. And as we deliver vehicles to customers, we obviously can see what the margin does on the vehicle. And even though it's a bit early days, I would say. If I compare to equivalent products, the CLA didn't have a best predecessor. So it's a bit difficult in terms of a like-for-like. But overall, I think, the margin which is coming up from the vehicles delivered already, definitely has a structural change compared to previous EV model. So I think that is opening a chapter in terms of the next -- the new generation EV vehicles, not only in terms of product, but also in terms of variable cost base and therefore also in terms of margin evolution.

Your question on the fourth quarter. Fourth quarter, I commented before, will carry a bit higher tariffs. It will carry also seasonal cost phasing. It will also carry a step up in terms of some supplier one-off compensation, which we still see at a higher level in fourth quarter than in the third quarter. We keep the guidance range at the 4% to 6%, but to be clear, I think, the options you offered in terms -- is it -- is there something we see, which we didn't share? Or is it more prudence? I would rather hint to the latter one. And for sure there is still uncertainty, I think, on tariffs on a couple of relationships. I think everybody is looking forward to tomorrow when we think about China and the U.S. So I think that just keeps a bit more flex in the space in terms of keeping the guidance at 4% to 6% in terms of the underlying. I think you heard us commenting before that we rather see that at the midpoint. And therefore, I would judge it more as a matter of prudence.

[Christina Schenck, executive]

And the next question goes to Philippe Houchois from Jefferies.

[Philippe Houchois, analyst]

Right. I've got two, if I can. The first one is on the U.S. market. We've seen, again, changes in the tariff environment between the inclusion of engines in the potential offsets and the 3.75 production credits being kept for longer. Obviously a benefit to the U.S. car makers. I'm just trying to wonder -- I'm wondering into 2026, last year or this year, you've done mostly destocking in the U.S. How much of a benefit to you is there from the changes in the offset calculation from the White House? And then how much benefit is there from you being able to use your high mix of vehicles and sell more V8 and bigger engines in the U.S.? And should we think of the U.S. as being quite positive next year as you rebuild stock, have a better mix and potentially have a bit of relief on the tariff side?

And then if I can -- second question more specifically on FX, you had a significant headwind on FX in the third quarter. I'm just wondering as we think about 2026, what can you tell us about your hedging policy? And what it means as given the more expensive euro and the cheaper dollar, what it means for your '26 earnings?

[Ola Kallenius, executive]

Maybe I'll start with the market, but I'll let Harald comment on the financial impact because you mentioned the offset 375, which is for parts. Obviously, I know you know. Yes, it is true that particularly in Q2 and Q3, we made our best efforts to manage wholesale to optimize the financial result. That is the bottom line. And again, I don't want to go into now a specific kind of market guidance for 2026. Of course, it's clear. So I'm going to stay away from that, but I would like to say this is a general statement looking forward. If I take a 5-year view on the U.S. market, how we are set up, the product portfolio that we have, the products that we have in the pipeline, also this fundamental product offensive here in the next 2 to 3 years.

Yes, I do believe that in the next 5 years, that will also benefit us in the United States, and we look at the United States as a growth market and a market where we want to increase our footprint. So that is absolutely clearly part of our strategy. Having said that, the 15%, yes, not 27.5%, but the 15% of a significant part of the vehicles coming into the United States remain. So that has then not gone away, and we will try to manage that as best we can, but maybe details on the financials of that.

[Harald Wilhelm, executive]

Yes, Philippe, you're absolutely right. I mean the extension of the 375 in terms of going for longer and staying at 375 rather than coming down has a supportive impact. I think at earlier stage for the year, we commented that the tariff copy could have a run rate of, I mean, around up to 200 basis point run rate moving forward. You could see in the third quarter, it was 150. I commented before that fourth quarter could be a bit higher. We now take that picture, I mean, into 2026, again, without making predictions now on 2026.

But I would say probably, I mean, the tariff bill comes in rather at 150 to 200 basis points, but not 200 as such. And the 375 credit scheme, I think, is a favorable element in this respect. On the FX side, for 2026, well, I don't want to look into crystal ball here. But if you look on how we are hedged for in terms of the U.S. dollar and the renminbi, I think we're pretty well covered throughout 2026. So probably not too much of an exposure in that respect. If I look at other currencies, well, if we see continued softness in the Korean won and the Japanese yen. That's something where we would be less covered for 2026. Whereas on Turkish lira, we see now for quite some time softness on the currency, however, kind of a natural hedge via pricing. I hope that helps.

[Christina Schenck, executive]

Thanks, Philippe. The next question goes to Horst Schneider from Bank of America.

[Horst Schneider, analyst]

Yes. I want to get back basically to Munich Auto show. When we met there, I had the impression everything was a little bit more subdued. Now I think the environment is a little bit brighter. Can you summarize now what, in the end, is the delta versus Munich Auto Show? What really got better versus your initial expectations? Is it just top end? Is it then price mix and you think this is going to continue also through the coming quarters. So we can expect a little bit better results, mainly on the back of positive price mix.

Then the second question that I have is, again, on industrial performance, cost cutting. You made very good progress here, and you say you continue to cut costs also in 2026, of course. When do we achieve basically the peak of -- in bridge term? So how long can industrial performance basically remain such a strong driver? Or when is the item coming down from a bridge perspective maybe?

[Ola Kallenius, executive]

So Horst, I have to go back and look at my own speech that I gave there in Munich. But you know that we usually take a sober and matter of fact approach to our communication. So I could not detect a major difference in my tone or style between Munich and now. But what we did say in Munich is we're staying the course and the results today is we're staying the course, and we delivered on the key performance indicators, as had been announced.

What did give me a positive feeling in Munich, though, most definitely was the reaction to the products that we were presenting. I had the opportunity not only to, of course, engage with you guys and press and so on, but with very many dealers, very many customers. And if you had stayed on in Munich, I don't know if you did, you could see that people were standing in line, 20 people behind each other just waiting to just get a glimpse of the GLC. So the message that we did get from Munich was the new face of Mercedes the iconic grill taken into the future seems to have hit the nerve, a product that is technologically very advanced, in many dimensions leading. But combined with the what we call Mercedes-Benz welcome home feeling that everything is thought through. It's a Mercedes through and through. That also seems to have hit the nerve. So if there's anything that we are, I don't know, feeling encouraged by. And now with all the other products that we're going to launch is that the second-gen BEVs, but of course, this carries on to the ICE as well that we're on to something. That is certainly true.

[Harald Wilhelm, executive]

Horst, maybe quickly on the numbers. I do remember that I almost ended up in a negotiation with some of you, whether it is 4.0 or 3.95 for the third quarter in May. I think in terms of sales, it came in line with expectations. Top end share, I think, was stronger. I think that was a favorable tailwind. I think also efficiencies, we made good progress in the third quarter. So in terms of the underlying, I think, yes, we can say that, we did better in the third quarter. And definitely, we want to take that momentum moving forward. You could also see on the cash flow, I think that was supportive, including working capital. And I will not rest here, as commented before, we'll keep going with our performance improvement program, 2026 into 2027.

I'd like to remind you what we outlined in February this year during the CMD in terms of the ambitions we take on us to mitigate for the headwinds and we do know that since we had the CMD in February, the market environment became even more demanding in China on volume and on pricing side, and that means we rather reflect how to take it even to a higher level to make good for the incremental headwind we are facing. But as Ola said before, here and today is probably not the point to talk about 2026 in more detail, but the approach, the spirit we and the team takes is clearly to work rigorously on the performance also in 2026 into 2027.

[Christina Schenck, executive]

The next question goes to Henning Cosman from Barclays.

[Henning Cosman, analyst]

I was just also actually going to ask on the -- Harald just mentioned the February plan, I sometimes find it little bit difficult to keep track of where we stand. I think in February, the target had basically implied 300 basis points more or less just from the cost savings on flattish volume, flattish price/mix. Harald said about a 2-year payback of what's going to be roughly EUR 2 billion of provisions by the end of the year. So I guess that's 2 points. But I'm just wondering a bit about the reference point. Are we still thinking about 300 points improvement potential, but then apply that to the midpoint of the Mercedes-Benz cost margin range. So 5% plus 8%, or have we eaten into the 300-point improvement potential by that EUR 1 billion that we're going to see this year already. So if you can just help me there a little bit as to where we stand and we still think about 300 points from obviously now a lower starting point.

Second question, just a bit of housekeeping. Your main competitor in Munich, obviously, spoke about a bit of a distortion from late refunds from U.S. tariff cash held in escrow, you didn't really comment on that. Is there an opportunity for you to receive that next year to perhaps offset some of the cash out or were you just more aligned all along and had anticipated the timing of the refunds better?

[Harald Wilhelm, executive]

So on the cost savings, so let's wrap up shortly. In February, I think, we outlined what are the savings expectation and targets that we have under different chapters on production costs, on material cost for -- compared to 2024 actuals into 2027, 8% on material cost, 10% on production cost, 10% on fixed cost, 10% on funding. These targets, I think, I mean, are still valid. And if you look into the slides of 2025, I think we're tracking pretty much in line with these maybe even slightly ahead of it. And as I said just before, we don't take it easy and then slow down. We will come back on the initial trajectory. We'll definitely take them as a base and push the savings forward into 2026 and into 2027, and probably rather look at a higher level, on the variable cost challenge compared to the numbers, we gave in the CMD in February.

I think, definitely, when we get to 2026, we'll get -- we will give more color on that in terms of what does it mean, how is the plan moving forward? But I would say for now, these targets remain intact with a bit of, I think, a tailwind we can take from the 2025. On the, what we call, the escrow held on the tariffs and the refunds, yes, I think, there is some refund to be expected. We -- I would say we take a cautious view on that. P&L-wise, I think it's still clear what we did. So the tariffs at 15% from the -- from Europe to the U.S. have been applied and applied retroactively in the P&L. We take a bit more cautious view with regard to, yes, Europe as Brussels seems to be a bit slow and the amounts, therefore, to be recouped from the pre August situation are yet to be cashed in. But at maximum, I think we see that in the 2-digit number, not in the 3-digit.

[Henning Cosman, analyst]

Harald, well done on the cost.

[Christina Schenck, executive]

Thanks very much, Henning. We have time for 1 last question, I would hand that over to Stephen Reitman from Bernstein.

[Stephen Reitman, analyst]

Yes. Two questions, please. First of all, congratulations on the very good reception you've been talking about with the CLA. I know it's again, it's very early days, but can you talk about what you're seeing in terms of -- are you seeing any conquest from other brands? What is the reaction on the vehicle in what you're seeing from around the world as well?

And secondly, on the vans business, still a very high margin and probably a lot better than the commercial margins that some of your competitors are probably seeing -- I mean, I'm talking about particularly in the commercial space rather than your passenger vehicles. Could you comment a bit more about how you see that going on?

[Ola Kallenius, executive]

So Stephen, I'll start with the CLA. As you know, we have now launched in the European markets and are rolling out quickly and we're launching now in China and in the United States, and then we'll go overseas. I think it's a little bit too early days to say exactly where conquest comes from. But because we didn't have a predecessor electric vehicle in this segment. So for us, it's almost like -- it's a conquest across the board, combined with some people or more people switching from ICE to BEV, but it's too early days to make a more serious analysis of how that's going. What we can say, though, is that we look at early customer feedback and early customer feedback next to the general feedback on the car has been very positive.

[Harald Wilhelm, executive]

And on the vans margins, Stephen. Well, you're right, 10.7% year-to-date, 10.2% in the quarter. We guide 8% to 10%, but you heard it loud and clear, rather towards the upper end of the higher end of the band. That's the target for this year. Again, here is not the point to talk about 2026. But as we commented on cars before, I think, we take a realistic view on the market evolution, which is also more competitive than some time ago. We clearly see that. But the same thing, try to fight it by mix, by structure, by cost improvements. At the same time, ramping up. However, the new van platform in terms of the product, but also in terms of the PPE. That will constitute some headwind in 2026. The ambition of the team is definitely to keep the margin high, but I would not speculate now whether it's a high single digit or whether it is a double digit. Let's work on that, and we'll get back in February on it.

[Stephen Reitman, analyst]

Is there any particular reason why you're doing so much better in Germany than in the rest of Europe?

[Ola Kallenius, executive]

Germany has always been our best market for our commercial vans. We have unbelievable customer loyalty. We have an unbelievable service network. And by the way, our product is pretty good, too.

[Christina Schenck, executive]

Thank you very much, ladies and gentlemen, for your questions and for being with us today. Also, thank you very much to Ola and Harald for answering the questions. I know we had a few more questions in the queue. And as you know, Investor Relations remains at your disposal to answer any further questions that you might have. And now to all of you, have a great morning, a great afternoon and a great evening. Thanks, and goodbye.