Traton SE

Dear ladies and gentlemen, welcome to the conference call for the three-month 2023 interim statement of Traton SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in the listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference, please press star and zero on your telephone for operator assistance. May I now hand you over to Lars Korinth, head of IR of Traton, who will start the meeting today.

Thank you for that. Good morning, everyone. Welcome to the Traton first quarter 2023 conference call. And thank you all for joining us today. Before we start, let me first make you aware of the disclaimer. And of course, as always, you can find all relevant documents on our Q1 performance on our website, traton.com.ir. including the slides of today's presentation. Together with me today are Christian Levine, our CEO, and Michael Jackstein, who has appointed Trayton CFO and CHRO effective 1st of April. So welcome to the team, Michael. I'm also joined by Camilla Devone, Head of Corporate Relations. We will start with a presentation of the first quarter results and the updated 23 outlook. After that presentation, We look forward to answering your questions. With that, I hand it over to Christian.

Great. Thank you very much, Lars, and good morning to everyone out there. Good to have you with us again. Also from Mayan, before we start, very welcome, Michael, to the team. You're going to head up the areas of finance and human resources where you also have the business development function, all enabling functions that are super important to us during these times of big transformation. So really look forward to having you on the board, having you on board, and having you at my side working together with the rest of the executive board to shape the future of the Trayton group.

Thank you for the very warm welcome.

Ladies and gentlemen, we have lost the speaker line. Please stay connected while we reconnect the speaker. So we have time for that.

Excellent. So back to you, Michael. Well, thank you for the very warm welcome, Christian, and a good morning from my side as well. I'm honored to join the Trade and Executive Board at such an important point in time when we as a group take key decisions, execute towards our strategic targets, and together shape the transportation industry. During the past years, and especially during my time at the Office of the Chairman of Trayton Supervisory Board, I gained a lot of insights into this great company and its brands. I will now take the time to connect to the people at Trayton and the teams at Scania, MAN, Navistar, Volkswagen Truck & Bus, and Trayton Financial Services at their various locations and, of course, to onboard as fast as possible. you will certainly understand that I will not have an active role in today's Q&A session. But you can be rest assured that after my onboarding, I very much look forward to engage with all of you and meet many of you in person in the quarters and years to come. With that, I hand the floor back to Christian.

Great, Michael. So let's have a look at our first slide where we see the – performance or the strong performance I would say of our first quarter of this year 2023. We see a macro environment with continued difficulties, a lot of uncertainty, kind of a paradox where despite all the challenges the transport activity around the world remains pretty high. We will talk later about certain areas or regions where we also see start to see headwinds, especially in Brazil, where the macroeconomic political situation is driving the market down. But I'm proud to say that we had a very good start of the year, as you can see from the figures. So incoming orders are lower compared to the beginning of last year, but then you need to remember that the beginning of last year we still had the biggest part of the supply chain challenges in front of us, and we had not introduced the limitations that we still have in all our brands today as a means to take care of the very big order book. We had very strong deliveries, up 25%, and we saw a performance increase from all of our three big brands. Despite that, we say that we have not yet reached the full potential, we have still seen disturbances to our supply chain throughout the quarter. But gradually, we see a stability coming back. Sales revenues increased even further, meaning that not only were volumes up, but we also managed to do that with improved pricing, with a positive mix, and especially with very, very strong results from all our brands in the important earnings area of services. All in all, we managed to achieve a return on sales adjusted of 8.4%. That is, of course, a huge improvement all across the Trayton group, and therefore we also made the ad hoc announcement on the 14th of April about the over-expected return on sales figure, especially at Scania. where we are in Scania now, back into the double-digit margin landscape where we should be, but even more so an impressive step up of MAN, where they, and allow me to say finally, reached into positive territory with above 5% return on sales as a result of very strong leadership, and a restructuring plan that has gone from PowerPoint to reality. So overall, I would say a very encouraging performance in our first three months of this year, but we certainly plan for more to come. I also see this as a very good confirmation that we are on our way towards delivering on what we set out at the Capital Markets Day. our full potential and bringing us towards our strategic return target. Next slide, please. So not only financially, we did a lot of steps forward during the quarter, but also operationally and strategically. And just to mention a few highlights. that you can see on this slide, starting with Trayton Financial Services, which we discussed lately at our annual results conference. First of April, one important milestone was achieved, and that means that we can go live with our global commercial vehicle financial services entity. So under the leadership of Johan Häggman, we now transferred all the Scania financial services units into the new legal unit Trayton Financial Services. There will be many steps on the way as you know during this year to be operational with all our brands but we will continue to report to you on that continuously. Then we unveiled just a week ago the joint developed battery cell together with Northvolt specifically tailored for heavy commercial vehicle. An impressing lifetime of more than 1.5 million kilometers can be achieved, which is amazing because it means that the battery cell life now starts to be in line with the vehicle technical lifeline. And hence, the big discussion about the business model and about secondhand use of batteries becomes less challenging or less complicated. So a very important announcement. Of course, working with Northvolt means that we are producing battery cells very close to fossil-free. An important announcement in the area of battery electric vehicles was also done together with... Your passcode has been confirmed.

Please wait while you are joined to the conference.

delivered throughout 24, 25 and 26. On the Scania end, we also made a delivery where we got a lot of attention. We delivered what is today Norway's largest and heaviest battery electric commercial vehicle. A total vehicle weight of 66 tons was delivered. It's going to do limestone transport in a quarry. in northern Norway. Norway, by the way, the market where there are already 100 battery electric Scania vehicles in operation. On the Navistar side, we have decided to continue the launch of the common base engine and the common driveline and are now also doing the commercial launch for the vocational market. And to finalize, with Volkswagen truck and bus. We celebrated 30 years anniversary since the very first introduction of the Volkswagen bus brand in the Brazilian market. Okay, back to figures and back to our Q1 performance, where, as I said in the beginning, our incoming orders ended at 68,500 vehicles, which is 28%, sorry, lowered than the same period last year. But remember, in that period, we have not yet started to limit our orders. And I have repeated that throughout the calls in the last quarter. We do that in order to make sure that we have the cost situation under control. And we do that in order to give a relevant delivery time to our customers. And when you start to get beyond 12 months, both of these factors become clear. problematic. Hence, we still operate under these circumstances, and therefore we end up at 68.5. Said that, the underlying demand is still very good with one exception, and that is Brazil, where the political and macroeconomic situation plus the introduction of what we in Europe call Euro 6, so the Konoma P8 legislation, plus overstocking of the previous emission step, Konoma P7 or Euro 5, have led to a weaker demand in the first quarter of this year. Unit sales were, as I said before, also significantly up with 25%. And we did a record 84,600 units sales in the first quarter. You all understand that that means that the supply chain continues to stabilize. It does, however, not mean that it is completely stabilized. It does not go one single day without minor disturbances. And it is particularly challenging in our North American operation with our Navistar brand. We see more easing coming out of the European system. So said that, we could nevertheless then run our production in all our brands on record level, even if we still see more potential to come. But with that, I would like to hand over back to Michael for more financial performances figures in detail. Michael.

Thank you, Christian. On slide nine, you can see our sales revenue development with the separate vehicle services business contribution. Sales revenue increased by 31% in the first quarter to 11.2 billion euros. This development was in particular driven by the strongly expanded new vehicle sales volumes and the favorable market and product mix. In addition, we benefited from the successful realization of higher vehicle prices. Importantly, sales revenue in the vehicle services business increased further by about 10% as demand for spare parts, and repair and maintenance services remains high given aged fleets and strong utilization. With this, the business continues to contribute significantly to trade and success and resilience, not least due to its stabilizing effect. Approving volumes and the stronger top line as main drivers translated into significantly enhanced earnings, which brings me to slide 10 of our presentation. As you can see, the adjusted operating results of the trading group more than doubled to 935 million euros. This corresponds to a very strong adjusted return on sales of 8.4%, up by 370 basis points year over year, and 230 basis points quarter over quarter. With that, we were able to continue the strong underlying earnings trajectory with performance step-ups in every quarter since Q2 last year. This positive development was in particular due to the higher utilization of our production capacity, increased vehicle deliveries, and the associated better fixed cost absorption. In addition, thanks to the successful execution of pricing initiatives for new vehicles across all our brands, we were able to compensate for the significantly increased input cost pressures. A very encouraging development, which impressively underlines that the trade group is on track to deliver on the strategic return on sales target by 2024. Let us have a look at the performance of our brands and segments. Scania vehicles and services benefited from higher volumes, better utilization of the production, higher pricing, and growth in vehicle services. As a result, at an adjusted return on sales of 13.3%, Scania achieved an outstanding profitability level. MAN Truck and Bus recorded an impressive step-up of 360 basis points to an adjusted return on sales of 5.8%, a profitability that the brand has not seen for quite a while, and a key contributor to trade's successful performance in the first quarter. The strong improvement was driven by better fixed-cost absorption to higher volumes and growth in the vehicle services business. as well as positive pricing. While these for sure are impressive achievements, it is by far not the end of MAN's journey towards the strategic margin target of 8%, especially since large effects from the realignment program are yet to materialize in the second half year and fully in 2024. Navistar again showed a very compelling performance, with a return on sales of 6.3%, despite continued supply chain constraints in North America. The strong year-on-year improvement was mainly driven by increased unit sales, better production utilization, as well as strong implementation of pricing initiatives. In challenging markets, especially in Brazil, Volkswagen truck and bus recorded a strong return on sales of 9.2%. Despite lower unit sales as a result of a stricter emission regulation in Brazil, sales revenue slightly increased. This was mainly due to improved pricing and stronger product positioning. A common theme across all our brands in the first quarter was strong headwinds from higher prices for components raw materials and energy, which we were able to compensate via successful pricing initiatives. Finally, Trayton Financial Services recorded double-digit percentage growth on the back of an expansion of its portfolio and an increased interest income. Higher funding costs and, as a result, lower spreads had a counteracting effect on the margin, which came in slightly lower year-on-year at 23.3%. Moving to our cash flow and net debt on page 12. As you can see, net financial debt of trade and operations improved by about 900 million euros to 2.6 billion euros by the end of the first quarter 2023. Key driver for this development was the positive net cash flow of This reflects, above all, the improved operating performance, but also includes the proceeds from the close sale of Scania Finance Russia of €400 million. We had already indicated this effect during our full-year results conference. Nevertheless, cash conversion was held back by a further increased working capital. Almost 600 million euros cash was tied up, largely due to higher inventories as a result of the strong expansion of production volumes and ongoing logistic shortages, as well as high receivables due to the increased deliveries. Adding the 4.6 billion euros under corporate items brings the total net financial debt in our industrial business to a level of 7.2 billion euros. corresponding to an improvement of about 500 million euros versus year end 2022. Back to you, Christian.

Thank you very much, Michael. And that brings us to the outlook of this calendar year, where we say that the truck markets remain robust, but we see a bit different development in different markets, starting with Europe and North America, we are expecting a range from flat up to plus 15%, but rather an expansion from the midpoint. Slightly better outlook due to higher production levels in the industry and improving supply chains rather than demand itself. Overall, track lead times are in the industry slightly shorter and order books are opening up for first quarter of 2024, so there is still a significant catch-up on the demand side to be made. In South America, on the other side, the market is expected to decline, in particular in the big market of Brazil because of previously mentioned reasons. All in all, one must say that uncertainty continues to be historically high Key factors such as the supply chain, logistic shortages, but especially the war in Ukraine makes our markets extremely difficult to predict, meaning for us that we must be ready with short notice to react to things happening in regions, but even more so in individual markets. Over to you, Michael.

Thanks, Christian. And now on to the full year outlook, which we upgrade today in light of the better than expected performance in the first three months of the year. Based on the high order backlog and improved supply chains, we confirm our forecast for both unit sales and sales revenue to grow by 5% to 15%. Given the strong start to the year, we upgrade our forecast for the adjusted operating return on sales by 100 basis points and now expected in the range of 7 to 8%. Finally, we expect net cash flow for trade and operations to range between 1.8 and 2.3 billion euros. Please note that the net cash flow outlook now includes a positive effect of 500 million euros related to the intragroup sale of the Scania financial services business to Trayton Financial Services. Christian elaborated on this earlier. On Trayton group level, this transaction has no impact on the net cash flow. Back to you, Christian.

Great. So before we head into the Q&A, let me quickly summarize this conference. Strongly expanded production and unit sales are happening stepwise. It's backed by improved supply chain. but there are still headwinds all over the supplier industry. Good price realization, compensating for increased input cost, meaning that we continue to run the system ahead of the cost curve, and we clearly have a double-digit sales revenue growth, very positive. We have a strong momentum in profitability and earnings, particularly thanks to the Scania strong performance that Michael was into, but also MAN finally putting an exclamation mark behind their turnaround and very positive performance. Positive net cash flow in our trade and operations, meaning that our net financial debt position is improving in the industrial business. So a very good start of 2023, but of course a long way to go and we now use this momentum to continue to do a good year. Based On a better than expected performance, we have upgraded our financial outlook, confirming a strong top line outlook for both volumes and sales revenue, but increasing the forecast for adjusted return on sales by 100 basis points. At 7% to 8%, aim for substantial step up. We harness the momentum in Q1 to take crucial steps towards our strategic target return levels. It feels very good today to be able to confirm that we are on the right track. 2023 is the year when we enforce our execution part of the Trayton WayForward strategy, and we deliver as we have promised. Thank you very much, and back to you, Lars, to start the Q&A.

Thank you, Christian, and Michael, of course. So now let's open the floor for the Q&A. Before we start, for your information, we will first take questions from analysts and investors. And from about 10 to 11, if there are some, we will also take questions from the media. So, operator, let's start the Q&A.

Yes, thank you, ladies and gentlemen. We will now begin the question and answer session. If you have a question for our speakers, please press star followed by one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial star and two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment for the first question, please. And the first question comes from Klaas Bergelind from Citi. Please go ahead.

Thank you. Hi, Christian and Michael. The first one I have is on the ASPs. Similar discussion, Christian, as we had during the last call. There are obviously mixed effects in there. There is FX. Most of the ASP increase at the moment is driven by Volkswagen truck and buses. And when we spoke last time, you talked about that you wanted to bake in some caution. You reflected about potential price concessions into the second half. Can we talk about what kind of pure price carryover you have now for the group in the first quarter? And if you still think caution is warranted on concessions into the second half, given how you see the current cost inflation developing? I'll start there.

Thank you very much, Claes. I'll do my best to elaborate on that question. uh first of all on the cost and what what we see is that uh this despite that that of course uh raw material uh listed prices are coming down we have rather long contracts meaning that we don't really see costs coming down yet in our order book um and and that that was expected on the other hand they are also not increasing as we expected and that's why i can can say that the way we have set our prices we are running ahead of the curve And that's partly, of course, what you see in our operating returns. So going forward, as we have full order books, and as we always do, we work with pricing in our individual markets to maximize the return. And up until now, I have not seen any particular deals where we have had to make price concessions from the levels that we have set out to achieve. So at some point, of course, when the market turns south, and no one knows when that will happen, but there will be these discussions. But I would say that we have that pretty well in our pocket right now. There are rather a few things perhaps on the upside. And of course, one of these is on the Scania side, we still have less than 50% of our invoicing made with the combined CB1, the combined trade and group driveline, where we know that we have at least 3,500 euro price increases to be harvested. And then you know that volumes in the fourth quarter also starts to pour over to Navistar, where we already have a substantial order book with the very same driveline. And there we will, of course, also see a perhaps even higher pricing effect when we bring that to the market as the fuel saving effect is even stronger on the Navistar brand. So I think that there are a couple of positives, but of course, this is, as you know, in our industry, very, very difficult to predict. I think that the thing that makes me sleep good at night is really that we have the order book at hand. with the exception of truck and bus in Brazil. And I see that month by month, we keep or increase, I would say, the gross margin of trucks. I hope that answered your question.

Yeah, no, absolutely. My point was exactly that, that obviously when the CBE is kicking in on Scania, then you get the MAM backlog out with higher pricing. The flat ASP implied by the guide there must be quite a big mix effect in there, particularly on the service side. I guess that was my point.

And you're right, and of course also some currency.

Okay, my second one is on the market outlook. You now see a bit higher growth both for Europe and North America. This is a supply-driven considerable improvement in Europe, but North America is still tough looking at supply, you say. Can we talk about how you see the supply chain developing in North America and into the second half? as that is sort of still a quite tricky picture. Thank you.

Yes, it is. And it's not so much anymore about semiconductors. It's also one of the other semiconductors, but we're not talking a direct disturbance of the line. It's really the whole industry has a problem to catch up with the big order books that the whole industry has built up. And there is fight over capacity on basic stuff such as frames, axle, engines. And I think, well, you know where we're coming from. We're the brand. We're taking market share, hence we need to eat out of the capacity of the others. We have signaled that pretty strongly, and we take advantage of the trade and group purchase power in doing so. But nevertheless, I have a feeling that we have suffered a little bit more than our competitors in North America, and there is more to be done. When we're out of this, if this happens in the second half of this year, or I doubt to be honest, I think we need to be into 2024 before we see a stabilization of the supply chain and the investments needed from the supplier base to catch up. You know, it seems that the American market holds up. And we know that we have emission legislations coming into the market in 2025. So most probably there will be pre-buy effects through 2024, meaning that volumes will continue to be high. So where we might see a dip in other parts of the world, I doubt that we will see a dip in North America. And hence, we need to wait for this long stretch of investments happening in the supplier base to get the capacity where we want it and where we need it.

My third question. Yeah, thank you, Chris. My third and final one is on the service business. And if we look at Scania, it looks like 15% organic growth versus percent in the fourth. Some of your peers have reported an acceleration of the pure volumes quarter on quarter and increased contract penetration, i.e. self-help. If we back out pricing and look at quarter on quarter development for Scania in services, did you see a similar improved volume effect or is it largely pricing explaining the growth?

Yeah, we have to take out Russia, but you know that's a relatively big market in the Scania context where we're now, of course, invoicing zero. And if you take that out, if I remember right, we have a more than 8% volume growth on the services side, meaning hours and parts. On top of that, you have pricing, and on top of that, you have currency, which brings to these impressive basically never seen before growth figures. You have to add in the Scania context, we also had disturbances on the supply chain side into the parts business. We had rather low availability out of our parts operation, but we now establish ourselves back above 96% availability, and that, of course, also helps to drive volumes. So all in all, I would say we're back where we should be in terms of stability, and we continue to enjoy both. both growths of volume as a result of that and the pricing growth.

Thank you.

Thanks, Klaus.

And the next question comes from Hampus Engelau from Handelsbanken. Please go ahead. I'm sorry. I got the wrong line. The next question comes from Nikolai Kempf from Deutsche Bank. Please go ahead.

Yeah, thanks for taking my questions. Nikolai Kempf from Deutsche Bank. And first of all, welcome, Sjerkstein. Great to have you on board. My first question is also on the guidance. And we appreciate that you increased the margin outlook. But I think the top line still looks a bit cautious. Especially keep in mind, first quarter, revenue is up 31%. Probably second quarter, you have a low base. So it's just rather a matter of cautious or should we expect that volumes are declining second half of the year?

Michael, give it a shot.

I give it a shot. Thank you for the warm welcome. Well, actually, we increased the forecasted range based on the better than expected performance in Q1. There have been only insignificant changes to the expectations in the remaining quarters of the year compared to the original forecast. So the strong uplift in profitability in Q1 you have to take into consideration was to a large extent due to higher production volumes as a result of the improved supply situation as explained and mentioned by Christian before. and the corresponding higher fixed cost absorption. Nevertheless, the strong Q1 results and the margin of 8.4% cannot simply be extrapolated to the full year. As already mentioned by Christian, based on the higher order backlog and prevailing demand for trucks in the market, we are optimistic. However, we continue to see risks in the supply chain also in the availability of logistics capacities and the economic environment, as mentioned before. So that's why we feel comfortable with the outlook.

I think very complete answer, Michael. Nothing really to add. Maybe seeing that we, of course, compared to also a stronger Q3, Q4 from last year. when we do this. And of course also Brazil and Latin America being a bit of a question mark. So we stick to that forecast.

Okay, thanks. Maybe just my second last one. Can you comment on current lead times and what's your target for the lead times by how much should they come down by end of the year?

Yeah, I'll take that one, Nikolai. So So here we need to be a bit brand dependent, of course, in Volkswagen truck and bus, completely dependent on the Brazilian market. Of course, you can get the vehicle basically immediately. They also work with a stock refill model. But in our big brands, I think Navistar is today the one who has the longest order book, and you're well into next year. So we're beyond nine months and up to 12 months waiting time. With Scania and MAN, we are improving our lead times as we're eating out of the order book now with very high production levels. But nevertheless, you're also in the range six to 12 months depending on market. You know that we make market allocations because we want the priorities to be made locally. So it's a per market allocation, then it's a per dealer allocation. And then they locally define which are the most important customers to get priority in the order book. So for an individual customer, it can vary depending on if the dealer then holds, which they usually do, holds a few slots free. So towards the end of the year, you ask, where are we? Well, as things look, we are just slightly better. I hope that we're down to six months. Our target is certainly to be in three-month average lead time. There is absolutely no benefit in our industry to have this huge order book, and we have seen that throughout the last 18 months, two years. We want to be able to respond quickly to demand, and we want also to have not just a two in the water, but feet and leg in the water to understand where is the market, and you can only do that if you have a short order book. But I guess that will not happen until we are well into 2024 or perhaps even beyond.

Perfect. Thank you. And again, congrats to the strong strategy.

Great. Thanks, Nikolaj.

And the next question comes from Hampus Engelhau from Handelsbanken. Please go ahead.

Thank you very much. Three questions from me. Maybe starting off on the Q1 deliveries question. if it would be possible for you guys to maybe add some flavor on how much that was held back in terms of growth due to component shortages. Second question is on the pricing. I mean, Claes touched upon that, but if you could put the number on average prices last year compared to where you are now in price compensation for vehicles. And then the last is on the outlook again on the market side. To get to a flat market in North America, given how the production plans look for the OEMs in the first half, we need to have 10% drop in Q3 and 15% drop in Q4. Is the lower part of the range just on the back of seeing risk in all component shortages, or is it just a cautiousness? How should we think about that? Those are my three questions. Thank you very much.

Okay, thanks, Hampus. Let's see if I get this right. So Q1 deliveries, how much were they held back due to supply chain problems? Yeah, to a small extent in Europe, to a rather large extent in North America, and to zero extent in truck and bus, I would say. We also have the effect of some stock build-up that you see in our balance sheet, meaning that we managed to manufacture pretty well. Both Scania and MIN did really good production figures. But Scania, as you know, owns a significant amount of the dealer structure, and MIN also a rather big part, especially in the Dutch countries. A lot of these vehicles are now with the dealers and with bodybuilders and will be delivered throughout Q2. So that held a bit back the delivery figures. I will not give you an exact number. And I will not talk about exactly how much pricing influenced the performance in Q1 either. On the third question, outlook for North America, I could agree with you. that we are a bit perhaps overly cautious when we talk about zero at the base up to plus 15. Looking at it right now, of course, one could mathematically say it would be plus 15. So the reason for saying that is that we still have the disturbances of the supply chain, which brings insecurity into the market. The second is that we know that our markets move quickly. Brazil is a good example of that. We thought there was a solid order book and we thought we would run at least the first two quarters in this year at full production in Brazil. But what happened with the insecurities coming into the market is that we don't get cancellations, we don't do things like that, but we have a lot of customers who ask for a later delivery. And then what happens is that you have to take down production and as a consequence deliveries will be lowered. Of course, that could happen quickly in the U.S., and we have seen that historically, U.S. being no better than Brazil in terms of volatility. So that's perhaps why we are a little bit careful, saying that it could also be zero. But I would agree, too, right now, we're rather looking at the higher end of that guide, of that interval, I would say. Sorry for not answering all your questions, but I think we can take it.

Yeah, I'm thankful for that, Tom. Thanks. Thanks. Take the next one.

And the next question comes from Michael Jacks from Bank of America. Please go ahead.

Hi, good morning, Christian. Michael, last congrats on a strong Q1. My first question is just on the guidance again, and perhaps incorporating the response to Klaas' question earlier on ASPs and also the typical seasonality in North America, which sees the performance in this business get stronger. through the course of the year. And I guess then in the context of the Q1 margin, which was at 8.4%, the guidance range of 7 to 8 implies some deterioration in one or more of the coming quarters. Are there any other specific factors that you would point towards that could potentially detract from the margin? Or is this just pure conservatism on supply chain and the other things that you've mentioned? I'll stop there.

Thanks Michael, I will take that. You probably have heard Michael elaborate on that earlier, what has been driving the upgrade and the margin outlook and that was specifically driven by the stronger than expected first quarter result and we have left our expectations more or less unchanged for Q2, Q3 and Q4. So there's no further thinking behind that when it comes to a deterioration in the market environment or so on. We just updated our expectations based on the first quarter results, and that's where it is right now. So don't read too much into that for the remainder of the year. And by the way, and I think also Michael mentioned that as well, you know there's a seasonality also in our quarter results and margins. Entering into the probably week or summer period, think about vacations and think about plant holidays, and going then back into the fourth quarter. So there are sometimes ups and downs, and also when volumes go up and down in production levels, take that into consideration and don't just extrapolate the 8.4% of the full year. That is not possible. And it's a long year. It's a long year, too.

Thank you. Then maybe just touching on Scania, the margin in Q1 was the best level reported, I think, in more than a decade. How should we think about the margin development here through into Q2? I mean, cost pressures are stabilizing. You have ASP tailwinds from the new engine. So is it fair then to assume that the only sort of near-term source of potential margin headwind here would be a potential ramp again or ramp up again in Q2? group R&D costs?

I'll take that one Michael. Of course we look positive to the development of the Scania results. 13.3% in Q1 is where we should be. You remember that we've made a statement to the market that we should be 12% over cycle and And right now we are, of course, in a very positive market situation. So we should be above the 12. And we are. And, of course, we intend to continue to be that throughout this year. Super short term, are there any risks? Well, there are always risks. You mentioned that the R&D expenses could shoot through the roof. I doubt that that will happen, but of course we are investing, as we have said, also in the guidance more into R&D and especially CapEx. The battery factory that we are building here in Södertälje, plus that we are rebuilding the whole assembly line here over the summer holidays, of course, will draw on our CapEx. to a quite big extent but I still expect us that we can continue to do a solid performance in Q2 and by the way throughout the year. I think the challenges in Scania and in the whole group is with these developments to continue to have a very strong focus on cost and make sure that we have a disciplined approach not only in R&D but in all areas of the company. I think We all know and we're all expecting that the economy will turn sour on us. Therefore, to celebrate too much and be too cocky about the short-term future is actually a bit dangerous. So that's the message I will be sending in the Scania top management meeting here in the afternoon of today, saying that this could turn very, very quickly. So we need to be very careful and we need to be prepared for that.

I hope that answers your question. Yeah, yeah, absolutely. And if I may, just one last question then just on volumes. Again, just looking at the volume performance at Scania in Q1, it's recovered relative to historical levels. MA and volume seem even higher than that. So how should we expect production volumes to evolve into the second quarter? And then perhaps just as an aside to that, on the production increase, has this been accommodated within your standard production capacities, or have you had to raise your temporary headcount to achieve this higher level? Thank you.

As we've said throughout the last quarter, it's been super frustrating to have the full headcount in place. Everyone is trained, everyone ready to rock and roll, so to say, and then we did not get the components. Now we're finally in a position where most days of the week and most hours of the day We actually get the material we need to build trucks and therefore the result looks like it does. I mean, we've had a tremendous under absorption, especially in Scania, but also in MIM and Navistar throughout the last six, seven quarters. And now we don't have that. Did we have to employ more people? No, we didn't. We stay rather flattish on the production side in both Scania and MIM. In parallel, we are building out capacity on the MIM side with the investment we're doing in Krakow. And we're testing new levels of production. It's not easy. So we're constantly kind of hitting the roof. But we are continuing to challenge the levels throughout this year. So provided that we continue to get good order intake, provided we get a supply chain to work, of course, we will challenge the production levels In North America, we really have the technical capacity, but we're not managing to utilize it. That's the challenge. Running Escobedo plant in Mexico at relatively high capacity utilization, the San Antonio plant that we've more or less finalized in the end of last year is far from utilized. So there is capacity. But to do that, again, we need to have a supply chain in order, which we still don't fully have. So a lot of, I would say, positive challenges going forward. But again, with the disclaimer that we don't need to continue to see a good fill out of orders.

We have now touched base with 10 to 11 a.m. mark, and I don't see any media questions in the line so far, so we will continue with you guys on the analyst side. I can see that Jose is next in line.

Yes. Next question comes from Jose Azumendi from J.P. Morgan. Please go ahead.

Thank you very much, Jose from J.P. Morgan. Just a couple of questions. Can you speak about the benefits of the restructuring actions from a mine? You mentioned you should see some of the benefits still in the coming quarters. Is there a way to quantify or just to maybe outline a little bit what we should be looking for? Second, on Latin America, I mean, it is what it is, cycles. Demand goes up and down. But how should we think about the actions you're taking to... to cut the cost base of workers to be able to withstand the sharp decline in revenues in the next three quarters. And then, finally, we'd love to hear a little bit around your share of electric trucks in your order backlog. How is that progressing? What are you hearing from clients? Thank you.

Great, Jose. Let's see. Your first question was on the MIM. restructuring program and if there is more to be expected and the answer is certainly yes as you know we are absolutely convinced that we can and must take a man up to a reasonable performance which is 8% over a cycle and again we're in a good cycle so we're not at all happy with the five ish But there are more meshes coming into place. And we said now for quite some time that during this calendar year, 2023, we should really start to see the effects. And the big jump or the biggest effect will be when we finally close down the Steyr plant in the middle of the year. So during the summer, we will take the last production volumes out of Steyr and then that whole capacity will be transferred over to the Krakow plant in Poland. We also have a bit of headcount reduction in Germany coming through. In this last year, we have a little bit of cost also related to that that we need to take extraordinarily into the P&L. That's also bound to happen in the first six months. So I think when you can really judge is when we are in the second half. So Q3, Q4, we should be running a clean MIM and we should stop talking about restructuring. And I'd rather start talking, like in all other brands, about continuous improvements. And of course, there will be things we need to adjust, change, but it will be more normal running business based on the local management's capabilities to improve the company. Let me see. Your second question was on Latin America. It was on potential layoffs.

How to manage the cost situation.

Yeah. So in both Scania and Volkswagen, we are in very close discussions with the labor unions on how to handle the situation. Of course, we prefer not to do any layoffs. We have different starting points in the two brands. Scania has a relatively high proportion of temporary workforce that are on hire, whereas Volkswagen has more of fixed workforce employed by the company, but also by the suppliers, as the consortium is a special setup. So we work there also with the suppliers. We have decreased production speed already, working without layoffs, working with a three-day scheme right now, which is a good way to be able to accelerate quickly. But it's not a good way if you think that the volumes, the low volumes will persist throughout the year. So said that, we of course bet on this initial difficulties being mainly driven by the Konoma P8 introduction, meaning that demand should start to creep up in the second half of the year and then we will need the banning again. So hopefully we can do without other measures than short-term work and then, unfortunately, then parting with the temporary workforce in Scania. Remind me, what was your third question?

Electric trucks, sharing the other backlog, and what are your clients' reaction? Thank you.

Thanks again, Jose, for the bad question. Of course, there has been a bit of hesitation on the battery electric based on the war and the energy crisis in Europe where it's very hard to predict electricity prices and also based on European electricity markets' inability to offer long-term contracts. So that has a little bit harmed the order intake compared to plan. But we are in continuous discussion with basically all big accounts in Western Europe especially on how to transform them gradually into electric fleet. Of course, that will take years. But on top of that, we have the legislation, and the legislation pushes us already for 2025 when the first step of the CO2, which is confirmed then, is coming into play, and then proposed for 2030 to be very aggressive. I would say with 45% CO2 reduction mandatory in the European Union. Coming hopefully then, and this is what we're waiting for, with strong political measures to make this transition possible. I think we are ready, as are many of our peers, to take on the challenge. But, of course, for the customers, there needs to be a business case in place, first of all. And that business case in most of the applications, not all, but most of the applications, requires some kind of incentive, positive or negative. Positive towards BEV, negative towards Fossil. It requires a charging network. where, you know, we are investing ourselves together with two of our peers in the industry to get that in place, but that will not be enough. We also need to see public investments coming, and we're happy that the EU adopted the AFEAR directive, which will force member states to build electric infrastructure along the main roads, although we would have hoped for an even more aggressive plan. And thirdly, what we need is, of course, an electricity mix in the main markets that is predominantly green. so that the change over to above from a sustainability and CO2 reduction point of view makes sense. All of that, of course, does not happen overnight, but I see very positive movements on all sides. Good understanding in Brussels and with the local governments. Investments in the grid are coming, very different in different markets, I know that. And finally, the investments from the energy companies to build out green electricity is also coming, probably faster because of the war, than slower because everyone understands the need to go energy independent for Europe and the way to do that is to go fossil free. I think on all of that there is a positive momentum but we don't still see that in the order intake as you can see on, I don't know if we've shown that slide, that we are looking at, but it's in the backup. But you could see ordering the intake of 446 trucks in the first quarter, which was lower than in the fourth quarter last year. So a little bit of hesitation. On top of this, you should know that we're taking pre-orders in Scania and MAN. We're not going public with these figures, but we're taking pre-orders, let's call it the Tesla way, without having the full product specification and the exact delivery date or the price ready. But these are for the regional BEV, so the tractor units in Skåne are coming later this year, and for the MIN TG Electric, that is coming in 2024. And I would say that order intake is, on the other hand, very, very encouraging. But I'm sorry not to be able to tell you the number. I stop there.

Thanks. We're running a bit out of time. Yeah, thanks, Josep. So we have a couple of more people in the line, and I would ask you to maybe restrict yourself to your most urgent one question, and we try to keep our answers as short as possible. And we had an interruption in the beginning, so we will allow, of course, for a slight overrun of this call. I think I see Eric Golrang.

Next question comes from Eric Golrang from SAB. Please go ahead.

Yeah, thank you. I'll do one question. It's a bit of a follow-up on the question previously about Scania and margins long-term. I mean, you did very well in the first quarter, and I guess a lot of that is up to company-specific, but many of your peers have also delivered very strong numbers, so there's clearly some industry dynamics at play here as well. So, I mean, the question is, could you in any way differentiate how much is sort of industry dynamics short term and what's more sustainable. I guess it boils down to how you and your peers will act from here. Do you use these sort of profitability gains to invest more in R&D, to invest more in volume and market share, or how should we think about that dynamic? Any comments, thoughts there will be very appreciated.

Yeah, well, in general, Erik, I mean, of course, having a Scania that starts to make good money again gives us a lot of freedom to act. And that's, of course, very, very good in these times of difficult market conditions, but even more so that we're in the middle of a transformation over to a battery electric based system. So first of all, it's very important to have that freedom to act. Secondly, around market shares, we are not aiming for a specific market share in Scania, as you know. But we're aiming to have the price leadership and we are aiming to be the most profitable player in the industry. And we're of course on our way back there. We have suffered tremendously under the last two years where we could not utilize our production capacity that we had invested in. What we're doing now is that we are investing in more production capacity with the plant that we're building outside Shanghai in China. to cover for the east part of our planet. And that is coming into operation with the first vehicles out in 2025. So, yeah, we know we're in the cyclical industry, but at some point that capacity will be needed to take Scania away from this between 80,000 to 100,000 units and up to rather 100,000 to 120,000, where I'm absolutely sure there is demand. and where we can continue to be in all parts of the planet the premium choice for customers in our industry. So I'm convinced that we can take Scania on a journey where we can both do growth and at the same time do class-leading return on sales over a cycle. I hope that was somewhat an answer to your question or at least a comment.

Thank you. The next question comes from Shakir Kirunda from Morgan Stanley. Please go ahead.

Hi, guys. Good morning. Thanks for taking my question. Congratulations on a very strong quarter. I think most questions around the guidance have been answered. Just on Trayton Financial Services, can you tell us a bit more about the progress made during the quarter and the timeline for further developments? The return on sales still remains quite high. Do you expect it gradually decrease this over the next quarters to come, based on the guidance.

Okay, thanks, Shagil. I would say on trade and financial services, we're running more or less on plan. So the big administrative operation to take all the 60 Scania entities and transfer them into trade and financial services and get the trade and financial services legal structure in place. But not only legal structure, we have also manned up. So we have now appointed the heads of the different brand financial services units, meaning that we are adding for MIM and for Navistar new structures. We are preparing together with Volkswagen Financial Services to start to do business with MIM customers. Timetable is not fully set and not fully decided yet. And we have with Bank of Montreal still the agreement that we can start from 1st of October this year to do the customer financing for Navistar. So 2023 is a bit of a transition year for Triton Financial Services. Lots of preparations, lots of administrative work, but rest assured, that we will make sure that as soon as we have all the decisions in place and we're out of the notice period that we will really start to make business and make money with Triton Financial Services. So I guess that was on TFS. And then what was the second part?

Margin progression and the remainder of the year. But I think, Shaquille, actually we answered that question twice already. So we do not guide, of course, on a quality level. and no change to our forecast for the remainder of the year. Again, the outlook upgrade was driven by our stronger-than-expected Q1, and that's it. And don't forget that there is a seasonality of earnings and returns on sales based on production levels especially. Nothing else to be mentioned here, I think. Thank you.

The next question comes from Nancy Nye from Goldman Sachs. Please go ahead.

Hi, good morning. And yeah, thanks for taking my question. I think my one is sort of on the impact of credit tightening on your Finco and also on your orders, given, I guess, a lot of your customers rely on third party financing. So I'm wondering how you see the impacts flow through, whether, for example, with your Finco, you decide to finance more customers whom you previously weren't financing, or if that's not the case, sort of what you see the impact on your orders to be. Thank you.

Thanks Nancy. Of course interest rates are going up and spreads are going up and of course there is a discussion with many customers on the cost of financing and especially if they did not buy a vehicle in the last 12 to 24 months they are of course shocked. But we don't see neither the penetration of our captive financing services nor the kind of appetite to do the deals based on a higher monthly fee happening. So in a way, so far, so good. Of course, in the Scania portfolio, we see certain margin pressure coming in because of the cost of funding that is hitting us as a result of the higher interest rates, but also as a result of our rating. So that, I would say, I think is what I can say around the effect of the increased interest rates. I mean, let's see where this is going.

And Nancy, just to add to that, this is exactly what we baked into our guidance for the segment of trade and financial services, which compares at the 10% to 15% level to the very strong 23.3% in the first quarter, because actually we do anticipate that the interest rate will increase. That will leave its mark. Spreads are going down to a certain degree. And that will be affecting, of course, our results. And in addition, we also would anticipate in the current economic environment with the uncertainty we see in the market, that there will also maybe an increase in bad debt expenses going forward. All that said, of course, you can never be sure, of course. And so it was also for them a good start into the year. But let's evaluate that when we have maybe more quarters and more months on the table. Thanks, Lars. I think then we have one final one, right? Yes.

The next question comes from Himanshu Agarwal from Jefferies. Please go ahead.

Hi. Thanks for taking my questions, Himanshu from Jefferies. I just wanted to ask on the Q1 margins, was there a temporary price-cost mismatch which supported the margins, i.e. prices carried over from last year and raw mats have come down? And as the year progresses, that should probably normalize. And the second part of this question is, given the evolution we have seen in cost inflation, do you think we've seen the peak pricing in trucks, while you may have some mixed benefit during the second half? Thank you.

Yes, if I got your first part of the question right, I mean, we're not in the daily operations to see the raw materials coming down yet. Again, we have rather longer contracts than shorter. What I said in the beginning was that we are happy to not see the raw material price increase in our day-to-day operation. We are, of course, happy to make new contracts on lower levels. In a way, you could say that we took some precautionary measures to increase pricing based on a forecast of cost that did not fully happen. But on the other hand you have no effects coming in such as the wages Very high salary increases in Europe that we did not plan for Going into this year, so let's see where the whole thing plays out So have we reached peak pricing you're asking? that's of course very very difficult to say and especially on on an average level and Again, I don't see any tendencies. There is always price competition in our industry. There is right now as well. But again, it's around total cost of ownership. It's around total operating economy for the customers. And with the goodies we are bringing to the market now with the completely new drivelines, I think we still have an upside on our end to get even better average prices in the market. I stop there, Lars.

All right. Yeah, I think that brings our Q1 results conference call and, of course, the Q&A to an end. As always, let me remind you that you can always reach out to the investor relations team in case of any further questions. Thank you for joining us today, and I wish you all a nice remaining day. Goodbye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded, and you may disconnect.

Bye-bye.