Traton SE

Welcome to the conference call of the 2023 Health Year Financial Report of Triton SE. At any time during this conference, you can press start followed by 1 to enter the queue for the question and answer session. Please note that the anonymous participants are not allowed in this conference and will be disconnected. Thank you for holding. The conference will start shortly.

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Okay, good morning, everyone, and welcome to the Trayton Hot Year 2023 results conference call, and thank you for joining us today. Before we start, let me first make you aware of the disclaimer. As always, you can find all relevant documents on our H1 and the Q2 performance on our website, trayton.com.ir, including, of course, the slides of today's presentations. Together with me today are Christian Levine, our CEO, and Michael Jackstein, our CFO and CHRO. I'm also joined by Camilla de Woon, Head of Corporate Relations. Christian will start with an overview and our progress in strategy execution, and Michael will then explain the financial performance in Q2 in more detail before we conclude the presentation with a full year outlook. After the presentation, as always, we look forward to answering your questions. will start with the questions from analysts and investors and in the final 10 minutes of our call we will offer media representatives the opportunity to ask questions as well with that i hand it over to christian christian the floor is yours thank you lars also welcome from my own to everyone on the call uh yeah uh let's start with uh a bit

business environment and perhaps the most important part at least was what concerns our industry and our company the supply chain supply chain has stabilized further throughout this quarter as was the case also in the first quarter which has allowed us to drive up our industrial output in Basically, all of our brands said that it doesn't come without continued challenges. We've had headwinds, especially in North America with delivery disturbances, but honestly also in other regions around the world. That means that our order book is still very big. And unfortunately, that lead times to customers remain far above what is desirable. On the macroeconomic and geopolitical side, of course, the uncertainty remains, which is leading to a weakening trend in the global economy, but with different regional dynamics. We do see lower transport activity in some markets, said that it still remains on a high level. Of course, inflation pressure has continued. with interest rate hikes as a consequence and that of course comes through in certain businesses as creating difficulties for our customers to get proper financing. We will talk more about our own financial services business which performs very well under the circumstances later. Said that, and perhaps surprisingly to many, the truck demand in both our most important markets for Triton, which is Europe and North America, remains on a very high level. And our analysis comes to the conclusion that this mainly depends on the very high replacement need of old equipment with very high average age, especially in Europe. The third most important area for the trading group is, of course, Latin America and especially Brazil, where we do see a significant weaker market, and that has several reasons, but especially the changeover into the Canoma P8 or the Euro 6, if you would like, have had an impact during the first half of the year, although we saw during the last month in the second quarter an improvement, particularly based on the incentives that were put into the market by the Brazilian government. If we change slide and have a first glimpse on our numbers, you see that Tratom performed a strong quarter in the second quarter of the year. Incoming orders were lower and that is mainly due to our own continued restrictive policies on taking in orders because of the long lead times and because of the inflationary pressures. And especially in our Navistar company with international brand, we have not opened the order books yet for 2024. And that has, of course, an influence on the order intake throughout the quarter. Another factor was Brazil, where order in fact is lower due to the lower demand in the market. On the delivery side, we had a very strong growth of unit sales. Of course, the Q2 in 2022 was low, as you remember, especially because of the difficulties in the supply chain. But still, we're very happy with this considerable growth that we are showing. We expect that to continue going forward. Sales revenue increased, as you can see, by almost a quarter. That is driven both by higher volumes, of course, but also by a good product mix and a very good price realization. And on top of that, We have continued to grow for the profitability, so important vehicle services business. So our adjusted operating result advanced to above 1 billion euro, which in percentage gave us a good return on sales of 8.9%. The improvement was seen all throughout the group in Scania. delivering and further advancing the very strong double-digit margin we performed already in Q1. And then we were all super happy to see that MAN is now up in the range or at least close to the range where they should be after so many years of struggle and with the restructuring or realignment program now finally getting traction and coming through to bottom line. 1.7% in the quarter, really showing what they are capable of performing under the new setup. So all in all, I think it's a remarkable performance that we produced both in the second quarter and in the first six months. And of course, we are pushing forward with full focus on continuing to deliver. There is more to do. We did lose production volume, as I said, also in the second quarter so we're not fully utilizing our capacity yet and we are of course aiming to take us up to our strategic targets for the calendar year 2024. I also want to mention that of course we continue to follow our strategy and what I introduced the fourth pillar in our strategy execution so-called strategy execution remains top on the agenda for everyone in the organization. And I think we achieved a number of milestones also in this second quarter. And that takes me into the next slide. And one of these milestones was that we followed the announcement in early April. We established now fully the trait on financial services based on the backbone of the Skåne Financial Services. a framework agreement with Volkswagen and Volkswagen Financial Services and Volkswagen Bank that we can take over the activities of financing customers of MAN and Volkswagen truck and bus. So the scope of this includes the sale and transfer of the rights to provide financial solutions to these customers, but the existing portfolio remains with Volkswagen Financial Services. This means that there will be a gradual transition. We will do our utmost to make this smooth so that customers do not even notice the transformation. And it will start with the 14 markets in Europe with a rollout that we expect to be fully completed in the second quarter of 2025. With this, a number of employees today serving both MIM and Volkswagen truck and bus financial services will move over and join the Trayton Financial Services. So a big step and a logical one in the development of the Trayton Financial Services as a global captive and integrated financial service business provider in the Trayton Group. We are also looking forward in October to relaunch Navistar financial services retail business and by that we will have completed the creation of a complete group-wide financial services solution provider that will allow support unit sales of course but more importantly enlarge the range of services which is just becoming more and more important as our industry is gradually moving into the area of electromobility. But also, of course, so important to be a shock absorber in the earnings and the resilience of our group. Let's move into the next page and the next slide and talk about another important pillar in our strategic framework. the road towards electrified transport. And there were a number of cool things happening throughout this quarter. One was the announcement between Scania and Northvolt of the first battery cell for heavy electric vehicles that can last basically the lifetime of the vehicle, 1.5 million kilometers, which is, I would say, a milestone. And that takes away some of the worries around the business model for batteries. And it will help us to create also a circular economy around not only the battery, but the vehicle as such. Another milestone was the successful test of the first in the world megawatt charging system at Skånes facilities up in Södertälje together with ABB e-mobility. And you know that this system moving from 750 kilowatt hours, sorry, 750 kilowatts up to 1.2 megawatts will take down the charging time of the heavy commercial vehicle down with 50%. And Skåne will be able to offer this, and it's still a pre-standard because the standard will hopefully be concluded during the end of this year or beginning of next year. So it's a MSC pre-standard connector you can get already from start of production in 2024. In MIN, we are preparing the start of series production of the e-truck in our Munich plant, which will be a full-fledged 40-tonner prepared for long-distance transport in Europe. I should add, excuse me, I should add, that we are collecting pre-orders for this vehicle, and we have already more than 500 in our order books. As a consequence, we are also training our employees, and 2,600 of our MAN employees have already been trained in the usage of the high-voltage technology in these vehicles. Another highlight from the MAN side was that this vehicle that we also showcased at the IAA in September last year won the so-called red dot design award in the month of june this year from our friends in brazil fox one truck and bus we can report that the e-delivery track that was launched earlier is now fully integrated into the assembly line mixed in with the ice vehicles and our hands ready for volume or if you would like serial production On the next slide, there are a few more examples from our different brands. You see that both competitive products are coming through. That is one crucial element for customers to switch over. The other crucial element is of course the infrastructure of charging. We are expanding the product portfolio and we continue to do so in the upcoming years and with that we also see demand increasing and here are a few highlights you see the logistics service provided Dufenbäck that is to deploy 120 MAN e-trucks by 2026 that is transports for the Volkswagen Group logistics and this will be one of the first customer to receive the new MAN 40 tonner Another pilot customer for this truck will be the Logistic Powerhouse DB Schenker that plans to operate 100 new MIME trucks by 2026. And the first vehicles will be delivered already in the beginning of 2024. Navistar has delivered the first international EMV series. That's the medium duty vehicle. to the global food service distribution company Cisco and Scania finally received an order for 100 battery electric trucks, the first Scania regional whole battery electric 4x2 tractor unit that will be used in the UK. This, by the way, was part of the huge order that we announced earlier this week by 2,500 trucks, the rest of them delivered with the Scania Super driveline that was successfully launched a year and a half ago. So just underlining that the transformation towards zero emission vehicles starts to become a reality. And where it's most pronounced is in the public transport space. where the high demand for electric city bus solutions are starting to show in Europe. And also here, we continue to deliver, and especially with our MIM brands, where the VHH already with a fourth contract for e-buses from MIM. They ordered another 100, Lion City 12e, and the first 48 buses are scheduled to delivered already at the turn of the year 2024. Another part of our strategy is the focus on value creation and really executing on the programs we have in place and here one of the most important part is MIM and now I'm on the next slide. The MIM realignment And that has continued in a very successful way throughout this quarter. The plant expansion in our Polish plant in Krakow was successfully completed in May. And with that, we are driving up production numbers. You know, before we could only manufacture the heavy range there, but we have now also transferred in the medium and the light duty trucks to Krakow. And we continue to ramp up production, and until the end of 2023, we expect to be at the daily rate of up to 300 vehicles, and of course also cabs that are manufactured there, which is roughly three times more than what was previously the capacity of this plant. And to do this expansion and to move production capacity away from Austria, The Steyr plant is a key building block in the transformation of MIM to be a profitable manufacturer. With this, around about two-thirds of all MIM trucks and truck cabs will be assembled in Krakow. Next page again, please. Here, it's about the Skåne bus business where we took an important decision during the quarter to reshape the way we drive our bus and coach business. You know that bus and coach was heavily impacted by the pandemic much more than truck business and even if it is picking up it is picking up rather slowly and we do not expect it to come back to the levels that we had before the pandemic. We also see much tougher competition. We have now more than 40 competitors only in the European space where we used to work with less than 10. We see further challenges in terms of upcoming legislation that requires massive investments in new technology. So with low volumes in Scania, less than 10% of our bus sales are with our own body. We decided to reshape our business model and focus on working with partners, meaning bodybuilder partners, and with that, provide customers with competitive and sustainable solutions at the same time as we can provide and secure profitable growth for Scania as a brand. So the decision might sound dramatic. We seized body production. at our chassis and body plant in Słupsk in Poland. We will be gradually ramping down until the end of the first quarter next year where we completely close. We continue, of course, to focus on chassis production so chassis production is not affected. So underlining that it's an updated strategy, we stopped our own body, but we continue to offer customers complete buses and complete coaches and rather build on our strengths, which always was the modular system, reusing truck components, an extensive service network, and an even stronger partnership with our body builder partners. On the next page, page 12, a few words about our journey to become a more sustainable company. Now, the turn has come to Navistar, following first Scania and then MAN, will now sign the commitment to develop science-based emission reduction targets aligned with the SBTI organization's criteria. By now, the commitment has been approved. by the SBTI and I'm very proud of that and that means that now we started to submit binding targets within the upcoming two years and this is of course supporting our ambition to cut emissions in half before 2030 and of course also support the Paris climate agreement. Also in the second quarter Scania took a massive step towards decarbonizing its supply chain by placing the first order for green steel. So we have signed a contract with H2O Green Steel in Sweden to provide Scania with sustainably produced steel. And this is a key element in our brand strategy to phase out the main sources of CO2 emissions from the most emitting production materials and batteries in supply chain until 2030. So a last page in this block and for me just to summarize the quarter. Trayton keeps on delivering both in operating and financial performance terms, but we also continue to drive our strategy execution forward. We continue to succeed in a very demanding and quite unpredictable market environment. We deliver a strong both top and bottom line performance. Our trade from brands strongly increased deliveries throughout the board supported by the improved supply chains and hence production volumes and global track demands remains at the high level in our key markets. And we continue to be restricted in order intake. So, while successfully managing our short term, we focus on the long term and we continue our strategy execution with full force and we made further progress along all our strategic priorities. So with that as an introduction I would like to hand the word over to Michael, Michael Jackstein our CFO and CHRO to take us deeper into the financial results. Michael over to you.

Thank you very much, Christian. And having said that, directly moving on to the analysis of our performance in the second quarter. Incoming orders reached 56.8 thousand vehicles, corresponding to a book-to-bill ratio of 0.7 and a 17% decline compared to the prior year. I will come back to this in a minute. Unit sales were significantly up by 20% to a good level of 83.5 thousand vehicles and growth across all brands, with the exception of Volkswagen truck and bus due to the market weakness in Brazil. This was in particular driven by a further stabilization of supply chains and its impact on our production. Nevertheless, we continue to experience headwinds and selective disruptions as well as tight logistic capacities, all of which still holding back Trayton to reach its full potential. As a result of strong unit sales and relatively low incoming orders, we were able to reduce the order book size. However, the overall order book continues to be on a very high level. 2023 production is fully covered and orders reach well into the year 2024, with differences between the brands of the trade and group, which leads me to the more detailed analysis of our order intake. As you can see on the next slide, 16, incoming orders for Scania and MAN continue to be supported by the overall high demand in key markets. Book-to-bill at 0.8 in the second quarter remained on a reasonable level for both brands, largely a result of the continued restrictive order intake management. In addition, we are starting to see a somewhat lower transport activity and a normalization of demand in some markets, also against the background of more difficult and expensive financing for our customers. This holds true for the North American markets as well, while customer demand in the region stayed on a robust level. However, order intake of Navistar was extraordinarily low, especially in the second quarter with a book-to-bill ratio of 0.2. Output has been increasing due to improving supply chains. In addition, our order backlog is very robust with almost all available production slots for 2023 filled with little flexibility to expand. Second, the order book for 2024 has largely not been open throughout the first half year. This was due to the brand's intensified efforts to reduce too long lead times. Meanwhile, Navistar started to selectively take orders for 2024 and expects to increasingly open the book throughout the third quarter. Volkswagen truck and bus, as expected, was affected by the emission regulation change in Brazil, as well as the overall economic weakness. The good news is that we start to see signs of stabilization and recently an uptick from a low level. On slide 17, you can see our sales revenue development. Sales revenue increased by 23% in the second quarter to 11.7 billion euros. This development was in particular driven by the strong growth of new vehicle sales and favorable mixed effects. In addition, we continue to benefit from the successful realization of higher vehicle prices. Please bear in mind, that last year's quarter was heavily affected by the war in Ukraine. Another factor supporting our top line growth was the vehicle services business, where sales revenue increased by about 3% year over year. Demand for spare parts and repair and maintenance services remains high given age fleets and strong utilization. Moving on to slide 18 and the bottom line performance. As you can see, the trading group continued its strong earnings momentum, both in absolute and relative terms. The adjusted operating result advanced to slightly more than 1 billion euros. This corresponds to a very strong adjusted return on sales of 8.9%, up by 470 basis points year over year compared to an admittedly exceptionally low comparison base in the prior year quarter. The positive development was in particular due to the higher utilization of our production capacities, 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 prices for energy, raw materials, and bought-in components. Not to forget our strong focus on cost management. Overall, a very encouraging development, which impressively underlines that the trading group is on track towards the strategic return on sales target of 9% by 2024. Let us now have a closer look at the performance of our brands and segments. In the second quarter, all brands except for Volkswagen truck and bus benefited from higher volume and improved production capacity utilization. Sales revenues in the vehicle services business continued to expand strongly at both Scania and MAN, while Navistar recorded a decline. This, however, was due to the sale of MWM in late 2022. Another common theme across all our brands with different dynamics were successful pricing initiatives, which helped to compensate for strong input cost pressures. On brand level, Scania achieved again an outstanding profitability level with an adjusted return on sales of 13.6%, confirming the strong performance in the first quarter. After an already strong first quarter, MAN Truck & Bus recorded another impressive step up to an adjusted return on sales of 7.7% in the second quarter. Nevisar showed a robust performance at a return on sales of 6%, confirming the margin levels achieved in the past quarters. Volkswagen truck and bus faced extremely challenging market conditions, especially in Brazil, and recorded a remarkably strong return on sales of 9.4%, despite significantly lower unit sales. This is another proof of the brand's ability to master stormy markets with its highly flexible business model. Finally, Trayton Financial Services recorded a double-digit percentage growth on the back of an expansion of its portfolio and increased interest income. Higher funding costs and lower spreads had a counteracting effect on profitability. And this leads me to our net cash flow development on page 20. Trayton Operations recorded a robust net cash flow of slightly more than 1 billion euros in the second quarter, bringing the first half year figure to plus 1.75 billion euros. It is important to note that this number includes the proceeds from the sale of Scania Finance Russia of 400 million euros and the positive effect from the intra-group sale of the Scania Financial Services business to Trayton Financial Services for 499 million euros. We had already indicated both effects in previous results calls. Excluding these effects, net cash flow of Trayton operations amounted to 855 million euros in the first half year, reflecting the strongly improved operating performance. Nevertheless, cash conversion was once more held back by an increase in working capital. 1.2 billion euros cash was tied up in the first half of the year, largely due to higher inventories as a result of the strong expansion of production volumes and ongoing logistics shortages. This also ensures that we can keep our delivery promises to our customers. To optimize working capital and to reduce our net debt position remains a key priority for us. Which brings me to the next page. During the first half year, the net financial debt of trade and operations, including corporate items, improved by about 600 million euros to 7.1 billion euros as per end of June. Main driver was the strongly improved operating performance, which was partly compensated for by cash tied up due to a further buildup of working capital, in particular on the inventory side. While the net debt position benefited from the 400 million euro proceeds from the sale of Scania Finance Russia early in the year, the impact from the intergroup transfer of Scania Financial Services was neutral. Also important to note is that we paid out the dividend for fiscal year 2022 amounting to a cash out of 350 million euros in the second quarter. With that, back to you, Christian.

Okay, great. Thanks, Michael. And then I will take you through the expectations. an outlook for the total markets on trucks 2023. Here we have done an improvement. This is now our own expectations and not based on a general market forecast. So let me start by saying that overall the global truck demand remains at the high level. It continues to be supportive and mainly driven by replacement needs. We, however, see starting to see, I would say, a normalization of some of the most heated markets. So starting by Europe and North America, we expect growth. We expect the growth in the range of plus 5 to plus 20%. We see a slight improved outlook compared to what we did in the Q1 call. three months ago, and that's mainly due to the higher production levels, meaning that supply chains are stabilizing, and it's not that demand itself is growing stronger. That also means that overall track lead times are slightly shorter, still low, but slightly shorter, and there is a significant catch-up demand. South America, the market is expected to decline further, And in particular in Brazil, due to the new emission standard regulation, but also a general market weakness. So we expect a minus in the range of minus 20 to minus 5. So a slightly weaker outlook. And more recently, demand has started to improve. And we believe that it's mainly a temporary effect from some quite minor, I would say, government incentives introduced here at the end of Q2. So all in all, we need to say that uncertainty continues to be high. So the key factor, such as our supply chain, but also logistics, shortages, and of course, economic uncertainties makes it particularly difficult to predict. the market going forward, which of course means that we need to continue to be prepared to react quickly to any change in our environment. So, with that outlook, back to you, Michael, for the guidance.

Thanks a lot, Christian. So, based on the strong results in the first six months, we largely confirm our full-year outlook. which we had upgraded in May with the release of the Q1 results. Based on the high order backlog and improved supply chain, we continue to expect to grow both unit sales and sales revenue by 5% to 15%. While we confirm our forecast of an adjusted return on sales of 7.5 to 8.5% in the trade and operations business area, we raise our expectation for trade and financial services and now expect it in the bandwidth of 13 to 18%. Overall, for the trade and group, we confirm our forecast for the adjusted operating return on sales of 7 to 8%. Also, The forecast range of between 1.8 and 2.3 billion euros for the net cash flow of trade and operations in the full year remains unchanged. Please bear in mind that the effects from the Scania Financial Services intra-group transfer and the sale of Scania Finance Russia are included. However, on the back of a strong financial performance in the first six months of the year, with an adjusted return on sales of 8.6% and a net cash flow of 1.75 billion euros in trade and operations, we expect to end the full year closer to the higher end of the respective forecast ranges. With that, back to you, Christian, for the final remarks.

Yeah, thanks, Michael. So before entering into the Q&A, just let me make a short summary. in the beginning of the year 2023 will be the year where we enforce execution of our trade from way forward and we deliver um i think we can after six months now summarize that this is exactly what we do uh i think year to date we have delivered a strong performance across all brands and all segments with a very clear focus on our customer needs and the market trends We master the persisting challenges in markets and vigorously drive our strategy execution. There is a strong momentum in our top line and underlying earnings, in particular driven by Scania's performance, but also MIM starting to deliver a very good result. Net cash flow and net debt position is having a positive trend, but of course, there is still a big room for improvement. And finally, we confirm our positive outlook for 2023. where we target the upper end of the forecasted range for the adjusted internal sales, the net cash flow of the trading group and the trading operations respectively. So with that, we end our presentation part and hand back to Lars for the Q&A part. Lars.

Excellent. Thanks, both of you, Christian and Michael. Let us now open the floor for the Q&A. As I said, we will start with questions from analysts and investors and we'll take questions from media in the final 10 minutes. Before we start, just a quick housekeeping item, as always, and you all know this stuff. If you would like to ask a question, please press star followed by one on your telephone keypad to enter into the queue. And if your question has been answered before it's your turn, you can dial star and two to cancel the question. If you have any kind of difficulties, press star and zero for operator assistance. And yeah, it would be great if you would announce your name when you ask your question. With that, Let us open the floor, and I can see that our first name in the line is Claes Berglin from Citi. Hi, Claes.

Hi, thank you. Thank you, Lars. Hi, Christian and Michael. So, Claes at Citi. So, the first question I had is on the guidance and the implied trading for the second half. The upper end for the full year, looking at the margin, 8%, still looks pretty conservative, given that the benefits from Krakow in MAN is yet to come through on the ramp, and with Scania now delivering almost a mid-teams margin. It's obviously sensible to be conservative, but can I ask Christian if you would highlight what you think could impact deliveries and margin negatively here? Is it price concessions? Do you think cancellations are likely? Do you see increased cancellations somewhere at the moment? And I'm asking, as you're fully booked for 2023, is there any demand weakness will only impact more 2024? I'll start here.

Yeah, right. Thanks, Klaas. The first question will be taken from Michael in guidance, and I think that Christian will be more than happy to talk about the cancellation part.

Yeah, thank you very much for the question. As just mentioned, we expect to end the year towards the higher end of the forecast range of 7% to 8% for the return on sales. Also, as already said during the Q1 conference call, The quarterly results cannot be simply extrapolated to the full year when we look at the typical seasonal patterns, especially when you look at the summer breaks during the third quarter. We remain on the conservative side, and this is actually due to various reasons that we see. On the one hand side, we see high macroeconomic uncertainty still with a low predictability. We still see a still vulnerable situation in the global supply chains. We see tight logistics capacities, and we see movements in the prices for energies. uh raw materials and bought in components so uh if we summarize all that um then we remain on the conservative sides taking all these reasons into account thank you yeah if i should have their christian here um yeah i think that the supply chain is is the remaining main risk we have here where it continues to be

Troublesome, and we constantly have still disturbances in the supply chain affecting our production and hence the output. But also to add, because no clause there is, there are no cancellations. I mean, we're still talking handful of cancellations per week, so. And there are no price concessions. I mean, the order book is there and it's stable. But what we have is, of course, Brazil. and so we have a global production system but unfortunately as the world is moving towards less globalization we have actually more and more difficulties to find markets which we can source out of brazilian production system when we cannot fill with brazilian orders so even if we are more than 60 000 trucks on order book in brazil we are not fully sold out in the in the production system so that's that's the remaining risk and that's one of the reasons why we also want to stay conservative. But again, consolations and pricing, there is no change whatsoever from the previous quarter.

That's good to hear. My second one is on the timing of the order book reopening for 2024. Clearly, the week orders in Avistar, you haven't opened there, but I think you're opening up a bit selectively. Am I right to assume that you still see This is in discussions with customers. You still see North America strong in a Europe, no major trade ins on the side. Obviously, only operators struggling more than fleets. But you could comment there, Chris, on the differences between North America discussions and Europe. Yeah.

Yeah, exactly. So you got it exactly right. Demand in Europe, it takes a little bit longer time to close the orders, and specifically with smaller customers, whereas in the US, as soon as we open up, we sell. So to explain a little bit why Navistar has been so restrictive with taking on orders, I mean, first of all, Navistar is the brand with the biggest problems with the supply chain. We also have a new factory we're ramping up in Texas, which will, of course, eventually give us much more capacity, but it is creating quite a lot of problems for us. And short-term, and that makes it very hard to promise a delivery date, and you don't want to make customers disappointed again, so to say. So that is one main reason why we have been very restrictive in taking on orders. The other is the introduction of the super driveline. uh what is in sconia called the super driver which will be called s13 in navistar we did actually open up specifically for the s13 capacity or at least what we expect to be the s13 capacity here during uh during july so after the closing of the second quarter and immediately sold these units out uh so and we are now considering here during uh the month of august to open up also for for the rest of the product program. But you're right, there is a very solid demand in North America, and I see that as a very good sign also moving into 2024 for the U.S., where we have previously said that, okay, here we see some clouds, but yeah, it seems to be very solid, and the IRA is, of course,

the the inflationary reduction act from the biden admin is of course supporting demand uh all over i would say quick final one uh the third one is on ma and they're thinking a bit further out do you think you're over earning here a little bit is pricing running ahead of cost inflation a bit and the reason for asking is that they're doing a margin here very close to the eight percent through the cycle target with the benefits from croco other other efficiency measures yet to come through it feels almost like the margin can go higher than 8% over time. And Michael, I totally understand decisionality going into the third, but interested in your thoughts there.

All right. I think Christian will take the question, I think, on MTB and the profitability part and as well.

I can take that one. Thanks, Lars. No, but yes, there is, of course, some kind of overshoot in terms of pricing versus costing. and in general we see especially in europe that costs are actually lower than our expectations on on some of the important raw materials on other areas we we see a little bit higher costs than we expected amongst other logistics by the way but i mean that's good for our for our business model that our customers are making more money but will this prevail that's hard to say And that's, by the way, another reason why we are restricted with order intake. When it's getting harder to take orders, of course, prices are generally put to question in competition with other brands. And if you then make concessions, you also have to adjust the orders you have with these customers in the order book. As you know, I mean, our customers buy regularly and put new orders monthly. So that's another reason why we are restricted. So, in terms of MIN, yeah, there are a lot of goodies coming our way in terms of lower costs, lower fixed costs, and that should eventually transform into better margins. But again, given the uncertainties on the cost side and the supply chain side, we remain conservative in our outlook for the time being. Thank you. Thanks, Lars.

All right, thanks. Thanks, Lars. So the next name in the line is Hampus Engelow from Handelsbanken. Hi, Hampus. Thank you very much.

Can you hear me?

Yes, we can hear you.

Yes, excellent. Sorry. A couple of questions from me. First question is on your service business. If you could share some light, if we adjust for price increases, How did service volumes develop during the quarter and talking about Europe and North America? Second question is on your range on the outlook for North American Europe markets for this year. I mean provided that we would be at the 20% and North America would be about 370,000 units and Europe would be at an all-time high 356. If I'm talking above 60 tons and not the medium duty, that may be you including your outlook. What risk do you see in 2024 if that happens? Maybe not a number for that, but more sense of your feeling, because how much of the replacement need would we be adjusting for if we are on the upper end in Europe and North America? I'll stop there and then take maybe the last question when we discuss these two questions.

Thanks. Thanks, Hampus. Thanks too much. I think we'll start with the question on markets 2023 and especially the risk on 2024. I think that's something Christian is perfectly situated to answer. And then, of course, we have another question on the service business. Am I right that you asked for especially the Navistar part? which has been negative in the second quarter and why that is?

It was a general question, but just to get the sense on the activity in the service business. Yeah.

Okay. But then we just want to comment before Christian answers the question, probably on service business as well. and there's a technical aspect in the north american market because of the sale of the mwm um engine manufacturer effective november last year and and if you would adjust novice numbers for that the consolidation effect service business was actually up in the in the first quarter so that is a consolidation effect but yeah christian over to you sorry

Hi Hampus. On the total market development, our numbers by the way are from 6 ton and not 16 as you're used to from Volvo and Scania. But the 6 ton and upwards numbers, I'm more positive for 2024 today than I was maybe three months ago. The order books are solid. They are growing. We are seeing good demand. We're seeing good underlying transport activity, both in North America and in Europe. The replacement need, we have perhaps even underestimated historically. And just looking at the volumes that were lost during the pandemic years because of Well, 1st, because of the pandemic itself, and we will shut down production in 2020 and then the subsequent lack of capacity because of the semiconductor crisis and then later on the general supply chain. I think 1 could expect that 2024 would be only based on the replacement need at least a good and I will not give you a number, but at least. a very good year in terms of total market, both in North America and Europe. And if you would have asked me three months ago, I would have been a little bit more shaky on that one. But I feel a bit more confident now that we're going to see a good 24.

Excellent. I hope I answered the question. I hope I didn't say too much. No, it's fine. Fine for me then. That's just to get the sense. I'm not actually in front of a cash number here, but just to get the sense of the lead times. Have you managed to shorten the lead times sequentially, second quarter over first quarter, or do you typically remain on similar levels? And if you have a number for the lead times, I would have to get that. Thanks.

Yeah. You know, the way we have managed these last very strange years, these last almost three years now, is that we have allocated volumes per market. So as a market, you get a certain volume to work with, and then you prioritize your customers to the local best, let's say, optimization based on many different things, of course. And that means that we cannot say that we have a general lead time, but we have in all our brands close to one year of sales in the order book. And that then translates in some markets to six months and in other markets to more than 12 months. And that's where you start to get beyond 12 months. That's where we're getting restricted. And for instance, in Scania, we have not accepted orders going longer than that. Said that, yes, the situation has improved as we have been able to ramp up production. And yes, as the pressure on new orders is also lower. Both these things have improved the situation. and especially in some markets. And then you have exceptions such as Brazil, where the lead time is back to normal, where you get the truck within three to four months. So it is a scattered picture. And what we need to do now is we need to get away from these allocation systems and get back to where we were in 2019, where first-come, first-served principle is put back into place. But we can only do that when we have full control of our supply chain. And that is what is still haunting us. And back to Navistar, that's why they are particularly, I would say, careful with taking on the orders. I hope that gives you a bit of a flavor of the situation we're in. Absolutely.

Thank you very much.

Thanks. Perfect. Thanks for that. So the next question comes from the line of Miguel, Miguel Borrega from BNP Paribas. Hi, Miguel.

Thank you, Lars. Hello everyone. Thanks for taking my questions. The first one on your order intake, I mean, we've seen a couple of quarters now with consecutive order decline. I'm assuming, you know, you're not taking orders in Europe fully for 2024, selective in the US, but how does this shape up in terms of production, your production outlook for 2024? I know it's still early, but what are you essentially, Are you assuming lower production at higher value? Is that how you're thinking or the other way around? So more broadly, if you've been restrictive on order intake because of supply chains, now that supply chains are, let's call it easing, not quite there, but easing, shouldn't you be more comfortable with long lead times, especially if raw materials are also not going up?

I think that's the question. Thanks, Miguel. Perfect for Christian, right?

Yeah, I am sleeping best at night. Yes, we could perhaps feel a bit more comfortable with raw material prices coming down and with our supply chains getting a little bit more in order. So what are we expecting in terms of production? We are not at all utilizing the production capacity we have installed So both in Europe, Scania and Miami, we did not manage to fill production despite full manning. So there's still a rather big upside there. We have not fully utilized crop of yet. And in Navistar even further, we have by far not utilized the plant in Texas. And again, it is really the supply chain that is playing games with us. So I see a good chance that we could increase our production output in the second half, of course, but also in 2024. Of course, when we start to come into 2024, we do not know how the order situation will develop, especially going into the second half of 2024. But as it is right now, we're not planning any decreases of production capacity. We're rather hooked for the opposite.

I stopped there on that one. That's great. Thank you very much. And then can you provide some early indications of how you're pricing the new orders going into 2024? Is there any pricing pressures either from customers or perhaps from competitors that everyone is now seeing a weaker macro environment? So perhaps your competitors want to lock in lower priced orders, or you're not seeing that at all. Everyone's still quite booked out. So pricing should be sustainable at least for now.

Yeah. Should I take that one as well Lars? That would be perfect. Thank you. Yeah. Yeah. So Miguel, we have introduced further price increases in all our brands, starting with 2024 production. less hefty increases than last year, I should admit. But nevertheless, we have introduced gross price list improvements. And you never know what is coming out after negotiations, of course. But what we see right now is very good price discipline in the market. And that is, of course, a very general statement. But in general, we see that all the big players are careful, let's say. and probably have very good self-confidence in the negotiations. So that's good for the industry.

Thank you very much.

Thanks. Thanks, Miguel. So we get to the next questioner. And next in line is Daniela Costa from Goldman Sachs. Hi, Daniela. How are you doing? Daniela, we can't hear you.

Hello? Is that working? Yeah, now it's working? Perfect. Thank you so much. Sorry for the trouble. I have two questions, one more on the short term and one on the long term. Just on the shorter term, going back to what you've been talking about regarding the regulation change and the impact that that's having in terms of the order pattern into the U.S., do you think that can sort of translate into some catch-up in the coming months? Is that what you're seeing in terms of As you look for the next few months, maybe more than just underlying demand is that maybe what's driving. We will drive some off the orders, and how significant can that be? And then just more into the long term, now it looks like in Europe that the internal combustion hydrogen engines might be allowed. Does that change how you think about sort of technologies and power train shift going forward and where to allocate energy? capital or you're still very much batteries is the way to go. Thank you.

Yeah, both nice questions, Daniela. Thank you. And both nice questions for Christian, I think.

Yeah, I have to ask a clarification on the first one, Daniela. Are you thinking about the CARB24 when you talk about legislation in North America or what was your thinking about what could be driving short-term water intake?

I was asking regarding what you mentioned that has been one of the reasons why we've seen sort of some incitation on the, I think, the design commentary that you mentioned in the release and whether we could see the reverse of that, that as we get clarity, you get suddenly.

Okay, more our own limitations. Yes, the answer is yes. I expect to see a strong order intake as we release the order books for Navistar. in the upcoming months for deliveries in 2024. On your second one, H2I, you were right. That was a surprise in a way that the EU proposed, it's still a proposal, that in the measurement of CO2 reductions, so vehicles that use a combustion engine but burn hydrogen, are allowed to be counted as zero emission vehicles and hence has no CO2 impact. What does that mean for the industry? Well, first of all, if we talk about the technology briefly, this is then an engine that is even less sufficient than the fuel cell. So if you take all known technologies, in the heavy commercial vehicle industry to propel vehicles you start with a battery electric vehicle which is the most efficient meaning most of the energy the original energy is transformed into kinetic energy pulling the load so to say the least efficient you can find is burning hydrogen so that's that's just the fact so one could then say well let's roll out that technology but it's not that easy The interesting thing here is that with this EU proposal, the whole industry could reuse much of the infrastructure and the capex that we have spent over the years in building gas vehicles, so vehicles propelled by natural gas or even better, biogas, because to transform a biogas engine into an H2 burner is not that big a deal. You need to work with higher pressures. You need another compressor to push the fuel into the combustion room, the combustion chamber. But this is rather small investments, both for the manufacturers and then also, of course, for the customers because, you know, they normally then have already infrastructure to fill up gas. even if it's inefficient and even if the cost per kilometer will be very high energy cost I think that there could be a market for this type of product as a complement to the to the battery electric vehicles and maybe but just maybe it will then be more competitive than the fuel cell vehicles whether it's so to say no infrastructure invested by any of the big manufacturers at least not at least not as much as on the conventional gas ice engines so let's see it's an interesting and it was a bit of a surprising proposal from the EU commission but let's also wait until this turns into into law and then we will we will follow this closely and we will continue to report to you how we make our strategic choices

Thank you. And maybe, as you mentioned CARB in the first one, can you actually comment on that? Do you see an impact on others from that?

No, we're still analyzing what it really means, this agreement between CARB and EPA. But that seems to be a very positive one, meaning that we will just have one standard to relate to in the U.S., but then with an even higher demand for zero emission vehicles. And I mean, that fits our strategy perfectly. if that is the case, but I'm still waiting from our U.S. team for more thorough analysis, but it seems to be a very good thing.

Maybe one additional comment, and then give it from my side last year. It's the number one, by far the number one reason for the order intake development at Navistar is the order book, full stop. And then there were some, of course, some headwinds from uncertainty around the future design of the CARB24 emission regulation in North America, which have been solved meanwhile, more or less, and which have been, of course, also having an impact on the order situation and the ability to take orders into 2024. But that's only a minor aspect in the overall order intake development of Navistar.

Got it. Super clear. Thanks.

Thank you, Danila. So the next question comes from Himanshu Agarwal from Jefferies. Hi, Himanshu.

Thank you, Lars. Good morning, Christian and Michael. Thanks for taking my questions. Himanshu from Jefferies. Just wanted to come back to the guidance. So despite the headwinds you have mentioned, seasonality, et cetera, the top end of operations margin guidance implies 7.5% margin in second half versus 9.4% in first half, which is quite a sharp deceleration. It seems like volumes will be flat sequentially, and also you have mentioned no price concessions or cancellations. So I'm just trying to understand what is causing this. And also, you have increased the market outlook but kept the unit sales guidance at 5% to 15%. I would have thought you would outperform the market in Europe given production problems at MA and last year, and Navistar continues to gain share. So that's my first, and then I've got one more question.

Okay, thank you. I think, uh, the guidance question will be taken from Michael.

Yeah. Um, thank you very much. Uh, happy to answer this. Uh, let me start with the, with the unit sale guidance here. Um, so, uh, I mean, in the, in the first half year, 2023, as mentioned, uh, we increased the unit sales by 22%. which was, as already mentioned a couple times before, supported by the stabilizing supply chains. In addition, you have to take into account that the relative performance benefited here from a really low comparison base in the first half year of 2022, where we come from a level of, let's say, only 137,000 units. given the significant effects from the war in Ukraine in 2022, especially in the second quarter 2022. So when you put this into contrast, the comparison base in the second half is significantly higher with 168,000 units, which is a similar level then as in the first half 2023. Overall, As already mentioned before, we continue to have a very high order backlog and the production slots for 2023 are filled, which overall supports output in the remainder of the year. Nevertheless, and this counts for the unit sales guidance as well as for the return on sale guidance. As mentioned, we see still a vulnerable situation in the global supply chains. When we talk about the guidance regarding return on sales, I can more or less, let's say, repeat what I've said before. Yes, we remain on the conservative sides, taking into account the various uncertainties. And again, one more time, the quarterly results cannot be simply extrapolated. to the to the full year so we see the q3 especially with the summer breaks and overall we are we're having this conservative guidance and we think we end up at the upper end of the guidance understood thank you until your calculation was right so thank you and the second one on europe so one of your us peers have repeatedly highlighted that they are the only ones in europe to have trucks available

that comply with the mass and dimensions regulations introduced a few years ago and potentially enabling them to gain market share. So just wanted to hear your thoughts from Scania and MAN perspective if you have similar compliant trucks and what you think about that.

I'm not sure whether I got the question right, but Christian, can you answer?

No. I'm sorry. I also don't know. Either which competitor you think of or what they are claiming. Can you give us a few more clues?

Yeah, sure. I'm referring to PACCAR yesterday on their Q2 call. They talked about that they are the only ones having mass and dimensions regulation compliant trucks in Europe, which is good for the aerodynamics and i.e. leading to better savings on the customer's side, which is also in high demand and hence getting market share. So, yeah.

Yeah, okay. Then I understand and we have all seen their new prolonged cab at IAO. I think that's what they're talking about. I don't think they mean that none of the others are compliant. But let me not speculate on what... for PACCAR says. You have to ask them what they mean. Do we have competitive vehicles? Do we have compliance vehicles? Yes, of course. Do we with the super driveline claim fuel leadership? Yes, we do. Do our customers confirm that? Yes, they do. I hope so.

Okay, and just a last small one. At OEM level, there is this UAW negotiations due this year. Is it something that's due at Navistar as well, or does it impact Navistar?

So you mean the industry organization employee representative is UAV in North America? Yeah. I have more information about that. I would have to follow up on that, I think, if that's okay.

Yeah, no, I also cannot answer that straight out. We have to get back to you. Okay, thank you.

All right, thanks, Dimanjo. We have the next in the line from Jose Agumendi from JP Morgan. Hi, Jose.

Good morning. Thank you, Lars. Three quick ones here. On the first one, EMA and track and bus efficiency gains, how should we think about this in the coming quarters? What else is there to be booked? Additional goodies that you mentioned that could be harvested in the coming quarters. Second, a bit more philosophical, what has changed in the industry? to have such an elevated heavy-duty truck market in Europe and North America. I don't want to make the conversation very long, but, you know, I used to understand the cycles, you know, going back a few years. I don't understand them anymore. I think we're running clearly above replacement. But maybe you can provide some color as to what you're seeing in the market. And then three free floats of the company. Not sure if this is the right conference call for this question, maybe for Lars in the next conference call. But... Obviously, the company is delivering higher margins. You're delivering the efficiency gains you promised on EMA and TRACONBUS. Navistar is going through a major product mix improvement. Is this still part of the discussion to increase the free float within Traton, or is this completely out of the discussion currently? Thank you.

Excellent. So then we start with the last part, the last question, which Michael has taken over, and then I would leave the floor for Christian to answer the MIME and target bus efficiency targets and the more philosophical part of the discussion.

Yeah, thank you for your questions regarding the free flows. First of all, I think we have to say that clearly we cannot comment on the plans of Volkswagen and this question mainly goes to our major shareholder who had to answer this. But let me put it that way. We think it's fair to say that the common feedback that we received from the investor side is that the relatively low trading liquidity of the share is hindering many of you to get engaged.

Yeah, thank you. Christian?

Yeah, but of course, also to add to that last one, I mean, the whole management is remunerated in a long-term incentive scheme based on the share price development of Trayton. So you can imagine what we would like to see. So of course, but it's not our decision, but we have a very clear opinion. Second, on the MN goodies, what I'm thinking about is predominantly that we will get completely out of the Steyr, very expensive industrial setup in Austria. Here after summer, I think it's during the month of September now that we finally produced the last vehicle there and shift that over to Krakow that will take down the product cost on all these vehicles. And then we have basically finalized the uh the realignment program and we officially close it by by the end of uh the year we have a few more people who will unfortunately leave the company as part of this program and and these costs have already been been taken and and reserved for us that that's another goodie that should be realized throughout the second second half um and and and then our uh strategic target as you know is to take the group up to nine percent and we're targeting 2024 and that means of course during next year we will have to come out with what is kind of the next step on the trade zone journey and then going forward and then we will probably do that through a capital market day where we where we will be talking more about how we see the potential in our different brands in terms of both volume and profitability going forward. But it's clear, it's been a very long and difficult journey in MIM and we see now the best results in more than 15 years. And of course, that's extremely good also from a motivational point of view for the team that has been, I mean, truly... I wouldn't say depressed, but it's tough to work in a company that keeps performing badly quarter after quarter after quarter. So it will be, I think, also an effect here going forward. And it's hard to measure, but you're suddenly part of a winning team. And I think that's fantastic to see. I already see a sense of or another spirit in the company. And of course, the leadership of also Alexander Flasskamp here and the whole executive board has been crucial in turning this company around. It's not just the realignment program. It's so much more in terms of, you know, being closer to the customer, having the self-confidence to put the right price there, to be focusing on the important things and not on everything and so on and so forth. So I'm really, as chairman of EVI, I'm really proud to see that. the development in the last year, year and a half. Your philosophical question there, where is the European market supposed to be? I think with the growth, or relatively small growth, but still growth of the economy that we've had also last year, I think we need to see a market around about 300,000 heavy commercial vehicles. That means 350 roundabout, including the medium range, long term. if you use that as your basis and then of course there will be ups and downs around that curve but my conclusion is that that we shouldn't be too worried about 2024 at least so but we can have a longer longer conversation on that i should say when we need next time as it's it's more philosophical thank you very much that was very helpful thank you okay thanks for saying thank you

So we have another question in the line from Shaquille Kirunda from Morgan Stanley. If I may, I would like to ask you to limit yourself to one question because we have one more in the line and we are running out of time. Thank you.

Hey, guys. Thanks for taking my question. This is Shaquille from Morgan Stanley. So, Christian, with your positivity around 2024, Could you give us an idea of the type of customers which are driving this? Is it truckload? Is it vocational? Is it U.S., Europe? And how much market share do you guys have in the NAFTA vocational market also? Because with the IRA and the IIJA coming in, some of your competitors are talking about almost 40% market share in U.S. and Canada. So really, how much can you guys benefit from that?

You're referring to the S13, right? Did I get it right? Sorry? You are referring to the S13 International, right?

Correct, yes, for the NAFTA vocational market. Yeah.

So I must admit, if I should answer, Lars.

Yeah, please.

I must admit that I don't have top of mind in the vocational segment what is our current market share. But while Lars and Michael and the team is looking that up down in Munich, I can just say that we have seen a good recovery in market share, basically slightly higher than planned. And we're now in the close six to eight, about 15% all in all trucks. And in our targets, there was to take one to two percentage points per year. And because taking more than that means that we're probably using the price weapon too aggressively. So, but we continue to have this ambition. And we will not let anything stop us, so to say, until we're back to where Navistar once was and where we belong. overperforming our current Navistar driveline with 15% in terms of fuel efficiency will of course massively support this journey. So if we could take now 3% during this year, which let's see where the year ends, but we are again setting out to take 1-2% market share next year. And yes, the IRA is heavily supporting the total market development. We would be surprised if there's not a strong market 2024 to harvest from. I hope that answered at least in part your question.

Yes, thank you. And just if I could follow up on the kind of customers who are giving you confidence about 2024. Is it truckload? Is it vocational? Is it US, Europe? Where is it coming from?

Yeah, sorry, I forgot about that one. No, but in the US it's all over the range. So we see good demand from all types of customers, both on-highway, off-highway, vocational and traditional. What we see in Europe is a little bit more scattered picture where we see more... more hesitation from the smaller customers with a shorter investment horizon and more interest from the big fleets who have a longer planning horizon and also probably longer contracts with the transport buyers. We also see clearly in Europe that the construction sector is slowing down. So construction material transport and construction vehicles are calming down and that market is shrinking. Now that's a relatively small, that's between 10 and 15% of the European total markets. So it's not having that big an impact, but there we also see a clear decline.

Got it. Thank you very much.

Thanks. We have a final question then for the call today from Anthony Dick from other BHF. So far we have no questions from media representatives, but just in case if you would like to ask a question from that side, you know how to do it. Press star one on your telephone keypad. So Anthony, I would say the floor is yours. Yes.

Hi, thank you. Thank you for taking my question. Just one on the margin guidance, margin outlook for 2024. I'm just wondering what kind of volume assumption is baked into that guidance? Or maybe another way of asking the question is what kind of market decline, if any, could we see in 2024 and could you absorb in order to still achieve that guidance that you have? Thank you.

Yeah, maybe I take that one. You know that we don't provide a formal guidance for 2024. So that's for sure. We can provide you with a directional, optimistic outlook directionally to how we see market environments and customer demand going on next year, but it's too early to speculate about potential KPIs, including unit sales production for the year 2024. I think we are going to provide a new financial guidance for that year with the publication of the full results early next year. So nothing to share today when it comes to our assumptions for next year. Sorry for that, Anthony.

Okay.

Thank you. We have actually one name in the line now from the media side. And so the pleasure is yours to ask the final question of this call. This is Markus Clausen from Dow Jones News GmbH.

Yes, hi. Thanks for taking my question. I would like to ask once again regarding the drop in order intake by a quarter. Is this due to the extraordinary high order intake in the previous year? Do we feel a general reluctance from customers in view of the uncertain economic environment? Or is the main effect a full stop for new orders at Navistar? Perhaps you can elaborate a bit. Thanks.

Yeah, maybe that's the next question for Michael.

Actually, we don't see a slowdown here, let's say, in the demand from customers. This is really based on our restrictive intake order policy. So we are, as mentioned before, quite positive, more positive when we look at the upcoming month anyway because of our order book, but also when we look into 2024. But no decrease here when we talk about the demand.

Excellent. Thank you and everyone in the call. So that concludes our H1 results conference call. As always, please reach out to the teams at media or investor relations in case of any further questions. Thank you for joining us today. I wish you all a nice remaining day and goodbye.