Traton SE

Good morning, everyone, and welcome to Trayton's Q1 2024 earnings call. I am Ursula Keret, Head of Investor Relations. As published in our press release early this morning, we had a strong start into the year. And in a minute, we will present to you the respective Q1 financials. I am joined here today by our CEO, Christian Levine, and Dr. Michael Jagdstein, our CFO and CHRO. Also present is Camilla Devon, Head of Corporate Relations, to handle potential media inquiries during the Q&A session. Christian will kick off the presentation with the key Q1 results and highlights, and we'll wrap it up at the end. Michael will guide you through the financial performance in more detail. As always, the presentation will be followed by a Q&A session where we are looking forward to questions from financial analysts, investors and media representatives. Before we start, please be aware of the disclaimer with respect to forward looking statements. With that, I hand it over to Christian.

Very good, thanks Ursula and welcome also from my side to this call. And yes, as you see on the slide, sometimes the numbers speak for themselves. A really strong start into 2024 for the Trayton Group. And just reflecting on our major financial KPIs, as you see here on the slide, it's really a robust level of deliveries with more than 81,000 vehicles delivered to customers throughout the group. continued disturbances in some of our brands in terms of supply chain and production as we already reported back in the full year report our markets are normalizing our big markets europe and north america whereas we benefit a really strong bounce back in latin america which of course benefits both volkswagen truck and bus and Scania, so a well-balanced market mix that we benefit a lot from. So despite the small decrease in unit sales, as you can see, we are increasing our total revenue, meaning that we have a really good price and mix effect coming in into the result. And the result then, 9.4% of return on sales, that is the highest ever. for Trayton Group and we are of course happy about that, feeling however that we can do even better. We generate a positive cash flow, we're coming in at a solid 440 million euro on the back of these strong earnings and to hopefully happiness of our shareholders, we do generate a net profit already in the first quarter On 1.5 euros per share, which is an increase by 35%. Now, this is, of course, the super average of everything. And you will get from Michael much more details into these KPIs, both on trade level, but also per brand. But let me kick you off by looking a little bit also into the more operational and strategic highlights of the first quarter. We are on a major transformation journey and we're driving this forward at the fastest possible pace. And it's really about two things. One, you can call our internal transformation. We're a young group. We started as a collection of brands and we have promised each other that we should really grow into, together, one group. And that means that we're on an internal transformation journey that is huge. You can imagine 108,000 employees over many locations. But on top of that, we have the challenge of the industry, which is the external transformation, i.e. digitalization and electrification mainly. So in Q1, what I'm most proud of is that we have, in the end, finally come to decide on one R&D organization. We have talked about that ever since the IPO back in 2019 as some kind of a North Star. We have managed to come to the decision on one common product system, i.e. let's expand the Skåne Modellersystem into a Trayton Modellersystem. That is happening. You have seen the common base engine as the first start of that. But the next logical step is that we also merge the R&D organizations into one meaning that we expand the group capacity by 15, 20, 25, maybe even 30% by eliminating double work, friction coordination internally. And as a result, we'll improve both speed and capacity, meaning more and faster solutions to customers for all our brands. Of course, to balance against the so important brand positioning in markets where we're in market areas where several brands are present. So a big step forward under the leadership of Niklas Klingenberg. Since when we move over to Navistar, the second picture here, since the start of 2024, we now accelerate the rollout of the common based engine and the entire powertrain S13 at Navistar. And the feedback from customers overwhelming, confirming up to 15% fuel efficiency compared to its predecessor. And as a result, already by February, we were completely sold out for 2024. We are, of course, doing everything we can, again, acting as a group to then transfer production capacity to the colleagues in avistar and we're working currently with trying to to supply that out of sconia's latin american operation in the third picture we look a little bit into the future emission zero emission technologies and here is about an out layer we are investing in man in the h2 combustion engine As you might remember in the new legislation for CO2 reduction, hydrogen burners or hydrogen internal combustion engines are classified as zero emission vehicles. And we use the opportunity to experiment through our MAN brand with an initial test fleet build up on our biggest engine, six-cylinder engine platform. However, I continue to say everywhere I can, That the TCO advantage of the battery electric vehicle in the long term will determine that that will be the prevailing technology. But it might not be the only one and therefore we need also to explore more technologies. Moving to Scania, we took further steps in expanding the battery electric modular system, meaning that we're adding more performance steps to the portfolio so that when demand is coming and when our industrial system is ready to ramp up, we can supply even more different applications and solutions to our end customers as full electric. Another transformation in our industry where we continue to invest, but that we talk less and less about, or the market is talking less and less about, but where progress is really fast, is autonomous driving. In the first quarter, we announced the partnership with the US-based company Plus, which will be our partner to take us to level four and beyond. And again, we're building on one platform, meaning that our autonomous-based vehicle, as we call it, will be the same regardless of which brand it is coming out from. We have started sales for the confined areas, i.e. mines, through the Scania brand already. But when it comes to hub-to-hub and the bigger volumes, we are still in development mode. So summing it all up, we are really establishing a top-notch R&D organization and process to accelerate innovation, reaching end customers faster, and really taking market demands from all brands into account. So let's shift slide and have a look at the current market situation. How does demand really look like? So first thing to say is that we can confirm what we already said in the full year report. Markets in North America and in Europe are normalizing, which means that they are expected to be lower than last year. Our incoming orders are than slightly below last year, but still on what I would call a very solid level. There are very different dynamics into this. Europe, the truck business is down and especially Germany and Central Europe, which gives a bigger impact on MAN. In North America, we enjoy higher orders. We have a very strong order book Whereas the demand is changing away from the heavy on highway, so-called class eight applications. And we benefit being really strong in the medium and the severe segments. South America already mentioned, but demand is coming back very, very good. And especially in the extra heavy segment, where we see investments into agriculture and mining, giving the biggest effect on Scania, but also on folks going truck and bus. We see all over the segments that increase in demand is coming through. So to summarize this, our book to build ratio continues to be below one. The order book, however, is strong, although normalizing. And we are capitalizing on it, as we've said, over summer, but also partly into the second half of this year. So with this, let me hand over to you, Michael, to take us deeper into the financials.

Thank you very much, Christian. And of course, a warm welcome from my side as well. So let's have a look at slide nine, where you can see how the demand dynamics translate into first quarter 2024 sales figures. Despite the decrease in unit sales, Christian just mentioned, we were able to grow our sales revenue by 5%, a really good achievement. This development implies our successful pricing strategy, but we also profited from a favorable market and product mix, hence our diversified business model. Besides that, we benefited from a continued high demand for our vehicle services, given age truck fleets and high utilization. Let's move to the next slide, slide 10, which shows that the increased revenue per unit combined with our improved cost structure led to a record margin level for trading. As you can see, in Q1, the adjusted operating result rose by more than 18% year on year to 1.1 billion euros, leading to an outstanding 9.4% adjusted return on sales. While this number is above the upper range of our annual return on sales guidance, please bear in mind continued conservative market assumptions for Europe and North America in 2024 and potential risk from further supply chain disruptions and geopolitical uncertainties. But let me also point to the efficiency gains accomplished by our brands, which are here to stay. With the completion of the realignment program, MAN clearly contributes to an improved margin resilience of the trading group, and all brands have further cost efficiency initiatives in place. Let us now look into the individual performance of our brands on the next slide, on slide 11. Here you can see how mix effects within and between our diversified brands resulted in a combined upwards performance of our industrial business. The trade and operation sales revenue was up 5% year on year at 11.5 billion euros and the respective return on sales came in at 10.4% plus 1.3 percentage points compared to the year before. As you can see, the main contributor to the industrial revenue growth in the first quarter was Scania. Here, sales revenue increased substantially by 17%, mainly due to the strong growth of the brand's heavy-duty truck business in Brazil. The new vehicle business in Europe also increased year on year. Concerning the return on sales, Scania is well on track to best-in-class performance, reaching a record level of 14.3% in the first quarter. MAN Truck & Bus reached 3.5 billion euros in sales revenue, an increase of 3% despite lower unit sales year-on-year. At the same time, return on sales improved by 2.1 percentage points to 7.9%. I already mentioned the successful realignment program and its impact on margin resilience. A stronger bus business performance also positively contributed to MAN's margin development. Navistar sales revenue declined by 11% due to two factors affecting new vehicle sales. We saw continued challenges from supply chain disruptions, hindering us to produce the truck volumes we had initially planned for. Second, we underwent a slower than expected ramp up for our new school bus, resulting in a delay of deliveries to customers. Both developments also influenced Navistar's bottom line in the first quarter, but We were able to offset some of the impacts through better pricing, and we already saw evidence of a higher production rate in March and April. As of today, I can say that we have fixed most of the issues, but we remain cautious as the supply chain in North America still has not fully stabilized. Volkswagen Truck & Bus increased sales revenue by 9% year-on-year despite lower unit sales. This was driven by a better product positioning and unit price realization. Hence, based on its excellent product offering and its leading position in a growing market, Volkswagen Truck & Bus was able to increase its return on sales to 11% in the first quarter. Besides trade and operations, trade and financial services recorded a 29% revenue growth in the first quarter. This was mainly due to a larger portfolio volume and higher interest income. Profitability also improved significantly year on year to 13.2% return on equity. Last year's return on equity was negatively impacted by the sale of Scania Finance Russia. I already mentioned in our annual results call in March that we will gradually increase our financial services business with MAN and Volkswagen Truck and Bus on the basis of a framework agreement signed with Volkswagen Financial Services. During the first quarter, we prepared for further important country rollouts starting in the second quarter. And Scania and Navistar will continue to grow their portfolios with a growing business activity. So the ramp up of our captive financial services offering for all trade and brands is a strategic priority for 2024 and beyond. Let's move to the next slide, page 12, where I'm happy to announce that we achieved a further reduction in net debt in the first quarter. The net cash flow of trade and operations reached a solid amount of around 440 million euros on the back of our strong earnings. And this despite a typical seasonal working capital build up in first quarter, mainly due to increased inventories. Therefore, we continue to reduce our net debt, this time by around 300 million euros versus year end 2023. As I already mentioned at our annual results conference, by further reducing our net debt, we aim to achieve two main effects, increasing our equity value and reaching a standalone investment grade rating for more flexibility in our financing efforts. With this, let's directly move over to our full year outlook. Based on our strong start into the year and unchanged expectations regarding the truck and bus markets, we remain optimistic and confirm our forecast for 2024. And we remain committed and we will work diligently to reach our strategic goal of 9% return on sales for the trading group in 2024. Let me quickly repeat our main guidance parameters. we see unit sales and sales revenue developing in a range between minus 5 and plus 10%. Our ambition to reach a 9% adjusted operating return on sales is reflected in the upper end of our margin guidance, which ranges from 8 to 9%. As mentioned before, although in first quarter the margin came in above the 9%, the lower end of the full year margin forecast considers conservative market assumptions for both Europe and North America. For the remainder of the year, we still do not rule out further supply chain disruptions and risk arising from economic and geopolitical uncertainties. Finally, we expect net cash flow for trade and operations still to range between 2.3 and 2.8 billion euros. With this, I hand back to Christian for our truck market outlook and some concluding remarks.

Great, thanks, Michael. And then we move. Yeah, excellent. So what you see on this slide is the registrations in our main market areas. Maybe confusing to see that the curve is pointing upwards in both the EU, the North America and pointing down in South America. But remember that registrations are coming long after sales and orders. So what we say is exactly what we said that the full year report. We expect Europe and North America both to level out. And these curves then that you see turning down. What you see on the curves are also our 6 ton upwards, which is not always fully comparable with what our competitors are showing you. But if I take Europe as an example, and if we take only the heavy duty part of the market, i.e. above 16 ton, our minus 5 to minus 15% expectation towards 340,000 last year would bring you into the round about 300,000 as a midpoint, perhaps down towards 280,000. but also perhaps up towards 320. So that's how to read these figures. But again, a leveling out in Europe and North America and an increase in Latin America and especially in the heavier part of the segment. But let me summarize the overall situation on the next slide, slide number 16. So if we start then with Scania, it's of course a excellent quarter. We do record deliveries, we do record return on sales, we do a record cash flow generation and we generate a market share above 18% in both Europe and in Latin America. I've been long time with Skona but I'm not sure whether that is all-time high but it's certainly a very very strong performance and we go all the way here to on the slide to say there is certainly potential to sustainably be best in class in the industry. MAN I'm super happy that we can once again reconfirm what we saw already last year that we have stabilized returns of MAN in and around the target level of 8% and the team performed this showing really good resilience in a German European market that was not supportive. And you can see in the delivery figures that Michael showed you that we do this with really lower volumes than expected. We have a strong pipeline on its way. So nevertheless, coming very close to it. So really good Navistar certainly would have expected more out of this first quarter. And Michael was into the challenges we have both on supply and for new products. But we have a really strong order book. We sold out well into third and for the school bus the full year. And we are well positioned in the mixed change that happened in the total market. So we are still reconfirming our outlook for the year in terms of Navistar performance. Folks who are on truck and bus, amazing thing to see. Regardless where the market is going, we have managed to to be a double-digit company and deliver strong margins, whatever basically hits us, new products, markets ups, markets downs, and competitor activities. Michael also mentioned our financial services. I mean, this is a really important building block of becoming one group where the benefits that was only enjoyed by Scania back as long as or as recent as last year is now opening up the expected rollout is following the plan meaning that throughout q2 we have big min markets joining us we have navistar financial services up and running and then we continue throughout this year and in the beginning of next we add also fox one truck and bus to the trade on financial services portfolio So really supporting our brands, but also coming with improved funding capabilities that is of course a super important part of financial services. So to summarize, it's really a new trait that we're seeing. We see our brands collaborating, we're working as one team, although of course every brand is accountable for and take responsibility for their results and showing their individual strengths. So all in all, we're driving the Trayton way forward. I see great progress and I see a new culture spreading. And I really would like at this point to extend a big, big thanks to all the fantastic work done by our 108,000 Traytonians coming together in the result that you're looking at here in Q1. So it's a Trayton group that continues to transform. invest into a journey which I would claim gives really attractive return profiles to investors. And with that, we take the last news of today, which is the pleasure that I have and we have as a team to invite you all to a long sought after Capital Markets Day. We have not had one since we met here at the test track in Södertälje where we confirmed our targets for the different brands and for the group. But a lot is happening and it's time to update you and we invite you therefore on the 1st of October to Munich at MIM this year where we will give you a view of Trayton going forward. Book that into your calendars and we really look forward to seeing you all physically in Munich. And with that, I end my part and I hand back to Ursula to do what is probably the most interesting part of this, call the Q&A. Ursula.

Yes, thank you Christian and Michael. We actually have a bit more than 30 minutes left for the Q&A session and I already see some questions lined up from the audience. But before we start, let me quickly explain the rules. This Q&A will be recorded and the replay will be made available on our website later today. If you want to ask a question, please press star and one on your telephone keypad. If you want to cancel your question, you can dial star and two. If you need operator assistance, please press star and zero. And in respect of the time, please limit yourself to two questions. Now, let us start and take the first question, which comes from Hemal Gundia from UBS. Hemal, please go ahead.

Good morning, Christian, Michael, and Ursula from UBS. Thank you for taking my questions. So my first question is on Navistar. I was wondering... how you feel about the supply chain based on what you've seen so far in April versus Q1. And given that all the books are now full for the rest of the year, should we expect Q1 to be the bottom in terms of margins and sales for Navistar? And I'll follow up on my second question after.

Thanks, Mark. Sorry, Ursula, I'm too fast.

No, go ahead. Go ahead, Kristen.

And good, and I'll take the first part on the supply chain and I hand over to Michael then for the financial impact. But yeah, so a bit troublesome start of the year in Navistar, not what we expected. So what is happening specifically on the on the school bus market side, where you know, we are the market leader, and it's an important volume for us is that we were simplifying the product range, reusing more of the medium duty truck parts. And hence actually building a completely new school bus. We made a clean cut over Christmas and New Year, rebuilt the factory for the new product. And what happened is that we were not fully ready to supply these buses then when we restarted production for many reasons. And they are technical, but they are actually not really related to suppliers. It's more our own capabilities to restart a new product. So delayed in the ramp up a lot of unfinished products on the yard. But deliveries are started and they have started now in April. And we are actually thinking we can catch back most of the volumes throughout the year. And as you said, yes, you caught me right. We are actually completely sold out in terms of school buses for 2024. So if you order now, you're into 2025. That does not mean that we're putting any limitations on the order intake. We are fully open to take orders on school buses. When it comes to trucks, it's a more... Complicated picture, we are suffering the supply chain in the US. We still have the frame rails, I mean, the main part of the chassis, which is holding us back, but also numerous other suppliers. And in this shift that I described away from class eight on highway towards more severe and off-road applications, there is a fight again of capacity, just like it was on the class eight specification in the US with the suppliers for typical components like components for all-wheel drive applications, where the suppliers are having a hard time to catch up. And this has been hitting our deliveries. But we see here on the truck side, we see continuous improvement throughout February and March and are expecting to come up to normal production levels here throughout Q2 and Q3. So, I think that's in a nutshell the situation. I should also mention that the S13 penetration is increasing as we speak. And I mentioned the customer feedback, really, really good. So, with that, we're also sundowning the A26, so the current in-house produced engine, which is also going to save us cost. Michael, over to you for the financial impact.

Yeah, thank you, Christian. And I mean, just following up on, let's call it the prerequisites that Christian just mentioned. And as I also was into during the presentation, I mean, yeah, in the supply chain, we had the framework topic. Actually, as I also already indicated in the annual results press conference, that the first quarter will not be too strong based on that effect. But as I was also into, when I look at the production level in March and April, then we see a clear step up. So as I mentioned, we believe that we have fixed most of these issues. Also referring then to the new buses where we believe that in the rest of the year we will deliver this product to our customers. Then, as Christian also already mentioned, the order books look promising. And then the S13, as we talked about already last year with the ramp up this year, clearly will also have a positive effect. And I'm just reiterating those aspects because, of course, again, those are the ingredients then to make a judgment call to your question, what about the financial situation? And here I can just say, if you take this all together, as I tried to put it here, coming from the 6% last year, we still believe that despite the more challenging market in North America, we will clearly increase the performance. And another aspect I could also add here is that we believe that we also have a quite favorable product mix in North America. That's why we believe that we are here still on track after the first quarter to speed up and come to a higher margin level compared to last year.

Thank you both for that helpful answer. Next question comes from Klaas Bergelind from Citi. Klaas, go ahead.

Hi, Christian, Michael and Ulrich. So my first one is also Navistar. I get the impact on unit sales and margin owing to the tricky ramp-up in the supply chain issues. But just a question on orders. To what extent was the weaker orders here versus expectations impacted by the inefficiencies? Or did you, Christian, see an incremental weakness versus your expectations when you look at over-the-road Class 8? We see listed truckers still reporting weaker results this reporting season. We had a big dealer last week sounding incrementally cautious during the calls. So did you see any weakness there, Christian, on the over-the-road? Thank you.

Yeah, thanks, Klasa and Ursula. I kick this one off then. Yeah, I mean, if you take the freight market, it's quite gloomy for on-road. I mean, it's almost two years in a row now that we see falling prices, both in the spot market and in the contract market. And that is, of course, creating cautiousness from the whole years. So in class eight, there is a decline in orders. And we have a very long order book also there due to our challenges in last year, which has then continued, meaning that we're not holding back orders as we did a year back, but we see customers hesitating where we have really long lead times. Because I mean, the school bus, I said, you have to wait until 2025, but also for a truck, you have to wait into Q3, end of Q3. So which is not ideal in that cautious market. But the market is not going away. I mean, we still see, especially from the big fleeters and the big rental companies, there is a big interest to renew their fleets. We have really important discussions ongoing. So I'm not too worried and again we benefit them from the really strong increase in severe and off-road applications. So all in all, with that strong order book, and it's rather our own capabilities that right now are hindering us from actually growing the business. I would in this context also mention the market shares. I mean, I clearly pointed out our targets, which is through 1% to 2%. year and we've been able to do so ever since we started to buy into Navistar. Of course in the first quarter with these bad deliveries we are suffering and you rather see a decrease in the range of around about one and a half percent but the organization is really committed to actually continue on the path we lined out. So with what we have in pipeline we still stick to our ambition that we're going to gain market share. So around about 1% or 1.5% we should be able to gain nevertheless. So I hope I covered most aspects of your question.

Yeah, absolutely. My second one is from Scania, and a better margin than I thought, and I thought that I was positive into the numbers, so well done. I'm just trying to understand price-cost relative to mix here. You talk about the positive sales mix, And then looking into the second half, you will have obviously a lower carryover on pricing. Are you starting to deliver trucks that probably have a little bit lower price cost than what's in the water book right now? So how should we think about the margin here into the second half? I know you don't guide by brand in the year, but just to get a feeling. Thank you.

Yeah, I feel confident about Scania. As you say, we did a stunning quarter. still with not all inline six engines transformed into the super. I think we've been public, but the super gives us about 3,000 euro extra margin through pricing. In Latin America, we're increasing prices going into this year. In Europe, you will of course have more fleets signing than small customers due to the insecure situation that of course has a pressure on the average margins. Order book is still good with good price realizations. And then, of course, we believe that the market will come back towards after interest rate decreases over summer. So all in all, I don't feel too worried. As I always say in this call, I follow first figure I look at when we close a month is the gross margin of vehicles. And it continues to look good. Cost is, of course, you know, we're down on important materials. Steel, aluminum is down. Energy cost is down. But you have other demands from suppliers that we have to honor in terms of cost increases. I mean, wages is, of course, a huge problem, especially in Central Europe. But all of that together, I still feel confident that we should be able to continue on a good level in Scania. I think I stopped there, but that gives you perhaps a flavor.

Yeah. Very quick final one on European orders is obviously single out Germany as the weak spot. But we've also heard about hesitations among carriers sort of in broader Europe awaiting price decisions from you, from other OEMs. Do you see any improvement in retail orders in Europe sort of quarter end into April? I'm trying to understand to what extent this is temporary and that they eventually might need to place orders again here into the second quarter.

Yeah, there is a replacement need. I mean, the truck park is old, so the interest is very high. The level of offers is very high on a high stable level, I would say, whereas the order intake is lower. But I do not see any tendency. I mean, we had a relatively okay order intake, Scania and Europe, and that continues. But it is, of course, on the lower level, indicating the total market I was talking about. But there's no tendency neither up nor down much. Thank you.

Okay, thank you. Next question comes from Daniela Costa from Goldman Sachs. Daniela, please go ahead.

Hi, good morning. Thank you so much for taking my question. I'll stick to the one in the follow-up. But first, I guess, given sort of the margin improvements that you have done now, and I know you have your medium and long-term targets, but can you help us understand what you think is the sort of like peak-to-trough volatility now that the improvements, particularly on MAN, seem to have been mostly done or gone a long way on the improvement side? If you could help us there first, more of a medium-term peak-to-trough volatility. Okay.

On MAN, yeah, that's a question. Let's take it here from Michael.

Yeah, I mean, when you look at MAN here, then, of course, we are also quite happy with the start and with the first quarter with 7.9% really close to the strategic target for MAN of 8%. So we have seen actually really quite a strong performance here. And as I was into during the presentation, I mean, the realignment program really pays off. We started to see the effects already last year. But as we mentioned a couple of times this year, for the first time, we will see the full effects of the realignment program. That's why we really believe and this is what we indicated already last year and what we mentioned and what in a way we have to prove this year, we believe. that the performance of MAN is on a sustainable level, that we have come to a much more robust and resilient position here. And we believe that in, let's say, a more challenging market environment in Europe, as we talked about, especially in Germany, where MAN has quite an exposure, this is clearly the proof point for the robustness and new resilience of MAN. if we are able to even increase the margin level in this market environment. So we are quite positive. And certainly, despite the challenging market situation, we will work hard here and the MAN team will work hard to show that proof.

And so we should look at this as a base rather than a through cycle.

Yeah, we try to keep that now for the next quarters on a steady level.

Understood. Thank you. And then just following up in terms of like production cadence throughout the year, both Europe and U.S., because the only player that we have seen actively saying that was cutting production was in Europe, Volvo. Can you talk through sort of what you're seeing, what you're planning more broadly, and then maybe link that with sort of an outlook for pricing? If others don't cut production, is there a risk on price?

I think that's for you, Christian.

Yeah, for sure. So that's, of course, a tricky question. I would love to have the answer. But we run every month, of course, our production planning meeting and all the brands based on the incoming orders, the order stock and what we are forecasting as the demand in the markets. So if I start with Scania, we continue to run at a high pace in Europe. We actually increased from 1st of January our pace both for Europe and for Latin America. So now the system is running quite close to full capacity. We still have some disturbances, but it's now in the range of like 0 to 10%. When that is going to change is too early to say. And if it's going to change, I of course hope that the market is coming back before we're running out of audiobook in Europe. In Latin America, we're really discussing, could we increase even further? And we're shifting production away from Latin America into the European production system. So we're now even looking at markets very close to Brazil to be supplied from Europe to free up even more capacity, for example, for Brazil. So to give you an example, Chile, we're now starting to supply out of European production system to really use whatever we can for Brazil and Mexico. And then... So Scania are rather positive, I would say. And from MIM, of course, much more focused on Europe with European manufacturing footprint only. A sharp decline in orders, 33% down, but a good order book. So far, we are running on the production capacity that we have decided. But of course, it's a crystal ball what happens down in the second half with the incoming orders. So that's the key question. when it comes to airman. We should note on a positive side that the bus order intake continues up and we're adding them capacity to produce. For Navistar, it is a tricky situation. So we have these challenges in production. So we really are not performing to the level we have decided. So we have also extra cost, of course, because we have manning in place. So we have an underutilization of the production system. But we're seeing the light in the end of the tunnel and trying to catch up with the market demand. So right now, the question is not whether to adapt capacities to fill the capacity that we have. And that capacity is taking us well into the fourth quarter, actually. So kind of coming a bit beyond the planning horizon in terms of production capacity, rather fighting for resources from the suppliers. And finally, folks on truck and bus, I mean, they show that they can cope with anything. any demand, and they are currently upping their production capacity to take care of the increased demand in the market, both of the trucks and the buses. So that's painting a bit the picture of where we stand, but it will all depend on, in the end, the activity in the market in terms of orders. And that is, it is hard to fully predict. I don't know, Michael, if you want to join in and add something on that one.

Well, I think this, of course, I would believe is answered. But maybe, Daniela, since you also asked the question regarding pricing, maybe I can chip in here and start, first of all, from the trading level. I mean, here, as we mentioned, When we look at our operating results, then this went up thanks to better mix and prices. So you see that here pricing played a positive role in that aspect. And of course, this is now the trade group perspective. Then we have to differentiate when we go into the different regions. So you can imagine, as we talked about, that especially we got some tailwinds here from South America with fantastic demand for Scania and Volkswagen truck and bus, as we said, in the agriculture and mining business. that this open up for opportunities regarding pricing, while in the other regions where we said that the markets are more challenging, of course, as always are obvious, there is some pressure on prices. Nevertheless, in total, we mentioned before, and we stick to this, that we say overall for the group, we believe that the prices are more or less stable. which indicates that in some markets there might be some potential for slight increases, while in others there might be some pressure on the prices. But despite the last year where we had really an environment where we could increase prices significantly, we believe this year, again, it's more or less stable for the trading group.

Very clear. Thank you so much.

I just wanted to add, thanks, Michael, for reminding me about the pricing. I think if it's something that we have agreed in trade and group and that we have brought, I think, to evidence, first with Volkswagen truck and bus and then with M&M and now with Navistar, is that when you have customer value to deliver, then you also charge for it. Hence, and that has of course always been the Scania philosophy, but I think we really see the proof point that this principle is establishing. We're going to be the last ones to adjust pricing if that starts to happen in the market because of overcapacity. We're going to stick to our principles. We have customer value to deliver. We're not luring pricing, we're delivering good TCOs. So, and this I'm really proud to say, and I wanted to add that because we really see the difference in MIM performance. If you look to the total improvement, it's actually not cost, it's price. And if you look to the resiliency of Volkswagen truck and bus, it's also very much due to the courage to take out the price you deserve, which the customer then accept and hence we keep the market shares. But just wanted to add that. Ursula, back to you.

Yeah, thanks for that addition. Let's turn to the next question from Nicolai Kemp from Deutsche Bank.

Yes, good morning. Nicolai here from Deutsche Bank. Thank you for taking my questions and congrats to what was a very strong start into the year. My first one would be in current lead times. Can you just update us how by how much have they come down and when we should expect the book to build to be above one times again, maybe in third quarter? And my second one would be just a bit more color about the input costs, which seem to be quite a big tailwind. Can just give it a bit more clarity which kind of price have come down. And do you also think that at one point suppliers could ask for a better share of the cake since the Truco-M seem to be doing quite well? Thank you.

Christian, do you want to start with the lead time question?

Absolutely, with pleasure. And I think I've touched it already, but of course, Navistar has the biggest order book and the longest lead times right now. So you're in the end of Q3, beginning of Q4 for truck order and buses again beyond that in 2025. Scania, we are a little bit depending on market, but we are in the summer region right now. for most of the specifications, some specifications a little bit longer. And for MAN, it's about the same, but you're rather after summers. MAN has a little bit higher order book in Europe than Scania has. So for Scania and MAN in Europe, you can say it's quite, we're seeing what used to be a normal situation pre-COVID that Three to four months is what you have to wait. And that's actually quite favorable. That's where we want to be, to be able to be in sync with the market for our internal planning. Volkswagen truck and bus has a very good availability. And you get, as they also build buffers and stocks, you can get products with very short lead times. So that's a quick one on lead times.

Yeah, let's take input costs. And for Michael here.

Yeah, of course, I can say a couple of words regarding input costs. And I mean, in a way, since you ask about the future here, I would like to echo what Christian mentioned before. It would be nice to have The glass ball here, I can just say maybe a little bit more. When we look at the input costs so far, what we see is it's really a mixed picture. On the one hand side, as you know and can imagine, we saw some decreasing prices regarding raw material. Here we can mention, for example, steel or aluminum. Also, the energy prices came down. On the other hand, we also see some increases in prices, for example, for wages and transport costs. So more or less, I would say it's a balancing effect. And when we look into the next quarters, then coming back to the glass ball, there are certainly quite some uncertainties, especially when we talk about the supply chain situation when it's coming again to shortages here. Of course, this will influence the prices. um so not that easy to predict i would say but in in general i mean when we talk about the input factors where we've seen increases like wages at least we see a moderating trend here so this also here in a way is normalizing i hope that helps a bit yeah yeah great

Thank you. Nicolai, if I may, because we still have quite some questions lined up, could I ask you to limit yourselves now to one question, because a lot has been said already, if that's okay for everybody. So next question then would be from Miguel Borrega from BNP Paribas.

Hi, good morning, everyone. Yes, so since I only have one question. On financial services, you said this is a key strategic priority. Can you give us a sense of your ambitions in terms of size of the portfolio, penetration rates, and leverage to achieve that? When you look at your balance sheet, do you think you have enough resources, or will you need to secure funding from somewhere else? Thank you.

Michael, we cannot say a lot because, again, it's quite a future-driven question.

I mean, let me say, of course, a couple of words regarding financial services. I mean, as we were into, we are really in the ramping up phase. We are building the captive here. We started last year, 1st of April, bringing in Scania Financial Services, also, as Christian mentioned, under the roof of Trayton Financial Services. Then we restarted. our own financial services at Navistar. And as I was into, thanks to the framework agreement we reached with Volkswagen, market by market, we take over the new business here from MAN or for MAN financial service business and Volkswagen Truck & Bus. So we are really in the ramping up phase. Regarding the portfolio, please understand that We don't give more details or a guidance here, but you asked about the balance sheet and the financing situation here, which is, of course, a valid question that I'm happy at least to give you an indication what you're into. So we are fully aware, of course, that financing financial services business, this is a different thing compared to financing the industrial business. And therefore, I can just say that, of course, we are prepared and we have an imagination, of course, about how we want to ramp up the financial services business. And in these regards, we are already prepared and we will take further step that we are capable to finance that business.

Christian, do you want to add a bit in backwards looking on to Scania's financial services?

I can just, yes, Ursula, thanks. No, but I can say, I mean, Scania is where we have the mature financial services business. and here of course our ambition has and we have communicated that before is to come up towards 50 percent and we're well underway we're between 40 and 45 and here of course we continue to build out the offering and now we can gain some scale together with the colleagues in the other brands which is really good and help to develop our tools but we of course also need to continue to to work to get our rating up so that the funding costs are not hampering us compared to competition. So everything we do as a group to improve the balance sheet is of the utmost importance to be competitive in the financial services space. And to be honest, also in the complete business, because most customers are financing in one way or the other. Thanks.

Yeah, and thank you for the question. Next question comes from Hampus Engelau from Handelsbanken. Hampus.

Thank you very much. One question for me. I wanted to ask about Navistar and the backlog. As you highlighted, that we're seeing a slowdown in Class 8, where the medium duty is better. Historically, I think there's been some difference in profitability between those segments. And I was wondering, is there a major change in mix if you would kind of look in your crystal ball for this year on NAV compared to last year. And we need to think about that regarding profitability. Thanks.

Should I start, Ursula?

Yeah. Yes.

Yeah. Hi, Hampus. Thanks. It's interesting because what you recollect is what I always learned being in Scania that you know, there's a lower margin on the medium duty trucks. And that was also always the reason why we never entered into that segment. But I was surprised to learn that in the US space, it's a very profitable product. And we see no difference between a heavy and a medium duty vehicle. So when the mix is now clearly changing towards class six and seven, it does not have a significant impact on our gross vehicle markets. So, which is also good news as for us in Navistar, sales on medium duty represents around about 50% of our total sales. So, and of course, I don't know whether if this is the normal situation in the US market or if it's only Navistar, but I imagine it's the situation in the market. So, but that could be a fly in. I hand over to you, Michael, for more on the financials there.

Yeah, no, exactly. I mean, we believe that we really have a favorable product mixture in the U.S. Also, as you mentioned, Christian, here with the Class 8, but also the Class 6 to 7, and not to forget the buses. So it's really a favorable product. product mix, which then leads to the potential profitability as I was into. So I can just very short do the recap that we believe with the product mix that we're having. and taking into account the special situation at the beginning of the year, again, we are positive that we will see an increase here in our margin for this year, despite the more challenging conditions overall.

Thanks. Thank you. Let's go to the next question, which comes from Michael Aspinall from Jefferies. Michael, please, go ahead.

Just one from me. It's a follow-up question around production. How much notice do you need to lower production around the different regions and what are the key levers you'll pull if you do make that decision?

Okay, I wish I could take that one. So typically we need in the three big brands around about three months from decision to execution in terms of adjusting our production pace. And the levers or what we do is that we work with the flexible contracts on the workforce. So we use them the temporary workforce, that's a little bit different between the different regions, how flexible we can be varying somewhere from 10 up to 30%. And then, of course, I mean, the fixed cost we have, so there is no real leverage. But then you have, of course, the full effect on the material cost. So that's from the engineer, Michael, from the financial guy.

Excellent. Thank you.

No, I can just agree to that. And of course, I mean, as you were into, we look at the situation and if we see the need from a financial standpoint to do something here or to slow down, then of course, this is taken into account.

Okay. Next question comes from Daniel from Bernstein Societe Generale. Daniel.

Hi, thank you. Thanks for the question. Just a question on price and some guidance clarification. You obviously talked about strong pricing at MAN and VW truck and bus, and obviously with units down four and revenues up five, sort of nine points of price mix is quite positive. So the question is, how much of that price mix do you expect to sort of carry over? And then sort of linked to that is the guidance clarification. So do you think that the minus five to 10 Sorry, minus five to plus 10 is sort of the minus five would be more like the deliveries and units and sort of the lower end. And then at the higher end, so the plus 10 would be more sort of applicable for revenues, because obviously at the moment, your guidance doesn't make any difference for that strong price mix and ASP that we've been seeing in the first quarter. Thanks.

I mean, when we talk about the unit sales and the sales revenue, then we have the guidance that you just mentioned from minus five to plus 10%. And, uh, Again, when you look at the unit sales, then we were here below the midpoint. But when we just stick to that guidance to give you some more clarification here, we still believe that we have a good chance to end up at the midpoint. So roughly around 2.5%. Again, taking into account that especially here in North America, At Navistar, we were not able to deliver as many trucks as we could have because of, again, the supply chain situation and the situation with the buses, as mentioned. So that's the explanation here, why we still aim for the midpoint. Then, since you mentioned here pricing and mix, I mean, this has the influence regarding our RRS guidance. And there I can just echo that we have the range from 8% to 9%. Yes, in the first quarter, we are above this. We stick to our midterm target of 9% for this year. So as we already said during the annual press conference, you should not read the guidance from 8% to 9%. in the way that we guide for the midpoint of 8.5. Now we stick to our midterm target. And that's why clearly we were happy with the start into the year. But as I also mentioned during the presentation, I mean, we opened up the corridor to 8% because there is simply a lot going on in this world. There are a lot of uncertainties. And I mentioned, I believe, at least when I had various interactions with investors, you also can never outrule that there is a major impact from either an earthquake or, again, a fire at one of our suppliers, for example. And then a couple of days, unfortunately, after I had mentioned that we had the earthquake in Taiwan, And then also there was a fire at one of our suppliers a couple of days or weeks later. So we just see that those things are happening. And this is how you should interpret the guidance. Again, happy with the 9.4%. Start into the year, but you also know for the rest of the year, there are seasonal effects, vacation periods. So you cannot simply say that this will continue, even though we will work hard.

Thank you, Michael. So just on the guidance clarification, it's not just on the margin, it was on the differential between the units. And the revenues, obviously, with the price mix being the difference. So if you're confirming midpoint being 2.5 on units, obviously, with price mix coming in, is it fair to assume that you'd be higher than that for the full year if you start putting in the price mix benefits that you've already seen in Q1?

Now, again, also here we are sticking to our guidance. And I mean, as I mentioned, the price and mix effects as well, I have to add here as the vehicle services business, pretty much like last year, contributed significantly. here to the good numbers. But I mean, there was a question before regarding input costs. And there I said that we had some positive effects, decreases regarding raw materials, but also increases. So let's see how things are going. But there we don't go. And please understand that into further details regarding these aspects. But again, we stick to our guidance range here. Okay, very clear. Thank you.

Thank you. Next question comes from Anthony Dick from AutoBHF.

Yes, thank you. Just a quick one on my side. Could you please update us on the penetration of the S13 at Navistar? and how you expect this to evolve as the year goes by, and also provide the additional profit per vehicle that you expect to come from the implementation of this engine at Navistar as you did with Scania. That would be great. Thank you.

Christian, can I hand that over to you?

Yeah, I wish I could be more precise, but we are ramping up production in our plant in where we're building a system that could actually supply, we're talking about the full system and half a system. We're building a full system instead of telling you we're building half a system in Huntsville. And that's basically means that we can potentially build some 30,000 units. So where we are throughout this year, I will not be able to give you precisely, but the target is of course that we reach full capacity like we have done in Scania over probably a year and a half or two calendar years. So it's not, I think, reasonable to believe that we will be fully using this capacity in this year. But I'm sorry, I cannot be more precise, both because I don't know and also because I don't want to. When it comes to pricing, I hand over to Michael.

Yeah, I mean, typically we don't share here a precise figure because also, I mean, even if you go to dealers, it's tough to compare because there are different factors. uh that come into account but let me just say a little bit more generic um and this is one of part of the navistar story of course why we said uh also here despite more challenging market conditions we believe that the s13 is not a game changer that would be probably overdone, but it will play a significant role in increasing the margin level at Navistar. So you have the clear indication that there are, let me say, at least maybe a couple of thousand dollars positive effect thanks to the S13. Perfect.

Thank you very much.

Thank you. Next question comes from Shaquille from Morgan Stanley.

Hey, good morning, guys. It's Shaquille from Morgan Stanley. So clearly Navistar is looking to grow share in North America 1% to 2% per year. Your German competitor is looking to grow in vocational and go to 45% in Class 8. The Swedish competitor opened a new factory in Mexico. And then on top of that, there's EV specialists we are starting to ramp to. So Christian, what are your thoughts on competition and price discipline in North America over the next few years?

Yeah, that's a very fair question. And of course, it's a battleground, as it always has been in North America. And everyone has the intention to up their market shares. And if we sum that up, we're somewhere 125, 130%. And that will, of course, not happen. So yeah, and of course, that will have an impact on pricing now. Where we start from is really being the last of the line in terms of price. So we were the cheap product. We're the one who could not increase value. We could not use technology to charge more. And that is what we're changing now. So we're going from kind of worst in class on the driveline performance to best in class. And that doesn't mean that you reposition your pricing completely from one day to the other, but it gives very good sales arguments to the sales force to increase pricing and And now on the last question, we don't want to go into the exact pricing we're getting out, but we get substantial better pricing with the S13 compared to the A26, and we still sell out. So I don't think any of our competitors, but I know have an order book like we have for the S13, which means the full calendar year. So what we're going to continue to do is to take more and more of our European developed technology, integrate that neatly into the Navistar products, and by that adding cost advantages for our customers, and by that being competitive and by that charging the price. And then the good thing is that we're not having the Amaya and Scania kind of cannibalization risk. We have only one brand, and that is international in the North American space, meaning that we have a chance to reposition the brand back to where international ones was. And it's an iconic brand in the US and many of you on the call know that better than me. And we see that from the dealer loyalty and from the customer loyalty. When I meet with dealers and customers in the US, together with Mattias and his team, they all ask us to really come back. They all think that Freightliner dominate this market too much. And with our dealer coverage, And with our technology, I'm absolutely certain that we will be one of these who can actually capture the market shares that's up for grabs. If you look to our dealer and workshop capacity, for instance, I mean, we're a brand that is coming from 25% market share. We were down to 11. Of course, that means that we have capacity to grow. This has, of course, also been hampering us on the supplier side because they have kind of given up on Navistar and shifted their capacities over to our competitors. But they see here as the months go by that they need to start to think differently on us. And that is a struggle that takes time. Luckily, many of the suppliers are also based in Europe and know us from other places, which really helps in converting them into giving us more volume allocations. but that's not always the case for American-based suppliers. So I think that we are very well positioned to continue this growth. You might think that we are sticking out our necks a bit when we're saying we're going to take 1-2% market share, but we are, but it's important to point out we will do that through value. It's going to be value-based pricing, and it's not going to be any price or engagement from our side. We're far too cheap for that, you know. So that's a few comments how I think about our penetration journey going forward in the States. Thanks.

Thanks, Christian. And now we have the last question in the queue, which comes from Jose Asumendi from JP Morgan. Jose.

Thank you very much. Just one question, please. Can you comment on the leverage of the company and where do you see it by the end of the year? How do you see free cash flow in 2024?

and you know the medium term view how do you see the leverage into 20 into 25 26. thank you yeah i mean let me start with the with the net cash flow and uh here uh maybe starting with our guidance uh of 2.3 to 2.8 billion so first of all let me say that also here uh we stick to our guidance and then when we talk about the Our net debt level, then let me say one more time, even though we look at the Q1 figures here, that we were quite happy and also proud that we were able to reduce our net debt level last year. We believe significantly from 7.7 to 5.8 billion euros. And we continue that path. So in the first quarter, we were able to further reduce it by almost 300 billion euros. now to a level of 5.5 billion euros. And to be crystal clear here, this is a top priority for us. That's why, as we mentioned in the last calls, We have put the net cash flow here on a different level. We have a clear focus on that aspect because we want to reduce our net debt level further. So this is important for us. for the two effects that I mentioned before. One is clearly increasing our equity value and then the other topic is that we're of course aiming for a standalone investment grade rating to have more flexibility in our financing efforts linked to the question already that we heard before regarding our financial services. captive and being able to finance this so of course also therefore it's important to have the standalone investment great so you can be sure that again this is a top priority for us and we continue walking down that path

Thanks, Michael. That was a strong closing commentary. With this, we are concluding our event. Thank you, Christian and Michael, for explaining the trade and strategy and the recent operations and results to everyone. Thank you for joining us today. And please save the date for our upcoming CMD in Munich on 1st of October. And please reach out to me or Camilla or our respective teams in investor relations and corporate relations if you have any further questions. With that, we wish you all a nice remaining day. Goodbye.