Traton SE

Ladies and gentlemen, welcome to the Tratton Q2 first half 2024 results conference call. I am George, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star N1 with your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ursula Queret. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Trayton's second quarter 2024 earnings call. My name is Ursula Queret, and I am head of investor relations at Trayton SE. with me on the call today are christian levine our ceo and dr michael yakstein our cfo and chro christian will kick off the presentation with the key results and highlights of the second quarter and michael will guide you through the financial performance and outlook in more detail as always we will conclude the call with a q a session where we welcome questions from financial analysts investors and media representatives to handle potential media inquiries during the q a session camilla devon our head of corporate relations is also present this session will be recorded and a replay will be made available on our investor relations website as soon as possible after the call You can also find our half-year financial report, which we published this morning, and the slides to this call on our IR website. Before we start, let me remind you of the disclaimer with respect to forward-looking statements on page three of our presentation. With that, I hand it over to Christian.

Thank you very much, Ursula, and welcome, everyone, also from my side. Thanks for joining. So, you can see the overall picture on this slide, and we follow up the second quarter with a really good result, just like in the first quarter, concluding a strong first half of the year. And from the left, we start with the order intake situation, and you can see that we further managed to grow our orders to almost 59,000 vehicles. Said that, the overall picture is that customers are becoming more cautious, especially in Europe and North America, and we see markets are normalizing from the past two very strong years. Brazil and Latin America, however, are moving in the other direction, and we see a really positive market development there with good order intake as a consequence. If we look to our sales in Q2, we're down 5% compared to last year to 79,000 vehicles, still a solid level, especially taking into account that we've had a really tough temporary supplier issue happening at our international brand Navistar in the US where a fire hit our supplier of rear view mirrors which unfortunately is a single source so in Escobedo just neighboring our own plant there was a total loss now this of course heavily influenced negatively our delivery figures for North America whereas actually impacting all our key figures in Q2. We, however, expect to be able to complete the tracks they are built. and we have an additional line and an additional shift up to complete with mirrors and deliver them and the vast majority we expect to deliver throughout the second half of this year now if we move on to the cash flow this is what has been especially hit by this temporary effect in Navistar so a minus of 374 million euro in the quarter but remember also that this is the quarter where we pay out the dividend and we did double the dividend payout 750 million euro this year If you look then back to the third box, sales revenue, you can see that despite 5% lower vehicle deliveries, we did 1% minus on the sales revenues coming to a very good 11.6 billion euro revenue, mainly explained by a very good price discipline in all of our brands, but also a good regional and product mix. So looking then finally to our result, it's an 8.8% return on sales, another strong quarter, showing again that our strategic ambition of reaching 9% in 2024 is definitely well within reach. All right, Michael will of course take you more into the financial details later in this presentation, so let me instead move you into the next slide and have a look on some of the most important strategic highlights from the second quarter, starting with Scania and an important announcement made that we have established and launched a company called Erinion. This is a company that will supply turnkey depot and destination charging equipment to our customers. We've come to realise that, of course, charging along the highways is important, but absolutely 100% of the customers first require depot and destination charging, and this is where they anticipate to make the majority of their charging happening. strategically important and interesting is that we were never into the energy supply of customers before with some very few exceptions fuel cards and other solutions but this is and will continue to be 30 to 40 percent of the customer wallet so a small step taken towards a big target of reaching 40 000 charging points already by 2030 and by that supporting further the transition into e-mobility solutions. Moving to MAN, despite shifting to zero emission vehicles, the demand for traditional combustion engine vehicles remains strong, and the most important sales arguments remain TCO, reduction of fuel, and with that comes, of course, reduction of CO2. min announced the launch of the new highly efficient d30 engine so after the super comes the s13 in navistar and d13 min all are based on the cb1 engine gearbox and after treatment system being the first trait on modular solution for all of our brands but mn has taken that one step further made further improvements with a new brake generation and with several aerodynamic measures, being able to promise reductions by up to 4% to their customer base. And deliveries of these driveline will start in the next calendar year. Back to battery electric vehicles and international brand in the US, where a huge effort has been made to prepare the dealer and service network for the electric vehicles, both trucks and buses. We've learned in Europe that you need a significant effort to prepare the staff, and Navistar has chosen the path to prepare 100 out of the around about 300 dealers of international BEV trucks and IC buses for electric. an important step to be able to take on, especially the school buses that are coming out first. In Volkswagen Truck and Bus, we choose to highlight the internationalisation strategy that we've talked about for this strategic period, where in this quarter, a new production facility was opened up in Argentina, in Cordoba. There will be five models brought into the local production, in the market and in the market where Volkswagen truck and bus is present since more than 25 years. But if you look to the results in the market, you can see that Iveco and Daimler are the predominant players as they do have local production. So we expect significant improvement in sales figures for Volkswagen truck and bus thanks to this move. So two of these strategic initiatives directly pay into our electrification journey, which is moving momentum. And on the next slide, you can see our Key figures, order intake and deliveries of full electric vehicles throughout the first half of the year. And you can see that momentum is rising. Customer interest is really high. More than 1,700 orders is a clear improvement over the first half of 2023. We choose the picture here of an MAN electric bus, electric city bus. because we are tremendously proud to be actually the market leader in Europe for electric city buses. You might have thought that was a Chinese manufacturer, but it is not. It is MAN that is number one in the European city bus market, thanks to an excellent product that you can see here, the MAN's Lion's City E. But, as you know, we also have a great line-up from Navistar, with school buses, the biggest bus segment in the US, and we see momentum building up, especially on the offering side for e-trucks. Unit sales are going backwards, 605 only, and then you should know that this is partly due to the fact that the MAN e-van was discontinued at the end of last year. And hence, that's out of the delivery figures for this year. And then there is a strong pipeline of electric trucks coming into the market in the coming quarters. We see more and more customers being able to make a positive TCO calculation. We see improvements in the charging infrastructure mylands as we've already told you about erinian that we talked about today but also min strategic collaboration with eon where they are electrifying all of the min workshop and dealer outlets but as usual i call out to the governments especially in europe but around the world to make sure that the tissue parity is improved through whatever means available to them, and for us to be able to reach the CO2 emission reduction needed to reach the Paris Agreement. And with that, let's leave the zero emission vehicles, move into the next slide, and I will give you an overview of the market situation. so this is our global both deliveries and orders in one slide over the years and as you can see there is a decline in unit sales in q2 due to continued normalization in our big market areas, both Europe and North America. MIN is especially hit by the weakness of the German market, but both Scania and MIN in Europe are impacting by weaker demand out of Eastern Europe. Nevertheless, we continue to have a strong order book in both our European-based brands. Also in the US, we see decreasing figures, and this is mainly coming from the on-road Class 8 vehicles, whereas we actually see growth in Class 6, 7 and in the severe segment. And as you'll see later on, We make no change to our guidance. We stick to it. We believe that all the market areas will be as we forecasted for this year. South America. It continues, like in Q1, to be really strong. In Q1, it was predominantly Scania that benefited as the heaviest part of the market grew fastest. But in this quarter, you also see a very positive development for Volkswagen truck and bus, whereas the lighter and medium duty segments also started to grow. But besides the total market effects, I need to mention again the additional hit that the Navistar team took with this fire at the supplier of mirrors. Tough for our team that worked so hard with restructuring and getting the company back on track, getting this force majeure. taking their deliveries down with 23%. So mixed picture between the brands, but all in all, that takes us to a decline of 5% in the quarter. Order intake. We actually managed to increase 4%, as already mentioned, mainly thanks to North and South America, and especially thanks to Brazil. And therefore, you see very strong order intake improvement, especially from Volkswagen truck and bus, growing 36%. But also Scania benefiting this development, being a big player in Latin America, and also growing order intake in the first half year. This takes us to a negative book-to-bill ratio, or a book-to-bill ratio below one, I should say. We are on 0.75, a slight sequential improvement, and as a consequence, improved, or if you would like, lower lead times. So if we talk in the different market areas, we are now down to rather normal delivery times, around about three months on average in Europe. Whereas in South America, lead times are growing up to six months, depending on brand and application. And with Navistar in the US, we have the longest lead times because mainly of this supply chain issue now mirrors. But as you remember and recall from before, we also have frame rail issues, gearbox issues, etc. So there you need to count between three and at least six months, depending on specification. So that's trying to paint the picture, overall picture of the market. And with this, let's jump into the financial figures and I hand it over to you, Michael.

Thank you very much, Christian. And of course, a warm welcome from my side as well. Christian just spoke about the market trends that affected our unit sales while we still profited from a good order book. He also referred to the new EU general safety regulation, which on the one hand created some market momentum in the second quarter. On the other hand, the application of the regulation came with a model change at MAN and hence with a slow delivery. The Navistar mirror supply issue and the respective transitory effect on truck unit sales in Q2 was also mentioned. Unit sales of buses at Navistar were still down year on year in the second quarter, although deliveries of the new school bus model are now ramping up. While unit sales decreased by 5% in the second quarter, sales revenue remained almost stable, which is a remarkable achievement. This resulted from a favorable geographical and product mix, thanks to our diversified business model. It was also due to our good order book and price realization. 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 with our profitability development. As you can see here in the second quarter, the adjusted operating result decreased only slightly, resulting in a continued strong adjusted return on sales of 8.8%. This shows once again how our cost structure and overall resilience have improved, especially due to the positive impact from the MAN realignment program. And despite the negative effects that we have already discussed. We reached a profitability of 9.1% for the first half of 2024, which meets our 9% adjusted return on sales ambition. However, our RRS guidance remains unchanged with a range of 8 to 9%. This takes into account ongoing cautious market expectations for Europe and North America and potential risks from further supply chain disruptions and geopolitical uncertainties. let us now look into the individual performance of our brands on the next page so page 12 shows how our group benefits from having diversified brands markets and products so despite the navistar supply issue and softer markets in europe and north america sales revenue of trade and operations remained almost stable year over year the corresponding return on sales even increased slightly by 0.4 percentage points to 10.2% in the second quarter of 2024. As shown on the slide, Scania was the main driver of the industrial revenue growth. Its sales revenue went up by 8% to 4.8 billion euros, mainly due to the strong growth of its heavy-duty truck business in Brazil. Also, Scania's revenue benefits from the increasing delivery of trucks equipped with the Scania Super Powertrain, as well as the ongoing strong demand for its vehicle services business. With this, Scania again improved its adjusted return on sales, both quarter over quarter and year over year, reaching a very high 14.7% in the second quarter. MAN reported €3.6 billion in sales revenue, which is a decline of 2%. As mentioned, MAN suffered from the weak demand in Germany. The revenue growth was also affected by the new EU safety regulation. However, this was partly offset by increasing bus and van sales revenues. Nevertheless, the adjusted return on sales improved by 0.8 percentage points to remarkable 8.5%, clearly demonstrating the positive outcomes from the successful realignment at MAN. As stated, Navistar's deliveries were significantly affected by the fire at its mirror supplier, and therefore sales revenue declined by 21%. As a consequence, we saw a drop in Navistar's operating profit and the adjusted return on sales came in short of expectations. We made a rough calculation. If all trucks produced in the second quarter had been delivered to customers, the Navistar return on sales would have come in significantly higher, approximately around 7%. Even if this drop driven by a force majeure is unfortunate, we're confident to deliver the vast majority of the backlog to customers in the remainder of the year. We expect that this and overall production will help to significantly improve profitability at Navistar in the coming quarters. Volkswagen truck and bus increased its revenue by very impressive 41% year on year. This was driven by strong market table and a better product positioning and unit price realization. Hence, based on an excellent product offering and a leading position in a growing market, Volkswagen Truck & Bus further increased its adjusted return on sales to 12.6% in the second quarter. Next to trade and operations, trade and financial services increased its revenue by 22% in the second quarter. This came mostly from a larger portfolio volume and the continued country rollouts for MAN customers. However, this had a negative effect on the profitability of our financial services business in Q2, along with higher funding costs. Return on equity came in at 11.9% in the second quarter. And I should mention that last year's return on equity was lower because of the sale of Scania Finance Russia. Let me end this slide on a positive note. We are consistently executing on our strategy. We leverage the strengths of our four brands while building out the Trayton modular system and growing together as a group. And we are ramping up our captive financial services offering for all our Trayton brands. With that, let's move on to page 13 and our recent net debt development. Here you can see that the net cash flow of trade and operations was significantly affected by a strong buildup of working capital, largely inventories. This is predominantly related to the mentioned situation at Navistar, where due to the missing mirrors, we could not finish and deliver our trucks as planned in the second quarter. According to our calculation mentioned before, the trade and operations net cash flow would have been approximately 700 million euros higher if the mirror supply issue had not occurred. An increased capex also weighed on our net cash flow. But let's take this as a positive since it clearly pays into our future competitiveness. Our dividend payment of €1.50 per share in June resulted in an additional cash outflow of €750 million. Our strong operating performance could not fully offset the mentioned effects, so the net debt of trade and operations, including corporate items, rose by €1.2 billion in the first half of this year. This should be a temporary event as our prime goal to deliver our balance sheet remains fully in place. We expect working capital to help us in the second half of this year, especially from the relief of semi-finished inventory and inventory in North America. As we have said many times, we're aiming at a standalone investment grade rating by further reducing our net debt. This will make our financing more flexible. With this, let me move over to our full year outlook. As I said before, we maintain the Trayton operations net cash flow guidance in a range between 2.3 and 2.8 billion euros. I also reiterated the Trayton Group return on sales guidance range of 8% to 9% for the full year. And based on our strong first half of the year and unchanged expectations regarding the truck and bus markets, We also confirm our group unit sales and sales revenue forecast for 2024. We expect both performance indicators to develop in a range from minus 5 to plus 10%. On the next slide, you can see that we did not change our truck market forecast presented in the annual results conference. So now, before we start the Q&A, I'd like to mention two important milestones we celebrated this quarter. We were very happy to see that Trayton joined the index, which tracks the performance of the 50 largest companies in Germany outside the DAX. This not only reflects our strong financial performance and higher market capitalization, but also enhances our visibility and credibility in the financial markets. This quarter also marks the fifth anniversary of Trayton on the stock market. Over the past five years, we have made great progress on the Trayton way forward and have created value to our shareholders. I want to take this opportunity to thank our investors, employees and partners for their support along that way. And with that, I hand over back to Ursula.

Thank you, Christian and Michael. I already see quite some questions lined up from the audience. But before we start, let me quickly re-explain the rules. The 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 1 on your telephone keypad. If you want to cancel your question, you can dial star 2. If you need operator assistance, press star zero. And in respect of time, please limit yourself to two questions. Now, let us take the first question, which comes from Klaas Bergelind from Citi. Klaas, please go ahead.

Thank you. Hi, Christian, Michael, Ursula, Klaas at Citi. My first question is on the growth margin, which is down a bit quarter on quarter. I guess this is mainly by the because of the temporary issues at Navistar. There is no price-cost drag yet, correct? And just to put this into context, looking into the second half and in the context of other OEMs talking about price pressure now in Europe this week, what is the risk, Christian, of a greater impact from pricing than just price-cost normalization to EBIT in the second half? We know that the carryover from pricing will become smaller and smaller, but are you now seeing more negative pricing entering the order book for second half deliveries? I'll start here. Thank you.

Okay. Gross margin question. Actually, Klaas, the gross margin was at 21.2% and actually it was not down from last quarter.

Quarter to quarter.

Quarter on quarter also almost a very, very small downturn from 21.8 to 21.2. So maybe that already answers the gross margin question. Nothing spectacular happened here.

My question is to Christian on the price cost normalization.

Then let's take it from that perspective. Thanks, Claes, for clarifying.

Hi, Claes. It's a good thing you asked for gross margin. That's the first thing I check when I get in the monthly figures. I'm really pleased to say that the price discipline that we have, installed in this group based on the historical Scania way of thinking is really paying off and you can see that we're not engaging in crazy deals so I do not see price solutions I do see some crazy deals as always when the market starts to go south in the market we're not engaging in these And that's probably what you picked up from Compact. Typically, these are the big fleet deals where people see a chance to fill order books with volume but without much profit. So we don't see that. We see, however, a good cost development. uh over several areas which is to our benefit we see the the pricing power of the super drive line in sconia and the s13 then in navistar helping and we as i announced earlier here we also now finally get it into the min range as from next year that would that will also have a counter effect so i i feel pretty confident uh despite that as you say the order book based on the extreme years, is gradually being delivered. I see fair price realisation, I see good cost development, and I have no fear that we will at least not in the short term suffer gross margins. So I hope that answered your question.

Yeah, very clear. Thank you for that. My second one is on Navistar and the FIRA at the supplier. Thanks for that underlying margin, Michael, of 7%. How many units looking to sales that we're talking about here that will return into the third and fourth quarter? And can you please talk about other capacity issues here? You know, on the frame side, you had some difficulties also ramping on the new school buses. And I'm trying to understand, I mean, in general, some orders, because I get that unit sales takes a hit from the supplier issue. But I'm curious why orders were weak in Avistar. Is this weaker heavy-duty demand quarter-on-quarter, or is it also a result of that you can't sort of ramp, you don't want to build the order book, et cetera? Thank you.

Yeah, thank you very much for the question, Klaas. Maybe let me start with the question about the other supply chain issues. You're fully right. When I referred to the first quarter call that we had, then I mentioned that we unfortunately still had the frame rail topic as we called it practically the entire last year. So that was, if you want to say, a spillover effect in January and February. So this is at this point completely overcome. We don't see any issues here regarding this supply chain issue when we talk about the frame rails. Then you mentioned the bus ramp up, which was the second topic in the first quarter when we looked at Navistar. And there, the ramp up has clearly improved. So we are catching up here. And we expect for the full year that we will deliver a large extent of the volume that we have lost here in the first quarter or in the first half. So good progress here on the bus ramp up, which is the second topic. Then you asked in general about the supply chain. I believe I can reiterate what I've mentioned the first quarter. In general, supply chains are not as stable as they were before the pandemic. And when we differentiate here regarding the regions, then we can say that in Europe, supply chains are more stable in the meantime. In North America, there are still some slight hiccups, I would say, if we compare that to Europe. overall more stable, clearly, But there are from time to time, I would say minor issues in the supply chain, but not heavily affecting here what's going on at Navistar at this point in time. Nevertheless, you heard me. Also regarding our ROS guidance that we are here cautious, taking into account the experience from the supply chain. This is one of the explanations for our range. to put this into context here. Then regarding practically your first question regarding the volume, let me just say that we believe that we will also catch up here the volume of trucks to a very large, maybe even to the full extent, uh in the second half of the year it will likely not happen all in the third quarter we will probably need the third quarter and the fourth quarter because now we have a large extent of semi finished goods which we translate then first into finished goods so this will take some time and the volume number you asked that's in the ballpark of almost 8 000 units so this is the ballpark Then you mentioned one more topic, if I recall it correctly, and that was the auto situation at Navistar. As Christian was into when he talked about the different lead times in the regions, he mentioned that the lead times in North America are a little bit longer. And this, of course, goes back to, on the one hand side, the slower ramp up in the bus situation, as mentioned, and then as well goes back to the fire here at our supplier with the mirrors. That's why the lead times in North America at Navistar are longer. And I can say, therefore, that the order book is quite well filled and there is not too much room left, let's say, to completely fill it for the entire year. That's why we are here overall quite positive when we look at Navistar and the order book situation.

Very clear. Thank you. Yeah, very clear. Thanks.

Okay, then the next question comes from Daniela Costa from Goldman Sachs. Daniela, please go ahead.

Hi, good morning. Thank you for taking my questions. I have two questions as well, but I'll start with one which is more just in terms of strategy. I guess we've seen lots of supply chain problems across the industry. We've seen now the mirrors issue. Reflecting on those and as we think about sort of your progress, particularly on Avistar going forward, does that sort of make you think on any changes that are sort of needed to the production system, any dual sourcing, and how should we think about the long-run margin target perhaps on the back of that? But would be interested to hear from you on this.

Yeah, maybe, Daniela, I may jump in here directly. Yes, of course. I mean, we are looking at the situation. And maybe I can say here very concrete when we talk about the frame rates, for example. In the meantime, we have three suppliers here. So of course, there is a lessons learned. And when you look at the history of Navistar, then I would say for a good reason. The company worked with single sourcing. But you're fully right. And as I indicated also, the situation regarding the supply chains have changed after the pandemic. And in this sense, we adapt. And of course, we look where we have crucial parts. And you asked about our supply chain strategy, where we believe that it makes sense to go for dual sourcing instead of single sourcing. We clearly consider this.

Thank you. Let me add the bigger picture, because you asked about the entire production system. And I think we took over a company that had a lot of problems, but they had a new factory facility in Texas, in San Antonio. But we were surprised to find that there was no systematic work, improvement work at all ongoing. And we have moved a lot of our top people, both from Europe and from Brazil, up and over to US and Mexico to support Navistar in revamping the entire production system, including the supply chain. So there's actually no surprise that we take those hits. There's also no surprise that we're lost in line with the suppliers because we've been the one who have had the toughest relationship with the suppliers based on our poor financial outcome and always being under pressure. So this is something that we are gradually working on. It's not only about whether we go single or double source, it's really about another way of working in in transparency and along the supply chain, all the way down to second, third, fourth tier suppliers. But this is a work that will take time, and it will constantly improve. And it was of course very, very unfortunate that in a time of good improvements in Navistar, and Michael, you mentioned that we had finally solved some of the bigger issues, we got this force majeure fire. which really set us back, otherwise we would have seen a really good result out of Navistar. But again, there will be more hiccups, but we're gradually improving the situation we're in with Navistar.

Thank you. And then continuing on the U.S., I guess sort of a couple of months ago, there were a lot of questions regarding EPA and the potential pre-buy sort of as we head up into the 27 deadline. But now we have this Chevron ruling overturn. Do you still think that there is any possibility of any pre-buy? And if so, when and to what significance could that impact 25?

Should I take that, Ursula?

Sorry, Christian, I think that's for you.

So let me say that we are once again reviewing what EPA has come out with here. And so far, several times we've answered that yes, we believe there will be a pre-buy and that's based on a rather expensive technology needed in order to reach the proposed levels. Question is of course if that is going to stand and it's also when is that going to happen. And previously we've said that this is probably going to happen already in the second half of next year. But let me say that with the ruling that you referred to and with the discussion ongoing I think it's a little bit premature to give you clear guidance. So at this point I would actually refrain from from giving you a forecast. We have to follow the situation and hopefully it clarifies in the upcoming quarters.

Got it, understood. Thank you.

Thank you. The next question then comes from Hemal Bondia from UBS.

Good morning, Christian, Michael and Ursula. Thank you for taking my questions. My first question is on Scania. Solid margin performance in the second quarter. Just wanted to understand the dynamics a bit more. Would it be fair to say that a greater mix of South American truck sales boosted margins? Was it growth in vehicle services or predominantly pricing? And I'll follow up with my second question after.

Okay, I think that's a question for Christian in his role of CEO of Scania.

Yeah, thanks, Hemal. Yeah, so we have... both in the european production system and in the latin american and brazilian production system very similar setups where we run production in in one process and we have the same product which is unique i would say in our industry so it's it's identical we could ship any product anywhere which also means that the cost situation part from of course labor cost differences and and also some import restrictions into Brazil remains pretty much the same. So when I look to our margin realisation, it is, despite the quite weak Brazilian REIs and a big volume in Brazil, it's pretty much comparable. So if you would have asked a couple of years ago, it would have been a problem for us to have such a big part of sales in Brazil. But that is not at all the case. Would the Brazilian reais appreciate? I don't know if that would happen, but that would be actually very positive for us. But already at this level, we see really strong margins. So actually, both production systems deliver strong gross margins. I hope that clarified a bit your question.

Thank you. And then I guess just on the German truck market, what have you heard from customers so far in July? And on that, for MAN, how long does your backlog currently give you visibility for? And what does the mix of that backlog look like? Thank you.

Yeah, so what we hear from the German market is a lot of interest, so very high level of offers, both in MAN and Scania. uh low closings so customers hesitate and just like in big parts of europe perhaps except the south it's really about financial cost which typically is a quite small part of the total cost of ownership for a logistics operator, but it has grown and it has grown a lot. And if you add the amount increases from the beginning of this year, it's like some customers say, it's just too much. Now we need to see the interest rates really coming down to bolster the cost situation. So hesitation is what we see in Germany. And I guess the kind of negative outlooks around the industry in general does not really help the sentiment. So that's what we hear from customers. You asked about the order book, and we have a solid order book for MAN, even if we also have open production slots, as we said, lead time around about three months. So for this year, we feel pretty comfortable, but we are, of course, using the flexibility measures that we have in order to be able to adapt the production rate to the order intake, and make sure that costs are in line with our revenues. So that's a bit about the order book. I don't know if you want to add something there, Michael?

Maybe I can just add that I would say it's quite obvious that MAN will face probably, if we compare it with our brands, then the most challenging situation in the second half of this year, also leading a little bit towards the financial situation here. I mean, as we talked about the markets, You can understand if we look at our brands that there is a good tailwind for Scania and Scania is well balanced here. So this is clearly positive. We talked About Navistar, I believe we were quite clear that we have a catch-up race to do, but with potential, because this was really just a transitory effect with the Miros. So we expect, of course, that the second half is much better compared to the first half. Volkswagen, truck and bus, I believe it's obvious that there we have the tailwinds from the markets. And then, as Christian was into, the order book has normalized, but The situation in the European market, especially in the German market, is challenging. And because of the exposure, you can probably expect that it will be likely that, let's say, the margin that you see here from MAN in the first half, that this will be under pressure in the second half. Thanks, of course, to the couple of times mentioned realignment program and the resilience of MAN. We don't see a significant drop, but I would indicate that it will be quite likely when we look at the market that we will see a slightly different margin at MAN in the second half of the year, taking into account the market conditions, the order book and the order intake situation in a whole.

Thank you. And so just quick for the backlog mix, would you say that's more buses and vans weighted than trucks or is it very different from that?

Yeah, I can take it. Just overall what we see is a very positive development on buses where we have a really strong growth in order intake both in Europe and latin america so but as you know the the bus proportion of our total sales is is low so it doesn't have a major impact but the order book of buses is is actually growing and especially in min it's it's growing fast with the success of the of the zero emission buses and also the traditional buses yeah thank you so much okay thank you for

all this additional color. Let's take the next question, which comes from Nicolai Kemp from Deutsche Bank.

Yeah, hey, good morning. Nicolai here from Deutsche Bank. Thank you for taking my question. Let me start first with Scania. Again, excellent quarter, and you're probably proud to beat your Swedish peers here. Typically, in Q3, you have the summer break. Would you expect that the summer break could be prolonged this time, just given that European demand is a bit muted going into H2?

I guess that's from me, Ursula.

Yes, please.

Yeah, thanks, Nicolai. No, we're not... I mean, we have flexibility measures that we can use in our European system in Scania. But we are not planning to prolong the summer break in production. We run according to our normal production schedule. We do the maintenance we need, and then we start up again here in the second week of August. And I think if I should expand a bit on the Scania Q3 situation, we were a little bit held back with our deliveries in Q2. due to the cyber security regulation that came into the market on the 7th of July, where we were not fully ready and would have expected a little bit higher delivery figures. We do know that these trucks will be delivered in Q3 and I think that will bolster the effect of what you normally have a somewhat lower volume in Q3 because of the

of the summer holidays but uh let's see that's a little bit of crystal ball okay sounds good thank you and just um one pull up on on man um i appreciate the color you've given and actually also the resource you have shown so far in q1 and q2 um also makes another pfu look rather soft um but you have mentioned that h2 will be softer um what should we expect here that we're going

back to below five percent or could we stay above the five percent margin line at manh2 no let me just say i mean we we don't give a precise forecast here what i just wanted to indicate is that the the first half at man when you look at the rs figure was really strong and of course an outflow of the really new resilience that we have at MAN. You also might recall that we mentioned a couple of times in the previous calls that when we talk about the effects of the realignment program that you will see for the first time the full effects of the realignment program in 2024 and this this is let's say part of the new resilience i just wanted to indicate that you should not extrapolate uh the really super robust margin here a very good margin of man into the second half of the year because we see the headwinds which are just in line with our market guidance and expectations and therefore we believe that there will be some pressure on the margin and that we will likely come out weaker than for the first half of the year, taking into account the circumstances as we see them right now. As Christian mentioned, we don't have the crystal ball. I just wanted to indicate that We will likely not maintain the margin level at MAN as we see it in the first half, but you should not expect a drop, let's say, to former times. Let me put it like that.

Okay, understood. Thank you.

Thank you. Then let's take the next group of questions from Virginia Montorsi from Bank of America.

Good morning, and thank you for taking my question. Just going back to Navistar and the order intake, On considering all the supply chain issues that we've discussed, is it my understanding correct that you would still expect some increase in orders, regardless of the delivery improvement in the second half? And could you give us a little bit of color on how long does your current backlog cover on Navistar? Thank you.

Maybe I can at least start here, Christian, and I don't know if you would like to add something. So talking about the backlog, again, we are, I can say, almost sold out for the entire year. There are a couple of slots left. for this year regarding the production but we believe that we will fill that rather soon so that very likely when we meet again then for the call of the third quarter then the order book should very likely lead already into the next year. So this is the order backlog situation here. And yes, of course, I think that I, in a way, answered your first part of the question as well. We expect, despite the situation we have here, that we see an increase of the order intake in the upcoming month.

Thank you very much.

Nothing to add from my side. Good answer, Michael.

Virginia, do you have a second question?

No, good on my side.

Thank you. Perfect. Thanks. So then the next question comes from Forbes Goldman from Pareto.

Yeah, hi. Thanks for taking my questions. Just one on financial services. You're seeing higher costs with the integration activities and so forth. How long do you expect that to be a headwind for you?

Maybe I can... Christian, do you want to?

Well, I can start. I mean, this is a project with several dimensions. So on one hand, we, of course, do expect synergies coming out of using a back office for four brands instead of one brand. But on the other hand, short term, as you're into, we will have integration costs when we are taking over the the business in the US, Canada, Mexico and in Europe for MAN. So the project to take over MAN will take also the full of next year. So we add market by market and next year we also take over Volkswagen truck and bus. Navistar is done. and should not bring any additional costs. So now I'm again a bit in the crystal ball, but I expect already throughout next year, perhaps towards the end, that we see synergies overtaking costs when volumes are coming towards us. But it's maybe something you can give more detail on, Michael.

i i think you put it perfectly fine uh so we we are in the ramp up phase as we mentioned we build our captive financial services business uh you uh probably follow the roll out of the markets that christian just mentioned especially for man financial services uh around the world uh and therefore um this year and also next year we will see costs from the from the ramp up phase But also then the synergies kick in. But it takes some time, of course, to ramp up the business, to build the captive. So it will certainly take quite some more time, but the synergies then kick in. And this is why we are doing it. So, of course, take it as an investment that will pay off then later on.

Great, thank you. And just a second one, if I may. It's on the European market. Do you consider 2024 to be a trough year and then to return to higher total volumes in 2025? If you could provide a comment, that would be really helpful.

Maybe let me kick in here because that's maybe CMD material. We will talk a bit about the longer term market outlook on the 1st of October. So let's leave it with that.

All right, thank you.

Then I would take the next question from Michael Aspinall from Jefferies.

Thanks, Cecilia. Hi, Christian and Michael. I'll start with one on orders in Scania and Mann. Orders seem to have stabilized a bit in the last few quarters in what are weak markets for your customers. Can you just characterize the types of customers that are continuing ordering? I'm just interested in if you're seeing any orders from smaller customers at all, or if we should consider that customer segment as zero at the moment.

Christian, can you take that one?

Yeah, thanks, Michael. Yeah, so Scania is seeing another growth in orders this first half year, and Scania is predominantly working with the smaller and medium fleets, as you're well aware. So it's when you hear that the smaller ones are hesitating more than the larger ones, I mean, that's not entirely true. But if I look to the order portfolio here more recently, it is true that the smaller ones are more hesitating. So let's see how this develops. I think the smaller ones are really the ones who are more vulnerable to fluctuations also in the transport market. I think we didn't mention that, but both in Skåne and MAN with our fleet management systems, we see a solid demand for transport. So, I think, again, one shouldn't be too worried about the European market going much more south. I think it's really normalisation that we see. And in our guidance, we see a market of the plus 16 tonnes, somewhere close to 300,000. And actually, the first half of the year, we're well above that, if we just look to registration six months. MAN is a little bit more dependent on larger customers, as they are dependent on the DACH region to a larger extent. And there we have a bigger decrease in order intake, actually. So it does not really follow the logic big-small. I think it more follows the logic of where is the majority of your sales. So you know that Scania's market share are more evenly spread out over all the European markets, where MAN has very, very strong market shares in Germany, Austria, Switzerland. and a bit weaker in the surrounding big markets. Something, by the way, that we work heavily on to improve MAN's position in France, Spain, Italy, and the UK. So I don't fully, I say, yes, there is a little bit more hesitation among the small customers, but it's not like that market with more specialized trucks is disappearing.

Okay. And then just one thing. Guy Coward- follow up, then you just mentioned your fleet management system where you get quite good good visibility into your customers operations, have you seen any kind of increasing utilization the last few months in Europe to kind of give you a sense that you think of stabilization and improvement.

So we have not seen any increase in utilization. We have seen the leveling out on a level that is around about 13% lower than the pre-pandemic levels. And that has been very stable this year, the entire year. Then if you look into individual applications, you can see ups and downs, but if you look at the total mileage of the trucks, it is actually very stable.

Okay, great. Thank you.

Thank you, Michael. The next question comes from Jose Azumendi from JP Morgan.

Thank you very much. Great to see the resourceful Scania. Fantastic margins there. Just a couple of questions. I think I would really appreciate it if you could give us some guidance with regards to revenues, second half versus the first half across the different divisions. I know it's not easy to give specific guidance, but some color across the different divisions and whether we should see a pronounced insanity in revenues, second half versus the first half. And then second, we've seen some of your peers partnering up with some Chinese counterparts, I would appreciate it if you could give us a brief update with regards to your footprint in China. Thank you.

Should we start with the... Maybe Michael on the first, yeah?

I can take the China. Yeah, let me start with the first one. I mean, you asked about the revenues here and... I mean, clearly the first half, as Christian mentioned during the presentation, the first half or especially the second quarter was affected regarding almost all our core KPIs when we talk about the mirror topic at Navistar. as we said, transitory effect. So we will see the catching up in the second half of the year. That's a little bit regarding the revenues. And then when we talk about our RS guidance, then, I mean, let me just reiterate one more time that, yeah, we stick to our guidance, the 8% to 9%. You can typically not extrapolate what happens in the first half into the second half. There was the question before regarding the vacation season, which is a valid one because typically on historical terms, the Q3 is a little bit weaker because of the vacation time. So that's one aspect that we see. We also see the challenging markets, as mentioned a couple of times in North America and in Europe. So overall, as I was into before, we confirm our guidance and we also stick to what we have said before. You should not read the 8% to 9% guidance that we aim for the midpoint. We've put the 9% target in the capital markets in 2022 and nothing has changed compared to Q1 and compared to our annual press conference, we aim to reach the 9%. in this year, so the upper end of our guidance.

Yes, so Jose on China then, and by the way, thanks for your praise of Scania, but on our China strategy, so you know that we are constructing the third industrial hub inside Scania in Rougao outside of Shanghai. We do that for three main reasons. The first is to expand Asconia brand capacity. The second is to gain better footprint in the Chinese market, which even if it is currently depressed, we estimate will remain the biggest truck market in the world. And third, and this is perhaps the most important reason, is to be part of the Chinese technology ecosystem. So, perhaps not looking to traditional combustion engine trucks, where we have, amongst the Europeans, a clear technology lead in the world, also in China. But when you look to the digital transformation that is happening, the Chinese players are coming at a very fast pace and very strongly. You see that on the passenger car side as well. And it's very, very valuable for us to be with our own staff, independent in China, working with Chinese colleagues, of course, out of Chinese universities, but also Chinese suppliers, Chinese researchers to develop at the same pace, speed and with the same preconditions as our Chinese competitors. And later on, of course, this is valid also once battery electric vehicles or zero emission vehicles with other technologies is going to make it into the Chinese heavy truck market. So, our strategy is to build on that production license that we have, that is pretty unique in the sense that we do not need to have a joint venture partner. It's only us, Tesla and Hyundai, who've been able to get these licenses. Everyone else needs to work in a partnership 50-50 with a Chinese manufacturer, should they be allowed to manufacture inside China. So, we continue along that line. Our production license is for 50,000 units. That gives us a pretty good flexibility on how to use that capacity. Right now, we are aiming at a market introduction towards the end of next year, beginning of 26. So, that's a bit about our China strategy. I hope that clarified your question.

Thank you. Then the next question comes from Hampus Engelau from Handelsbanken.

Thank you very much. Two questions for me. First question is on when lead times now are normalizing in Europe and you have your issues in the US. I was interested if you could talk about production adjustments And given that lead times are normalized. And have you started to reduce run rate for MAN and are you where you should be? And on Scania, how do you expect to kind of manage that, given you're more and more robust? That's my first question. Second question is more if you could update us on the captive engine program and Navistar and how we should think about that going forward. Thanks.

Christian, do you want to take production flexibility and the second one?

Yeah, thanks, Hampus. So yeah, the lead times are normalizing. That's not a bad thing. Actually, it's been very, very stressful to have these big order books and not knowing exactly where you are, when to deliver and what cost positions you would end up in, et cetera. So I'm really happy that we're coming back to a normalization. both in Skåne and MIN. But what does that mean? Well, it means that we need to play the normal game of adjusting the cost base in production the best way we can. And as you know, we cannot use the same instruments in all geographies, in all legal jurisdictions, and we have different agreements in place. So if you ask them for MIN, have we started? The answer is yes. we have started to adjust downwards in our production, both in Germany and in Poland, in order to be in line cost-wise with the somewhat lower output that Michael also described. In Scania, we have not adjusted downwards. We have so far been accelerating in this year, but we see that we also in scania not in latin america that we need to do everything we can to get every every extra track out but in in europe we need to adapt to this somewhat lower output that we expect also for scania towards the end of the year and the instrument that we use in scania is done that we use stop days and use training days instead And that's a minor change, and that is what we think is needed. And that is what we have decided so far. So from September onwards, we will start to take stop days when needed. And then, of course, this is something we evaluate every month when we look to the order intake versus the production needed towards which geographies, etc. So that is something that might then have to change. But that's where we stand currently with the Skåne MN production adjustments. That was the first question. The second question was on the rollout of the common based engine. And you specifically asked about Navistar. But I can cover it, as I think this is a very important part of the Trayton story. Scania is now approaching 60% of our volume on the CB1. Navistar really started sales last year, but we started ramping production this year. And we are aiming to cover the 13-litre segment that is around about half of the total market in the US. The rest of the sales we will cover with the Cummins X15 engine. And we're a bit underway, but we don't expect this year to come above 10% of the total sales, but somewhere around about 8-10%. And then, of course, we hope that with good customer feedback that we already see from the first deliveries, that we can continue to grow that towards, also for us, around about 50% of the sales in the Clause 8 segment. At the same time, we intend to grow Navistar, as you know. I'm of the opinion that we could come back to market share as well, about 20%. And with that, that would mean that we predominantly grow with the super driveline where we remain stable with the 15-litre segment and also in the smaller segments where we use other supplied engine from other suppliers. So that's a bit about the engine strategy and then also mentioning MIN coming in 2025 with a D30 being their derivative of the CB1 adding volume and therefore gaining cost with the supplier base on all the common components on not only the engine but also the gearbox, the after treatment, the control system and the rear axle. I stopped there Hampus.

Thank you. Then let's take the last question. I hope he's still there. From Shaquille Kirunda from Morgan Stanley.

Yes, still on the line. Good morning, Shaquille from Morgan Stanley. Thanks for taking my question. Obviously great result this quarter. Just a quick one for me. So how should we think about the second half margin for Scania? Strong performance in H1, strength in Brazil should continue. Europe remains under pressure. Does the Scania mix in Europe support margins, or will it be impacted like MAN will?

Christian, can you take that one?

We're not guiding on margins, but we are pretty confident that we can continue to perform in a good way, let's put it like that, in Scania. The mix will be moved towards Latin America. which, as I was into in my previous answer, is not a bad thing nowadays. We have good profit margins over there. We're confident that we have an order book that carries us well into next year. We have an increased amount of super engines. I mentioned 60%, meaning we have a way to go to reach 100%, which is giving us really good price position, and then, of course, you have the market in Europe, and let's see what kind of headwind that is giving us. So, that's a bit the dark cloud, but it's actually the only dark cloud I can see right now on the horizon.

Great. Thank you so much.

Thank you. Then I would say this is concluding our event. Thank you, Christian and Michael, for explaining and discussing the trading strategy and the financial results. Thank you everyone for joining us today. Our Capital Markets Day is our next important event on our financial calendar. It will take place in Munich on 1st of October. We sent out the official invitations already and we would appreciate if you could confirm your physical attendance as soon as possible. um for those who are unable to join us in person we will offer a live webcast during the event and the replay afterwards so that you know please reach out to me or camilla or our respective teams in investor relations and corporate relations if you have further questions on this quarter with that we wish you all a nice remaining day goodbye Thank you very much.