Traton SE

XETRA:8TRA

Earnings Call Transcript 2022-Q1

[Operator]

Dear ladies and gentlemen, welcome to the Conference Call of TRATON SE. [Operator Instructions]. One final request, please note the disclaimer that you will find at the beginning of the presentation. If you are only connected via phone, please access the online tool to display the disclaimer.

May I now hand you over to Lars Korinth of TRATON who will start the meeting today.

[Lars Korinth, executive]

Thank you, Martin. Dear all, I would like to welcome you all to our first quarter 2022 conference call today. And I hope that you and your families are all well. Together with me are our CEO, Christian Levin; and our CFO, Annette Danielski. Before Annette provide some insight into the drivers of the Group's financial performance in the first quarter, Christian will comment on the highlights and overall performance. Finally, we will discuss our outlook for the full year '22. And as always, after the presentation we look forward to answering your questions.

Before, Christian actually start, let me provide a few housekeeping items. I hope that you have received all materials for today's call. If not, you can find everything on our TRATON IR website. Let me also take the opportunity to make you aware of the disclaimer on Page 2 of our presentation.

With that, I will hand now over to Christian. The floor is yours.

[Christian Levin, executive]

Super. Thank you very much, Lars. And by the way, welcome to the TRATON team also in this context. Good to have you on board. And good afternoon, everyone. It's great to have you all in the call.

Let us start with some cool highlights from the TRATON world out of the first quarter of this year. Of course, starting with sustainability as being the key component of our corporate strategy. And I think that manifests itself in some of the Q1 highlights. Like Scania has received a big order to deliver more than 100 electric trucks to the Copenhagen municipal waste company. And Volkswagen Caminhoes who now joined the UN Global Compact and is taking responsibility for limiting climate change as well.

Another highlight, Navistar has opened finally the state-of-the-art San Antonio manufacturing plant. The facility improves quality but also lowers cost and provides capacity to support Navistar's current manufacturing footprint. Another important milestone was related to the MAN repositioning and realignment. We laid the foundation for the expansion of the Polish plant in Krakow. Thirdly, MAN joined forces with suppliers and research institutions in the ATLAS Level 4 funding project. This project aims to have autonomously driven trucks on the highway by the middle of this decade.

And lastly, just 2 months after its launch, the Scania Super has already won its first competitive test. The new super based powertrain with a common base engine was a decisive factor for Scania's fourth victory in a row in Germany's renewed 1000 Points test.

Moving on to the next page, yes, thanks. With an overview of a truly challenging environment that we are currently operating in. The war in Ukraine with all its consequences is impacting us severely with the strongest impact being on our supply chain. We have observed significant spillover effects on many other industries and economies all across the globe. There is a high degree of risk that these negative impacts will continue and could even hope not, but could even intensify further in the upcoming months.

When it comes to business climate, truck demand remains robust. There is still upside compared to pre-pandemic peak levels in our core markets of North America and Europe. We continue to see substantial supply chain bottlenecks, particularly in the field of semiconductors. In addition, we're experiencing supply gaps in wiring harnesses in parts of the business as a direct consequence of the war in Ukraine. All of this prevented us from fully benefiting from the strong underlying market demand.

Prices for input materials, pre-products and energy continues to rise, resulting in high inflationary pressures for both industrial and consumer goods. Our teams continue to work very hard to offset these effects with our strong product offerings, improved pricing and a better product mix. In line with our full year reporting, we want to give you an update also on the implications arising from the war in Ukraine. MAN's truck production stood still for a total of 6 weeks due to the supply constraints related to wiring harnesses. Production has reassumed as from April 25. However, current production rates are low as we are not fully receiving our supply of inbound components.

We plan to gradually ramp up production, but the situation remains highly volatile and highly difficult to predict. The production of vehicle has been suspended at the Scania and MAN joint venture truck and bus assembly plant in St. Petersburg in Russia until further notice. As a consequence, our second quarter results will be clearly impacted by these disruptions and the resulting limited output. In addition, in the first quarter, we have impaired assets of EUR 46 million. These included both bad debt allowances and receivables of roughly EUR 30 million in TRATON Financial Services segment and further loss allowances roughly EUR 16 million in the TRATON Operations business area, mainly related to Scania Vehicle and Services.

Incoming orders and unit sales were up by low double-digit percentages. Sales revenue increased even more, plus 30%. The increases were mainly resulting from the integration of Navistar. Adjusting for this effect, both incoming orders and unit sales were below prior year, while sales revenue was more or less flat. Given the substantial headwinds we faced during the quarter, our adjusted operating result of EUR 402 million or a return on sales of 4.7% was still solid, but could not match last year's exceptionally strong Q1.

Please note that this result includes the effect of the purchase price allocation. Excluding PPA, the adjusted operating results would have been EUR 476 million or a return of 5.6%. The net cash flow for TRATON Operations in Q1 amounted to positive EUR 133 million, a robust achievement given the substantial working capital headwinds arising from the supply chain shortages and the related production shortfalls.

On the next slide, Slide 8, you can see the already mentioned trends in incoming orders and unit sales. Production levels and as a consequence, unit sales continued to be held back by the supply chain constraints. At the same time, our order backlog remains on a high level, thanks to continued high demand for vehicles. We can see that market participants are becoming more cautious with orders. That's the same for us and our brands, which have become more selective in accepting orders with long lead times. No reason to be overly concerned given the substantial order backlogs and the tight supply and output situation.

This is also evident in the quarterly development of unit sales, which you find on Slide 9. Despite the supply chain challenges, it is important to mention that our unit sales continue at a healthy level, also thanks to the consolidation of Navistar. As you can see, and already indicated on the slide before, supply chain challenges caused us to delay delivering a significant amount of unit sales. Rest assured, we're working very hard to meet our delivery commitments to our customers.

A crucial part of our ambition is to be the forerunner in the electrified business with a holistic offering of electric trucks and buses. We have already competitive product portfolio in place today for a wide range of different applications. All brands are offering alternative or electrified products in the different categories, trucks, buses and vans. And we will continue to expand our offering in the months and years to come in order to provide our customers with highly competitive and efficient vehicles. We do so already today. In Q1, we delivered more than 400 fully electric units, the majority being MAN TGEs.

And also for medium and heavy-duty trucks, there is a growing customer demand for electric vehicles as evidenced by the recent order from the Copenhagen municipal waste company already mentioned. While we're still at the early days for electrified trucks, order intake for electrified buses is rapidly increasing. The book-to-bill ratio in Q1 continued well above 1, giving us confidence that we will continue our strong growth momentum in this field.

On to our service business on Page 11, which continued to gain traction and importance in TRATON's business mix. Sales revenue in the service business increased 57% to EUR 2 billion in the first quarter with improvements in all of our brands. The inclusion of Navistar sales and services largely contributed, of course, to this increase. Also adjusting for the consolidation effect, the growth in the service business almost compensated for the lower unit sales. As a result, the sales revenue share within TRATON Operations increased from 20% to more than 24%. And with the integration of Navistar, the vehicle services business has even become more important. This once again shows the importance of our vehicle services business as a stabilizing factor for our earnings.

With that, let me hand over to you, Annette.

[Annette Danielski, executive]

Thanks, Christian, and a very warm welcome to everybody on the call also from my side.

I'm now on Slide 13, which shows the key figures for Q1 with a separated Navistar contribution. Due to the integration of Navistar, we achieved a double-digit percentage increase in incoming orders, unit sales and sales revenue. Excluding EBITDA, incoming orders were 20% lower against a very strong prior year quarter especially for trucks. The robust demand was not reflected in our unit sales, which declined by minus 16%, excluding Navistar. This was due to the severe supply shortages as well as temporary stoppages at MAN trucks production. However, sales revenue was almost stable despite those significant headwinds. This was because of a very strong performance in the vehicle service business and an improved product mix and positioning.

Moving to the next slide and to our profitability and cash generation, again, with a separated Navistar contribution. Despite significant impacts from supply chain bottlenecks and the war in Ukraine, the adjusted operating result came in at EUR 402 million. This corresponds to an adjusted return on sales of 4.7%. As Christian already mentioned, we booked an impairment of EUR 46 million related to the war in Ukraine, including those effects, operating result improved by EUR 200 million year-over-year. It is worth noting that operating result in the prior year quarter was burdened by onetime items of EUR 362 million relating to the MAN realignment. Despite an increase of working capital by EUR 0.5 billion due to the continued supply shortages and the MAN production stops, net cash flow and TRATON Operations was still positive as we generated EUR 139 million.

Let us have a look at the segment's performance in the first quarter on the next page. As you can see on the left, Scania vehicle and service and MAN truck and bus, each recorded a single-digit sales revenue decline in Q1. Because of the initial consolidation of Navistar and the very high growth of 48% at Volkswagen Caminhoes e Onibus, the group sales revenue was 30% higher year-on-year. Financial Service increased by 45%, mainly due to the consolidation of Navistar financial service business as well as strong underlying performance. In total, the group reached sales revenue of EUR 8.5 billion in the first quarter.

Moving to the adjusted operating result by segment on the right side of the chart. Despite the MAN production stoppage in March, MAN recorded an adjusted return on sales of 2.2%, only 0.5 percentage point lower than year-on-year. One important driver has been the positive impact from the successful execution of MAN's realignment. I will come back to this in a minute. Scania vehicles and services reached EUR 243 million, equivalent to a return of sales of 7.6%, a similar level as in Q3 and Q4 last year, since the trend has been significantly impacted by semiconductor shortage in each of the past few quarters. Navistar sales and service operating results reached EUR 76 million, corresponding to a return on sales of 3.7%, the strongest performance since the merger last year.

Main driver was that Navistar was able to deliver more trucks, even though it is still facing supply chain shortages. Our Precision team achieved 9.5% return on sales. This very strong performance was driven by higher sales revenue and improved product positioning and a strong pricing. Lastly, the financial service business reached an adjusted return on sales of about 24% and adjusted operating result of more than EUR 70 million. Again, please bear in mind that these results include a negative effect from purchase price allocation, which totaled EUR 75 million within the corporate items. Including the PPA, TRATON's adjusted operating result would have been totaling EUR 476 million with a return on sales of 5.6%.

Let me now provide some more background from Scania's performance in Q1 on Slide 16. As already mentioned, Scania vehicle and service recorded an adjusted return on sales of 7.6%, roughly on the level of Q3 and Q4 2021, but significantly behind the first quarter of last year. This is mainly resulted from supply chain shortages, particularly semiconductors as truck unit sales were 28% lower year-on-year. A strong vehicle service business could only partly compensate for this, and total Scania sales revenue declined by 7%.

The lower unit sales and production utilization as well as the impact for lower fixed cost absorption negatively impacted profitability in Q1. Additionally, raw material expenses increased due to the impact from higher inflationary cost pressure. At the same time, we continue to invest in the further development of our e-mobility solutions. Also on earnings level, this impact was partially offset by the positive effect from higher contribution from bigger service business. While uncertainty remains high, we expect Scania vehicle and service to improve starting in the second quarter. With continued support from the common base engine, we expect the new powertrain to gain further traction in the second half of the year.

Moving on to the next slide with a more detailed look at MAN performance. Taking into account that we had more than 2 weeks of production stops in March, profitability was solid. Production levels are significantly affected and truck unit sales were 13% lower in the first quarter because of the lack of wiring harnesses. The team has been implementing countermeasures to offset these effects, including a duplication of the supply structure and the introduction of the short-time work. The good news is that MAN's earnings are resilient, also structurally improved in the past months, which became clearly visible here in the Q1.

Compared to Q1 2020, while [indiscernible] lost money after a similar production stop, that was driven by COVID-19 lockdown. MAN today is working on the basis of a significantly improved cost position. Despite the volume shortfall, MAN recorded an adjusted return on sales of 2.2%, close to the level of Q1 2021, further evidence that our restructuring efforts are having a positive impact. If we would exclude the production stops, we estimate that the adjusted return on sales would have been between 4% to 4.5% in Q1 2022. In other words, this would have been the strongest MAN quarter since the first half of 2019.

On Slide 18, and the net cash flow by quarter is now referring to TRATON Operations. Despite significant challenges in the quarter, net cash flow in TRATON Operations was still positive as we generated EUR 139 million. This is mainly due to the gross cash flow, which improved by about EUR 200 million to almost EUR 1.1 billion in the first quarter 2022. A counteracting effect was a significant increase of working capital of around EUR 500 million. This was mainly due to an inventory buildup related to the supply shortages and lower trade payables and further effect from the MAN production stoppage.

On the next page, you see the net debt bridge. Compared to year-end 2021, the net debt position of TRATON Operations improved by more than EUR 180 million to EUR 1.5 billion. We included the net debt position for corporate items to provide a full picture of TRATON Group's net debt position, excluding financial service business. The corporate items added EUR 4.4 billion, of which EUR 3.1 billion are related to the acquisition of Navistar back in 2021. In total, net debt of TRATON Group, excluding financial service, totaled EUR 5.9 billion at the end of Q1 2022.

Although going forward, we continue to focus on reducing TRATON's net debt. However, please note that in the second quarter, net debt will be impacted by the payment of EUR 880 million fine plus interest related to Scania's EU antitrust proceedings. With this payment, which was completed on April 12, TRATON is avoiding further interest burden. It is important to note that this payment is independent from Scania's recent appeal against the judgment on the General Court of the European Union.

Moving on to the full year outlook and starting with the truck markets. The war in Ukraine is significantly impacting global economies. However, so far, truck demand is expected to remain relatively robust. It is expected that our core markets will continue to record positive growth in 2022 with expansion rates varying from region to region. However, compared to the release of the full year results in March, the outlook has become a bit more cautious. Most market forecasts foresee an increase of truck market in Europe and the range between 0 up to 10% for the year 2022.

For South America market estimates currently foresee an range between minus 5%, up to plus 10%. For North America, market participants are slightly more optimistic. Truck market growth in North America is forecasted to be between 0 and up to 15%. There is a high degree of uncertainty and a high geopolitical and economic risks arising from the ongoing war in Ukraine persisting effects from the COVID-19 pandemic and supply chain limitations. This will largely continue to be a headwind in the remainder of the year with particularly effects in the coming months, while we expect them to ease gradually in the second half of the year.

This leads me to the next slide. The financial outlook for the TRATON Group in 2022. Our outlook is based on our latest internal planning, the market expectation and our business performance to date. As we are all aware, it is not possible to predict the situation with certainty that as to extent which the war in Ukraine will affect the global economy or our industry. In light of this uncertainty, we cannot rule out further material effects on TRATON Group's net assets, our financial position and to decide of operation if the war in Ukraine continues longer term.

Further, short-term supply chain bottlenecks, mainly semiconductor and other components are expected to continue to affect our production as well as a significant price increase for raw materials and pre-products. We continue to closely monitor the situation and to implement countermeasures to limit the effects on our operations. We now project a sharp year-on-year increase in unit sales and a very sharp increase in sales revenue in the fiscal year 2022. We narrowed the basis of our expected range of adjusted operating return on sales to 5% to 6% compared to an original basis of 5% to 7%. However, in a highly uncertain environment and given the supply chain challenges, service is currently more towards the lower end of this range.

Our guidance is including the effects from the purchase price allocation, which is expected to range between EUR 270 million to EUR 290 million. We confirm that our net cash flow for TRATON Operations is expected to range between EUR 700 million and EUR 1 billion. Please note that this does not include the mentioned cash-out in connection with the EU antitrust proceedings.

Now let me hand back to Christian for the final remarks.

[Christian Levin, executive]

Okay. Thank you very much, Annette. Before entering into the Q&A session, let me summarize the key takeaways. Despite the very challenging business environment, TRATON Group was able to post a solid result in Q1. Scania results were impacted by continued headwinds, particularly from the semiconductor shortages and higher cost, but kept profitability broadly on the level of Q3 and Q4. The MAN restructuring is progressing according to plan, with visible results as evidenced by a strong underlying improvement of performance.

Volkswagen Caminhoes e Onibus or Volkswagen Truck & Bus, as we can now call them, delivered strong results. And also Navistar improved their profitability quarter-over-quarter in a difficult environment, although supply bottlenecks for semiconductors still weighted on. Our service business continued to gain further traction and importance and particularly compensated for the pressure in unit sales and sales revenue. Supply chain constraints still hold back deliveries and the geopolitical and economic risks remain high. Our updated full year outlook is reflecting those factors as we narrowed the range to 5% to 6% adjusted return on sales.

We have plenty self-help potential in our group to support our performance short and medium term. Product-wise, we have a very, if not the most competitive portfolio with our new truck lines on all brands at the very moment that will help to win new customers and orders. And we will continue our strong focus on delivery and execution. Thank you.

[Lars Korinth, executive]

Thank you, Christian, and Annette. Let's now open the floor for the Q&A.

[Christian Levin, executive]

We have one reminder, and I can do that one. And that is that we will host our Capital Markets Day on the 18th of May here in Sodertalje at the Scania plant, exactly 2 weeks from now. And this event will include teach-ins and, of course, a driving event that's in the morning. Our new strategy and deep dives in the brand's performances in the afternoon and a dinner with the opportunity to exchange with the TRATON team in the evening. If you haven't done so already, please confirm your participation as soon as possible since we will be closing the registration for the event very soon. So we're all looking forward meeting you here in person in Sodertalje.

Now Lars, we're happy to take your question. Right?

[Lars Korinth, executive]

Thank you, Christian.

[Christian Levin, executive]

Thanks.

[Operator]

[Operator Instructions] We have a first question, it's from Klas Bergelind of Citi.

[Klas Bergelind, analyst]

Christian and Annette, it's Klas from Citi. So a couple of questions, please. The first one is on pricing. So the ASPs in the quarter, I guess, part of look good as you have strong service growth against lower unit sales because of the bottlenecks. But I guess, pricing is coming through as well. And you've raised the ASPs for the year as implied by how you communicate around unit growth and revenue growth for the year. Unit growth is a bit lower, revenue growth stronger. How much of that is a price step-up versus FX? And can you please talk, Christian, about the price levels running in the P&L at the moment? It feels like pricing is lagging some of your peers a bit. So should we expect higher pricing quarter-on-quarter for the group into the second quarter? I'll start here.

[Christian Levin, executive]

Okay. Klas, great question. This is, of course, something that I monitor very closely on every monthly closing, look into how is the gross margin developing given the inflationary tenancies that we clearly see all over the range and that we also mentioned. So I'll give you a pretty general answer to your question and then see if Annette want to sharpen it. But we have a different approach to pricing coming from different histories and different price positions also in the market with the different brands.

So if I start with the brand, I know best, the one I managed Scania. We have a long tradition of always increasing prices when the order book is growing. So we have applied that principle as well. And on top of that, we have the introduction of the Scania Super, which is the group common drive line developed by Scania, which is gradually over the year, taking bigger and bigger proportion of the deliveries. And the price increase on that product is pretty hefty based on the fact that it's delivering 8% fuel savings for customers. So far, so good. We have not seen any deterioration rather the opposite when it comes to the gross margins on the Scania side.

MAN, with a more difficult situation and with the force majeure because of the war in Ukraine and the lack of cable harnesses, actually went so far to cancel the order book with customers and then renegotiate with each and every one, a new delivery date and also a new price level. This is something pretty unusual and to my knowledge, unique so far in the European market space, which, of course, puts customer relationship into risk. But the outcome has been very positive and a very, very small proportion of customers have chosen them not to reconfirm their order at higher prices.

And then finally, if I should comment on Navistar, there is common practice in the -- sorry, in the American market space, North American market space to actually up prices on existing order book. And to my knowledge, all of the big players there have done so, Navistar as well and not once, but numerous times already, and that is playing out well. So all in all, we also see sustained gross margins for these brands. So -- but this needs to be continued in focus. I also want to comment before anyone of you ask on the Scania side, why is order intake down. Well, actually for the reason of protecting pricing.

So we have stopped taking orders beyond 12 months. So beyond 12 months, we open up a month at the time in order for us to control the cost or have some kind of control at the cost level and then set right price, but also in all fairness for the customers to have predictability and also on delivery position. So that's maybe to be added to why the order intake is down on the Scania side.

[Klas Bergelind, analyst]

Yes. No, that's very clear on the orders.

[Christian Levin, executive]

Annette, please on the FX.

[Annette Danielski, executive]

I can add also to -- for the Q1, although we have a positive impact from price and we can say this is clear because we stated this already and for the whole year, we have 2 impacts. One is really that we still believe that we can price the headwinds that we have on material cost with a time delay, sure. And also we will have positive impact from exchange rate effects. And this is the reason why we increased the guidance for the revenue.

[Klas Bergelind, analyst]

Okay. No, that makes sense. My second one is on the margin. You talked about a 2% plus impact, Annette, from the 2-week production stop at MAN. And we have -- it seems at least 4 weeks in the second quarter to take that to 6 and capacity utilization is low as you gradually ramp up. So I guess, you're alluding to a mid-single-digit margin impact for the second quarter. And on the Scania margin weaker than I thought, I guess, the higher R&D. But on the production, Christian, you talk about, obviously, bottlenecks, we know it's worsening because of China lockdowns, Russia-Ukraine. At least on the semi side, last time we spoke, you sounded more confident into the second quarter. Is that still the case? Sorry, a lot of questions in one day.

[Annette Danielski, executive]

I can start with the MAN. Yes, you are completely right. We had in the first quarter, only 2 weeks shutdown. We had already additional 4 weeks now, yes. And then we ramp up at MAN on low scale. As you know, the situation in Ukraine, yes, we will ramp up further, but we really have a strong impact here in Q2. This is clear on MAN. When I compare to the COVID crisis when we have the Q2 2020, it was also that we had nearly no production or very low.

I think they will do better because they are in a better, resilient position now. This is my view at this point in time, and we hope that Ukraine will still deliver on low level. This is really the main -- what is our hope that we can perform there. And the positive is when we had COVID, everybody was negative. So we hope also that the other brands will cover here. So this is what is the outlook on this one.

[Christian Levin, executive]

Yes, Klas. And on the Scania part there, I was pretty confident going into already end of Q1, we would see some improvements. That was the information we had from the sub-suppliers and their sub-suppliers. We're actually talking to all of them. So we have shortcut the supply chain. But nevertheless, that didn't fully materialize. Although our situation improved throughout the quarter, so January was really bad and March was substantially better, and we do plan for an improvement throughout Q2. But unfortunately, not back to full capacity utilization. So from the Scania and we account on being back on full capacity utilization after the summer break, and then we are into Q3.

[Klas Bergelind, analyst]

Okay. Very quick final one for you, Christian. Is that you say that customers are more concerned accepting orders with long lead times. And last time, you said that this is limited to Eastern Europe. Is that for obvious reasons? Is that spreading now elsewhere? And do you sense that this is demand driven at the margin softer interest? Or is it just supply?

[Christian Levin, executive]

No, it's not spreading. And we continue, as you know, to monitor the vehicle utilization over the connected fleet. So we see strong utilization all over all regions, all markets. We see continued strong demand for orders. So when we open up the month, there is really a rush to get this production slots. So despite the clouds that we all see, we see the cloud from the war, from the COVID and the Chinese lockdowns that you mentioned from inflation from increased interest rates. Of course, at some point, that will have an impact on the investments and on the transport needs.

But it's really nothing that we spot right now in the -- and the effect that we were into last time that we saw in some of the Eastern countries, I think that was temporary and related to the outbreak of the war. So well, so far, so good. I hope that answered your question.

[Klas Bergelind, analyst]

Yes, very good.

[Operator]

The next question is by Hampus Engellau of Handelsbanken.

[Hampus Engellau, analyst]

2 questions from me. Would you possibly maybe discuss the lead times on each of the brands to get the feeling if there's a big difference there? And also, I mean I appreciate the comments on Scania's orders during the quarter on the pricing. And I noted MAN having a quite good order intake and I presume that might be not being able to deliver as much as expected. But maybe could you add some flavor on MAN's orders during the quarter?

[Annette Danielski, executive]

As we mentioned already, we have full order book. So the lead times of the brand are nearly the same. So we have nearly 12 months as a lead time. And with MAN, they speak with the customer and trying to -- try to find the [indiscernible] can be good more to a standardized product, so that we have not so variant of the buying harness so much, then they could deliver earlier. And so they discuss really with every customer and they -- what they can offer to serve them and to fulfill the demand. So this is, I think, a special situation where they really have to go through the order book with everybody.

But for Navistar and Scania, you can comment on Scania. So, yes, lead times are terrific.

[Christian Levin, executive]

Yes, exactly, Hampus, it's approximately 12 months. And then both us and the customers feel it doesn't really make sense to build up order book any longer. We do some exceptions for really big fleet customers that basically have supply contracts with good stable volumes over time. So it's a situation that's actually quite hard. You can say this is a luxury situation, but it's actually quite hard. I think for all of us in the industry to handle. We were never -- well, we were in the situation back in 2008 -- 2007, 2008 before the financial crisis.

And then -- but then we had a rather poor grade on the order book. Today, we're very cautious. We have financing secured. We have done payment on most of the contracts. We have signed contracts. We know exactly what the end customer is even when this goes through non-captive dealerships or importers. So I think we have a lot of quality in the order book. And then does it really make sense to continue to build it up. And we come to the conclusion both Scania MAN and Navistar, that it doesn't really make sense.

So yes, that's what you have. I also wanted to add that we have, of course, taken out all the Russian order book, which is also part of the Scania negative order figure here in Q1. And as you know, that was a rather substantial volume. As Scania market leader and MAN second in line, normally in the Russian market.

[Hampus Engellau, analyst]

And I guess to what extent have you managed to raise prices on existed orders of maybe 2, 3 quarters lead times? And when that has happened, has customers choosing to just stick with the orders? Or have they involved to other more eager customers?

[Annette Danielski, executive]

No. So it's different pipeline. So now in the U.S. market, we have the surcharge for material costs. So we were able to negotiate with our customer on this one. MAN, you know this is force majeure, so they can offer the customer to cancel the order and place it a new one. And then they will have an increase from material costs. And I think Scania, connecting Christian, better than I.

[Christian Levin, executive]

Yes. And I can add on the MAN. I mean, there's no secret. I mean, we're asking between EUR 1,500 and EUR 3,000, depending on specification of the vehicle and surcharge. And then on the Scania side, no, we have not asked for price increases on the existing order book. So a bit of a different approach where, of course, we sit with a very long as a yearly samples generation long relationships with our customers, and we have so far deemed it more harmful to reopen that discussion with a customer as we have already really strong price increases into the order book and have not seen any tendencies that we don't keep up the margins.

But of course, I should never say never. I mean after MAN have done their exercise, I have noticed or got signals from the market that others seems to be doing the same. So -- and you never know where inflation goes, right? So of course, there is some kind of limit also to what we can stand without also making force on the order book. But I would like to avoid it to the maximum extent. I think that's for the long term and for brands such as Scania, that's the right decision.

[Operator]

The next question is Michael Jacks of Bank of America.

[Michael Jacks, analyst]

I have 3 brief ones, if I may. Firstly, just a question on the integration of the common base engine at Scania and how this is progressing and whether or not you faced any challenges there in Q1 and to what extent these have been resolved? Second question is on Navistar. The order intake there was pretty strong relative to the overall market based on the preliminary data we're seeing from ACT. Can you please comment there on mix? And do you see this as an opportunity for market share gains?

And my last question is in relation to Scania and the substantial growth that we saw in vehicle services revenue in Q1. Curious as to what the main driver was there? And to what extent this performance can be repeated in the upcoming quarters?

[Christian Levin, executive]

Good. Great question. I can start with the first one, and maybe Annette, you elaborate on the second one, and then I can close with the Scania one. So the CBE1 engine, yes, it's progressing well. Unfortunately, also here, we were hit by the semiconductor shortages. So the main chip in the engine control unit, we could not get in the quantities that we needed. So the ramp-up has been slightly delayed. But the ramp-up is ongoing, and there were a small amount of vehicles being delivered throughout Q1.

And then we're having a gradual ramp in order to make sure that we get quality right in the manufacturing process. And the real big ramp is coming in the third quarter, towards the end of the third quarter where we really started to shift over and then we will have a very long tail. And the tail will actually last all the way up until 2026, 2027, depending on how the emission legislations will develop, which is still a little bit unclear. But that's always how we do it because we keep it in certain applications such as marine engines or in Latin America and so on and so forth. But the big impact and the big volume shift is coming in the second half of the year. But no deviations you asked for problems, no deviations apart from the ones you always find when you debug a new product as big as a complete power train.

Annette, the Navistar order intake?

[Annette Danielski, executive]

Yes. So Navistar order -- opens the order book for the first quarter in 2023. So you see that there was a rush to place orders already there. And as you can believe, we work on our relationship with dealer and customer, when we took over Navistar to improve the situation there. And I think it's the first good sign that you can recognize now in our order book.

[Christian Levin, executive]

Super. And then on the Scania Services performance with a 19% increase, that is in Swedish currency. And if -- in all fairness, if we then look to performance, we should look to really volume and local currency and then the performance is still very strong. I must say 13%. Can we count on that going forward? Yes, that's my strong belief and my demand from the organization. And we have such a good -- we have such good tools in the market. We have the data. We have the best services in the industry. We have the predictive so-called ProCare, which is a new service that is launched by Scania now, where we not only do individual maintenance based on exact utilization of the vehicle, but we also change repairs into maintenance.

So the big and frequent breakdowns that you have on heavy trucks, we are now predicting through Big Data, AI and sensor sets. And, of course, an over-the-air information, meaning that we proactively tell the customers that, hey, your generator is about to give up, let's plan a stop, and let's do it in conjunction with your next visit to the workshop or in worst case then at a special visit at the workshop where you have to -- where you have to exchange. But then it's plannable and you don't have subsequent repairs, which you usually have when something breaks.

And of course, we make sure we have the part at home and so on and so forth. So we -- so we really -- we improved the uptime for the customer, and we take more market share on the service business. Just one example, I think where Scania continues to progress and captivizing the service business in the market. And hence, I as a base of that, I expect the service organization to continue to perform really good growth going forward. And I will talk more about that at the Capital Market Day in Sodertalje in 2 weeks.

[Michael Jacks, analyst]

Very interesting and look forward to that CMD.

[Operator]

Next question is by Nicolai Kempf, Deutsche Bank.

[Nicolai Kempf, analyst]

My first one would be actually a follow-up on the semi shortage at Scania. At the beginning of the year, we were expecting higher volumes in the second quarter. This now moved to the second half of the year. Are you concerned that this could be again delayed?

[Christian Levin, executive]

Yes. Okay. Nicolai, short and good questions. No, I still expect the Q2 volumes to substantially improve over Q1, but I do not anymore expect us to be back on full utilization by the end of Q2. So unfortunately, we will have to wait for summer break in July. And then we are according to the current planning and the current information from our sub-suppliers, we're back into full capacity utilization based on semiconductors. I have to say that when you increase production rate as fast as we're planning to do, there might, of course, be other shortages or other bottlenecks that we're not yet aware of.

Of course, we try to monitor every supply. We have a green light from every supplier to ramp, like we're planning to do. We have the semiconductor secured, but after the last 2 years, I think we've learned a lot, and it's something we learned the devil is in the details. So a small disclaimer there. I'm sorry for that, and I wish I could be more precise. But that's, I think, the nature of our industry right now. And I would also like to say, based on that, we continue to keep all staff in the company. So we're not reducing staff short term to try to save a few krona, but we want to have everyone on their tools ready to start to push out volumes once we have the components.

I hope that answers your question, Nicolai?

[Nicolai Kempf, analyst]

Yes, understood. I know the volatility is very high currently. My final question would be just given the truck cyclical business, and we've seen recent GDP revisions across the board, do you see any rise in cancellation or customers becoming more cautious on accepting higher prices?

[Christian Levin, executive]

No, maybe strangely enough. But at this point, we do not see any tendencies either for our price increases or on the volume. So no cancellations of any magnitude. The type of cancellations we receive are usually the ones who would like to change in the order book, so keep their slot but change specification or time, but it's very small volumes. It's still talking handfuls per week. So really nothing that we worry about at this point in time.

[Nicolai Kempf, analyst]

Okay. Understood. Sounds good. And looking forward to the CMD.

[Christian Levin, executive]

Thank you.

[Operator]

The next question is by Daniela Costa of Goldman Sachs.

[Daniela Costa, analyst]

I wanted to follow up on some of the points earlier, actually on the MAN and then ask a second question. But I think in the -- during the speech, you mentioned market participants were getting more exited, but what you said in some of these answers, it seems like you don't think that's the case. I was wondering what exactly we're referring to there. And related to demand as well on the back of the last question, I understand there's no cancellations.

But in terms of us looking at the backlog and thinking about backlog stickiness of the orders compared to prior downturns, is there anything in terms of the way that you're asking for advances? Or is there any bigger guarantee that if you do have a downturn, we don't have a fast cancellation rate like we had for many market participants, for example, in 2008, '09. It would be great to hear your views there.

And my final question is just regarding wage growth. We're hearing a lot of commentary across industrials on very big numbers in the U.S., maybe less big numbers in Europe. Can you tell us what you're seeing in terms of negotiations and what's to come ahead both in the Navistar side as well as in the European side?

[Christian Levin, executive]

We'll start from the back on the wages and salary side. You're right. So we see the increases being rather hefty in North America. And of course, our opening there of the San Antonio plant for Navistar is somewhat supporting us. But you're right, the salary inflation is ongoing. In Europe, less, we do not really see any so far, I must say, but so far any exaggerated demands nor in our negotiations or in our closing of salary agreements. So I don't know, Annette, if you have something to add there on the wages. No? Okay.

And then I think your second question was about consolations and kind of the -- how safe we feel with the order book if the market would go [ sour ]. And of course, even if we have contracts and even if we have down payments, there is no such guarantee in our industry. I think what we learned back in 2009 was that because, of course, we had similar contracts with some or part of the order book also back then is that if a customer can take delivery to force it upon a customer that is out of cash or suddenly become nonfinancial is not a very smart move.

So in the end of the day, we, of course, sit with a big part of the risk. And I think that's the cyclicality and that's why we are valued as we are throughout the industry. So no guarantees. But of course, to keep a very tight dialogue to have as much information as possible to be close to the customers and to have the connected data, I think are a number of things that we have improved a lot since the last crisis. I think we're better positioned. But of course, today, we see that there are cancellations or that there is resistance towards price increases, we need to be very careful.

[Annette Danielski, executive]

And you mentioned do we see the truck demand changing, but this is a small reduction. It's not double digit. That is the 6%, 7%, 8%, depends on market. It's not like that you see a big reduction in the newest forecast, and this is what we were referring to. It's a little bit cautious, but it's so small amount that we are not in fear that the market drops in a big extent.

[Christian Levin, executive]

No, absolutely. You can still say that we're still not balanced between our capacity to supply and the order intake. So the order intake is still stronger than what we can supply. And that's also what -- but yes, it's not a balloon anymore.

[Operator]

Your next question is by Jose Asumendi, JPMorgan.

[Jose Asumendi, analyst]

It's Jose, JPMorgan. 3 topics, please. The first one on the profitability of electric trucks. Can you mention a little bit if they are margin dilutive or not to the current business? And any comments around the pricing of those trucks? Second, I wanted to come back to the wire harness topic and how -- which specific measures have you taken in the past months, weeks to establish the supply chain? And is the peak of the disruption behind us?

And three, I was thinking if you could please give us an update with regards to Navistar and the synergies you are looking to achieve? And how far are we in terms of the plan you laid already maybe in percentage terms, what are the sort of the next milestones we need to think about with regards to the synergies with Navistar?

[Christian Levin, executive]

Jose, what -- on your first question, I didn't get you. The profitability of which trucks?

[Jose Asumendi, analyst]

Electric ones, electric trucks, the electric.

[Christian Levin, executive]

Okay. Great. So we have the bus. We have the wire harnesses. Often, we have also synergy, right, potential synergies. So Annette, if you go with the bus.

[Annette Danielski, executive]

Yes. We believe, as you know that on the long run, the buses will have the same contribution margin as a combustion engine truck. So -- and as you know, we are on a low level at this point in time but that vehicles they are more expensive as this one, but it's a small volume, as we mentioned. Wiring harness, we can evaluate on the measures that we have. So as you know, one of the supplier will bring their production from Ukraine to Romania to double the other lines that they have.

We have our wiring harness production also in Turkey for buses so that we can use and we try to duplicate with other supplier too. So those are the measures that we do to really get rid of the shortage of wiring harness. But as you know, it's not done in a week. Yes, we need a little bit more time. That's the reason why we ramp up on a lower side.

[Christian Levin, executive]

And we're, of course, very, very pleased that our suppliers in Ukraine are now producing and are increasing production rate or else our complete stop would have been longer.

[Annette Danielski, executive]

Yes. We have duty to operate and that we come to the plant producer and then go to the bunker during night. This is a great work that they are doing [indiscernible].

[Christian Levin, executive]

No, that's fantastic. And of course, that's also why I said it's very hard to, of course, predict how will this ramp up continue. Yes, as long as they can go to work, I think their plan is to continue to ramp.

[Annette Danielski, executive]

Yes. And as Navistar, I think you can read on the CBE1.

[Christian Levin, executive]

Yes, exactly. So we're currently then introducing this common base engine, but also with the common gearbox, common rear axle gear, common aftertreatment system and common software and control units in Scania. And as someone asked before, it's going well. And we are confirming the 8% fuel savings and more than 50% thermal dynamic efficiency. So we are very much looking forward now introducing that into the second brand, which is international and Navistar products. And that work has, of course, started, and we have -- we're already in late testing.

And the market introduction is planned for the second half next year, and that's where the ramp-up starts. And that's where we get on top of a fantastic driveline that will, of course, offer big fuel savings to customers. We also -- we start to capitalize our services business. So this is for us, as a supplier, this is really the game changer. So instead of being dependent on OEM suppliers who then will do their best to capitalize their components from a service perspective, we will, of course, do everything and use all the tools that we have from the Scania world in terms of contracts and predictive and proactive contracts.

Pairing that with building up TRATON Financial Services in the U.S. to be able also to offer this over leasing contracts, including services done. So super excited about the exchanging 50%, 60% of the value of these trucks to European technology. I hope that answered your questions, Jose.

[Operator]

The next question is by Miguel Borrega of BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

I've got a couple of questions. The first one, just on Navistar. So how do you compare your margin performance relative to Q4 of last year? What has changed sequentially? Was it more chips available, better mix, perhaps pricing, anything on the cost base, something to help us understand the EUR 70 million adjusted EBIT on a similar revenue base relatively. I'll start there.

[Christian Levin, executive]

I think I hand that one over to Annette. So it was the sequential change over Q4 on Navistar.

[Annette Danielski, executive]

Right. And the main thing was really that we are able to deliver more trucks than in the Q4. And this was one of the main drivers that we really were able to improve the side of Navistar. But keep in mind that still also supply shortages, they could even do better, but we have off-line units also there. And this is also for us in the next one as everybody, how many suppliers we get and if you get the trucks really delivered. And I think this is -- although as maybe start the question now, what is the outcome for the next orders.

[Christian Levin, executive]

So you're right. So they were not as severely hit as Scania, but they were severely hit by shortages throughout the first quarter. And also there, we expect improvements, but still disturbances throughout Q2 as well.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then just coming back to the first question from Klas. The difference between the growth in deliveries and revenues at VWCO in Brazil, the difference is material. And I see that services was not much of a contributor there. So -- and you mentioned the product repositioning in Brazil. Could you give us more detail on that? And whether this has had some impact on the margin as well?

[Annette Danielski, executive]

So as you've seen, Volkswagen Caminhoes e Onibus is market leader in Brazil, they are the leading market share. While again, also market share, they extended the product portfolio. So now they have heavy-duty trucks in the portfolio that are very well placed in the market. And so they gained a higher margin out of this truck, I think, to say this, yes, they have also increasing the service revenue because of utilization of the fleet, how many trucks there in the last year, we had a big growth in Brazil. So really good performance there.

And I think they also worked very good on the pricing side. They are high inflation countries. They are used to price inflation and were really successful to do this and to place the product very well. And I think they did a great job. So I cannot add anything there really, really on a good track. And they will continue, but also here, we have to say they have supply shortages. But although here, you can see the head from the group, so MAN when they stop production, delivered semiconductors to Volkswagen Caminhoes e Onibus which they can produce. So we really help each other in this group.

And I think this is also positive signs that happened in the last week.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

Then my third question on the orders for electric vehicles. I see that your orders are somewhat below Q4, and I would expect that to ramp up faster. Is it because you're also restricting these orders? Or -- and you are prioritizing diesel orders? Or is it because perhaps your diesel offering is so much more attractive relative to electric? Just wondering if something more radical in the total cost of ownership needs changing? Or is it just internally that you don't have capacity to take more orders on electric?

[Christian Levin, executive]

No. Yes. Good question. No, we're actually doing the opposite. We are giving priority to the battery electric vehicle. So of course, they contain a lot of semiconductors, but we want to ramp them as quickly as possible. So the answer is, as you speculate, well, on one hand, it's really small volumes volatility between months and quarters. But of course, we are truly at the beginning of the S curve. We mentioned a couple of times this 100-plus units to garbage collection Copenhagen.

We are in discussions for more of these orders. So it means that the market is maturing. The biggest question is, of course, around profitability, so total cost of ownership and total operating economy for the customers. Is that creeping closer to breakeven? Yes, for sure. That journey continues, but we're far from it in many segments. So can that be accelerated? Yes, it can be accelerated, of course, by political decisions, and that's what we keep pushing for.

Second answer -- second question is always on the charging infrastructure. Where can I charge? How much can I charge? What it cost to charge? And that is, of course, where we really look forward to getting our joint venture with Daimler and Volvo going so that we can pave the way for charging not only in depots and in destinations, but also along the roads where our customers are operating.

And finally, it's always the match with specification. In the ideal world, our customers, they would change from the exact specification they have right now, which is optimized to their transport demand and just get electric on the very same one. And I think that's the challenge, and that's where we are today competing in this industry to come as close as possible to the original specification so that the risk for the customer is only shifting to electric, let's say, but not having to change anything about the load area, how they do their -- how they optimize their business.

And yes, this we master differently well in different applications and by different brands, but that is really the battle on. But to finalize, I mean, I'm really convinced that we started to see the beginning of an S curve. It's still small numbers. It's ups and downs, but the interest from the customer base is just massive.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

That's great. And if I could squeeze in just one more question. On margins for Scania, I understand your gross margins are only slightly down year-on-year. And you mentioned no pricing surcharges and indeed lower production levels. So if I could push you on the margin outlook for Scania, you were saying full production capacity after Q3. So could margins go back to 10% or maybe above in the current inflationary environment? Or are we still talking about maybe high single digits in 2022 for the remainder of 2022 to 2023?

[Christian Levin, executive]

I'm totally unhappy every month, we're below 10%. That's not where we should be. This system is geared to be double-digit margin in hard times, in difficult times with or without semiconductors. But of course, we have a fixed cost base and especially as we decided to keep the personnel on duty to be prepared. And that's, of course, what is hitting us when volumes go really low. So I, for sure, without trying to give any guiding on our margins going forward from Scania, but we are definitely seeing possibilities to go above 10% and do that quickly.

Okay, Annette, I'm saying too much again.

[Annette Danielski, executive]

No.

[Christian Levin, executive]

I hope that answered your question. Okay, Martin?

[Operator]

The next question is by Himanshu Agarwal of Jefferies.

[Himanshu Agarwal, analyst]

Himanshu from Jefferies. The first one is on the semi -- the chip supply. One of your peers have been talking about the change in type of chips that are constrained this year versus last year, i.e., more common chips are in shortage this year, which is helping to improve the mix. However, last year, the shortage was more in the specialized chips. Are you seeing that as well? And also, the reason I ask this question is because you have seen 6 weeks of production stoppage at MAN, and I believe you would have some excess availability of chips. So is it possible for you to use those chips into other brands? So that's my first question.

[Christian Levin, executive]

Great question. No, we're not yet at the level of product synergy or product commonality so that we can reuse the chip for -- not to my knowledge, at least in the steering, on the controlled units of the vehicles. But your first observation there is right. I think we're moving out of a problem that is more accentuated on specialized chip and that are really one-to-one with the vehicle and start to see more shortages on general chip, which is good because it also means that we have numerous sources to look for.

And then we're also getting out of normally the area where we have homologated or certified a certain chip to a certain function, meaning that we can also create some internal flexibility actually changing the product, which, for instance, is not the case in Scania, where the problem is the engine control system. You don't fiddle with the engine control system, you don't change the chip of the engine, [ propels ] just the motherboard without having to go to the authorities and recertify the whole thing.

So I hope that answered your question on chip or Annette, you add more.

[Annette Danielski, executive]

And the second question, Himanshu asked that is -- that we really reallocate chips on MAN to Volkswagen Caminhoes e Onibus. We do this already until we stop it.

[Himanshu Agarwal, analyst]

Okay. Understood. And just following up on that. So when you talk to your suppliers in terms of the chips, is it like they don't want to produce these common chips because they are probably cheap and they want the OEMs to shift to more sophisticated chips, i.e. it becomes a structural headwind? Or is it just a temporary issue when that will gradually resolve?

[Annette Danielski, executive]

No, I think everybody will go to the newer chip generation. And so normally, we have longer lead time in the truck because we have longer product cycle than a car, but it will move to the new renovation also with the new common [indiscernible] and everything in the industry, I'm sure.

[Himanshu Agarwal, analyst]

Understood. And just lastly, a clarification question on MAN orders. I see the MAN orders were broadly flat Y-o-Y. Were these all like new orders in Q1? Or does it also include the renegotiated old orders which were probably counted as new? And also, how did your customers take the renegotiation process?

[Annette Danielski, executive]

One thing, I think we done a top account order. So it's not that we have it canceled and then we come in. We have net orders reported, yes. So it's not that top accounted. And yes, sure, the customers, we scheduled some cancellation, but it's really on a low level. So it's nothing to mention. So we are happy at this point, but it's still an ongoing process that you should know. And so it's not that we are finalized with the whole order book. So those steady work from the company at MAN. But I think the order is still very good at MAN. And I think we discussed the truck demand that people still looking for trucks in all transportation, the demand is there.

[Operator]

There are no further questions. And so I hand it back to you.

[Lars Korinth, executive]

So thank you, guys and everyone on the call for the good discussion. Thanks, Christian, and Annette for your time and for your time. We look forward to welcome you in about 2 weeks' time, actually, very, very shortly at our Capital Markets Day at Sodertalje. And yes, I wish you a nice afternoon, evening or morning wherever you are. Thank you for joining us today.

[Christian Levin, executive]

Yes. Thanks all.

[Annette Danielski, executive]

Thank you.

[Christian Levin, executive]

Really good questions. Take care. Bye-bye.