Traton SE

XETRA:8TRA

Earnings Call Transcript 2024-Q1

[Ursula Querette, executive]

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

[Christian Levin, executive]

Very good. Thanks, Ursula, and welcome also, from my side to this call. And yes, as you see on the slide, sometimes the numbers speak for themselves. A really strong start into 2024 for the TRATON Group, and just reflecting on our major financial KPIs as you see here on the slide, it's really a robust level of deliveries with more than 81,000 vehicles delivered to customers throughout the group. And this, despite continued disturbances in some of our brands in terms of supply chain and production. As we already reported back in the full year report, our markets are normalizing, our big markets in Europe and North America, whereas we benefit a really strong bounce back in Latin America, which, of course, benefits both Volkswagen Truck & Bus and Scania. So, a well-balanced market mix that we benefit a lot from. So despite the small decrease in unit sales, as you can see, we are increasing our total revenue, meaning that we have a really good price and mix effect coming in into the result. And this should result then 9.4% of return on sales. That is the highest ever for TRATON Group, and we are, of course, happy about that, filling however that we can do the even better. We generated positive cash flow. We're coming in at a solid EUR 440 million on the back of this strong earnings, and to hopefully, happiness of our shareholders, we do generate a net profit already in the first quarter on EUR 1.5 per share, which is an increase by 35%. Now this is, of course, the super average of everything, and you will get from Michael much more details into these KPIs, both on TRATON level, but also per brand. But let me kick you off by looking a little bit also into the more operational and strategic highlights of the first quarter. We are on a major transformation journey, and we're driving this forward at the fastest possible pace. And it's really about two things. One, you can call our internal transformation. We're a young group. We started as a collection of brands, and we have promised each other that we should really grow into together, one group. And that means that we're on an internal transformation journey that is huge. You can imagine 108,000 employees over many locations. But on top of that, we have the challenge of the industry, which is the external transformation, i.e., digitalization and electrification mainly. So, in Q1, what I'm most proud of is that we have in the end finally come to decide on one or in the organization. We have talked about that ever since the IPO back in 2019, as some kind of a north star. We have managed to come to the decision on one common product system, i.e., let's expand the Scania modular system into a TRATON modular system that is happening. You have seen the common base engine as the first start of that. But the next logical step is that we also merged the R&D organizations into one, meaning that we expand the group capacity by 15%, 20%, 25%, maybe 30% by eliminating double work friction coordination internally. And as a result, we'll improve both speed and capacity, meaning more and faster solutions to customers for all our brands. Of course, to balance against the so-important brand positioning in markets where -- or in market areas where several brands are pressed. So, a big step forward under the leadership of Niklas Klingenberg. Since when we move over to Navistar, the second picture here since the start of 2024. We now accelerate the rollout of the common based engine and the entire powertrain S13 at Navistar. And the feedback from customer is overwhelming, confirming up to 15% fuel efficiency compared to its predecessor. And as a result, already by February, we were completely zoned out for 2024. We are, of course, doing everything we can, again, acting as a group to then transfer production capacity to the colleagues in Navistar, and we're working currently with trying to supply that out of Scania's Latin American operation. In the third picture, we look a little bit into the future mission, zero-emission technologies. And here is about an out layer. We are investing in MAN in the H2 combustion engine. As you might remember, in the new legislation for CO2 reduction, hydrogen burners or hydrogen internal engines are classified as zero-emission vehicles. And we used the opportunity to experiment through our MAN brand with an initial test fleet buildup on our biggest engine -- six cylinder engine platform. However, I continue to say everywhere I can that the TCO advantage of the battery electric vehicle in the long-term will determine that, that will be the prevailing technology, but it might not be the only one, and therefore, we need also to explore more technologies. Moving to Scania. We took further steps in expanding the battery electric modular system, meaning that we're adding more performance debt to the portfolio so that when demand is coming and when our industrial system is ready to ramp up, we can supply even more different applications and solutions to our end customers as full electric. Another transformation in our industry, where we continue to invest, but that we talk less and less about, where the market is talking less, less about, but where progress is really fast is autonomous driving. In the first quarter, we announced the partnership with the U.S.-based company Plus, which will be our partner to take us to Level 4 and beyond. And again, we're building on one platform, meaning that our autonomous base vehicle, as we call it, will be the same regardless of which brand it is coming out from. We have started sales for the confined areas, i.e., mines through the Scania brand already. But when it comes to hub-to-hub and the bigger volumes, we are still in development. So summing it all up. We are really establishing a top-notch R&D, organization and process to accelerate innovation, reaching end customers faster, and really taking market demands from all brands into account. So let's shift slide and have a look at the current market situation, how does demand really look like? So the first thing to say is that we can confirm what we already said in the full year report. Markets in North America and in Europe are normalizing, which means that they are expected to be lower than last year. Our incoming orders are then slightly below last year, but still on what I would call a very solid level. There are very different dynamics into this. Europe, the truck business is down, and especially Germany and Central Europe, which gives a bigger impact on MAN. In North America, we enjoy higher orders. We have a very strong order book, whereas the demand is changing away from the heavy on-highway so-called Class 8 applications, and we benefit being really strong in the medium and the severe segments. South America already mentioned, but demand is coming back very, very good, and especially in the extra heavy and heavy segment, where we see investments into agriculture and mining, giving the biggest effect on Scania, but also for Scania Truck & Bus, we see all over the segments that increase in demand is coming through. So to summarize this, our book-to-bill ratio continues to be below 1. The order book, however, is strong, although normalizing. And we are capitalizing on it, as we've said, over summer, but also partly into the second half of this year. So with this, let me hand over to you, Michael, to take us deeper into the financials.

[Michael Jackstein, executive]

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

[Christian Levin, executive]

Great. Thanks, Michael, and excellent. So what you see on this slide is the registrations in our main market areas. Maybe confusing to see that the curve is pointing upwards in both the EU and the North America and pointing down in South America. But remember, that registrations are coming long after sales and orders. So, what we see is exactly what we said at the full year report, we expect Europe and North America both to level out. And these curves then that you see turning down. What you see on the curves are also our 6 ton upwards, which is not always fully comparable with what our competitors are showing you. But if I take Europe as an example, and if we take only the heavy-duty part of the market, i.e., above 16 tons, our minus 5% to minus 15% expectation towards 340,000 last year, would bring you into the around about 300,000 as a midpoint, drops down towards 20%, but also perhaps up towards 320,000. So that's how to read these figures. But again, leveling out in Europe and North America and an increase in Latin America, and especially, in the heavier part of the segment. But let me summarize the overall situation on the next slide, Slide #16. So if we start then with Scania, it's, of course, an excellent quarter. We do record deliveries. We do record return on sales. We do a record cash flow generation and we generate a market share above 18% in both Europe and in Latin America. And I've been a long time with one, but I'm not sure whether that is all-time high, but it's certainly a very, very strong performance, and we go all the way ahead on the slide to say there is certainly potential to sustainably be best in class in the industry. MAN, I'm super happy that we can once again reconfirm what we saw already last year, that we have stabilized returns of MAN in and around the target level of 8%. And the team performed this showing really good resilience in a German European market that was not supportive. And you can see in the delivery figures that Michael showed you, that we do this with really lower volumes than expected. We have a strong pipeline on its way. So nevertheless, coming very close to 8%. So really good. Navistar certainly would have expected more out of this first quarter, and Michael was into the challenges we have both on supply and for new products, but we have extremely strong order book. We sold out well into third, and for the school bus the full year. And we are well positioned in the mix change that happened in the total market. So, we are still reconfirming our outlook for the year in terms of Navistar performance. Volkswagen Truck & Bus, anything to see, regardless where the market is going, we have managed to be a double-digit company and deliver strong margins, whatever basically hits us new products, markets, ups, markets found and competitor activities. Michael also mentioned our financial services. I mean this is a really important building block of becoming one group where the benefits that was only enjoyed by Scania back as long as -- or as recent as last year, is now opening up. The expected rollout is following the plan, meaning that throughout Q2, we have big MAN markets joining us. We have Navistar Financial Services up and running, and then we continue throughout this year and in the beginning of next year, we add also Volkswagen Truck & Bus to the TRATON Financial Services portfolio. So, really supporting our brands, but also coming with improved funding capabilities. That is, of course, a super important part of financial services. So to summarize, it's really a new TRATON that we're seeing. We see our brands collaborating. We're working as one team although, of course, every brand is accountable for and take responsibility for their results and showing their individual strengths. So all in all, we're driving the TRATON way forward. I see great progress, and I see a new culture spreading. And I really would like at this point to extend a big, big thanks to all the fantastic work done by our 108,000 TRATONanians coming together in the results that you're looking at here in Q1. So it's a TRATON Group that continues to transform invest into a journey, which I would claim gives really attractive return profiles to investors. And with that, we take the last news of today, which is the pleasure that I have and we have as a team, to invite you all to a long sought after Capital Markets Day. We have not had one since we met here in the test track in Sodertalje, where we confirmed our targets for the different brands and for the group, but a lot is happening, and it's time to update you, and we invite you therefore on the 1st of October to Munich at MAN this year, where we will give you a view of TRATON going forward. So please book that into your calendars, and we really look forward to seeing you all physically in Munich. And with that, I end my part, and I hand back to Ursula, to what is probably the most interesting part of this, called the Q&A. Ursula.

[Ursula Querette, executive]

Yes. Thank you, Christian and Michael, we actually have a bit more than 30 minutes left for the Q&A session, and I already see some questions lined up from the audience. But before we start, let me quickly explain the rules. [Operator Instructions]. Now, let us start and take the first question, which comes from Hemal Bhundia from UBS.

[Hemal Bhundia, analyst]

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

[Christian Levin, executive]

Sorry, Ursula, I'm too fast.

[Ursula Querette, executive]

No, go ahead. Go ahead, Christian.

[Christian Levin, executive]

And I'll take the first part on the supply chain, and I hand over to Michael then for the financial impact. But yes, so a bit troublesome start of the year in Navistar not what we expected. So, what is happening specifically on the school bus market side, where you know we are the market leader and it's an important volume for us is that we're simplifying the product range, reusing more of the medium-duty truck parts, and hence actually building a competing school bus. We made a clean cut over Christmas and New Year, rebuild the factory for the new product. And what happened is that we were not fully ready to supply these buses then when we restarted production for many reasons, and they are technical. But they are actually not really related to suppliers. It's more our own capabilities to restart a new product. So delayed in the ramp up, a lot of unfinished products on the yard, but deliveries are started and they have started now in April. And we are actually thinking we can catch back most of the volumes throughout the year. And as you said, yes, you quote me right. We are actually completely sold out in terms of school buses for 2024. So, if you order now you're into 2025. That does not mean that we're putting any limitations on the order intake. We're fully open to take orders on school buses. When it comes to trucks, it's a more complicated picture. We are suffering the supply chain in the U.S. We still have the frame rails, I mean, the main part of the chassis, which is holding us back, but also numerous other suppliers. And in this shift that I described away from Class 8 on-highway towards more severe and off-road applications, there is a fight again of capacity, just like it was on the Class 8 specification in the U.S. with the suppliers for typical components like components for all-wheel drive applications where the suppliers are having a hard time to catch up. And this has been hitting our deliveries. But we see here on the truck side, we see continuous improvement throughout February and March, and are expecting to come up to normal production levels here throughout Q2 and Q3. I think that's in an actual situation. I should also mention that the S-13 penetration is increasing as we speak. And I mentioned the customer feedback really, really good. So with that, we're also sun-downing the A26. So the current in-house produced engine, which is also going to save us cost. Michael, over to you for the financial impact.

[Michael Jackstein, executive]

Yes. Thank you, Christian. And I mean, just following up on, let's call it, the prerequisites that Christian just mentioned. And as I also was into during the presentation, I mean, yes, in the supply chain, we had the framework topic. Actually, as I also already indicated in the annual press, results press conference that the first quarter will not be too strong based on that effect. But as I was also into -- when I look at the production level in March and April, then we see a clear step up. So as I mentioned, we believe that we have fixed most of these issues, also referring then to the new buses where we believe that in the rest of the year, we will deliver this product to our customers. Then as Christian also already mentioned, the order books look promising. And then the S13, as we talked about already last year with the ramp-up this year, clearly will also have a positive effect. And I'm just reiterating those aspects because, of course, again, those are the ingredients then to make a judgment call to your question, what about the financial situation. And here, I can just say, if you take this all together, as I tried to put it here coming from the 6.6% last year, we still believe that despite the more challenging market in North America, we will clearly increase the performance. And another aspect I could also add here is that we believe that we also have a quite favorable product mix in North America. That's why we believe that we are here still on track after the first quarter to speed up and come to a higher margin level compared to last year.

[Ursula Querette, executive]

Thank you both for that helpful answer. Next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

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

[Christian Levin, executive]

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

[Klas Bergelind, analyst]

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

[Christian Levin, executive]

Yes. I feel confident about Scania. As you say, we did a stunning quarter still with not all in line 6 engines transformed into the super. I think we've been public, but the super gives us about EUR 3,000 extra margin. through pricing. In Latin America, we're increasing prices going into this year. In Europe, you will, of course, have more fleets signing than small customers due to the unsecured situation. That, of course, has a pressure. On the average margins, order book is still good with good price realizations. And so if I -- and then, of course, we believe that the market will come back towards after interest rate decreases over summer. So all in all, I don't feel too worried. As I always say in this call, I follow -- first figure I look at when we closed the month with the gross margin of vehicles and it continues to look good. Cost is, of course, we're down on important materials. The aluminum is down, energy cost is down. But you have other demands from suppliers that we have to honor in terms of cost increases. And wages is, of course, a huge problem, especially in Central Europe. But all of that together, I still feel confident that we should be able to continue on a good level in Scania. I think I stopped there, but that gives you perhaps a flavor.

[Klas Bergelind, analyst]

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

[Christian Levin, executive]

Yes, there is a replacement need. I mean, the truck park is old. So the interest is very high. The level of offers is very high, on a high stable level, I would say, whereas the order intake is lower. But I do not see any tendency. I mean, we had a relatively okay order intake Scania in Europe, and that continues. But it is, of course, on a lower level, indicating the total market I was talking about. But there's no tendency in either up or not down much.

[Ursula Querette, executive]

Okay. Thank you. Next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I'll stick to the one and the follow-up. But first, I guess, given sort of the margin improvements that you have done now, and I know you have your medium and long-term targets. But can you help us understand what do you think is the sort of like peak-to-trough volatility now that the improvements, particularly on MAN, seem to have been mostly that not gone a long way on the improvement side. If you could help us there first, more of a medium-term peak-to-trough volatility?

[Ursula Querette, executive]

On MAN. Yes, that's the question. Let's take it here from Michael.

[Michael Jackstein, executive]

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

[Daniela Costa, analyst]

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

[Michael Jackstein, executive]

Yes. We try to keep that now for the next quarters on a steady level.

[Daniela Costa, analyst]

Understood. And then just following up in terms of like production cadence throughout the year, both Europe and U.S. because we're the only player that we have seen actively saying, that was cutting production was in Europe, Volvo. Can you talk to sort of what you're seeing -- what you're planning more broadly? And then maybe link that with sort of an outlook for pricing, if others non-cut production, is there a risk on price?

[Ursula Querette, executive]

I think that's for you, Christian.

[Christian Levin, executive]

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

[Michael Jackstein, executive]

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

[Christian Levin, executive]

I just wanted to add. Thanks, Michael, for reminding about the pricing. I think if it's something that we have agreed in TRATON Group and that we have brought, I think, to evidence, first, with Volkswagen Truck & Bus and then with MAN, and now with Navistar, is that when you have customer value to deliver, then you also charge for it. Hence, and that has, of course, always been the cone philosophy. But I think we really see the proof point that this principle is established. We are going to be the last ones to adjust pricing. If that starts to happen in the market because of overcapacity. We're going to stick to our principles. We have customer value delivery. We're not lowering pricing, delivering good TCOs. And this I'm really proud to say, and I wanted to add that because it's -- we really see the difference in MAN performance. If you look to the total improvement, it's actually not cost, it's price. And if you look to the resiliency of Volkswagen Truck & Bus, it's also very much due to the courage to take out the price you deserve, which the customer then accept and hence, we keep the market shares. Just wanted to add that. Ursula, back to you.

[Ursula Querette, executive]

Yes. Thanks for that addition. Let's turn to the next question from Nicolai Kempf from Deutsche Bank.

[Nicolai Kempf, analyst]

Nicolai Kempf from Deutsche Bank. Congrats to what was a very strong start into the year. My first one would be current lead times. Can you just update us by how much have they come down? And when we should expect the book-to-bill to be above 1x again, maybe in third quarter? And my second one would be just a bit more color about the input costs, which seem to be quite a big tailwind. Can you just give a bit more, kind of price have come down? And do you also think that at one point, suppliers could ask for a better share of the cake, and truck seem to be doing quite well.

[Ursula Querette, executive]

Christian, do you want to start with Nicolai question?

[Christian Levin, executive]

Absolutely, with pleasure, and I think I've touched it already, but of course, Navistar has the biggest order book and the longest lead times right now. So you're in end of Q3, beginning of Q4 for track order and buses, again, beyond that in '25. Scania, we are a little bit depending on market, but we are in the summer region right now. For most of the specifications, some specifications a little bit longer. And for MAN, it's about the same, but rather after summer. MAN has a little bit higher order book in Europe than Scania has. So for Scania and MAN, in Europe, you can say it's quite -- we're seeing what used to be a normal situation pre-COVID, 3 to 4 months is what you have to wait. And that's actually quite favorable, that's where we wanted to be to be able to be in sync with the market for our internal planning. Volkswagen Truck & Bus has a very good availability and you get -- as they also build buffers and stocks. You can get products with very short lead times. So that's a quick one on lead times.

[Ursula Querette, executive]

Yes. Let's take input costs for Michael here.

[Michael Jackstein, executive]

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

[Ursula Querette, executive]

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

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

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

[Ursula Querette, executive]

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

[Michael Jackstein, executive]

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

[Ursula Querette, executive]

Christian, do you want to add a bit backwards looking on to Scania's Financial Services?

[Christian Levin, executive]

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

[Ursula Querette, executive]

Yes. And thank you for the question. Next question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, analyst]

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

[Christian Levin, executive]

Yes. Hi, Hampus, thanks. It's interesting because what you recollect is what I always learned being in Scania, that there is a lower margin on the medium-duty trucks, and that was also always the reason why we never entered into that segment. But I was surprised to learn that in the U.S. space, it's a very profitable product, and we see no difference between heavy and medium-duty vehicle. So, when the mix is now clearly changing towards Class 6 and 7, it does not have a significant impact on our gross vehicle margins. Which is also a good news as for us in Navistar, sales on medium-duty represents around about 50% of our total sales. And of course, I don't know whether -- if this is the normal situation in the U.S. market or if it's only Navistar, but I imagine it's the situation in the market. But that could be a fly in. I hand over to you, Michael, for more on the financials.

[Michael Jackstein, executive]

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

[Ursula Querette, executive]

Thanks. We'll go to the next question, which comes from Michael Aspinall from Jefferies.

[Michael Aspinall, analyst]

Just one for me. As a follow-up question around production. How much notice do you need to lower production around the different regions? And what are the key levers you pull if you do make that decision?

[Christian Levin, executive]

Okay, should I take that one. So typically, we need in the 3 big brands around about 3 months to -- from decision to execution in terms of adjusting our production pace, and the levers or what we do is that we work with the flexible contracts on the workforce. So we used the temporary workforce. That's a little bit different between the different regions, how flexible we can believe varying somewhere from 10% up to 30%. And then, of course, I mean the fixed cost we have. So there is no leverage on that, but then you have, of course, the full effect on the material cost. So that's from the engineer, Michael, from the financial guy.

[Michael Jackstein, executive]

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

[Ursula Querette, executive]

Okay. Next question comes from Daniel Cunliffe from Bernstein, Societe General. Daniel.

[Daniel Cunliffe, analyst]

Just a question on price and sort of guidance clarification. You obviously talked about strong pricing at MAN and VW Truck & Bus, and obviously, with units down 4% and revenues up 5%, sort of 9 points of price mix is quite positive. So, question is how much of that price mix do you expect to sort of carry over? And then sort of linked to that is a guidance clarification. So do you think that the minus 5% to 10% -- sorry, minus 5% to plus 10% is sort of the minus 5% would be more like the sort of deliveries and units and sort of the lower end and then at the higher end of the plus 10 would be more sort of applicable for revenues? Because obviously, at the moment, your guidance doesn't make any difference for that strong price mix and ASP that we've been seeing in the first quarter.

[Michael Jackstein, executive]

I mean, when we talk about the unit sales and the sales revenue, then we have the guidance that you just mentioned from minus 5% to plus 10%. And again, when you look at the unit sales, then we were here below the midpoint. But when we just stick to that guidance to give you some more clarification here, we still believe that we have a good chance to end up at the midpoint, so roughly around 2.5%. Again, taking into account that, especially here in North America at Navistar, we were not able to deliver as many trucks as we could have because of, again, the supply chain situation and the situation with the buses, as mentioned. So, that's the explanation here why we still aim for the midpoint. Then since you mentioned here, pricing and mix, I mean, this has the influence regarding our RS guidance. And there, I can just echo that we have the range from 8% to 9%. Yes, in the first quarter, we are above this. We stick to our mid-term target of 9% for this year. So as we already said during the annual press conference, you should not read the guidance from 8% to 9% in the way that we guide for the midpoint of 8.5%. We stick to our mid-term target. And that's why, clearly, we were happy with the start into the year. But as I also mentioned during the presentation, I mean, we opened up the corridor to 8% because there is simply a lot going on in this world. There are a lot of uncertainties. And I mean, I mentioned, I believe, at least when I had various interactions with investors, -- you also can never out rule that there is a major impact from either an earthquake or again, a fire at one of our suppliers, for example. And then a couple of days, unfortunately, after I have mentioned that we had the earthquake in Taiwan. And then also, there was a fire at one of our suppliers a couple of days or weeks later. So we just see that those things are happening, and this is how you should interpret the guidance. Again, happy with the 9.4% start into the year, but you also know for the rest of the year, there are seasonal effects vacation period. So, you cannot simply say that this will continue even though we will work hard.

[Daniel Cunliffe, analyst]

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

[Michael Jackstein, executive]

No. Again, also here, we are sticking to our guidance. And I mean, as I mentioned, price and mix effects as well, I have to add here as the vehicle services business, pretty much like last year contributed here to the good numbers. But I mean, there was a question before regarding input costs. And there I said that we had some positive effects, decreases regarding raw materials, but also increases. So let's see how things are going. But there, we don't go, and please understand that into further details regarding these aspects. But again, we stick to our guidance range here.

[Ursula Querette, executive]

Thank you. Next question comes from Anthony Dick from ODDO BHF.

[Anthony Dick, analyst]

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

[Ursula Querette, executive]

Christian, can I hand that over to you?

[Christian Levin, executive]

Yes. I wish I could be more precise. But we are ramping-up production in our plant in Huntsville, Alabama, where we're building a system that could actually supply -- we're talking about the full system and half system. We're building a full system sort of tell you, we're building half a system in Huntsville, and that basically means that we can potentially build some 30,000 units. So, where we are throughout this year, I will not be able to give you precisely. But the target is, of course, that we reach full capacity like we have done in Scania over probably 1.5 years or 2 calendar years. So it's not, I think, reasonable to believe that we will be fully using this capacity in this year. But I'm sorry, I cannot be more precise, because I don't know and also because I don't want to. When it comes to pricing, I hand over to Michael.

[Michael Jackstein, executive]

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

[Ursula Querette, executive]

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

[Shaqeal Kirunda, analyst]

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

[Christian Levin, executive]

Yes. That's a very fair question. And of course, it's a battleground as it always has been, North America. And everyone has the intention to up their market shares. And if we sum that up, we're somewhere 125%, 130%, and that will, of course, not happen. So yes, and of course, that will have an impact on pricing. Now, where we start from is really being the loss of the line in terms of price. So we were the cheap product. We're the one who could not increase value. We could not use technology to charge more. And that is what we're changing now. So we're going from kind of worst-in-class on the driveline performance, to the best in class. And that doesn't mean that you reposition your pricing completely from one day to the other, but it gives very good sales arguments to the sales force to increase pricing. And now on the last question, we don't want to go into the exact pricing we're getting up, but we get substantial better pricing with the S13 compared to the 826,and we still sell out. So, I don't think any of our competitors, but I do know, have an order book like we have for the S13, which means the full calendar year. So, what we're going to continue to do is to take more and more of our European developed technology, integrate that neatly into the Navistar product, and by that, adding cost advantages for our customers, and by that being competitive, and by that charging the price. And the then the good thing is that we're not having the MAN, Scania kind of cannibalization risk. We have only one brand that is international in the North American space, meaning that we have a chance to reposition the brand back to where international ones was.I mean, it's an iconic brand in the U.S., and many of you on the call know that better than me. And we see that from the dealer loyalty and from the customer loyalty. When we meet with the dealers and customers in the U.S. together with Matthias and his team, they all ask us to really come back. They all think that Freightliner dominate this market too much. And with our dealer coverage and with our technology, I'm absolutely certain that we will be one of these who can actually capture the market share that's up for grabs. If you look to our dealer and workshop capacity, for instance, I mean we're a brand that is coming from 25% market share, we were down to 11%. Of course, that means that we have capacity to grow. This has, of course, also been hampering us on the supplier side because they have kind of given up on how we start and shifted their capacities over to our competitors. But they see here as the months go by that, they need to start to think differently on us. And that is a struggle. That takes time. Luckily, many of the suppliers are also based in Europe and know us from other places, which really helps in converting them into giving us more volume allocation. But that's not always the case for American-based suppliers. So, I think that we are very well positioned to continue this growth. You might think that we're sticking out our necks a bit when we're saying we're going to take 1% to 2% market share. But we are, but it's important to point out, we will do that through value. It's going to be value-based pricing, and it's not going to be any price, more engagement from our side. We're far too cheap for that. So that's a few comments how I think about our penetration journey going forward in the states.

[Ursula Querette, executive]

Thanks, Christian. And now we have the last question in the queue, which comes from José Asumendi from JPMorgan. José.

[Jose Asumendi, analyst]

Just one question, please. Can you comment on the leverage of the company? And where do you see it by the end of the year? How do you see free cash flow in '24? And the medium-term view, how do you see the leverage into '25, '26?

[Michael Jackstein, executive]

Yes. I mean, let me start with the net cash flow. And here, maybe starting with our guidance of EUR 2.3 billion to EUR 2.8 billion. So first of all, let me say that also here, we stick to our guidance. And then when we talk about our net debt level, then let me say, one more time even though we look at the Q1 figures here that we were quite happy and also proud that we will reduce or were able to reduce our net debt level last year. We believe significantly from EUR 7.7 billion to EUR 5.8 billion, and we continue that path. So in the first quarter, we were able to further reduce it by almost EUR 300 million now to a level of EUR 5.5 billion. And to be crisp clear here, this is a top priority for us. That's why, as we mentioned in the last calls, we have put the net cash flow here on a different level. We have a clear focus on that aspect, because we want to reduce our net debt level further. So, this is important for us for the 2 effects that I mentioned before. One is clearly increasing our equity value. And then the other topic is that we're, of course, aiming for a stand-alone investment-grade rating to have more flexibility in our financing efforts, linked to the question already that we heard before regarding our financial services, captive and being able to finance this. So of course, also, therefore, it's important to have the stand-alone investment grade. So you can be sure that, again, this is a top priority for us, and we continue working down that path.

[Ursula Querette, executive]

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