Traton SE

XETRA:8TRA

Earnings Call Analysis

Strong First Half Despite Supply Chain Challenges

In the second quarter of 2024, Traton reported strong results with nearly 59,000 vehicle orders and revenue of €11.6 billion. Despite a 5% decline in vehicle deliveries due to supply chain issues at Navistar, they maintained steady sales and a return on sales of 8.8%. South America showed positive market trends, particularly for Scania and Volkswagen Truck & Bus. Traton's guidance for 2024 remains steady with a return on sales between 8% and 9%. Net debt rose by €1.2 billion but is expected to improve by year-end as inventory issues resolve.

Solid Start to the Year Despite Challenges

Traton SE reported a robust performance in the first half of 2024, with CEO Christian Levin highlighting notable achievements despite facing several obstacles. The company saw strong order intakes, almost 59,000 vehicles, primarily driven by positive market developments in Brazil and Latin America. However, temporary supply chain issues, particularly a major disruption caused by a fire at Navistar's mirror supplier in the U.S., resulted in a 5% decrease in sales to 79,000 vehicles. This issue significantly impacted Navistar's delivery figures and overall North American performance .

Financial Performance and Profitability

CFO Michael Jackstein explained that Traton’s financial results were largely stable despite facing a reduced delivery count. The company reported an 8.8% return on sales for Q2, showing resilience and strong cost structure improvements, particularly due to the MAN realignment program. For the first half of 2024, profitability was in line with Traton's ambitions, reaching an adjusted return on sales of 9.1%. Despite ongoing market uncertainties, Traton maintains its guidance range of 8% to 9% for return on sales for the full year .

Brand Performance Insights

Among Traton’s brands, Scania emerged as a key driver of growth, with a revenue increase of 8% to EUR 4.8 billion, largely due to the success of its heavy-duty truck business in Brazil and the continued strong demand for vehicle services. Scania also saw a 14.7% improvement in adjusted return on sales. Meanwhile, MAN faced a revenue decline of 2% due to weak demand in Germany but managed to improve its return on sales to 8.5%, benefiting from increased bus and van sales .

Challenges at Navistar and Future Prospects

Navistar was significantly affected by the temporary supply chain disruption, leading to a 21% drop in sales revenue. The fire at the mirror supplier severely constrained delivery capabilities, which, if resolved, could have pushed Navistar's return on sales to around 7%. The company expects to recover from this setback in the latter half of the year by addressing the backlog and improving profitability. Despite these issues, Volkswagen Truck & Bus showed impressive growth, with a 41% increase in revenue driven by strong market conditions and better product positioning .

Cash Flow and Debt Management

Traton’s net cash flow was adversely affected by the supply chain issues and increased capital expenditure, but the company views this as an investment in future competitiveness. The dividend payout also added to the cash flow challenges. Net debt rose by EUR 1.2 billion in the first half, but Traton remains committed to reducing its net debt and achieving an investment-grade rating by year-end. The company anticipates that reducing working capital, particularly by clearing semi-finished inventories, will aid in enhancing cash flow in the second half of the year .

Outlook for the Second Half of 2024

Looking ahead, Traton remains optimistic about its prospects despite acknowledging market headwinds in Europe and North America. The company is confident in its strategic initiatives, particularly in electrification and market expansion in Latin America. Scania’s entry into the zero-emission vehicle market and MAN’s launch of the efficient D30 engine are expected to bolster the group's market position. Moreover, the group's diversified portfolio and strategic investments are likely to mitigate risks and support sustained growth .

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Traton Q2 First Half 2024 Results Conference Call. I am George, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's now pleasure to hand over to Ursula Querette. Please go ahead.

[Ursula Querette, executive]

Thank you, operator. Good morning, everyone, and welcome to Traton Second Quarter 2024 Earnings Call. My name is Ursula Querette and I'm Head of Investor Relations at Traton SE. With me on the call today are Christian Levin, our CEO; and Dr. Michael Jackstein, our CFO and CHRO. Christian will kick off the presentation with the key results and highlights of the second quarter and Michael will guide you through the financial performance and outlook in more detail. As always, we will conclude the call with a Q&A session, where we welcome questions from financial analysts, investors and media representatives.

To handle potential media inquiries during the Q&A session, Camilla Dewoon, our Head of Corporate Relations, is also present. This session will be recorded and a replay will be made available on our Investor Relations website as soon as possible after the call. You can also find our half year financial report, which we published this morning and the slides to this call on our IR website. Before we start, let me remind you of the disclaimer with respect to forward-looking statements on Page 3 of our presentation. With that, I hand it over to Christian.

[Christian Levin, executive]

Thank you very much, Ursula, and welcome, everyone, also from my side. Thanks for joining. So you can see the overall picture on this slide, and we follow up the second quarter with a really good result, just like in the first quarter, concluding a strong first half of the year. And from the left, we start with the order intake situation, and you can see that we further managed to grow our orders to almost 59,000 vehicles. Said that, the overall picture is that customers are becoming more cautious, especially in Europe and North America, and we see markets are normalizing from the past 2 very strong years.

Brazil and Latin America, however, are moving in the other direction, and we see a really positive market development there with good order intake as a consequence. If we look to our sales in Q2, we're down 5% compared to last year to 79,000 vehicles, still a solid level, especially taking into account that we've had a really tough temporary supplier issue happening at our international brand, Navistar in the U.S. where fire hits our supplier of rearview mirrors, which unfortunately is a single source.

So in Escobedo just neighboring our own plant, there was a total loss. Now this, of course, heavily influenced negatively our delivery figures for North America, whereas actually impacting all our key figures in Q2. We, however, expect to be able to complete the trucks that are built, and we have an additional line and an additional shift up to complete with mirrors and deliver them and the vast majority we expect to deliver throughout the second half of this year.

Now if we move on to the cash flow, this is what has been especially hit by this temporary effect in Navistar, so a minus of EUR 374 million in the quarter. But remember also that this is the quarter where we pay out the dividend, and we did double the dividend payout EUR 750 million this year. If you look then back to the third box sales revenue, you can see that despite 5% lower vehicle deliveries, we did 1% minus on sales revenues coming to a very good EUR 11.6 billion revenue, mainly explained by a very good price discipline in all of our brands, but also a good regional and product mix.

So looking then to finally to our results. It's an 8.8% return on sales, another strong quarter, showing again that our strategic ambition of reaching 9% in 2024 is definitely well within reach. All right. Michael will, of course, take you more into the financial details later in this presentation. So let me instead move you into the next slide and have a look on some of the most important strategic highlights from the second quarter, starting with Scania and an important announcement made that we have established and launched a company called Erinion.

This is a company that will supply turnkey depot and destination charging equipment to our customers. We've come to realize that, of course, charging along the highways is important. But absolutely 100% of the customers first require that when destination charging. And this is where they anticipate to make the majority of their charging happening. Strategically important and interesting is that we were never into the energy supply of customers before with some very few exceptions, fuel cards and other solutions. But this is -- and will continue to be 30% to 40% of the customer wallet.

So a small step taken towards a big target of reaching 40,000 charging points already by 2030 and by that supporting further the transition into the mobility solutions. But moving to MAN, despite shifting to zero emission vehicles, the demand for traditional combustion engine vehicles remain strong. And the most important sales arguments remains reduction of fuel and with that comes, of course, reduction of CO2.

MAN announced the launch of the new highly efficient D30 engine. So after the Super comes the S13 in Navistar and D30 in MAN, all are based on the CB1 engine, gearbox and after treatment system being the first Traton modular solution for all of our brands. But MAN has taken that one step further, made further improvements with a new brake generation and with several aerodynamic measures, being able to promise reductions by up to 4% to their customer base and deliveries of this driveline will start in the next calendar year.

Back to battery electric vehicles and international brand in the U.S., where a huge effort has been made to prepare the dealer and service network for the electric vehicles, both trucks and buses. We've learned in Europe that you need a significant effort to prepare the staff and Navistar has chosen the path to prepare 100 out of the -- around about 300 dealers of international BEV trucks and IC buses for electric an important step to be able to take on, especially the school buses that are coming out first.

In Volkswagen Truck & Bus, we choose to highlight the internationalization strategy that we have talked about for this strategic period where in this quarter, a new production facility was opened up in Argentina and Cordoba. There will be 5 models brought into the local production in the market and then in the market where Volkswagen Truck and Bus is present since more than 25 years.

But if you look to the results in the market, you can see that Iveco and Daimler are the predominant players as they do have local production. So we expect significant improvement in sales figures for Volkswagen Truck & Bus, thanks to this move. So two of these strategic initiatives directly paid into our electrification journey, which is moving momentum.

And on the next slide, you can see our key figures, order intake and deliveries of full electric vehicles throughout the first half of the year. And you can see that momentum is rising. Customer interest is really high. More than 1,700 orders is a clear improvement over the first half of 2023. We chose the picture here of an MAN electric bus -- electric city bus because we are tremendously proud to be actually the market leader in Europe for electric city buses.

You might have thought that was a Chinese manufacturer but it is not. It is MAN that is #1 in the European city bus market, thanks to an excellent product that you can see here, the MAN Lion's City E. But as you know, we also have a great lineup from Navistar with school buses, the biggest bus segment in the U.S. and we see momentum building up, especially on the offering side for e-trucks.

Unit sales are going backwards, 605 only. And then you should know that this is partly due to the fact that the MAN e-van was discontinued at the end of last year, and hence, that's out of the delivery figures for this year. And then there is a strong pipeline of electric trucks coming into the market in the coming quarters. We see more and more customers being able to make a positive TCO calculation. We see improvements in the charging infrastructure. Milence as we've already told you about, Erinion that we talked about today, but also MAN strategic collaboration with EON, where they are electrifying all of the MAN workshop and dealer outlets.

But as usual, I call out to the governments, especially in Europe but around the world, to make sure that the TCO parity is improved through whatever means available to them and for us to be able to reach the CO2 emission reduction needed to reach the Paris agreement. And with that, let's leave the zero emission vehicles, moving to the next slide, and I will give you an overview of the market situation.

So this is our global both deliveries and orders in 1 slide over the years. And as you can see, there is a decline in unit sales in Q2 due to a continued normalization in our big market areas, both Europe and North America. MAN is especially hit by the weakness of the German market, but both Scania and MAN in Europe are impacting by weaker demand out of Eastern Europe.

Nevertheless, we continue to have a strong order book in both our European-based brands. Also in the U.S., we see decreasing figures, and this is mainly coming from the on-road Class 8 vehicles, whereas we actually see growth in Class 6, 7 and in the severe segment. And as you'll see later on, we make no change to our guidance. We stick to it. We believe that all the market areas will be as we forecasted for this year.

South America continues like in Q1 to be really strong. In Q1, it was predominantly Scania that benefited as the heaviest part of the market grew fastest. But in this quarter, you also see a very positive development for Volkswagen Truck and Bus, whereas the lighter and medium-duty segments also started to grow. But besides the total market effects, I need to mention again the additional hit that the Navistar team took with this fire at the supplier of mirrors.

Tough for our team that worked so hard with restructuring and getting the company back on track, getting this force majeure, taking their deliveries down with 23%. So mixed picture between the brands, but all in all, that takes us to a decline of 5% in the quarter. Order intake, we actually managed to increase 4%, as already mentioned, mainly thanks to North and South America and especially thanks to Brazil.

And therefore, you see a very strong order intake improvement, especially from Volkswagen Truck & Bus growing 36%, but also Scania benefiting this development, being a big player in Latin America and also growing order intake in the first half year. This takes us to a negative book-to-bill ratio or a book-to-bill ratio below 1, I should say. We are on 0.75 a slight sequential improvement.

And as a consequence, improved or if you would like, lower lead times. So if we talk in the different market areas, we are now down to rather normal delivery times around about 3 months on average in Europe, whereas in South America, lead times are growing up to 6 months depending on brand and application. And with Navistar in the U.S., we have the longest lead times because mainly of this supply chain issue now mirrors.

But as you remember and recall from before, we also have frame rail issues, gearbox issues, et cetera. So there, you need to count between 3 and at least 6 months depending on specification. So that's trying to paint a picture overall picture of the market. And with this, let's jump into the financial figures, and I hand it over to you, Michael.

[Michael Jackstein, executive]

Thank you very much, Christian. And of course, a warm welcome from my side as well. Christian just spoke about the market trends that affected our unit sales, while we still profited from a good order book. He also referred to the new EU general safety regulation, which, on the one hand, created some market momentum in the second quarter. On the other hand, the application of the regulation came with a model change at MAN and hence, with a slow delivery.

The Navistar mirror supply issue and the respective transitory effect on truck unit sales in Q2 was also mentioned. Unit sales of buses at Navistar were still down year-on-year in the second quarter, although deliveries of the new school bus model are now ramping up. While unit sales decreased by 5% in the second quarter, sales revenue remained almost stable, which is a remarkable achievement.

This resulted from a favorable geographical and product mix, thanks to our diversified business model. It was also due to our good order book and price realization. Besides that, we benefited from a continued high demand for our vehicle services, given age truck fleets and high utilization.

Let's move to the next slide with our profitability development. As you can see here, in the second quarter, the adjusted operating result decreased only slightly, resulting in a continued strong adjusted return on sales of 8.8%. This shows once again how our cost structure and overall resilience have improved, especially due to the positive impact from the MAN realignment program and despite the negative effects that we have already discussed.

We reached a profitability of 9.1% for the first half of 2024, which meets our 9% adjusted return on sales ambition. However, our ROS guidance remains unchanged with a range of 8% to 9%. This takes into account ongoing cautious market expectations for Europe and North America and potential risks from further supply chain disruptions and geopolitical uncertainties.

Let us now look into the individual performance of our brands on the next page. So Page 12 shows how our group benefits from having diversified brands, markets and products. So despite the Navistar supply issue and softer markets in Europe and North America, sales revenue of Traton operations remained almost stable year-over-year.

The corresponding return on sales even increased slightly by 0.4 percentage points to 10.2% in the second quarter of 2024. As shown on the slide, Scania was the main driver of the industrial revenue growth. Its sales revenue went up by 8% to EUR 4.8 billion, mainly due to the strong growth of its heavy-duty truck business in Brazil. Also, Scania's revenue benefits from the increasing delivery of trucks equipped with the Scania Super powertrain as well as the ongoing strong demand for its vehicle services business.

With this, Scania again improved its adjusted return on sales, both quarter-over-quarter and year-over-year, reaching a very high 14.7% in the second quarter. MAN reported EUR 3.6 billion in sales revenue, which is a decline of 2%. As mentioned, MAN suffered from the weak demand in Germany. The revenue growth was also affected by the new EU safety regulation.

However, this was partly offset by increasing bus and van sales revenues. Nevertheless, the adjusted return on sales improved by 0.8 percentage points to remarkable 8.5%, clearly demonstrating the positive outcomes from the successful realignment at MAN. As stated, Navistar's deliveries were significantly affected by the fire at its mirror supplier and therefore, sales revenue declined by 21%.

As a consequence, we saw a drop in Navistar's operating profit and the adjusted return on sales came in short of expectations. We made a rough calculation. If all trucks produced in the second quarter had been delivered to customers, the Navistar return on sales would have come in significantly higher, approximately around 7%. Even if this drop driven by a force majeure is unfortunate, we're confident to deliver the vast majority of the backlog to customers in the remainder of the year.

We expect that this and overall production will help to significantly improve profitability at Navistar in the coming quarters. Volkswagen Truck & Bus increased its revenue by a very impressive 41% year-on-year. This was driven by strong market tailwinds and a better product positioning and unit price realization, hence, based on an excellent product offering and a leading position in a growing market, Volkswagen Truck & Bus further increased its adjusted return on sales to 12.6% in the second quarter.

Next to Traton operations. Traton Financial Services increased its revenue by 22% in the second quarter. This came mostly from a larger portfolio volume and the continued country rollouts for MAN customers. However, this had a negative effect on the profitability of our Financial Services business in Q2, along with higher funding costs.

Return on equity came in at 11.9% in the second quarter. And I should mention that last year's return on equity was lower because of the sale of Scania Finance Russia. Let me end this slide on a positive note. We are consistently executing on our strategy. We leverage the strengths of our 4 brands while building out the Traton Modular System and growing together as a group, and we are ramping up our captive financial services offering for all our Traton brands.

With that, let's move on to Page 13 and our recent net debt development. Here, you can see that the net cash flow of Traton operations was significantly affected by a strong buildup of working capital, largely inventories. This is predominantly related to the mentioned situation at Navistar, where due to the missing mirrors, we could not finish and deliver our trucks as planned in the second quarter.

According to our calculation mentioned before, the Traton operations net cash flow would have been approximately EUR 700 million higher if the mirror supply issue had not occurred. An increased CapEx also weighed on our net cash flow. But let's take this as a positive since it clearly pays into our future competitiveness. Our dividend payment of EUR 1.50 per share in June resulted in an additional cash outflow of EUR 750 million.

Our strong operating performance could not fully offset the mentioned effects. So the net debt of Traton operations, including corporate items, rose by EUR 1.2 billion in the first half of this year. This should be a temporary event as our prime goal to delever our balance sheet remains fully in place. We expect working capital to help us in the second half of this year especially from the relief of semifinished inventory and inventory in North America. As we have said many times, we're aiming at a stand-alone investment-grade rating by further reducing our net debt. This will make our financing more flexible.

With this, let me move over to our full year outlook. As I said before, we maintained the Traton operations net cash flow guidance in a range between EUR 2.3 billion and EUR 2.8 billion. I also reiterated the Traton Group return on sales guidance range of 8% to 9% for the full year. And based on our strong first half of the year and unchanged expectations regarding the truck and bus markets, we also confirm our group unit sales and sales revenue forecast for 2024. We expect both performance indicators to develop in a range from minus 5% to plus 10%.

On the next slide, you can see that we did not change our truck market forecast presented in the annual results conference. So now before we start the Q&A, I'd like to mention 2 important milestones we celebrated this quarter. We were very happy to see that Traton joined the MDAX, which tracks the performance of the 50 largest companies in Germany outside the DAX. This not only reflects our strong financial performance and higher market capitalization, but also enhances our visibility and credibility in the financial markets.

This quarter also marks the fifth anniversary of Traton on the stock market. Over the past 5 years, we have made great progress on the Traton Way Forward and have created value to our shareholders. I want to take this opportunity to thank our investors, employees and partners for their support along that way. And with that, I hand over back to Ursula.

[Ursula Querette, executive]

Thank you, Christian, and Michael. I already see quite some questions lined up from the audience. But before we start, let me quickly reexplain the rules. [Operator Instructions] Now let us take the first question, which comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

My first question is on the gross margin, which is down a bit quarter-on-quarter. I guess this is mainly by the -- because of the temporary issues at Navistar, there is no price cost drag yet, correct. And just to put this into context, looking into the second half and into -- and in the context of other OEMs talking about price pressure now in Europe this week, what is the risk Christian of a greater impact from pricing than just price cost normalization to EBIT in the second half?

We know that the carryover from pricing will become smaller and smaller, but are you now seeing more negative pricing entering the order book for second half deliveries. I'll start there.

[Ursula Querette, executive]

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

[Klas Bergelind, analyst]

Quarter-on-quarter?

[Ursula Querette, executive]

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

[Klas Bergelind, analyst]

Okay. Yes. My question is to Christian on the price cost normalization into the second half, please.

[Ursula Querette, executive]

Let's take it from that perspective. Thanks Klas for clarifying.

[Christian Levin, executive]

Yes. Klas. And it's a good thing you asked for gross margin. That's the first thing I checked when I get in the monthly figures. And I'm really pleased to say that the price discipline that we have installed in this group based on the historical Scania way of thinking is really paying off. And you can see that we're not engaging in crazy deals.

So I do not know the price erosions. I do see some crazy deals as always, when the market starts to go south and in the market, we're not engaging in this and that's probably what you picked up from competitors. Typically, these are the big fleet deals where people see a chance to fill order books with volume but without much profit. So we don't see that. We see, however, a good cost development over several areas, which is to our benefit.

We see the pricing power of the Super driveline in Scania and the S13 then in Navistar helping. And as I announced earlier here, we also now finally get it into the MAN range from next year, that will also have a counter effect. So I feel pretty confident despite that, as you say, the order book based on the extreme years is gradually being delivered. I see fair price realization, I see good cost development and I have no fear that we will at least not in the short term suffer gross margins. So I hope that answers your question.

[Klas Bergelind, analyst]

Yes. Very clear. My second one is on Navistar and the fire at the supplier. Thanks for that underlying margin, Michael of 7%. How many units looking to sales that we're talking about here that will return into the third and fourth quarter. And can you please talk about other capacity issues here on the frame side, you had some difficulties also ramping on the new school buses.

And I'm trying to understand, I mean, in general, as an orders because I get that unit sales takes a hit from the supplier issue, but I'm curious why orders were weak in Navistar. Is this weaker heavy-duty demand quarter-on-quarter. Or is it also a result that you can't sort of ramp? You don't want to build the order book, et cetera?

[Michael Jackstein, executive]

Yes. Thank you very much for the question, Klas. Maybe let me start with the question about the other supply chain issues. You're fully right when I referred to the first quarter call that we had, then I mentioned that we unfortunately still had the frame rail topic as we called it practically the entire last year. So that was, if you want to say, a spillover effect in January and February. So this is, at this point, completely overcome. We don't see any issues here regarding this supply chain issue when we talk about the frame rails.

Then you mentioned the bus ramp up, which is -- which was the second topic in the first quarter when we looked at Navistar. And here, the ramp-up has clearly improved. So we are catching up here, and we expect for the full year that we will deliver, yes, a large extent of the volume that we have lost here in the first quarter or in the first half. So good progress here on the bus ramp-up, which is the second topic.

Then you asked, in general, about the supply chain. I believe I can reiterate what I have mentioned in the first quarter in general, supply chains are not as stable as they were before the pandemic. And when we differentiate here regarding the regions, then we can say that in Europe, supply chains are more stable in the meantime. In North America, there are still some slight hiccups, I would say. If we compare that to Europe, overall, more stable, clearly.

But there are from time to time, I would say, minor issues in the supply chain, but not heavily affecting here what's going on at Navistar at this point in time. Nevertheless, you heard me also regarding our ROS guidance that we are here cautious taking into account the experience from the supply chain. This is one of the explanations for our range to put this into context here.

Then regarding practically your first question regarding the volume. Let me just say that we believe that we will also catch up here the volume of trucks to a very large, maybe even to the full extent in the second half of the year. It will likely not happen all in the third quarter. We will probably need the third quarter and the fourth quarter because now we have a large extent of semifinished goods, which we translate them first into finished goods. So this will take some time and the volume number you asked that's in the ballpark of almost 8,000 units.

So this is the ballpark. Then you mentioned one more topic, if I recall it correctly, and that was the order situation at Navistar. As Christian was into when he talked about the different lead times in the regions, he mentioned that the lead times in North America are a little bit longer. And this, of course, goes back to, on the one hand side, the slower ramp-up in the bus situation, as mentioned, and then as well goes back to the fire here at our supplier with the mirrors.

That's why the lead times in North America at Navistar are longer. And I can say therefore, that the order book is quite well filled and there is not too much room left, let's say, to completely fill it for the entire year. That's why we are here overall quite positive when we look at Navistar and the order book situation.

[Ursula Querette, executive]

Okay. Then the next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I have 2 questions as well, but I'll start with one which is more just in terms of strategy, I guess, we've seen a lot of supply chain problems across the industry. We've seen now the mirrors issue, reflecting on those and as we think about sort of your progress, particularly on Navistar going forward, does that sort of make you think on any changes that are sort of needed to the production system, any dual sourcing? How should we think about the longer margin target on perhaps on the back of that, but would be interested to hear from you on this.

[Michael Jackstein, executive]

Yes. Maybe, Daniela, I may jump in here directly. Yes, of course, I mean, we are looking at the situation. And maybe I can say here very concrete when we talk about the frame rails for example, in the meantime, we have 3 suppliers here. So of course, there's lessons learned. And when you look at the history of Navistar, I would say, for a good reason, the company worked with single sourcing. But you're fully right. And as I indicated also, the situation regarding the supply chains have changed after the pandemic and in this sense, we adapt. And of course, we look where we have crucial parts and you asked about our supply chain strategy where we believe that it makes sense to go for dual sourcing instead of single sourcing, we clearly consider this.

[Christian Levin, executive]

Let me add the bigger picture because you asked about the entire production system. And I think we took over a company that has had a lot of problems, but they had a new factory facility in Texas in San Antonio, but we were surprised to find that there was no systematic work improvement work at all ongoing. And we have moved a lot of our [ property ] both from Europe and from Brazil up and over to U.S. and Mexico to support Navistar and revamping the entire production system, including the supply chain.

So there's actually no surprise that we take those hits. There's also no surprise that were lost in line with the suppliers because we've been the one who have had the toughest relationship with the suppliers based on our poor financial outcome and always being under pressure. So this is something that we are gradually working on. It's not only about whether we go single or double source. It's really about another way of working in transparency and along the supply chain all the way down to second, third, fourth tier suppliers.

But this is a work that will take time and it will constantly improve. And it was, of course, very, very unfortunate that in a time of good improvements in Navistar, and Michael, you mentioned that we had finally solved some of the bigger issues. We got this force majeure fire which really set us back. Otherwise, we would have seen a really good results out of Navistar. But again, there will be more hiccups, but we're gradually improving the situation we're in with Navistar.

[Daniela Costa, analyst]

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

[Christian Levin, executive]

Yes. Should I take that Ursula?

[Ursula Querette, executive]

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

[Christian Levin, executive]

So let me say that we are once again reviewing what EPA has come out with here. And so far, we at several times, we've answered that, yes, we believe there will be a prebuy, and that's based on a rather expensive technology needed in order to reach the proposed levels. Question is, of course, if that is going to stand and it's also when is that going to happen.

And previously, we've said that this is probably going to happen already in the second half of next year. But let me say that with the ruling that you referred to and with the discussion ongoing, I think it's a little bit premature to give you a clear guidance. So at this point, I would actually refrain from giving you a forecast. We have to follow the situation and hopefully, it clarifies in the upcoming quarters.

[Ursula Querette, executive]

The next question then comes from Hemal Bhundia from UBS.

[Hemal Bhundia, analyst]

My first question on Scania. Solid margin performance in the second quarter. I just wanted to understand the dynamics a bit more. Would it be fair to say that a greater mix of South American truck sales boost margins? Was it growth in vehicle services or predominantly pricing? And I'll follow up with my second question after.

[Ursula Querette, executive]

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

[Christian Levin, executive]

Yes. Thanks, Hemal. Yes. So we have both in the European production system and in the Latin American and Brazilian production system, very similar setups where we run production in one process, and we have the same product, which is unique, I would say, in our industry. So it's identical. We could ship any product anywhere, which also means that the cost situation, part from, of course, labor cost differences and also some import restrictions into Brazil remains pretty much the same.

So when I look to our margin realization, it is despite the quite weak Brazilian reals and a big volume in Brazil, it's pretty much comparable. So if you would have asked a couple of years ago, it would have been a problem for us to have such a big part of sales in Brazil, but that is not at all the case. Would the Brazilian real appreciate? I don't know if that will happen, but that would be actually very positive for us. But already at this level, we see really strong margins. So actually, both production system delivered strong gross margins. I hope that clarified a bit your question.

[Hemal Bhundia, analyst]

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

[Christian Levin, executive]

Yes. So what we hear from the German market is a lot of interest, so very high level of offers, both MAN and Scania, but low closings. So customers hesitate and just like in big parts of Europe, perhaps except the South, it's really about financial cost, which typically is a quite small part of the total cost of ownership for logistics operator, but it has grown and it has grown a lot.

And if you add the [ mouth ] increases from the beginning of this year, it's like some customer size is just too much. Now we need to see the interest rates really coming down to bolster the cost situation. So hesitation is what we see in Germany, and I guess the kind of negative outlooks in -- around the industry in general does not really help the sentiment.

So that's what we hear from customers. You asked about the order book, and we have a solid order book for MAN even if we also have open production slots as we said around about 3 months. So for this year, we feel pretty comfortable but we are, of course, using the flexibility measures that we have in order to be able to adapt the production rate to the order intake and make sure that costs are in line with our revenues. So that's a bit about the order book. I don't know if you want to add something there, Michael.

[Michael Jackstein, executive]

Maybe I can just add that I would say it's quite obvious that MAN will face probably if we compare with our brands, then the most challenging situation in the second half of this year, also leading a little bit towards the financial situation here. I mean, as we talked about the markets, you can understand if we look at our brands that there is good tailwind for Scania and Scania is well balanced here.

So this is clearly positive. We talked about Navistar, where I believe we were quite clear that we have a catch-up race to do, but with potential because this was really just the transitory effect with the mirrors. So we expect, of course, that the second half is much better compared to the first half Volkswagen Truck & Bus. I believe it's obvious that there we have the tailwinds from the markets.

And then as Christian was into, the order book has normalized, but the situation in the European market, especially in the German market is challenging. And because of the exposure, you can probably expect that it will be likely that, let's say, the margin that you see here from MAN in the first half that this will be under pressure in the second half.

Thanks, of course, to the couple of times mentioned realignment program and the resilience of MAN. We don't see a significant drop, but I would indicate that it will be quite likely when we look at the market that we will see a slightly different margin at MAN in the second half of the year, taking into account the market conditions, the order book and the order intake situation in a whole.

[Hemal Bhundia, analyst]

And sorry, just a quick follow-up. The backlog mix, would you say that's more buses and vans weighted than trucks? Or is it very different from that?

[Christian Levin, executive]

Yes, I can take it. Just overall, what we see is a very positive development on buses where we have a really strong growth in order intake, both in Europe and Latin America. But as you know, the bus proportion of our total sales is low. So it doesn't have a major impact. But the order book of buses is actually growing and especially in MAN, it's growing fast with the success of the zero emission buses and also the traditional buses.

[Ursula Querette, executive]

Okay. Thank you for all this additional color. Let's take the next question, which comes from Nicolai Kempf from Deutsche Bank.

[Nicolai Kempf, analyst]

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

[Christian Levin, executive]

I guess that's for me Ursula?

[Ursula Querette, executive]

Yes, please.

[Christian Levin, executive]

Yes. Thanks, Nicolai. No, we're not -- I mean we have flexibility measures that we can use in our European system in Scania, but we are not planning to prolong the summer break in production. We run according to our normal production schedule. We do the maintenance we need, and then we start up again here in second week of August. And I think if I should expand a bit on the Scania Q3 situation, we were a little bit held back with our deliveries in Q2 due to the cyber security regulation that came into the market on the 7th of July, where we were not fully ready. And would have expected a little bit high delivery figures.

We do think that, that -- I mean, we do know that these trucks will be delivered in Q3, and I think that will bolster the effect of what you normally have a somewhat lower volume in Q3 because of the summer holidays. But let's see, that's a little bit of crystal ball.

[Nicolai Kempf, analyst]

And just one follow-up on MAN. I appreciate the color you've given and actually also the stats that you've shown so far in Q1 and Q2 also makes another peer of you view look rather soft. But you have mentioned that H2 will be softer. What should we expect here that we're going back to below 5% or could be stable of the 5% margin line at MAN in H2.

[Michael Jackstein, executive]

No, let me just say, I mean, we don't give a precise forecast here. What I just wanted to indicate is that the first half at MAN when you look at the ROS figure was really strong. And of course, an outflow of the really new resilience that we have at MAN. You also might recall that we mentioned a couple of times in the previous calls that when we talk about the effects of the realignment program that you will see for the first time the full effect of the realignment program in 2024.

And this is, let's say, part of the new resilience. I just wanted to indicate that you should not extrapolate the really super robust margin here, a very good margin of MAN into the second half of the year because we see the headwinds, which are just in line with our market guidance and expectations. And therefore, we believe that there will be some pressure on the margin and that we will likely come out weaker than for the first half of the year, taking into account the circumstances as we see them right now.

As Christian mentioned, we don't have the crystal ball. I just wanted to indicate that we will likely not maintain the margin level at MAN as we see it in the first half, but you should not expect a drop, let's say, to former times. Let me put it like.

[Ursula Querette, executive]

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

[Virginia Montorsi, analyst]

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

[Michael Jackstein, executive]

Yes. Maybe I can at least start it, Christian, and I don't know if you would like to add something. So talking about the backlog, again, we are I can say, almost sold out for the entire year. There are a couple of slots left for this year regarding the production, but we believe that we will fill that rather soon so that very likely when we meet again then for the call of the third quarter, then the order book should very likely lead already into the next year.

So this is the order backlog situation here. And yes, of course, I think that I, in a way, answered your first part of the question as well. We expect, despite the situation we have here, that we see an increase of the order intake in the upcoming months.

[Christian Levin, executive]

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

[Ursula Querette, executive]

Virginia, do you have a second question?

[Virginia Montorsi, analyst]

No, good on my side.

[Ursula Querette, executive]

So then the next question comes from Forbes Goldman from Pareto.

[Forbes Goldman, analyst]

Just one on Financial Services. You're seeing higher costs with the integration activities and so forth. How long do you expect that to be a headwind for you?

[Michael Jackstein, executive]

Maybe I can or Christian, do you want to?

[Christian Levin, executive]

Well, I can start. I mean this is a project with several dimensions. So on one hand, we, of course, do expect synergies coming out of using a back office for 4 brands instead of one brand. But on the other hand, short term, as you're into, we will have integration costs when we are taking over the business in the U.S., Canada, Mexico and in Europe for MAN. So the project to take over MAN will take also the full of next year. So we add market by market. And next year, we also take over Volkswagen Truck & Bus. Navistar is done and should not bring any additional costs.

So now I'm again a bit in the crystal ball, but I expect already throughout next year, perhaps towards the end that we see synergies overtaking costs when volumes are coming towards us. But it's maybe something you can give more detail on, Michael.

[Michael Jackstein, executive]

I think you put it perfectly fine. So we are in the ramp-up phase. As we mentioned, we built our captive financial services business. You probably follow the rollout of the markets that Christian just mentioned, especially for MAN Financial services around the world. And therefore, this year and also next year, we will see costs from the ramp-up phase but also then the synergies kick in. But it takes some time, of course, to ramp up the business, to build the captive. So it will certainly take quite some more time and the synergies then kick in, and this is why we are doing it. So of course, take it as an investment that will pay off them later on.

[Forbes Goldman, analyst]

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

[Ursula Querette, executive]

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

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

[Michael Aspinall, analyst]

Christian and Michael, I'll start with one on orders in Scania and MAN. Orders seem to have stabilized a bit in the last few quarters in what are weak markets for your customers. Can you just characterize the types of customers that are continuing ordering. I'm just interested in if you're seeing any orders from smaller customers at all or if we should consider that customer segment as 0 at the moment.

[Ursula Querette, executive]

Christian, can you take that one?

[Christian Levin, executive]

Yes. Thanks, Michael. Yes. So Scania is seeing another growth in orders this first half year, and Scania is predominantly working with the smaller and medium fleets, as you're well aware. So it's when you hear that the smaller ones are hesitating more than the larger ones, I mean, that's not entirely true. But if I look to the order portfolio here more recently, it is true that the smaller ones are more hesitating.

So let's see how this develops. I think the smaller ones are really the ones who are more vulnerable to fluctuations also in the transport market. I think we didn't mention that, but both in Scania and MAN with our fleet management systems, we see a solid demand for transport. So I think, again, one shouldn't be too worried about the European market going much more south. I think it's really a normalization that we see.

And in our guidance, we see a market of the plus 16 tons somewhere close to 300,000 and actually, the first half of the year, we're well above that if we just look at the registration 6 months. MAN is a little bit more dependent on larger customers as they are dependent on the DACH region to a larger extent. And there, we have a bigger decrease in order intake, actually, so it does not really follow the logic big, small, I think it more follows the logic of where is the majority of your sales.

As you know, that Scania's market share are more evenly spread out over all the European markets where MAN has very, very strong market shares in Germany, Austria, Switzerland and a bit weaker in the surrounding market. Something, by the way, that we work heavily on to improve MAN's position in France, Spain, Italy and the U.K. So I don't fully -- I say yes, there is a little bit more hesitation among the small customers, but it's not like that market with more specialized trucks is disappearing.

[Michael Aspinall, analyst]

Okay. And then just one follow-up then. You just mentioned your fleet management system where you get quite good visibility into your customers' operations. Have you seen any kind of increase in utilization in the last few months in Europe to kind of give you a sense that you're seeing some stabilization and improvement?

[Christian Levin, executive]

So we have not seen any increase in utilization. We have seen a leveling out on a level that is around about 13% lower than the pre-pandemic levels. And that has been very stable this year, the entire year. So no -- then if you look into individual applications, you can see ups and downs. But if you look to the total mileage of the trucks, it is actually very, very stable.

[Ursula Querette, executive]

Thank you, Michael. Then the next question comes from Jose Asumendi from JPMorgan.

[Jose Asumendi, analyst]

And yes, great to see the results of Scania. I mean, fantastic margins there. Just a couple of questions. I think I would really appreciate if you could give us some guidance with regards to revenues second half versus first half across the different divisions. But I know you stick to specific guidance. But some color across the different divisions and whether we should see a pronounced seasonality in revenue second half versus the first half?

And then second, we've seen some of your peers partnering up with some Chinese counterparts, I would appreciate if you could give us a brief update with regards to your footprint in China.

[Christian Levin, executive]

Maybe, Michael, on the first, I can take the China.

[Michael Jackstein, executive]

Yes. Let me start with the first one. I mean you asked about the revenues here. And I mean, clearly, the first half, as Christian mentioned during the presentation, the first half or especially the second quarter was affected regarding almost all our core KPIs when we talk about the mirror topic at Navistar, as we said, transitory effect. So we will see the catching up in the second half of the year. That's a little bit regarding the revenues.

And then when we talk about our ROS guidance, then I mean, let me just reiterate one more time that yes, we stick to our guidance, the 8% to 9%. You can typically not extrapolate what happens in the first half into the second half. There was the question before regarding the vacation season, which is a valid one because typically, on historical terms, the Q3 is a little bit weaker because of the vacation time.

So that's one aspect that we see. We also see the challenging markets, as mentioned a couple of times in North America and in Europe. So overall, as I was in to before, we confirm our guidance. And we also stick to what we have said before. You should not read the 8% to 9% guidance that we aim for the midpoint. We've put the 9% target in the capital markets in 2022, and nothing has changed compared to Q1 and compared to our annual press conference, we aim to reach the 9% in this year, so the upper end of our guidance.

[Christian Levin, executive]

Yes. So on China. And by the way, thanks for your praise of Scania. But on our China strategy. So you know that we are constructing the third industrial hub inside Scania in Rugao outside of Shanghai. We do that for 3 main reasons. The first is to expand Scania brand capacity. The second is to gain better footprint in the Chinese market, which even if it is currently depressed we estimate will remain the biggest truck market in the world.

And third, and this is perhaps the most important reason is to be part of the Chinese technology ecosystem. So perhaps not looking to traditional combustion engine trucks where we have amongst the Europeans a clear technology lead in the world, also in China. But when you look to the digital transformation that is happening, the Chinese players are coming at a very fast pace and very strongly.

You see that on the passenger car side as well. And it's very, very valuable for us to be with our own staff independent in China, working with Chinese colleagues, of course, out of Chinese universities, but also Chinese suppliers, Chinese researchers to develop at the same pace speed and with the same preconditions as our Chinese competitors.

And later on, of course, this is valid also once battery electric vehicles or zero remission vehicles with other technologies is going to make it into the Chinese heavy truck market. So our strategy is to build on that production license that we have that is pretty unique in the sense that we do not need to have a joint venture partner. This is -- it's only us, Tesla and Hyundai, who have been able to get these licenses, everyone else needs to work in a partnership 50-50 with a Chinese manufacture should they be allowed to manufacture inside China.

So we continue along that line, our production license is for 50,000 units. That gives us a pretty good flexibility on how to use that, that capacity -- and right now, we are aiming at a market introduction towards the end of next year, beginning of '26. So that's a bit about our China strategy. I hope that clarified your question.

[Ursula Querette, executive]

Then the next question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, analyst]

Two questions from me. Maybe first question is on -- when lead times now are normalizing in Europe and you have your issues in the U.S. I was interesting if you could talk about production adjustments given that lead times are normalized. And have you started to reduce run rate for MAN and or where you should be? And on Scania, how do you expect to kind of manage that given you more robust outlook. That's my first question. Second question is more if you could update us on the captive lending program in Navistar and how we should think about that going forward?

[Ursula Querette, executive]

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

[Christian Levin, executive]

Yes. Thanks, Hampus. So yes, the lead times are normalizing. That's not a bad thing. Actually, it's been very, very stressful to have these big order books and not knowing exactly where you are, when to deliver and what cost positions you would end up in, et cetera. So I'm really happy that we're coming back to a normalization both in Scania and MAN. But what does that mean?

Well, it means that we need to play the normal game of adjusting the cost base in production, the best way we can and as you know, we cannot use the same instruments in all geographies, in all legal restrictions, and we have different agreements in place. So if you ask them for MAN, have we started? The answer is yes. We have started to adjust downwards in our production, both in Germany and in Poland in order to be in line cost wise with the somewhat lower output that Michael also described.

In Scania, we have not adjusted downwards. We have so far been accelerating in this year, but we see that we also in Scania, not in Latin America that we need to do everything we can to get every extra truck out. But in Europe, we need to adapt to this somewhat lower output that we expect also for Scania towards the end of the year and the instrument that we use in Scania is that we use stop days and use training days instead.

And that's a minor change, and that is what we think is needed and that is what we have decided so far. So from September onwards, we will start to take stop days when needed. And then, of course, this is something we evaluate every month when we look to the order intake versus the production needed towards which geographies, et cetera.

So that is something that might then have to change. But that's where we stand currently with Scania and MAN production, adjustments. That was the first question. The second question was on the rollout of the common base engine and you specifically asked about Navistar, yes. But I can cover it as I think this is a very important part of the Traton story.

So Scania is now approaching 60% of their volume, our volume on the CB1. Navistar really started ramping sales last year, but we started ramping production this year. And we are aiming to cover the 13-liter segment that is around about half of the total market in the U.S., the rest of the sales we will cover with the Cummins X15. And we have -- we're a bit underway, but we don't expect this year to come above 10% of the total sales, but somewhere around about 8% to 10%.

And then, of course, we hope that with good customer feedback that we already see from the first deliveries that we can continue to grow that towards also for us around about 50% of the sales in the Class 8 segment. At the same time, we intend to grow Navistar, as you know. I'm of the opinion that we could come back to market share well above 20%. And with that, that would mean that we predominantly grow with the Super driveline where we remain stable with the 15-liter segment and in the -- also in the smaller segments where we use other supplied engine from others suppliers.

So that's a bit about the engine strategy and then also mentioning MAN coming in, in 2025 with a D30 being their derivative of the CB1 adding volume and therefore, gaining cost with the supplier base on all the common components on not only the engine but also the gearbox, the after treatment, the control system and the rear axle. I stop there, Hampus.

[Ursula Querette, executive]

Then let's take the last question. I hope he's still there from Shaqeal Kirunda from Morgan Stanley.

[Shaqeal Kirunda, analyst]

Shaqeal from Morgan Stanley. Obviously, great result this quarter. Just a quick one for me. So how should we think about the second half margin for Scania, strong performance in H1. Strength in Brazil should continue. Europe remains under pressure. Does the Scania mix in Europe support margins? Or will it be impacted like MAN will?

[Ursula Querette, executive]

Christian, can you take that one?

[Christian Levin, executive]

Yes. I mean we're not guiding on margins, but we are pretty confident that we can continue to perform in a good way. Let's put it like that in Scania. The mix will be moved towards Latin America which, as I was into, in my previous answer, it's not a bad thing nowadays. We have good profit margins over there.

We're confident that we have an order book that carry us well into next year. We have an increased amount of super engines. I mentioned 60%, meaning we have a way to go to reach 100%, which is giving us really good price position. And then, of course, you have the market in Europe, and let's see what kind of headwind that is giving us. So that's a bit the dark cloud, but it's actually the only dark cloud I can see right now on the horizon.

[Ursula Querette, executive]

Then I would say this is concluding our event. Thank you, Christian and Michael, for explaining and discussing the Traton strategy and the financial results. Thank you, everyone, for joining us today. Our Capital Markets Day is our next important event on our financial calendar. It will take place in Munich on first of October.

We sent out the official invitations already, and we would appreciate if you could confirm your physical attendance as soon as possible. For those who are unable to join us in person, we will offer a live webcast during the event and the replay afterwards so that you know. Please reach out to me or Camilla or our respective teams and Investor Relations and Corporate Relations if you have further questions on this quarter. With that, we wish you all a nice remaining day. Goodbye.