Traton SE

XETRA:8TRA

Earnings Call Transcript 2022-Q4

[Lars Korinth, Head, IR]

Good morning, everyone. Welcome to the Virtual TRATON and Annual Results Conference 2023. Thank you for joining us today. Together with me are Christian Levin, our CEO; and Annette Danielski, our CFO. We will start with the presentation of the full year results 2022 and our outlook 2023, which we both have released this morning. After the presentation and a short break, we look forward to answering your questions.

Before we start, let me make you aware of the disclaimer, which you can see here, which, of course, is always the basis of our presentation. And if you have not done so already, you can now download all relevant documents on our website, traton.com/ir.

With that, I hand it over to Christian.

[Christian Levin, CEO]

Thanks a lot, Lars. And also from my side, a very good morning, and thanks, everyone, for joining in.

So today, we're summarizing 2022 in many ways, a very, very special year, full of challenges and to some extent, a year that you'd rather put behind you. But I would say that it took our super dedicated and focused team to attest. It really tested our flexibility and our entrepreneurial spirit. And I'd say that we managed to make very strong progress, especially in our strategy execution, but also our financial results. And let's have a look at the main results for 2022.

We took incoming orders to a level of 335,000 units despite having a very restrictive policy in accepting orders long into the future. Our deliveries, our unit sales were held back by supply chain bottlenecks. We've been talking about that in our Q1, Q2, Q3. But nevertheless, we managed first time ever to come above 300,000 sold vehicles, not least, thanks to the now fully integrated Navistar.

Both top line and bottom line then clearly improved. We did better volumes, but we also managed higher pricing, and we had a very strong underlying growing vehicle services business, which took finally our adjusted return on sales to a solid 5.1% for the full year. I think more importantly, we had a positive trend, especially throughout second half and we closed the year in Q4 at well above 6% and of course, more about that from Annette lately -- later from the COVID-19 and the subsequent shocks to the different economies around the world.

Bottlenecks continued throughout the whole year. They were especially severe in the first half. And then we saw gradual improvement, especially on the semiconductor situation throughout the second half.

Then there is the Ukraine war, which further exaggerated the headwinds for these already stressed supply chains hitting very vulnerable post COVID recovery and especially turned in on logistic, the global logistics systems.

In a way strangely, transport markets were less affected by this turmoil, maybe many of you would have expected them to be as safe as many other parts of the economy. But that's not what we have seen and what we see. Probably because there is a very high demand for renewal. The fleet is getting older and older also in the developed part of the world, but also because there is a good underlying transport demand.

We needed to implement broad-based price increases because we took on raw material and energy price increases. And we learned how to handle not only Latin America but in the rest of our system, historically high inflationary pressures. Of course, followed then by central banks taking action and increasing interest rates.

One additional comment to the year. Because of the war in Ukraine, we did announce also the disposal of the MAN and the Scania, both Sales and Financial Services businesses. In Russia and in the meantime, we also completely completed the sale of these Russian activities according to plan. And Annette will provide more information about that later on in today's conference.

Okay. Looking at the demand side. All our brands recorded a very strong underlying customer demand, as you can see on this picture. We had a good growth of deliveries, especially in the fourth quarter. And actually, we have a consequent increase all the quarters since quarter two of course, supported by setting headwinds in our supply chains.

We filled up the order book very well despite being, as I said before, quite restrictive in accepting orders beyond 12 months into the future meaning about what you can see on this picture is higher orders than delivery, hence, and further increased backlog and longer delivery times. That's, of course, negative for our customers, but it's, of course, giving some comfort for our financial results and our outlook of 2023 as our production for this year is more or less completely sold out.

So in these challenging times, we did manage to bring the TRATON GROUP forward and as I said, especially in terms of our strategy, our so-called TRATON Way Forward. And let me take a few highlights, starting with the electrification journey. We further expanded our offering, and we prepared even more introductions of new vehicles and services for the upcoming years. You all saw the MAN heavy eTruck that was displayed at last year's [indiscernible], four deliveries in 2024 with an impressing daily range up to 800 kilometers per charge. We are collecting orders from customers and demand is most promising.

Also, Scania expanded its already existing portfolio of BEVs, introducing a BEV truck that now cover all major applications within regional long haulage applications. 40-tonne trucks, which can travel up to 350 kilometers on one charge, which actually covers a big part of today's traditional European long-haulage market.

But also Volkswagen Truck & Bus presented, a world news, the 17-ton Volkswagen e-Delivery, which is the heaviest electric truck actually ever manufactured in the country of Brazil. And we saw increasing demand for electric bus solutions, especially for inner-city traffic and for school buses. We saw the IRA, the Inflation Reduction Act in the U.S. supporting electric school buses. And we saw especially European cities moving into electric buses where MAN did good business in many of the big capital such as Copenhagen and Oslo to mention a few. So our deliveries as a result and our orders continue to gain further momentum, and we did all in all, throughout 2022, deliver 1,740 full electric vehicles and got 2,366 orders.

One prerequisite and perhaps the most important prerequisite to continue the transition into electric vehicles is charging infrastructure. And to do our part of that transformation, we have founded together with our main competitors, Volvo and Daimler, the now named Milence joint venture. So this summer, we got the antitrust clearance from the EU and Milence kicked off its operation, starting working towards a rollout of Europe's first, hope will be first, public charging for heavy commercial vehicles along the main highways in Europe.

We got quickly a very experienced management team in place who will run this company and support our transportation to electric road transport. So it's a great start, but there is much more to be done in the area of infrastructure, and it's not only up to us. It's up to partners, both private and public, and it's certainly up to regulators to now support a fast transformation to complete CO2-neutral vehicle and transport.

Okay. So there are vehicles and they are electric and there are electric infrastructure in place, and that is with 100% green electricity. What is then the challenge for our industry to further decarbonize? Well, it's going to be all about the supply chain. And therefore, Scania, as the forerunner in 2022 took the key initiative to set up targets, ambitious targets to decarbonize also the supply chain.

And I'm very proud to say that we are taking sustainability to the next level. We're taking the lead in TRATON, we're taking the lead in the industry by saying that in 2030, our target is 100% green batteries, 100% green steel, 100% green aluminum and 100% green cast iron in our production.

Because at that point, emissions will then be back to what is in the vehicle production in the vehicle supply chain. And if you just take the batteries on a BEV, it will stand for more than 50% of the CO2 footprint. So this will support rural transformation within Scania as well as the whole TRATON GROUP towards more -- being a more sustainable company.

Another super important milestone is the introduction, the group-wide introduction of what we call the TRATON Modular System. So a common product platform for all the brands in the group. And the major milestones so far is, of course, the launch of what in Scania is called the Scania Super.

Scania being the first brand in the group to introduce this 13-liter Common Base Engine platform but including also a common gearbox, a common aftertreatment system software and rear axle gear. It gives an outstanding fuel efficiency, and we have already won several independent tests, I'd say the most prestigious being the 1000 Point test here in Germany, but also the Green Truck award for the sixth time in a row.

Production started up early 2022 in a very demanding environment with, I must say, unfortunately, several hiccups, but is now ramping up and is expected to accelerate throughout the first half and to be finalized during 2023. But followed in this same year by Navistar, who launched during June last year, and taking customer orders for deliveries during the second half of this year.

And I'm coming back to that a little bit later. So standardized components that is good, that creates scale, but to really achieve the combination of tailor-making with scale, you need to go to completely modularized system. And therefore, you need to introduce the three principles of modularization and you need there to have standardized interfaces.

You need well thought through performance steps and you need to apply to the principle, same-need identical solution. And that's what we have decided to do inside the TRATON GROUP, and we, of course, focus mostly on the future, meaning our battery electric vehicles, and our software architectures that will be based on this and that will be shared. But to support that, we also need to optimize and change our structure.

So we have already global central R&D unit, and we have a product management global central unit set up to define one road map for our products and services based on the unique customer needs from all our brands across the whole group. So we foster more collaboration, more simplification within the group and we take away waste, we take away friction and we take away unnecessary coordination, meaning that we will be more efficient in the allocation of our resources.

Lastly, in our strategy, we utilize the possibilities within digitalization and new business model to shape the future of transport and logistics ecosystems. And Here, I'm proud to say that three of our brands, Volkswagen Truck & Bus, Scania and MAN, all delivered self-driving truck solutions to customers in different stage of development, I would say, and across very different application areas, as you can see on this picture with a Brazilian harvester in a sugarcane field. These applications are all suitable for autonomous driving.

In Scania, we continue to work with Rio Tinto now in the iron ore mines in Australia and we have made lots of trials and reached some really good key milestones in 2022, where we can run complete with driver out with simulating load and conveying cycle environments in the mine. New milestones to be reached throughout this year in that project. So we continue to do field experience together with customer, we collect more data, we learn and we improve and this chapter, of course, has just about started.

Before I'm handing over to Annette, let me sum up this first part and this 2022. We, TRATON, proved our resilience and we delivered a robust financial performance in a most challenging business environment. We did record levels in both unit sales and in sales revenue. Our order books are well filled, and they are supported by continued strong customer demand for our vehicles and services. We made very important steps in the execution of our TRATON Way Forward strategy along all the four key pillars.

And in addition, we managed to complete the disposal of our business activities in Russia. And with this, Annette, the stage is yours.

[Annette Danielski, CFO]

Thank you, Christian, and a warm welcome from my side as well.

Looking back at 2022, the war in Ukraine has been dominating our business environment, but it is far more than that. It's a human disaster and I feel with the people in the Ukraine and their families. Two years into the pandemic, COVID was and is still part of our lives. Last year, we experienced a significant increase of prices for raw materials, components and energy.

We faced shortages in semiconductors and tires and plastic parts, buying harnesses and many more. Drivers were short in both inbound and outboard transportation. We saw strong demand but with bottlenecks in the supply chain, the production flows were interrupted with siting and long lead times.

We, as a global company managed all of this highly professional and we grew stronger together as one team. Together, we achieved a decent result with more than 300,000 units sold, sales revenue above €40 billion and an adjusted operating results of €2.1 billion, all new record levels for TRATON. Finally, we achieved an adjusted return on sales at a level of 5.1%.

Let us now have a look at our financial performance in the fourth quarter as well as the full year 2022 in more detail. Two indicators in our industry are unit sales and incoming orders which you can see on the left of this slide. Starting with the full year, incoming orders declined slightly by 7%, but they remained on a healthy level with a book-to-bill ratio of 1.1. In the final quarter, orders were lower year-on-year at 78,000 units. There are two drivers for this decline.

Navistar booked the retroactive adjustment of the full year order intake in Q4, and we continue to be restrictive in accepting orders as we are tightly managing the supply chain situation and the input costs. Still, the development of order intake is more driven by supply and the ability to produce and deliver later than by demand.

Our very high order backlog is already covering the vast majority of 2023 production. Our unit sales, which you can see in the right graph, were significantly up by 16% in the full year 2022. Importantly, we recorded improving volume in each quarter of the year.

This was supported by continued gradual easing of the supply chain shortages and improved production levels. Our global expansion was very successful. And as a result, in 2022, we sold more than 300,000 vehicles for the first time in TRATON history. Here, you can see our sales revenue development with a separate vehicle service business contribution. Sales revenue increased by nearly 1/3, both in fourth quarter as well as in the full year.

Top line growth has clearly exceed unit sales cost of 16% in Q4 and 12% in the full year, which are explained on the chart before. This was driven by gradually improved unit sales and strong pricing initiatives and supported by positive effects from exchange rate movements. In addition, sales revenue from Vehicle Service business again delivered double-digit percentage increases. As a result, and for the first time, the TRATON GROUP recorded a sales revenue of more than €40 billion in 2022. And with the dynamic quarterly revenue improvement throughout the year, we ended the year on a very positive note with €11.8 billion in Q4.

This strong performance is proof of the ability of TRATON to quickly react to the changes in environment. At the same time, the group's resilience improved further as the Vehicle Service business continued to gain more and more traction. Moving to our operating sites and profitability.

Most importantly, we recorded a very positive development since the second quarter. The adjusted operating result came at €724 million in the fourth quarter, a strong improvement compared to the final quarter of last year.

This corresponds to adjusted return on sales of 6.1%. The positive development was mainly driven by the higher deliveries and corresponding improvement in capacity utilization. In addition and importantly, with the successful execution of our pricing initiatives, we were able to compensate for significantly increased input costs. Both in the quarter as well as in the full year 2022. As a result, adjusted return on sales amounted to 5.1% for the full year.

We reached, as forecasted, the lower end of the projected range of 5% to 6%. Despite the significant challenges in our environment, we were able to almost reach return on sales of the prior year. Again, this result underpins the improved robustness of the TRATON GROUP. Let us have a look at the brand's performance with specific focus on the fourth quarter. Scania Vehicle & Service benefited from higher volumes, price and mix effects and significant growth in Vehicle Service business.

At an adjusted return on sales of 10.5%, Scania returned to a double-digit margin. Nevertheless, margin was still held back by selected headwinds in the supply chain, tight logistic capacity and material price inflation. The adjusted return on sales of MAN improved to 1.8%. This was driven by better fixed cost absorption through higher deliveries and growth in the Vehicle Service business as well as price effects. The significant cost increases for material and energy prevented a stronger result.

Navistar showed a very compelling performance with return on sales of 5.9% despite continued supply chain constraints. The development was mainly driven by increased unit sales, leading to better production utilization as well as strong implementation of pricing initiatives. Volkswagen Truck & Bus achieved a return on sales of 9.3%. Again, improved pricing was a major driver. Production remained on a high level in the fourth quarter whereas delivery of about 4,000 units were shifted to Q1 2023 to manage the transition of the new emission regulation.

Finally, the Financial Service business recorded a strong growth, mainly on the back of the expansion of its portfolio. Higher funding costs had a counteracting effect on the margin, which climbed to 23.7% against a very high prior year basis. Let us have a look at the earnings after tax and the earnings per share in the full year. Starting point of the earnings page on the left is the adjusted operating result of €2.1 billion. The adjustments were mainly related to the war in Ukraine and especially the disposal of business activity in Russia.

Please note that we will record and adjust for a special effect of minus €108 million in the first quarter 2023. This relates to the sale of the Scania Financial Service business in Russia which was closed on January 17 after the year-end. The corresponding operating result came at €1.6 billion was €1.2 billion higher than in the prior year. The earnings per share more than doubled to €2.28, up from €0.91 in the previous year. Based on this good performance in a challenging year, the Executive Board and the Supervisory Board of TRATON will propose a dividend payout of €0.70 per share at the annual January meeting in June.

This corresponds to a payout ratio of close to 31% of our earnings after tax. This leads me to our net cash flow development. TRATON operations achieved a strong net cash flow of more than €700 million in the final quarter of the year. This brings the full year to minus €625 million. Excluding the effect from Scania's payment related to the EU antitrust proceedings, net cash flow amounted to €312 million.

The guidance range of €700 million to €1 billion was not reached. The main driver for this deviation were working capital movements due to supply chain headwinds and shortages and logistic capacity, which led to higher-than-expected inventory levels, the changeover to the new emissions done at in Brazil, and higher receivables due to increased deliveries in the final quarter. Investments are slightly higher year-on-year at around €2 billion.

Given the constraints in the supply chain, we increased the level of inventories to ensure a more constant production flow in our plants and to deliver vehicle to our customers as fast as possible. In Brazil, we increased our stock levels of finished vehicles in order to cope with the changeover to the new emission standard.

By doing so, we were able to retrofit the production and enable deliveries to our dealers in the first quarter 2023. With the implementation of these measures, we are well prepared for a good start into the year 2023 with a clear focus of further optimized working capital and to reduce our net debt position. This brings me to the next page of our presentation. As you can see, net debt of duration operation increased to nearly €3.6 billion by the year-end 2022. Key drivers for this development was a settlement of legal proceedings and working capital movements.

Adding the €4.2 billion under corporate items, brings a total net debt in our industrial business to a level of €7.7 billion. Please note that the net debt figure is also impacted by cut-off date effects related to the sale of Financial Service activity of Scania in Russia. Net debt by year-end 2022 included a negative impact of €670 million for the Russian entities. The related positive effect from the purchase price of €400 million was booked in January 2023 following the closing of the deal. To wrap it up, the trading group managed the challenges in this special year very well and improved its vastness based on the expanded global footprint.

We are well prepared for 2023 with a full order book, improving production in our plants and with full focus on delivery vehicles to our customers and managing our working capital. We are strongly committed to deliver, and we will.

Now let me hand back to Christian to present you the strategic focus areas for 2023.

[Christian Levin, CEO]

Yes. Thank you, Annette.

And I'd say that our focus areas stay stable for 2023 and beyond. The top priority for the TRATON team is crystal clear. we need to execute and we need to deliver. And doing so, we need to show sizable steps towards achieving our strategic financial targets. So the team and myself, we believe, more than ever, that we are now heading in the right direction, and we have the right strategic priorities laid out.

Of course, you always need to adapt. We have learned the hard way throughout the last couple of years to changes in the environment, but our strategy remains unchanged, and the priorities are crystal clear. So let me take you into all of our four strategic pillars on the upcoming slide.

And starting with the first one, which is to be a responsible company, and the most important part of that is, of course, to decarbonize transport. And as I said earlier, Scania starts the deliveries of the new 40-ton eTruck range for regional-haulage to customers this year. This is a huge step on the way to come to zero emission vehicles.

We are expecting electrified unit sales with this to strongly increase as we are now finally addressing what is the main segment of our total sales, not only in Europe, but also outside. In MAN, we are preparing the Munich plant to start the manufacturing of the electric heavy-duty truck at the beginning of next year, 2024.

Lots of questions are coming on batteries, supply of batteries and that is, of course, a strategic part of the shift out battery electric vehicles. We have come to the conclusion that we will source, we will source cells from external partners, partners we will work very close with. But our battery models and our battery packs, they will be produced in-house, and they will be produced close to the main assembly lines. And because of that, we will, in 2023, start up production in the already announced Scania plant that is in the final stage of construction right now in Södertälje, and just next to the Swedish and assembly line.

Simultaneously, we have started up construction of a large series battery plant at MAN in Nuremberg which will commence this year, but intended to produce battery packs as from 2025. Total capacity above 100,000 packs per year. This plus intensifying activities in the ecosystem, including the creation of Milence, the charging infrastructure will take the first high-performance battery electric vehicles into operation and hopefully, with a rapid ramp up. The second pillar is creating value. Value creation needs to improve in the TRATON GROUP and a key part of that is executing the MAN's realignment program.

And it needs to be this time a sustainable change. And 2023, we're all well aware, we'll be a decisive year when we need to show and MAN needs to show the world that it is emerging stronger than ever and that the measures that have been put in over the last two years make a significant contribution to MAN's bottom line, but also the TRATON GROUP's financial performance.

And it's looking good. MAN's transformation, however, invisible on the 2022 result outcome, as Annette just showed, is visible in many other ways. And you need to remember that MAN had a particularly tough year on the supply chain side and on the volume side as a consequence last year.

But we can see development on all three building blocks in this realignment. We see a leveraging on pricing on volumes we see a reduced impact from material costs, and most importantly, we see a new structure emerging and emerging according to plan. So throughout 2023, a key structural initiative will start to materialize and they will make a substantial contribution to the bottom line result.

Perhaps the biggest one is the sale of the Steyr site in Austria and the subsequent ramp down of production and shift of capacity which is gradually happening as we speak and coming to an end by the summer holidays this year. And by that, we should really start to see a full impact on the P&L of MAN.

By that, and further shifting our production capacity over to Krakow in Poland to be expected to be finalized in the end of the fourth quarter, we will see 2/3 of MAN's truck assembly to be located in best-cost countries.

Further on, we take, unfortunately, personnel measures as well in MAN, they are being executed this time, and they are well on track. And by that, we continue to create a more flexible company, a company prepared for changes and a company that can take on changes in the environment and in its market. And by continuing to work in MAN, the team has also decided themselves to start the restructuring of the bus operation given that they don't see a sustainable profitability in the current setup, but more about that in the upcoming quarters. Third pillar, TRATON Accelerated.

So taking digitalization, new business models into what could be the best to our customers. And one thing I want to highlight here is the creation of our group-wide Financial Services company. We have been prepared for almost a year now, and we are almost ready for launch. We have most of the approvals from the regulatory bodies that we need, and we have almost all the decisions needed to start operations. And that's the expectations for this year.

It's, again, execution. It's to go live and it's to stepwise ramp up back office and front office capabilities for all our four brands with all the Financial Services, all their products so that they can be brought to the benefit of all customers of the group. As you know, we use Scania's highly successful Financial Services operations as a backbone, as a foundation for this creation and create separate front office for each of the brands.

In Navistar, their Financial Services expected to start up during the beginning of the fourth quarter this year, whereas for MAN and Volkswagen Truck & Bus, it will be a gradual takeover of market by market from -- that is currently being served by Volkswagen Financial Services. And we will, of course, report on this throughout the remainder of this year.

Moving on to what is perhaps the most important pillar in the execution part of the strategy of TRATON to roll out the common product platform, the TRATON Modular System. And the next visible step of that strategy -- that journey is the launch of the International S13, that is the name that Navistar has given the engine and driveline platform in the International heavy truck range. It's based on the CBE where we already have a highly competitive integrated powertrain and it will be -- start to deliver to customers in the second half of this year.

And it's impressing because together with an updated aerodynamic package, -- this powertrain will offer up to 15%, 1-5 percent, improved fuel efficiency, which is a true game changer in the marketplace for Navistar. But not only the fuel efficiency is important, also for us that we can finally offer to the customers of Navistar an integrated in-house service offering based on captive components.

Now feedback from customers is extremely positive. And I'm very confident that we will see a very good pickup rate increasing over the years to come. And this ramp-up of this powertrain will first be supported out of Europe from Scania, but also later on from Latin America, where Scania is currently introducing the same driveline, but will gradually evolve into fully independent production at an upgraded Huntsville site in our Navistar plant there in Alabama.

And to support the rollout of this TRATON Modular System, we needed to implement a new steering philosophy and a new organizational structure. And I already talked today about our global product management function that is headed by Catharina Modahl Nilsson but also about our global R&D organization that is handled by Anders Williamsson.

But today, I'm very, very glad to announce that we are also launching two new global functions, the one for purchasing and the one for production. And we have appointed Murat Aksel, who is currently a Board member for Purchasing at MAN to assume the group-wide responsibility for Purchasing. And we are appointing Stefan Palmgren as from today to be responsible not only for production at Navistar, but also to take the lead in the entire production network of the TRATON GROUP.

Now this new steering and this new structure is necessary in order to strengthen the collaboration and the introduction of the modular system to have a coordinated system, a coordinated governance instead of having waste, friction and coordination. So all of the industrial functions, all of the industrial operations will thus be represented in an extended TRATON Truck Board.

But of course, the brands remain the backbone of the group's business performance. And the intersection between the brands and the overall industrial operation is the foundation for our sustainable value creation and our scale effects going forward. But moving to a topic that is also very, very close to my heart. It is the company culture. And I'm convinced that the company's culture is absolutely key to the business success of the same company.

So we decided to review our corporate values in the TRATON GROUP. We have a new family member with Navistar joining in and we need to accelerate collaboration and execution throughout the entire group. So this review has been completed. And I'm very proud today to introduce our new corporate values that will be rolled out as from today with the top management meeting later this afternoon across the entire TRATON universe. And these are customer first, respect, team spirit, responsibility and elimination of waste.

These values will be our North Star and orientation for collaboration between our employees and how we act as a company in our markets and in our environment. Now values, they always work together one by one, they don't make much sense and they are completely depending on each other, and they also complement the TRATON purpose, transforming transportation together for a sustainable world. That takes me into the outlook and our main assumptions for the upcoming year. As the war in Ukraine unfortunately continues, it is still expected that global economies will grow, although at a slower pace. Prices for key raw materials have declined from their peaks, but uncertainty is high.

And we expect inflationary pressures to persist with interest rate likely to further rise. We have input cost inflation that will continue. We will see incremental cost pressure now coming from wage increases and from energy probably rather than what we have had up to now based on raw material. And our supply chains are expected to continue to ease gradually but we will unfortunately still see selected bottlenecks and lack of logistic capacity, making our life a continued challenge.

We expect customer demand though in most global markets to be resilient to these economic fluctuations because there is a high need for replacement, the fleet age is growing in almost all of our markets, and we continue to see a strong underlying demand for logistics services and hence, transport capacity.

That brings me in to the outlook for our key regions of the truck markets. In 2023, our truck markets are expected to continue to be robust with a different development in the key regions. Most forecast for truck markets in Europe and in North America vary between a minus 5% to plus 10%, a slight expansion at the midpoint of these ranges. Where South America, these markets will experience some slowdown triggered by the introduction of the new emission standard CONAMA P8 in Brazil.

And our current estimates are for a minus 15% up to a flattish development. And we need not to forget, there is a very high degree of uncertainty in all of our market. And we need as a group to be prepared to quickly react to any change in these forecasts.

And with that, I hand over to Annette.

[Annette Danielski, CFO]

Thank you, Christian.

And now on to the full year outlook of the TRATON GROUP. As you can see, we changed the methodology and now provide the forecast ranges for all key KPIs to enhance understanding and tracking of our development. Our focus for this year is clear. We strive to achieve a significant improvement in our performance.

We are looking on the fiscal year 2023 with optimism, and this is reflected in our financial forecast. Based on the high order backlog and improved supply chains, we anticipate a substantial increase in truck unit sales. By contrast, bus unit sales are expected to moderately decline. In total, we anticipate both unit sales and sales revenue to grow by 5% to 15%. Further, we expect adjusted operating return on sales in the range of 6% to 7%, a significant improvement compared to the 5.1% recorded in 2022.

We have our sights set firmly on our target return of 9%, and intend to take a crucial step towards our target this year. This is strongly supported by the strategic initiatives we presented to you earlier. Finally, we expect a net cash flow for trade and operations in the range between €1.3 billion and €1.8 billion.

Back to you, Christian, for your final remarks.

[Christian Levin, CEO]

Great. Thank you, Annette.

So before we move into the Q&A session, let me summarize the key takeaways from today's conference. In a highly challenging environment, TRATON provided its resilience and delivered a robust financial performance. We recorded a high level of incoming orders, we strongly improved unit sales and increased sales revenue to record levels, backed by a gradually improving supply chain.

There is good momentum in sales and profitability is positive despite being held back by supply chain bottlenecks and relatively low production utilization. So our focus for 2023 is very clear. We aim for a significant improvement in our performance and to take crucial steps towards our target return. So in 2022, our strategy and our joining our forces to shape the transition to sustainable transportation entered into a new phase. And 2023 will be the year to enforce execution of our TRATON Way Forward and we will deliver.

Thank you.

[Lars Korinth, Head, IR]

Thank you, Christian. We will have a short break before we will enter the Q&A session. So stay tuned.

[Lars Korinth, Head, IR]

All right. Hello, everyone, and welcome back to the Q&A session, which we will now enter. [Operator Instructions] And with that, now let us start the Q&A and take the first question and which comes from Klas Bergelind from Citi. Klas the stage is yours.

[Klas Bergelind, Citi]

Thank you Lars, hi Chris and Annette, Klas at Citi. The first one I had is on the price increase that you're pushing through. I think it's a pretty big carryover effect on pricing into the first half, but you're guiding unit sales and revenues at the same pace. Is there a negative mix impact that you have baked in into that ASP number? Is it slower service growth versus higher unit sales as the bottlenecks ease? I'm trying to understand what kind of pure price assumption, Christian, that as part of your guide. I'll start there.

[Christian Levin, CEO]

Thanks, Klas. I'll shoot that question directly over to Annette who is a master of the guidance.

[Annette Danielski, CFO]

Okay so thank you for this, okay thank you Klas. Yes, you are right, it we will have impact from the pricing 2022 and 2023. So we will see there also the full year effect, but we also have then a different mix a little bit. And this is the main topic. And also the pace of the service business, we'll continue, but it will be not on the high levels that we saw in 2022, because the fleets will be renewed and new trucks came in and this is why we are forecasting this increase the same as a sales increase.

[Christian Levin, CEO]

Thanks, Annette, great. And if I add there in, Klas, a little bit from the customer end, there is a little -- maybe surprisingly a little resistance now from customers as these price increases have been rather hefty, both on the new vehicle side and on the part side and service side, and we bundle that into a monthly installment. So discussing with the customer didn't buy vehicles for a year or two, it starts to be a little bit cumbersome.

But so far, we're coming through in the main markets. But of course, we need to - we need to somewhere expect that this cannot continue. So, we've chosen to be rather conservative on this. And therefore, we're guiding as we are. But to be honest, so far, in the first couple of months, we are getting continued price increases through and we compensate more than well for the raw material and energy cost increases. I hope that was enough to…

[Klas Bergelind, Citi]

No, that makes sense. Yes that makes sense, but there is some sort of carryover, right, into the first half on pricing?

[Annette Danielski, CFO]

Yes.

[Christian Levin, CEO]

Of course, there is.

[Klas Bergelind, Citi]

Yes, yes okay. My second and final one is on the deliveries. When we look at the VW delivery report, obviously, Scania ended over 10,000 in December, but only 5,000 for January. I guess this is your seasonality after a strong year-end. But it's quite a big difference and also relative to your quite bullish unit sales guide for the year?

I know its early days, right? But how should we think about the short-term margin trajectory if Scania starts the year at a slower pace? Will we see sort of a weaker margin in the first quarter versus fourth before we ramp up on the super through the year, Christian?

[Christian Levin, CEO]

Yes, I'm not going to guide you on the margin in the Q1, as you know, but it's a good question and it has a couple of underlying reasons. So yes, of course, we were rather pushy in the end of the Q4. We were disappointed. We didn't get volume through. We had all the problems in the world with the supply chain and as from November, we really came together and started to deliver.

So there was some kind of a catch-up effect, and we also did a good job emptying our yards. So we basically had nothing on the industrial yards, and we had quite empty yards also at dealerships, the captive dealerships. So that explains the kind of overshoot in December. But we are planning 2023 to be above 100,000 trucks and to be there, of course, we need to be in the range of 8,000 to 10,000 per month.

January is substantially lower. I would give you two main reasons for that. The first is that we stopped completely our Brazilian factory in Sao Paulo. So we needed also there to rebuild to take in the Scania Super which is now, and by the way, have had a very, very good start as opposed to Europe where we had a lot of trouble. But from 1st of February, we are up and running fully with the introduction of the Super in Brazil.

So in January, you lost that 120 per day in production capacity. The other is not production actually we produced almost according to plan. We lost 5% in January in Europe. But you know our system. So, we emptied the yards of the dealers in Q4, meaning that we fill them up now in January, and that will continue throughout February.

But yes, this is kind of an overswing. I expect the system to stabilize in Q2 perhaps where we will see a balance between really good factory output and also really good deliveries to end customers from the captive dealer network. So these are the two main reasons why January was low in terms of volumes.

We see other good things. We see margins. As you said, there is a good realization on pricing. We see service volumes continuing to grow at a very good pace.

So I'm not worried for Q1 to tell you the truth.

[Klas Bergelind, Citi]

All right thank you.

[Christian Levin, CEO]

Thanks Klas.

[Lars Korinth, Head, IR]

Thank you, Klas. And the next question comes from the line of Michael Jacks from Bank of America. Michael, good morning.

[Michael Jacks, Bank of America Merrill Lynch]

Thank you Lars, and good morning Christian and Annette, congrats on a strong finish to the year. My first question is just on the cash flow guidance. How much of the working capital release are you factoring each of the full year guidance, that's my first question? And then the second question is just on the MAN structural measures?

Are you able to perhaps quantify for us the level of improvement expected in the second half from the transfer of the Steyr plant and from personnel measures? And then I guess also on the expected uplift from shifting production to Krakow, which I suspect will be more accretive for 2024? Thank you.

[Annette Danielski, CFO]

So for the cash flow guidance, it does not include a positive impact from working capital because we have full order books for the year 2023. And so, we also believe at the year-end, we will have higher inventory. And those are the supply chain shortages that we experienced. So, we have to have a little bit higher inventory to run the plant on a smooth production level. I think it's more important for us on this one.

The improvement mainly in the cash flow comes really from our improvement in the operating result. And also - as a capital expenditure and R&D, you saw the increase also burdened our cash flow, but we still have a good guidance with a midpoint of 70% cash conversion rate, and I think this is okay. You want to add?

[Christian Levin, CEO]

Yes, no - I think you covered it well on the cash side. Michael, you also asked about the MAN and we are - we spent me and Annette, we spent a day with MAN yesterday actually on - the bigger management team to kind of pressure test where are we, - and are we on plan? And that this is, of course, a difficult industrial exercise that we're into, including the HR measures that are not to be seen, especially not in Germany.

But we are well on track, and we feel confident that we can, thanks to these measures be up and running on the 7% return on sales level in MAN that we have set out to do on our more strategic path to take them to 8%. So we're targeting 7% for the year.

[Michael Jacks, Bank of America Merrill Lynch]

Okay understood. And I would imagine that there will be quite a big difference between the first half and the second half performance?

[Christian Levin, CEO]

Yes, you will see a gradual increase throughout the year and especially as you were into there with the Steyr closure, that will quite dramatically reduce the cost per vehicle. But we are expecting to see good results already from Q1 coming out of MAN. I mean, there has, been many other measures taken into - action already throughout 2021 and 2022.

And the main reason they did not come through last year was the lack of volume. So - and volumes are looking good. We're seeing a more stable production from MAN and the ramp-up of the plant in Krakow is going actually according to plan this year, so touchwood.

[Michael Jacks, Bank of America Merrill Lynch]

Okay very good, thank you.

[Christian Levin, CEO]

Thanks Michael.

[Annette Danielski, CFO]

Thanks.

[Lars Korinth, Head, IR]

Thanks Michael. We have a next question from Nancy Ni from Goldman Sachs in line. Nancy, good morning.

[Nancy Ni, Goldman Sachs]

Hi, good morning, and thank you Lars for my question. I take the one on your EV battery investments. I thought the comment will be interesting. And some of your peers have actually decided to go sort of direct into cell manufacturing. So I'm just kind of wondering why and you will not consider it the cell core and sort of who will you supply from -- and who you will get your supply from? And also, just in general, on your EV sort of it's hard to believe is in the same line as your ICEs.

[Christian Levin, CEO]

Great. Good question, Nancy. Yes. So we classify all components that are in our vehicles in three categories. Either we classify them as core or strategic or as nonstrategic. And components that are core, we want to both develop and manufacture ourselves in-house. If there are strategic, we want to develop or codevelop and we want to produce or co-produce with suppliers or partners.

And when it comes to the battery cell, it is, of course, important for the performance of the vehicle. It is not as important as the software which the platform is running on. So we have taken the decision to classify this as strategic, not core.

And hence, it's perfectly fine for us to supply the cells as such from a partner. What is important here is it's not traditional supply customer relationship, but it's really a partnership where we have, on the cell side, on the cell chemistry side, we have lots of internal research. So we really codevelop with our partners. And you know what we are currently in Scania, working with prominently with Northvolt, where MAN working with CATL. So we are developing this together.

And we think that along the road, there will be not initially, but there will be sufficient battery cell capacity. It will, of course, be a bumpy road. But throughout that period, we think there are plenty of chances to do really good collaborations with partners. So therefore, we come to this conclusion. I don't know if you want to add Annette, on the battery cell strategy.

No? Then I will answer your second part of your question was, how do we manage to manufacture? So both in Södertälje, right now, actually, we are integrating the battery electric vehicles mixed in on the main assembly chain with the combustion and vehicles, and we will do the same when we rebuild the MAN plant for the launch in end of '24 of the -- deliveries in end of '24. So with our modularized approach, we do not need to build a completely new assembly line or a completely new plant. We managed to do this in an integrated way.

It is challenging. It is difficult because we talk about very heavy stuff. These battery packs are up to five, six tonnes. But so we need to rebuild the lines, but done that, we can work completely mixed as we do today, by the way, between two axles, three axles, four axles, five axles; small caps, big caps, high caps, low caps; small engines, V8. So I think we're in the industry quite good at handling these types of challenges. But that's how we have planned to do it in TRATON. I hope that answered your questions, Nancy.

[Nancy Ni, Goldman Sachs]

No, that was great. Thank you. I just maybe I had a follow-up on that then sort of given your investments into modular impact production then, do you think you have the required balance sheet flexibility?

[Annette Danielski, CFO]

We have to have. Yes, this is one of our strategic priorities to fund this way the battery vehicles. And as you follow us in the last announcement, we announced EUR 2.6 billion that we want to spend for battery electric vehicle in five years. And this is where we prioritize how we spend the money. And as Christian explained, we really structured very well how we want to spend it and allocate it to the right way and battery electric is one of our priorities in TRATON.

[Christian Levin, CEO]

Yes, that's where we probably need to invest more, whereas, of course, in other technology areas, we have scaled back. So that's part of the transformation.

[Nancy Ni, Goldman Sachs]

Thank you very much.

[Lars Korinth, Head, IR]

Thank you. Next line is Hampus. Hampus Engellau from Handelsbanken. Good morning.

[Hampus Engellau, Handelsbanken]

Thank you very much. Two questions from me. Could you just maybe clarify on the introduction of the commonality and the modular system between the brands? I assume that you're going for using the same platform, same architecture -- electrical architecture, gearboxes and of course, the common engine that we introduced. Will this be parallel to existing ICE products? And on the battery electric, will that move into the Common platform, probably be when you launched the electric platform, how should we think about that?

[Christian Levin, CEO]

Yes. Great. Great question, Hampus, and we have, of course, struggled ourselves internally how to do this. We also suffer from some bad decisions of the past, where we decided not to go common on some core components. So the way you should think about it is really to become fully modular, we need to have common chassis and we need to have common electrical architecture and software because these two things are the backbones of the vehicles.

That's where you can start to talk about standardized interfaces. On the electric side, including software, we have a very solid plan, and that plan is independent of whether it's ICE vehicles or battery electric vehicles.

So that plan is running for all the four brands independently. It will, of course, take some time. There are legal requirements that has rather big influence on this plan, such as the cybersecurity, the global cybersecurity, legal -- the international law actually coming into our market.

So this is running in complete parallel. Then you have the drivelines. The driveline is the other big chunk of the drivelines are, of course, depending on whether we talk ICE. We're moving over to the 13-liter Common platform. On the electric side, we will go Common from the very start.

The big challenge is the chassis. And here, we have, of course, struggled the most that's come up with the strategy, how do we go common on the chassis as quickly as possible because every integration is kind of waste of money, even if the component is developed by the same team and using the same suppliers.

And we have come to the conclusion that we need to move towards common chassis as well and we will end up with two chassis families in the group. I cannot give you the exact time plan of that. That is the work of Catharina, Anders and their teams, and they're working intensively on this right now, but the plan is to shift over before the market is shifting completely over to battery electric, which will probably happen given the proposed legislation from EU in the time frame up to 2040.

So accelerate this. It will be a bumpy road. It will cost some money, but we think this is the fastest way to come to a really high-performing company. I hope that answered your question, Hampus.

[Hampus Engellau, Handelsbanken]

Absolutely. Can I do more on the second question on - as the second question on the outlook. How should we think is the range you're providing for 5% to 15% on units. Is the 5% like just you are executing on what you have in the backlog? Or how should we think about that? And what risk do you see in the backlog given that, if I read you right, Christian, on the call here that it's almost 10, 12 months, we're looking at in terms of backlog?

[Annette Danielski, CFO]

And I say we presented the outlook on the market. So as we look at today to the markets in North America and Europe will be little bit increase, not a lot. So this is why we range -- put the range together for the market forecast. If you follow this, what we see, it's a 5%, maybe 10%. But then we have the order backlog what we could not deliver last year due to the supply chain constraints and order book is full and it's confirmed.

So we believe it's a mix of both. As said, the markets slightly increased, are stable and that we deliver what we missed last year to our customer. This is how we should read the outlook and Christian put a little bit more attention on the list, what he sees.

[Christian Levin, CEO]

I mean it's also a very relevant question. There's always risk in an order book, and we learned a very hard way back with the financial crisis in 2009, where the -- literally the order book just managed in this period. As Annette said, the order book today is more stable, first, because we have the end customer, always signed. There is a written contract. There are penalties if you cancel and it's all financed.

So it's a solid order book. Of course, that doesn't stop the customer from canceling if that customer does not have a transport assignment. And looking to the outlook that is shared in the industry, North America looks very solid, so we don't expect any cancellations from there. Europe solid. And I would say the same, maybe with one or the other market exception.

Where there is, of course, risk is in Latin America where not only you have the new emission legislation that made the price increases even more hefty to customers, but also the political instability. What happened after Lula's taking office and the Bolsonaro support storming governmental buildings, that was not good for the investment appetite in Brazil.

And you also have a not perfectly stable situation, if I phrase it like that, in Chile, in Argentina as usual, but also in Peru. So some of our big markets there are with a little bit higher risk. And of course, in that type of environment, an order book is not worth so much despite the stability that we see.

So it's exactly like an Annette says, it is difficult to forecast. We need to plan for going with full production, finally utilize it the way we have not been able in the last two years. But we need also to be prepared to put the foot on the brakes actually in all our markets areas, but especially in Latin America.

[Hampus Engellau, Handelsbanken]

Thank you.

[Lars Korinth, Head, IR]

And we will take the next question from Himanshu Agarwal from Jefferies. Himanshu, good morning.

[Himanshu Agarwal, Jefferies]

Hi. Thanks Lars. Hi Christian and Annette. Himanshu from Jefferies. Thanks for taking my questions. The first one is on the pricing and supply chain constraints. I see you've mentioned that your receiving some resistance from your customers in terms of price increases. And also, you talked about supply chain constraints. And I think that's true for most of the European OEMs.

But when we listen to your U.S. peer, they are still quite aggressive on pricing as well as they say, the supply chain constraints are largely behind them now. So why such a stark difference between OEMs? And has it got something to do with the region -- regional exposure? Yes. And then I have a second one.

[Christian Levin, CEO]

Okay. I can start, Annette you can fill in. And of course, I can't answer for the others in North America, for instance. But what I tried to say on the first question here today when it comes to the negotiations with customers, I say that we are still coming through with price increases, and the price increases continue to be applied. So we continue to offset and we try to stay ahead of the inflation curve, so to say, with the pricing curve.

But we are expecting that there is a point where this will not happen anymore. Customers do also follow the raw material price development, for instance. And what also happens also in the U.S., but more so in Europe is that freight rates are stabilizing. So it's harder for our customers to pass on price increases to their customers. So I -- we are coming through with the price increases.

We are fencing off inflation. We see that continuing but we are expecting at some point that this cannot continue forever. And we are expecting that to happen before in Latin America than in Europe. We are expecting that happens before in Europe compared to the U.S. But we are expecting that at some point to happen.

But up until then, we are going to be bullish. We're just going to keep trying. As long as our order book is up to 12, 13 months, why should we not increase prices? So I think that's the message I would like to say. I don't know, Annette, would you like to complement that picture?

[Annette Danielski, CFO]

So mainly, what is our aim? Our aim is really to compensate for our higher input cost. Yes. And this where we were able in 2022, and we want to be also able in 2023. But as we also follow, the commodity prices came down a little bit.

So we are not at the peak levels that we are in the third quarter. So we see also that, that gets more moderated. So why we should over price. So we want to balance this also for our customers, and this is our main aim.

And then you should keep in mind we have coming -- our colleagues here at Scania with a new Super with a new CPE, where we have a new pricing to international asserting comes in place in the second half in the year, we come with a new product in Brazil, the market is difficult, but we come with a new product there with a new engine in.

So we have also pricing opportunities here that -- taking place, and we will see and also we believe that this is what we have to balance. So the main really, for me, as finance is that we balance the input cost increase with our prices, and this we're still able and react positive to the request from our customers. And I think this is so important, and you pointed it already out and I think this is what we...

[Christian Levin, CEO]

It was good with completing with the value part, if we -- if a customer in the U.S. sees a 15% fuel reduction, of course, there is pricing power behind that for the new driveline. So that is kind of coming on top. Okay. You had a follow-up question, Himanshu?

[Himanshu Agarwal, Jefferies]

Yes. And just on the supply chain constraints, are you seeing any differences regionally? Or -- and are they getting better sequentially? And at what level are you in terms of the production?

[Christian Levin, CEO]

Yes. It seems to be a little bit tougher in the U.S. than in Europe. In Latin America, it has not been such a big challenge. Of course, part of that system we take from Europe, so they have been hit in the Scania side, especially a little bit Volkswagen for MAN components also from Europe.

But it is easening all over, actually. And it's not just one sector. It was only semiconductors for a period. Now it has really been a little bit of everything. And I think many of our suppliers, and they are -- many of them are global, they run on really, really high capacity today.

And that is a little bit scary from our point of view, as we are not yet as an industry back to the peak levels before COVID. And as we see a growing demand, and we have good order books, we, of course, expect our suppliers to continue to invest to be able to keep up with further increases.

So I think it's a very difficult market to read because you have this and then you have the kind of regionalization that is very counterproductive, that it's getting more difficult, more expensive, more unpredictable to ship components over the globe, which is also, in a way, then both making it more difficult to predict and plan, but it's also making it slightly more expensive.

So it's really not a world in order that we are handling. And I think the procurement and the logistics teams are doing a fantastic job to try to offset this, the best they can. And in the last quarter, they were very, very successful. I hope that answered your question on the supply chain.

[Annette Danielski, CFO]

Christian, maybe to add. I explained before, our main target this year is really to have stable production levels. So we also -- as we explained, we increased the working capital a little bit to secure that the production can run smooth and we get the product out. I think this we learned in the last year very well with the supply chain shortages. And this is now what we are doing.

And so we really think that it will easily -- gradually ease away during the quarter. They're getting better. We will stop for using parts still a day or two, but we will not stand hopefully for weeks or we have really a lot of problems. And this is so we learned about this and take the right measures to be more smooth production on a higher level in 2023. And this is the aim we have together.

[Christian Levin, CEO]

Yes. No, it's good to bring that happen. One illustration of that could be the cable harness problem we had with being supplied out of Ukraine where we, of course, continue to be supplied out to Ukraine, and we see heroic partners working there in that environment. But for -- not to be hit again, we have to build up capacity outside of Ukraine as a fallback. And of course, that fallback capacity somewhere costs money.

It costs capital and it has cost. So that is an example of what you're saying Annette. So that's also why we -- on the working capital side, we need to be careful with our expectations because it's more important to make the production system run now and really get good cost coverage for every product we manufacture.

[Himanshu Agarwal, Jefferies]

Thank you.

[Lars Korinth, Head, IR]

All right. We have about 11, 12 minutes to go in the Q&A, and we have six analysts in the line. So I would like to ask you without being -- I don't want to be rude...

[Christian Levin, CEO]

You're talking to us now.

[Lars Korinth, Head, IR]

To restrict maybe to one for the moment. So the next question will come from Miguel Borrega from BNP Paribas. Miguel?

[Miguel Borrega, BNP Paribas Exane]

Hi, good morning, everyone. Thanks for taking my questions. So the first one on the realignment of MAN. It seems there's a lot of changes in 2023. So just wanted an update on the operational side of things. So first on, is the plant in Austria already sold? And if so, what would be the financial impact of that?

And then start-up production in Krakow in Q4, should we expect any changes in production from the transition? And then lastly, personnel changes on track, what would be the impact of the restructuring, the headcount reduction in Austria? Can you also quantify maybe a follow-up to a previous question, the total cost saving of this whole transition? I think I heard you, Christian, mentioning a 7% margin at some point in the Q&A. I'm not sure if that was H2 2023 or something else?

[Annette Danielski, CFO]

So Miguel, I would like to start. So we sold the plant in Steyr last year already, yes. But we still have a contract that they deliver us at -- until the summer of this year, 2023, and this is the main driver. Then the contract runs out. And we move a lot of the production to Krakow.

So we come to a better cost position out of this best-cost country. And this impact, we will see starting the second half of 2023, and the full impact of the shift of the production to Krakow is that we have now closed 60%, 65% out of the production MAN at Krakow will really be shown in 2024. So we have an impact already this year, but the full impact in 2024. And so the profit for the sale of Steyr, we took already in 2022. Yes, it was 2022 -- sorry, in 2021, sorry, I have to correct myself, in 2021. So the contract runs now under this and then we see the benefit out of this.

[Christian Levin, CEO]

There was also on HR or on personnel. So what happens is, on one hand, we're shifting production out of Steyr, partly out of Munich and into Krakow and we are shifting from, let's say, indirect to direct workforce. The proportion will go from 1:4 to 1:5. And all of this with an increase of production capacity and the target is to be able to do this without increasing the total number of employees in the company. I hope that gives some guidance to the headcount question. And then it was on the financial.

[Annette Danielski, CFO]

Yes. We already announced that with all the measurements of the restructuring program, we want to reach a 7% return on sales on MAN. We're working strategically at 8%, yes. So we're working on those.

[Christian Levin, CEO]

And this is a big part of it, of course. But as we said before, it's also pricing. We have a very good product. We have very good services in MAN. We need self-confidence.

I think that is coming. It's also the supply chain. We work more in the group now together, and we work more professionally on the purchasing, that is also contributing a number of other measures that are done on MAN. So again, it looks really promising that we should be able to achieve in -- the 8% in the longer time horizon.

[Miguel Borrega, BNP Paribas Exane]

Thank you very much.

[Lars Korinth, Head, IR]

All right. Thank you. We have next question on the line from Anthony Dick who is calling from ODDO BHF.

[Anthony Dick, ODDO BHF]

Thanks for taking my questions. Can you maybe provide some further granularity --

[Lars Korinth, Head, IR]

Can you speak up a bit?

[Anthony Dick, ODDO BHF]

Yes, Sorry. Could you maybe provide a bit more granularity into the individual business unit [indiscernible]. If I look at VWCO, for example, you expect -- the market will be declining quite significantly next year. So I know this is a business where you have quite a bit of the variable cost in your cost structure, but what kind of decremental leverage you should we expect there? And also, if I look at the Q4 performance of some businesses, the operating leverage was quite limited versus the very strong performance of Scania, for example. So just wondering what held that performance? Thank you.

[Annette Danielski, CFO]

Anthony, if you understand the question, it was on MAN Q4 and development of MAN or...

[Christian Levin, CEO]

Well, I think it was on the others, actually you have to give some input.

[Annette Danielski, CFO]

On the others so I didn't hear.

[Christian Levin, CEO]

No, but one question was, I understand on Volkswagen and how we see their performance going forward, given that Brazil might retract as a total market. And I would say Volkswagen, as you know, is already delivering well above the strategic target and we expect them to continue to be on or above their strategic target also in a somewhat shrinking market, they have an export strategy that goes beyond Brazil, beyond Latin America, that will help.

And they have an updated product program. Navistar is, of course, the biggest lever we have. And to get production going and get volumes out from Navistar is our target number one this year. And there, we really expect the team to deliver towards their strategic target, probably not already this year, but at least in 2024. Scania, as you said back on double-digit, we want to do more. And also see of Scania, I can say that we are focusing very hard to come back to 12%.

And the levers here are cost - fixed cost that has grown too quickly in the company, especially compared to volume. And the volume is the other lever. We are, of course, pricing also as we always do, we're being the price leader in the market. But volumes, needs to come back. And as I replied to Klas on the first question, we see a positive volume development now as production is stabilizing and we can finally deliver the customer orders. I know that was a quick run through Anthony, but as we are short on time, I hope that was giving you some guidance.

[Anthony Dick, ODDO BHF]

Yes that's great. Thanks very much.

[Christian Levin, CEO]

Thanks Anthony.

[Lars Korinth, Head, IR]

The next one comes from the line from Jose Asumendi from JPMorgan. Jose, good morning.

[Jose Asumendi, JPMorgan]

Good morning thank you Lars. Just one question, please, could you share with us, please, the output you're planning for long-haul Navistar units in 2023 in North America and if you could comment on the gross margin dilution between electric truck and internal combustion engine? Thank you.

[Annette Danielski, CFO]

So Anthony, we would not guide on a brand to be true - so I think you see the outlook for the long-haul, and we already pointed out that we want to gain slightly market share back. I think you can estimate out of this, hopefully, what is our estimation here.

[Christian Levin, CEO]

1% to 2% market share gain per year.

[Annette Danielski, CFO]

Yes. We've already put this out. And so, I think you can follow us there.

[Christian Levin, CEO]

Yes, the split between battery electric and ICE. It's a little bit different in different brands. But we have - with Scania, we have said that by 2025, we should be 10% BEVs, by 2030, 50%. And MAN is a similar trajectory, a little bit delayed. And with Navistar, we have not set up a firm target just yet. Was that okay, Jose?

[Jose Asumendi, JPMorgan]

Yes, thank you.

[Christian Levin, CEO]

Thanks Jose.

[Annette Danielski, CFO]

Thank you, Jose.

[Lars Korinth, Head, IR]

We have a next question coming from Nicolai Kempf from Deutsche Bank. Hi Nicolai.

[Nicolai Kempf, Deutsche Bank]

Nicolai Kempf from Deutsche Bank. If I have made on just one question, maybe support dividends, and you decided to pay dividend for 2022 despite generating a net free cash flow and that given that you have still net debts and also keep in mind that your biggest shareholder maybe doesn't need the cash. So my question is, why did you decide to pay a dividend?

[Annette Danielski, CFO]

Really, we stick to our commitments, Jose If you follow us since our IPO, we committed that we pay 30% to 40% of our annual earnings after tax to our stakeholder. And we aim to be a reliable partner to the capital market. And really what we really do is reduce the net debt is our priority, but we also want to stick to the promises that we have. And this is the reason why we decided to pay the €0.70 and as you now on the lower end of the range, we already showed in the IPO prospect.

[Christian Levin, CEO]

And if I may add, it's also sending the signal that we are confident that we can reduce our net debt position in the upcoming years. Well knowing that, as you said, that is a top priority. We don't want to be where we are.

[Christian Levin, CEO]

All right thank you Nicolai.

[Nicolai Kempf, Deutsche Bank]

Okay, thank you and congrats.

[Christian Levin, CEO]

Thanks.

[Annette Danielski, CFO]

Thanks.

[Lars Korinth, Head, IR]

Thanks Nicolai. We have a next question from Shaqeal Kirunda from Morgan Stanley. Good morning Shaqeal

[Shaqeal Kirunda, Morgan Stanley]

Hi, good morning, thank you for taking the question. Congratulations on the quarter. Just some measures of the MAN restructuring plan were not concrete during the CMD and we saw robust improvement plan included now. Can you quantify how much this adds? And are there any further measures that you can share at this stage? And also, can you just confirm the time period on the 7% target? Thank you.

[Annette Danielski, CFO]

I think we should really make clear the program that we put with restructuring is we really track very hardly. The MAN team - does a good job. And also, if you have the headwinds that we experienced in the last month, the supply chain, increased wages, increased logistic costs. So they have to offset all the headwinds to still keep the program on track. And this is the reason why it includes the bus program, to really reach the program targets that we put out.

So it's really an enabler to still be on track with all the headwinds they have. And I think this is the most important that they are looking every day for new measures to offset if something comes was a negative impact. And I think we saw this yesterday, it's a very good proof how they do it and how they track the measures. Would you add to the other?

[Christian Levin, CEO]

Yes, so in a way, we are kind of running a little bit behind on buses then, we're starting two years later. We're taking more or less the same type of measures, but adapting to the bus business. And we're taking into account that we don't see the bus market growing back to pre-COVID levels for MAN. So the team and encouraged by us has decided that they want to be the bus team in MAN, they want to be as profitable as MAN, meaning that they should contribute to the 8% in the long term, and they need to deliver on that level.

And right now, they're far from that. So it is a big effort that they need to put in. And you can ask why didn't we include that? If you go back three years, and I don't really have an answer to that question. I think it's good that the team is picking that up themselves. I hope that gave you a little bit more on flesh on the bone, Shaqeal, on MAN.

[Shaqeal Kirunda, Morgan Stanley]

Thank you that's clear. And then just a very quick follow-up on the common base or the common modular system, which divisions are set to benefit the most? And what kind of margin impact could that be?

[Christian Levin, CEO]

Yes, well - I think it's very hard to quantify. You have a, different rules of thumbs where you talk about double volume, get 10% lower cost. I think for us, what is very clear is that we need to take away all the double work that is ongoing by having multiple, development ongoing on several platforms at the same time. I can't have that, can't have a lot of coordination work, can't have friction between teams, and that's why we need one head of R&D who can implement one strategy, one road map.

We have said, and I think we said at the CMD that we have up to 30% waste in the R&D organization. And the R&D organization is close to 15,000 people. So, I'd just say without giving you any number that there is, substantial opportunities. But of course, it also comes with a big effort to do the integration and do that in a time when we do a lot of other transitions like the one to battery electric vehicles. So, we should also not be expecting too much too quickly out of this transformation. But there is a lot of benefit to take out financially on R&D cost. I stop there.

[Shaqeal Kirunda, Morgan Stanley]

Okay great, thank you.

[Christian Levin, CEO]

Thank you, Shaqeal.

[Lars Korinth, Head, IR]

Our final question will come from Erik, Erik Golrang from SEB. So you have the honor to ask the final question, choose wisely.

[Erik Golrang, SEB]

Well, I actually won't because they've all been asked with these last two, three sessions it was on the electric ramp and balance sheet priorities. Thank you.

[Annette Danielski, CFO]

Thank you.

[Christian Levin, CEO]

Hi Eric, thanks.

[Lars Korinth, Head, IR]

So with this, we are coming to the end of our Q&A session and also the conference. Thank you all for joining us today. It was a great session. Please reach out to the Investor Relations team whenever you need anything or have any additional question. For now, I wish you and we wish you all a nice remaining day. Thank you.

[Annette Danielski, CFO]

Thank you.

[Christian Levin, CEO]

Thank you.