Traton SE (8TRA) Earnings Call Transcript & Summary

A warm welcome here from our site in Munich. We hope that you and your families are all well. Together with me in the office is Matthias Grundler, our CEO; as well as our CFO, Christian Schulz; and the usual suspects from the legal, finance, communications, treasury and IR department. As you're all aware, we signed on November 7 a definitive merger agreement with Navistar, and therefore, we will use today's call also to give some insight into the transaction. And afterwards, we provide you with a brief update on how TRATON did during the first 9 months of 2020 as most important KPIs were already pre-released on October 21, and we also notified you about our market outlook for fiscal year 2020 on October 28. Matthias will kick off the conference call with all around Navistar transaction continued by Christian who will guide us to the results section. In the interest of time, today's quarterly section is a little bit shortened and shorter than normal in the main deck, but you have all the information which we regularly provide in the backup of this presentation. After the presentation, we will host a question-and-answer session on both topics on the Navistar merger agreement segment as well as on the 9 months results. And before I hand over to Matthias, just a couple of housekeeping items. First of all, we hope you have seen all the material for today's call, which is the press release as well as the interim statement in the IR presentation. If not, you will find them all on our website, and I also should make you aware of the disclaimer, which you will find on Page 2 in the presentation, and we will not go to read this disclaimer. With that, I hand over to Matthias for the first couple of slides.

Thanks a lot, Rolf. A warm welcome from my side. We are happy that on last Saturday, we reached a definitive merger agreement with Navistar. The deal accelerates our Global Champion Strategy by creating a global leader across key truck markets. Consequently, we, the TRATON management team, are very much convinced that the combination of TRATON and Navistar will create sustainable value for our clients as well as for our shareholders. I'm now on Slide 4 where we provide a transaction overview with the respective key facts. Navistar ranks currently as the #4 manufacturer in the U.S. with a revenue of USD 11.25 billion in their respective fiscal year 2019 and a wide range distribution network with more than 1,200 dealers in the NAFTA region. The acquisition rationale will be elaborated in the next section, but the key points are access to the NAFTA profit pool; deliver on our Global Champion Strategy; leverage powertrain components, in particular, the common base engine across brands to generate significant cost savings over the years to come; and achieve a well-balanced and global footprint with complementary regions. We will acquire all outstanding common shares for $44.50 in cash as a one-step merger with full support of Navistar's 2 largest shareholders. This reflects an equity purchase price of about USD 3.7 billion. Financing of the transaction will be provided by Volkswagen. The loan for the purchase price totals EUR 3.3 billion and has a tenor of 30 months. TRATON intends to refinance the bridge via the capital market, and we are not ruling out any refinancing instrument. We think there is significant more value in TRATON, and it will materialize with the execution of the MAN restructuring plan, the opportunities arising from the Navistar transaction and the strength of the Scania brand. Our current share price is not reflecting this yet. TRATON is committed to maintain a solid investment-grade rating post transaction. Last, closing is expected mid of 2021 and subject to regulatory approvals and customary closing conditions, including Navistar's shareholder approval. I'm now on Slide 5. TRATON has been in a strategic alliance with Navistar for almost 4 years already when we acquired a 16.6% stake in Navistar. The key objectives of the collaboration were access to the North American market, establishing a procurement joint venture and a technology cooperation for joint powertrain and future technologies. With the full acquisition, we are now in the position to fully capitalize on the incremental synergy potential. This brings me to Page 6. If TRATON could wish for a perfect fit to close the gap in North America, it would be active only in North America with focus on trucks and buses above 16 tons, it would be able to deploy technology that TRATON can provide, it would be a company which we can work with easily. As we can see on this slide, all 4 acquisition rationales perfectly underline the wish and it will come true. Navistar is the perfect fit for TRATON. It offers the opportunity to access the attractive NAFTA profit pool directly with a highly complementary geographic footprint with no product cannibalization. As mentioned in the beginning, TRATON will be able to capture more than 75% of global profit pools as NAFTA accounts for 35%. Further, we deliver on our Global Champion Strategy with this transaction, and we'll use our strong market position to further create value and sustainably establish TRATON in the first row of global truck makers. Page 9. By leveraging powertrain components across our brands, we can generate significant cost savings over the years to come as the powertrain stays for a significant amount of the manufacturing cost of a truck. Our common base engine, which will go and start in 2021 and will help to amortize costs over a significant higher volume. Just as a refresher, the powertrain stays for almost 65% of the total manufacturing cost of a truck. As we target for CBE to achieve an 80% commonality level and avoid that each brand develop its own engine, the consequence is clear: leverage cost synergies throughout the group. From 2025 onwards, over 50% of our heavy-duty trucks will be propelled by this engine. Brings me to Page 10. Last, with the acquisition of Navistar, we, as TRATON, will achieve a well-balanced and global footprint. That means we will generate a significant share of our future revenues in the NAFTA region and balance our total revenue, which, so far, was largely sourced from Europe and South America. Further, TRATON can then serve 3 key truck market regions, which all have distinct cycles. During the 2017 U.S. downturn, South America continued to grow. Likewise, during the 2016 U.S. downturn, Western Europe continued to grow. Serving all 3 regions will permit to smooth out the amplitude of the regional cycles. Page 11. We, as TRATON, remain committed to achieve a 9% through the cycle margin. The distinct brand performance, the new truck lines, the key powertrain packages and future technologies should all help achieving these goals. Page 12. Looking back, there have been a few milestones along the way since TRATON was established. The acquisition of Navistar will accelerate our Global Champion Strategy. And it's natural next, going forward on this deal, we'll put our focus on the successful integration. Brings me to Page 13. And this leads me to my last slide of this section, the status and next steps. The Navistar AGM is expected to vote on the deal in Q1 2021. The transaction is expected to close mid-2021, subject to regulatory approvals. The geographic footprints of TRATON and Navistar are almost entirely complementary. And therefore, we do not expect delays from competition agencies' reviews. The delisting of Navistar is envisaged to take place shortly after closing. Overall, the deal is a great opportunity for our company and for our stakeholders. I'm very happy and proud to run this further with the management team. But Navistar will not be our sole focus until the rest of the year. Three other topics are utmost importance. With a new family member, we will focus to retain and even further develop our TRATON holding with dedicated value-adding services for the brands. We want to reach an agreement with our unions on the necessary restructuring at MAN Truck & Bus. We need to further stabilize and even improve the brand performance during COVID-19 times. With that, I hand over to Christian. Christian, please.

Thank you very much, Matthias, and also a warm welcome from my side. In the beginning, let me make some remarks on the current situation we are facing. We are still in an unprecedented situation because of the COVID-19 pandemic. We saw a significant decline in demand and supply chain disruptions in the second quarter. A substantial part of production capacities was closed or idled mainly from end of March to large parts of April. But we were able to stepwise restart our production, including supply chains, at the very end of April and saw the positive direction in May starting, continuing into the third quarter. Also, October confirms the positive trend seen lately. But we remain cautious given current rise of infection rates as everyone in our industry once more focused and are still focusing on managing cost reduction and established measures to safeguard our liquidity. The economic outlook for 2020 in October has been adapted slightly positive as the signs for economic activities within the third quarter have been released. Still, the contraction for 2020 is expected to be much worse than it was as the financial crisis in 2008 and '09. This is why we still stay alerted and focused. For '21, the IMF is forecasting a noticeable increase for EMEA regions. Clearly, the economic downtrend triggered commercial vehicles markets globally to contract significantly. With only the fourth quarter outstanding, most third-party research foresees a decline of the truck market in Europe of minus 30% to minus 35% and minus 10% to minus 20% for Brazil, all much better than what was seen last quarter. Looking at all regions around the globe and having several shutdowns in mind, there is still a high level of uncertainty for weeks and months to come. On Page 15. Incoming orders declined by 14% to 145,933 units in 9 months. All figures were negatively impacted by COVID-19 pandemic, but the positive trend seen end of second quarter continued in the third quarter. Unit sales were down by minus 29% to 127,660 units in the first 9 months. Same here is on the order front, we saw the positive trend set in May continuing into Q3. TRATON GROUP sales revenues decreased by minus 21% and fell less than unit sales, thanks to our aftersales business. Operating profit in the first 9 months, still negative at minus EUR 58 million driven by the EUR 382 million loss in the second quarter, but with a catch-up in Q3 with EUR 162 million positive. Adjusted operating profit is down to minus EUR 9 million close to breakeven. That means 9 months adjusted return on sales was slightly negative at minus 0.1%. Last, net cash flow in the Industrial Business was at minus EUR 148 million versus EUR 2.323 billion 1 year ago. Please have in mind, last year's investing cash flow was supported by the sale of Power Engineering with EUR 1.978 billion. Excluding this, the swing year-over-year was positive EUR 493 million, thanks to a solid net cash flow generation of plus EUR 199 million in third quarter. The net cash flow in the light of COVID-19 looks acceptable. Other topics to mention, I will run through some topics in a minute. For your reference, we listed them all down here. Page #16 leads me to the next slide, which is showing the development of our unit sales and incoming orders. Overall, vehicle utilization in most regions, especially in the long-haulage truck business, saw a continuation of the positive development since May. The market recovery went faster than expected with close to 50,000 units sold. We are still not on the pattern we saw in the years '18, '19. But as it can be seen on the right side, the gap to previous year's level narrowed significantly. Looking at the year-over-year change on the right, we see that unit sales are following the incoming order momentum, which was strong in Q3. Book-to-bill ratios were well above 1 for Industrial Business throughout the third quarter. All in all, the graph suggests the V-shaped momentum in the third quarter, but we still have to be careful as we all see the pandemic development increased strongly in the last couple of weeks. Page #17. Before we go into some specific topics, let me raise some quick highlights on the performance in the fourth quarter. As seen in slide before, we see a noticeable market recovery in combination with increasing incoming orders. These were up 19% year-over-year in third quarter, a very impressive Scania with a book-to-bill ratio of 1.5 in the third quarter. The adjusted return on sales was 3.7% and, therefore, above the first quarter 2020 level, which stood at 2.8%. We were able to clearly reduce CapEx and primary R&D as well as capitalization ratio for R&D stood at 19% in third quarter. Thanks to all the developments and other actions, we were able to write a net cash flow of positive 9 -- EUR 199 million. Page #18. Here, you see a detailed view on brand level for the third quarter alone. Highlights are Scania had a book-to-bill of 1.5 in third quarter. Sales revenue declined by only 15%; but unit sales were down 25%, mirroring a strong product mix. Adjusted operating return on sales, close to 9%. And compared -- across competition on like-for-like basis, again, benchmark for the industry. MAN on strong volume year-over-year and sales revenue followed. The operative loss declined to EUR 27 million and was better than Q1, mirroring the production stop relief since -- in late March and the fact that we made good progress on the cost side. Caminhões e Ônibus sales revenue was clearly impacted by exchange rate, but again, positive on return on sales. On Page 19, similar to our first half year reporting, I once more can just reiterate what was said in the last weeks and months. TRATON looks at a sound balance sheet and ample liquidity. Both are highly important elements as they give us the freedom to concentrate on the steps necessary to emerge stronger from this crisis. In general, our balance sheet position is strong with an equity ratio within the Industrial Business of 36% and a net debt-to-adjusted EBITDA ratio of minus 0.5% even after the end of the domination in profit and loss transfer agreement with Volkswagen AG for the fiscal year '19. EUR 1.4 billion have been transferred. Our gearing is currently at only minus 6%. That also holds true looking at our liquidity. Thanks to strict cash management, unrestricted cash of EUR 2.1 billion and credit lines of EUR 7.7 billion, we are able to safeguard liquidity in these uncertain times. As announced, TRATON SE took out its first syndicated revolving credit facility with a volume of EUR 3.75 billion in the third quarter. Further reducing operating costs by reproducing our capital expenditure and R&D expenditures, we once more took decisive action. If you please go to Page #20. Here, we put altogether relevant information on the MAN realignment. Negotiations have been formally begun and shall be successfully closed, hopefully, by the end of the year. What we can witness, there's a clear momentum at MAN Truck & Bus. And of course, we keep you posted when we have an update here. Next page. One highlight worth mentioning is the signing of a joint venture agreement for e-mobility with our partner, Hino, with the scope to develop electric vehicles and relevant components. The extensive know-how of the MAN Scania and Caminhões e Ônibus brands will be concentrated at the TRATON office and combined with Hino's expertise in alternative drive systems. We believe this will shorten lead times for future e-mobility products, be it battery or be it fuel cell technology. Further, we have introduced strong products during this year, which underline our strong efforts to further develop our portfolio. We would like to emphasize, in particular, the innovations in electrification of our trucks and buses. If we go to the next page. After highlighting some latest news within our group, I would like to conclude the presentation with our outlook, which we already made public in an ad hoc release on October 25, provided there is no further increase in the number of COVID cases and no associated countermeasures are adopted by developing countries. And subject to the potential impact on our production and supply chains, we are assuming that our business activity will continue to recover by the end of 2020. However, we're anticipating a sharp decline in total unit sales worldwide for the entire fiscal year 2020 due to the market downturn. In line with unit sales, we are assuming that the sales revenue of the TRATON and Industrial Business segment will also decline substantially year-on-year. We're expecting an operating return on sales for the TRATON GROUP of between minus 1% and plus 1%. The projected operating return on sales does not contain any expenses for the realignment of MAN Truck & Bus announced on September 11. Due to the ongoing nature of the negotiations obviously with the employee representatives, it's not possible to predict the timing as well as -- not the amount of these expenses in this point in time. For the cash conversion rate, we are anticipating a negative net cash flow in the Industrial Business segment. As mentioned already in the beginning, truck markets for a third-party perspective can end up at minus 30% to minus 35% in Europe and in the bandwidth of minus 10% to minus 20% in Brazil. With that information given, Matthias and me are happy to answer your questions in the due course of this meeting.

[Operator Instructions] We've received the first question. It is from Klas Bergelind of Citi.

Matthias and Christian, it's Klas from Citi. First on Navistar, I obviously appreciate that there are hard numbers on synergies right now. But if we think of the likely trajectory at least, you're starting, introducing the CBE in Scania in Europe next year; the year after, in LatAm; and then you have MAN and Caminhões e Ônibus 2024 and 2026. But how much technology transfer can you really push through with Navistar in the short term? Obviously, when we look at the trajectory of the current brands, the synergy potential on the powertrain feels a little bit back-end loaded. So just to understand the shape of the powertrain synergies at least.

I think -- thanks very much for the question. I think you shouldn't forget that we are already in 4 years where we actually work together in our alliance. So we know each other well. Our projects are running well. And I can tell you, you will not wait until the end of the century that we're going to see efficiencies. They're going to come significantly earlier.

Yes. And I think -- yes, yes. And Klas, what Matthias has said, look, I mean, so far, with all the components that might come to Navistar, we would have only been possible to participate with our, let's say, 70% shareholding. Now if there's a full takeover, obviously, if the success of the product is in the market, then we can also benefit on the full scale.

So the reason for asking is, obviously, you're sourcing -- Navistar is sourcing from Caminhões currently, and you have the 13-liter coming out now with Scania. So how quickly can we see that shift over? I guess that is the question.

Look, we're going to give more color after this once closing is done. I think you understand this, sir?

Yes. Yes. Yes. Sure. Then my second one is on the guidance for the year. I appreciate it's sensible to be prudent. But obviously, looking at the numbers here, particularly on the Scania side, you have a very strong order book. Into year-end, your book-to-bill is 1.6 on the truck side in Scania. And that would suggest that the margin could increase sequentially as you deliver out of the backlog around production. So I get that orders can be weaker in November onwards in Europe, but not really sure why the margin will go backwards. I totally get the message in the press release. But just wondered, Christian, if you agreed with my reasoning, at least, that you have a lot of deliveries coming in into the fourth quarter.

I mean I emphasized on orders, obviously. And for us, it's a very simple, Klas. I mean we've seen how quickly the world turned in March, April. And I mean if you see infection rates in Europe, which is, for sure, one of the core markets, I mean nobody can rule out how the next 6 to 8 weeks will come. Obviously, there might be things. As you have said, we are prudent people. Yes, I said it before, we have positive feedback so far from the market. But we'd rather be prudent when it comes to the entire year. And I think this is not a mistake, quite honestly.

No. No. No. I understand. It feels that the backlog looks so strong in Scania. Then my final one is on the cooperation with Hino now focusing also more on the fuel cell side, similar to what Volvo and Daimler are doing. So what is the scope here of the JV? Is it on the truck and the powertrain only? Or are you also thinking of including infrastructure, fueling stations, similar to what we see at Nikola? Or are you relying on subsidies and partnerships here going forward?

No. At the moment, we're really focusing on the technical side of the product at this point in time when it comes to electrification, when it comes to fuel cell. And we are especially exploring all the opportunities we have on the fuel cell side when it comes to [ long haulage ] to evaluate what we can really do here.

Keep in mind, Klas -- and keep in mind, the joint venture was just announced recently. So there's plenty of things to discuss...

No. I'm talking...

Yes. The key question we get from investors is obviously whether there could be sort of first-mover advantage from start-ups in that they're also providing the infrastructure. So that's the reason why.

Look, again, it's too early. But I mean Hino and Toyota have a good track record on fuel cells. So let's see where the joint venture leads us to.

The next question is from Hampus Engellau of Handelsbanken.

Hampus Engellau, Handelsbanken. Two questions from me. I'm sorry for coming back on this Navistar situation here, but they signed the 2 emission cycle agreement with Caminhões, and you're targeting to implement your 13-liter engine. Does this mean that Caminhões will continue to supply engines on the 15-liter side? Or what's the thinking here? That's my first question.

I'm just really sorry. But at this point in time, we are not really commenting on this. You have to wait until closing.

Okay. Maybe then on Navistar, everybody has the history with Navistar and the next cross-border engine and pushing an AGR when you were thinking everybody else went for SCR solutions and that eventually resulted in a 5, 6 percentage point market share loss. Given where you're heading now, are you aiming to regain sort of structural lost market share? Or how should we think about that going forward? Is that a reasonable target given that you have a quite competitive engine?

Hampus, it's all well understood, yes, that you obviously want to get more information and gain more information actually on how Navistar will continue with the supply chain and so on and so forth. But we have to ask at this point in time for your patience. You know that's quite complicated within -- until closing for us to comment on. Navistar is an independent company, and we refrain from speculating. So therefore, please be patient. After closing, we will answer all these questions.

The next question is from Demian Flowers of Commerzbank.

Matthias, Christian, yes, my first question is about demand. So in Q3, the sales volume growth was clearly better at MAN than it was at Scania. But when we look forward, when we look at the order book, that seems to be reversed. So the Scania book-to-bill, as already mentioned, is better than that of MAN. But I sort of assume that given all the new product you've got at MAN that you would be seeing continued strong momentum there. So is this -- the orders that you're seeing a bit disappointing? Can you make a comment on the demand dynamics that we're seeing there between those 2 divisions, first of all?

I think if you compare to our previous year, as you know, in comparison back then, Scania market share in Europe has been down because of the spillover effect of the new truck generation in Q1. That's still from the history, if you see order book in Scania is quite strong, as you have said. On the MAN side, well, look, I mean we're going to introduce a new generation of the heavy-duty truck in the due course of next year, right? And as we have said before, we also need to watch out that margins are safeguarded there. So this is basically if you saw a introduction strategy to a certain extent. I wouldn't say that we are disappointed on the MAN side, I think it's going according to track. And if you remember, Demian, the discussion we had in the IPO, how important it is that the launch of the new MAN truck is obviously would have been a better timing without the COVID crisis in Europe that we need just to be, let's say, senseful, and this is what you see there.

So in terms of the timing of when we'll start to see that? In which quarter of next year meaningfully hitting the MAN volumes, is it in the first half?

I think I would rather say, second to third quarter, you will see the share of those new heavy-duty trucks arising.

Okay.

Obviously, depending on the overall market dynamics, right?

Yes. And then just a follow-up on MAN's profitability. I mean when I look at your guidance and also the MAN guidance of $450 million to $650 million loss, clearly, you're pointing to a weaker Q4 versus Q3. So is that dynamic all about volumes getting softer? Or is it also about other cost headwinds that are playing a role as well at MAN?

Yes. If you look into the past, I mean you see Q4 always as one of the weaker ones, right? And every year, second thing is, again, all the, let's say, discussions we currently see and the ramp-up we still have there. I mean don't forger we ramped down our production. In the first half of the year, we needed to restart it. We have all this distancing things. It's really -- you need to be careful what you do in MAN now in the fourth quarter. I think it's rightly set. And yes, hopefully, we are improving.

The next question is from Horst Schneider of Bank of America.

Before I try it again on Navistar, maybe first of all, another question related to the business you own already. When I look at the Scania charges in Q3, was that not all the charges that we should expect? Or is there the bulk of the charges only to come in the fourth quarter? That's my first question.

I think you might see minor ones continuing, but not in the same magnitude. And I think by second quarter next year, everything should be baked in.

So then the larger part is coming just in next year because I mean for...

No. No. No. The other way around, Horst. I just said the 50 you saw, you might see the one or the other smaller thing. And this might continue until second quarter, but not in the magnitude you've seen in the Q3.

I mean it sounds like a quite cheap restructuring, right, given the fact that you reduced 5,000 employees or you reduce now less than you wanted originally?

No. I mean there are other things. First of all, Scania has reduced significantly costs last year already in the fadeaway of the dual ramp-up costs, right? Then they decided to take out the 5,000 people. And obviously, now via order book on the direct side, you have a small counter effect depending on how the volume comes. But what you saw here in the third quarter is structural things like the bus plant in Finland or other things where you really now take actions there. So I wouldn't say that we didn't meet our expectations. No, that's not the case.

Okay. The other question, I'd try it again on Navistar, especially related to potential fees from the acquisition. You booked any of these fees already in the fourth quarter? And if yes, in which segment?

Say no.

No. No disclosing.

Okay. And you -- I guess you cannot yet comment on any purchase price allocation effects, right? That, you can only do post acquisition.

Horst, this is a nice try, okay? Thank You.

All right. But then on the refinancing again. Because you said you leave all options open, you decide on these options before the acquisition or you decide on that when the deal is fully closed and all is fully consolidated. What I'm pointing to is the risk of a capital -- oh, not risk, but the possibility of a capital increase, then you would decide on that.

First of all, I would say both. We will think through what we do in the refinancing of the debt in the course of the next couple of months. And there's nothing more to say than what Matthias has said. We keep open which instruments we use from the capital market. And I understand the background of your question, but I will not comment on this. We will cross the bridge when we get there.

The next question is from Nicolai Kempf of Deutsche Bank.

Nicolai Kempf here, Deutsche Bank. My first question would also be on MAN. And can you give us more updates here on how MAN should improve and how the margin of 8% should be achieved? I understand that the biggest level should be labor costs, but what else can be done? And my second question would be on your alternative powertains. So one of your key competitors announced last week at its Capital Markets Day an electric vehicle sales target. When will you provide something similar like that?

[ These are questions online. ]

Yes. So MAN is quite a holistic work we need to do. Know when it comes to material costs, we're going to attack there. When it comes to the overall headcount, we're going to attack there. When it comes to the -- our overall plant structure, we actually have to improve there significantly to actually get the inbound and outbound logistics costs down. So it's really in every area, we're actually going to have to improve the company.

Yes. And keep in mind, we just introduced the new heavy-duty truck. That means, like Matthias has said, not only on headcount and whatever is going to be agreed with the unions. Also on the material costs, you have way more potential because if you have a new truck, it's something different when you discuss with your suppliers if you then have a 20-year-old truck, obviously. So there's lots of potential, yes. And as for the...