Traton SE (8TRA) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of TRATON SE. At our customers' request that this conference will be recorded. [Operator Instructions] One final request. Please note the disclaimer that you will find at the beginning of the presentation. If you are only connected by phone, please access the online tool to display the disclaimer. I now hand you over to Rolf Woller of TRATON, who will start the meeting today.

Thanks, Kai, and welcome to everyone or good afternoon or good morning from wherever you have dialed in. I would like to welcome you to our first half conference call today in very good hope that you and your families are well. Together with me today on the line, as always, our CEO, Matthias and our CFO, Christian, together with the usual representatives from the legal department from finance and from treasury and IR. As you are all aware, some of our KPIs have already been pre-released on July 13. And this is why there is limited additional news, which is particularly belonging to the brand level. Matthias and Christian provide more insights into these data and will elaborate on why we think we have solidly continued to perform in the second quarter of this year, and that some of the variable trends we have seen in the first quarter has even accelerated. After the elaborations, Matthias will continue to highlight some of the potential we see already for our newest TRATON family member, which is Navistar. And this is then followed by a short wrap-up of our latest e-mobility effort. In the last section, both will guide you through the outlook. And after the presentation, as always, we host a question-and-answer session where we already asked you limit yourself to maybe 2 or 3 questions per session so that everyone has the opportunity to ask a meaningful question. Before Matthias and Christian will start, I have to come up with some housekeeping items. You should have all received the material for today's call, which is the half year financial report together with the Investor Relations presentation. If you have not received it, please grab it from our website, which is www.traton.com, and they are under the Investor Relations section. And I should also make you aware of the disclaimer, which you will find on Page 2. To take already 1 question upfront, if you have looked in the material and didn't find the Navistar figures included, that was on purpose because the deal closed on July 1st, and therefore, we have -- we will include the Navistar figures for the first time with the third quarter 9 months reporting, which will be in late October. In the meantime, we have to convert from U.S. GAAP to IFRS. Purchase price allocation has to be prepared, and we ask for your patience. This takes some time. It's not that we don't want to, but we still have to be a bit patient in order to have these data ready. So with that, I would hand over to Matthias, and ask him to start with the first section.

Thanks a lot, Rolf, and a warm welcome from my side. Let's start with the summary and highlights of our business perform in the first half year of 2021. Let me make some remarks on our very robust development. You can find them in the upper box on Page 4. Overall, business recovery continued and even accelerated in the second quarter compared to the first quarter, despite challenging environment. We managed the challenge in second quarter well, especially in the light of semiconductor shortages we saw in the industry. What are the challenges for the remainder of the year, there are still supply chain bottlenecks like semiconductor. And we still see setbacks because of the overall COVID-19 pandemic situation, which we have to watch carefully. Our underlying market trends, especially in Europe and South America remained solid also in the second quarter. Thanks to these trends, incoming orders for our trucks above 6 tons were up substantially in all regions. Incoming orders during the first half of 2021 came in at more than 147,000 units with nearly 77,000 incoming orders in the second quarter 2021. With nearly 171,000 units, including buses and vans, we reached the highest level of incoming orders in a half year for TRATON GROUP ever. Also, second quarter on a stand-alone basis was outstanding and another record after first quarter's record with incoming orders of more than 89,000 units for trucks, buses and vans. Truck unit sales were also up in total nearly 109,000 units. When we have a look onto the profit line, our adjusted operating result was significantly up to EUR 1.13 billion. This was achieved, thanks to continued good sales momentum from our renewed truck lines in combination with strict cost discipline. Also, in comparison to 2019, adjusted operating result was slightly up. Consequently, adjusted operating return on sales improved substantially to 8.3%. Both parts of the business, the industrial part and the financial services arm contributed to the improvement. MAN Truck & Bus booked EUR 672 million of restructuring expenses for the repositioning in the first half of 2021, of which EUR 362 million were already booked in the first quarter. Last highlight to mention is our net cash flow in the Industrial business. For the first half, it increased to EUR 527 million, an increase of EUR 130 million in the second quarter after we showed a net cash flow of EUR 397 million in the first quarter, still a solid result for second quarter as we have to keep in mind the seasonal pattern for net cash where the second quarter is one of the weaker quarters. And during this quarter, we had a deal with the management of the semiconductor shortages and our strong order intake. On the lower box of the page, you can see that we are also making good progress on other topics important to TRATON. We executed important steps in our MAN realignment process to improve the operating result. We have successfully completed the Navistar merger and boosted investment in e-mobility. A recent example for our ambitions to foster e-mobility and become an electric leader together with Daimler Trucks and the Volvo Group, we plan to pioneer a European high-performance charging network for heavy-duty trucks and coaches. We will come back to this in some minutes. Last but not least, TRATON will increasingly focus on China and its future strategy. We will provide you with some more details in due course after the summer break. And with that, I hand over to Christian with the detailed financials. Christian, please?

Thank you, Matthias, and also a very warm welcome from my side. I'm now on Page 5, which summarizes the second quarter achievements for some of our core KPIs as pre-released on July 13. Looking at our key figures, all have been clearly up versus prior year's second quarter. As you know, the second quarter 2020 was severely affected by the corona pandemic. But besides the cash flow key figures are even above the first quarter, and therefore, clearly, showing into the right direction. Incoming orders reached new highs and almost tripled compared to the second quarter 2020. Unit sales jumped back to pre-COVID-19 levels with more than 66,000 units. And please bear in mind that second quarter '19 saw some pre-buy effect related to the introduction of the digital tachograph and Brexit pull forward effects in U.K. For both incoming order as well as unit sales, this was a sequential improvement of around 10% versus an already strong first quarter. Sales revenue reached EUR 7.1 billion, noticeably up. That development is a clear testament to our new truck generation, and our service offers are gaining strong traction. The adjusted operating result increased to EUR 612 million, an increase of almost EUR 1 billion compared to 1 year ago. Adjusted operating return on sales was at 8.6% for the second quarter of this year. Net cash flow, very solid. And I will elaborate on this a little bit more on Slide 10. I'm now on Slide 6, where we can see the development of our unit sales and incoming orders on absolute and the left and the relative level on the right hand of the chart. The market recovery went faster than we expected, and even accelerated during the first half of this year. Incoming orders of trucks were likewise recovering faster than anticipated in combination with good perception of our new truck lines, which helped the order momentum. The order momentum is broadly based across all our main truck markets. Most of our core markets showing double-digit percentages in growth. As you can see on the left-hand graph, unit sales in first and second quarter are on the same level of 2019. Orders are already on a higher level. By relating incoming orders to unit sales, you can see that our book-to-bill ratio was well above 1 with 1.3x for Industrial Business in second quarter, confirming the trend of the first quarter in 2021. Looking at the year-over-year change on the right-hand graph, we see that unit sales are following the incoming order momentum, which means there's a good opportunity for us for the remainder of the year and even beyond. If all runs well in light of the before mentioned challenges, which have been highlighted by Matthias. The next slide on Page 7 is for your reference as it confirms we have reached pre-COVID levels already 1 year after the COVID-19 pandemic had its low lights. Availability of our new truck lines allowed us to achieve stable sales revenue of EUR 7.1 billion in the second quarter 2021 and helped us to improve our margins by around 60 basis points for TRATON GROUP compared to second quarter 2019. And as already highlighted, second quarter 2019 contained the prebuy effects related to the introduction of the Digital Tachograph and Brexit pull forward effects in the U.K. Adjusted operating profit in the first half of 2021 totaled, as Matthias has already said, to EUR 1.128 billion, and the adjusted operating return on sales was 8.3%, different to practice in the industry. Our operating result does not contain the adequity accounted results which amounted to EUR 226 million in the first half of the year 2021. If these were added to make them comparable with the results of our competitors, our adjusted operating results, including adequity results would have amounted to EUR 1.254 billion. And accordingly, the return on sales would be on 9.2% by the first half of 2021. All we managed to show a stronger first half in the year 2021 than we had in 2019. On the next slide, we show the first half group development and the bridge for sales revenue and operating result. I can just emphasize that we are on a very good way. As you can see on the left graph on that page, all 3 brands showed strong double-digit percentages increases in their top line. Scania added EUR 1.9 billion sales revenue, and MAN followed with EUR 1.3 billion versus first half of 2020. Caminhões e Ônibus had higher sales of EUR 400 million compared to their size, a powerful achievement. Also, Financial Services showed a small 2% increase, bringing the total group sales revenue to EUR 13.6 billion, 35% up compared to the first half 2020. On the right chart, we see that the increase in adjusted operating result was also fairly well distributed with regard to the size of each brand. MAN improved its adjusted operating result by EUR 567 million, whilst Scania was a notch better, with an improvement of EUR 639 million year-over-year. But also Caminhões e Ônibus and Financial Services, saw a decent rise in operating results. Altogether, we had a swing of more than EUR 1.3 billion versus the first half of 2020. Adjusted return on sales at Scania vehicles and services is at 12% for the first half of 2021, confirming its top position within the industry, as we already saw in the first quarter 2021. Including Financial Services, Scania reached a return on sales of 13%. Worth mentioning, MAN. The MAN team achieved to improve its earnings once more, which is showing the first successes of the repositioning process take place. Further levers has been higher sales revenue, the introduction of the new truck generation and the continued strict cost management. Last, not least, Caminhões e Ônibus. Our team in Brazil achieved a strong return on sales of 7.6%. Second quarter was even stronger than the first quarter with EUR 45 million operating result and 8% return on sales. This was driven by higher sales revenue and an improved product positioning. Last, the Financial Services business, we saw an increased revenues. We reached nearly 24% adjusted return on sales meaning that operating results more than doubled to EUR 100 million. I'm now on Slide 9, where we have detailed a view on brand level for unit sales and incoming orders on a quarterly basis. Starting with Scania, both incoming orders and unit sales showed a strong increase year-over-year in the second quarter 2021 and followed the positive trend from fourth quarter 2020 and the first quarter of 2021. Truck incoming orders were more than 2.5x higher to be fair from a lower basis, whereas unit sales more than doubled. But also on an absolute level, the second quarter is outstanding on both metrics. Regionally, we saw strong incoming orders of trucks in all regions, especially in our core region, Europe and South America. This was also confirmed on a unit sales level. Looking at MAN, a strong increase on unit sales and incoming orders was visible as well. Truck orders likewise were then 2.5x higher and unit sales increased by 84%. We once more followed the margin before volume approach, with our new truck generation at MAN. The incoming order increase on a regional basis was both driven Europe and other regions like Russia, of course, with EU on an absolute level on the forefront in accordance to MAN regional mix. Same was true for the unit sales. On the bus unit sales, both brands still showed only minor improvements, whereas the incoming orders for Scania increased strongly compared to the previous year's very low levels, and MAN incoming orders for buses showed a declining path, but compared to Scania for a higher level. Last, let us spend some seconds on Caminhões e Ônibus. Our colleagues also had a good momentum on incoming orders and unit sales in the second quarter of this year and posted increases in trucks and bus orders and unit sales, what is nice from a mix perspective, as the new product positioning with our heavy-duty truck line pays off. On Slide 10, we show you the development of our net cash flow within the Industrial Business. After the strong cash flow in the first quarter, we have been able to once more show a solid net cash flow with EUR 130 million. Year-over-year, the net cash flow improved by EUR 309 million in the second quarter. When we have a look into the line items, we see clear positive from adjusted operating result, which increased by close EUR 1 billion. On the other side, working capital step-up driven by management of semi shortages throughout the second quarter, and inventory step-ups caused by our strong order intake had a reverse effect on our net cash flow. Investing activities were almost stable compared to the first quarter 2020 at about EUR 298 million. As you know from our very short history, the second quarter is normally seasonally one of the weaker quarters when it comes to net cash flow. That gives us some comfort with regards to our net cash flow guidance for fiscal year 2021. Overall, the good net cash flow generation was helping us to increase our net liquidity position. Once again, we show no net financial indebtedness in our industrial business, but closed EUR 578 million net cash in the first half of the year. With that having said, I hand back to Matthias, who will provide you with more details on the potential we see in our new company, Navistar.

Thanks a lot, Christian. We are now heading towards a few slides on the newest member of family, Navistar. To start off, I want to recap an important milestone in the history of our young company. On July 1, we have successfully completed the Navistar merger and are extremely proud to welcome a new member in the family. The addition of Navistar as the newest member of the trading group marks the beginning of a new era. I'm now on Slide 12. Let me make a small remark on Navistar's financial reporting before I outline our new setup in the TRATON GROUP. Navistar, besides the adequity income is not in our numbers for the first half of 2021 as the closing was done on July 1st. We plan first consolidation of Navistar with the third quarter report this year. TRATON is now a family of 4 leading brands around the globe. All of them have a decent market share in their core markets and will benefit from our organizational setup within the TRATON GROUP. This will also be supported by our associates and strategic partners, be it on the procurement side, like with Hino, on the technology side with our stake in TuSimple. Altogether, we have the right ingredients to offer sustainable mobility solutions for the transportation sector and for our customers. Most of you already saw our sneak peek on Navistar back in November 2020 when we announced the merger agreement. On Slide 13, we provide a comprehensive overview of Navistar's business. Like all other players in the industry, Navistar was heavily impacted by the COVID-19 pandemic in 2020, and all major KPIs reflect that. Before the pandemic deliveries have been at more than 106,000 units and revenues reached USD 11.3 billion. The EBIT margin stood already at 6% in pre-pandemic times. Navistar has a clear position in the U.S. being #4 in the market, and the vast majority of their production plants are located in the U.S. and in Mexico. It shows that from now on, we have a strong footprint in the NAFTA region. This brings me to the next slide, which summarizes the rationales we want to benefit from in the future. Navistar is the perfect fit for TRATON. It offers the opportunity to access the attractive NAFTA profit pool directly with a high complementary geographic footprint. With this, we now are able to capture more than 75% of global profit pools as NAFTA accounts for around 35%. We can also now fully capitalize on a successful strategic alliance to leverage powertrain components. Just a refresher, our new 13-liter carbon base engine will have 80% commonality. We intend to lever this new engine all across the group. Lastly, the merger with Navistar will provide TRATON with 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 now serve 3 key truck market regions, which all have distinct cycles, serving all 3 regions will permit to smooth out the amplitude of the regional cycles. Coming to Slide 15. This slide summarizes one of the big potentials we see for Navistar. Navistar is strong in the bus, medium and light-duty segment. It has also once a decent market share in the 13-liter segment. The MaxxForce engine issue, were eating up a significant portion of this market share with its low point in 2016. Since then, it improved constantly until the pandemic took place. Looking at the status at the moment, our ambitions are quite simple, but effective, establish a strong and competitive product in this segment and gain back market share. How we get there, I gave the answer a minute ago, Navistar can make use of our powerful components and technology set up within the group. To make the picture complete, let's now have a look at Slide 16. Once we have gained momentum and increased market share, we can fully rely on the access to the excellent and by the way, largest dealer network in North America. The strong distribution and service network is completed by the service partnership with Love's Travel Stops, an industry largest leading service network. Navistar's network is positioned to be industry leader in uptime and minimize customer downtime. In combination with a strong product, this can and will, clearly drive profitability and strengthen Navistar's position as one of the leading players in the U.S. On the next slide, we provide a short overview of our recent refinancing activities in the light of the Navistar merger. In November 2020, TRATON SE took out a loan of EUR 3.3 billion with Volkswagen, with a term of up to 13 months to finance the U.S. dollar purchase price of the outstanding common shares of Navistar. The total loan amount was reduced to EUR 2.75 billion in May 2021 because of the solid net liquidity position of the group. In March of this year, we, for the first time, have been active in the Euro debt capital market. Based on our recently established EUR 12 billion trade in EMTN program, we have issued a total of EUR 3 billion senior bonds. The bonds have maturities of 4, 8 and 12 years in fixed rate format. The average coupon stood at 0.67%. Prior to the bond market debut, TRATON has issued several Schuldscheindarlehen in a total amount of EUR 700 million with maturities of 3, 5 and 7 years in fixed and floating formats, respectively. The senior bonds as well as the Schuldscheindarlehen have been placed at very attractive terms, allowing for an average interest rate for about EUR 6 billion raise of below 1%. This will lead to savings of up to EUR 120 million annually in interest expenses already. The next 3 slides are our e-mobility efforts before we end up today's presentation with the outlook section. The trend towards alternative drives is no longer reversible. TRATON positioned itself early on. We want to take a leading position here. Climate protection is an elementary goal for us. Since last year, electric buses from Scania and MAN have been on the road with a common electric drive. Our brands have set clear goals for alternative drives. In 2025, electric vehicles will account for around 10% of Scania's volume in Europe. At the same time, half of MAN's new bus will have an alternative drive. By 2030, every second vehicle sold by Scania will have an electric drive and MAN at least 60% of trucks for delivery and 40% of trucks for long distance traffic will be emission free. To underpin our ambitions and to ensure our customers can benefit from the shift towards e-mobility, together with Daimler Truck and the Volvo Group, we have signed a nonbinding agreement to install and operate high performance public charging network for batteries and extra heavy-duty long-haul trucks and coaches across Europe. We have 5 years at least 1,700 high-capacity charging points powered by green electricity are to be created. In this way, Europe's 3 leading commercial vehicle manufacturers are supporting the EU in its sustainability goals, especially in heavy-duty long distance trucking. Charging points will be compatible with vehicles of all brands. The nonbinding agreement lays the foundation of a future joint venture. It will be equally owned by the 3 parties, and it's planning to start operating in 2022. Together, we plan a joint investment of EUR 500 million. Every OEM should get equal rights and responsibilities. I'm now in Slide 20. Another crucial part of our ambition to act as runner is a holistic offering of electrified trucks and buses. As I mentioned before, we have a good portfolio in place, which you can see on the right side of the Page 19. It will be enlarged in the months and years to come to provide our customers with highly competitive and efficient vehicles. The table on the left already shows that we do so already nowadays. We have delivered close to 500 electrified units in the first half of 2021. There most of them are MAN TGEs, but also for medium and heavy-duty truck, we delivered 13 units. If you look on the left column, we see incoming orders of 76 units. This shows that we see more and more customers asking for electrified trucks. We will continue with this reporting to show all of you the progress here. With that, I hand back to you, Christian. Please.

Thank you very much, Matthias. We are heading to the second session of our first half presentation, the outlook. On Slide 22, similar to the last reporting, we have collected market views for 2021. Most forecasts for see an increase of the truck market in Europe, which should range between plus 10% to plus 25% for the year 2021. These views remain more or less unchanged to what we observed back in May when we reported our first quarter numbers for the year. Same holds true for South America. The range goes from plus 10% to 40%, as you can see in the middle chart. As shown on the lower chart, the truck market in North America is forecast to grow between 10% and 30%. In conclusion, still market participants, including ourselves, are undecided how strong the recovery is taking place, which is also reflected in the big bandwidth we monitor for each market. On the one hand, we see strong truck order momentum. On the other hand, there is still high uncertainty arising from COVID-19, but also with regards to the supply chain topics especially semiconductor and other component suppliers. This leads me to the next slide, the outlook for the TRATON GROUP in 2021. Our outlook still assumes a sharp increase in volumes and substantial increase in group sales revenue as witnessed in the first half 2021. With the [ upper ] release of our core KPIs on July 13, we have indicated that we should achieve the upper area of our guidance on the operating return on sales to 5% to 7%. Same holds true for the net cash flow, we expect our net cash flow for the Industrial Business at the upper area of the EUR 500 million to EUR 700 million. Please have in mind that the entire outlook is before expenses for restructuring measures for the repositioning at MAN and before effects from the merger with Navistar International Corporation. Business trends into the third quarter remained solid but will show the typical seasonal pattern, which is clearly lower sales and profits than achieved in the first half of the year, which is mainly due to the holiday season. So far, we see similar to the first half, currently no bigger impact from the supply chain bottlenecks, mainly semiconductor and other components, to affect our manufacturing operations, but we stay alerted as the situation can always change. The constant rise on raw material cost adds to the overall uncertainties. Our continued cautiousness simply continues to reflect these uncertainties we currently see all around us like COVID-19, supply chain bottlenecks and raw material volatility. Now Matthias will have some closing remarks.

Thanks, again, Christian. This leads me to the last slide of our today's first half year session. Beside the very supportive market environment, which we see on the both bubbles on the top, we have plenty of potential to lift our performance. As I mentioned already in the beginning, product-wise, we have a very, if not the most competitive portfolio with our new truck clients on all brands at the very moment that will help to win new customers. The introduction of the new truck generation at MAN is now largely completed and will allow MAN to further reposition its brand. First benefits were already realized in second half of 2020. This will be complemented by the start of the introduction of the common base engine in the fourth quarter of 2021. With successful implementation of our current base engine, we can concentrate now on new investment for future technology. That means we will continue to further speed up our electrification activities and expand our position on alternative drivetrains. With the plan to pioneer European high-performance charging network for heavy-duty trucks with Daimler Truck and the Volvo Group committed ourselves to boost immobility. Two other topics concerning the group structure will further enrich TRATON's potential. Integration of Navistar, the transaction delivers on our Global Champion strategy by creating a global leader across key truck markets. Other important milestones were related with the mine repositioning. As most of you know, we are planning to sell the Steyr plant. And end of June, initiated the merger squeeze-out of the MSA shareholders, which is also helping to streamline our organizational setup. I think we can truly say we managed well to emerge much stronger from the pandemic. Rolf, we are now happy to answer your questions. Thank you.

Well, thanks, Matthias. Operator, please.

[Operator Instructions] And the first question received is from Klas Bergelind of Citi.

Klas Bergelind at Citi. So my first question is on production and price cost. You ended your presentation with this, Christian. But is there anything we should think of beyond the normal seasonality now into the third quarter? And I'm thinking about Scania here, you obviously handle the bottlenecks really well during the second quarter. But we have read about some extended shutdowns at Scania over the summers. So you wanted to confirm if that's the case and to what extent? And if raw materials will impact you more in the third versus the second? So I'll start there.

Well, look, as you have rightly said, I mean, we preponed summer vacation by a week. We have minor impacts that we will see in third quarter and inventory stuff like that. But we do not yet expect materials high impact on operations there also in the first...

So far I think the prepayment will stabilize the situation of the holidays.

That's good. My second one is on MAN and the impact from dual production and from the launch cost. And at the time of the IPO, you gave this information for Scania before the margin drag. And I was wondering if you're willing to do the same for MAN, it could be quite good supporter for MAN into the second quarter -- into the second half as these effects drop out.

What as you rightly said, it's pretty much similar effect like we had in Scania. We see those fade out in the second half of the year. Fourth quarter most likely, we'll have that come comfortable.

Okay. That's good.

Then we have the absolute amount, Klas, here and not the percentages.

Then my final question here is on Caminhões e Ônibus, obviously, a great margin. we have seen this, however, in the past with this business, delivering great results in 1 quarter and then for us to perhaps get a bit disappointed in the next quarter. So can we talk a little bit more about the earnings bridge here for Caminhões e Ônibus? How sustainable is this kind of profitability? Was there any extra price mix impact that we can't carry into the second half?

I think you have to understand that we now sell our extra heavy truck material in the market. And this is a real structural change for the company, which we didn't have because actually, Volkswagen wasn't in that segment. this is a structural change in the margin which you can see and will be also reflected in the future, but we see a heavy increase in raw materials in our Latin American business, and we need to see how we can price for that.

And the next question we have is from Kai Mueller, Barclays.

The first one, really quite an impressive order intake that you have shown right now. We've seen some of your peers, they've been a bit more reluctant opening the order books. Can you give a comment how much of these orders are ready for '22? And what would speak against that you already get a substantial portion from them also in Q4, i.e., having a strong second half? First question, then that follows on your outlook. You now, of course, specify it saying you can achieve the upper range from the 5% to 7% operating return, and also on net cash flow, the upper area. Now you've already delivered an 8.3% at H1. You've delivered already more than EUR 500 million on net cash flow in H1. What keeps you to keep the lower end of the guidance has and not actually upgrade the lower end or maybe even drive the entire range higher? And then the last question is really on your debt financing. I think the chart was very helpful that you outlined the different loan agreements versus Volkswagen and then the bonds you have issued yourself. What is the plan to refinance this Volkswagen loan that you said, I think, had a 13 months maturity? So I understand it would be coming to end of this year.

So then I would start with the order intake. We already have bookings for the Q2, but -- and we never closed our order books, and our customers are so far satisfied with our delivery terms.

Looking to your question, Kai, when it comes to the second half of the year, of course, we did not change, let's say, the range because we still see that uncertainties. We saw in Scania, we needed at the end of the second quarter to perform the summer holidays because even with the good measures, we came into certain, say, challenges in our production network. Now even if you have a good order book, you see that things are going to be delayed to a certain extent because you don't know when will this crisis on the semiconductors go away. Secondly, we see now discussions on the fourth wave. And we simply said, look, I mean, we feel comfortable at the upper end of the range, but the risk around this do not allow to see it more positive. There is still a view that the second half of the year will be weaker than the first half of the year driven by those levers I just outlined. And this is why we kept the guidance and specified that we currently big second quarter at the upper end. But again, the year is still running.

And on the term loan, Kai, the term loan has a tenure of 30, 3-0 months. So luckily, we are not under pressure. It matures in May 2023. We have reduced it now from the 3.3 to the 2.75 because of the good generation of net cash in the group. And you see actually that we are confident also on net cash generation for the coming quarters. So there is plenty of opportunities, and we will definitely behave opportunistic. We have always said that the -- we have the capital structure now clearly inside. So a clear intention also to reduce the level we have now on the balance sheet. You might understand that we will not elaborate here in more details. But obviously, the bond market is an option for the remainder, but also our net cash generation remains an option for reducing the term loan on the Volkswagen side.

The next question received is from Nicolai Kempf of Deutsche Bank.

And my question would also be on the guidance because if I just look at your numbers, you have the strong order intake you have good price, you have the right product and supply chain could probably improve in the second half of decade. Could you just, again, maybe also quantify it happens you see in the second half? I mean, yes, as in raw mats, but are there any other issues holding you back? Because it looks like you're very conservative here.

Nicolai, I think the answer is not changing dramatically from what you heard before. I mean what we would like to emphasize on the COVID pandemic, and now we have the discussion about the holidays when everybody returns from holiday incident rates could go clearly up again. We cannot rule out another lockdown, be it on the industrial side, be it on the social side. We have then FX rate volatility, material cost, we have the semiconductor shortage. So call us too shy or too cautious, but I think for the time being, given the experience we made also in 2020, where only 1 month really caused a huge hiccup in our P&L. We just want to be on the safe side here.

And really on the supply chain side, it's actually not only semiconductors. It's tyres, it's plastic, there's a lot of areas where our people have really to work around the clock to make it happen in the production side and in the logistics chain. So -- and we don't know what happens in the second half.

And you saw even in second quarter that some of the competitors had their bigger struggles when it comes to the supply chain. So I think it's fair to leave it at that point.

Next question received from Hampus Engellau from Handelsbanken.

Three questions from me. I'm sorry for coming back on the orders, but they were significant during the quarter. Could you maybe talk a little bit about the process here with price increases coming in correctly for next year, as you highlighted some of the orders being for second quarter next year. And also thinking of lead times and maybe comparing when we last time had this really strong order bookings, there was a lot of issues with double bookings, et cetera, and customers being afraid of not getting their deliveries in the beginning for the coming years when the list is in starts. So that is kind of the first question. Second question is more related also coming back to your guidance, which by all means, seems a little bit conservative. But could you maybe talk a little bit about how like normalized cost could affect you guys coming into second half, i.e. assume that we'll continue to open up the society, let's assume that we're starting to travel more, et cetera. And if there's any part of that cost that we should think of that maybe boosted the results somewhat more in second quarter this year. Those are my questions.

To the order intake item, I don't see that we have doubled bookings or anything like that. I think we have a quite clean order book. We also have for these units where we don't have semiconductors a very clear process in place. We call it like green fence. We know exactly the units which are in there. Where the customers have to wait, but they are informed, so I don't see any issues on that side.

So we think the order book is stable. And when it comes to price increase, as Matthias has outlined in the beginning, obviously, if raw material prices are coming in, there will be discussions on certain prices per market depending on the situation. And quite honestly, Hampus, on the guidance, let's not speculate on if travel goes up and there's no fourth wave and all this normal and normalized cost levels. We have a very solid order book. So if the situation is going to be stable, then we'll be doing fine. If it is continuing like it was now when we preponed the vacations of Scania, things get tougher and get difficult and that will then be the result. And that's it, and I have nothing more to say to the guidance.

And the next question received is from Jose Asumendi of JPMorgan.

Just a few items. And yes, congratulations on the progress down there, it looks like a promising second half. I guess the first question, I would like to get some comments, please, on the EV, and thank you for the disclosure on the orders. Do you think you have the right competitive product, specifically also in the past EV segment there. I'm just looking in the light of the work done by other competitors, including BYD, in Europe. I see them taking quite a lot of market share. Do you think you can gain -- reestablish a little bit your market share on the bus EV side as you continue to roll the products? That will be the first one. And if you could also comment a little bit of how you see -- which segments do you think are going to be electrified first, bus, truck, within truck, which segments are you seeing more and more demand. The second one, pretty straight forward, how much capacity do you have for Scania in China? I mean this is clearly a growth region. So even if it's not now a year down the road, where do you see this business going at that rate. Then 3 on Navistar, North America, very -- I think very interesting chart. Can you talk a little bit about how does you work to reestablish the heavy-duty segment for you? Is it a question of technology? Is it a question of investment? Is it a question of discussion with customers? Is it a mix of everything? But how does you work to build up that heavy-duty share in the U.S. That? I think it's -- yes, it's very, very interesting to track going forward.

Okay. Let me start with the bus side, yes, we have now a very comprehensive electrified offer from MAN as well as from Scania. I think, yes, we have the product portfolio to actually fight back BYD and other Chinese players. Surely, we will not do it on every price. We have also a certain margin targets in our bus business, and we will not do every deal. On the truck side, where will electrification starts first, as there is no charging infrastructure on long haulage yet, and that's why we've done the joint venture with the other groups. It will not start the long haulage. It will start where you can do home depot charging and so on. Yes. So this mainly is driven by -- not by the electrification of the trucks, by the possibility to charge. And that's why it's now so important. If we want to have a higher share on long haulage in 2025 that we start now working and implementing this charging stations for long haulage, yes? So we can really change the industry there. Then you were asking on Scania. Yes, it's technology, but we have a clear road map there. It's about implementation now. And then with the new product, it's then to enforce the sales side of the business and force and invest there.

Yes. And Scania in China, I mean, Scania is the only one among the truck manufacturers with 100% owned license for R&D production and sales. So they're going to be the spearhead for the group. There is a license up to 50,000 units. But how we see how we're going to evolve this. We're going to talk about our China strategy later this year. Matthias has outlined that in the Annual Meeting speech, I think, Matthias, but it's not Scania only, It's going to be the spearhead for the group.

Absolutely.

Very interesting. I have one little follow up, please. And we had this discussion with, [ for ] Matthias, in terms of increasing the free float within TRATON. And I should be asking this question in a different conference call. But -- is this still part of the discussion, it is still on the -- is this still a valid argument is it still being considered? Or is this not the case at all?

This question I have now to pass on to the CFO.

I will take the question with pleasure because it's the first time that this question is ever asked in the conference call.

I never heard that before. So I mean...

I mean we've done the closing on first of July. You know that our industrial debt significantly increased by this. We said that we're going to refinancing the Navistar takeover with all options. So we don't rule out anything. Rolf has said before, it's on the bond side that one can imagine. But also equity could be an option if market permits. And I said it in the press call this morning, I don't know whether it's Q3, Q4 discussion comes from surely not from us. We look and review the market we will discuss with our Board. And then as time has come, we might or might not consider an equity portion.

The next question received is from Himanshu Agarwal of Jefferies.

Himanshu from Jefferies. I just wanted to ask a few questions on BEVs actually. It's -- I understand it's early days, but can you talk about the ASPs and margins on battery electric trucks. And secondly, we never talk about BEVs when it comes to trucks, but it has been a critical part of the car OEMs electrification strategy. Do you see that as a possible solution in future? And do you have some products in that category? Yes. I'll leave it there.

Yes. We have a Scania product with a hybrid in the market. It works well. But if you ask me, long term, I fully believe in the fully electrified truck. That's what we need in the future to actually achieve our CO2 targets and contribute to the plans of the European Union.

Yes. And when it comes to your question to the EV margins, we don't discuss this now in public. I mean we started here with the track record to show you and the community how much progress we are doing on operational side by selling those vehicles, it's increasing later point in time, we will talk margins, but let's see how the market develops.

Technology can be a bridging technology, but we need a charging infrastructure and we need electrified trucks.

And this is why Daimler Truck and Volvo Group and us have found agreement to found the joint venture and building up the infrastructure. That's right.

Exactly.

Okay. Understood. And if I may just ask one quick housekeeping question. Before the merger, Navistar had around $2 billion in deferred tax assets. Can you just tell us, like are those tax assets transferable? Like will you be able to offset your future profits against those or they are not?

Look, Matthias has said it in the beginning. We going to now, incorporate Navistar into Q3. We're going to do the first report on the, let's say, new group on an outlook and also on this subject that you just referred to. Just give us a little bit of time. The closing was just a couple of weeks ago. So we need to manage through the opening balance and the first integration quarter.

The next question received is from Erik Golrang of SEB.

I have 3 questions. The first one, trying to get a bit better understanding of what you think you could achieve in terms of production volumes in the second half. It's quite uncertain, but you don't see any major disrupters at this point. Does that mean that you can sort of keep the production rates you've had here in the second quarter? Obviously, orders would indicate that you need to ramp production to bring lead times down a bit. You may feel it's a clean order book, but if we would dictate that or lead times are this long. We see cancellations in the other end. That's the first question. And then the second question, if you could maybe shed some light on how we should think about the where the earnings base now is for MAN in the first half. If you can relate it to how much of that total restructuring program you've outlined, EUR 1.7 billion, how much of that is in the books right now? And then the third question, just if you can conceptually seasonality in margins. Is that like a percentage point for Scania, H2 versus H1 and around 2 for MAN?

Erik, so let's start off first with MAN. I said it the last time, and we start getting the contracts in place by the first quarter. Now we start implementing those. You've seen that we found an agreement on Styre. That deal is supposed to be closed by end of August. So there's only a minor part of that cost portion out of the EUR 1.7 billion included in there, what you saw in Q1 and also Q2 that the market share of MAN was lower. That was intentionally because like Matthias has outlined before, we go for margin, before volume, we have the new truck with the better fuel consumption. So that portion is in there, but we do not yet quantify how much out of the EUR 1.7 billion is in the first half of the year because what you see now only includes a minor portion of the MAN restructuring. It's coming in the next, let's say, 7 to 8 quarters, Matthias, going forward.

Yes.

Then when it comes to your question of production volumes. Look, I mean I repeat myself again and add now the flooding situation in Belgium, in Germany and suppliers that have difficulties there. It's really hard to give you a volume number for the second half of the year because we simply don't know. The order book is quite solid. If we can get the things under control, it's going to be okay if we have increasing challenges like now the one with flooding and the semiconductors and others, there might be impact also in there. And to your other question, we haven't seen yet cancellations in size because of the long lead times, this is not the case. The order book is very solid. The market is really good at the moment, and that's reflected in the order book. Right, Matthias?

Absolutely.

And on the seasonality, Erik, I mean, the seasonality as you know, third quarter can be clearly weaker than the second quarter is normally seasonally the weakest we have because of the summer shutdown. And I mean the production in first half was 118,000 units. So if you see for the whole year around EUR 238 million, EUR 240 million. The question is can we deliver what is reflected in the other book? And that's a miracle. If you have the glass bowl, please hand it over to us.

Yes. I know what you're - I mean there's plenty of uncertainty, but could you at least say if you're planning to increase production rates at all? Or are you just running it as a [ indiscernible ]

It's very similar to the half year. Second half year will be very similar.

That's why it's 118 in the first half of the year, it might be around 120 in the second because if you're running almost on full capacity, I mean, it's tough to increase.

The next question received is from Michael Jacks from Bank of America.

I have 2. The first one is just a follow up on the question on production. But perhaps more with a view to 2022. Assuming orders don't fall dramatically in the second half relative to historical levels, then it looks like the order backlog will continue to grow. So maybe asking it this way, absent bottlenecks, and if they are clear, what is your unconstrained production capacity in order to start working the backlogs down? That's the first question. And I mean, I guess just to add on to that, I mean, you don't have a long history per se, would it be fair to look at sort of 2019 levels or 2018 levels as the base there. That's the first question. And then the second question is just a follow-up on raw mats. Given that the lead times are growing, are you able to make adjustments to the prices quoted at the time of booking the orders?

To the later one, we said before, I think it was Matthias that as raw material will sustain, will adjust prices in certain segments, in certain markets as time goes by.

Yes. Volume.

And for the volume, I mean, it's essentially the same like in 2021, as I said before, if you are running on full capacity. Yes.

If you go in a bit more detail. I think Scania will be very limited on additional production volume for the next year because we run, as Christian said, on full capacity. On the MAN side, on the Brazil side, there are slight opportunities. If there are no shortages in the supply chain anymore to increase slightly in comparison to '21.

It's the same thing. You can increase from a 2 shift to a free shift in particular. But again, they all probably you need to have parts. If you don't have parts, it doesn't make sense to increase the shift.

No means exactly.

Does that answer, Michael?

Matthias, yes.

And we have -- the last question for today is from Frank Biller of LBBW.

Frank Biller, LBBW. It's 3 quick questions here left on my paper here. The one is, again, on semiconductor and raw materials. What are you expecting on the impact on working capital in the second half coming out of these issues? Should it be a positive impact here from increased prices or more on the negative side. The other thing is on residual values for used trucks. What was the impact in the first half? And what are you expecting for the second? And also for the second half, are there any one-off items left coming from MAN or other topics?

So let's start with the easy first. We do not see any on top onetime effects in the second half of the year for MAN. You saw in the documenting material that 2 portions have been booked in Q1 and Q2. When it comes to semiconductors, well, I think we discussed this before. I mean it's the question how this business is going to develop and what then the impact is on our operations. It's hard to judge that. And when it comes to residual values in the complementary material, Frank, you find the overview on the inventories and you basically see that in the used truck, we have historically low levels. That means residual values at the moment are not affected to the business. And when it comes to the working capital effect of the semiconductors, again. We continue with the ring-fencing, as Matthias has said before. So there will be similar effects, will have working capital maybe having some impact with higher working capital in third quarter, but it seems to be seen. But as long as there's a semiconductor ring-fencing supply chain rearrangement, we'll stick with some impacts in the chain.

Okay. So no big issue here. Uncertainty -- high uncertainty, but not a big issue here for the second half.

Yes. True.

As we have no further questions. I hand back to the speakers.

Thanks very much. Thanks for the discussion. Yes, and thanks for attending us today. We will now go on summer holidays for the next 2, 3 weeks. However, the IR department is definitely available for you in case there are any follow-up questions. And then I say, I look very much forward together with the gentleman here to speak to you again in late October when we report on the 9-month results. And then this time with Navistar on board. Thanks very much for attending today's call, and have a good time.

Thanks, everybody.

Bye-bye.

Bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.