Traton SE (8TRA) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of TRATON SE. At our customers' request, 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 via phone, please access the online tool to display the disclaimer. May I now hand you over to Marvin Kalberlah, who will lead you to this meeting.

I would like to welcome you all to our full year 2021 conference call and that we hope you're all doing good. Together with me on the line today are our CEO, Christian Levin, and our CFO, Annette Danielski, together with the usual suspects from legal, finance and IR. In order to avoid an overlap with the Foton reporting, we have scheduled the call for today. As you know, yesterday, we have published our annual report, the press release and the presentation for this call. Before Annette provides some insights on what drove growth to group's performance in the fourth quarter and full year, Christian will start with a few words on the highlights for 2021 as well as overall performance. In the last section, we will guide you through the outlook. After the presentation, as always, we will host the Q&A. Before Christian starts, I need to mention some housekeeping items. I hope you have all seen the presentation, the annual report and the presentation on our web page. If not, you can find the materials on our web page. Also, once again, I should make you aware on the disclaimer you find on Page 2. And lastly, I would like to make you aware on the new reporting structure, which you can see on Slide 4. Some of the vehicle brands is now -- from now on called TRATON Operations. Next to this, we have the segment, Financial Services. Our holding activities as well as the items like PPA, were reported under Corporate Items. With this, we are convinced that we can create better transparency on the true operational performance of our business and show the progress of the individual brands. With that having said, I leave the floor for Christian.

Excellent. Thank you very much, Marvin, and a warm welcome also from my side to all of you calling in. Before I start with the 2021 highlights, I want to address the situation in Ukraine. The TRATON Group supports the rights of the people of Ukraine to choose their own way of democracy and to be able to protect the human rights of its people. That is why we condemn Russia's invasion of Ukraine. The degree of impact on our business is continuously monitored. The TRATON Group will, of course, follow the current sanctions being gradually imposed by the EU and the U.S. Our 2 brands, Scania and MAN Truck & Bus, decided in the upcoming weeks directly after the invasion to ramp down its production facility and halt its sales of vehicles and parts into Russia until further notice. This is, of course, affecting our plant in St. Petersburg, which is, however, in the overall count of TRATON, a relatively small plant with around 70 employees and an output of around 4 vehicles per day. As you can see on Page 5, our exposure with regards to unit sales and group sales revenue is limited. Our supply chain, though, is impacted and on -- specifically on the MAN side, and we had to temporarily stop some production. Due to the volatile situation, short-term adjustments to the production program are possible at any time. So let's change slides and have a look at some of the highlights from TRATON in 2021. So starting with the most significant, of course, the completion of the acquisition of Navistar and welcoming the great colleagues of Navistar into our group. And by that, we have finally and officially entered into the North American market. Secondly, and another milestone, was related to the MAN repositioning and the realignment. We completed the merger squeeze-out of MAN's shareholders, initiated necessary restructuring measures and sold the Steyr plant. This was complemented by the start of the introduction of the Common Base Engine and the entire driveline in the fourth quarter of 2021, with the first brand being Scania. Then the CB1, with its driveline, will be gradually offered by each of the brands over the next few years. Sustainability is a key component of our corporate strategy. This will now manifest itself in more concrete targets for reducing greenhouse gases. Our 2 brands, Scania and MAN, have recently taken important decisions on this journey. Scania decided to join Amazon and the Global Optimism in The Climate Pledge, and is now one of the companies committing to reach net 0 carbon by already 2040, 10 years ahead of the Paris Agreement. But also MAN Truck & Bus is joining Scania in the Science Based Targets Initiative and is taking responsibility for limiting climate change as well, and our other brands will follow in the upcoming years. Finally, and to boost e-mobility and enable the most efficient infrastructure expansion, we signed a pioneering joint venture agreement together with our fierce competitors, Daimler Trucks and Volvo Group, to develop European high-performance charging network for the heavy-duty trucks, something we deem necessary to create the prerequisite for our customers in Europe to have the courage to take the step to invest into electrical vehicles. Let's move into Slide #8, and have a look at some of the key facts. 2021 was characterized by both ups and downs. After the challenges in 2020 resulting from the COVID-19 pandemic, the economy improved significantly in the first half of 2021. The overall business recovery continued, but as you all know, the environment was still very challenging. Not only because of the ongoing overall COVID-19 pandemic, but also, and especially in our industry, because of the impact from supply chain constraints. This ultimately prevented a more robust recovery. Like the oil industry, we were not immune against the semiconductor shortages especially, but also other supply chain disruptions. Incoming orders and unit sales in 2021 were strongly up. This partly resulted, of course, from the first time and half year consolidation of Navistar, but also became -- also because of the strong demand from our customer base. This, together with our renewed truck lines and strict cost discipline, led us to an adjusted operating result of EUR 1.6 billion, equaling an adjusted return on sales of 5.2%. And please bear in mind that this result actually exclude -- sorry, includes the effects of the purchase price allocation. If we would have excluded these effects, the adjusted operating result would have been EUR 1.9 billion and the return, 6.2%. We also had 2 large special items under expenses occurring in 2021. First, the expense for the EU antitrust proceeding at Scania Vehicles & Services of EUR 510 million. And secondly, the restructuring expenses at the MAN Truck & Bus of EUR 696 million. Net cash was, of course, heavily influenced by the Navistar transaction. It includes a EUR 2.6 billion for the acquisition as well as EUR 347 million cash out for the restructuring at the MAN Truck & Bus. On a clean basis, we posted EUR 842 million net cash flow. On the next slide, Slide 9, you can see the already-mentioned trends in both incoming orders and in unit sales, and you see the effect both including and excluding the Navistar figures. On Page 10, we compare the full year numbers. Despite the supply chain challenges, I think it's important to mention that unit sales were still at a good level. So even excluding Navistar, unit sales were comparable and actually slightly above 2019. As you can see and already indicated on the slide before, the supply chain challenges caused us to delay delivering a significant amount of unit sales, especially in the second half of last year. And of course, we are working diligently to meet our delivery commitments to our customers that are eagerly waiting for our products. Moving into Slide 11. A crucial part of our ambition to act as the forerunner in the electrification business with a holistic offering of electric trucks and buses. We have already a rather good portfolio in place for a wide range of different applications, which you see examples of on the right side of this page. All brands are offering alternative or electrified products in many different categories, and they do that for both trucks, buses and vans. It will be enlarged in the months and the years to come to provide our customers with highly competitive and efficient vehicles. And I would like to underline that we do so already today. We have delivered nearly 1,100 electrified units in 2021, and most of them are MAN TGE vans. But also for medium and heavy-duty trucks, we started last year deliveries and reached nearly 100 units. In total, we had more than 1,700 incoming orders, which includes more than 300 orders for heavy trucks. Further evidence that we are seeing more and more customers asking for electrified trucks. The latest update on this, you can see in the bubble top right. Scania, to deliver on an order another 100 electric trucks to the Copenhagen municipal waste company ARC, being one of the biggest orders taken in our industry for electric vehicles efforts. Page -- Slide 12, sorry, is giving you more insight on our important service business. From 2019 and over to 2021, our services business sales revenue has increased by 29%, up to EUR 6.4 billion. The sales revenue share within TRATON Operations has increased from 19% to above 21%, and with the integration of Navistar, the vehicle services business has become even more important. And this once again shows the importance of our vehicle service business also as a stabilizing factor for our earnings when the economy is being turbulent. With that, I would like to hand over to you, Annette.

Thanks, Christian, and a very warm welcome from my side as well. I'm now on Slide 13, which shows our key figures for 2021, excluding Navistar. We added this in the following slide to the presentation to give you a transparency for the full year 2021 in a comparable structure to 2019 and 2020. The strong recovery in demand resulted in incoming orders well beyond the level of 2019 and '20 and a strong order backlog. Unit sales and sales revenue returned to pre-COVID-19 levels, but as you know, earning quality was hit by the supply chain bottlenecks, higher commodity prices and other cost increases. Nevertheless, the adjusted operating result and the corresponding margin almost reached the 2019 levels. Moving to Slide 14. Comparing the first half year 2020 to the second half of the year, again without Navistar. When we compare the 2 halves of 2021, we realized that it was again a year with 2 phases, a déjà vu of what we have seen in 2020, only this time, the other way around. The year started with strong 2 quarters and the positive momentum for a continued good recovery. However, looking at the second half of the year, the negative impact of the value in FX is clearly visible. Coming to the next page. Here, we show the full year 2021 for the TRATON Group for both sales revenue and operating results. I can only emphasize that despite all challenges we have faced in the recent months, we are still on a very good track. As you can see on the left graph, Scania, MAN Truck & Bus and Volkswagen Caminhões e Ônibus all showed strong double-digit growth on the top line. Also, financial service showed an 18% increase, partly driven by the first-time consolidation of the Navistar Financial Service business. In total, the group reached EUR 30.6 billion sales revenue. For the first time, a revenue higher than EUR 30 billion. Compared to 2020, that is an increase of 36%. On the right-hand side, we see the breakdown of the adjusted operating result. MAN improved by more than EUR 800 million compared to 2020. The improvement is evidence of early successes with MAN's repositioning process. Other factors are the higher sales volume, the introduction of the new truck innovation as well as continued strict cost management. Scania Vehicles & Services reached EUR 1.4 billion adjusted operating result. This is an increase of more than EUR 600 million. Return on sales at Scania Vehicles & Services is at 10.1%. The last 2 quarters have been highly impacted by semiconductor shortage, but still, Scania holds a leading position with a double-digit margin within the industry. Since being fully consolidated on July 1, Navistar Sales & Service operating results reached EUR 41 million during the second half of 2021. Our team in Brazil achieved a strong 8.1% return on sales, the long-term target. The positive development in 2021 was driven by higher sales revenue, improved product positioning and strong pricing. Lastly, the financial service business reached nearly 27% of adjusted return on sales as the operating result more than doubled to EUR 259 million. All in all, our operating result improved by almost EUR 1.5 billion versus 2020. Again, please bear in mind that this includes the negative effects of the purchase price allocation of EUR 291 million within the corporate items. Excluding this, the adjusted operating result would have been EUR 1.9 billion and return on sales 6.2%. I'm now on Slide 16, where we can see together with Slide 17 some key figures for the fourth quarter 2021. Incoming orders, excluding Navistar, would have increased by 3%, but the continued strong demand was again not fully reflected in the numbers. This is true for all brands, but notably for Scania. Due to the current long lead times and the shift into the new offering with a Common Base Engine, Scania temporarily closed their books during the quarter. Even though unit sales, excluding Navistar, would have decreased by 4%, largely due to supply chain bottlenecks, sales revenue would have increased by 3% thanks to a favorable mix and pricing. Our book-to-bill ratio was 1.2 for TRATON Operations in 2021. Turning to Slide 17. Our results in the fourth quarter 2021 were burdened by one-time items mentioned earlier. Even though adjusted operating results and margins were impacted by the continued supply chain disruption, both increased compared to the fourth quarter of 2020. Here again, the purchase price allocation is included. Net cash flow was positively influenced by strong working capital management, notably by reduced inventories and higher trade payables. On Page 18, we provided an overview of the key figures of the Navistar Sales & Service. Navistar's fourth quarter orders were impacted by long lead times, driven by the robust demand for its products in the strong North American truck market on one hand and the supply chain bottlenecks on the other hand. Navistar fourth quarter unit sales grew by 15% compared to the third quarter. For both quarters combined, the book-to-bill ratio remained well above 1. Navistar's fourth quarter sales revenue increased by 12% versus the third quarter. However, this growth was not enough to offset the impact from supply chain disruptions, higher commodity prices and inflationary cost increases. Additionally, Navistar's combined third and fourth quarter result was impacted by EUR 54 million of costs incurred in context with the merger. On the next slide, you get the net cash flow by quarter now referring to TRATON Group, excluding Financial Service. Cash flow in the first quarter 2021 was strong, similar to the fourth quarter of 2020. Reason for the strong net cash flow performance in the fourth quarter was a positive working capital development, mainly due to increased payables and decrease in inventories. For the full year 2021, in total, we had a special effect from the Navistar acquisition visible in the third quarter and the cash out from the MAN restructuring. On a clean basis, we posted EUR 842 million net cash flow for the fiscal year 2021. This leads me to the net debt, which is on Page 20. Starting from a net cash position at the end of 2020, the main driver for the net debt increase was the Navistar acquisition. Dividend payments and MAN merger squeeze-out were also causing further cash out. Group pensions increased by integration in Navistar's pension obligation. Focus will be now to reduce the net debt. We are heading to the third part of the full year presentation, the outlook. On Slide 22, we are showing the market outlook for 2022, but please bear in mind the forecasts were prepared prior to the escalation of the Russian-Ukrainian conflict. Most forecasts were seeing an increase of the truck market in Europe that should be ranged between 0% and up to plus 10% for the year 2022. For South America market participation, participants are a bit more optimistic on the upper end. The range goes from 0% up to 15%, as you can see in the middle chart. As shown on the lower chart, the truck market growth in North America is consistent with the growth rate in South America, growing between 0% and up to 15%. We will -- we still see solid truck demand. But on the other hand, there is still uncertainty arising from COVID-19 and supply chain limitations. This will certainly also be the topic for 2022, especially during the first half of the year. Overall, it seems that quarter by quarter gradually steps up can happen. That is why we expect the growth will be more back-end loaded, where we, as well as the industry, foresee an easing of the semiconductor shortages. We remain confident that over the medium to long term, the duration will be -- get better. This leads me to the next slide, the outlook for the TRATON Group in 2020. Moving on to the next page, and let me start with an explanation for the outlook in these difficult times. Our outlook is prepared on our internal planning, the market expectations and our business performance. Our guidance was prepared prior to the escalation of the Russian-Ukrainian conflict. Therefore, this guidance is subject to further development of the war in Ukraine, and particular, the impact on TRATON's supply chains and the global economy as a whole. Already today, we know that suppliers of the TRATON are affected. At this point in time, conclusive assessment of the concrete implication is not yet possible. In addition, it is not yet possible to predict with sufficient certainty the extent of this conflict will affect the global industry, and the growth of the industry in the fiscal year 2022. It cannot be ruled out that as the war in Ukraine unfolds, it may have a material negative impact on TRATON Group's net asset, financial position and result of operations. We are hoping for a quick end of the hostilities and the return to diplomacy. This is our wish. Further, short-term supply chain bottlenecks, mainly semiconductors and other components, will continue to affect our manufacturing operation. We continue to closely monitor the situation as it can always change. So content-wise, raw material cost and the ongoing COVID-19 pandemic adds to the overall uncertainties. Another important reminder is that our 2022 forecast for the TRATON Group includes annual expectation for Navistar, whereas the 2021 results were only included beginning on July 1. We project a sharp -- a very sharp year-on-year increase in unit sales and a sharp increase in sales revenue in the fiscal year 2022. We should achieve an adjusted operating return on sales in the range of 5% to 7%, including purchase price allocation. The purchase price allocation in 2022 is expected to range between EUR 270 million to EUR 290 million. We expect our net cash flow for TRATON Operations to range between EUR 700 million and EUR 1 billion. Please note that this does not include possible expenses at Scania Vehicles & Services in connection with the EU antitrust proceedings. Now, let me turn the floor over to Christian for the last remarks of today's presentation.

Excellent. Thank you, Annette. This leads me into the key takeaways, as you can find here on the last Page 24. So despite all of the uncertainties, as of today, the economic environment overall is still supportive to the commercial transportation industry, but supply chain constraints still hold back our deliveries and the geopolitical and economic risks, as outlined by Annette, are still high. But besides that, we have plenty of self-help potential left to support our group performance, which we will execute on. The full integration of Navistar was one of the highlights within TRATON in 2021. This year, we will further continue and prepare Navistar for the introduction of the group Common Base Engine and the entire driveline in 2023. We did launch our Common Base Engine in the fourth quarter of 2021 inside the Scania brand. With the successful implementation of our Common Base Engine, we can concentrate now on the investments for future technologies. That means we will speed up electrification activities and expand our positions on alternative drivelines. With a plan to pioneer a European high-performance charging network for heavy-duty trucks with Daimler and Volvo, we are committed to boosting e-mobility. Meanwhile, our e-mobility vehicle lineup is steadily increasing. Other important milestones related to the MAN repositioning and realignment, all measures will help to significantly improve the earnings power of MAN in the years to come. We will share more updates with that -- of that in our Capital Markets Day. Product-wise, we are a very, if not the most competitive portfolio, with our new truck lines on all brands at the very moment that will also help us to win over new customers. As the group has made a lot of progress in the last few quarters and we have continuously achieved milestones within our Global Champion Strategy, it is now the time to give you a more in-depth update on how the management team wants to position TRATON for the success during the next year. TRATON will hold its Capital Markets Day on the 18th of May at the heart of the Scania plant in Södertälje in Sweden. The agenda of the CMD will be starting with Teach Ins and Driving event in the morning, then we will move into the new strategy and a deep dive into our brand performance in the afternoon, and then we'll have an extensive Q&A session. All of this followed by a nice dinner with management for open discussions as long as we can bear. So we're looking very much forward meeting you all first time in a very long time in person in Södertälje in the spring time. And with that, we are more than happy to take on all your questions. Thank you very much from my side and from Annette's side.

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

Christian and Annette, it's Klas from Citi. So a couple from me. So first on the semis shortages. So during the press call earlier today, I think you said that things would improve into the second half. But then in an interview in Dagens Industri, Christian, earlier, I think you said that the semi bottleneck for you would be solved already by the second quarter and that you would be back at full capacity, and that's obviously considerably better than what we hear elsewhere. So of course, excludes any impact from Russia-Ukraine. But just curious, Christian, if you could comment on the second quarter or the second half? I'll start there.

Sorry, I was on mute. Klas, yes, I mean, I wish I could give you a promise, and I wish that the promise is given by my control system suppliers, containing a lot of semiconductors would be considered promises. We've been disappointed many times, and if I take the Scania situation, I think we did very, very well in the first half of 2021. Actually better than our peers, and you could see that also in the following market shares. Second half, however, we started to have more problems, and I think we did worse than our peers in securing the semiconductor. And in the fourth quarter, I think the problems really peaked. And unfortunately, we've seen that continuing into Q1, and it's especially our engine control system where we cannot really exchange the chip supplier because that would involve a long homologation process, and we're talking years. So we really are squeezed between a rock and a hard place here. But this very supplier has now given a very firm commitment that we can come back, not only with normal volumes but actually also delivering higher volumes to compensate us from middle of April. So okay, that would transform into deliveries end of April and beginning and throughout May and June. So that's why I'm saying Q2. Disclaimer is, of course, that when we then start to utilize all the personnel we still have with us and then calling off components from all other suppliers, there is, of course, risk for hidden bottlenecks that we're not aware of. I mean, of course, we have a confirmation from all of them that they are ready, but there is always an element of Black Peter in this game where they're probably happy that we're not calling off because then they could deliver to others. So -- but it has not looked this good in the last 9 months as it actually does now, if I take the Scania context. Sorry for a bit long answer, but that's why...

No, no. And is that also linked to the inventory improvement at year end? Because that's also better than others. But you guys are seeing better working cap?

Yes. Yes, exactly. I mean both Scania and also MAN had a rather difficult situation when it comes to semiconductors. So of course, we took the advantage to clean up -- clean out inventories on both used and new trucks, and that you were seeing in the performance. But I would say, I continue to see rather low inventories also into this year. So I think we continue to do a good job there.

Yes. And lastly, to mention, we've improved quarter-over-quarter, so this is the reason why we say the second half year should be stronger, though we may not have such 2 strong quarters in the first half year of 2022 though this is our guidance, and then improvement in the second half year. I'd say this year, we had 2 phases. So 2021, we had a strong first half. We had a weak second, and now, we think we have a weaker first half year of 2022 and then stronger in the second half year. So this double phase will happen again from our point of view.

Of course. And my second one is on the R&D and your press release moving up by EUR 1 billion next 5 years. I'm just trying to understand if this increase really capped at this level, or if you need to increase R&D also outside, if they're linked to the 2025 targets, i.e. CO2 targets, which will largely be met through the ICE fleet? Or can the new Common Base Engine meet the 2025 targets? Just trying to understand if the EUR 1 billion -- I know it's tricky, but if we should see this sort of largely maxed out?

Yes. That's, of course, a very good question, Klas. And our intention is, of course, to shift resources now gradually over from combustion engines and into electric components and electric drives, and that is going relatively well. I must say that worked. The CB1 project has had a slight delay on Scania, but we're just talking about a couple of months, and the performance is actually excellent. The progress in Navistar is also running very well. So we expect on-time deliveries there. And then we can -- by that, we can start to ramp down resources for that variant with EPA Emission Legislation instead of EU Emission Legislation. And then back to MAN, where we still have some more work to do as it is a different installation in the MAN chassis for delivery as from 2024 second half. After that, there is only one big question mark, and that is why I can't give you a precise answer. But we are then calculating and counting on an EU update by 2027 or 2028 for the last Euro 7 emission level, and we're betting on a rather mild technology increase there. Because we do believe that Brussels will realize that we all need to shift all our money over to electrification if we're going to save the planet, and to actually reduce the CO2 instead of chasing the last gram of -- or NOx or of particulates. And we are already on a level where the current sensors in the market cannot measure any improvement. This is, however, a debate that is ongoing between ACEA and between Brussels. We have the same discussion going on in the U.S. for the upcoming EPA 27. So it will depend a little bit. If that legislation comes out with very, very tough technical requirements, well, then we will have to put more money into engines again. If it comes out as we plan and as we believe, then we will definitely be able to shift this money over without increasing further in order to fulfill our electrification promises.

Yes, makes sense. A very quick final one for me is on the balance sheet. So obviously, solid cash already at year-end, but now we have the antitrust provision, we have a higher R&D spend and the backlog is strong, but risks are growing, obviously, for a knock-on effect on German production should we see a stop in gas supplies from Russia. And obviously, that's pretty extreme, but we could have a pretty big downturn in Europe in the second half. Can you update us on how to think about the balance sheet and your covenants and so forth? Because we are coming into a potential downturn with quite high leverage.

But Klas, we mentioned though, if I would have a crystal ball on Q1, I would give you an answer. But this is really the problem, and so we have to really watch what happens and how much it impacts the second quarter. Nobody knows at this point in time, and so we really wanted to show our guidance what we really believe and thus the Q1 from nonrecurring item, what I have then to estimate. And say, okay, what will be really the impact? I don't know because we don't know what will happen with Russia and Ukraine and what measures we have to take. So please give us a little bit more time. When we went to the Q1 closing, I think we have a little better glimpse on this and can explain what we then do, and this is 6 weeks from now when we publish Q1, and then I can answer this more detailed at that point in time, sorry.

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

I appreciate -- starting with the first one. I appreciate that the guidance is pre-Russia-Ukraine. But I'm wondering, have you perhaps tried to quantify what sort of potential incremental cost inflation would be implied by spot commodity, energy prices and freight rates? And my second question is based on the current order book, what are the average price increases that you're expecting to be realized through the course of the year? And is the expectation for an under recovery of inflation in the first half?

First, you watched all the charts that I saw. When you saw the chart of commodities after Ukraine, it's like, jumping. Nobody knows, will it stay on this high level? Will it be more normalized? This -- I don't -- cannot estimate at this point in time because nobody knows. And then also when it happens, we will have a delay until it comes to us to the supply chain and everything, so it will not hit us from the first day. On certain commodities, it may be a little bit earlier, uncertain a little bit earlier. For that, we watch this. And really, we'll watch also how we can find measures to offset these price increases. And as we discussed before, there's a really high increase that we think we can offset it in the past before Ukraine, but it will be a delay, yes? We cannot ascertain -- vary month to month. We will have a delay to get this -- really back the money for the pricing increase. And so with Ukraine, it's even worse. We don't know at this point how much is the impact and how much will fold in. With the price increase, yes, we increased our prices for all brands for material costs and commodity rises. This is in the forecast included already.

Yes. I think you framed it well, Annette. So we have a number of planned -- or we have a number of price increases in the order book already, a little bit for different reasons in different brands. In Navistar, they've actually renegotiated the entire order book with all the customer base. In Scania, it's partly because of the delivery of the new CB1 and the new driveline that gives better return for customers. But it's also by proactively increasing prices as we saw that demand was very high. So not from the cost side, but from the demand side. MAN is more that they were -- they had to increase prices in order to come to performance. So they were a little bit bold, and of course, that has paid off. So far, we don't see any decrease on our gross margins, and that -- I think I can say that also about the first months of this year. We see it stable, it's not increasing vehicle margin. But as Annette said, with what happens in Ukraine now when that is -- if that -- if these raw material prices remain on these spike high levels, and then that will trickle down into our supply chain. And of course, that is going to be very, very hard to offset. So it's a very good question. We're doing scenarios, of course. I wish I could be more precise, but yes, just look at the oil price development, and I think you know what I mean. So -- but that's what we're seeing so far.

The next question is from Daniela Costa, Goldman Sachs.

I have 3 things. The first one is just a quick follow-up on what you were just talking before, and maybe I didn't understand the full question. But can you comment through beyond, and understand you put in the price increases for raw materials. But if your comment includes as well energy. I imagine it's probably a very small percentage of sales that we are seeing in Central Europe, like huge rises on electricity prices. So how much do you have factored in for that? And also labor costs, what are you seeing there? And then the other 2 questions. Can you talk through like your order book? I think there's been an active debate amongst various truck players on exactly how long are the order books open, and what's the sort of visibility at the moment, and then how confident that we're not going to see any cancellations there? And then the third point, more on the EV side. I think Volvo publishes on some market share figures. That's shows like 60% plus market share that they have in Europe at the moment on EVs. I know it's very early days. The market is small, but I wonder if you could comment on what sort of you think is your market share there? And how do you see that evolving with latest product launches?

So Daniela, first, we talked a lot about raw material, but sure, all inflationary costs are really on our watch list, yes. So energy as is personnel cost, everything. We follow this very closely, and what I mentioned raw materials, this is all; energy, cost inflation and cost, we are watching and -- for the estimate, and this is my disclaimer with the guidance, these are based on our planning premises at this point in time. And now we have the Ukraine crisis, and this is on top of what we had in the planning permits for the guidance. And it's all, yes. It's not only raw material, energy, everything. Order book, I would say overall, and then I give to Christian. The order book is filled for TRATON and all brands look very good for the 2022, and Christian can give you insights for Scania, especially.

Yes. And then maybe add on to the question on inflation related to energy and to labor cost. I think that, of course, in some way is going to hit us. We cannot calculate it. I think it's more relevant for our industry to think about what that means for our transport companies and the logistic companies. So there is already a shortage of drivers. Quite high proportion in East Europe are Ukrainians. They're all going home, or many of them go home to defend their country. And of course, energy, I mean, that's usually between 30% and 40% of the cost of operations. So when diesel prices and also biodiesel prices are skyrocketing, of course, there's a very tough time. So I just wanted to frame that. And I know that very many of our customers, they do have indexation clauses that protects them against specifically fuel price increases. But I think we will see, with the smaller customers, some of them running into trouble. We haven't seen that yet. Our finance portfolio is still performing perfectly, no bad debts coming, but it's something to watch very, very closely in our industry. To the order book, yes, this is the million-dollar question. How healthy is the order book? We have between 12 and 18 months of order books between the different brands. We see very, very small cancellations, which is meaning that I'm talking a handful per week. It has increased a little bit in the very last week. So last week, I saw in Scania brand 300 cancellations instead of maybe 50-ish, and the only thing that one should think about there and reflect and analyze deeper is that they're all coming from Eastern Europe. What it probably means is that we have customers in Poland, in Slovakia, Czech, yes, Romania, Hungary, Moldavia that are doing some transport into Ukraine and Russia, and they are probably getting cautious. Now the good thing is, of course, that these cancellations are immediately, including the big order book we had for Russia, absorbed by markets in Western Europe with much higher specifications and as a result, much higher prices and gross margins. So short term, that is definitely -- that's just an upside, actually. But of course, it's -- and it's -- we're talking about a few hundred on an order book of more than 100,000, so it's absolutely not material. But it's something that we're watching, of course, very, very closely. And then you have the last question was on the BEV truck uptake in the market shares. And you're right, Volvo was actually the dominating truck player with around 60% last year. Scania was only 11%. This was based on a total market of a little bit more than 400 trucks, so it's a very, very small market. Personally, I believe and I hope that we are at the beginning of an S curve. We released a press release here a couple of weeks ago from the Scania side with an order of 100 units to a garbage collection company in Copenhagen. Volvo released at the end of last year an order to the SDV for 130, so these are big orders in the electric vehicle context. And I think we told you before that price-wise, we are 2.5 to 3x higher. So of course, these are -- I mean, it's big money. It's big risks, and therefore, it has taken some time. But now they start to come. So I think that we will really see an acceleration throughout this year. Market share wise, I'm not too worried because, again, we have taken one of these big orders last year, we would also have had 30%, 40% market share, so it's too early to start the ranking. But it's very obvious that -- amongst the European, it is Volvo, Scania, Daimler that are going for these early adapters. So it's not like in the city bus space where we relate to the market, and we left it wide open to startups and to Chinese players.

The next question is from Miguel Borrega, BNP Paribas.

In terms of the whole supply chain disruption from Ukraine and Russia, can you tell us the key parts suppliers you're expecting major disruption? We heard about wire harnesses in the Ukraine, any other key components that could be problematic? I mean, how easy would be to change Tier 1 suppliers from the region? And if you're anticipating -- I know it's too early, but if you're anticipating production to stop over the coming weeks in any of your plants? That would be great.

Yes. Thank you, Miguel. Yes, of course, this is -- was from the first day, our biggest worry. So we have made a deep analysis of our supply chains, particularly in Scania and MAN. And if I start with the positive then, on the Scania side, we have 0 Tier 1 suppliers in Russia and in Ukraine. We have a couple of second-tier suppliers in Ukraine, and we have some third-tier suppliers in Russia. We have already secured supply from other suppliers. So for what we know, Scania will not be influenced directly by this war. When it comes to MAN, and here comes the bad news, yes, MAN has 2 supplier of cable harnesses, and I think you have followed that large part of German automotive industry, and I will not mention the brands, but you read about it in the press as I do, are dependent on 2 big companies there. They are located in the western part of Ukraine close to Lviv, and have actually been able to continue production miraculously. But as the bomb started to fall now also on Western Ukraine a couple of days ago, it actually means that for MAN already us from Tuesday, it was yesterday -- or even from Monday, we had to reduce production of trucks. And that is, of course, a component that is quite difficult to shift over to another plant. We're working with different remedies. So we have the Scania supplier, PK Cables, or maybe not mention the name, but the Scania supplier will support. And we have also the current suppliers from Ukraine have production in other countries, both in Europe, in Africa, North Africa and South America. So we are working around the clock with a crisis team in place in order to safeguard both supplies but also toolings for a worst-case scenario where we would have to start to produce this in-house. So -- but that's the situation on MAN. We have not found any other bottlenecks for MAN coming out of Ukraine or Russia. On top of this, one has, of course, as we were already into, to think about materials and the impact that will have when that trickles down the supply chain. Hopefully, that's more of a pricing costing issue than an availability issue. But yes, I think what we learned throughout the COVID years, you can never be sure.

And to mention the sanction change every day. So we don't know which is the next, what we get as a supply out of Russia or something else would change every day, and we monitor it very closely, so we cannot estimate this.

No, you're right. There's a daily addition of sanctions. And yesterday, again, there was a new bunch, yes. I hope that was answering your question, Miguel.

Yes, that's great. And then just on Navistar. I know that you're just concluding the integration, but can you give us a sense why margins were so weak in Q4? You're barely breaking even. And where does the margin sit for 2022 within your 5% to 7% margin? I know that you don't want to give too much away from the CMD, but just a flavor here of what is the opportunity for margins at Navistar. Is there a potential for some fixed cost reduction? Or do you need to be at a certain level of market share to get to the 7% margin that you got a few years ago?

So first, you're right, with the weaker performance and maybe start for this half year with a low number of EUR 41 million from Navistar Sales & Service. Keep in mind that we have the nonrecurring cost of EUR 54 million. This will now bring you closer to EUR 100 million. And then you have also to remember, they have also a great and big semiconductor issue, so they lost a lot of units due to semiconductors. And now, they work to find out how they can deliver the trucks to the customer without some parts, and we did -- and finalizing later on, and so they really were punished by semiconductors this year as in Europe, in Scania. And for next year, we hope that they have more semiconductor available. This is also quarter over quarter, and then they improve their result, and this is included in our guidance. And I cannot give you a percentage, so we will see it on the Capital Markets Day.

The next question is from Nicolai Kempf, Deutsche Bank.

Nicolai here from Deutsche Bank. My first would be on MAN and post several quarters of good brokers in restructuring just being breakeven is kind of a setback here in the last quarter. I understand long lead times in raw mats, but is there another issue? And how -- what's your plan forward? How is this going to improve over the next quarter or in the first half of this year?

So first, traditionally, the fourth quarter is the weakest quarter in the truck industry though they have a formula. And I would compare and take a look, when you go to the first quarter of 2020, we have higher sales here, nearly the same revenue, and we have EUR 140 million better now in this quarter, though they improved already when you compare this to Q4 2020 to the Q4 2021, so I really see the improvement from the colleagues to go ahead. It's not like on the margins that we would like to have, but really, the structure take place. And without the Ukraine crisis, I really think that we would have a good improvement, and we see it in the first 2 months that they really deliver on results and improve very well. So for us, they're on the right track, and it's really sad that Ukraine happens now for them.

Okay. Understood. And maybe just one follow-up on this. It seems like MAN is a bit more dependent on supply chain of one of those major shareholder, let's put it that way. Is there any chance that you might want to change this in the future so it's more aligned with Scania instead of Volkswagen?

Well, that's, of course, a great question and stands at the core of our new strategy that we will launch to all of you in the Capital Markets Day. We follow different business logic as commercial vehicle manufacturers and the consumer goods, cars, with different sizes. We have much more volatility in our markets. So you're right, to lean on Volkswagen is sometimes fantastic because you can benefit technology and scale, but there is also a risk that you become slow, and there is a risk also that you fall into the single source track. And I think that specifically when it comes to purchasing, we're kind of living both. We have a lot of advantages being part of the Volkswagen Group, but we also suffer a lot of disadvantages on the purchasing side. Now with Aksel, Murat coming in as new CPO of Volkswagen, things have improved substantially for us. I cannot judge in Volkswagen. But for us, we have a fantastic collaboration, and we have now agreed to work on the so-called pool principle. So anything we want to join when it comes to supplier contracts and of course, specifically on the nonautomotive, so IT supplies or any other nonautomotive things, we benefit the huge volumes. But when it comes to specific what we call commodities in our industries, so automotive parts honestly, it's much better that we go together as TRATON. We see huge advantages of that. And that has been highly debated in the past. And of course, Scania, we always did what we wanted anyway. But MAN, being a little more lenient towards Volkswagen partly because the job market is shared, so that resulted in these dependencies. And there, we have to do better, and that's part of our upcoming strategy. So that was actually a great question. Thank you for bringing that.

And the next question is from Himanshu Agarwal, Jefferies.

Himanshu from Jefferies. I've got 2. One is take one on the cost inflation. I understand you're not talking about the -- you don't know where the current raw material prices will end up or stabilize. But in your current guidance, do you have net price cost as positive for FY '22, as in like your price increases will be sufficient to offset the cost inflation prior to any Russia-Ukraine conflict? And then second one on the CBE engine. Could you just talk about the feedback you're hearing from customers on the new Scania trucks with CB engine? And also as you roll out CB engine to other brands, is there a risk of cannibalization at Scania from weaker brands having the same dry frame?

So the first one, the cost inflation. In our guidance, we have that we can offset cost inflation with pricing and savings.

Yes. On the CBE one and the new gearbox after treatment, axel and control system because it's actually more than just the driveline. So we participated in the first press test or in several, but the most prestigious in our industry is coming out of a German magazine, and it's called the 1,000 Punkte test, the 1,000 point test. And Scania won there with a comfortable distance to the second competitor. We have now the first customer deliveries happening, and they all confirmed the 8% promise that we're making, so -- and we also see really good effects on product cost, on the weight, which gives extra payload, and on the need for maintenance. So -- and quality seems to be good. I mean you always have a few bumps in the beginning, but it seems very good. So it's a very successful launch so far. The only thing that disturbed is that the ramp-up is not going fast enough because, again, of shortages. So we would like to shift over faster. And you noticed, of course, our lower order intake in Q4, which was a result of actually closing the order book on the old driveline because we're simply running out of them because we had to shift over to the new one. And now we have some supply chain constraints also on the new one. But greatly received. So you also asked about the other brands. And then, well, Navistar coming in, in '23, I mean, that will be fantastic for them, especially down the line with the service business. But also we see here performance improvements up to 12% compared to what they currently are supplying to their customers through the come-ins and their in-house engines. So big expectations for a successful launch in the States in '23, of course, no cannibalization. But then you're thinking about, of course, when MAN gets this engine in the tractor segment in 2024. And I'm not too worried, to be honest. We have looked very deep into the customer base of Scania and MAN. With the exception of a few markets, we have quite limited overlap. And of course, this is going to make the MAN a better product, but it's also making Scania a much better product. And we will still see performance deltas because the Scania cabin is substantially more aerodynamic as in the NTG upgrade or the NTG new cab coming in 2016, which changed the board in white completely. Whereas the MAN new cabin that was launched in 2020 was more of a facelift, even if it was a big one also with a lot of changes to the electrical architecture. So the kind of the performance delta in terms of fuel efficiency will prevail, and I think that is the most important measurement for our customers when they choose supplier. Plus, of course, all the other things around the branding and the relationship and the services and so on. So not to worry, but one needs to be cautious getting the MAN pricing right when this product comes into the market, and here is where we traditionally have some challenges with MAN. But as I now assigned Alexander Vlaskamp, the previous Head of Sales and Marketing from Scania as new CEO of MAN, there is no one better to safeguard pricing and to make sure we capitalize on value than with Alexander. So I feel very confident that we will have a CEO who overlooks this and makes no mistake as we provide more value to customers. I hope that was answering, Himanshu, your question.

Yes.

And we haven't received any further questions at this point. I hand back to the speakers for closing remarks.

Thank you, operator. Yes, as always, the IR team is around to cover any upcoming questions in the next hours, so just give us a call, and thanks for the detailed discussion today. And with that, I hand over to Annette for some closing remarks.

Okay. Thank you, Marvin. So first, thank you for Marvin to step up in the position of the Head of Investor Relations, and thank you for the great job. And I would like to share with the audience that we will have a new Head of Investor Relations starting April 1. [indiscernible] will take over, and we will make an official statement. But I want to inform you that you know that he will join, and Marvin and [ Abigail ], thank you for the great work, and you're still around, and I'm happy to have you here and that you take this great challenge and helped us out. Both Christian and me new into job, so thank you very much.

You're welcome.

You did a great job.

Thank you very much, everybody. Have a nice day.

Yes. Thanks for having you. Thanks for great questions.

Looking forward to see you.

Thanks. See you soon.

Bye.

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