Traton SE (8TRA) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of TRATON SE. [Operator Instructions] One final request, please note the disclaimer that you will find at the beginning of the presentation. If you are connected by phone, please access the online tool to display the disclaimer. May I now hand you over to Lars Korinth of TRATON, who will start the meeting today.

Thank you. Dear investors and analysts, welcome to the TRATON Second Quarter 2022 Conference Call. Thank you for joining us today. Together with me, as usual, are Christian Levin, our CEO; and Annette Danielski, our CFO. Before Annette provides some insights into the drivers of the group's financial results in the second quarter, Christian will comment on the key developments and the overall performance. Finally, we will discuss our outlook for the full year 2022. And as always, after the presentation, we look forward to answering your questions. But before Christian starts, 2 housekeeping items. First, I hope that you received all materials for today's call. Otherwise, please have a look at the TRATON IR website, where you can find everything you need. Second, let me make you aware of the disclaimer on Page 2 of our presentation. With that, I hand it over to Christian.

Okay. Thank you very much, Lars. And also from my side, good morning, good day, good afternoon, wherever you are in this world. So let me start us up with a few key highlights from this first half year of 2022. First of all, the TRATON Group, together with our competitors, Daimler Truck and Volvo Group, took the final steps to form a joint venture in setting up the first high-performance charging infrastructure in Europe. And here, I really would like to congratulate the team for a great achievement and great progress. This is one of the most important bottlenecks in order to get going with electrified vehicles. But more so, a further milestone on the way towards sustainable transport was reached at our Scania brand. There, we unveiled our first electric truck for regional long haulage operations, and hence, covering a much bigger part of our customer base. These vehicles are based on the new battery generation and have up to 624 kilowatt hours of capacity, and hence, offering up to 350 kilometers of range between the charges. On the same theme and to take a frontline position in battery technology, Scania has invested in additional R&D facilities, close to our assembly line, a new battery laboratory, which also started up its operation in the second quarter and having the capacity to test up to 170 cells, modules and packs simultaneously. But also MAN is making significant efforts in the battery technology and battery electric vehicles. Starting up early in 2025, we will produce high-voltage batteries for electric trucks and buses in large series at the Nuremberg plant in Germany. MAN is planning to expand production capacity to more than 100,000 batteries per year over the next 5 years. Moving to the U.S., where Navistar, our international brand, launched the preparation to build our new common-based engine, so-called CBE, in its recently expanded Huntsville Powertrain manufacturing plant. The brand plans to introduce this highly competitive engine already next year and then as the second brand in our group. And lastly, our Brazilian colleagues unveiled their new company name at our Capital Markets Day back in May. The new name, Volkswagen Truck & Bus, coincides with the announcement of the expansion of the company's presence in more markets outside of Latin America and then focusing on the West and the North African regions as well as also evaluating opportunities in the Middle East. Let's move on to Page 5. And here, we have an overview of the, what I would call, challenging environment that we are operating in. And I believe that you all will agree that times are not just challenging, but extremely challenging with tense geopolitical situation, with continuing supply chain bottlenecks, and on top of that, very high inflationary pressures. So what is happening is that the war in Ukraine continues. Sanctions against Russia by the international community have been gradually expanded. Energy security and the imminent risk for gas supplies in parts of Europe is coming to top of the agenda. And many industries and economies across the globe continue to be heavily affected. So there is a high degree of uncertainty and the risk that these negative impacts will continue, perhaps further intensify in the upcoming months. But at the same time, truck demand remains relatively robust. We continue to see strong replacement needs with an increasing average fleet age and lead times that go well beyond 12 months and into 2023. Also, demand for used trucks and the price level of used trucks are holding up quite well. We also continue to experience substantial supply chain bottlenecks. Semiconductors have gradually improved, but the situation remains fragile and hard to predict. As you already all know, the war in Ukraine led some massive supply shortages for truck cable harnesses, resulting in a complete still stand for 6 weeks at our MAN truck production facilities. This situation has luckily been easening throughout the second quarter. On one hand, key suppliers in Ukraine have restarted production and are ramping up volumes again, but also our own efforts in MAN to duplicate production at other locations starts to pay off. So MAN could resume production on April 25 and is since then gradually increasing production levels. Nevertheless, the situation in global supply chain remains extremely tense and volatile. Supplies of important components such as tires and other materials as well as freight capacity have become increasingly tight throughout the second quarter. And prices for input materials, pre-products and energy continues to rise, resulting in high inflationary pressures. Inflation rates for both industrial and consumer goods reached levels not seen in decades. And as a direct consequence, interest rates are on the rise and companies across sectors face significant wage demands. In this, of course, rest assured, that we and our teams continue to work really, really hard to offset these effects with our strong product offering, with improved pricing and with an optimized product mix. So let's move into Slide #6 and have a look at the key facts of our performance during the second quarter. Incoming orders declined by 23% compared with an exceptionally strong second quarter of 2021. Unit sales were slightly up by plus 5%. But adjusted for the integration of Navistar, unit sales were below the prior year level, mainly as a result of supply bottlenecks at Scania and the production stopped at MAN. Sales revenue increased significantly with a plus 34%. Also here, the first time consolidation of Navistar plays a major role. We benefited from an improved product mix as well as a strong performance in the vehicle services business. Adjusted for Navistar, sales revenue would have only been 4% below the second quarter of last year. Given the substantial headwinds, our adjusted operating result of EUR 396 million or a return on sales of 4.2% was very solid, but it could not match last year from second quarter. The net cash flow from TRATON operations in the second quarter amounted to a minus EUR 1.5 billion. Extraordinary cash-outs drew this number. The payments related to the Scania antitrust proceedings and settlement agreements at Navistar. And Annette will, of course, come back with more details on this later. If we exclude these cash-outs, net cash flow would have been slightly negative. A robust achievement given the substantial working capital headwinds arising from the supply chain shortages and related production shortfalls. On Slide -- Page 7, you can see the recent development in incoming orders and unit sales in comparison to the medium-term trends. Due to high order backlogs and long delivery times, well into 2023, caused by supply constraints, Scania and MAN, also Navistar, were very restrictive in their order acceptance throughout the second quarter. And as a result, consolidated incoming orders declined 23% or 46% adjusted for the Navistar consolidation effect. Production levels and, as a consequence, unit sales were heavily affected by the earlier mentioned supply chain constraints and the production stopped at MAN, which brings me on to Page #8 in the presentation. On this slide, you can see the quarterly development of unit sales. So while headwinds from the semiconductor shortage were easening during the second quarter, the production stopped at MAN had a particularly strong effect on unit sales in the second quarter. They were almost 17,000 units or 26% lower year-on-year without taking Navistar into account. Including Navistar, unit sales actually increased by 5%. Despite the several supply chain challenges, our unit sales does continue at a reasonable level, thanks to the integration of Navistar. And we are working really, really hard to meet our delivery commitments and continue to work ourselves through our order backlog. And with that, on to Slide #9. Despite all the challenges, we continue to execute also on the long-term strategic agenda called our TRATON Way Forward. A crucial part of our ambition is to be the forerunner in the electrified business, and we have reached several important milestones throughout this first half year on our way to sustainable transport. Of course, charging infrastructure is one indispensable requisite for the success of battery electric trucks and buses. Following recent regulatory clearance, we kicked started a joint venture for high-performance charging infrastructure in Europe together with our JV partners. The team is working quickly to scale up operations and network deployment. It plans to install and operate on average 700 high-performance green energy charge points. And the 3 parties together will invest EUR 500 million. We're also making progress in battery technology. And as I mentioned earlier, Scania set up -- opened a large test lab for batteries, and MAN is investing EUR 100 million in its own battery production facility in its Nuremberg site. Production plans to start 2025. In addition, MAN is shifting up the gear and preparing its production footprint for a strong step-up in BEV volumes. Production of heavy-duty trucks in Munich -- electric trucks in Munich is now set to start already at the beginning of 2024, a year earlier than what was originally planned. We also continued to further expand our product lineup and help our customers in their transformation towards sustainable transportation, showing that for BEVs, there is hardly any limit at all. Scania delivered, as an example, a 74-ton electrified truck or heavy transport to the Swedish mining company, Boliden. Our brand's electric trucks are successfully operating at an LKAB mine in Northern Sweden. So imagine, heavy transport, off-road, Arctic conditions, just to show the world that there is really no limit to what battery electric trucks can do. Also at MAN, we presented eMV series prototype of an upcoming electric truck, which will be launched in 2024. The vehicle capacity for future megawatt charging has been developed in partnership with ABB E-mobility and will offer daily ranges between 600 and 800 kilometers of range. That takes me into Slide #10. We already have a competitive product portfolio in place for a wide range of different applications, and our range of E-vehicles continues to grow. Already today, we make a difference in the marketplace and provide our customers with highly competitive and efficient vehicles. In the second quarter, we delivered more than 420 fully electric units, bringing the number to 841 in the first half year. Figures are still quite low. But when we talk to customers, the interest is really high. And also for medium and heavy-duty trucks, there is growing customer demand for fully electric vehicles. In total, we received orders for 542 electric vehicles in the second quarter and 1,096 in the first half year. The book-to-bill ratio in the second quarter continued to be well above 1, giving us confidence that we will continue to grow this momentum. And with that, I would like to hand over to Annette. Annette, the floor is yours.

Thanks, Christian. And a very warm welcome to everyone on the call from my side as well. I'm now on Slide 12, which shows the key top line figures for the second quarter with a separate Navistar contribution. Excluding Navistar, incoming orders were at 48,000 units or 46% lower compared to very strong prior year quarter. Against a very high order backlog and long delivery times, we have been very restrictive in accepting new orders. The development of order intake was thus driven by supply rather than demand. Our unit sales declined by 26%, excluding Navistar. This was due to the severe supply shortages and especially the temporary stoppage at MAN's truck production. Including Navistar, unit sales totaled 69,500 units, an increase of 5%. Despite the mentioned headwinds, sales revenue was up by 34% to EUR 9.5 billion as a result of the consolidation of Navistar. But even excluding Navistar, sales revenue was almost stable. This was because of a very strong performance in the vehicle service business and an improved product mix and positioning. On our service business, on Page 13, which continues to gain traction, sales revenue increased by 62% to EUR 2.1 billion with improvements in each brand. Again, the inclusion of Navistar was the key driver of the increase. But also adjusting for the consolidation effect, growth in the vehicle service business was at 15%. As a result, the sales revenue share within TRATON operations increased to about 23% from 19% in the prior year period. We continue to invest to further expand our service business to drive growth as well as taking advantage of a stabilizing effect on TRATON's sales revenue and earnings. Moving to Slide 14 and to our profitability and cash generation, again with a separate Navistar contribution. The adjusted operating result came in at EUR 396 million, EUR 250 million below the previous year level. This corresponds to an adjusted return on sales of 4.2%. The decline was mainly due to the severe supply chain issues and shortages and especially the production stop at MAN, and so resulting in lower capacity utilization. Significantly higher prices for energy, raw materials and other broad impacts as well as for logistics service were largely offset by higher selling prices. A quick comment on operating results as booked, which increased by EUR 5 million year-on-year to EUR 306 million in the second quarter. We booked further impairments of a total EUR 90 million in the period under review mainly related to the war in the Ukraine. However, they were significantly below the onetime items of EUR 311 million in the second quarter of 2021. Net cash flow of TRATON operation amounted to a negative EUR 1.5 billion. The main driver were the payment of a total EUR 1.4 billion related to Scania antitrust proceedings and settlement agreements at Navistar. I will come back to this in a minute. Let us have a look at the segment performance of the second quarter on the next page. Sales revenue at Scania Vehicles & Services were slightly down year-on-year, while MAN Truck & Bus recorded a double-digit percent decline. Because of the integration of Navistar and a very high growth of 36% at Volkswagen Truck & Bus, TRATON operations sales revenue was 33% higher year-on-year. Financial service increased by 46%, mainly due to the consolidation of Navistar financial service business as well as continued strong underlying performance. Moving to the right of the chart and to adjusted operating results by segment. Scania Vehicles & Services with EUR 291 million and return on sales of 8%. Despite the massive effect from the production stop, MAN was able to effectively limit that impact on its result. The plant recorded an adjusted operating return result of minus EUR 23 million and a slightly negative adjusted return on sales of minus 0.9%. I will explain Scania's and MAN's result in more detail in a minute. Navistar sales and service operating results reached EUR 81 million, a return on sales of 3.1%. The brand continued to be negatively impacted by shortages and supply of semiconductor and other key components. In addition, Navistar booked an impairment related to the sale of the Brazilian engine business, which we did not adjust for. Volkswagen Truck & Bus achieved an outstanding 11.1% return on sales. This performance was driven by higher sales revenue and improved product mix and a very strong pricing. Lastly, the financial service business reached an adjusted return on sales of 24.1% and an adjusted operating result of EUR 75 million. Please bear in mind that these results include the negative effects of the purchase price allocation, which totaled EUR 68 million within the corporate items. Excluding the PPA, TRATON's adjusted operating results would have totaled EUR 464 million with a return on sales of 4.9%. Let me provide some more background on Scania's performance on Slide 16. Truck unit sales declined by 25% in a challenging environment against the exceptionally strong prior year quarter. This mainly resulted from shortage and supply of semiconductors and other key components as well as shortage in logistic capacities. The volume and total decline on revenue was almost offset by a significant increase in sales revenue in the vehicle and service business and improved product mix. As a result, the brand recorded sales revenue of EUR 3.7 billion, only down by 2%. The lower unit sale and production utilization negatively impacted profitability. In addition, earnings were affected by higher costs for raw materials. At the same time, Scania continued to invest particularly in the further development for e-mobility solutions and the expansion of its vehicle service business. As a result, Scania recorded an adjusted return on sales of 8%. This is roughly on par with the previous quarter, but significantly behind the strong second quarter of last year. While uncertainty remains high, we expect Scania to improve its performance in the second half of the year. The semiconductor situation should improve further from here. In addition, we expect additional momentum from the continued introduction of the new powertrains, the common-base engine. Moving to the next slide, and a more detailed look at the MAN performance. Considering the production stop in the second quarter and the gradual ramp-up of production since 25th of April and the resulting volume shortfall, profitability was very solid. Production levels were heavily affected by the lack of wiring harness due to the war in the Ukraine. As a consequence, truck unit sales declined by 46% year-over-year in the second quarter. This is roughly on par with the volumes in the second quarter 2020, where we've had the strongest effect from the COVID-19 pandemic. The team has being implementing countermeasures to offset these effects, including the duplication of the supply structure for wiring harness and the temporary introduction of short-term work. In addition, the sites were impacted by increased raw materials and energy prices. These effects were offset especially by improved market and product mix as well as a strong performance in the vehicle service business. Despite the massive effect on the production stops, MAN was able to limit its impact on its result and recorded only a slight negative adjusted return on sales of minus 0.9%. If we would exclude the production stop, we estimate that the adjusted return on sales would have been between 4.5% to 5% in the first half of 2022. A clear evidence that the robustness of MAN'S business model and earnings profile is structurally improving. On Slide 18 is the net cash flow, which is now referring to the TRATON operations. Gross cash flow at EUR 862 million in the second quarter was almost on par with the prior year level, thanks to the improved reported operating result. Working capital movements remained a significant headwind. We recorded a further buildup of inventories related to the ongoing supply bottlenecks for both in parts and logistics shortages as well as higher trade receivables. In addition, the net cash flow was significantly affected by the payment of in total EUR 1.4 billion related to Scania litigation and Navistar agreement settlements. As already announced in our first quarter conference call, Scania settled the fine of EUR 937 million, which includes interest imposed in the EU antitrust proceedings. In addition, Navistar made final payment of totaling EUR 420 million in June 2022 following the court approval of the profit sharing settlement agreement and the Krzysiak action settlement agreement. This negatively impacted cash tied up in working capital, increasing provisions. Excluding those cash-outs, net cash flow was only slightly negative at minus EUR 177 million. This was due to further build up of working capital resulting from supply chain shortages and production shortfall. This leads me to the net debt bridge on Slide 19. Compared to the first quarter 2022, the net debt position of TRATON's operation increased by more than EUR 1.4 billion to EUR 2.9 billion as a consequence of the mentioned payments. We included the net debt position for corporate items to provide the full picture of TRATON Group's net debt position, excluding the financial service business. Corporate items added EUR 4.4 billion, of which EUR 3.1 billion stem from the acquisition of Navistar back in 2021. In total, net debt of TRATON Group excluding financial service totaled EUR 7.3 billion at the end of the second quarter 2022. Reducing our net debt remains a priority. Looking towards the second half of the year, we expect positive effects from improved earnings and lower working capital. Moving on to the full year outlook, and starting with the truck market. It is expected that our core markets will continue to grow in 2022 with expansion rates varying from region to region. Most market forecasts foresee an increase of the truck market in Europe in the range between 0% and plus 10% for the year 2022. For the South American market, current estimates range between minus 5% to plus 10%. For North American market, participants are slightly more optimistic. Truck market growth in North America is forecasted to be between 0% and plus 10% -- plus 15%. There's still a high degree of uncertainty and high geopolitic and economic risks arising from the ongoing war in Ukraine, persisting effects from the COVID-19 pandemic, possible energy shortages, ongoing supply chain and logistic capacity limitations. This leads me to the next slide, the financial outlook for the TRATON Group in 2022. Our outlook is based on our latest internal planning, the market expectation and our business performance to date. As you are all aware, it remains impossible to predict the effects of the continuing supply chain bottlenecks, the possible energy shortages, the development of COVID-19 pandemic and the further course of the war in the Ukraine with sufficient certainty. We continue to closely monitor these situations and to implement counter measurements to limit the impact on our operations. We slightly reduce our expectation for unit sales, and now project a substantial year-on-year increase in unit sales. At the same time, we continue to expect a very sharp increase in sales revenue in the fiscal year 2022. Further, we confirm the basis of our expected range of adjusted operating return on sales to 5% to 6%. However, in a highly uncertain volatile environment and the given supply chain challenges, the risk is currently more towards the lower end of this range. Our guidance is including the effects of the purchase price allocation, which is expected to range between EUR 270 million to EUR 290 million. We confirm that our net cash flow for TRATON operation is expected to range between EUR 700 million and EUR 1 billion. Please note that it does not include the mentioned cash-out in connection with the EU antitrust proceedings. Now let me hand back to Christian for his final remarks.

Okay. Thank you very much, Annette. So before entering into the Q&A session, just let me summarize some of the main takeaways from the call today. So we are in TRATON pushing our strategic agenda forward with very strong progress in driving electrification. We achieved a robust development of sales revenue in the second quarter despite extremely strong headwinds in production and unit sales. Our results development underscores improving resilience in a highly challenging environment. And cash flow and the net debt were impacted by further working capital buildup and payments related to legal proceedings. While we continue to see high risks in our environment, we largely confirm our outlook and expect improved earning momentum and net cash flow in the second half of 2022. And with that, I stop and hand back to you, Lars.

Thank you, Christian and Annette. Let us now open the floor for the Q&A.

[Operator Instructions] We'll take our first question from Klas Bergelind with Citi.

So my first one is on the margin in Scania. How much of the drag here is linked to investments in R&D group platform, et cetera, in the rest of the group? And Christian, you talked about this before. When are you planning to allocate R&D more evenly through the brands? So I think this is something you talked about at the CMD. Obviously, the Scania margin is yet again underperforming key peers. Or is it something else going on? If I look at the ASP, it's very solid, looks like driven both by strong services and higher prices to compensate for cost inflation. So I'm just interested in that investment impact. I'll start here.

Yes. A good question, Klas. And perhaps I start in the end of your question. So of course, none of us is happy with Scania performing anything below double digit in the strong demand environment that we're working in right now. So mainly the lower performance is explained -- solely explained by low truck deliveries, in combination, of course, with full manning. So worst of 2 worlds you can say. We are -- and we were, as you know, expecting to ramp up fast during Q2. We didn't manage because of shortages and also because of changing over to the completely new driveline, the group driveline, where we actually changed more than half of the components on the truck. But then having full manning -- so full cost and low production output is, of course, a lethal cocktail. So that is actually the explanation of the Scania performance. Moving on to your -- the beginning of your question, okay. So Scania has, of course, been acting as kind of a bank in the former setup of TRATON and doing the absolute majority of the R&D investments and then getting money back with the license fees once the other brands start to take the common components, which will, by the way, then start up with Navistar next year, taking the -- well, not only the engine, but the complete driveline. But you're right. And that is going to change. And maybe Annette will comment upon the details of that. But we're planning already as from next year to have another model, where the brands pay for their R&D engagement as they go regardless of where they happen in the system, meaning that we will have a combined R&D budget for what is combined development and then pay that through a development fund as if it was one brand. So that is going to change quickly. And I think that is one of the key elements in our new setup with combined industrial operation and combined product planning. But maybe I hand over to Annette to give some more details on when you're ready with the new financial steering model.

Yes. So as you mentioned, there's a new setup of the industrial operation. We're working on a new steering model how to allocate the cost in a better way that we can reflect where the R&D belongs to, in which period. And so we're really working on a different view that we not have only a legal entity steering. We also have a management steering. This is the main part. And so we will implement this, and we are working on the next steps. And also we'll reinforce this with closer cooperation and be more transparent how we work together and how we really allocate the cost. And this is really the cornerstone to get the further efficiency, the better cooperation between the brands. So this is really important because this is transparent and shown. And we work then on common working shops together and working with the metals and how we can reduce this. This effort is really to negotiate, yes? And I think this will be a main keystone to go forward.

Okay. Very -- just a follow up, Christian. You say that the main explanation is the production stalls. But did you have more stop days quarter-on-quarter. One of your peers had almost a week better production quarter-on-quarter. But I just want to understand sort of if you had more production stops sequentially.

Yes, we have. And of course, that was not something we expected. But the beginning of the quarter was really, really tough when it came -- I mean it was, again, the semiconductor related to our engine control system, where we have one unique part and one unique supplier, same thing that hurted during Q1. So we're really striving -- and it's improved a lot throughout the quarter and our volumes then gradually came up. So May was kind of acceptable, and June was actually pretty good. And I'm expecting that when we start up again now after the industrial holiday in Sweden, that we are not on full capacity utilization, but towards Q3 we ramp up to be in Q4 to full capacity utilization. And we do not foresee any chip shortages. There might be 1 or 2 stop days, but we're not foreseeing these massive shortages that we have suffered throughout this half year. And that is fully confirmed by all our suppliers at this point.

That's good. My second one then is on MAN, and then -- yes, more positive development, obviously, nearly breakeven in the environment of wire harness issues. So it was actually quite good and came back nicely in June. I heard you say, Annette, the 4% to 5% adjusted in the first half. But can we talk about the exit and the start to July? Is in line with that level, 4% to 5%? Or is it better? Or -- just so we understand the starting point of the wire harness.

No. So we will not guide on months. We are happy that we managed it really good in the third quarter -- in the second quarter. And we believe that they also work on the third quarter. But as you know, we have the summer break here. We have the changeover to Poland, because, as you know, Steyr will stop next year with production. So we really also prepare our production here for the move. But we believe that we will really not be a lot weaker than we expect. But we cannot predict at this point in time. I will not -- really, this is already a starting operation in some areas. So that we -- we ramped down and in August we have the break, yes. So we will not discuss it any longer. But we hope that they continue because they manage it really well. And remember, last year, when we had these semi-finished goods, that they also managed really good with the missing semiconductors. So I believe that they continue. But this is what I can say.

Yes. A very quick final one on VW Truck & Buses. A strong margin yet again. How much of this is price mix on the new product ranges, which will face a tougher compare into 2023, versus structural improvements?

Yes. One thing that really -- they were really successful with is really the position of the new heavy truck line. That is really -- the material and so on, very good. So they have a good pricing momentum. But as you know, the headwinds of price increases also in Latin America are increasing and also they see now the shortage of parts. So this has also happened that we have higher inventories there because they also have the same bottlenecks there. And this is really the question now: how they'll continue with this? But they are used to high inflationary environment better than we are here in Europe and U.S. And so we hope that they continue. But will it stay double digit? Nobody knows. Due to the fact there are shortages plus raw material and other price increases, it could come a little bit lower in the next quarter, yes. We have to make -- really manage this expectation because it's extraordinarily high with the double-digit margin in the services product portfolio, yes.

We'll take our next question from Michael Jacks with Bank of America.

The first one is just on the downward revision. I know it's a slight downward revision to your unit sales guidance. Just want to understand what's changed there to drive this? And which brand is it in? Christian, I know at the CMD, you had expected Scania to have a significant volume ramp-up in the second half. Is this still the case? I'll stop there and I'll ask the second question afterwards.

Yes, I can start off with the volumes, and you can follow up, Annette, on the guidance. So yes, I -- you're right, I stated that we will have a significant ramp-up. I actually thought we would see these numbers coming through already end of the second quarter, which didn't really happen. And again, it was not only shortages, also the changeover into the new driveline. And you can imagine the -- I mean, we changed around 60% of all the components. And what happens is that we changed many of the suppliers. And as we are then late, we also ran into problems that when you abandon a supplier and on top of that you are delayed, then, of course, they are not very friendly towards you, helping you support this delay. So that's just to give some further explanation to why didn't we ramp up during Q2 as we expected. Yes, we are now counting to start to really take back volumes in the second half. The order book is solid. Customers still are screaming to get the products. And how much we actually get out, I don't dare to promise. But it will be significantly better than the first half. That is absolutely clear. Annette, please fill in.

Yes. Because -- as we mentioned before, when we started the year, we told everybody that it will be a very strong second half year and not a strong first half year. So the units we lose in the first year, we cannot make up because our production slots are filled already with this high ramp-up. So we have to reduce a little bit. And it's not a lot. So -- the difference between the 2 guidance are 5% points. So this is where we play, around 3%, 4% -- it's nothing big. But we have to adjust how we make the ranges. And it's still a good increase of over 15%. But we guide this, and I think it's a good thing. But as you know, we have only production slots and they are filled already versus what we expect.

Understood. My second question is on gas in general and shortage risks there. Can you perhaps share what your contingency plans are in the event of shortages? And what your exposure is to higher energy prices going into the winter months?

I think you have to be aware that on our European production, so MAN and Scania together, we account 1/3 of our total consumption. Yes, 1/3 of MAN and Scania is not significant. So I made it wrong. So 1/3 of the energy consumption in Europe at MAN is gas, and for Scania it's not a significant amount. And we have also this MAN production side that are -- is secured in gas supplies. It's like Turkey or Poland. And the main topic is here on our German plant, where we have a potential risk of shortage. So we're working with the team together to minimize the impact of our production. And we're really starting with different measures to reduce the risk that we have there. And we also think about if we can go with alternatives for heating. It's oil, coal, propane, electrification. You know it. So we work on this. Our exposure is not so high. But it's a risk, you're right.

We'll take our next question from Himanshu Agarwal with Jefferies.

Himanshu from Jefferies. My first one is on the order intake. I understand you have been restrictive in booking orders. But still, can you talk about the significant sequential decline in order intake, because I understand the lead times are still the same as Q1, around 12 months, but there was a significant slowdown in the order intake? And also, I think based on 12 months, you probably would have a good idea about the demand in '23 because half of the year is full. So can you talk about like second half of '23, how much acceleration should we expect basically, yes, in terms of the order intake collectively?

Yes. Christian here. I can start. And I understand the figure that we showcase is causing some concern and some questions. So you're right. We have changed our strategy, you could say, when it comes to handling the order book. So we realized that going beyond 1 year and up to 1.5 years in this environment with big uncertainties, high inflation, it doesn't make sense. It doesn't make sense to us because we cannot really foresee what is the cost over there and we cannot properly price the product. But it also doesn't really make sense for our customers as we have been not very good also in predicting when we actually can deliver the product that the customer wants. And on top of that, we do then the transition of it to the new driveline and have ramp-up challenges. So we decided to start to allocate month by month and keep our order book at 12 months, which give us some reasonable oversight of both capacity and cost. So what we actually do is that we release the slots to the dealer network and they get a quota and then they locally have to do the balancing between their customers, which is, of course, a tough work, because it means that -- it doesn't necessarily mean you say no to customers, but it means they get less number of vehicles than what they would like to have. It also means that we, on a central level, can prioritize more profitable markets, which we have done. And you can see in Scania, particularly, sales of Europe is growing on the expense of other markets because that's where we have the most profitable customers and markets. So -- but could we have -- I mean do we foresee 2023? I mean we could have filled 2023 with orders without any doubt, I would say, with all our brands. But we chose not to. Because what are these orders then worth? That is the question. And that brings me to the topic of cancellation. Right now, we have very, very low cancellations. We have -- when we made the forced price increase in MAN on the order book in relation to the cable harness problem, then we had a number of customers who said they wouldn't take it and they actually canceled their orders. But on the other brands, we have very low cancellations, which leads me to believe that customers really, really need the vehicles that they have ordered and that the quality of the order book even at these interest rates and these price levels is very, very robust. So -- but still, we, in the management, we feel more comfortable having a somewhat shorter order book and also giving us a chance to start to work during next year to work it down to more reasonable lead times. Because the risk is always that if you have a huge order book, you don't see when the market turns down because you get bad visibility. And I must say also at 12 months order book, it is a little bit difficult to really see what is happening down the line. But so far, it looks solid. I know I don't fully answer your question, but I think that's as much as I can say at this point on the order book. Annette, do you want to fill-up?

No. You explained it very well already. Cannot add anything.

My second one is for Annette. You talked about reducing the net debt as one of the priorities. And I understand -- so given the macro uncertainty, how do you feel about pausing dividend for some time to accelerate deleveraging?

I think we promised when we did the IPO that we have a 30% to 40% of our earnings after tax that we want to give to our shareholders. And this is really our guidance. And this is where we want to stick and make the continuancy there, yes. And what are our initiatives to bring it down? As we explained, reducing working capital, increase our cash conversion rate at the year-end. And so we're working on our sales having measures to reduce the net debt. And this we are doing in the second half of the year. And I think this is most important that we get a grip on this one first and then not discuss a dividend policy. I think it's more that we operate this work to bring our net debt down.

Okay. And just lastly, a quick one. Can you quantify the short-term benefit you received at MAN in Q1 and Q2?

No. It's a minor amount. It's nothing big. Yes, it's not like -- no, we would not give -- we'll definitely publish it. But it's nothing -- it's a measure, but we don't give an amount. But it's a lower amount, that I can say you. But it helps.

[Operator Instructions] We'll take our next question from Hampus Engellau with Handelsbanken.

2 questions for me. Christian, could you maybe talk a little bit about what you say -- I mean, this kind of connected fleet in terms of customer activity and the service business during the quarter. Have you seen any kind of changes sequentially over month that is maybe not simply related? That's my first question. Second question is more on Navistar. Very interesting to hear that you're putting out the captive engine in Navistar for next year. Could you talk a little bit how you see the contracts with Cummins and how customers -- have you seen any customer feedback so far from testing? And also what kind of an aftermarket potential that could generate? Those are my 2 questions.

Hampus, great questions. So perhaps starting from the back then, Navistar. Yes, I agree with you, it's extremely promising that -- not only it's the group driveline. It's the captive driveline that is going into the international brand next year. Of course, our strategy is not only to challenge Cummins' position, but also to kind of drive customers from the 15-liter segment, where Cummins dominates also with our competitors, down to 13 liters, where you get a much better torque horsepower ratio, and therefore, get much better fuel efficiency. So not only will we -- with our state-of-the-art engine, which is some 8% to 10% better than the peers. We will also gain from this downsizing. And of course, that's a challenge to convince the customers. But as they test it, I'm quite sure. And we have talked to big customers, big fleets. They are all into this. So they understand that logic. We are not yet having customer reactions. The first vehicles are tested. They run in our internal fleet, and they are confirming extremely good fuel savings compared to what we can offer today. And we're not talking 8% like in Europe. We are rather in the range above 12% to 13%. So that's, of course, extremely promising. When it comes to the aftersales impact, of course -- well, the downside is that you have to wait until you build up the fleet. So the impact in the first couple of years will be minor. But per vehicle sold, we think that we can at least double the aftersales revenue by not only being captive, but also being much more aggressive on selling contracts, something that Navistar today understandably is not very good at as they don't have these products. And when you look into what our peers Cummins and Volvo are doing, I mean they are like in the rest of the world and specifically in Europe, they are selling a lot of contracts for maintenance and repairs, are then included at the fixed cost. So that is going to be the strategy. So over a course of 5 years, you're really going to see an impact on service revenues, which is, of course, badly needed in Navistar. They've had a hard time coping with the ups and downs in power market. So I don't know. Annette, do you want to complement on the Navistar?

No, I think you explained already. So nothing to add.

And of course, you also asked about the relationship with Cummins. Of course, Cummins they are our partner also in other parts of the business. They are fully aware of what we're doing. And of course, they are determined as good competitors also to give us a match, which could also be a good thing for us in order to get better conditions out of Cummins. But let's see when we have the engine fully launched. Second question -- or your first question actually was on the connected fleet. And yes, that's one other reason why we continue to be rather optimistic around order intake, at least short term. So we don't see any significant reduction in driven kilometers, and we still see old vehicles being engaged in rather frequent transport, which means that the transport capacity is missing. So -- and of course, that is also driving much of the increase in service revenues that we see from us and from our peers. So with some exceptions -- and these exceptions are only the markets that are neighboring Ukraine. These are the only ones where you can see that -- so the transport in and out of Ukraine and, of course, transport in and out of Russia, that's the only part of the world where you see a decline in vehicle usage. That's on the truck side. On the bus side, you actually see increases all over. So -- and that to me means that people are starting to use public transport again post Corona, but it also means that people start to go on the tourist trips on tourist coaches. And that's also what is reflected in our order intake. So nothing worrying in the utilization, actually, at least not yet. And we follow this on a weekly base. So it's -- I think it's rather consistent and good data we have. I hope that answered your question, Hampus.

[Operator Instructions] It appears we have no further questions at this time. I would like to turn it back to your presenters, Lars Korinth, for any additional or closing remarks.

Yes. Thank you. And thank you to everyone on the call for the good discussion. Please reach out to the Investor Relations team in case of any further questions. We are ready to take them and your call. I wish you all a nice remaining day. Thank you for joining us today. Goodbye.

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