Traton SE (8TRA) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call for the 3-months 2023 interim statement of Traton SE. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only-mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] May I now hand you over to Lars Korinth, Head of IR of Traton, who will start the meeting today.

Yes. Thank you for that. Good morning, everyone. Welcome to the Traton First Quarter 2023 Conference Call, and thank you all for joining us today. Before we start, let me first make you aware of the disclaimer. And of course, as always, you can find all relevant documents on our Q1 performance on our website traten.com/ir, including the slides of today's presentation. Together with me today are Christian Levin, our CEO; and Michael Jackstein, who was appointed Traton CFO and CHRO effective 1st of April. So welcome to the team, Michael. I'm also joined by Camilla Dewoon, Head of Corporate Relations. We will start with the presentation of the first quarter results and the updated '23 outlook. After that presentation, we look forward to answering your questions. With that, I hand it over to Christian.

Great. Thank you very much, Lars, and Good morning to everyone out there. Good to have you with us again. Also from my end before we start, very welcome Michael to the team. You're going to head up the areas of finance and human resources where you also have the business development functions, all enabling functions that are super important to us during these times of big transformation. So really look forward to having you on the board, having you on board and having you at my side working together with the rest of the Executive Board to shape the future of the Traton Group.

Thank you for the very warm welcome.

Ladies and gentlemen, we have lost the speaker line. Please stay connected while we reconnect the speaker.

Sorry for that. Excellent. So back to you, Michael.

Well, thank you for the very warm welcome, Christian, and a Good morning from my side as well. I'm honored to join the Traton Executive Board at such an important point in time when we, as a group, take key decisions, execute towards our strategic targets and together shape the transportation industry. During the past years and especially during my time at the Office of the Chairman of Traton Supervisory Board, I gained a lot of insights into this great company and its brands. I will now take the time to connect to the people at Traton and the teams at Scania, MAN, Navistar, Volkswagen Truck & Bus and Traton Financial Services at their various locations and, of course, to onboard as fast as possible. You will certainly understand that I will thus not have an active role in today's Q&A session. But you can be rest assured that after my onboarding, I very much look forward to engage with all of you and meet many of you in person in the quarters and years to come. With that, I hand the floor back to Christian.

Great, Michael. So let's have a look at our first slide, where we see the performance or the strong performance, I would say, over our first quarter of this year 2023. We see a macro environment with continued difficulties, a lot of uncertainty kind of a paradox where despite all the challenges, the transport activity around the world remains pretty high. We will talk later about certain areas or regions where we also see -- start to see headwinds and especially Brazil, where the macroeconomic political situation is driving the market down. But I'm proud to say that we had a very good start of the year, as you can see from the figures. So incoming orders are lower compared to beginning of last year, but then you need to remember at the beginning of last year, we still were -- had the biggest part of the spacing charges in front of us, and we had not introduced the limitations that we still have in all our brands today as a means to take care of the very big order book. We had very strong deliveries, up 25%, and we saw performance increase from all of our 3 big brands. Despite that, we say that we have not yet reached the full potential. We have still seen disturbances to our supply chain throughout the quarter. But gradually, we see stability coming back. Sales revenues increased even further, meaning that not only were volumes up, but we also managed to do that with improved pricing with a positive mix and especially with very, very strong results from all our brands in the important earnings area of services. All in all, we managed to achieve a return on sales adjusted of 8.4%. That is of course, a huge improvement all across the Traton group. And therefore, we also made the ad hoc announcement on the 14th of April about the over expected return of sales figure, especially at Scania, where we are in Scania now back into the double-digit margin landscape where we should be, but even more so an impressive step-up of MAN, where they -- and allow me to say finally, reached into positive territory with above 5% return on sales as a result of very strong leadership and a restructuring plan that has gone from PowerPoint to reality. So overall, I would say, a very encouraging performance in our first 3 months of this year, but we certainly plan for more to come. I also see this as a very good confirmation that we are on our way towards delivering on what we set out at the Capital Markets Day, our full potential and bringing us towards our strategic return targets. Next slide, please. So not only financially, we did a lot of steps forward during the quarter, but also operationally and strategically. And just to mention a few highlights that you can see on this slide, starting with Traton Financial Services, which we discussed lately at our annual results conference. 1st of April, one important milestone was achieved, and that means that we can go live with our global commercial vehicle financial services entity. So under the leadership of Johan Haeggman, we now transferred all the Scania Financial Services units into the new legal unit Traton Financial Services. There will be many steps on the way, as you know, during this year to be operational with all our brands, but we will continue to report to you on that continuously. Then we build just a week ago, the joint developed battery cell together with Northvolt, specifically tailored for heavy commercial vehicle, an impressive lifetime of more than 1.5 million kilometers can be achieved, which is amazing because it means that the battery cell life now starts to be in line with the vehicle technical life line. And hence, the big discussion about the business model and about secondhand use of batteries becomes less challenging or less complicated. So a very important announcement. And of course, working with Northvolt means that we are producing battery cells very close to fossil free. An important announcement in the area of battery electric vehicles was also done together with...

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Delivered through '24, '25 and '26. On the Scania end, we also made delivery where we got a lot of attention. We delivered what is today Norway's largest and heaviest battery electric commercial vehicle, a total vehicle weight of 66 tonnes was delivered. It's going to do a limestone transport in a quarry in Northern Norway. Norway, by the way, the market there are already 100 battery electric Scania vehicles in operation. On the Navistar side, we have decided to continue the launch of the common base engine and the common Driveline and are now also doing the commercial launch for the vocational market and to finalize with Volkswagen Truck & Bus. We celebrated 30 years anniversary since the very first introduction of the Volkswagen in the Brazilian market. Okay. Back to figures and back to our Q1 performance, where as I said in the beginning, our incoming orders ended at 68,500 vehicles, which is 28%, sorry, lower than the same period last year. But remember, in that period, we have not yet started to limit our orders. And I have repeated that throughout the calls in the last quarter. We do that in order to make sure that we have the cost situation under control, and we do that in order to give a relevant delivery time to our customers. And when you start to get beyond 12 months, both of these factors become problematic. Hence, we still operate under the circumstances, and therefore, we end up at 68.5%. Said that, the underlying demand is still very good with one exception, and that is Brazil, where the political and macroeconomic situation, plus the introduction of what we in Europe called Euro 6, so the [indiscernible] P-8, plus overstocking of the previous emission step, Euro 5 have led to a weaker demand in the first quarter of this year. Unit sales were, as I said before, also significantly up with 25% and we did a record 84,600 units sales in the first quarter. You all understand that, that means that the supply chain continued to stabilize. It does, however, not mean that it is completely stabilized. It does not go one single day without minor disturbances, and it is particularly challenging in our North American operation with our Navistar brand. We see more easening coming out of the European system. So said that, we could nevertheless then run our production in all our brands on record level, even if we still see more potential to come. But with that, I would like to hand over back to Michael for more financial performance figures in detail. Michael?

Thank you, Christian. On Slide 9, you can see our sales revenue development with a separate vehicle services business contribution. Sales revenue increased by 31% in the first quarter to EUR 11.2 billion. This development was in particular driven by the strongly expanded new vehicle sales volumes and the favorable market and product mix. In addition, we benefited from the successful realization of higher vehicle prices. Importantly, sales revenue in the vehicle services business increased further by about 10% as demand for spare parts and repair and maintenance services remains high given aged fleets and strong utilization. With this, the business continues to contribute significantly to Traton success and resilience, not least due to a stabilizing effect. Improving volumes and the stronger top line as main drivers translated into significantly enhanced earnings, which brings me to Slide 10 of our presentation. As you can see, the adjusted operating results of the Traton Group more than doubled to EUR 935 million. This corresponds to a very strong adjusted return on sales of 8.4%, up by 370 basis points year-over-year and 230 basis points quarter-over-quarter. With that, we were able to continue the strong underlying earnings trajectory with performance step-ups in every quarter since Q2 last year. This positive development was in particular due to the higher utilization of our production capacity, increased vehicle deliveries and the associated better fixed cost absorption. In addition, thanks to the successful execution of pricing initiatives for new vehicles across all our brands, we were able to compensate for the significantly increased input cost pressures, a very encouraging development, which impressively underlines that the Traton Group is on track to deliver on the strategic return on sales target by 2024. Let us have a look at the performance of our brands and segments. Scania vehicles and services benefited from higher volumes, better utilization in the production, higher pricing and growth in vehicle services. As a result, at an adjusted return on sales of 13.3%, Scania achieved an outstanding profitability level. Also, MAN Truck & Bus recorded an impressive step-up of 360 basis points to an adjusted return on sales of 5.8% and profitability that the brand has not seen for quite a while and a key contributor to Traton's successful performance in the first quarter. The strong improvement was driven by better fixed cost absorption to higher volumes and growth in the vehicle services business as well as positive pricing. While these for sure are impressive achievements, it is by far not the end of MAN's journey towards the strategic margin target of 8%, especially since large effects from the realignment program are yet to materialize in the second half year and fully in 2024. Navistar again, showed a very compelling performance with a return on sales of 6.3% despite continued supply chain constraints in North America. The strong year-on-year improvement was mainly driven by increased unit sales, better production utilization as well as strong implementation of pricing initiatives. In challenging markets, especially in Brazil, Volkswagen Truck & Bus recorded a strong return on sales of 9.2%. Despite lower unit sales as a result of a stricter emission regulation in Brazil, sales revenue slightly increased. This was mainly due to improved pricing and stronger product positioning. A common theme across all our brands in the first quarter with strong headwinds from higher prices for components, raw materials and energy, which were able to compensate via successful pricing initiatives. Finally, Traton Financial Services recorded double-digit percentage growth on the back of an expansion of its portfolio and an increased interest income. Higher funding costs and as a result, lower spreads had a counteracting effect on the margin, which came in slightly lower year-on-year at 23.3%. Moving to our cash flow and net debt on Page 12. As you can see, net financial debt of Traton operations improved by about EUR 900 million to EUR 2.6 billion by the end of the first quarter 2023. Key driver for this development was the positive net cash flow of EUR 737 million. This reflects above all the improved operating performance but also includes the proceeds from the closed sale of Scania Finance Russia of EUR 400 million. We had already indicated this effect during our full year results conference. Nevertheless, cash conversion was held back by a further increased working capital. Almost EUR 600 million cash was tied up, largely due to higher inventories as a result of the strong expansion of production volumes and ongoing logistic shortages as well as high receivables due to the increased deliveries. Among adding the EUR 4.6 billion under corporate items brings the total net financial debt in our industrial business to a level of EUR 7.2 billion, corresponding to an improvement of about EUR 500 million versus year-end 2022. Back to you, Christian.

Thank you very much, Michael, and that brings us to the outlook of this calendar year, where we say that the truck markets remain robust, but we see a bit different development in different markets. Starting with Europe and North America, we are expecting a range from flat up to plus 15%, but rather an expansion from the midpoint. Slightly the better outlook due to higher production levels in the industry and improving supply chains rather than demand itself. Overall, truck lead times are in the industry slightly shorter, and order books are opening up for first quarter of 2024. So there is still a significant catch-up on the demand side to be made. In South America, on the other side, the market is expected to decline, in particular, in the big market of Brazil because of previously mentioned reasons. All in all, I must say that uncertainty continues to be historically high. Key factors such as the supply chain, logistics shortages, but especially the war in Ukraine makes our markets extremely difficult to predict, meaning for us that we must be ready with short notice to react to things happening in regions, but even more so in individual markets. Over to you, Michael.

Thanks, Christian. And now on to the full year outlook, which we upgrade today in light of the better-than-expected performance in the first 3 months of the year. Based on the high order backlog and improved supply chains, we confirm our forecast for both unit sales and sales revenue to grow by 5% to 15%. Given the strong start to the year, we upgrade our forecast for the adjusted operating return on sales by 100 basis points and now expected in the range of 7% to 8%. Finally, we expect net cash flow for Traton operations to range between EUR 1.8 billion and EUR 2.3 billion. Please note that the net cash flow outlook now includes a positive effect of EUR 500 million related to the intra-group sale of the Scania Financial Services business to Traton Financial Services. Christian elaborated on this earlier. On Traton Group level, this transaction has no impact on the net cash flow. Back to you, Christian.

Great. So before we head into the Q&A, let me quickly summarize this conference, strongly expanded production and unit sales happening stepwise. It's backed by improved supply chain, but there are still headwinds all over the supplier industry. Good price realization, compensating for increased input cost, meaning that we continue to run the system ahead of the cost curve, and we clearly have a double-digit sales revenue growth, very positive. We have a strong momentum in profitability in earnings, particularly thanks to the Scania strong performance that Michael was into, but also MAN finally putting an exclamation mark behind their turn around a very positive performance. Positive net cash flow in our Traton operations, meaning that our net financial debt position is improving in the Industrial business. So a very good start of 2023. But of course, a long way to go, and we now use this momentum to continue to do a good year. Based on a better-than-expected performance, we have upgraded our financial outlook, confirming a strong top line outlook for both volumes and sales revenue but increasing the forecast for adjusted return on sales by 100 basis points. At 78% aim for a substantial step-up, we harness the momentum in Q1 to take crucial steps towards our strategic target return levels. So it feels very good today to be able to confirm that we are on the right track. 2023 is the year when we enforce our execution part of the Traton Way Forward strategy and we deliver as we have promised. Thank you very much, and back to you, Lars to Q&A.

Thank you Christian and Michael, of course. So let's open the floor for the Q&A. Before we start, for your information, we will first take questions from analysts and investors. And from about 10 to 11, if there are some, we will also take questions from the media. So operator, let's start the Q&A.

Yes. Thank you ladies and gentlemen. We will now begin the question-and-answer session. [Operator Instructions] One moment for the first question, please. And the first question comes from Klas Bergelind from Citi. Please go ahead.

Klas, Citi. The first one I have is on the ASPs and similar discussion, Christian, as we had during the last call. There are obviously mix effects in there. There is FX. Most of the ASP increase at the moment, in driven by Volkswagen Truck & Buses. And when we spoke last time, you talked about it, you wanted to bake in some caution, you reflected about potential price concessions into the second half. Can we talk about what kind of pure price carryover you have now for the group in the first quarter? And if you still think caution is warranted on concessions into the second half, given how you see the current cost inflation developing, I'll start there.

Okay. Thank you very much, Klas. I'll do my best to elaborate on that question. So First of all, on the cost and what we see is that despite that, of course, raw material listed prices are coming down, we have rather long contracts, meaning that we don't really see costs coming down yet in our order book, and that was expected. On the other hand, they are also not increasing as we expected, and that's why I can say that the way we have set our prices, we are running ahead of the curve, and that's partly, of course, what you see in our operating returns. So going forward, as we have full order books, and as we always do, we work with pricing in our individual and in our individual markets to maximize the return. And up until now, I have not seen any particular deals where we have had to make kind of price concessions from the levels that we have set out to achieve. So at some point, of course, when the market turns south and no one knows when that will happen, but there will be discussions. But I would say that we have that pretty well in our pocket right now. There are rather a few things perhaps on the upside. And of course, one of this is on the Scania side, we still have less than 50% of our invoice being made with the combined CB1, the combined Traton Group Driveline, where we know that we have at least EUR 3,500 price increases to be harvested. And then you know that volumes in the fourth quarter also starts to pour over to Navistar, where we already have a substantial order book with the very same driveline. And there, we will, of course, also see a perhaps even higher pricing effect when we bring that to the market as the fuel saving effect is even stronger on the Navistar brand. So I think there are a couple of positives, but of course, this is as you know, in our industry, very, very difficult to predict. The thing that makes me sleep good at night is really that we have the order book at hand with the exception of truck and bus in Brazil. And I see that month by month, we keep the -- keep or increase, I would say, the gross margin of trucks. I hope that answered your question.

Yes. No, absolutely. My point was exactly that. But obviously, when the CBE is kicking in on Scania, and then you get the backlog out with higher pricing. The flat ASP implied by the guide there must be quite a big mix effect in there, particularly on the service side. I guess that was my point.

And you're right. And of course, also some currency.

Yes. Okay. My second one is on the market outlook. You now see a bit higher growth both for Europe and North America. This is a supply-driven considerable improvement in Europe, but North America is still tough looking at supply you say. Can we talk about how you see the supply chain developing in North America and into the second half as that is sort of still a quite tricky picture. Thank you.

Yes, it is. And it's not so much anymore about semiconductors, it's also one of the other semiconductor, but we're not talking a direct disturbance of the line. It's really the whole industry has a problem to catch up with the big order books that the whole industry has built up, and there is fight over capacity on basic stuff such as frames, axle, engines. And I think well, you know where we're coming from. We're the brand we're taking market share, hence, we need to eat out of the capacity of the others. We have signaled that pretty strongly, and we take advantage of the Traton Group purchase power in doing so. But nevertheless, I have a feeling that we have suffered a little bit more than our competitors in North America, and there is more to be done. When we're out of this, if this happens in the second half of this year or I doubt, to be honest, I think we need to be into 2024 before we see a stabilization of the of the supply chain and the investments needed from the supplier base to catch up. It seems that the American market holds up, and we know that we have emission legislations coming into the market in 2025. So most probably, there will be prebuy effects to '24 meaning that volumes will continue to be high. So where we might see a dip in other parts of the world, I doubt that we will see a dip in North America. And hence, we kind of we need to wait for this long stretch of investments happening in the supplier base to get the capacity where we want it and where we need it.

My third, yes. Thank you. My third and final one is on the service business. And if we look at Scania, it looks like 15% organic growth versus percent in the fourth. Some of your peers have reported an acceleration of the pure volumes quarter-on-quarter and increased contract penetration, i.e., sales. If we back out pricing and look at quarter-on-quarter development for Scania Services, did you see similar improved volume effect? Or is it largely pricing explaining the growth?

Yes. We have to take out Russia, as you know, that's a relatively big market in the Scania context where we're now, of course, invoicing zero. And if you take that out, if I remember right, we have a more than 8% volume growth on the services side, meaning ours and parts. On top of that, that you have pricing. And on top of that, you have currency which brings to these impressive basically never seen before growth figures. You have to add in this context, we also have disturbances on the supply chain side into the parts business. We had rather low availability out of our parts operation, but we now establish ourselves back above 96% availability and that, of course, also helps to drive volumes. So all in all, I would say we're back where we should be in terms of stability, and we continue to enjoy the both groups of volume as a result of that and the pricing growth.

And the next question comes from Hampus Engellau from Handelsbanken. Please go ahead. I'm sorry, I got the wrong line. The next question comes from Nicolai Kempf from Deutsche Bank. Nicolai Kempf from Deutsche Bank.

Nicolai Kempf from Deutsche Bank. And first of all, welcome Jackstein, great to have you on board. My first question is also on the guidance. And we appreciate that you increase the margin outlook. But I think the top line still looks a bit cautious, especially keep in mind, first quarter revenue is up 31%. Probably second quarter, you have a low base. So is this rather a measure of cautious or should we expect that volumes are declining second half of the year?

Hi Michael, give it a shot.

I'll give it a shot. So thank you for the warm welcome. Well, actually, we increased the forecasted range based on the better-than-expected performance in Q1. There have been only insignificant changes to the expectations in the remaining quarters of the year compared to the original forecast. So the strong uplift in profitability in Q1, you have to take into consideration was, to a large extent, due to higher production volumes as a result of the improved supply situation as explained and mentioned by Christian before and the corresponding higher fixed cost absorption. Nevertheless, the strong Q1 results and the margin of 8.4% cannot simply be extrapolated to the full year. As already mentioned by Christian, based on the higher order backlog and prevailing demand for trucks in the market, we are optimistic. However, we continue to see risks in the supply chain, also in the availability of logistics capacities and the economic environment, as mentioned before. So that's why we feel comfortable with the outlook we've...

I think very complete answer, Michael. Nothing really to add. Maybe seeing that we, of course, compare to also a stronger Q3, Q4 from last year when we do this. So -- and of course, also Brazil and Latin America being a bit of a question mark. Yes. So we stick to that forecast.

Okay. Thanks. And maybe just my second last one. Can you comment on current lead times? And what's your target for the lead times by how much should they come down by end of the year?

Yes, I'll take that one, Nicolai. So here we need to be a bit brand-dependent, of course, in Volkswagen Truck & Bus, completely dependent on the Brazilian market. Of course, you can get the vehicle basically immediately. They also work with the stock refill model. But in our big brands, I think Navistar is today the one who has the longest order book, and you're well into next year. So we are beyond 9 months and up to 12 months. waiting time. With Scania and MAN, we are improving our lead times as we are eating out of the order book now with very high production levels. But nevertheless, you are also in the range, 6 to 12 months depending on market. You know that we make market allocations because we want the priorities to be made locally. So it's a per market allocation, then it's a per dealer allocation. And then they locally define which are the most important customers to get priority in the order book. So for an individual customer, it can vary depending on if the dealer then holds, which they usually do hold a few slots free. So towards the end of the year, you asked where are we? Well as things look, we are just slightly better. I hope that we're down to 6 months. Our target is certainly to be a 3-month average lead time. There is absolutely no benefit in our industry to have this huge order book, and we have seen that throughout the last 18 months, 2 years. We want to be able to respond quickly to demand and we want also to have not just the 2 in the water, but feet and leg in the water to understand where is the market, and you can only do that if you have a short order book. So but I guess that will not happen until we are well into 2024 or perhaps even beyond.

Perfect. And again, congrats to the strong start of the year.

And the next question comes from Hampus Engellau from Handelsbanken.

Three questions from me. Maybe starting off on the Q1 deliveries. If it would be possible for you guys to maybe add some flavor on how much that was held back in terms of growth due to component shortages. Second question is on the pricing. I mean, Klas touched up on that. But if you could put the number on average prices last year compared to where you are now in price compensation for vehicles. And then the last is on the outlook again on the market side. To get to a flat market in North America, given how the production plans looks for the OEMs in the first half, we need to have 10% drop in Q3 and 15% drop in Q4. Is the lower part of the range just on the back of seeing risk in all component shortages? Or is it just a cautious -- how should we think about that? Those are my few questions.