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Edited Transcript of 8TRA.DE earnings conference call or presentation 4-May-20 12:00pm GMT

Q1 2020 Traton SE Earnings Call

May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Traton SE earnings conference call or presentation Monday, May 4, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Hermann Renschler

Traton SE - CEO & Member of the Executive Board

* Christian Schulz

Traton SE - CFO & Member of the Executive Board

* Rolf Woller

Traton SE - Head of IR

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Conference Call Participants

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* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Demian Mizupho Flowers

Commerzbank AG, Research Division - Team Head Automotive

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* José Maria Asumendi

JP Morgan Chase & Co, Research Division - Head of the European Automotive Team

* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Tim Rokossa

Deutsche Bank AG, Research Division - Research Analyst

* Xingzhou Lu

UBS Investment Bank, Research Division - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Q1 2020 conference call of TRATON SE. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Rolf Woller, Head of Treasury and Investor Relations, who will lead you through this conference? Please go ahead, sir.

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Rolf Woller, Traton SE - Head of IR [2]

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Thank you very much. A very warm welcome here from our side from Munich office. We hope that everybody who has dialed in is in good health and that also your families are well.

Together with me in Munich, sitting in almost 3 different offices, are several members of the core team, of course, our CEO, Andreas Renschler; our CFO, Christian Schulz; and then we have Klaus Schartel, Head of Law Department, Annette Danielski, Head of Finance; and Julia Kroeber-Riel, Head of Corporate Communications; and myself.

Before we start to give you an update on how trading did during the first 3 months of 2020, I have to make some initial remarks, as you know them. So we hope that you have all seen the material which we have published in the course of this morning. It should be the press release, the 3 months quarterly note as well as the IR presentation. If you have not received them, you'll find them on our web page on the TRATON website.

I should make you aware of the disclaimer which is on Page 2. And I also wanted to state the obvious right upfront. So any questions on Navistar, you know the proposal is out since January 31 -- no, since January 30, I'm sorry. And there is no change actually in status, and therefore, we currently have nothing to add to what has been publicly announced so far.

And how do we proceed today? First, we have Andreas who gives us an overview over the current situation. And once he has finished, he will hand over to Christian who will guide you through all the financials during first quarter and our status outlook. And last not least, we will close the session with a question-and-answer session. (Operator Instructions) Otherwise, it will be a very cumbersome and then boring approach here just having one interviewing all of us.

So with that, I hand over to Andreas. Please, Andreas, the floor is yours.

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [3]

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Thank you, Rolf. Also, welcome to all of you.

Before Christian will elaborate on the financials for the first quarter, let me make some introduction -- introducing remarks on the current situation.

With the COVID-19 pandemic, global economy is faced with an unpredicted -- unprecedented situation even not comparable with the global financial crisis more than -- already more than 10 years ago. Caused by the pandemic, we have seen and continue to see falling demand, supply chain interruptions, temporary closed factories and companies focusing on securing their liquidity. Driven by the standstill of nearly all industries around the globe, the economic outlook for 2020 has been clearly reduced, in some countries to levels not seen during the Great Depression. This has accelerated the downtrend in commercial vehicle market globally, even so expectations before the pandemic has been already low, in particular for the U.S. and Europe.

Furthermore, as global supply chains are not restarted in unpredictable frameworks with many unknowns, the bandwidth with the -- of the listed forecasts illustrates the high uncertainty for the weeks and months to come. Even Americas Commercial Transportation Research Institute, a leading publisher of commercial vehicle industry data for the North American market recognized -- let me read it. Three -- "There are too many unknowns to form an expectations with confidence." This, of course, affected and it's still affecting us across the board, but we implemented effective countermeasures.

First, we assured to protect the health of all our employees around the globe. Suspension of production was in line with the availability of parts, given the impact of the corona pandemic government requirements, the development of sales market and resulting modes of operations of the plants, administration employees, working from home wherever it's possible. We introduced unemployment assistance to strengthen our financial position during the production stop and further focused on safeguarding liquidity by several actions.

Just give you some more light into that. We introduced short-term work, so-called Kurzarbeit, for the majority of our employees at MAN and where possible in group functions based in Germany. Further, in Sweden, we put roughly 19,000 people into kind of a similar unemployment assistance program. And in Brazil, we entered into the so-called forced vacation.

As the transportation industry is systemically important, system critical, we continued our service and replacement parts operations with more than 10,000 employees supporting the daily needs of our customers. Important innovation projects are being continued.

We also supported society and joined the effort to overcome the corona crisis with targeted relief campaigns. TRATON, for instance, supports the dock stop for European Truck Drivers Association, which provides for an improvement in medical care and working conditions for bus and truck drivers on the road.

Meanwhile, we prepared our production for a great gradual safe restart by coordinating the reliable supply of parts by our suppliers as well as the organizations of our own work processes while protecting our colleagues, but also initiate measures to stimulate demand for commercial vehicles.

Scania has initially tested the stability of its supply chain and its production line processes in Sweden and the Netherlands successfully and further continue to ramp up their operation at sites in France and Brazil. MAN Truck & Bus restarted its bus and truck production step-by-step and will continue in the weeks to come. Some holds that the same is valid for Volkswagen Truck & Bus in Brazil who started the assembly line of its main plant in Resende back to -- into operation on April 27. The blend of Volkswagen Truck & Bus in Mexico is scheduled to reopen today. Last, we are restarting administration function depending on COVID development and regulation in the respective countries.

Clearly, for our company, a sound balance sheet and the necessary liquidity are the names of the game in this crisis and so to say at the moment. In general, our balance sheet position is strong with an equity ratio within the Industrial Business of higher than 37% and a net debt to adjusted EBITDA ratio of only 0.1x. After the end of the DPLTA between Volkswagen AG and TRATON SE, terminated as of December 31, 2019, EUR 1.4 billion were transferred in February 2020.

That also holds true looking at our liquidity. We have initiated additional measures in the current environment in order to monitor liquidity even more closely, identify bottlenecks at an early stage and make additional liquidity reserves available to us.

With unrestricted cash for more than -- of more than EUR 2 billion and credit lines of more than EUR 5.5 billion, we are able to safeguard liquidity in these uncertain times.

By implementing strict cost management across the group, further reducing operational costs within our plants and reprioritize investments and R&D, we took decisive action.

As I highlighted before, we already implemented our gradual restart. Clearly, we at TRATON, are well-prepared to get back to old output levels, but it is obvious that the pace to get there is determinated by a combination of factor. Supply as well as demand disruption can interfere our gradual ramp-up and force us to prolong or adjust the ramp-up steps from today's perspective. Similarly, the influence of economic policies and overall health and safety measures will decide on how fast we can proceed to fully establish our operations.

Simplified, there are 3 scenarios on how the economy can develop. First, the most desirable option, the V-shape scenario, where we return to the pre-shock level at the same growth rate. That would mean a fast recovery as a catch-up effect. Second, the U shape, where here, we could expect the growth at a lower level than before but at the same growth rate leading to a delayed recovery. Last and most unfavorable is the so-called L shape scenario. This scenario would mean to end a period of growth at a much lower level in combination with a lower growth rate, which then can be summarized as no recovery or a recession.

Beside the mentioned 3 scenarios, of course, further manifestations are possible like the V-shaped or W-shaped scenario. Overall, the next weeks and months will show how the combination of the before mentioned factors will affect our business.

It's at the time not so clear that we have the crystal ball available that we can see how the things are developing, but we are preparing ourselves for the different scenarios, test out productions. We still have a good order backlog that we can use now, and then depending on the order intake that we can see in the next couple of months, how we can run further and increase production rate.

With that, I hand over to Christian who gives you more detail on the financial figures.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [4]

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Thank you, Andreas. A warm welcome also from my side.

Let me briefly summarize our first 3 months of 2020 from a CFO's perspective before we go back into the presentation. I think it is fair to say that we were running ahead of schedule in January and February of 2020 on both sales revenue and operating profit despite an expected weak market environment for Europe. However, starting mid-March, the decline in European market accelerated and led to a disproportional decline in operating profit in the Industrial Business in Q1. The net cash flow in Industrial Business, however, improved year-over-year, amounted to minus EUR 167 million and was, therefore, better by more than EUR 200 million compared with the first quarter of '19 if you adjust for the sale of the Power Engineering business by that time.

You know the rest of the story quite well. Due to the COVID-19 pandemic, we had to shut all our plants gradually starting from mid-March onwards. Since the environment continues to be characterized by substantial uncertainties regarding the duration and the severity of the disruptions, the impact resulting from COVID-19 on customer demand, the supply chain and production can currently not be accurately forecasted. Therefore, an updated prognosis on our business development in 2020 is still not possible. However, with operations almost completely shut since late March, we achieved to gradually restart our production operations at the end of April. With the continuation in May being a further month of the stepwise ramp-up of production, we expect a substantial drop in sales revenues in second quarter, which will affect all other key figures negatively.

So what can we say? We started from the very beginning on to have close look at cash and liquidity. As per end of April, as Andreas has mentioned, we had more than EUR 2 billion of cash available and more than EUR 5.5 billion of credit lines. So I think it's fair to say that this gives us some freedom to address the challenges as we've determined.

With that, let me return to the presentation and to Page 8. Unit sales were down by 20% to 45,990 units in first quarter. But as you know, and we already discussed, we have seen a deceleration in the overall trend, which already started back in the second half of last year. The reduction in Q1 was mainly driven by the truck business, with markets down as expected in the EU27+3 region. The impact of COVID-19 in March further accelerated the decline and curbed the growth in Brazil and Argentina. Scania and MAN saw double-digit percentage declines, whereas volumes were stable at Caminhões e Ônibus compared to first quarter '19. TRATON GROUP sales revenue decreased by minus 11% in first quarter and fell less than unit sales, mainly due to product mix. Sales revenue in the bus business showed an increase of 11%. The aftersales business posted a slight growth of 2%.

The operating profit in first quarter was down to EUR 161 million, but it is still positive. Operating leverage arising from the volume declines and increasingly difficult used vehicle businesses, together with higher depreciation and amortization charges as well as costs in relation with the rollout of the new truck generation at MAN Truck & Bus led to the margin decrease.

Looking on return on sales by brand. Scania return on sales was coming in at 8.6 compared to minus 240 basis points to first quarter of '19 and Caminhões e Ônibus at 3.1, both resilient in that environment. Whereas, the operating leverage was higher at MAN Truck & Bus, we expected MAN to be weak in Q1 because of the dual production cost as we have discussed coinciding now with the decline in the European truck market. But COVID-19 led to the deterioration of the situation in the second half of March, and by this, operating profit margin declined to minus 3.4%, a significant reduction compared to first quarter '19.

Profit after tax declined to EUR 96 million as a consequence of the low operating profit and less favorable financial results and an increasing tax ratio of 27%. Last, as you can see, cash flow in the Industrial Business was EUR 167 million minus versus EUR 1.607 million in the year before. As said in my intro, please have in mind last year's investing cash flow was supported by the sale of Power Engineering with EUR 1.978 billion. Excluding this effect, industry cash flow year-over-year improved by more than EUR 200 million despite the slump in operating profit.

Just a word to the Annual General Meeting. We decided to postpone the AGM for fiscal year '19. It was previously scheduled for May 28. Due to the strong spread of the coronavirus, we will now announce a new date in the due course of time.

Let us have a look into the 2 segments. I'm on Page #9 now. You can see Industrial Business, the first 2 months of 2020 were on track despite the expected weak European truck market. Key figures in March were then negatively affected by COVID-19. As you know, March is seasonally the strongest month in the first quarter. Incoming orders softened and declined by minus 16% year-over-year in first quarter. The incoming orders for trucks went down by 18% in Q1.

Looking at the incoming orders with the truck business. There was a considerable decrease in the European region driven in particular by the economic downturn and the acceleration due to COVID-19 in March. A similar trend was visible in South America, especially in one of its main markets, Brazil. Incoming orders increased in the Middle East and Asia Pacific regions.

The incoming orders in the bus business were up, with a strong increase in January and February, but a significant reduction in March based on the COVID-19 pandemic outbreak. The coach business came to an abrupt halt. Unit sales, as already mentioned, were down by minus 20% compared to previous year. The book-to-bill ratio in the Industrial Business for first quarter was up to 1.2. Sales revenue in Q1 in the Industrial Business was down by minus 12, less than unit sales decrease. The operating profit was down to EUR 135 million, and the ROS stood at 2.4%. Return on sales was impacted by declined sales revenue, additional costs due to the rollout of the new truck generation in MAN Truck & Bus and an increasingly difficult used vehicle business. In addition, measures taken in connection with COVID-19, in particular, the closing of all our plants, had a negative impact on sales revenue. We already mentioned the net cash flow.

Let us now focus on the Financial Services business. Our net portfolio in Q1 was up by 3%, and the penetration rate was at a level of 39%. The Financial Services operating profit was down by EUR 7 million to EUR 26 million driven by lower margins, higher operating expenses and bad debt provisions.

Page #10. Very briefly, you see sales revenues and return on sales quarter-over-quarter comparison. This is for your reference.

If we go to Page #11, as you can see, and as I mentioned before, European truck market developed according to our expectations in the beginning of the year, but as you see in March, it declined significantly. The growth in Brazil slowed significantly as COVID-19 pandemic started to spread in March. Russia and South Africa also saw declining truck sales. Overall units followed the trend and declined by 20%. TGE units on the MAN side, one more time, up with 10% growth year-over-year in first quarter, but in that environment, not continuing the strong growth rate of the last year. Lastly, bus unit sales were lower with minus 4%. The European region was slightly down, and we saw a slightly positive development in Brazil.

We go to the next page. Looking at this chart, we have to note that the comparison is not always like-to-like as we are mainly heavy-duty truck, but not exclusively, and the time lag between deliveries and registration might be possible. However, taken as an indicator, it gives us quite good feeling of how we trend. For the first quarter, as already indicated quite a while ago, European markets for heavy-duty trucks were down in the first 2 months as expected, and the downtrend further accelerated in March. Our unit development was a notch worse with 35%, largely due to the rollout of the new truck generation at MAN as planned and discussed before and the time lag that I mentioned on deliveries and registrations. A similar market trend was visible in Germany, being down minus 26% versus all volumes minus 32%. In South America, where Brazil is about 80%, we grew by 4%.

Looking in detail into the Brazilian market, the market declined minus 5%, whereas, we increased unit sales by plus 5% in comparison.

The incoming orders declined but remained on a relatively stable footing in Q1. March incoming orders in HDT trucks were down about 20% from February. Cancellations only a bit higher in Q1 than one would expect normally. However, incoming orders in April contracted significantly. Our order backlog should last for several months when operations restart properly. And as we said, we will watch the difficult situation in the European market as well as other major truck markets very, very closely.

Our book-to-bill by brand for first quarter reads as follows: book-to-bill was 1.33x at MAN, plus 13 basis points better than Q1 '19; followed by Scania on a level of 1.14 on prior -- compared to prior year's level; and 0.97 for Caminhões e Ônibus.

Page #14 is for your reference only, as well very briefly only on Industrial Business sales, revenue and return on sales. You can see again how it developed further. Aftersales grew slightly in Q1, with a share of more than around 23% of overall sales. We already focused on the levers on return of sales before.

Page #16. This leads me to the discussion of the bridge by brand. Sales revenue was down at all brands in a similar magnitude and then up to the 12% sales revenue decline in Industrial Business. Regarding return on sales, as mentioned in the beginning, Scania was the most resilient, still showing 8.6% return on sales in Q1; Volkswagen Caminhões e Ônibus at 3.1%; and MAN showed the biggest deviation driven by the effects that I furtherly mentioned. It was the introduction of the new truck. It is an increasing burden of the used vehicle business, and it is a higher operating leverage.

Let's now focus on financial indebtedness and net liquidity within the Industrial Business. The net financial indebtedness increased by EUR 1.6 billion mainly driven by the cash outflow of EUR 1.404 million from the end of the domination and profit and loss transfer agreement with Volkswagen AG for the fiscal year '19. I think we all debated it lengthy in the due course of the capital structure discussion in the IPO, so you should be aware of that effect. Other than that, you can see in the bridge that there are no bigger unexpected [things] and let us end up at EUR 162 million.

If you go to the next page, you can see our leverage ratios comparing by the quarters and over the year. And on the left side, we see that our gearing ratio increased to 1% as it was negative at year-end '19, meaning, we had net cash instead of net debt. And in general, we show a strong balance sheet position in the first quarter. On the right side, we see a net debt adjusted EBITDA ratio with 0.1x, only slightly positive. And again, at the end of the domination and profit loss transfer agreement with Volkswagen AG for the fiscal year '19, it is mainly explaining the change in those ratios.

From the overview now to the Financial Services business, you can see here sales revenues at 31st of March were up 6%. Return on sales was at 12% as operating profit decreased by 21% to a level of EUR 26 million.

Some more detail about the decline in operating profit. Well, our portfolio growth was positive, but there was a negative effect, first, from lower margins; secondly, higher operating expenses, in particular, for IT, for example, and partly due to an increased share of bad debt provisions. Because of that coronavirus outbreak, our customers' payment ability has started to deteriorate. We are working closely together with them to support them in these tough times.

On the next page, the year-over-year net portfolio grew on a sequential basis, declined by 6% versus '19. The main driver for the decline was exchange rate. The penetration rate was sequentially down by 257 basis points to 39% in Q1. And the Financial Services book value of equity decreased compared to year-end to EUR 933 million compared to EUR 971 million in '19. Again, here, financial fixed rate was the effect of the [driver].

We now continue with the last section of today's presentation before the chance to exchange in the Q&A and giving a status update in a heavily volatile time. The environment continues to be characterized by substantial uncertainties regarding the duration and the severity of the disruptions. As stated in the beginning, the impacts resulting from COVID-19 on customer demand, the supply chain and production can currently not be accurately forecasted. And by this, consequently, an updated prognosis on our business development in 2020 is still not possible. I mean we need now to see how April is coming in and most probably also May. The second quarter with the ramp-up of the production gives us a better feeling how the markets overall will develop. Nevertheless, we expect a substantial decline in unit sales for the current quarter, and this will, for sure, affect all key performance indicators.

Another 2 topics at the bottom of the chart to mention. Regarding the proposal to acquire all outstanding common shares in Navistar, there's nothing to be added to what has been publicly stated on January 30. And the merger squeeze-out of the noncontrolling shareholders of MAN SE is planned as publicly stated on February 28.

Next page, you see the outlook on markets. We did not yet reflect in here how COVID-19 will have an impact. You can see widely from ACT, from all other externals, for everybody, it's a glass bowl, and we need to see what the second quarter tells us here for the outlook of the remainder of the year. So Slide 22 and 23 are not containing any updates.

With that, we are happy to take your questions, and I would like to give back to Rolf in order to facilitate the discussion.

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Rolf Woller, Traton SE - Head of IR [5]

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Yes. At this time, it is a little bit different, actually, than usual. I will try to moderate the question-and-answer session with regards to the questions casted, just simply because we are sitting here in 2 different rooms and can't see each other. So don't feel reminded of old Volkswagen times. But this is just for the sake actually of handling this properly.

So moderator, if you could start actually with the Q&A, that would be great.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Klas Bergelind with Citi.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [2]

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It's Klas from Citi. I hope you're both safe and are keeping well. And the first one is on the margin there at Scania ex the Syncros. So if I back out the currency, I get the drop-through operational gearing to around 40% on a 10% organic sales decline. That's a bit bigger than I thought. It's despite ARPU and services being strong in the quarter, and there is no major impact from Cap R&D. I obviously get that you have write-downs on the second-hand trucks, but it should be a little bit more at the MAN side. So my question really is, I'm trying to get a sense for that margin in March. The exit rate at Scania, is that a breakeven number or better? I will start there.

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Rolf Woller, Traton SE - Head of IR [3]

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Yes. This is for Christian, I would say. It's not very easy.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [4]

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Yes. I think if you look on both MAN and Scania, you can basically say that even without corona, MAN would have been negative. So you could consider 50% of what you see in Q1 on the MAN side being an effect out of the COVID-19 market decline. On Scania, I would say it's a bit better than breakeven, and they are managing very well. As you say, we have a couple of effects when it comes to -- on used trucks. That's also into the bad debt increase that I mentioned on Financial Services. But overall, I think you can see Q1 was still very substantially positive on the Scania side. And MAN was a little bit more affected, of course, given the situation that we're in anyhow with the ramp-up and the issues around that, that we have discussed before, Klas.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [5]

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My second one is on orders and deliveries at the start of the quarter. I guess 2 questions in one, I suppose. It seems like orders in April must be trending down at 60%. Could you please break that down maybe between Europe, Brazil, Asia? I guess I mean Asia is very strong. Europe, maybe near 0, Brazil down 70, 80. And then on deliveries, you say that you have a backlog for a couple of months, but deliveries undershot my expectations and can be down more than what the backlog suggests. A big part of Europe is closed for business, so a feeling also for deliveries in the beginning of the quarter would be great.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [6]

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Well, giving detailed outlook here is difficult. I would rather like to have that myself to give the capital market an update on the prognosis. I would say, generally, you can say we see the Asian markets recovering a bit with an increasing demand from Taiwan, Korea and China. That gives some positive feeling from that end on the coming months. We do currently, as you have rightly said, see, of course, a significant reduction in March and also April being very difficult. When it comes to order intake, as we have stated in the press call this morning, we see, let's say, stability in the order program for a couple of months. Now is it 3, 4, 5? Quite honestly, it's hard to tell. And as I said before, we need to see now April and May how they are doing. One thing for sure, Asia heads a little bit more on the Scania and MAN is a little bit more focused on the European market, and thus has a little bit more difficulties from the market side as you have rightly estimated.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [7]

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Okay. My very final one is for Andreas on fleet renewals. You talked about during the press call -- what is the feedback so far from the government versus you guys now lobbying for it? Just try to get a sense where in the order of infrastructure investments in tunneling, road network versus truck renewal programs, where would we see it? It's obviously a very solid proposition. But just to get a feeling on the feedback in your discussions, Andreas, with the different parties.

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [8]

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I think, first of all, it's not only for the investment in good truck that we recommend this to the different governments on the European level and also on the German level. It's a program that will help to increase the investments in the different areas. It could be in the equipment, machinery and what else. Because I believe totally, if we don't manage it -- a lot of countries have managed this pandemic from a health point of view pretty good. Now we can argue back and forth. But basically, I think we see in all these areas decreasing numbers, so they have done pretty good. And we have to make the same intention when it comes to the economic situation that we are not going into a real recession. So for that, my recommendation to them is always look at investment contribution to all of these industries. And one part of it could be, for us, a truck renewal program, that we can increase the number of trucks with Euro 6d in this case, and with Euro 6, Euro Norm, of course, that we can really improve also the CO2 and also the NOx emissions. And that means, at the same time, we can do something for the overall climate, but at the same thing, we see there a potential -- if we are looking it from a -- in the investment industry, that we are not postponing investments, that we are pushing them, that could have a good input or -- it's a good driver for economic -- in the economic situation.

So from my point of view, this is -- makes some sense. So it's not only for us, it's for the overall investment industry. And we can do, in addition, something to renewal the old fleet. And I think one sort of the fleet in Europe is still Euro 3 up to Euro 5, so we have some potential.

The reaction of the government is so far okay. They listen. Of course, they are much focused in how they can solve the issues at the moment, but they are starting a discussion or they are having in the meantime intensive discussions about that, and we will see what the next couple of months are bringing in this field. So there is a kind of willingness. And I'm not judging how China dealt with the pandemic overall. But how they are doing to support the economic situation at the moment, I think that could be also a kind of a good indication for our government to do certain things.

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Operator [9]

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And next question is from Hampus Engellau, Handelsbanken.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [10]

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Three questions for me. Maybe starting off on MAN and the drop-through during the quarter. I guess that most of the run rate was planned, maybe 50% drop in Europe this year. Would it be possible to maybe for you to discuss the drop-through if we adjust for the launch costs? And maybe if you can also quantify the launch costs. Second question is on backlog. And also if you look at the order intake, how was the cancellations in April, i.e. how much of Q1 orders were canceled in April and/or have customers like wanting to postpone delivery? Or how should we think about that? And on the last question, it's more related to the service business. I know the service development during the first quarter, but we have heard rumors of activity being down 20%. How that does correspond with your view of the service business looking at April? I'll stop there.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [11]

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Okay. So Hampus, thanks for your questions. First, I would say, on MAN, I tried to say that before without corona, I think MAN would have been already, if you take 50% of the loss in Q1, then we have been the performance. We do not communicate on detailed level what is operating, what is ramp-up costs like we have discussed before. But you can say the operational performance without corona would have been on that level. When it comes to the orders, these are net orders. That means the slump that you see already in April was on the level that we have discussed in Klas' questions, on that level of 60%, 70%. And now the question is, what will April and May tell us? We have seen couple of cancellations, but not in a magnitude yet. And the third one, on parts and services business. We have seen -- obviously, if you have less transportation, a certain effect also on aftermarket and parts business. Of course, on the level of Scania, parts and performance is always a little bit stronger given the high level of vertical integration in that -- the impact now needs to be seen also if Europe is ramping up again in production and everything, and then you see how the trucks are moving. That will, for sure, also then give us some information on how parts and services business is going to improve or is it going to remain on the current level.

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [12]

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I think it's very important to know. We are looking with our connectivity to a lot of trucks and how much they are used. And in the top of the crisis in Spain and Italy, it was 40% of the trucks were not running. So in the meantime, this improved already. It went to 35%. It went to -- then I think actual is between 20% and 25%. So with this number, when it increased, you would see a recovery on the service as well. So it depends everything on the economic development. If there is no transportation need for a full fleet, for European fleet, for a second, then you will see some issues, and we will have some issues at service as well. But at least, it looks like that when they are restarting also in Italy and Spain, that we can see some more mileage on the trucks again, and that will help us, of course, also in the service business.

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Operator [13]

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The next question is from Demian Flowers, Commerzbank.

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Demian Mizupho Flowers, Commerzbank AG, Research Division - Team Head Automotive [14]

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The first one is going to be on working capital. So now that your plants are reopening, and I think you've given us some good information about how the mechanics of that are working this morning, that should be a key step to helping you limit your cash burn. Can you talk about how the working capital has developed since the start of Q2? Obviously, Q1 was okay. And how do you view the maximum working capital risk for the upcoming quarter? And then secondly, just on the dividend. How do you think about paying this year's already declared dividend? I think Volkswagen is a bit unclear about what exactly it's going to do. Maybe you can confirm that you will still pay it when the AGM is finally rescheduled.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [15]

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Okay. Thanks, Demian. Let me take the questions. Question 1. We've improved working capital last year, second half, as you can see. Inventories, in particular, went down in Q1. Now we saw that we managed on the ordinary business as well in January, February. But as I said before, the used truck environment continues to be challenging. And by this, we already saw now in March certain effects. We -- despite all measures we are taking at the moment, with the ramp-up of production we see the biggest drain on the working capital side in the third quarter of the year 2020. Of course, it's very high on the agenda in the brands and also in the truck board. But having all these ramp-ups, also then in MAN, we have the new truck and everything, and if market is coming back, we expect in our current scenario is most probably Q3 to be the hardest on the working capital side. When it comes to the dividend that we have indicated, as you know, Annual General Meeting, we'll decide about the dividend payment. We do continue to keep on our level of 30% to 40% of our net income. We'll propose this for a discussion. And then the Annual General Meeting, once it is taken place, we'll decide on that.

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Demian Mizupho Flowers, Commerzbank AG, Research Division - Team Head Automotive [16]

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Okay. So maybe just to follow-up briefly then. So on the P&L, would you see the maximum launch costs impact in Q2 and then on the cash side, as you said it's Q3?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [17]

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It's not only the launch because it was an example for the working capital ramp-up. I mean, in general, you see -- I mean our plants have been down. We are ramping up now currently during May. We need to see if there is a second dip from the infection rate that will lead to more restrictive production. And then most probably, if the market is coming back in Europe in certain levels, if then the production is ramping up, if you have your supplies, if you have the launch costs in MAN, you will most probably see the highest rate in working capital overall, and in there, particular on the ramp-up.

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Operator [18]

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The next question is from Daniela Costa, Goldman Sachs.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [19]

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I wanted to ask 2 medium to long-term questions. The first one being can you update us on how you're thinking regarding the MAN Financial Services is evolved -- has evolved over the last few months? And then the second thing, I wanted to hear from you a little bit about how you're thinking around fuel cells is -- on the back of some of your competitors' recent announcements. So what is your take on that?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [20]

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Okay. Maybe on MAN Financial Services, we have continued as we have set the discussions also with Volkswagen, which is currently providing that for MAN. We have gained progress in there. We are currently assessing on pilot markets where we can do something together with Scania Financial Services. So those are progressing. Of course, Daniela, you will understand that in the current situation with COVID and with the ramp-up of the new truck, we need to be careful which markets we take in order to start up pilots. But the strategy is unchanged, and we work towards this direction. And we have a very good exchange with Volkswagen Financial Services on that. Secondly, I don't know if, Andreas, you would like to take the best questions. Or should I refer to fuel cell? Or what do you think?

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [21]

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I can refer to the fuel cell as well. So I think, as you know, we have a very, very good, and also for a longer time now, a good alliance with our Hino colleagues. And we believe of course, in the fuel cell technology long term. And that's the reason we are working very good together with Hino. And as you know, Hino is connected with Toyota. So we are working in the fuel cell business together with, let's call it this, we're the most sophisticated in this industry when it comes to fuel cell, and it's very good. So we are fine with that one.

And the same is on the best thing. We are looking into our global alliance partners and working together in these solutions. We are looking into modular systems for all of our different kind of trucks. And I totally believe this will be at least for the next couple of years, the mainstream that we are following when it comes to alternative drivetrains, not for all applications, but for a lot of applications. And in addition then, we can see in whatever end of the century maybe some other things in fuel cell. But we are looking from that one in a good economic of scales already. And it's much easier to develop something from scratch instead of using existing one and you have to combine that one. So in both things, we are good positioned when it comes to potential economic scales in the future.

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Operator [22]

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The next question is from Tim Rokossa, Deutsche Bank.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [23]

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All 3 of you, Andreas, Christian, Rolf, you have multiple experiences with crisis in the past. Andreas, you said this one is unprecedented, and I think everyone would agree with that. But do you still see that the playbook, i.e. your reactions to it and how you manage them is roughly the same as it used to be before? Or did you have taken any steps that you would have never taken in the past and that are new to you? Secondly, we had this discussion a couple of times in the past. But when I discuss with investors in light of the prelims that we had already, the biggest disappointment still comes out of MAN. It was a big part of the equity story to turn around this business. Now you said 50% of the negativity, Christian, came -- of the negative development came from COVID-19. That still leaves a fairly disappointing development on an underlying basis. And I understand, right now, it's difficult to talk about restructuring in the current mind, and you probably don't want to do this at the moment. But what are you -- what is your thinking post being back in a more normal situation again? Do you see that the demand for restructuring is increasing? And also does this impact the ideas that you had about launching the new truck generation on the MAN side? And then finally, Andreas, maybe for you specifically or Christian as well. Your previous colleague, Martin Daum, gave a fairly upbeat interview over the weekend, actually talking about being back at almost full capacity by the summer already, but obviously doesn't pair too well with you asking for incentive programs on the same morning. I think a lot of people in the industry are asking themselves where he takes that optimism from. Can you help me to understand it?

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [24]

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Let me answer then the last one. Is the better thing, you ask him. I know our figures and my statement before that I see not, whatever, a lot of positive developments without incentivation. Incentivation will help the economic situation, and then we will see. It's a different kind of question until you -- when can you achieve a certain production utilization, with all the -- like Christian mentioned before, the order backlog we have, and it's not a big undertaking, if you have the health measurements in place, and if you can do it, then you can achieve close to full production maybe before June or July. But it depends at least on the order intake. And I would not see it like that so far. It depends on April and May, and what happens in the overall situation economic-wise. So the best thing is you ask him, and maybe he can tell you then in detail where he gets it.

You asked with MAN. Of course, our strategy was and is, first of all, we found here organization that has the oldest truck in the industry. So we put the first restructuring program into place very early. And then we said now we have to do much more. And that was -- the first step was the new truck generation, and this was done now successfully with the organization. And with this new truck generation, we can change all the processes. And that's still valid, besides corona. They had nothing to do with corona. And this allows us to make the next big step. Of course, it's now a little bit postponed because if you have the people at home anyway, maybe it makes no sense to start this one. But we are there not in negotiations, but we are there in talks. And we're looking in the development of the next couple of weeks and months, we will see there. And this program is already on -- in a working process, that means we know what to do and we have our ideas. And now we have to look that this comes one step further in the next couple of weeks and months like I said. So things are valid. And of course, you can always question what is most important. If you have a totally efficient company without a new truck generation, you could not change the processes. So the question was always, what is more important after the first program. We said very clearly that, first, that we needed new truck generation to change processes. That goes now in a very detailed, you know you have to change product documentation, production, kind of things to change the sales process. And for that, you need such a new entrants. And now we look into the next big step of the -- to bring MAN back to a more competitive field when it comes to profitability.

Your question about playbook, this is a very, very good question. I thought very often about it. Of course, you can use some measures you have taken there. But the big difference, and this was the first time in my 30 something, whatever, years now of working in this auto industry that the whole world was shut down. Nothing happened any longer. The logistical change went down. We saw this from a global perspective, and this was, of course, something totally new. In the financial crisis, you still had some markets that could deliver, let's say, 40% to 50% of the demand. But this time, it was from acceptable demand. January, February, middle of March was better than expected, and then it was coming down to 0, something like that. This was an experience I never had before in my life. And so of course, you can look to certain things and counter measures you have taken in different crises. And it's right for the truck industry, it's always up and down. We had a lot of crisis in the history. And so I'm pretty sure that we have all measurements to overcome this. And you will use some of the kind of things you might experience with it, and you will have to define some new ones. And this is what made me very -- yes, brought me to a more positive attitude that I saw last week already the plant start-up, that we could do it with the supply chain, that we still have a lot of suppliers in Italy and in Spain, and they are producing already. That logistic is starting again. So the motivation of the people is very high. So we can do it. Now it depends really not only in the order backlog, that's fine. But -- and like Christian said, cancellation is very limited. But we have to now to look how the economic situation is developing. And the truck businesses, if the economic is doing good, we are doing good if there's a lot of transportation. If it's not, and we only have to transport toilet paper for the German customers, it will be not enough for our fleet. So this is the issue that I want to raise. Again, with this kind of economical support, I think we will see in the industry of investment -- of the investment industry -- of whole industry of investment goods, I think there would be a good chance to stabilize the situation.

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Operator [25]

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And the next question is from Xing Lu, UBS.

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Xingzhou Lu, UBS Investment Bank, Research Division - Analyst [26]

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Xing Lu for UBS. Firstly, on Scania orders. I think it declined over 60% in Latin America, I think, which is a lot more severe than the market. Was this due to high comps? Or was it due to weakness being more skewed towards heavy-duty sites in Scania -- in Latin America? That's the first one. Secondly, do you see any delays to the joint Common Base Engine that is originally planned for next year? And lastly, for MAN, could you maybe comment on the reception so far? I appreciate that it's been a pretty tough time since -- particularly in March, but even before COVID. How have customers been talking about your new truck generations?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [27]

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So maybe start briefly with Brazil. I mean you remember last year, we have discussing that Caminhões is not improving like Scania was because Scania's just heavy-duty. And this is now, this year's turn around. The heavy-duty segment has been under pressure. And this is why you see the effect of Scania being higher than to what you see for the overall market in Brazil. That might be the point. If not, I think we can specify more in detail afterwards with Rolf and the team. Secondly, I think, Andreas, the joint engine is not for disposal. It comes as it is planned. We planned for 2021 in Scania, and this is also the part of the investments that we do not touch on. And finally, maybe you can refer to the new heavy-duty truck in MAN, Andreas.

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [28]

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The new truck generation was received very, very good. A lot of interest from the customer that came also toward -- to the order book. It's not only interest, but the most important thing is that they ordered trucks. Of course, now we had to postpone the ramp-up a little bit, but of -- in the new kind of re-ramp-up after the crisis, the slowly start of production, we try to fulfill, of course, with the new truck generation, the demand of our customers. So the acceptance was pretty good. And this new truck helps us again to change processes. And this is, for me, similar important than the new truck generation. With these new processes in the sales area and other things, we are positioned much better.

And maybe one word to Brazil, because you mentioned Brazil. Brazil has, of course, also the corona crisis. But the second thing is that they have, at the moment, a political crisis as well. As you know, the President fired a lot of very well-accepted people in the -- the 2 ministers, I think, one for health and the other one for [leading questions], police or whatever. So in addition to all this kind of issues with the corona, they have, in the meantime, a political crisis. So we have to watch this really the next 6 to 8 weeks what will happen there. So this is a very, very severe situation because a stable political situation will help you much better than to handle such a big crisis. But this on top is not easy to what -- to foresee what will happen in Brazil.

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Operator [29]

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The next question is from Kai Mueller, Bank of America.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [30]

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The first one is really on the used truck pricing that you mentioned. You said there has been significant or definitely pressure that you've seen from now. Can you give us a little bit of a magnitude? And what is really the driver? Have you seen that even before COVID? Or is it really COVID in the starting point of that pressure? The second point is on your dealership network. Some are captives. But also on the independents, I think, we've obviously seen in the automotive industry many dealers are struggling really under the current lockdown situation. Is there any idea or have you had dealers asking for help on that side, which you would then help on some sort of working capital terms potentially? And then again, I know the question was asked earlier, but just sort of a clarification again. On your aftermarket business, we've obviously heard one of your peers talking -- saying that aftermarket revenues will go down over the coming quarters because of lower activity. Can you give us a little bit of a magnitude or if you think you'll have the similar effect? I know you mentioned Spain as an example in terms of how much it was lower, and then you're seeing that ramp up. Should we expect that to be hurting your margin again in Q2 or maybe even also all the way into Q3 in the back end of the year?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [31]

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Okay. Thanks, Kai. Let me take it that way, aftersales first. I mean we also see it coming down. We do expect 10% to 15% over the next quarters. But as I said before and the question that I received in the beginning also from Hampus and the other colleagues, it depends on how market will come back in third and fourth quarter and as transportation, as Andreas has rightly said, is going to pick up. But 10% to 15% on aftersales, it's something that we would maybe imagine in current scenarios.

When it comes to dealers, what we do currently see, I mean you know we have a way high range of captive dealers within Scania, but also, in particular, some of the captives in MAN. For the noncaptive, we do see rescheduling, of course, as we see it with other customers. That's one main impact and when it comes to financial strength and to liquidity. We are in discussions via our dealer network operations. And I think we handled it at the moment still very well and do not see more effects in there. But the one or the other might come there on the agenda, but it's probably monitored by dealer network management.

For the used truck, you saw in Q3, Q4, when you look into our inventory, a documentation that we put on the IR website, that it was a little bit of trend that used truck was already going up with markets being closed in particular in the Middle East and on these ship routes. I mean, of course, now with the situation in transportation industry, you have customers that return their vehicles. And depending on the situation, like Andreas has referred this morning, in the press con also today, is how you pick up demand. You will also see a correlation, obviously, to use truck as business in there, pretty much a European subject. And we do see now scenarios that the ramp-up will go up like I discussed before on the working capital question where we do see most probably an impact also during Q3 also on this end. When it comes to market pricing, I think there are a couple of external analyst companies where one can see how differential the tractor prices are between main competitors. I do not want to refer to our fellow competitors in here, but this data, I think, is available. There is some difference when it comes to the tractors in long haulage highway. But we're all coping with the same issue basically. Now the question is how do you assume the market to go and to continue.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [32]

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Okay. Perfect. Very helpful. And maybe just to follow up just on your truck business. In MAN, obviously, with Scania, you own the Syncro, how is the risk-sharing with the VW Syncro and your MAN business? Are you taking all the hits in your MAN business? Or is there a sharing agreement in terms of if there are defaults or delays on payments?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [33]

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We take it.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [34]

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You take it. Okay. So the Volkswagen is simply a financier, and they're not taking the risk.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [35]

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Yes. There is a complicated model behind, but that's the nutshell, yes. Either side, in my next slide, I will be also in the Financial Service area with no risk and have a lot of money.

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Operator [36]

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And the next question is from José Asumendi, JPMorgan.

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José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [37]

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José, JPMorgan. Andreas, can you talk, please, about 2 topics, please? The first one, on MAN. You mentioned some of the measures you're taking on the brand. Could you mention -- maybe give us an overview, please, of some of the structural measures you plan to take to improve the profitability? Maybe, as much as you can talk about the headcount reduction and any measures you could take around this topic. Second, can you talk a bit about Navistar collaboration, the latest that -- where do you stand on collaboration with Navistar? And as you think about a potential full merger, are there any projects that you think you are not able to achieve in the current shareholder structure? Or do you think you're able to tackle all of the projects? That would be the second one. Third, Christian, can you help us a bit on the leverage into the second quarter? I know it's difficult. Obviously, it depends on the outlook and the market and Q2 demand, et cetera, but can you talk a bit about leverage and which levels do you think are -- you feel comfortable with? And what kind of scenarios are you thinking about for 2020?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [38]

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Okay. José, maybe let's take the Navistar question first. I mean as we have discussed, the alliance projects continue to go very well. We discussed last year on the procurement joint venture on the components, and nothing that is on the table there is impacted on the other discussion. So the alliance project's going to continue as it is planned. As we said before, I mean, the offer is on the table. There's no new information currently. And please understand that we do not communicate to running discussions and transactions.

When it comes to the third quarter, I would love to have my sales and revenue for the next 2 quarters being identified. We work with scenarios, obviously, among those that Andreas has explained in the morning, with the V, U and L shape, and what that means for operating leverage in the third quarter. But given all indicators we see at the moment, it's for sure most probably into a negative direction somehow. But it's very difficult to make forecasts there.

Maybe, Andreas, you can take the question on the MAN measures, if you would like.

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [39]

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Yes. I think maybe that question was already answered. I think like I tried to explain a little bit before, we started with a restructuring program called PACE. After that, we concentrated on the new truck. And the new truck generation allows us in a lot of areas to improve the costs. And basically, it's very, very important in this case that when I'm talking about process changes that will be -- gives you a kind of a direction, it's -- it will be more a majority whatever we do in the indirect phase that -- in other words, in the white-collar area. Because with the new processes, we are able to be much more efficient and have a different kind of potential there. So the majority of everything what we are doing is in the indirect or white-collar area. But still, we have to look in other fields as well. However, like I said, we are in early talks with our labor representation. Now it was postponed a little bit because of the kind of situation we had the last 2 months. They are working further on it. And hopefully, very soon, we can announce this then and tell you in detail what kind of measurements we will take. But basically, it will be majority in the indirect or white-collar area.

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Operator [40]

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There are currently no further questions, so I'll hand back to the speakers for closing remarks.

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Rolf Woller, Traton SE - Head of IR [41]

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Yes. Thank you very much. Thanks for that very lively discussion we had. Interesting times. I hope or we hope that you're all staying healthy. And we are very much looking forward actually to answer any questions which might pop up in the aftermath of this call. And if we don't speak, then we -- hear us latest when we going to announce our half year results, which will be in August. So thank you very much, and have a good rest of the day and good rest of the week. Thank you. Bye-bye.

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Andreas Hermann Renschler, Traton SE - CEO & Member of the Executive Board [42]

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Thank you. Bye.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [43]

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Stay healthy.

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Operator [44]

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