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Edited Transcript of 8TRA.DE earnings conference call or presentation 4-Nov-19 12:30pm GMT

Nine Months 2019 Traton SE Earnings Call

Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Traton SE earnings conference call or presentation Monday, November 4, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Hermann Renschler

Traton SE - CEO

* 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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* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Sebastian Ubert

Societe Generale Cross Asset Research - Equity Analyst

* Tim Rokossa

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the 9 Months 2019 Conference Call of Traton SE. At our customer's request, this conference will be recorded. (Operator Instructions)

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

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

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Many thanks, Kai. A warm welcome to everybody from Wolfsburg to our conference call on the occasion of the 9 Months Results 2019. Together with me here in the room is Christian Schulz, our CFO; Julia Kroeber-Riel, our Head of Corporate Communications; Annette Danielski, our Head of Group Finance; and Klaus Schartel, the Legal Counsel; and last, not least, we have Andreas Renschler today with us, our CEO.

Before I hand over to the gentlemen, I have to mention a couple of housekeeping items. First of all, you should have received the presentation titled 9 Months 2019 Results, then you should have received the press release on the 9 months and our 9-month interim statement. If not, you can download it from our website under the IR link, which is ir.traton.com.

And further on, I should draw your attention on Page 2 of the presentation, which is the disclaimer. Please read it carefully.

With that, I hand over to Andreas for the introductory words. After that, we have Christian, who will guide us through the main deck of the presentation, before Andreas will comment on the outlook for 2020. And afterwards, we are very happy to take your questions. (Operator Instructions)

With that, I hand over to Andreas. Andreas, the floor is yours.

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Andreas Hermann Renschler, Traton SE - CEO [3]

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Thank you, Rolf. Warm welcome also from my side, this time in -- out of Wolfsburg.

Before I go into the presentation slides, let me briefly wrap up our results for the first 9 months of 2019.

As you know, the economic sentiment has further deteriorated in recent months, and the third quarter became more challenging for our industry -- I think it's fair to say for the whole global economy.

In the third quarter of 2019, we have seen signs of a weakening industry. Order intake in Europe declined significantly. How much of this drop is due to the prebuy effect in connection with the new smart digital tachograph in the first half year of 2019 and how much is poor market weakness is hard to quantify, but we have to admit that the negative trend is accelerating.

Against this background, we saw a solid development of our key figures during the first 9 months. Looking at our Industrial Business, we were able to perform in line or even outperformed some of our core markets during the first 9 months of 2019. Our truck unit sales grew without MAN TGE, which you know has much lower revenues and margin than trucks. The TGE is based on the Volkswagen (inaudible).

Our truck unit sales grew by nearly 6%, while our top line in the Industrial Business grew by plus 9% on a like-for-like business. Operating profit of the Industrial Business was up by 41%, adjusted for a minor effect in 2019 at MAN truck and bus exit of the Indian market, which impacted the Industrial Business in the first 9 months of 2018 with EUR 115 million. The increase would have amounted to 25%. This increase was related to better volumes and product mix as well as efficiency gains due to the elimination of bottlenecks in the supply process and the end of parallel production at Scania, together with the new truck generation introduction.

On the negative side, we had inflationary cost increases, higher depreciation and amortization and expenses in connection with product -- production preparations for the new generations of trucks and buses at MAN truck and bus. The later one weighted on profit at MAN truck and bus in the third quarter 2019. We ended the first 9 months in 2019 at 7.1% return on sales in our Industrial Business.

Another positive story in the first 9 months is the development of the net cash flow in the Industrial Business. It came in at EUR 345 million in the 9 months of 2019, of course adjusted for the sale of the Power Engineering business. More importantly, we improved the net cash flow considerably quarter-by-quarter. After minus EUR 376 million at the end of the first quarter, we improved to plus -- EUR 182 million in the second quarter and further improved in the third quarter to EUR 539 million. You can see we are further moving in the right direction on this KPI as well.

Our net liquidity position in the Industrial Business, we have no financial indebtedness; after the first 9 months of 2019 improved by -- to EUR 1.2 billion in the Industrial Business.

Looking at the Financial Services business. It saw a growth in the first 9 months of 2019 in the net portfolio of nearly 18% year-over-year and 11% versus end of the year 2018. Penetration rate and return on equity remained at a very healthy level.

All in all, the TRATON GROUP came in at 7.5% return on sales and are still well at the upper end of our targeted range for this year, which is, as you may know, 6.5% to 7.5% return on sales.

So for 2019, we can confirm our targets even though we think and feel it will be more challenging to achieve them, in particular when we compare it to the situation roughly 3 months ago when we spoke last time.

And at that, it is to our 2020 market outlook. What we can say today is what -- that, without any doubts, 2020 will be even a more challenging year for our industry than the second half year of 2019. The only truck market which is, at the moment is -- and is still foreseen to grow meaningful in 2020 is Brazil. Our expectations for the truck market in the EU28+2, that means the European 30, so to say, is a decline of 10% to 20%. This is why flexibility is the name of the game for the rest of the year.

For 2020, further measures have to be implemented. We explain further on how we prepare ourselves for the potential scenarios in 2020. All we aim for is to safeguard our competitiveness in a potential rapid downturn in order to emerge stronger with a renewed truck portfolio and an aligned cost basis. That's as a short introduction.

And with that, I hand over to Christian for the details.

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

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Thank you very much, Andreas, and also a very warm welcome from my side. So let's jump into the presentation, and let's go to Page #4, which is the group highlights. Briefly, you can see unit sales up 8% for the 9 months to split into plus 7% for Q1, plus 12% for Q2 and plus 3% in Q3. So there is some deceleration in the overall trends, and this is largely explained by, first of all, the slowdown after the prebuy digital tachograph that we talked about in second quarter. And secondly, we can see an overall cool off of the economic activity.

If you look into the brand performance, you can see MAN's dynamic decelerated the most in Q3, with unit sales down by 2%. The decline of truck unit sales would have amounted to minus 10% in Q3 if you would leave out the TGE, which is quite increased, the number of sales. However, Scania saw still a fairly good development in Q3 '19, with unit sales up 6% and for the Caminhões e Ônibus sales with positive momentum, up 11% in Q3.

TRATON GROUP sales revenue increased by 5% in Q3 and by more than 7% on a like-for-like basis. Sales revenues in Q3 ahead of unit sales by about 400 basis points, basically based on better product pricing and mix.

The operating profit increased by 34% and amounted to nearly EUR 1.5 billion in the 9 months of '19. Here, we have taken into account that in '19 we had some minor effects and 9 months '18 were impacted by the market exit of India, like Andreas has said before. So adjusted for this, increase would have been amounted to 20.2%.

9 months managing operating profit benefited from improved gross margin, 20.2% versus 19.6%. Distribution costs grew slower than sales, and the admin expenses were stable year-over-year. The positive effect from R&D net to the P&L amounted to EUR 45 million after the 9 months of '19.

The return on sales improved to 7.5%. Please keep in mind that previous year '18, Q3 was impacted by the market exit of India, which was EUR 150 million, which you can also see in the prospectus that we have given for the IPO.

Profit after tax after the 9 months grew by 19%. Please bear in mind that -- the 9 months '18 for EUR 111 million contribution from discontinued operations. Basically, that is the PE, the Power Engineering profit share. And before this effect, the net income rose 29% after the 9 months in 2019.

Net cash flow in the Industrial Business after 9 months totaled EUR 2.323 billion. However, you know this contains the proceeds from the sale of the PE business in the amount of EUR 1.978 billion. Adjusted for that, net cash flow was plus EUR 345 million after 9 months.

Other highlights in the first 9 months of the year: Innovation Day in Södertälje, where we have given, let's say, some signs of our capabilities on technical going forward. And we established last week now the procurement joint venture with Hino, which is now operationally [immediately].

If we turn page -- to Page #5, you can have a look at Industrial Business. As anticipated, the order intake continued to soften and declined minus 7% in Q3, bring it down to 6% after the first 9 months. Order intake for truck went down by minus 8% at an accelerating trend, while order intake for buses declined by minus 10%, with a slightly recovering trend during '19.

The order intake for truck business, there was a considerable decrease in Europe driven in particularly in significant declines in Germany and in the U.K., which were only partially offset by other markets. Demand grew in Brazil in the wake of the economic recovery, resulting in a substantial increase in order intake in Brazil. We also saw substantial declines in our markets in Russia, India and in Turkey. We're going to come back to that later when we discuss Scania MAN a little bit more in detail.

Order intake for buses was slightly lower in Europe than the previous year. Substantial growth in Brazil, overall decline in order intake for buses also reinforced by Mexican and especially the Middle East markets that are basically down at the moment. As already mentioned, we had at the same time strong unit sales, and we have put the book-to-bill development in this context. So if you look into book-to-bill, you can see that after 9 months, we're still at 0.95, backed by the good development in buses and the demand of the MAN TGE. Of course, talk about that in a second. If you take the TGE out on the MAN side, you see some more serious decline on trucks.

Sales revenue after 9 months '19, Industrial Business were up 9%, slightly above the unit sales. And operating profit was up 41%, as return on sales stood at %7.5.

Financial Services business. Looking at the net portfolio during the first 9 months of the year, up by 11%. The penetration rate continues to be well above 40%. Sales revenues in line with net portfolio growth, but operating profits, as you can see, growing somewhat lower than sales, therefore the return on sales 15 -- 16.5%.

With that, let's briefly go to Page #6, where you can see the sales revenue development quarter-over-quarter. We have increased from EUR 6 billion to EUR 6.286 billion quarter-over-quarter. If you then see the return on sales there, it is from 4.1% to 6.5%. Keep in mind, if you would put adjustments back in there coming out of the India effect, the increase would have just been from 6% to 6.5%.

9 months stay at the level of 7.5% return on sales. And basically, if you would see the group revenues without the VGSG impact you have seen in the year before, where that we adjusted -- that was that sales company of Volkswagen vans that we've excluded last year -- the revenue would have increased not only 6.5%, but 9%.

With that, going to the unit sales on Page #7. You basically can see on the left-hand side quarter-over-quarter that our unit sales increased by 3%. In that, you could consider trucks being flat, buses being up 8% and the TGE that was what I mentioned before on the MAN side, plus 68%. For the 9 months, we see an increase of 9% return on sales; therein, trucks with 6%; buses with minus 4%; and the TGE with 108% compared to the prior year.

Talk a little bit about markets, how have they developed in 2019, Page #8. You can basically see looking at the chart that we have to note that the comparisons are not always like-for-like, because we are mainly heavy-duty but not exclusively. However, as an indicator, if on the right-hand side you take the market, which gives us a good feeling for the trend. So the European market heavy-duty truck is up 5%. We grew, including our medium-duty share, by 11%.

Germany was up 8%; we grew by 14%. South America, where Brazil is about 80%, by around 10%; we grew 24%. And it's still true that the markets like Venezuela, Argentina, and others are in a very sorry state. But Brazil, as I've said before, plus 42%. And with that, we have grown in line with the market.

We'd now go to order intake, which is certainly of your interest. You can see, as told by Andreas also in the intro, that the order intake is backed by the strong development of the MAN TGE front and the recovering bus business development in the course of '19, but trucks are not really gaining traction at the moment. You can see in Europe the regulation change for tachograph led to a prebuy effect in the first half of the year. According to our own estimates it was around 19,000 trucks. We watch the situation very closely and have prepared ourselves for a softer Q4. Book-to-bill on a brand level for the 9-month '19 is on the MAN side, 0.99; Scania, 0.89; and for Eco, 0.97. Please keep in mind that if you take out TGE on the MAN side, it will be considerably lower on a level of 0.96.

If you ask yourself why Scania has a little bit deterioration in there, it was mainly a U.K. effect in the U.K. market, which was amounting on a level of 1,400 units. And that basically that brings it down to the level I described to you.

Briefly, Page #10, Industrial business unit sales shows you the corresponding unit sales going up 3% as well, and 9 months now currently on a very high level of 179,000 units. It's just a little [over] to chart #7.

Going forward to sales revenues in the Industrial Business, Page #11, grew faster, grew 9% faster than unit sales, plus 8% during the first 9 months of the year. Sales revenue stood in Q1 with plus 9%; Q2 with plus 11%; and Q3 with plus 7%. When we look at the different sources of sales revenue, we can state the new vehicle sales grew by plus 12%. The average revenue per unit was up by 4% after 9 months of the year and amounted to 70,000 -- EUR 71,000 compared to a level of EUR 68,000 in the prior year.

Used vehicle sales revenue grew by only 2% during the first 9 months of the year. After-sales and service grew by plus 5%. As already mentioned, operating profit in RoS benefited from an increase in unit sales and positive earnings from the end of parallel production of Scania after the successful introduction of the new truck generation.

On the negative side, we have inflation-related cost increases, higher depreciation and amortization and expenses in connection with production preparations for the new generations of trucks in MAN trucks and bus. Remember, last time we talked in Q2, that we started in Q3 already ramping up the production despite the fact that market launch will be in February next year, and MAN is quite busy working on that end. Therefore, return on sales of the Industrial Business improved to 6% in Q3 and amount 47.1% for the first 9 months of the year.

Maybe a few comments on primary R&D. They amounted in the 9 months '19 to a level of EUR 982 million, which is corresponding to 5% of the sales revenue, about 40 basis points below our levels in the 9 months of '18. P&L effect amount declined from EUR 844 million to EUR 799 million, and the capitalization rate was close to 33%, down from 36% in Q1 and 34% in first half of the year.

Continuing going now on the brand view on Page #12. It just reads as follows on MAN. You saw more or less stable sales revenue in Q3, despite unit sales declined by 2%. However, looking on pure trucks isolated, it declined by slightly more than 10%. We should all keep in mind that from an MAN perspective, the mix lift at TGE is dilutive in both revenue and also return of sales. Having said that the ARPU for MAN was decreased 9 months only slightly, by about 1% year-over-year. Excluding the TGE, MAN was even slightly up, and that's quite encouraging in the light of the new introduction of the truck because we always discuss that pricing is important for MAN, and I think that is a good sign.

Nevertheless, return on sales in MAN in Q3 was only at 1.3%. Basically, there are 3 reasons for that to be named: first it's the sequential step down in sales revenues Q2 to Q3, which you know, because in Q2, we said there's the digital tachograph with the prebuy effect, so MAN was disadvantaged in absorbing its fixed costs in Q3; secondly, a less favorable product mix and a difficult market environment for used truck vehicles; and thirdly, as I mentioned before, higher expenses, including starting depreciation and tariff increases in the launch of the new truck that MAN has started by September, October this year.

Scania saw sales revenues increasing by 10% in Q3, whereas unit sales were up by 6%, driven by truck and bus business. Return on sales in Q3 at 11.5% and on a like-for-like basis, again, amongst the best in terms of profitability in the industry in Q3 2019. Volkswagen Caminhões e Ônibus saw sales revenues increasing by 26% in Q3, whereas unit sales were up 11%. Return on sales for the quarter at 2.5%.

If we continue now to go to Page #13. I'm talking a little bit about our liquidity. You can basically see our Industrial Business, our cash and cash equivalents outstrip the net financial indebtedness. It improved EUR 1.2 billion after the first 9 months of '19, it stood at EUR 689 million at June 30. The improvement in net liquidity was driven by positive cash flow. As you could see, we made progress there in Q3 and the cash flow amounted to EUR 539 million.

Basically, the cash flow benefited from 2 things: one is the improved operating profit, and secondly a relief in working capital year-over-year. There are 2 nonrecurring effects included in Q3 net cash flow, which amounted in total to EUR 225 million. That is the sale of the military business out of MAN to Rheinmetall. And secondly, we've had an effect in Brazil where we got money back on some social payments.

Overall, we improved our net cash flow considerably. After the first 9 months, you can see a positive trend in the upper end, in that little blue box in the chart, where you see where cash flow developed in Q1, Q2 and Q3. So we see our measures taking action.

Page #14, very briefly on MAN. I think it's worthwhile noting that the reduction in revenues -- in order intake, sorry, was driven mainly by Germany, Poland, Russia, India and Turkey, given the situation there. I have described before the 2 effects that lead to higher costs on the MAN side, you can find them here again. It's basically, if you so will, a weak third quarter, driven by the prebuy effect and the general third quarter and by the ramp-up of the new truck generation. The good thing is MAN presented a good electric bus, city bus, the Lion's City E at the BUS2BUS fair in Berlin. So we have a product ready to be sold here.

If you go a little bit more in detail on Page #15, you can see the figures per quarter order intake, unit sales, book-to-bill, debt revenue, operating profit and return on sales. I think we concentrate here only on Q3 order intake, down 13%; unit sales, down only 2%. And by this, resulting obviously in the book-to-bill of 0.93 for the sale -- for the third quarter. Sales revenue are more or less flat, and operating profit increased.

Here, I would like to point out that Q3 '18 was impacted by the market exit of India with EUR 115 million; like-for-like operating profit was down significantly, as I explained before.

As told on Page 12, return on sales in Q3, only at 1.3%. Again, 3 regions, sequential step down in sales revenues Q2 over to Q3 of this year was EUR 441 million, by this less absorbed fixed cost from the MAN side, a less favorable product mix and difficult market environment for used vehicles, and also then on the third side the impact of the new truck generation, which, as you all know, is the key to lift MAN to a next level. And by this, we must not fail in any event with the new truck.

Scania, on Page #16, unit sales of trucks, as I said before, up 11%. Order intake declined by minus 8%. Order intake in truck was also down 8%, mainly caused by U.K., Russia and Iran. Operating profit, nevertheless, a very strong third quarter also on the Scania. And we have introduced now fully, as we said, the new Scania truck generation, double ramp-up costs, as promised before, are faded out. And we have introduced, for those of you participating in the Innovation Day, our AXL, which is a fully autonomous concept truck without a cab.

Going off here a little bit more in the detail of the key figures from left to right, order intake, unit sales, book-to-bill. I think it's worth noting that the order intake was down 11% and sales up by 6%; but if you see that the book-to-bill of Scania for the third quarter only is 0.77. Sales revenue, up 10% operating profit 41%. So one can really say that Scania has recovered on the margin side towards the 100 basis points that we have described when we were in London beginning of the year.

I think it's also important to understand that Scania, with a return on sales improved to 11.5%, is also continuing to concentrate on margin-rich business is also referring to the brand positioning of margin before volume. Needless to say, also in Q3, Scania was amongst the best in our industry.

Volkswagen Caminhões e Ônibus, Page #18. You can see our Brazilian market recovered in tandem with the economic upturn, truck unit sales up 20%. Export sales in Latin America still difficult given the situation in the countries around Brazil. Our operating profit on Caminhões e Ônibus benefited from the increase in sales revenue. It was, to a certain extent, offset by ForEx, foreign exchange rate effects. And basically, it also includes a gain of EUR 13 million from a reversal of restructuring provision. Nevertheless, we see Caminhões e Ônibus progressing. Are we satisfied at the moment? Of course not. But one also needs to keep in mind that the Brazilian truck market, especially in the extra heavy, was recovering on the light and medium duty, it's still in an upward trend. So we are confident that we can manage that in the future, also better than it is today.

Briefly, Page 19. Again, the 6 KPIs and an overview for Q3: Order intake, up 15%; sales, up 11%, resulting in a book-to-bill of 0.99. Q3 improved return on sales on 2.5%. But again, work is not over in Brazil. We need to continue.

Financial Services, Page #20. Sales revenue as at 30th of September, up by nearly 11%: 13% growth in Q1, 8% in Q2 and 11% in Q3. The return on sales is very satisfying on a level of close to 17% for the 9 months of '19 and in the third quarter at 16%.

When we then continue to the next page, you see that the net portfolio has grown 11% from year-end 2018. The penetration rate remained at very healthy levels according to our plans.

Now if you go to Page #22, let's come to the outlook for the market in trucks in 2019, and one needs really to say it's fair that you said the economic sentiment has further deteriorated over the last quarter. As you all know, the political environment is challenging: potential hard Brexit, trade wars, crisis and conflicts in Iran and Turkey and the global GDP focus was revised down again by the IMF, plus 3% for '19 in October. And also, Germany, Italy are forecasting, showing only limited growth. And the outlook for 2020 is hardly any better.

Fed lowered the interest rates, ECB restarted quantitative easing. And overall, we had to witness a decline in order intake, which has been somewhat anticipated in previous months, that showed an accelerating trend in truck business in the last 3 months.

However, our market outlook for '19 is more or less unchanged. We see EU28+2 stable in '19; Germany, which represents about 1/5 of Europe, slightly up; for Brazil, we expect substantial growth in '19. I think this outlook here on '19 is not very much different one from what you see in the overall industry.

When we go to the next page, on Page 23, leading us to the outlook for TRATON Group. We clearly confirm our outlook for '19. We expect a slight increase in unit sales for the overall year. We expect group sales slightly above prior year, whereas we do not adjust for the VGSG business in '18. Sales revenue in '18 amounted to EUR 585 million. Again, this is just Gebrauchtfahrzeug business company that we sold back last year in light of the IPO.

Group return on sales is 6.5% to 7.5%, and we see it around the midpoint in 2019. I alluded to the main reasons of our confidence in the introduction.

With this, I would like to hand back for -- to Andreas.

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Andreas Hermann Renschler, Traton SE - CEO [5]

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Thank you, Christian. Let me come now to the market outlooks for trucks in 2020. All what Christian has said before is also true for the outlook of 2020. We are operating on a high degree of uncertainty. What we can say without -- with certainty, not without -- with certainty is that 2020 will be much more challenging that the second half of 2019.

We currently think that the European truck market can be down by 10%, but it could also be down by 20%. We need another couple of months to finally assess if -- where we stay in the range.

On the positive side, we can note that Brazil, which is an important market for TRATON, with the brands Scania and Volkswagen, will be likely up and provide us with some buffer. However, after a long period of unparalleled growth, we have to prepare for a decrease of 10% to 20%.

Which brings me to the next slide. I think it's the last one. What we have already started is that we reduced time account, take out shifts and reduced temp workers as the slowdown seen in Q3 further continued into the fourth quarter of 2019. If, however, the situation gets worse further, then we have to make more action in order to safeguard our competitiveness. And this is what this chart is showing you. Because one thing is clear: we can and will not compromise the start of the new truck generation at MAN. In addition, we also have to safeguard the profitability of Scania.

Our aim is to emerge stronger from the downturn, from which we do not know how severe it will be. This is why we must and will be flexible, and we will tackle the respective cost items.

And again, to be clear, it's nothing decided yet, as we just simply don't know where we will end up in 2020. But one thing is for sure, we are prepared and have all the flexibility to react to different market conditions.

With that, we are happy to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question received is from Klas Bergelind from Citi.

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Unidentified Analyst, [2]

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[Chris Daneirol] with Klas and Citi. So the first one I have is on the cash flow. It's obviously good to see an improvement, but Christian, I was wondering if you could help us on how much of this is linked to the lower production and especially at MAN in the old range versus the improvement we have waited for at Scania following the NTG. So I'm thinking of the cyclical effect versus the underlying improvement.

And also, if you could comment on the work you're doing with VW to change your payable days. I think you're paying your suppliers sooner than what you collect the cash from your customers. So I will start there.

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Andreas Hermann Renschler, Traton SE - CEO [3]

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Yes. So let's put it like this. So as you know, the Q3 effect was mainly really done by the work of working capital reduction that we have run in our demand to cash initiatives, basically, majority coming out of Scania in there. The 2 effects that I've mentioned before obviously helped us. But nevertheless, we saw an improvement of higher than EUR 300 million. But I would consider that mainly the work of the demand to cash and not yet the big amount of the deteriorating overall business on the MAN side.

Secondly, when it comes to the payment terms, well, we addressed that actively, currently with Volkswagen also on -- with Christian Levin, our COO currently. And we also work in order to improve these payment terms, [if we're] still largely adjusted to Volkswagen. Also in our relationship agreement, we're pursuing that and we'll hopefully also gain some progress there.

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Unidentified Analyst, [4]

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Okay. That's good. My follow-up is on MAN, please. If I could ask, how much is cap R&D? There is still a positive swing in the group bridge. It seems like, if I backed out R&D, you're almost loss-making on a cash basis. And how much was cap R&D last year? I'm trying to get the bridge clean year-over-year in MAN.

And then sort of within this, looking into next year, it seems like EUR 200 million, EUR 250 million of EBIT is a working assumption depending on the market outcome. Could you help us with what pricing assumption you've baked into this? And how much cost do you expect from the truck and bus launch relative to the 2018 baseline?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [5]

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So let's put it that way. I mean, we do not go in details on the cap rate on the brand level. As I said before, we reduced it already substantially compared to first and second quarter and continue also to work here on the MAN side. When it comes to MAN, of course, we are not giving forward-looking profit statements for the year 2020. The only thing I can tell you is that there was extensive exchange between MAN and Scania on the preparation of the new truck in order to avoid the known things that hit Scania, and they are already baked into the plan. And as I said before, we must not fail with the new trucks, so we need to take all things that will come in the next year, because for sure the ramp-up of the new truck is in focus.

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Unidentified Analyst, [6]

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But so -- just quickly. So are we talking around EUR 200 million to EUR 250 million of cost drag for the whole launch from '18 baseline? Or have you said anything, Christian, in terms of we can get some help on the bridge into next year?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [7]

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So as I said before, we will not comment on that, let's say, range. You know that at Scania we lost 200, which was 100 basis points on dual production and another 100 on material costs. But again, just with all respect, it's difficult to say it now.

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Operator [8]

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The next question we received is from [Hampus Anglow] from [Huntington Bank].

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Unidentified Analyst, [9]

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Two questions from me. If you -- if I look at the Scania order intake in Latin America, it was down 4.3%, while if I look at the Volkswagen order intake, which is I know it's really not fully comparable, it was a plus 15%. If you could maybe talk a little bit about the difference here in development, in Brazil in particular, if it's the lower medium-duty heavy segment that is performing or how we should think about the difference?

Second question is maybe a little bit nitty-gritty on the cash flow, but I would be interested to hear that why the depreciation and amortization during 9 months was minus EUR 626 million, which is EUR 147 million increase year-on-year. If you could maybe add some flavor on that.

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Andreas Hermann Renschler, Traton SE - CEO [10]

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So okay. So let's talk first about the market. When you differentiate the segments, you see that the extra heavy -- so the segment of about 16 tons -- is on a 5-year high at the moment. You see that the market is quite good in Brazil, and that there, Scania gets some support from the market. When you go back to light and medium-duty, the overall economic, let's say, improvement hasn't yet reflected fully in that segment. So this is why we're optimistic for the year to come that Caminhões e Ônibus, which is mainly present in light and medium-duty, will benefit in the same positive way that Scania did on the other hand.

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

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And on the other question, Hampus, we will get back to you. Yes, you were referring to depreciation and amortization on the (inaudible) for Traton overall?

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Unidentified Analyst, [12]

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Yes. Exactly. There's EUR 147 million increase year-on-year on 9 months. And I guess I was looking for if there's a specific one-off write-down or something on the amortization side. But we think we'll come back on that. Maybe could -- maybe one question on -- I mean, you highlighted a little bit on the order side. But it would be interesting to hear what -- or if you look at the European business like MAN or Scania now, where are you in terms of taking down run rate? Are we looking at the 10% in each [in hour]? Or where are you?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [13]

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So let's put it that way. You saw, as you will see this afternoon, it should be already out, that Scania and MAN are both taking actions on MAN. We currently see that in Munich, (inaudible), Nurnberg and (inaudible), we extended the production tax. We also released the second shift in Kraków in Poland and we will have selective closure days also for the German operations, and the same thing basically on Scania. You can see basically, we will extend Christmas vacation in there. We will have selected production days that we do closures on. And we are, as Andreas has said before, quite flexible with that base that we have in there. So everything that is on the current [size] in 10% to 20% around, let's say, 10 to the midpoint, we can very well activate our time accounts with our flexible workforce. Of course, if a cool-off in the European market would turn into the, let's say, direction of 2009, measures would have been different. And those haven't been taken yet.

But of course, we monitor very closely the current market development also with our union members and their suppliers and are able to adjust quickly. And basically, that's what I would like to comment on that.

And maybe just one point on the depreciation and amortization. Don't forget, we have the IFRS 16 effect in there, that might be the point. But we'll also get back to you on that. Okay?

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Operator [14]

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And we go on to the next question, that's from Kai Mueller from Bank of America, Merrill Lynch.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [15]

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The first one is coming back to the -- this chart you showed with your 2 market scenarios, so the sliding scale. Can you give us a bit of color. You obviously talked about reducing time accounts and temporary workers. How much, in terms of temporary workers and time accounts, are you already tapping into in the second half of this year? And how much do you basically have left for next year?

And then following up from that, we obviously know sort of your guidance for through the cycle margin. If the scenarios of a minus 10% next year materialize or maybe even a minus 20%, can you give us a little bit of color in terms of where you think a Scania margin or an MAN margin could get to if you assume the cost measures you've sort of indicated today?

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Andreas Hermann Renschler, Traton SE - CEO [16]

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Okay. Let me start with the second part of the question. They will not get an answer. We will give you a guidance then at the first quarter as it used to, and it depends really on the market conditions. So as I said before we, up to now, don't know exactly how the market will be. It will be between 10% and 20%. That brings us to this kind of chart that we showed you. We have -- the first things for you're always doing is time accounts. So we are using time accounts, like Christian mentioned. We will have a longer break between Christmas and so on. This is the -- it's underlined with time accounts.

The second thing is we have -- then temporary workers, we have, approximately in our locations so far, 10% to 15% temporary workers and it depends on how this will go. We will see part-wise this year and then next year, the rest of the temporary workers.

So it's -- the major thing is if you have the orders, and the orders are -- if I'm looking to the situation overall, it's -- the orders are still, based on the circumstances, not so bad. So we have reduced this, and now we have to adjust when the orders are in a different level. Though as I said, we feel pretty secure through our measurements like we did all the time. In a downturn, that's expected. And whatever the downturn will be, we have a lot of potential to react.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [17]

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Perfect. And then maybe just have you seen any changes in pricing as a result of the -- obviously, the slower outlook? Has any one of your peers trying to fill the book on better price terms?

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Andreas Hermann Renschler, Traton SE - CEO [18]

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I don't know what our peers are doing, but we are very price disciplined. I think you mentioned in this [annual] remarks always, the -- if you look to our brand positioning of Scania, it's a very simple thing: price before volume, like -- [which we] have mentioned before. And we don't see -- or we don't compromise this if markets are getting into a different situation.

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Operator [19]

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The next question received is from Eric Goldring from SCB.

Eric is not in the queue anymore. The next question received is from Tim Rokossa of Deutsche Bank.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [20]

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It's Tim from Deutsche Bank. I would have 2 questions, please. The first one is, Andreas, you lived through quite a few truck cycles already as a manager. How does this one feel to you? And if you do talk about a high degree of uncertainty when making the forecasts, how do you come up with the 10% to 20% number?

And then secondly, I appreciate the prebuy effect. I appreciate the ramp-up costs. But for someone who has followed Scania and MAN for many years, it's really not a surprise at all to see how those 2 brands are now developing at a turning point of the cycle. Scania seems to just, always anticipate it earlier, does very well in reacting to it. MAN is always the opposite. Now, yes, okay, you get a little bit of a bounce maybe in the Q4 margin development, but it seems to be a very clear direction. I appreciate that you're giving us these measures on Slide 24. But when is it, if not now, the right time to really go structurally into the cost base of MAN beyond short-time work, beyond taking out a few shifts? This is a continuously underperforming asset. This is always been a big discussion of all of us during the IPO process and afterwards. But if we now see minus 10% to 20%, why not really fixing this company to finally make it live up to its potential?

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Andreas Hermann Renschler, Traton SE - CEO [21]

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I think, let me start with the first one. If the world would be so easy than you described it, that would have meant we have done nothing in the last 2 or 3 years. The most important thing now for MAN, like we said all the time, is the new truck generation, because there we are changing not only the full product line, that was necessary. The product is 20 years old and is, in certain areas, not as competitive as we would like.

And the second thing, we changed this kind of our introduction, this introduction of the new truck, we are changing a lot of processes. And these processes will bring us to another level. Of course, it's not only the kind of issue that we see this time compared to cycles you mentioned before. Of course we went through cycles. Forget that the second, the 2008 and '09, that was a cycle that was external-initiated crisis.

In the normal cycle, you will see something like a 10% to 20%. Now what is different than to other kind of market conditions, maybe 10, 15 years ago? It's really the unstable situation. We never met such experience -- or I never -- such experience that a tweet can change a lot of different kind of things, and we don't see it only in 1 country. So all this kind of unstable situation brought us to the point that we say, okay, there is a trend that we can be 10% to 20%. And we will know better then in the first quarter of next year.

The second thing is there was this prebuy effect. I think Christian Schulz mentioned before this new digital tachograph that was launched. And is there a prebuy effect? We get this from some customers, yes, they see it like that. So this is the [unsecureness]. And so the most important thing in our business is really that we are using this downturn, whatever, however this downturn will end up in, to come out stronger. And all the kind of measures we have prepared already will go into some substance, if it's necessary.

And so again, we feel us very well prepared, and now we have to show that we can realize this preparation, because so far it's only on paper, but I'm pretty sure that we can do it.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [22]

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And to add on your question on MAN. I mean, we discussed it all the time that the coming 6 to 7 quarters are a kind of a challenging situation for MAN with the new truck. Now you see that we started in Q3 with the new truck. Of course, we have the discussion, Tim, on how to improve structural measures.

But if you, in parallel, introduce a new truck, that gives you a lot of challenges. So it remains unchanged what we have said; the next 6 quarters of MAN are a period of transition, and now let's work through that.

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Operator [23]

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And the last question for today is from Sebastian Ubert from Soc Gen.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [24]

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More on a housekeeping things regarding the positive tailwinds you had from FX. Can you give us some figures here like we have gotten during the second quarter, as well can we do the math what was the real impact on Q3?

And then also, I guess, after having achieved after 9 months the upper end of the range, that your comments on 2019 outlook to end up at above the midpoint of the EBIT margin range is still valid despite a more challenging Q4 2019.

And then also your sneak preview you have given at the beginning of the year for further growth in revenues and margin improvement for 2020, just the range there, is that still valid?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [25]

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Okay. So let's take it one to one. First of all, ex-rate effect is pretty much neutral. We saw positive effect on the Scania side with the Swedish kroner. But on the other hand, we've seen a burden on Caminhões e Ônibus in Latin America. And as such, you can say it levels out in the group to a minor 2-digit million euro number.

Second thing is your question. I said before, we are comfortable around the midpoint, not above the midpoint. That's what I said before. So we have a close eye on the development of Q4, as I said before, and we are within our range and around the midpoint. And lately, since I would like also then to take the question is outlook on 2020, we only give around March when we have the annual press conference, but then we will confirm how we see the next year.

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Sebastian Ubert, Societe Generale Cross Asset Research - Equity Analyst [26]

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Okay. But just as a follow-up, during the Q2 call, Mr. Schulz, you stated you are happy to see an outcome above the midpoint of the margin range. So it's a...

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

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And today, I said I'm comfortable around the midpoint.

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Andreas Hermann Renschler, Traton SE - CEO [28]

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Which is not ruling out that it could be slightly above, but it does not rule out that it could be slightly below, Sebastian.

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Operator [29]

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We have no further questions. I'll hand back to the speakers.

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Andreas Hermann Renschler, Traton SE - CEO [30]

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Yes. Thank you very much. Thanks for the very vivid discussion and the very good questions. Thanks for sticking to the 2 questions per analyst. Very much appreciate it. And then we look forward, actually, catching up with you over the phone. So whenever you feel there was a question unanswered, then we will get back to you, and you can always reach us under the known numbers in Munich with all our team. We thank you very much. And yes, speak later then March 27, when we will have our annual press conference. Thanks, and have a good rest of the week. Bye.

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Operator [31]

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