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Edited Transcript of 8TRA.DE earnings conference call or presentation 29-Jul-19 12:00pm GMT

Half Year 2019 Traton SE Earnings Call

Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Traton SE earnings conference call or presentation Monday, July 29, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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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* Adam Brian John Hull

MainFirst Bank AG, Research Division - MD

* Daniela C. R. de Carvalho e Costa

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

* Graham Phillips

Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research

* Hanna Dorothee Hellmuth Cresswell

Barclays Bank PLC, Research Division - Research Analyst

* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Michael Raab

Kepler Cheuvreux, Research Division - Head of Automobile (Thematic) Research

* 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 First Half 2019 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 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. Welcome to everyone from Munich. Welcome to our half year conference call on the occasion of the half year results. And together with me in the room is our CFO, Christian Schulz; then we have Annette Danielski, our Head of Finance; our Head of Legal Counsel, [Claude Schascha]; Julia Kroeber-Riel, our Head of Global Communications, the IR team and [Flo], the assistant of Christian Schulz.

Before I hand over to Christian, I have to mention a couple of housekeeping items. The first one is you should have received the presentation titled H1 2019 Results. You should have also received the press release and as well as the half year results report. If you have not received it, you can download it from our website, and there under the IR link, which is ir.traton.com.

And further on, I should draw your attention to the disclaimer, which is on Page 2. You should already be able to view it via the webcast. I will not read through it, but you should definitely carefully read through it before you continue in this call.

This is our first analyst and investor conference call as a stock listed company and you see here very proud people sitting in the room.

We hope that the temperature in your locations has moderated down as well as it has cooled off a little bit here in Munich.

And with that, I hand over to Christian, who will guide us through the 23 pages. And afterwards, we are, of course, happy to take your questions.

Please, go ahead.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [3]

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Thank you very much, Rolf. Good afternoon, ladies and gentlemen. Before we go into the presentation slides, let me briefly wrap up our first half of '19.

We had a good start into the year on the backing of a healthy market environment. Looking at our Industrial Business, we were able to perform in line or even outperformed some of our core markets during the first 6 months of 2019. Our truck deliveries grew by slightly more than 8%, while our top line in the Industrial Business grew by 10% on a like-for-like basis.

Operating profits of the Industrial Business was up by 28% on better volumes and product mix as well on declining R&D and the end of the dual production work from new truck generation at Scania.

We ended the first half of '19 at 7.6% return on sales in our Industrial Business. This represents an increase of 105 basis points to former year's levels.

Earnings after tax in the Industrial Business was up by 64%, driven by better financial result and a tax rate well below 30%.

Net cash flow in the Industrial Business in the first half of '19 came in at minus EUR 194 million. That was obviously an improvement of EUR 182 million compared to the first quarter, where you might remember we stood at minus EUR 376 million before the sale of Power Engineering.

As you can see, we are moving in the right direction with cash flow as well.

Our net liquidity position after the first 6 months of '19 improved to EUR 689 million in the Industrial Business.

And looking at the Financial Services Business, it saw a growth in the first 6 months of '19 in the net portfolio of more than 17% year-over-year and 9% versus end of the year '18. Return on equity remained at very healthy levels in the first half of the year.

All in all, the Traton Group came in at 7.9% return on sales and thus well above our targeted range for this year, which is, as you may know, 6.5% to 7.5% return on sales. We hereby fully confirm our outlook for '19 and even think that we could end the financial year '19 above the midpoint of our target range.

What are the factors we have to take into account for the second half of the year? First of all, further softening of the economic indicators, and there we are referring to the latest IMF data shows that global growth outlook is a little bit more conservative, for Europe in particular; the softening order intake, which we, at the moment in time, qualify as a moderation from previous strong quarters; and thirdly, the ramp-up of the new truck and bus generation at MAN in the later half of the second half year.

Overall, we remain confident for the financial year '19. To summarize it, flexibility is the name of the game for the second half of the year and the further execution on our synergy plan.

With that, let's go into the presentation on Page #4 and discuss the group highlights.

What you can see in here, deliveries up 10% in the first half of the year, split by plus 7% in Q1 and 12% in Q2. While MAN's dynamic slightly decelerated, Scania saw a strong pickup in sales, VW Caminhões e Ônibus sales revenue activity as well accelerated from Q1 to Q2.

Traton Group revenue increased by more than 10% on a like-for-like basis, and operating profit benefited from a slight improvement in gross margins with 20.5% in the first half of the year compared to 20.3% in Q1 and 20.7% in Q2.

The distribution costs grew slower than the sales after the successful introduction of the new truck generation in Scania and also admin expenses declined year-over-year. Therefore, the RoS improved from 7.6% in Q1 '19 to 8.2% in Q2, amounting for the full half year at 7.9%.

The net income in the first half of '19 after minorities grew disproportionately to sales revenue and increased more than 60%. Main reason for this is the better financial result, which improved from minus EUR 284 million to minus EUR 31 million. Basically 2 effects there: one is the remeasurement of the put option, and compensation rights for minorities, which were included in the EUR 190 million positive from a reversal of impairment losses in our investment in Sinotruk.

Net cash flow in the Industrial Business after first half totaled EUR 1.784 billion. However, this includes, as you might -- may remember, also from Q1, the EUR 1.978 billion for the sale of Power Engineering. Adjusted for that, as I said before, cash flow in first half of the year was minus EUR 194 million and shows a significant improvement between Q1 and Q2. Other than that, obviously, as Rolf has pointed out before, since almost 4 weeks now we are a listed company, our free float now amounts to 10.3%.

Let's have a look into the Industrial Business, which is, to a certain extent, part of the overall group then. The order intake continued to soften and declined by 5% in Q1 '19 and close to 7% in Q2 '19, bringing it now down to 6% after the first 6 months.

The order intake for trucks went down as well. The order intake for buses declined by 12% mainly driven by the European Union, in particular declines in Germany and substantial reductions in the U.K., which were partly offset by other markets. The demand grew in Brazil in the wake of the economic recovery, resulting in a substantial increase in order intake down there. There were also substantial declines in Russia, India and Turkey.

As far as order intake in the bus business is concerned for the first 6 months, it was 11,283. Order intake in the EU region was noticeably higher than in the previous year, as well in South America, especially in Brazil. The overall decline of the orders for buses is mainly driven by Mexico, Iran and Saudi Arabia.

The book-to-bill in the Industrial Business after 6 months remains on healthy levels and stood at 0.98. If you remember, it was 1.13% by March 31, and it declined to 0.85 in Q2.

We're going to have a look at the brand development later, but it's fair to say that Scania in Q2 has concentrated on margin-rich business, which was the main driver for the decline in the book-to-bill. And -- however, when it comes to the overall group, we think we are still talking about a moderation in demand after some very extraordinary quarters that we have seen in the recent past. And as mentioned, being a cyclical company, we are used that the cycle will come sooner or later anyway, so we focus a lot on the flexibility in our business system and prepare for other things that may come in the future.

Looking at Financial Services, net portfolio was up 9%, penetration rates still above 40%. Revenue outpaced net portfolio growth slightly and was up by 10%.

If you go to Page #5 here, you can see our revenue development. If you take Q2 '18 to Q2 '19, you can see that we increased 8.7% for the first half of the year. As you can see on the right-hand side of the chart, it's 7.4% overall.

If you go further to Page #7 which is the group deliveries, one can see that in Q2 '18, we were on 58,900. That has substantially been increased by 12.3% on the level of 66,173. All over now at the first half of the year, we are trading on 123,336, which is a 10% increase.

When it comes to the markets, we've picked on Page #8 the core markets that we do see for Traton Group, which is obviously Europe, which has seen substantial growth and also we were performing quite strongly in the market; then also Germany, we have a very solid position; Brazil, there's a strong recovery, as outlined in the introduction.

On Page #9, when we talk a little bit about the order intake, as you can see in here, the development compared to previous year, it is slowing down quarter-over-quarter. Then it's minus 6.7% compared to Q2 in '18. As you can see here in the gray shadow on the left-hand side, it's the 1.13 that we still had in Q1 when we met you in this call, but this has now softened down to 0.85. All overall, we, as I said before, think that this is a moderate slowdown. Keep in mind we've seen quite strong quarters with Scania leading the segment above 16 tons in the European market for the first 5 months of the year so that, to a certain extent, this is also a normalization. But as I said before, economic indicators are slowing down and we also see that the demand is a little bit going down there as well.

When it comes to the deliveries, though, on Page #10, you can see that we basically, on the strong of -- on the foot of the very strong order book we have seen in the past, the total deliveries were increased, and we put it in here as a sake for completeness to the book-to-bill.

When it comes to revenue on Page #11, you can see that sales revenue in the Industrial Business increased by more than 10% in the first half of the year. I said before plus 9.4% in Q1 and another 11.3%, as you can see in here, in Q2. Operating profit benefited from the improvement in gross margin. Distribution costs grew slower than sales after the successful introduction of the new truck on the Scania side. And therefore, the RoS improved from 7.3% in Q1 '19 to 7.7% in Q2, amounting to the referred 7.6% after the first 6 months.

When it comes to primary R&D costs in the first half year, it was around EUR 663 million or 5% of sales, about 70 base points below first half of '18. And basically, that was it for this page.

If you go on Page #12, a little bit more detail when it comes to the brands. Let's take MAN first. You see in MAN Truck & Bus, we saw sales revenues increasing by 6% in Q2, whereas deliveries we're up by 8%, basically driven as the main -- as one of the main effects by the TGE. Bear in mind that the TGE from a mix perspective is dilutive to sales and also RoS terms. The return on sales for MAN in second quarter was on the level of 4.5%.

Scania, as you can see, saw sales revenue increasing by 14% in Q2, whereas deliveries were up 16% mainly driven by the truck business. The return on sales in the second quarter was on a level of 12.2%, and therefore on a like-to-like basis, meaning industrial truck and bus, benchmark in terms of profitability in our industry in second quarter '19.

Caminhões e Ônibus sales revenue increasing by 34% in second quarter, whereas deliveries were up 23%. The RoS in second quarter was at 2.2%.

If you go over to Page #13, which is the net liquidity, you can see that the net liquidity has improved to EUR 689 million after 6 months. It stood on EUR 604 million when we discussed on the 31st of March. The improvement was driven by the net cash flow, which was positive in second quarter, as I said before, on the EUR 182 million. The driver for the better net cash flow compared to Q1 was better earnings before tax and some improvement, working capital, on a year-over-year basis. The main driver for the improvement in the second half of the year will also be working capital, as we have extensively also discussed during Q1.

If we go on Page #14, obviously you can see the highlights on the MAN side. We could see that vehicle sales have been up 10%. Order intake, as I mentioned before, a little bit softening in the first half of the year. And the operating profit declined by 11%. Basically, what we could achieve in higher sales revenue was offset by higher expenses, mainly depreciation as well as the first things that we have in mind now for the new truck generation in Q3, Q4. And please keep in mind that if you compare to the quarter in the previous year, there was an effect when the RIO business was acquired by one of the Traton Group companies from MAN.

If you go a little bit on Page #15, you can see order intake at MAN was down 15%. However, the deliveries up by 8% and the book-to-bill is on a level of 0.86. Sales revenue, up 6%. And operating profit, as I said before, declined in the view quarter-over-quarter.

Return on sales, 4.5%. And by this, as we have said in London, MAN still focuses on a stable level of its performance, which they also could then somehow prove in the second quarter.

Scania, Page #16. Unit sales in trucks up 14%, growth mainly driven by strong growth in Europe and Brazil with some headwinds, again, in Russia and substantially lower Middle East.

Order intake declined. Two effects there. One is the general, let's say, situation in the market. The second one is that especially on the Scania side, you have seen a little bit of a peak already in the first 4 to 5 months, which is now just normalizing.

Operating profit increased by 34% benefiting from higher volumes and also price/mix and positive effect on the FX side. As you can see here drawn on the chart, there was a positive effect of EUR 57 million.

What is also very important for us, with the introduction of the new truck generation in Latin America by the end of Q1, we now can say that we have fully introduced the new truck generation.

And last not least, Scania, and especially the R450, have received the Green Truck '19 award.

On the profitability, just to round it up here, order intake, as I said before, 3% down. However, you can see deliveries significantly up 16%. And to a certain extent, I think it's fair to say that Scania was a victim of its success in the delivery as well when it comes to the book-to-bill ratio here if you keep the delivery numbers in mind.

Return on sales, 12.2%. And there also, you can see what we said in the beginning of the year in our Q1. You can see that Scania is on the road to recovery.

And as a matter of fact, second quarter was the benchmark for the truck industry.

Caminhões e Ônibus briefly. Situation in Latin America is improving. We could also see that unit sales are up 15% in the first half of the year. Nevertheless, export sales have declined. Demand was sluggish in some export markets other than when it comes to Brazil. Operating profit has benefited from the increased revenue. Nevertheless, we saw that we had a negative ForEx effect and also have had higher depreciation charges, which impacted the second quarter. We also had a positive effect by the release of a restructuring accrual that was done in the second quarter. And besides those effects, we think that Brazil and Caminhões is going to be on the stable track for the second half of the year.

Financial Services, Page #12 -- 20, sorry. If you look there, as I said before, sales revenue by the 30th of June, up 10.3%. This reads as a 13% growth in Q1 '19 and 8% growth in second quarter. Return on sales, very satisfying levels, close to 17% in the first half of the year and 17.1% in second quarter.

Page #21, net portfolio, you can see, grew 17%. Penetration rates, as you can see, remained at a very healthy level. And the equity ratio for the financial Services business was at 8%.

On the following pages, I would like to draw a couple of words on the outlook.

If you see Page #22, this is how we see the world on the market, and that basically means our picture remains unchanged. If we look for the total year perspective, we see Europe slightly decreasing in '19. Germany, which represents about 1/5 of the European market, is still slightly up. Brazil, we do expect substantial growth, especially in the second half of the year '19. And I think if you look on that page, that's not very much different from what you have heard elsewhere in our industry in other talks.

Page #23 leads us now to the outlook for the Traton Group, and I would like to fully confirm our outlook for the year '19.

We expect a slight increase in the deliveries, our sales units, for 2019. We expect group sales slightly above prior year and the group return on sales in the range of 6.5% to 7.5%. And we see us above the midpoint in '19. I alluded to the main reasons for our confidence in the introduction.

With that, I would like to conclude my presentation, and I hand back to Rolf, and we are happy to take your questions. So...

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Rolf Woller, Traton SE - Head of IR [4]

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But first, to the moderator, and then actually, we are happy to take your questions.

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

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Sorry.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Graham Phillips, Jefferies.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [2]

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I had 3 questions, please. First of all, on Scania, can you talk a little bit about the outlook for the second half and the decline, albeit modest, in orders in the second quarter? And were there any costs left in there for the new truck generation as you rolled out across all regions? On that, I'll follow up with the other questions shortly.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [3]

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Okay. So first of all, on Scania, as I said before, you saw Scania very strong in the first 4 to 5 months of the year given that, as we discussed last time, Graham, that we have had the supply chain stability in the fourth quarter of '18. So there was a spillover effect. And what you see now for the second half of the year, to a big extent, is the normalization of that [billow] effect in the first half of the year. Other than that, it's in line with my comments on the market outlook for Europe.

Secondly, as I said, the new truck generation was now introduced also in Latin America. By this, we made huge progress in second quarter with the costs of the dual ramp-up production that faded away, and this effect will be completely done by the end of the year.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [4]

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Okay. So you're not planning lower production in Europe in the second half?

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

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We will at the, let's say, in the second part of the second half year, have some reduction in the working days on the Scania side. But as I said before, that's mainly driven by the extraordinary demand we had before. So we will have some adjustments there, but that's really minor.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [6]

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Okay. And then on MAN, and I apologize if this is actually buried in the releases somewhere, but was the RIO profit sale in the first quarter or the second quarter? And again, ramping into the end of the year with the introduction of the new truck generation, what's the timing on that?

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

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Okay. So first of all, it was the second quarter last year in '18 on the MAN plus the RIO effect, the EUR 19 million. And the introduction of the -- our new truck generation will be started at the end of Q3 in the due course of the fourth quarter, with the introduction of the truck into the market in February with the introducing event in Spain.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [8]

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Okay. And just finally on VWCO. So if we take away that provision release, the business actually was in loss because we understood that this is a very asset-light business, very flexible. Why has that swung into loss? And what's the outlook in the second half?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [9]

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So I mean, first of all, I tried to say before, we had an FX effect there, around EUR 10 million-ish. And that was one effect, and the second one is depreciation of the new truck generation that is in there. We had some extra effect there. But as I said before, for the second half of the year, we see that gone. And also in the Q2, we had some costs that have been inflated. So all overall, a mixed second quarter. But when it comes to the remaining half year of Caminhões e Ônibus, we see it progressing.

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Operator [10]

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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 [11]

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I have 3 as well, if possible. So the first one, wanted to understand when we look at the MAN margin change year-on-year, shall we think about that [as] ballpark what we should expect over the coming quarters given the dual production and the introductions? That's my first question.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [12]

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The answer is somewhat, yes, as I have given also in the discussion in London and also in the investors talk and outlook. I mean MAN is now in that phase of the introduction of the new truck. So if they are in that corridor between 4%, 4.5%, 5%, that's, I think, an achievement. So that's pretty much what you have there.

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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 [13]

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Okay. And then I wanted to get -- to see if there's any updated thoughts regarding Financial Services for MAN and where's your thinking standing at the moment regarding that?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [14]

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Well, we are in constant discussions with Volkswagen on that. Project team is working jointly with VW on that. Keep in mind it's just 4 weeks that we were listed, so everybody was very much focusing on that. Progress is made already here, but nothing where we now can say that's the impact on funding, this is how we do that. It's a little bit too early. So it's work in progress.

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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 [15]

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And then finally, also on MAN, regarding minorities. If you can give us an update on the intentions there.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [16]

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Of course. Pretty much what we have said in the prospectus, there are basically 3 options: don't touch it; second one is the financial squeeze-out; third one is the, let's say, merger option. As outlined in the prospectus, there is no updated information or decision on that.

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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 [17]

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When should -- or do you have a time line on when we should expect that? Or completely unpredictable for the time being?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [18]

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Nothing to add on what I said. We are in discussions.

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Operator [19]

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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 [20]

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I would also have 3, please. The first one is just to really understand your comments about the economic slowdown that you're seeing, Christian. Is that something that really worries you? And in your experience, how long does a cyclical weakness like this persists? And have you taken any measures to prepare for this, or is it just something that you're watching carefully and then may react to it? That would be the first question.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [21]

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As I said before, we see signs of softening. We basically look a little bit more closer now into the second half of the year. Question is always how does your order intake develop. I referred to that in my presentation. Second one is what do we see in third and fourth quarter then on used trucks development. And the third indicator is what happens to the order intake in the U.S. which is coming down, which is an early warning indicator also for a more substantial decline that may come in future.

In Europe, for the time being, I would see kind of a normalization effect on our end, as I said before, with slight moderate indicators. But we will monitor that closely.

And of course, as I said before, as a cyclical company, we need to be prepared if a cool-off comes in the market. So what we do have is we have extensive time accounts for the time being. We have flexibility in our plants in Sweden, in (inaudible), France and also here in MAN with flex workers. So basically, we have our flexibility toolkit in place. And as I said before, we are prepared if things would go worse. But we do not see that yet. As I said before, the order intake shows a little slowdown but not something where we say there's now a big depression.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [22]

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Okay. Great. You spoke again about the used vehicles. You also said it this morning already on the press call and also said it in your highlights. Can you just update us again how that really impacts you from an operating perspective? And what is causing this weakness at the moment?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [23]

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Well, I mean, it's -- in our case, we have just had the changeover in the new truck generation in Scania. We have now -- we are at the edge on changing our MAN. So basically, we do see the couple of used trucks are coming back. We just watch how long do they stay there, what -- how are prices developing. So far, as I said before, something where we manage. It's not something that we say there's a huge issue coming up. But it's something where we see that the movement has shifted compared to last year, for example.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [24]

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Okay. Great. And finally, just coming back on VW Brazil again. Graham already touched on this, and you already said in the second half you see some improvements. But given how this business model worked in the past, if you would have seen growth similar to that, that you have now seen in H1 or even in Q2 when we talk about 34% growth, you would have seen substantially different profit margins. And I know there's a number of factors here. Will all of them disappear over time? Or do you think just given that the market is still at a relatively low level despite all this growth, it will just simply take a longer time to come back to higher-margin levels, as you frankly also indicated during the IPO process?

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

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Let me put it this way. I think first of all, it's important to remind ourselves that we have the Consortium Modular (sic) [Modular Consortium]. That means you have a lower vertical integration.

So the moderate swingdown you have seen in the downturn, if you have an upstream, you don't have this huge impact if you don't have the deep vertical integration. That's one effect.

Second one is we do see, especially in Brazil, that the extra heavy market is going, at the moment, to improve, which is not typically the market of Caminhões e Ônibus, which is more light and medium duty. So as far as the Q2 effect that I described will maybe fade away, we need to see what will happen in Brazil now. After the first reforms have been approved by the Parliament, will that give a, let's say, impact on the economy as well but also light- and medium-duty transportation will see a recovery? And by this then, you will have a momentum also for Caminhões e Ônibus.

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Operator [26]

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The next question is from Mike Raab, Kepler Cheuvreux.

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Michael Raab, Kepler Cheuvreux, Research Division - Head of Automobile (Thematic) Research [27]

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Mike Raab, Kepler Cheuvreux. Also got 3 questions. First of all, the last time we spoke with your official reporting, i.e. Q1 2019, you mentioned that the [fresh product] of Scania started to unfold favorable effects on your pricing. Are you continuing to see this? Secondly, in terms of the cost flexibility you claim to have, how much -- by how much, let's say, in percentage terms would you be able to reduce your costs within a 3- to 6-month time frame if required? And then finally, getting back on the signs of a potential economic slowdown you mentioned as seeing. When it comes to the decision making for reestablishing Financial Services for MAN potentially, would any slowdown impact your decision making either in terms of timing or perhaps in terms of, let's say, the construct or the type of solution you would go for, please?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [28]

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Okay, Michael. So let me take the first question then. The pricing we referred to in Q1 is still valid. So we still see yes, that is the case. Secondly, when it comes to the flexibility, we do not comment in detailed numbers, let's say, in -- when it comes to flex workers or flex accounts. The only thing I can say is that we are prepared, given the good business we had, that our time equivalent and our time accounts are filled up and that we do have a good flexibility to what we see is ahead of us in the next 6 to 9 months.

When it comes to your third question on Financial Services, I mean, we are in very good discussions there, and I think this will not be immediately delayed by discussion if volumes would cool off because that's a more substantial long-term decision and that a successful truck manufacturer should have, in any event, a financial services division.

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Michael Raab, Kepler Cheuvreux, Research Division - Head of Automobile (Thematic) Research [29]

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Okay. Because theoretically, you could imagine a situation where you're basically, let's say, hypothetically assuming again Financial Services for MAN, and you're doing this right into a downturn, which typically has negative ramifications for residual values. So just wondering.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [30]

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All right. Okay. Thank you.

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Operator [31]

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The next question is from Dorothee Cresswell, Barclays.

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Hanna Dorothee Hellmuth Cresswell, Barclays Bank PLC, Research Division - Research Analyst [32]

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I have 2 actually with regard to MAN. The first is I wondered if you could give us an update in terms of market share development in Europe. If I look at Slide 8, it looks like you're still gaining share, but it's not quite at the same pace as it was in Q1. And in particular, it seems like the outperformance in Germany just isn't there anymore. And perhaps you could also give us an update on the other European-focused market. And then perhaps you could also give us a feel for new truck pricing for MAN.

I know you referred to the used vehicle market already and that that's a little more challenging. But what are the dynamics for MAN in the new truck business?

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

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Okay, Dorothee. I mean if you go and compare it to the [EFTA] official data, you can see that when it comes to the first half of the year in Germany, MAN was only 11.7%. When it comes to France, slightly below the market in Europe, strong gains in France. When it comes to Italy, we are making small progress there. All in all, it comes back to what I said in the Q1 discussion. You need to have a new product. And this is now at the doorstep in the next, let's say, 3 to 6 months. And then it's important that we come in these markets with the new sales strategy, we have the new truck. And that is the key for the growth. I mean keep in mind the truck we are currently working there in these markets is still the almost 20-year-old product lineup that we do have, and we need to have the new product in order to get a better position in there.

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Hanna Dorothee Hellmuth Cresswell, Barclays Bank PLC, Research Division - Research Analyst [34]

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And with regards to the pricing?

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

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Same thing. I mean it's important now we've had the model year '19 that was introduced a couple of weeks before with the new engine update, and this is performing okay. So price/mix is positive there, which is a good base then for the new truck that might then come from Q1, Q2 next year onwards.

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Operator [36]

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The next question is from Graham Phillips, Jefferies.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [37]

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Just reflecting back on your confidence now that you think you could be above the midpoint. I know you did sort of indicate a few things, but perhaps maybe just be a little bit more specific. What's changed perhaps over the last 6 to 8 weeks that's now given you that confidence on -- now thinking you can exceed the midpoint?

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

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Well, first of all, we now got proof by the second quarter with our performance there and see that the first half of the year, obviously, is on the level of the 7.9% for the group. So that's the first thing. And when it comes to the second half of the year, even if we see markets on the Scania side still a little bit, let's say, normalizing, keep in mind what I said before, the IMF has said you never know what happens in Q4. You see, we are at the edge when it comes to the introduction of the new MAN trucks, so you can't simply say, let's take first and second quarter and just multiply it by 2. And there is that order intake that I've referred to in the beginning.

So this is why we say, look, this actual from 7.9% for the first half of the year, we are quite confident. But still, we cannot give a different guidance in an upper segment because we still need to watch out the softening of the market and see how we ramp up the new truck generation brand.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [39]

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And I guess it also does include the provision release now for the Brazilian piece in your guide?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [40]

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Yes.

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [41]

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Okay. And just finally, sorry, one housekeeping, the $57 million FX positive, can you give us an idea of the split between first and second quarter? Just clarify that one.

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Rolf Woller, Traton SE - Head of IR [42]

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$28 million, $29 million, Phillip.

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Unidentified Company Representative, [43]

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Graham.

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Rolf Woller, Traton SE - Head of IR [44]

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Graham, sorry.

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Operator [45]

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

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [46]

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The first one is on your deliveries in Europe. We've heard from one of your competitors that there was, before the introduction of the new tachometer switchover, sort of a pre-buy. Can you give us a bit of color on how much that affected you specifically in the market, both on MAN and Scania as well, and how you see that then coming through in July, August, especially in Q3, in terms of the softness?

The second point, in terms of your working capital, you now said, obviously, on the Scania side you're now fully up and running on the new trucks. How much working capital release that you've shown is related to that? And can you give us a bit of color if you have still any working capital issues with regards to the ramp-up of the new truck generations in MAN?

And then as a last comment/question, there were some comments from your team about no intention at the moment to buy Navistar, and -- but, at the same time, savings are progressing very well. Can you give us a bit of color in terms of where we would actually see them coming through? Or are they more coming on the Navistar side and you then see them through your associated earnings benefiting through that?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [47]

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Okay. So let's take it this way. The digital tachograph that is somehow baked in, in a, let's say, pre-buy effect in second quarter, it's hard to grasp and say the effect in Scania is X and the one in MAN is Y. So that's -- it's simply impossible for us to grasp now. So I need to disappoint you on that one.

When it comes to working capital, I mean, we have seen improvement in the second quarter. But still, we have our challenges on both MAN and Scania. Currently, in the second half of the year, to come back on our cash flow, we need to continue the work that we have done there. And there -- but the pipeline, especially on the Scania side, is easing up. And also on MAN, we are making progress in second quarter, as you can see with the positive cash flow, which is quite some progress to Q1.

And when it comes to Navistar, well, look, I mean, I cannot speak for Navistar, obviously. But if you listen to Troy Clarke and Walter Borst, they have indicated that the purchasing joint venture effects have been in their favor and that they were satisfied with that when they had their last Capital Markets Day. So that was pretty much on their end.

And then when it comes on our end, of course the nature of the strategic alliance is that you get agreement on components. And there, you have shared funding and you have added volume to your platform, which is obviously then material cost optimization for the leading brands in TRATON. And so those effects are baked into the components. And this is something we do not disclose yet because it's also on the discretion of Navistar to announce at a certain point of time which components of TRATON they will use and when they would like to release that to the market. But there, the improvement is on both sides, obviously.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [48]

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And have you already seen some of that coming through? Or is that more a story that's still continuing and helps you more for next year?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [49]

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We do see that also down the road because so far, we're discussing which components might come and obviously then working on contracts. So those haven't been yet baked in because deliveries are not yet with the new components established. So this is something you will see in future as Navistar takes the decision to take a component or not.

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Operator [50]

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The next question is from Adam Hull, MainFirst.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [51]

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Really just wanted to dig a bit deeper on free cash flow as you've turned a bit positive in Q2. If I remember correctly, I think you were talking about 30% to 40% cash conversion for the full year. Just update us if that's still in place and really help us through in terms of some of the key levers there. Is it working capital inflow in the second half? Is it lower cash CapEx, R&D, et cetera? Maybe really help us because clearly, I know that is a big, important factor here.

And maybe just in terms of the midterm, is that a normal 30% to 40%? Or can you really increase that significantly in the next 2 to 3 years, just to get a feel on the cash flow?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [52]

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Okay. So first of all, the question you answered -- is answered with yes, we're still aiming for the 30% to 40%. If you see second quarter, you could mathematically derive that cash conversion was around 50% for the second quarter. One side, as I said before, the earnings improved. Second is working capital, especially there the inventories. And this is where the major lever comes in the second half of the year. We have introduced both in Scania and MAN cash flow task forces, and you could see already trucks coming down in second quarter.

And now we will see that also in Q3 and Q4.

And down the road, I mean, it's a question. We will work hard on our synergy targets and on our profits.

And if profits go up and if you manage your working capital, you have a good position to also improve your cash conversion in the midterm.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [53]

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But would you say at the moment -- I mean, our inventories and your working capital, it is clearly too high. Is that how you see it? Or is this just to do with the sales level? I mean if you look at the days of selling, sales, et cetera, is it just -- it's got to -- I mean, it's run away a little bit, if I can put it that way, or not?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [54]

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I mean it still is below from last year. I mean we talked about in Q1 and also in London that we've had our challenges in the supply chain with the ramp-up of the new truck generation in Scania. Since now -- in Q1 of this year, we still have introduced the truck in Latin America with 6 weeks being down in production and the changeover. So inventories are, on the Scania side, are still quite high when it comes to the ramp-down there. We worked it off in the second quarter. And then, obviously, with everybody in Sweden pretty much going into the summer break, almost starting in June, I mean also, the June is not a strong month for inventory reduction. So this is what you will see coming down. I would not say that what we have seen as inventories in the first half of the year is normal levels. We still need to work our challenges down there.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [55]

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Okay. And just maybe a follow-up on MAN. I mean with the new truck coming onboard, as you said, Scania had disruption. When -- if -- putting aside the market potential movements and coming down potentially, when would we think the low point operationally of the launch period as it were? Is that sort of the latter part of 2020 or into early 2021 just in terms of that movement of bringing in the new truck, which normally hurts you when you see a bit of new and old truck at the same time?

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [56]

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I mean my gut feeling would tell me that, that might be in the later part of 2020. But keep in mind -- I mean, we learned a lot of things in the Scania ramp-up. So what we have now is Scania people working in MAN. We're making progress when it comes to the maturity of the program. So I mean, we have already planned in our plan that we will have certain hiccups in the production in there and have prepared for that. But I would say we need to see that quarter-by-quarter probably.

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Operator [57]

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There are no further questions. I would like to hand back to Mr. Woller.

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Rolf Woller, Traton SE - Head of IR [58]

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Thank you very much. That was 45 minutes. So very good for the second time.

And yes, we wish all of you, hopefully, a very refreshing summer break and hope actually it will be not as hot as it was here in Munich over the last couple of weeks.

Latest, we will talk to each other on November 4 when we have our 9-month results released.

And in the meantime, whenever there is any question not clarified, please get in touch here with the people in Munich, with Helga, with Thomas or myself. Keep us employed. And we wish you a very refreshing holiday. Thank you.

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Christian Schulz, Traton SE - CFO & Member of the Executive Board [59]

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Thank you.

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Rolf Woller, Traton SE - Head of IR [60]

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Bye.

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Operator [61]

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