Earnings call: TRATON Group reports robust growth and profits in 2023

TRATON Group, the heavy commercial vehicle manufacturer, has reported strong financial performance for the fourth quarter and full year of 2023, with significant growth in vehicle deliveries and sales revenue.

The group, which includes brands like Scania, MAN, Navistar (NYSE:NAV), and Volkswagen (ETR:VOWG_p) Truck & Bus, saw an 11% increase in vehicle deliveries, reaching around 340,000 units. Sales revenue grew by 16% to €47 billion ($1 = €0.92), and the adjusted return on sales was 8.6%, approaching their 9% target for 2024.

With the highest earnings per share since their IPO at €4.9 and a cash flow of €3.6 billion, TRATON is optimistic about maintaining strong performance despite a challenging market environment expected in 2024.

Key Takeaways

• TRATON Group delivered approximately 340,000 vehicles in 2023, an 11% increase year-over-year.
• Sales revenue grew by 16% to €47 billion, with an adjusted return on sales of 8.6%.
• Earnings per share reached €4.9, the highest since the company's IPO, with a cash flow of €3.6 billion.
• The adjusted operating result nearly doubled to €4.0 billion, surpassing expectations.
• Brand performance varied, with Scania at a 12.7% adjusted return on sales, MAN at 7.3%, Navistar at 6.6%, and Volkswagen Truck & Bus at 8.8%.
• TRATON Financial Services saw a 20% revenue increase in Q4.
• The company expects a more challenging market in 2024 but targets a 9% return on sales and a net cash flow range of €2.3 billion to €2.8 billion.

Company Outlook

• TRATON anticipates a challenging market environment in 2024 but remains focused on achieving a 9% return on sales and improving net cash flow.
• The company is dedicated to sustainability, aiming to lead in decarbonization, circularity, and human rights within the heavy transport sector.
• TRATON will continue its transition to battery electric vehicles, implement cost improvement measures, and develop the TRATON modular product system.

Bearish Highlights

• Supply chain challenges have impacted Navistar's S13 production and the overall market share growth.
• The company expects to face a more difficult industry environment in 2024.

Bullish Highlights

• Strong order books are expected to support the company's performance in the upcoming year.
• The introduction of the S13 engine has exceeded fuel efficiency expectations, which may drive market demand for more fuel-efficient vehicles.
• TRATON is optimistic about regaining market share without price concessions and maintaining high pricing, especially in South America and Europe.

Misses

• Despite strong financials, the company faced production issues and supply chain challenges that affected vehicle deliveries.
• The supply chain situation in North America has been a constraint, impacting deliveries and market share growth.

Q&A Highlights

• CEO Christian Levin and CFO Michael Jackstein emphasized the importance of improving working capital management and net liquidity.
• The company is focused on generating cash flow across all brands and management levels to improve credit rating and free float.
• TRATON is confident in its ability to fill the order book and achieve guided volume range, based on strong order intake in the initial months of the year.

TRATON Group (TRATON SE, ticker symbol not provided), with its robust performance in 2023, has set a positive tone for its future endeavors. The company's commitment to sustainability and innovation, along with strategic measures to overcome market challenges, are poised to steer it towards continued growth and profitability in the years ahead.

Full transcript - None (TRATF) Q4 2023:

Operator:

Ursula Querette: Good morning everyone and welcome to TRATON's Annual Results Conference 2024. My name is Ursula Querette, and I'm honored to host TRATON's earnings call for the first time today, even more so because today we present you a strong set of results for the fourth quarter and full year 2023. On a quick personal note, I joined TRATON GROUP in January in my new role as Head of Investor Relations and I am looking forward to being your contact person on the capital market side going forward. I already met some of you virtually or in person and I'm very much looking forward to a more regular exchange in the coming weeks and months. I am joined here today by our CEO, Christian Levin; and Dr. Michael Jackstein, our CFO and CHRO. Also present is Camilla Dewoon, Head of Corporate Relations to take care of media inquiries. Christian will kick off the presentation with the key 2023 results and highlights. Michael will then guide you through the financial performance in more detail. In the last section, they will present you our outlook for 2024. As always, the presentation will be followed by a Q&A session where we are looking forward to questions from financial analysts, investors, and media representatives. Before we start, please be aware of the disclaimer with respect to forward-looking statements. And with that, I hand it over to Christian.

Christian Levin: Wonderful. Thank you, Ursula and also from my side, good morning to everyone. Yes, 2023 was indeed a very successful year for the TRATON Group and I think it's reflected in all the major KPIs that you see on this slide. With close to 340,000 vehicles delivered, we delivered more vehicle than ever before. It's actually 11% up and that resulted in even higher growth in sales revenue, €47 billion and 16% year-on-year improvement. And with that, you can draw the conclusion that we were also successful in realizing higher pricing. Adjusted return on sales came in at 8.6%, already very close to our 9% adjusted RoS ambition for 2024 that we launched back at the Capital Market Day in 2022. What we're most proud of is probably the cash flow focus throughout the year that resulted in a stunning €3.6 billion result. And earnings per share finally came in on a more than double level, €4.9, the highest EPS since the IPO of TRATON. So, this success is coming on the back of a strong market tailwind and really high truck demand. Now, this allowed us to continue to significantly increase production in 2023. But remember, we still struggle with bottlenecks in the supply chains, even though we managed and have managed to build out a much more resilient system compared to 2022. So, gradually reducing our high order book, especially in Volkswagen Truck & Bus, MAN, and Scania and by that decreasing lead-times that is so important for our customers down to almost normal levels. But more importantly, this success is based on our strong brands, satisfying our fantastic customers with a strong portfolio of services and products, and our today more than 100,000 TRATONians, all fully committed to growing together as one group. Moving over to the next slide, where this team effort not only delivered on our financials but also on many of our milestones in our strategy, the so-called TRATON Way Forward. Four of them on this slide starting with the MAN restructuring, finally successfully executed. And I really want to give praise to the management of MAN that after so many attempts finally carried this home. This is, of course, a crucial step for MAN and its profit margins, but also very important for the entire TRATON Group. And remember, the full effect will be seen first in the calendar year of 2024 as we still have cost effects in 2023. Now, make no mistake, MAN, of course, continues to focus on costs through continuous improvements as all of our companies are doing. Another highlight is the creation of the TRATON Financial Services based on the successful Scania know-how as a global captive and integrated business unit established and expanded. Scania's Financial Services activities were in April fully transferred into TRATON Financial Services. We continued in July with signing a framework agreement with Volkswagen Financial Services to gradually take over the rights to provide financial solutions for MAN and Volkswagen Truck & Bus customers. And finally, in October, the exclusivity agreement with Bank of Montreal expired and we could start up Navistar Financial Services retail business, which is fantastically already contributing to our bottom-line results. Super important also point number three here, the TRATON Modular System, we continue, of course, to drive forward. So, after the successful launch of our CBE, Common Base Engine, and the common powertrain launched in Scania 2021, we last year delivered the first units with the name S13 in the Navistar as an integrated powertrain. And the feedback from customers have been overwhelmingly positive. We are actually overachieving compared to promises on fuel savings. We also finally set up our global product management organization, in itself a big step forward to foster cross-brand collaboration in the area of R&D and our products. Finally, sustainability stands at the heart of our strategy and we have clearly defined three impact areas. It goes about decarbonization, it goes about circularity, and it goes about human rights. Under the topic decarbonization, we are intensively working on the transition into battery electric vehicles, which leads me into the next slide, Slide number seven, with a few highlights from 2023 from our journey to the battery electric world. Starting with MAN, where we have prepared series production of the upcoming eTrucks in our Munich plant. We had a market launch at the end of October. We will be rolling out the first eTrucks to selected customers already. This calendar year, we managed based on a high interest to already book 700 pre-orders and then we'd go for full industrialization and ramp up in 2025. We were also very proud to receive based on the MAN eTruck, the Prestigious Red Dot Design Award in June last year. In Volkswagen Truck & Bus, we started up the production of -- the series production of eTrucks in our plant in Resende. And by doing that, we are actually the first manufacturer in Brazil to produce zero-emission vehicles on a large scale. We use the same strategy as in our other brands. We are blending in production of the battery electric vehicles on the same assembly line as where we produce ICE vehicles. Of course, we do that based on flexibility and the difficulty to predict the adaptation of battery electric vehicles in our markets. Now in Södertälje at Scania, we started operations of our battery assembly plant. This is a key step for continued ramp-up and industrialization at scale of Scania's battery electric vehicles in the coming years. We also marked another milestone together with Northvolt. We presented the jointly developed battery cell for heavy electric vehicles that gives a 1.5 million kilometers life length give or take the same as the vehicle and taking away any doubt around the business model for trucks and battery electric vehicles of the future. Also in MAN, we are investing into in-house battery pack production and we performed a groundbreaking ceremony in Nuremberg plant or close to the Nuremberg plant back in 2023 and our aim is to start up serial production here in 2025. Now, as all of you know, transformation and battery electric vehicle rollout is only possible on the back of a significantly built out infrastructure and more partnerships, at the extreme even between competitors. And we've already talked a lot about the Milence partnership, but we were proud to see the first charging hub open up for heavy duty vehicles in Venlo in The Netherlands in December. And as many of you already know, we're aiming having 1,700 chargers up and running by 2025. Also in North America, we are taking steps in this direction. Navistar is partnering up with a company Quanta, a specialty engineering group that build our charging infrastructure solutions. And finally, on the new or under the headline of new business model, Scania, together with sennder established a joint venture called JUNA which is a pay-per-use model only for battery electric vehicles and the first vehicles are up and running. And this is of course another way to accelerate the adoption, taking away risk for customers moving into battery electric vehicles. On Page 8, we move away from the BEV market dynamics and have a look on the general market development throughout last year and the influence on our incoming orders and deliveries. So, overall, as you can see, demand remained on high levels. We could significantly increase production through our more resilient supply chains, leading to higher deliveries and reduced lead-times, but still elevated levels for most TRATON brands and especially for Navistar. During the year, the market started to let's say normalize in Europe, affecting then MAN and Scania's order intake and order books taking the TRATON book-to-build ratio in the last quarters down to below 1. In U.S. and the North American market, we also saw a normalization of demand. However, in Navistar, we continued to only accept limited amount of orders due to the too high orderbook, the too long lead-times, and still having a number of supply chain constraints. Truck demand in South America were weak throughout the year, affecting especially Volkswagen Truck & Bus. Good news, however, there are clear signs of recovery in the heavy duty's segment especially throughout the second half benefiting then mainly Scania. Now, overall, TRATON started this year with very well-filled order books, lasting into the second half of this year. And with this good news, let me now hand over to Michael. Stage is yours.

Michael Jackstein: Thank you, Christian and a warm welcome from my side as well. On Slide 10, you can see how the high demand and production levels Christian just mentioned positively affected our 2023 unit sales and sales revenue development. 11% growth in full-year deliveries and a 16% sales revenue growth marked a very successful year for TRATON. This development also implies an improved unit price realization, admittedly on the back of strong market tailwinds, but also due to our high-quality product offering. Sales revenue in the fourth quarter increased by 8% to €12.7 billion compared to a high prior year basis. This brought us to an all-time high revenue level of almost €47 billion for the full year. Besides a favorable market and product mix, our revenue also benefited from a continued high demand for our Vehicle Services given aged truck fleets and high utilization. Moving to Slide 11, which shows a continued strong earnings momentum and hence a big step forward to reach our group profitability targets. On a full year basis, the adjusted operating result almost doubled to reach €4.0 billion at a margin of 8.6%. This was significantly higher than what we had guided at the beginning of the year. In Q4, the adjusted operating result rose by more than 50% year-on-year to €1.1 billion, reaching an 8.7% adjusted return on sales. On the one hand, this positive development is driven by the top line effects, I mentioned before, general market tailwinds, a favorable market and product mix, and better unit price realization. On the other hand, despite increased R&D and input costs, our cost base profited from scaling and saving effects. So, besides a better fixed cost absorption, the cost work accomplished by our brands, especially by MAN had a positive impact. As you know, we are continuously driving self-help and cost efficiency initiatives as we grow closer together as one group. Let us now have a look at the individual brand performance and their top and bottom-line impacts on Page 12. During 2023, all brands except for Volkswagen Truck & Bus benefited from increased new vehicle sales, better price realization, and higher capacity utilization. At the same time, throughout the year, Navistar suffered from supply chain disturbances, limiting their ability to deliver even higher volumes. Last, this was visible in Q4 2023, where units were short versus prior year's fourth quarter. Sales revenue in the Vehicle Services business continued to grow at both Scania and MAN, while Navistar recorded a decline mainly due to the sale of MWM in 2022. On the profitability level, Scania delivered a 12.7% adjusted return on sales for the full year, clearly up year-on-year. The ramp-up of the new 13-liter engine Super and the associated higher price realization were key drivers in 2023. R&D costs, which not only relate to Scania, but also span for the group, had a counteracting effect on Scania's profitability. MAN Truck & Bus achieved a strong 7.3% margin in 2023, significantly up by 6 percentage points year-on-year. The exit margin in Q4 was even higher at 7.6%. We already mentioned the positive effects of the MAN re-alignment program. Navistar showed a robust performance with an adjusted return on sales of 6.6% for the full year, outgrowing the margin levels achieved in previous years. Better pricing as well as a more robust production system helped to increase profitability. At the same time, despite disruptions in the supply chain, we managed to increase our truck market share in the U.S. Volkswagen Truck & Bus faced relatively challenging market conditions in 2023, however, recorded a remarkably strong adjusted return on sales with 8.8% despite significantly lower unit sales. This is proof of the brand's high flexible production system. Finally, TRATON Financial Services recorded a 20% revenue growth in Q4 and plus 23% for the full year. This was mainly due to an increased financing portfolio and higher interest income. Higher funding costs and increased bad debt allowances had an offsetting effect on profitability. Christian mentioned earlier that under the framework agreement signed with Volkswagen Financial Services in July, TRATON will gradually increase its Financial Services business with MAN and Volkswagen Truck & Bus customers. And Navistar relaunched their retail Financial Services business in October. Let us now move further down the profit and loss statement. The starting point of the earnings bridge on the left is the adjusted operating result of €4.0 billion for the TRATON Group in 2023. Deducting the adjustments brings us to the operating result of €3.8 billion, which was more than €2 billion higher than the year before. Please note that our operating result does not account for the earnings of our equity investments, which amounted to €124 million in 2023. If you included these, the figure would be accordingly higher. Earnings before tax came in at €3.3 billion and after tax, we achieved a profit of €2.5 billion. Hence, our strong operating performance resulted in earnings per share of €4.90, up from €2.28 in the previous year. This is the second year in a row that we were able to more than double our earnings per share. So, our strategic goal to create value clearly also holds true for shareholder value. Based on this, the Executive Board and the Supervisory Board of TRATON will propose a dividend payout of €1.50 per share to the Annual General Meeting in June. This corresponds to a payout ratio of 31%. We deliberately placed ourselves at the lower end of our intended payout range as the reduction of net debt is a core financial priority for us. Still, with a 7% yield, we think that we offer a highly attractive dividend to investors. Another attractive investment argument for TRATON is our high cash generation. TRATON Operations achieved an exceptionally strong net cash flow of nearly €1.2 billion in the final quarter of 2023. In addition to the strong operational performance, we benefited from a seasonally better working capital development. In the fourth quarter, inventories were down and liabilities up. This brought the full year number to €3.6 billion of net cash flow. Please bear in mind that this includes positive effects of €899 million from the sale of the Russia activities and the adjustment of the ownership structure of the Financial Services business. Still, over the full course of the year, despite the positive fourth quarter effect, the working capital increased by around €700 million, mainly due to higher inventories. In the current environment, where we still face some supply chain risks, these additional inventories serve us as a safety cushion. Here, we clearly see improvement potential. Therefore, an enhanced working capital management is a key priority, alongside further reducing our net debt position, which leads well to the next page of our presentation. As you can see on Page 15, we significantly reduced the net debt of TRATON Operations including corporate items by €2.0 billion to €5.8 billion by year end 2023. I already mentioned the positive cash inflow from our brands, which was partly compensated by the just mentioned working capital development. While the net debt position benefited from the €400 million proceeds from the sale of Scania Finance Russia early in the year, the impact from the intragroup transfer of Scania Financial Services was neutral. Also important to note is the dividend payout for fiscal year 2022, amounting to a cash out of €350 million in the second quarter. By further reducing our industrial debt, we aim to achieve two important effects; first, increasing our equity value; and second, reaching a standalone investment-grade rating for more flexibility in our financing efforts. With this glimpse into the future, let's directly move to the outlook section, which I would like to kick-off with an overview of the TRATON Group financial guidance for 2024 on Page 17. Despite a more challenging market environment in 2024, which Christian will comment on in a minute, we're overall optimistic about 2024. And we remain committed and we will work diligently to reach our strategic goal of 9% return on sales for the TRATON Group in 2024. But it is clear that we are facing and normalizing declining market environment in Europe and North America, which we will tackle by capitalizing on our high order backlog and by a favorable market and product mix. We, therefore, see unit sales and sales revenue developing in a range between minus 5% and plus 10%. Our ambition to reach a 9% adjusted operating return on sales is reflected in the upper end of our margin guidance, which ranges from 8% to 9%. The lower end considers conservative market assumptions for both Europe and North America as there could be risk arriving from further supply chain disruptions and economic and geopolitical uncertainties. Finally, we expect net cash flow for TRATON Operations to range between €2.3 billion and €2.8 billion. When comparing this guidance with 2023, please note that net cash flow in 2023 was positively impacted by €899 million from the sale of the Russia activities and the adjustment of the ownership structure of the Financial Services business. It goes without saying that we will continue to invest into our future, especially into the transformation of our industry through battery electric vehicles. Hence, we expect both CapEx and R&D to increase. With this, I hand it back to Christian for our truck market outlook and some concluding remarks.

Christian Levin: Excellent. Thank you, Michael, I should say. Good. So, let's see what we expect for 2024 in terms of truck demand. Starting with Europe, we are expecting Europe to remain at a high level, thanks to the still existing replacement need on the back of restrictions throughout the COVID period and thereafter and despite the very strong 2023 year. In North America, we also expect a higher level could potentially be carried by pre-buys from the emission regulations coming up in 2025 and 2027, meaning that for both Europe and North America, a coincidence, we see the decrease ending out somewhere in the range of minus 5% to minus 15% and again, really representing markets at normalized or actually good levels. South American market, that is very important to us, experienced, as you know, a significant downturn in 2023, triggered by a generally weak market and especially in Brazil, a pre-buy effect in 2022 due to the introduction of the so-called CONAMA P8 or the Euro 6 emission standard, if you would like. Now for 2024, we see growth coming again. We see this part by reduced interest rates from the Central Bank. We see the agro sector having good harvest. And we see governmental investments into infrastructure supporting us here. So, we are forecasting a market growth in the range somewhere of 0% to plus 10%. Now, you might ask, why are we then confident that we can overgrow the overall truck market? Well, firstly, and as mentioned before, we have a well-filled order book with enough orders that take us into the second half of 2024. Looking at Europe, both Scania and MAN ended the year with improved, but albeit lower than our ambition and lower than our historical level, meaning there is market share potential for both our European big brands to be taken back. In the U.S., we have faced an improved supply situation even if we still have difficult bottlenecks to struggle with. And we have our continued ambition ever since we stepped into Navistar to grow market shares with around about 1% per year, which we have proven that we can do, and we will continue to do so, supported, amongst other things, by the S13 offering into the market, supported by a strong market position in medium-duty, and a strong market position in the severe business plus the addition of the Navistar Financial Services. And as already mentioned, a strong demand for heavy-duty trucks in Brazil, both in agriculture and mining sectors. But aside from the market development, we will, of course, continue to work with our focus areas. And on the next page, Page 19, we have outlined four areas for 2024. Firstly, the BEV transition. We will continue to successfully launch new products from all our brands, both trucks and buses. We are starting up charging operations of our own and we continue to build out partnerships. Secondly, cost improvement measures. All brands are individually working on cost efficiency initiatives. We can use the MAN restructuring as inspiration and we leverage, of course, also cross-brand efficiencies. Thirdly, the Navistar profitable growth journey. So, we are entering and ramping up the international S13 truck deliveries. And we're pairing that with enhanced services and well, you could say the European way of doing it, which we could only do thanks to adding Navistar financial services capabilities to our brand over there. That should result in continuous increased market share and as a result, better capacity utilization and higher profitability. And finally, for the long-term, the so important buildup of the TRATON modular product system where we see cross-brand collaboration through a lot of organizational initiatives. We're merging development departments of our brands into a group-wide R&D organization and into one joint group product management organization to really strengthen the development of TRATON Modular System. And in this program, I could just mention that we are also preparing the introduction of our integrated powertrain at MAN on the basis of the same Common Base Engine now in use at Scania and Navistar, and this is due for 2025. These are just a few, but of course, important steps to transform transportation. The goal of transforming transportation goes hand-in-hand with our sustainability agenda. And here, we have identified three joint impact areas for the group. These are decarbonization, circularity, and human rights. And we have set up ambitious milestones in 2024, but of course, also beyond. We are dedicated to be the sustainability leader in the heavy transport sector. So, starting with decarbonization. We are driving decarbonization initiatives in our core, in our whole value chain, and beyond in our entire ecosystem. I'm really proud that we have developed science-based carbon reduction targets on group and brand level. When it comes to Scania and MAN, not only have we applied for, we have been approved by the science-based target initiative, and we are preparing already for resubmissions. Navistar status is that we have submitted our commitment letters to SBTi and are waiting for their approval. And finally, Volkswagen Truck & Bus will be benefiting the TRATON umbrella of decarbonization targets. On circularity, well, of course, it's about integrating circular mindset into all product development and in particular, in the preparation of TRATON Modular System. But more short-term, we are also ramping up cross-brand collaboration, scaling remanufacturing, which is not only a sustainability measure, it's also creating additional revenues in our so important service business. Finally, on human rights, we move strongly internally on areas such as diversity and inclusion, and inclusive company culture is so important to allow for everyone's idea, everyone's opinion. It caters for a diverse team and diverse teams we know not only better reflect our customer base, not only allow us to tap into the entire talent pool on this planet, but also through research shows that teams are performing so much better. And in our external system, we are, of course, focusing heavily on our supply chains in order to make sure that also there, we comply with the same high standards as we have set out for ourselves internally. So, before moving into the Q&A section, let's just summarize the key takeaways on Page 21. We believe we created significant shareholder value in 2023. We strongly improved operating performance and earnings per share. We got rewarded with a strong share price development in 2023. And today, we pair that with the proposal of an attractive dividend yield. We are highly cash-generative and we continue to focus on reducing debt, which has a positive effect on our equity value. We're confident for 2024 with a well-filled order book despite a continued difficult industry environment. And we're driving the BEV transformation and continue to invest into the future. We leverage the know-how of all our strong brands, and at the same time, we grow step by stronger together to leverage potential synergies inside the group. So, to summarize, we are very well on track to reach our 9% ambitious return on sales target that we set out in our Capital Markets Day back in 2022. And with that summary, I hand over to Ursula to kick off the more interesting Q&A session. Ursula?

A - Ursula Querette: Thank you, Christian and Michael. This was a very insightful presentation. And I already see some questions lined up from the audience. But before we start with the Q&A session, a few housekeeping items. This Q&A will be recorded, and a replay of this whole event will be made available on our website later today. [Operator Instructions] Now, let us start and take the first question, which comes from Klas Bergelind from Citi. Good morning Klas, please go ahead.

Klas Bergelind: Good morning Ursula. Hi Christian and Michael. Klas at Citi. So, my first question I had was on the flat ASP for the year, which is a bit more conservative than what we've seen from others. Can we talk through, Christian, how you see the phasing here? And to what extent mix is impacting the ASP this year? Maybe I misheard, but I think you said that you expect solid market and product mix, which would mean more negative assumptions on pricing. And I assume you will have carryover from pricing into the first quarter and then we should level off as we go through the year and perhaps link to the market share push, especially at Navistar, if we can start there? Thank you.

Christian Levin: Thanks Klas. Impressing you're always first, by the way. I think maybe you misunderstood. So, the way we look up on pricing, as you indicated now in your question, we have a good overview of course, of the pricing in the order book. And ever since the COVID crisis where we had to kind of reset the order book, we have been able to, with very small cancellation, keep the pricing or even increasing the pricing in the order book. So, we feel pretty confident about that. And then when we look to the new order intake that we have and take them prominently for the second half of the year, and as you know, of course, we have more insight into the Scania figures, we see a very good price realization. Mix effect as you're into is always present. And of course, we see a weaker Central Europe, for instance, that, that is, of course, negative as we have very high price levels there. But we, at the same time, in Scania, for instance, see a very strong development in Brazil, where we, throughout the last years, have been able actually supported by Volkswagen Truck & Bus to establish a really good price level. That seems to stick and actually increase throughout the year. So, that's on Scania. On MAN, we see a similar development. We keep up prices and we are determined to keep up prices. I think what we've learned throughout this year in the group is the importance of being self-confidence and not being afraid if you have a tougher order intake situation. And here, I think we benefit from the order book we have, meaning that we could be a little bit more sturdy, really sticking to pricing and we all know in all our brands, how important it is to bottom-line. So no, I wouldn't say I have a negative outlook. I'd say I have a rather -- actually a rather positive outlook on keeping prices up on historically high levels. I don't know, Michael, if you want to add.

Michael Jackstein: No, I fully agree with you. We believe that we can keep the price level stable. And of course, there are different effects here. Commodity prices have moderated. Other factors like wages are probably going up a little bit, but also they moderate. So, overall, not much to add but that we are confident to keep pricing levels.

Klas Bergelind: Thank you. I mean, yes, of course, you will have a carryover going through the first half as you're sold out. I get that. But the question is really, you're the second truck OEM as of late who is talking about, if you compare the market guide versus the unit sales guide, there is a market share gain embedded into this. And you almost can think the new order pricing, right? If everyone is taking share, then shouldn't sort of the ASPs on the new orders be a little bit under pressure, but maybe the industry is much more price disciplined these days.

Christian Levin: Yes, I think if you look to market share development, Klas, throughout the year, so I agree, of course, not everyone can take market shares that doesn't add up and of course, we cannot speak for the others. But if you look to the Scania situation, for instance, we have really been held back by more severe supply chain issues than it seems than most of our competitors and ended up in Europe, for instance, on a 15.4% market share, which is really lower than our historical average and certainly much lower than our ambitions. If you look to just through January, which are the figures available today in the market, we came in on an 18.7% which is, of course, even beyond our targets and might not stay. But it is an indication that we can take market share. MAN is a similar story. I mean we had a good recovery last year in market shares from the terrible situation we had, not least with the cable harness and the Ukrainian situation. But ending the year on the heavy side with 14.5% is far from what we can expect from MAN from our ambition. So, I think we can, with some self-confidence, talk about increasing market shares in Europe throughout this year. In the U.S., it is and it has been from the start, very important for us to show that we can gradually take back international market share as this is a brand that used to be 25% in the Class 8 and we were down to 11%. And we see that the dealer network is there hungry to take market shares. We see customers really begging us to come back, but we have been held back by supply chain challenges and still are, as a matter of fact. But our ambition to take another 1%, I think, is not unrealistic. So, we should see that happening without price concessions.

Klas Bergelind: Yes. So, there is a catch up. My second one is on the cash flow. My final one I promise is we had a solid end to the year. If you back out the €900 million from Russia and the Scania ownership, it looks like you're guiding flat cash flow. Underlying EBIT is flat. CapEx is seen significantly up. So, the difference must be lower working capital. Michael, are you planning to run production below demand here in the first half as demand normalizes? And will that weigh on the margins? So, weaker margin in first half and stronger in the second half. Trying to understand that relationship. Thank you.

Michael Jackstein: No, I mean as you were into, and this is the right starting point to mention that when you look at the net cash flow last year, the almost €3.6 billion that this was affected by the two extraordinary effects. And so you're right, our guidance if you deduct these extraordinary effects, then our guidance of €2.3 billion to €2.8 billion is practically in this range. We will clearly focus on our good operating performance that we showed last year. And yes, you have to bear in mind, of course, that we have to invest in various topics into the transformation, which is the e-mobility journey on the one hand side, also our China operations that we are ramping up. But overall, we are positive. Again, focusing on our operating performance that we will do quite well on the net cash flow as well. This is -- as we've mentioned, this is one of our key priorities. Reducing our net debt level, focusing on the net cash flow. This is really a new focus area. So, we have a little bit shifted the attention, of course, from the operating result where we have a lot of people working on that one also in the sense how do we forecast this. We've shifted that to get more intelligence, let's say, regarding the net cash flow, and this is a key priority for us.

Klas Bergelind: Thank you.

Ursula Querette: Thank you, Christian and Michael, for this additional insight on pricing, market share, and cash flow. Let's take the next set of questions, which comes from Hemal Bhundia from UBS. Hemal, please go ahead.

Hemal Bhundia: Hi Christian, Michael, and Ursula. Hemal Bhundia from UBS. Thank you for taking my questions. First question on Navistar, I just wanted to get an idea on the supply chain situation in North America and how much of a constraint this is to Navistar's S13 production so far in 2024? Is this really the main factor holding back Navistar's margins? And then secondly, on MAN, I understand there will be a CBE process this year, but I just want to understand how long the transition will take. Does the better supply chain situation in Europe effectively speed up this process when we're comparing it to Navistar's transition to the S13? Thank you.

Christian Levin: Should I start?

Ursula Querette: Yes.

Christian Levin: Okay. Yes, very good question. And yes, you're right to assume that the biggest challenge in Navistar in order to restore margins is volumes and capacity utilization. You probably know that we have invested in a brand new production plant in Texas, in San Antonio, which we are planning to fill not only with medium-duty trucks, which we're producing today, but also heavy duty trucks. We are aiming to come back to historical average market shares coming up towards 25% on the Class 8. And none of that can happen if we don't have the supply chain in order and can get the critical components. And we have a number, unfortunately, of critical components and critical suppliers that are still holding us back on this journey. And that's why we have an order book that is going beyond six months, and that is what is kind of keeping us a little bit back from taking more orders as we don't want to expose ourselves to too much risk, having too long an order book, but also not being fair to customers, not being able to say when we can deliver. So, it's really a supply chain issue to get profitability in order because if you don't have capacity utilization, you suffer not least fixed cost, but of course, we're also geared with people to be able to produce more, and then we don't get the components, and this happens very late. So, it's a little bit like the movie we saw in Europe back in 2021, 2022, we're seeing right now in the United States, and we work heavily with it. And I must say that the team is doing a great job there. And we are also supporting the colleagues from Navistar with our experts from both Latin America and Europe to help them to get on track. So, that's a few comments on Navistar. Do you want to add anything, Michael?

Michael Jackstein: Maybe just briefly. As we mentioned also in quarterly calls that Navistar was really heavily held back, we said by supply chain issues. We have to mention here the frame rail topic which had the biggest impact, I would say. Also, there was an issue with axles. And I would say the positive message is here that the supply chain situation is getting better. Nevertheless, we might see still some effects in the first quarter at Navistar. But overall, that's the clear message that we get that the frame rail topic is getting much better and is, let's say, more or less resolved. Nevertheless, I would say, it's fair to say, and this goes for our industry as well for many other industries, we don't have a supply chain situation as stable as before the pandemic, and we probably won't have in the future. This is simply the new normal and we will adjust to that. So, from time to time, there will be minor hiccups. But overall, the supply chain situation has eased, has increased more in Europe, but also now in the U.S.

Christian Levin: And you had a second -- you said a second comment also on your question on MAN. And if I got you right there, it's a little bit about the restructuring program that, yes, it has taken long. I would say, we have actually had, if I count right not less than four initiatives in MAN to try to get the cost structure right. And it's only with the latest change of management that we could really get traction and really part of the strategy, actually execute on what has been promised. And that is now done, and we have taken drastic measures. And the biggest one is actually that we're moving a big part of the production out of -- or all of the production from Austria, but part of the production also from Germany into our newly established plant outside of Krakow in Poland. But a lot of other measures. And our comment here was really we had extraordinary cost to handle this transformation all the way up to the fourth quarter last year. But by 2024, there is no more. And MAN is going into a state of being run, as I would say, a normal company in our group, meaning that cost is always at the center of everything, cost consciousness, scarcity of resources, but through continuous improvements, not through dramatic restructuring programs. That's always a failure when you end up there. But as you all know, that follows MAN. After many, many years of non-performance, this is for us really the proof that we are now having MAN in a really good position moving forward. And we expect to see this situation continue and be proven again throughout 2024 even if the market development in MAN's core markets in Europe might be somewhat weaker. I hope that answers your second part of the question.

Hemal Bhundia: Thank you. And just a quick follow-up. So, on the CBE progress for MAN in 2024, could we expect that process to be a bit quicker in -- than comparing to Navistar simply because European supply chains are a bit less impacted versus the U.S.?

Christian Levin: Well, there is a similar capacity investment made in Huntsville in Alabama, as is done in Nuremberg, in MAN. So, the peak capacity will be around about the same. The ramp-up period in MAN will start in 2025. So, unfortunately, we have to wait another year due to integration efforts into the MAN chassis and under the MAN cab. And once that is done, I don't dare to speculate how fast the adoption will be from 2025 and onwards. But of course, we'll do our utmost to make that as quick as possible. And I'm sure that there will be a positive reception from the customer side. But it will not be held back by capacity restrictions from suppliers. That's one thing that is for sure.

Hemal Bhundia: Thank you.

Christian Levin: Thank you.

Ursula Querette: Thank you. So, let's take the next questions, which come from Hampus Engelau from Handelsbanken. Hampus?

Hampus Engelau: Thank you very much. Two questions for me. Maybe starting off on the implementation of the 13-liter Common Base Engine at Navistar. Could you maybe talk a little bit on what type of KPIs you're using for selling this? And what type of fuel savings you're seeing over the 15-liter Cummins (NYSE:CMI) engine? And also I would be interested to hear if there's any scope for bringing the V8 engine from the TRATON Group into Navistar or to kind of compete against Peterbilt in the more premium segments in your chase for more market share? That's my first question. Thanks.

Christian Levin: Yes, good questions, Hampus. So, perhaps starting with your second part, the V8 is, of course, the gem of our engine portfolio. Right now, we do not have any plans to bring that into the international brand. We have an ambition to bring the international brand position today really at the lowest end of the scale, both price-wise and image-wise up towards the top. It is an iconic historical brand where many customers and also dealers have this in them that this should be a premium brand. But that, I think, is a journey we have to do step by some. And we start by bringing in the 13-liter engine and playing on the fuel efficiency. I'm not excluding anything. We -- this is the beauty of having a group that as we move forward towards more and more standardized interface, it's also becoming easier, read less costly to integrate products from the other brands into other brands. So, I'm not excluding it. Good. That was on the V8. And then on the CBE one, help me to remember your question.

Ursula Querette: Fuel savings.

Christian Levin: Yes. Fuel savings in reality. So, this has been a very interesting journey. As you know, we are replacing the current so-called A26, which is an engine based on MAN's current D26 that Navistar took up quite many years ago. And as you probably know, they had tremendous problems both with quality, but also with EPA not being fully compliant and all of that, we have cleaned out and that's, of course, off the table. But performance-wise, we promised back in the days from the TRATON side that we could offer an 8% improvement in fuel consumption over that A26 engine. Today, we're actually experiencing fuel savings up to 15%, 1-5, which drives me to the conclusion that we will be able to ramp in the 13-liter segment because this is the 13-liter segment, the S13 quickly. And here, we will only be held back by our own capability to get our production going. It will not be on the customer side. When I also say that customers are -- were overachieving, we're not promising customers any more than 8%, but we're seeing 10%, we're seeing 12% improvement. That's, of course, compared to other engines in the market, including the so popular 15-liter segment, where we also offer the Cummins alternative in our own range. So, really, really good fuel returns and somewhat benefiting from the fact that in the U.S., you're not using the payloads that we do in Europe. So, you are really around about 30 to 40 tonne total vehicle weight. And here, of course, a 13-liter volume is much more adapted than the bigger 15-liter that has, for many years, been taking up more than half of the American market. So, I think we will with this also establish a shift as, by the way, both Volvo (OTC:VLVLY) and Daimler (OTC:MBGAF) are aiming for to drive the market into the 13-liter range to be able to produce even more fuel-efficient solutions. But overwhelmingly positive reaction from the customers. And now we are, of course, making sure that as we add volume, that we really keep the quality level up to, let's say, Scania standard to make sure we don't have any hiccups similar to what Navistar had with the A26.

Michael Jackstein: And maybe if I may add to this from a financial standpoint here. I think it's clearly worth mentioning that the fuel efficiency that Christian just described, of course, helps our customers from a total cost of ownership perspective, which translates into a potential pricing for us. So, that's really the short-term effect. And then Christian also mentioned the shift that we're aiming for from 15-liter to 13-liter engines to our captive engine, which then has a mid-term effect. And then in the long-term perspective, of course, we do the service business with this captive engine. That's why I don't want to say that the S13 is a game-changer. This is probably overdone, but we see that the S13 will have a significant effect contributing to the success and the RS level of Navistar, short-term, mid-term, and long-term, as I just have described it.

Christian Levin: Now, that's a very good and important addition. So, the market strategy of the launch of the S13 is that it comes with European style service and repair packaging. So, -- and therefore, it was so important also to get the Financial Services business up and running again on retail level in the U.S. because, of course, you also want them to be able to one invoice per month, having everything included based on captive financing. So, I agree with Michael. It's really going to gradually be a game-changer for Navistar.

Hampus Engelau: Thank you. There's another last question for me.

Christian Levin: Yes.

Hampus Engelau: I mean TRATON has been very vocal on battery electric. At the same time, I think there is a very interesting emerging technology coming up on using hydrogen and diesel in just a diesel engine. And maybe could you talk us about what you see in terms of potential for reducing -- I mean reducing maybe CO2 with 90% and still using an existing well-developed technology in terms of ICE?

Christian Levin: Yes, of course. Yes, you're right. We've been very, let's say, skeptical or realistic perhaps, let's say, future will tell, but especially on the fuel cell technology in our business. I think it has a lot of merits in other places. But based on the fact that hydrogen will be expensive, and there will always be a relation between hydrogen and electricity as you can transition between the two, meaning that even if hydrogen gets less expensive, so will electricity and meaning that the battery electric vehicle through less losses. Actually, there are 3 times more losses in the fuel cell electric vehicle than the battery electric vehicle. The battery electric vehicle will always be the more economic to operate. So, TCO will be the game-changer. Now, interesting development, EU now considers an H2 burner. So, burning hydrogen in a combustion engine as a zero-emission vehicle. That opens up for new opportunities, and that's what you're into. So, this is a technology which is very close to the technology that we already offer, especially in Scania with the natural gas or biogas engine platform. You need to do certain modifications to these engines; you need to increase the injection pressure of the gas. For instance, you need to add compressors and of course, another software and control systems. But it has its merits of course, because infrastructure is in place. There is a gas network built out for natural gas and biogas vehicles in most countries in Europe. And many of the vehicle manufacturing, including ourselves, have a platform for it, which makes it CapEx interesting. The challenge with that technology and the reason why I will make you disappointed and say, I still believe this will be a very small part of the market is again that hydrogen will be very expensive. And in our scenarios, which is of course, based on assumptions, and they could, of course, be wrong, but we do our best to keep an ear to the ground. We see that just as with the fuel cell, we're talking in the range of 5%, perhaps 10% of the future market, unfortunately. So, it's not -- we don't believe it's going to be a game-changer. We believe it's something that you should probably have in your portfolio. But again, let's see all of this based on our best assumptions.

Hampus Engelau: Thank you very much.

Ursula Querette: Yes, thank you.

Christian Levin: Thank you, Hampus.

Ursula Querette: And thank you. I think this gave us some important additional insight on the product side, especially at Navistar and electrification in general. Let's turn to the next question, which comes from Moyo Adebayo at Goldman Sachs. Moyo, please go ahead.

Moyo Adebayo: Good morning all. Thank you for taking my question. I have just one. And it was if you could please comment on the capital allocation priorities once leverage comes down towards neutral? Thank you.

Christian Levin: For you, Michael?

Michael Jackstein: Can you repeat it?

Moyo Adebayo: Yes sure. Could you please comment on your capital allocation priorities once leverage comes down towards neutral levels?

Michael Jackstein: Yes, sure. I mean to say or to say a couple of words regarding our strategy. I mean our focus, as I was into before, is really on getting net cash and by that, reducing our net debt. As we were into, we believe that we made a significant step. And as I also mentioned already, we want to clearly achieve two important effects. We want to increase our equity value and we want to reach a standalone investment-grade rating for more flexibility. Nevertheless, of course, we have to invest in the future, as I was into before, we are in a transformation. I mentioned on the CapEx side, and this is the reason why we said that we see a sharp increase here regarding CapEx. We especially invest in the China plant, but also we invest when it comes to R&D and e-mobility and autonomous driving, and software in all these new technologies. Nevertheless, we clearly look for a good ratio. We look what we can afford, and we balance this out in a way to reduce our net debt level further and to invest in, let's say, the right way to achieve our targets and goals being here a transformation and sustainability leader and driving our efforts forward.

Moyo Adebayo: Thank you.

Ursula Querette: Thank you. The next question comes from Miguel Borrega from BNP Paribas (OTC:BNPQY). Good morning Miguel, please ask your question.

Miguel Borrega: Hi, good morning everyone. Hi. Thanks for taking my questions. A couple of them just on Navistar. Also a follow-up to what you just said, Christian, unit sales have been falling in the last couple of months, at least until January. Does it have anything to do with the transition to the 13-liter or it's just supply chain issues, as you said? Because at the same time, I see order intake was very strong in Q4. So, just a little bit of color there, Christian, the difference between units sold and orders? And then in terms of the margin target for 2024, Navistar is still the only brand that is a little bit far from the 9% target. What do you need essentially to get there? I'm sure you're not planning to get to 25% share by the next two years. So, is there anything that you'd like to achieve in the next two years that are key for that 9% margin? And if it wasn't for the supplier issues, you'd be at 9% already, would you say? Thank you.

Christian Levin: Great questions, Miguel. I'll start with the first one and then perhaps, Michael, you will comment on the second one. Yes, on the volumes, it is really supply chain issues or let's say, production issues. So, we're really holding ourselves back, you could say. So, you shouldn't read anything else into it. I mean could we have delivered more vehicles? We would have taken more orders and we would have grown market share a little bit quicker. On the other hand, we are quite careful to stay within the bandwidth of growing 1%, maximum 2% every year back towards the historical 20% or 25%, not to trigger any price effects in the market. We know it's -- as it is in Europe, by the way, it's sensible. So you need to be careful. And we are, of course, not using the pricing weapon to take us there, but you never know what the reaction might be from your competitors. So the answer is very simple. We are really held back by production issues to the absolute largest extent created by supply chain. Now, supply chain is not like we're not finger-pointing at suppliers and saying it's all the fault of our suppliers. It's, of course, also based on our communication with suppliers, being tied with them, updating them on changes in demand, mix, et cetera. So, it's an area where we need to do more work, and we're focusing heavily on that. I hope that's answering the first part of your question.

Michael Jackstein: Yes. Let me come to the second part of your question. And let me start with saying that we don't give a guidance for a brand for a specific year. We don't do that, but you referred to the strategic target for Navistar with 9%. And yes, of course, you are right, all our brands have strategic targets. And you're also right, of course, that if you compare the results of our respective brands in the full year 2023, with the strategic targets, then Navistar has, let's say, quite a way to go compared to our other brands. And this is, as we were into, and as Christian just mentioned, one more time, this is really based on the supply chain issues that we faced here and then to be a little bit more specific about what you're asking for, why do we believe that Navistar is making good steps towards their strategic target of 9%. Well, there are a couple of aspects. And one, of course, is the S13 engine that we already mentioned. So, we are ramping up this engine in Huntsville, Alabama, and this goes really well. I can assure you because I was there about three weeks ago and had the chance to see the ramp-up of this engine. So, this is perfectly going well. Another aspect that we tackled already is the ease in the supply chain. Still not 100% perfect, but certainly, a better situation in the supply chain compared to the previous year. So, there is another potential for a step up. And then thirdly, as we were also into, we started our Financial Services business in Navistar in autumn last year. So, that's another factor, which will support us in bringing the RoS level up. And then there is another factor I can mention, and this goes back to the product mix that we're having in the U.S., especially at Navistar. So, we have quite a significant stake also in the medium-duty segment where we believe that the medium-duty segment is performing a little bit better this year or I can turn it around and say that this segment does not face likely the same challenges as the heavy-duty segment. So, if you put all these factors together, then this gives you an idea why we are quite positive that Navistar will certainly improve the margin from last year. And why Navistar makes significant steps towards their strategic target. And then really last comment, I talked about the short-term, the mid-term, and the long-term perspective in connection with the S13 liter engine. So, this gives you already a glimpse that we see clearly more potential, not only linked to the year 2024 but also to the upcoming years later on.

Christian Levin: I think great, Michael. I mean there is so much more to than just the volume. The reason we talk about the volume and that we're held back is, of course, that is the one with the biggest impact, but the list is long.

Michael Jackstein: The list is long.

Christian Levin: Yes, the list is long.

Ursula Querette: It's quite a long list of chances to capitalize on.

Christian Levin: Yes.

Ursula Querette: Yes. Thank you.

Miguel Borrega: Can I just ask another one on CapEx, please? Maybe on the guidance for a sharp increase versus 2023. I mean if there's more brand collaboration, as you say, and product management, you also just launched new battery electric products. So, shouldn't there be an argument for lower CapEx? Where is the group essentially increasing spend? Where is the big delta versus 2023? And then looking forward, when would you see a possible decline in total CapEx? Thank you very much.

Christian Levin: I can start and you can fill in, Michael from a financial viewpoint, but it's very simple. We need to invest upfront in order to take our brands into the same platform. So, whether you talk about software, whether you talk about electronics, whether you talk about chassis, cabs drive lines, whatever. So, the examples that we're giving you here on the CBE is, of course, very positive. But as I indicated on MAN, it takes quite some effort to take the common drivetrain into another chassis and in another cab or under another cab and connect it to another electrical architecture. That's why it's so important that we quickly move into common interfaces. And that's a simplified way of thinking around the modular -- big loader or a modular system. But once you have that, then you adopt very quick and you scale very quick on any technology areas into the group. Now, we're in that journey. We just started. But to get there, you will, of course, have to invest into doing changes that is not necessarily short-term on what you would like to do for your customers because they don't contain any obvious customer benefit. But you need to do it in order to create speed and scale further down. And that's where we are right now, and that has to cost some money if we should do it quickly. If we should wait until every generation is at its end of technical life, we will be going on with this, as you know, cycles are long in our industry. Cabs can live for 20 years. Chassis can leave for 30, 40 years, drivetrains, maybe 10, 15, then we would go on forever. So, that's the simple explanation from a strategic point of view. But maybe, Michael, if you want to add.

Michael Jackstein: Not really much to add. Actually, maybe to give you some concrete figures that it's a little bit more crisp. So, when you look at the CapEx in 2023, it increased by 17%. And when we say that we guide you with a sharp increase in 2024, that means that it rises more than 20%. So, to put this a little bit into context, and the rest was, of course, perfectly said by Christian, we are in an investment phase here. And then in a couple of years, this will clearly pay off. And then we will see significantly lower investments in CapEx and R&D.

Ursula Querette: So, just as an information, we have five more analysts lined up in the queue. The next one comes from Nicholas Witting from Société Générale (EPA:SOGN). Good morning Nicholas.

Dan Cunliffe: Hello. Hi. Good morning. It's Dan Cunliffe from Société Générale. Thank you for your question. Two questions, please. First of all, the -- you mentioned a big focus on getting a standalone investment-grade credit rating. Could you just comment on the timing of that? Because if you look at the S&P analysis, if you plug in sort of €2.3 billion to €2.8 billion of cash flow, you're going to be there sort of this year on their measures of FFO to debt of 45%. So, question number one is timing of achieving that investment-grade. And then secondly, I think potentially the biggest impact on the equity value over the next 12, 24 months is the free float. Obviously, if you increase that investment-grade, it allows -- it removes the issue that VW has unable to sort of increase the free float because otherwise, TRATON sort of loses the protection of VW if it goes over 25%. But if you fix the standalone issue, as you've highlighted today, that removes the risk entirely and you could sort of move the free flow to 25% or higher. So, sort of any thoughts with regards to that second issue? And then slightly related and it may be -- I appreciate it's -- you've got to sort of move to that free float first. But the -- what would it be your priorities thereafter from a capital allocation perspective? Because if you look at Daimler, if you look at Volvo, they all have sort of 80% to 100% payout ratios, if you look at obviously specials plus buybacks versus your 30%. Clearly, I appreciate you've got to get the debt down further. But over the next sort of medium term thinking, what are your sort of thoughts on the priorities on once -- would you be thinking along the lines of peers with a higher sort of payout ratio, or is that sort of too early -- to think on those lines? So, those three questions would be great. Thank you.

Michael Jackstein: Yes, thank you very much for the questions. And let me start, and then Christian might fill in or add some comments to this. When you ask about our rating as well as about the free float, then let me just say that the first question, of course, officially, you have to address, for example, to S&P that you mentioned. And the second question you have to address to Volkswagen. I'll say, nevertheless, a couple of words to this. And what's really important for us here. We have a clear focus. And our focus last year was to deliver and this remains our focus. Our focus is operational excellence. And I believe that we made some good steps last year, and we intend to do further good steps this year. And we also believe if we are strong on the operating side and if we manage as we did last year to translate this operational excellence into cash with a good cash conversion rate, with a good net cash flow, then we further reduce our net debt level. So, we like to, let's say, tackle the things that we have in our own hands that we can influence. This is where our focus is. When S&P or Moody's (NYSE:MCO) come to a different rating assumption, you asked about the timing, we cannot really answer the question, but we can clearly say that we focus on what we have in our hands to do our utmost to come to a better rating, better sooner than later. And the same applies for the free float. So, we understand that we -- and this is also what we want to prove to us and want to prove to you that, for example, the MAN performance is sustainable, not only in 2023 but also this year in 2024 in a more challenging market. And we want to show the potential of Navistar. So, also here, we focus really on our operational excellence. And we believe that this might have an impact then to open up the discussion regarding the free float. We know from talks with practically all of you that you are highly interested in potentially investing and that the low free float holds you back. And this is, again, why we do what we have in our hands. We focus on what we can achieve. And we believe if we keep on moving down the track that we, in a way we started last year, we will create the circumstances that all come to a different rating and we might be able to open up the discussion regarding the free float. But again, this is up to our main shareholder.

Christian Levin: The sooner, the better, I would just say on both topics, but that goes perhaps without saying. I think also on your last question, once we're at positive net liquidity, how would we allocate our capital? I think that's a bit too early to speculate on. There will, of course, be a Capital Markets Day from us in due time. We have set our targets for 2024, let's deliver on 2024. And then in due time, we will, of course, come out and discuss what happens after. What is the next level for TRATON. But as Michael put it, I think, nicely. I mean let's really make sure we deliver and create trust that we can be on the level that we have shown in 2023 and beyond.

Dan Cunliffe: Much appreciate. Thank you.

Christian Levin: Thanks.

Ursula Querette: Thank you. Then let's turn to the next question, which comes from Shaqeal Kirunda from Morgan Stanley. Shaqeal?

Shaqeal Kirunda: Hi, it's Shaqeal Kirunda from Morgan Stanley. Thanks for taking my question and congrats on great results. So, clearly, a very strong operating margin in Scania. We know that the strategic target is at 12%. So, in terms of cost savings and efficiency gains, do you feel like there are further levers to pull? And also are you able to quantify the margin impact from some of the R&D that Scania does for the rest of the group?

Christian Levin: Yes. Great questions Shaqeal. There is more potential in Scania. We have the 12% over cycle, which means that we should do better than 12% in a good market. Like last year, we did 12.7%. I think we were held back. Volume-wise, we were aiming for 100,000 trucks, 5,000 buses, we didn't really get there. So, there is potential on the volume, perhaps not so much more on pricing right now, but there is a mix effect with more S13s in the mix. We ended the last quarter with around about two-thirds of the 13-liter sales being the Super -- sorry, the Super in Scania language. So, there is a potential there on pricing, but it's not huge. In terms of cost that you asked specifically about, yes, there are, I think, substantial amount of especially SG&A costs that we could address in Scania. A lot is about standalone where we need to work on our processes, have them unified throughout the 60 markets where we operate, but also going over to common systems, outsourcing certain services and so on and so forth. And here we look into Scania, but we also look into cross-brand collaborations and see what we can learn there. Finally, on Scania, I think the big leverage is the capacity investment that we are performing right now in China with the plan to be ready by end of 2025. We should start to see an impact in 2026 if the markets are with us over there, and meaning in Asia that we could start to really leverage that we have the modular system available, meaning tailor-made products for customers in the whole Asian and Oceanian region for reasonable lead-times because that has been, I think, the challenge for Scania in Asia, and that's why we are not where we are, for instance, in Latin America with our market shares. So, I think there's a lot of potential in Scania to move forward. Again, so far, we stick to the 12% over the cycle target. Let's see if we come out and revise that later on, but that there is potential in Scania, there is no doubt about that whatsoever.

Shaqeal Kirunda: Thank you very much. And on quantifying the R&D impact that it does for the rest of the group?

Christian Levin: Michael? I hand that over with a warm hand. I'm not sure we can quantify it, but for sure, there is something.

Michael Jackstein: No, I mean the R&D impact, we cannot really quantify, but I can just say that as we were into really coming closer together as one group and Christian made a couple of remarks, it's not only based on the TRATON Modular System, the way that we develop products in the future. It's also the way how we work together, how we grow closely together as a group, we clearly see potentials. And I mean once we have the product on the road, then you see the top line effects starting likely in 2028. But when we look in our planning, then of course, we already see the R&D efficiency gains, which come from the new way of working and go in common here on a common chassis and using the TRATON Modular System. So, we clearly see the effects here.

Christian Levin: And just to add, I mean from a TRATON point of view, it doesn't matter where we allocate the cost. So, from a shareholder perspective, what is important is that we create an efficient system and then exactly how we share the cost, we could probably improve, but that's not the priority number one. The priority number one is really that we're stopping doing double work that we have an R&D organization that is focusing on developing solutions for customers, not competing with each other. And that has been a journey to take us there, but we are clearly there today. And that's why we wanted to mention also the group product management or the group product planning, if you would like, that is so important to make sure that the road maps are aligned and that we do not double develop more than what is absolutely necessary because of our legacy portfolios.

Ursula Querette: Thank you.

Shaqeal Kirunda: Thank you very much guys. And just a follow-up. I mean in terms of the market outlook, can you tell us a bit more about the current customer sentiment and the differences between what you're hearing from medium-duty and heavy-duty customers?

Christian Levin: Sure. And that is specifically in the North American market or in general?

Shaqeal Kirunda: Overall, please.

Christian Levin: Yes, great. So, the customer sentiment is very different in different markets and in different segments. So, I have to spend a bit of time. I cannot give you a very general answer. I'm sorry for that. I know we have short of time, but I try to be crisp. I think we start in North America, we really see the market moving strongly in both severe and in Class 6 and 7, whereas we see the Class 8 is coming down. The impact on us with the international brand is then kind of positive as we have an overly strong market share in both severe and medium duty. Customer confidence is stronger in the big fleets where they have a more systematic buying pattern and weaker in -- with the smaller operators. And you see the spot market prices are coming down, which, of course, has an impact on the weaker kind of typically family run smaller companies. In Europe, it's very much depending on segment. I mean the construction segment is suffering heavily all over Europe, and we see decreases in mileages, 15%, 20%, whereas you have the ones doing packaging and doing last-mile where you have the medium duty, continue to have a positive development. And that's also why we topped up with the replacement need, why we see -- or our outlook is rather positive for the European market. So, that's quickly on Europe. Latin America, perhaps then a very strong recovery in demand on the heavy side, and that's strongly linked, as I said before, to agro and mining, whereas the medium and light duty, we see a slower adoption. They are suffering more from the inflation and from the high interest rates than what customers in the heavy and extra heavy segments are doing. But all-in-all, again, we see a positive development in Latin America overall. Sorry for being short, but that's just to give everyone a chance.

Ursula Querette: Yes, thank you,

Shaqeal Kirunda: Absolutely. Super helpful. Thank you. Thanks.

Ursula Querette: Thank you. So, three more analysts lined up. And please let's now try to be a bit shorter with -- so two questions, as I said. Next one is Nicolai Kempf from Deutsche Bank. Nicolai?

Nicolai Kempf: Yes. Good morning. Nicolai Kempf from Deutsche Bank. Thank you for taking my questions and congrats for a very strong year. I'll limit on to two. My first one would be on the free cash flow. And what kind of working capital tailwind or if any, do you expect or do you put in your free cash flow guidance?

Michael Jackstein: Well, let me just say, when we talk about the working capital, that's what I understood. We clearly increased inventories in the first three quarters in 2023, which came along with our increasing production levels. So, we were able then to decrease the working capital in the fourth quarter. For this year 2024, we actually believe that we will have here quite good working capital management, as I was into. This is also one of our focus areas. And since we were able to ramp up production last year significantly compared to previous year, and this year, we will have a, let's say, more or less on the same level. We believe that we will see, let's say, a better or an equal working capital management here, which translates then to the net cash flow guidance of €2.3 billion to €2.8 billion.

Nicolai Kempf: Okay. Thank you. And my second one will also be on the U.S. market. It seems like every manufacturer here is trying to gain market share this year. From who -- from which OEMs do you try to increase the market share?

Christian Levin: Yes. Of course, we're happy wherever we take it, but it's clear that Freightliner is our main competitor, especially in the medium and bigger fleet market. And that's where we lost the market share, if you go back in time when international started to suffer. So, that's my answer, short and crisp.

Nicolai Kempf: Understood. Thank you.

Ursula Querette: Thank you. Next question from Jose Asumendi from JPMorgan.

Jose Asumendi: Thank you. I'll stick to one question, please. We discussed in the past calls the need to improve the credit rating and also the free float. So, I'm just thinking, do you have any sort of anchor financial metrics like industrial margins or cash conversion metrics you're looking at to hit in the next, let's say, 12 months to 24 months to speed up the process across both actions, improving the credit rating and improving the free float? Thank you.

Christian Levin: I think it's very clear from the rating agencies that it is all about cash flow generation, and it is all about our net liquidity. And I think we took a great step this year. And as I said before, I hope that helps that we improve quickly. But of course, we continue to do the same this year. And Michael alluded a little bit to it. I mean we have really introduced the cash flow generation in all our brands as a top priority. We have introduced it in our incentive systems on all management levels. We have trained, we have worked with inventories, payables, receivables. We are using -- the Financial Services are now as a way to create floor planning opportunities. We use it also to team up with banks to do supplier financing, and we work, of course, with the working capital and the lead-times of the new products. There is one area where we really have to take a hit and that's creating buffers of materials or components in order to cope with this difficult world of disruptions in the supply chain. I think that's very hard to challenge. You see one you can tick down because it's stabilized, but then you have to tick another component up because it's unstable. So, that's probably the one that is hardest to work with. But all other areas, we are working really hard. And I would say, Michael, we have not taken out the full potential yet. There is much more we can do here by just continuing to stimulate the organization to really work with this.

Michael Jackstein: Yes. Fully agree. So we are -- I don't want to say we're at the starting point of the journey. That would be completely wrong. We're into this journey. That's for sure. But there is clearly more potential, and we intend to lift that potential.

Jose Asumendi: Thank you.

Ursula Querette: Thank you. So, then let's turn to the last question, which comes from Michael Aspinall from Jefferies. Hi Michael, good to have you on the call.

Michael Aspinall: Good morning Ursula and good day and Christian and Michael. I'll just stick to one given the time. And it's on the visibility. Just in the context that the order book is filled for the first half, does that mean the majority of the difference in the guided volume range of minus 5% to plus 10% is going to occur in the second half?

Christian Levin: No, I mean the order book is our own, the guidance of minus 5%, minus 15% in the U.S. and in Europe is the total market. If we assume that we can take market shares, we're certainly going to continue to fill the order book with an over-proportional compared to our competitors' number of orders. I think we can be a bit more relaxed as we have this order book, especially in Navistar, meaning that we don't engage, as I said before, into stupid price decisions, but really stick to high pricing and can be a bit relaxed if we don't win all the orders here that we need for the second half in January, February, March, but we can really make sure that we work with customers in a structured way to keep up pricing. I hope that answers your question. Maybe I was too quick.

Michael Aspinall: Yes. Sorry. I just meant the guided volume range for units of minus 5% to plus 10% for the year for TRATON.

Christian Levin: Yes. Got it. Sorry. No, but clearly, it's going to come not only through deliveries in the first half, but also in deliveries in the second half. I think if you add, I mean, South America is very important to us. We see growth there. U.S., yes, a decline, 5% to 15%. But if you add a market share growth of 1%, you're offsetting that and same in Europe actually. So, no, I'm not afraid. Let's see. It might change when we have the Q1 call, and we have all the order intake and can relate to that. But so far, what we see with order intake in the first couple of months is actually giving me a reason to be optimistic.

Michael Aspinall: Okay. Thank you.

Ursula Querette: Thank you. So there are no more questions in the queue.

Christian Levin: And we are overtime.

Ursula Querette: We are very well on time. So, with this, we are concluding our event. Thank you, Christian and Michael, for explaining the TRATON results and our Way Forward to the audience. Thank you, everyone, for joining us today. Please reach out to me or Camilla or our respective teams in Investor Relations and Corporate Relations if you want to discuss the TRATON story further. We wish you all a nice remaining day. Good bye.

Christian Levin: Thank you and good bye.

Michael Jackstein: Good bye.

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