Dear all, I would like to welcome you all to our first quarter 2022 conference call today, and I hope that you and your families are all well. Together with me are our CEO, Christian Levin, and our CFO, Annette Danielski. Before Annette provides some insights into the drivers of the group's financial performance in the first quarter, Christian will comment on the highlights and overall performance. Finally, we will discuss our outlook for the full year 2022, and as always, after the presentation, we look forward to answering your questions. Before Christian actually starts, let me provide a few housekeeping items. I hope that you received all materials for today's call. If not, you can find everything on our TRATON IR website. Let me also take the opportunity to make you aware of the disclaimer on page two of our presentation.
With that, I will hand it over to Christian. The floor is yours.
Super. Thank you very much, Lars. By the way, welcome to the TRATON team. Also in this context, good to have you on board. Good afternoon, everyone. It's great to have you all in the call. Let us start with some cool highlights from the TRATON world out of the first quarter of this year. Of course, starting with sustainability as being the key component of our corporate strategy. I think that it manifests itself in some of the Q1 highlights, like Scania has received a big order to deliver more than 100 electric trucks to the Copenhagen Municipal Waste Company. Volkswagen Caminhões , who now joined the UN Global Compact and is taking responsibility for limiting climate change as well. Another highlight, Navistar has opened finally the state-of-the-art San Antonio manufacturing plant.
The facility improves quality, but also lowers costs and provides capacity support to Navistar's current manufacturing footprint. Another important milestone was related to the MAN repositioning and realignment. We laid the foundation for the expansion of the Polish plant in Kraków. Thirdly, MAN joined forces with suppliers and research institutions in the ATLAS-L4 funding project. This project aims to have autonomously driven trucks on the highway by the middle of this decade. Lastly, just two months after its launch, the Scania Super has already won its first competitive test. The new Super-based powertrain with a Common Base Engine was a decisive factor for Scania's fourth victory in a row in Germany's renowned 1000- Punkte, the 1000-Punkte-Test . Moving on to the next page. Yes, thanks. With an overview of a truly challenging environment that we are currently operating in.
The war in Ukraine, with all its consequences, is impacting us severely, with the strongest impact being on our supply chain. We have significant spillover effects on many other industries and economies all across the globe. There is a high degree of risk that these negative impacts will continue and could even, hope not, but could even intensify further in the upcoming months. When it comes to business climate, truck demand remains robust. There is still upside compared to pre-pandemic peak levels in our core markets of North America and Europe. We continue to see substantial supply chain bottlenecks, particularly in the field of semiconductors. In addition, we're experiencing supply gaps in wiring harnesses in parts of the business as a direct consequence of the war in Ukraine. All of this prevented us from fully benefiting from the strong underlying market demand.
Prices for input materials, pre-products, and energy continues to rise, resulting in high inflationary pressures for both industrial and consumer goods. Our teams continue to work very hard to offset these effects with our strong product offerings, improved pricing, and a better product mix. In line with our full year reporting, we want to give you an update also on the implications arising from the war in Ukraine. MAN's truck production stood still for a total of six weeks due to the supply constraints related to wiring harnesses. Production has resumed as from April 25. However, current production rates are low as we are not fully receiving our supply of inbound components. We plan to gradually ramp up production, but the situation remains highly volatile and highly difficult to predict.
The production of vehicle has been suspended at the Scania and MAN joint venture truck and bus assembly plant in St. Petersburg in Russia until further notice. As a consequence, our second quarter results will be clearly impacted by these disruptions and the resulting limited output. In addition, in the first quarter, we have impaired assets of EUR 46 million. This included both bad debt allowances and receivables of roughly EUR 30 million in TRATON Financial Services segment and further loss allowances of roughly EUR 16 million in the TRATON Operations business area, mainly related to Scania Vehicles & Services. Incoming orders and unit sales were up by low double-digit %. Sales revenue increased even more, +30%. Increases were mainly resulting from the integration of Navistar. Adjusting for this effect, both incoming orders and unit sales were below prior year, while sales revenue was more or less flat.
Given the substantial headwinds we faced during the quarter, our adjusted operating result of EUR 402 million or a return on sales of 4.7% was still solid, but could not match last year's exceptionally strong Q1. Please note that this result includes the effect of the purchase price allocation. Excluding PPA, the adjusted operating results would have been EUR 476 million or a return of 5.6%. The net cash flow for TRATON Operations in Q1 amounted to EUR 133 million. A robust achievement given the substantial working capital headwinds arising from the supply chain shortages and the related production shortfalls. On the next slide eight, you can see the already mentioned trends in incoming orders and unit sales.
Production levels, and as a consequence, unit sales, continued to be held back by the supply chain constraints. At the same time, our order backlog remains on a high level, thanks to continued high demand for vehicles. We can see that market participants are becoming more cautious with orders. That's the same for us and our brands, which have become more selective in accepting orders with long lead times. No reason to be overly concerned given the substantial order backlogs and the tight supply and output situation. This is also evident in the quarterly development of unit sales, which you find on slide nine. Despite the supply chain challenges, it is important to mention that our unit sales continue at a healthy level, also thanks to the consolidation of Navistar.
As you can see, and already indicated on the slide before, supply chain challenges caused us to delay delivering a significant amount of unit sales. Rest assured, we're working very hard to meet our delivery commitments to our customers. A crucial part of our ambition is to be the forerunner in the electrified business with a holistic offering of electric trucks and buses. We have already competitive product portfolio in place today for a wide range of different applications. All brands are offering alternative or electrified products in the different categories: trucks, buses, and vans. We will continue to expand our offering in the months and years to come in order to provide our customers with highly competitive and efficient vehicles. We do so already today. In Q1, we delivered more than 400 fully electric units, the majority being MAN TGe.
Also for medium and heavy-duty trucks, there is a growing customer demand for electric vehicles, as evidenced by the recent order from Amager Ressourcecenter already mentioned. While we're still at the early days for electrified trucks, order intake for electrified buses is rapidly increasing. The book-to-bill ratio in Q1 continued well above one, giving us confidence that we will continue our strong growth momentum in this field. On to our service business on page 11, which continued to gain traction and importance in TRATON's business mix. Sales revenue in the service business increased 57% to EUR 2 billion in the first quarter, with improvements in all of our brands. The inclusion of Navistar Sales & Services largely contributed, of course, to this increase. Also, adjusting for that consolidation effect, the growth in the service business almost compensated for the lower unit sales.
As a result, the sales revenue share within TRATON Operations increased from 20 to more than 24%. With the integration of Navistar, the vehicle services business has even become more important. This, once again, shows the importance of our vehicle services business as a stabilizing factor for our earnings. With that, let me hand over to you, Annette.
Thanks, Christian, and a very warm welcome to everybody on the call, also from my side. I'm now on slide 13, which shows the key figures for Q1 with a separated Navistar contribution. Due to the integration of Navistar, we achieved a double-digit percentage increase in incoming order, unit sales, and sales revenue. Excluding Navistar, incoming orders were 20% lower against a very strong prior year quarter, particularly, especially for trucks. The robust demand was not reflected in our unit sales, which declined by 16% excluding Navistar. This was due to the severe supply shortages as well as temporary stoppages at MAN Truck's production. However, sales revenue was almost stable despite those significant headwinds.
This was because of a very strong performance in the vehicle service business and an improved product mix and positioning. Moving to the next slide and to our profitability and cash generation, again, with the separated Navistar contribution. Despite significant impacts from supply chain bottlenecks and the war on Ukraine, the adjusted operating result came in at EUR 402 million. This corresponds to an adjusted return on sales of 4.7%. As Christian already mentioned, we booked an impairment of EUR 46 million related to the war in Ukraine, including those effects, the operating results improved by EUR 200 million year-over-year. It is worth noting that operating results in the prior year quarter was burdened by one-time items of EUR 362 million in relating to the MAN realignment.
Despite an increase of working capital by EUR half a billion due to the continued supply shortages and the MAN production stops, net cash flow and TRATON O peration was still positive, as we generated EUR 139 million. Let us have a look at the segment's performance in the first quarter on the next page. As you can see on the left, Scania Vehicles & Services and MAN Truck & Bus each recorded a single-digit sales revenue decline in Q1. Because of the initial consolidation of Navistar and the very high growth of 48% at Volkswagen Caminhões e Ônibus , the group sales revenue was 30% higher year-on-year. Financial Services increased by 45%, mainly due to the consolidation of Navistar Financial Services business, as well as strong underlying performance. In total, the group reached sales revenue of EUR 8.5 billion in the first quarter.
Moving to the adjusted operating result by segment on the right side of the chart. Despite the MAN production stoppage in March, MAN recorded an adjusted return on sales of 2.2%, only a half percentage point lower than year-on-year. One important driver has been the positive impacts from the successful execution of MAN's realignment. I will come back to this in a minute. Scania Vehicles & Services reached EUR 243 million, equivalent to a return on sales of 7.6%. A similar level as in Q3 and Q4 last year, since the brand has been significantly impacted by semiconductor shortage in each of the past few quarters. Navistar Sales & Services operating results reached EUR 76 million, corresponding to a return on sales of 3.7%. The strongest performance since the merger last year.
Main driver was that Navistar was able to deliver more trucks, even so it is still facing supply chain shortages. Our Brazilian team achieved 9.5% return on sales. This very strong performance was driven by higher sales revenue and improved product positioning and a strong pricing. Lastly, the financial service business reached an adjusted return on sales of about 24% and an adjusted operating result of more than EUR 70 million. Again, please bear in mind that these results include a negative effect from purchase price allocation, which totaled EUR 75 million within the corporate items. Including the PPA, TRATON's adjusted operating result would have been totaling EUR 476 million with a return on sales of 5.6%. Let me now provide some more background from Scania's performance in Q1 on slide 16.
As already mentioned, Scania Vehicles & Services recorded an adjusted return on sales of 7.6%, roughly on the level of Q3 and Q4 2021, but significantly behind the first quarter of last year. This is mainly resulted from supply chain shortages, particularly semiconductors, as truck unit sales were 28% lower year-on-year. A strong vehicle service business could only partly compensate for this. In total, Scania sales revenue declined by 7%. The lower unit sales and production utilization, as well as the impact of lower fixed cost absorption, negatively impacted profitability in Q1. Additionally, raw material expenses increased due to the impact from higher inflationary cost pressure. At the same time, we continued to invest in the further development of our e-mobility solutions. Also, on earnings level, this impact was partially offset by the positive effect from higher contributions from vehicle service business.
While uncertainty remains high, we expect Scania Vehicles & Services to improve starting in the second quarter. With continued support from the Common Base Engine, we expect the new powertrain to gain further traction in the second half of the year. Moving on to the next slide with a more detailed look at MAN performance. Taking into account that we had more than two weeks of production stops in March, profitability was solid. Production levels were significantly affected and truck unit sales were 13% lower in the first quarter because of the lack of wiring harnesses. The team has been implementing countermeasures to offset these effects, including adaptation of the supply structure and the introduction of the short-time work. The good news is that MAN's earnings are resilient, also structurally improved in the past months, which became clearly visible here in the Q1.
Compared to Q1 in 2020, where the brand lost money after a similar production stop that was driven by COVID-19 lockdown, MAN today is working on the basis of a significantly improved cost position. Despite the volume shortfall, MAN recorded an adjusted return on sales of 2.2%, close to the level of Q1 2021. Further evidence that our restructuring efforts are having a positive impact. If we would exclude the production stops, we estimate that the adjusted return on sales would have been between 4%-4.5% in Q1 2022. In other words, this would have been the strongest MAN quarter since the first half of 2019. On slide 18, the net cash flow by quarter is now referring to TRATON Operations.
Despite significant challenges in the quarter, net cash flow in TRATON Operations was still positive, as we generated EUR 139 million. This is mainly due to the gross cash flow, which improved by about EUR 200 million to almost EUR 1.1 billion in the first quarter 2022. A counteracting effect was a significant increase of working capital of around EUR 500 million. This was mainly due to an inventory build-up related to the supply shortages, a lower trade pay base, and further effect from the MAN production stoppage. On the next page, you see the net debt bridge. Compared to year-end 2021, the net debt position of TRATON Operations improved by more than EUR 180 million to EUR 1.5 billion. We included the net debt position for corporate items to provide a full picture of TRATON Group's net debt position, excluding financial service business.
The corporate items added EUR 4.4 billion, of which EUR 3.1 billion are related to the acquisition of Navistar back in 2021. In total, net debt of TRATON Group, excluding financial service, totaled EUR 5.9 billion at the end of Q1 2022. Also, going forward, we continue to focus on reducing TRATON's net debt. However, please note that in the second quarter, net debt will be impacted by the payment of EUR 880 million fine plus interest related to Scania's EU antitrust proceedings. With this payment, which was completed on April 12th, TRATON is avoiding further interest burden. It is important to note that this payment is independent from Scania's recent appeal against the judgment on the General Court of the European Union. Moving on to the full year outlook and starting with the truck markets.
The war in Ukraine is significantly impacting global economies. However, so far, truck demand is expected to remain relatively robust. It is expected that our core markets will continue to record positive growth in 2022, with expansion rates varying from region to region. However, compared to the release of the full year results in March, the outlook has become a bit more cautious. Most market forecasts foresee an increase of truck market in Europe in the range between 0%-10% for the year 2022. For South America market, estimates currently foresee in range between -5% up to +10%. For North America market participants are slightly more optimistic. Truck market growth in North America is forecasted to be between 0% and up to 15%.
There is a high degree of uncertainty and a high geopolitical and economic risk arising from the ongoing war in Ukraine, persisting effects from the COVID-19 pandemic, and supply chain limitations. This will likely continue to be a headwind in the remainder of the year, with particular effects in the coming months, while we expect them to ease gradually in the second half of the year. This leads me to the next slide, the financial outlook for the TRATON Group in 2022. Our outlook is based on our latest internal planning, the market expectation, and our business performance to date. As you are all aware, it is not possible to predict with sufficient certainty the extent which the war in Ukraine will affect the global economy or our industry.
In light of this uncertainty, we cannot rule out further material effects on TRATON Group's net assets, our financial position, and the results of operations if the war in Ukraine continues longer term. Further, short-term supply chain bottlenecks, mainly semiconductor and other components, are expected to continue to affect our production, as well as the significant price increase for raw materials and pre-products. We continue to closely monitor the situation and to implement countermeasures to limit the effects on our operations. We now project a sharp year-on-year increase in unit sales and a very sharp increase in sales revenue in the fiscal year 2022. We narrowed the bandwidth of our expected range of adjusted operating return on sales to 5%-6% compared to an original bandwidth of 5%-7%.
However, in a highly uncertain environment and given the supply chain challenges, the risk is currently more towards the lower end of this range. Our guidance is including the effects from the purchase price allocation, which is expected to range between EUR 270 million and EUR 290 million. We confirm that our net cash flow from TRATON O perations is expected to range between EUR 700 million and EUR 1 billion. Please note that this does not include the mentioned cash out in connection with EU antitrust proceedings. Now let me hand back to Christian for the final remarks.
Okay, thank you very much, Annette. Before entering into the Q&A session, let me summarize the key takeaways. Despite the very challenging business environment, TRATON Group was able to post a solid result in Q1. Scania results were impacted by continued headwinds, particularly from semiconductor shortages and higher costs, but kept profitability broadly on the level of Q3 and Q4. The MAN restructuring is progressing according to plan, with visible results as evidenced by a strong underlying improvement of performance. Volkswagen Caminhões e Ônibus , or Volkswagen Truck & Bus, as we can now call them, delivered strong results. Also Navistar improved their profitability quarter-over-quarter in a difficult environment, although supply bottlenecks for semiconductors still weighed on. Our service business continued to gain further traction and importance, and particularly compensated for the pressure in unit sales and sales revenue.
Supply chain constraints still hold back deliveries, and the geopolitical and economic risks remain high. Our updated full year outlook is reflecting those factors as we narrowed the range to 5%-6% adjusted return on sales. We have plenty self-help potential in our group to support our performance, short and medium term. Product-wise, we have a very, if not the most competitive portfolio with our new truck lines on all brands at the very moment that will help to win new customers and orders. We will continue our strong focus on delivery and execution. Thank you.
Thank you, Christian and Annette. Let's now open the floor for the Q&A.
We have one reminder.
Sure.
I can do that one. That is that we will host our Capital Markets Days on the eighteenth of May here in Södertälje at the Scania plant exactly two weeks from now. This event will include teach-ins and of course a driving event, that's in the morning, our new strategy and deep dives in the brand's performances in the afternoon, and a dinner with the opportunity to exchange with the TRATON team in the evening. If you haven't done so already, please confirm your participation as soon as possible, since we will be closing the registration for the event very soon. We're all looking forward meeting you here in person in Södertälje. Now, Lars, we're happy to take your questions, right?
Yes. Thank you, Christian.
Thanks.
Dear ladies and gentlemen, we will now begin our question-and-answer session. If you have a question for our speakers, please dial zero and one on the telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question's answered before it's your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. We have a first question. It's from Klas Bergelind of Citi. The line is now open for you.
Thank you. Hi, Christian and Annette. Klas at Citi. A couple of questions, please. The first one is on pricing. The ASPs in the quarter, I guess, partly look good as you have strong service growth against lower unit sales because of the bottlenecks. I guess pricing is coming through as well. You've raised the ASPs for the year as implied by how you communicate around unit growth and revenue growth for the year. Unit growth a bit lower, revenue growth stronger. How much of that is a price step-up versus FX? Can you please talk, Christian, about the price levels running in the P&L at the moment? It feels like pricing is lagging some of your peers a bit. Should we expect higher pricing quarter on quarter for the group into the second quarter? I'll start here.
Okay. Hi, Klas. Great question. This is of course something that I monitor very closely on every monthly closing look into how the gross margin is developing given the inflationary tendencies that we clearly see all over the range, and that we also mentioned. I'll give you a pretty general answer to your question and then see if Annette wanna sharpen it. We have a different approach to pricing coming from different histories and different price positions also in the market with the different brands. If I start with the brand I know best, the one I manage, Scania, we have a long tradition of always increasing prices when the order book is growing. We have applied that principle as well.
On top of that, we have the introduction of the Scania Super, which is the group common driveline developed by Scania, which is gradually over the year taking bigger and bigger proportion of the deliveries. The price increase on that product is pretty hefty, based on the fact that it's delivering 8% fuel savings for customers. So far so good. We have not seen any deterioration, rather the opposite, when it comes to the gross margins on the Scania side.
MAN with a more difficult situation and with a force majeure because of the war in Ukraine and the lack of cable harnesses actually went so far to cancel the order book with customers and then renegotiate with each and every one a new delivery date and also a new price level. This is something pretty unusual and to my knowledge, unique so far in the European market space, which of course put customer relationship into risk. The outcome has been very positive and a very small proportion of customers have chosen then not to reconfirm their order at higher prices.
If I should comment on Navistar, there is common practice in the, sorry, in the American market space, North American market space, to actually up prices on existing order book. To my knowledge, all of the big players there have done so, and Navistar as well, and not once, but numerous times already. And that is playing out well. All in all, we also see sustained gross margins for these brands. But this needs to be continued in focus. I also wanna comment before any one of you ask on the Scania side, why is order intake down? Well, actually for the reason of protecting pricing. We have stopped taking orders beyond 12 months.
Beyond 12 months, we open up a month at a time in order for us to control the cost or have some kind of control of the cost level and then set the right price, but also in all fairness for the customers to have predictability and also on delivery precision. That's maybe to be added to why the order intake is down on the Scania side.
Yeah. No, that's very clear.
After you said on the FX.
Yeah, I can add, also though, for the Q1, although we have a positive impact from price, and we can say this clear because we stated this already, for the whole year, we have two impacts. One is really that we still believe that we can price the headwind that we have on material costs with time delay, sure. Also we will have positive impacts from exchange rate effects. This is the reason why we increased the guidance for the revenues.
Okay. No, that makes sense. My second one is on the margin. You talked about a 2%+ impact on it from the two-week production stop at MAN. We have it seems at least four weeks in the second quarter to take that to six.
Yep.
Capacity utilization is low as you gradually ramp up. I guess you're alluding to a mid-single digit margin impact for the second quarter. On the Scania margin, weaker than I thought, I guess the higher R&D. On the production here, Christian, you talk about obviously bottlenecks, we know it's worsening because of China lockdowns, Russia, Ukraine. At least on the semi side, last time we spoke, you sounded more confident into the second quarter. Is that still the case? Sorry, a lot of questions in one there.
I can start with the MAN. Yes, you are completely right. We had in the first quarter only two weeks shutdown. We had already additional four weeks now. We ramp up at MAN very on low scale, you know. As you know, the situation in the Ukraine, we will ramp up further, but we really have a strong impact here in Q2. This is clear on MAN. When I compare to the COVID crisis when we had the Q2 2020, this was also that we had nearly no production or very low. I think they will do better because they're in a better resilient position now. This is my view at this point in time, and we hope that Ukraine will still deliver on low level. This is really the main what is our hope that we can perform there.
The positive is, you know, when we had COVID, everybody was negative. You know, we hope also that the other brands recover here. This is what is our outlook on this one.
Yeah, Klas, on the Scania part there, I was pretty confident going into already end of Q1, we would see some improvements. That was the information we had from the sub-suppliers and their sub-suppliers. We're actually talking to all of them, so we have short-circuited the supply chain. Nevertheless, that didn't fully materialize. Although our situation improved throughout the quarter, so January was really bad and March was substantially better. We do plan for an improvement throughout Q2, but unfortunately not back to full capacity utilization. From the Scania end, we count on being back on full capacity utilization after the summer break. We are into Q3.
Okay. Very quick final one for you, Christian, is that you said that customers are more concerned accepting orders with long lead times. Last time you said that this is limited to Eastern Europe. Is that for obvious reasons? Is that spreading now elsewhere? Do you sense that it is demand-driven at the margin, softer interest, or is it just supply? Thank you.
No, it's not spreading. We continue, as you know, to monitor the vehicle utilization over the connected fleet. We see strong utilization all over all regions, all markets. We see continued strong demand for orders. When we open up the months, there is really a rush to get these production slots.
Despite the clouds that we all see, we see the cloud from the war, from the COVID and the Chinese lockdowns that you mentioned, from inflation, from increased interest rates. Of course, at some point, that will have an impact on the investments and on the transport needs, but it's really nothing that we spot right now, and the effect that we were into last time that we saw in some of the eastern countries. I think that was temporary and related to the outbreak of the war. Well, so far so good. I hope that answered your question as well.
Yeah, very good. Thank you.
Thanks.
The next question is by Hampus Engellau of Handelsbanken. The line is now open for you.
Thank you very much. Two questions from me. Would it be possible to maybe discuss the lead times on each of the brands to get the feeling if there's a big difference there? Also, I mean, I appreciate the comments on Scania's orders during the quarter and the pricing. I noted MAN having a quite good order intake, and I presume that might be not being able to deliver as much as expected. Maybe could you add some flavor on MAN's orders during the quarter? Thanks.
As we mentioned already, we have full order books. The lead times of the brand are nearly the same. We have nearly 12 months as a lead time, you know. With MAN, they speak with the customer and try to find, you know, one can go more to a standardized product so that we have not the variety of wiring harness so much, you know, then they could deliver earlier. They discuss really with every customer and say what they can offer to serve them and to fulfill the demand. This is, I think, a special situation, you know, where they really have to go through the order book with everybody. For Navistar and Scania, you can comment on Scania. It's a year lead time. It's twelve-
Yeah. Exactly, Hampus. It's approximately 12 months, and then both us and the customers feels it doesn't really make sense to build up order book any longer. We do some exceptions for really big fleet customers that basically have, you know, supply contracts with stable volumes all of the, or over time. It's a situation that's actually quite hard. You could say this is a luxury situation, but it's actually quite hard, I think, for all of us in the industry to handle. Well, we were in this situation back in 2008, 2007, 2008 before the financial crisis. But then we had a rather poor grip on the order book. I mean, today we're very cautious. You know, we have financing secured.
We have down payment on most of the contracts. We have signed contracts. We know exactly who the end customer is, even when this goes through non-captive dealerships or importers. I think we have a lot of quality in the order book, and then does it really make sense to continue to build it up? We come to the conclusion, both Scania, MAN, and Navistar, that it doesn't really make sense. Yeah, that's what you have. I also wanted to add that we have, of course, taken out all the Russian order book, which is also part of the Scania negative order figure here in Q1.
As you know, that was a rather substantial volume, as Scania market leader and MAN second in line, normally in the Russian market.
I guess to what extent have you managed to raise prices on existing orders with maybe two, three quarters lead times? When that has happened, have customers chosen to just stick with their orders, or have they been offered to other more eager customers?
No, it's different by brand. Now in the U.S. market, we have the surcharge for material costs, so we were able to negotiate with our customer on this one. MAN, you know, this is force majeure, so they can offer the customer to cancel the order and place it in a new one, and then they will have an increase for material cost. I think Scania can explain this better than I.
Yeah, I can add on the MAN. I mean, there's no secret. I mean, we're asking between EUR 1,500 and EUR 3,000 , depending on specification of the vehicle, in surcharge. On the Scania side, no, we have not asked for price increases on the existing order book. A bit of a different approach, where of course we sit with a very long yearly or sometimes generation-long relationships with our customer, and we have so far deemed it more harmful to reopen that discussion with customer, as we have already, you know, really strong price increases into the order book and have not seen any tendencies that we don't keep up the margins. Of course, I should never say never.
I mean, after MAN have done their exercise, I have noticed or got signals from the market that others seems to be doing the same. You never know where inflation goes, right? Of course there is some kind of limit also to what we can stand without also making force on the order book. I would like to avoid it, you know, to the maximum extent. I think that's for the long term and for brands such as Scania the right decision.
Fair enough. Thank you.
The next question is by Michael Jacks of Bank of America. The line is now open for you.
Hi, good afternoon, Christian and Annette. Thanks for taking my questions. I have three brief ones, if I may. Firstly, just a question on the integration of the Common Base Engine at Scania and how this is progressing, and whether or not you faced any challenges there in Q1 and to what extent these have been resolved. Second question is on Navistar. The order intake there was pretty strong relative to the overall market, based on the preliminary data we're seeing from ACT. Can you please comment there on mix? And do you see this as an opportunity for market share gains? And my last question is in relation to Scania and the substantial growth that we saw in vehicle services revenue in Q1.
Curious as to what the main driver was there and to what extent this performance can be repeated in the upcoming quarters? Thank you.
Good. Great question. I can start with the first one, and maybe Annette, you elaborate on the second one, and then I can close with the Scania one. The CB one engine is progressing well. Unfortunately, also here we were hit by the semiconductor shortages. The main chip in the engine control unit we could not get in the quantities that we needed, so the ramp up has been slightly delayed. The ramp up is ongoing, and there were a small amount of vehicles being delivered throughout Q1. We're having a gradual ramp in order to make sure that we get quality right in the manufacturing process.
The real big ramp is coming in the third quarter, towards the end of the third quarter, where we really start to shift over, and then we will have a very long tail. The tail will actually last all the way up until 2026- 2027, depending on how the emission legislations will develop, which is still a little bit unclear. The big impact and the big volume shift is coming in the second half of the year.
No deviations you asked for problems, no deviations apart from the ones you always find when you debug a new product as big as a complete powertrain. Annette, the Navistar order intake.
Yeah. Navistar opened the order book for the first quarter in 2023, you know, so you see that there was a rush to place orders already there. As you can believe, we worked on our relationship with dealers and customers when we took over Navistar to improve situation there. I think it's the first good sign that you can recognize now in our order book.
Super. On the Scania services performance with a 19% increase, that is in Swedish currency. If in the alternative we look to performance, we should look to real volume and local currency, and the performance is still very strong. I must say 13%. Can we count on that going forward? Yeah, that's my strong belief and my demand from the organization. We have such good tools in the market. We have the data. We have the best services in the industry.
We have the predictive so-called ProCare, which is new service that is launched by Scania now, where we not only do individual maintenance based on exact utilization of the vehicle, but we also change repairs into maintenance. The big infrequent breakdowns that you have on heavy trucks, we are now predicting through big data, AI, and sensor sets, and of course, over-the-air information. Meaning that we proactively tell the customer that, "Hey, your generator is about to give up. Let's plan a stop, and let's do it in conjunction with your next visit to the workshop," or in worst case, at a special visit at the workshop where you have to exchange.
It's plannable, and you don't have subsequent repairs, which you usually have when something breaks. Of course, we make sure we have the part at home and so on and so forth. We really improve the uptime for the customer, and we take more market share on the service business. Just one example, I think where Scania continues to progress in capturing the service business in the market. Hence, on the basis of that, I expect the service organization to continue to perform really good growth going forward. I will talk more about that at the Capital Markets Day in Södertälje in two weeks.
Very interesting and look forward to that CMD. Thank you, Christian.
Thanks.
Next question is by Nicolai Kempf, Deutsche Bank. The line is now open for you.
Yeah. Thank you for taking my question. My first one would be actually a follow-up on the same shortage at Scania. At the beginning of the year, we were expecting higher volumes in the second quarter. This now moved to the second half of the year. Are you concerned that this could be again delayed?
Yeah. Okay, Nicolai. Short and good questions. No, I still expect the Q2 volumes to substantially improve over Q1, but I do not anymore expect us to be back on full utilization by the end of Q2. Unfortunately, we will have to wait the summer break in July. Then we are according to the current planning and the current information from our suppliers. We are back into full capacity utilization based on semiconductors. I have to say that when you increase production rate as fast as we're planning to do, there might of course be other shortages or other bottlenecks that we're not yet aware of. Of course, we try to monitor every supplier. We have a green light from every supplier to ramp like we're planning to do. We have the semiconductors secured.
After the last two years, I think we've learned a lot, and if there's something we learned, the devil is in the detail. A small disclaimer there. I'm sorry for that, and I wish I could be more precise, but that's, I think, the nature of our industry right now. I would also like to say, based on that, we continue to keep all staff in the company. We're not reducing staff short-term to try to save a few krona, but we want to have everyone on their tools ready to start to push out volumes once we have the components. I hope that answers your question, Nicolai.
Yeah, understood. I know the volatility is very high currently. My final question would be just given the truck is a cyclical business, and we've seen recent GDP revisions across the board, do you see any rise in cancellations or customers becoming more cautious on accepting higher prices?
No. Maybe strangely enough, but at this point we do not see any tendencies either for our price increases or on the volume. No cancellations of any magnitude. The type of cancellations we receive are usually the ones who would like to change in the order book. Keep their slot, but change specification or time. It's very small volumes, you know. It's still. We're still talking handfuls per week, so really nothing that we worry about at this point in time.
Okay, understood. Sounds good, and looking forward to the CMD.
Thank you.
The next question is by Daniela Costa of Goldman Sachs. The line is now open for you.
Hi, good afternoon. Can you hear me?
Yes, we can hear.
Hi. Yeah. Oh, perfect. Thank you. I wanted to follow up on some of the points earlier, actually on demand, and then ask a second question. I think during the speech you mentioned market participants were getting more hesitant. From what you've said in some of these answers, it seems like you don't think that's the case. I was wondering what exactly you were referring to there. Related to demand as well on the back of this last question, understand there's no cancellations.
In terms of us looking at the backlog and thinking about backlog stickiness of the orders compared to prior downturns, is there anything in terms of the way that you're asking for advances or, is there any bigger guarantee that if you do have a downturn, we don't have a fast cancellation rate like we had, for many market participants, for example, in 2008-2009? Would be great to hear your views there. And my final question is just regarding wage growth. We're hearing a lot of commentary across industrials on very big numbers in the US, maybe less big numbers in Europe. Can you tell us what you're seeing in terms of negotiations and what's to come ahead, both in the Navistar side as well as in the European side? Thank you.
Right. Thanks, Daniela. We'll start from the back on the wages and salary side. You're right. So we see the increases being rather hefty in North America. Of course, our opening there of the San Antonio plant for Navistar is somewhat supporting us, but you're right, their salary inflation is ongoing. In Europe, less. We do not really see any, so far, I must say, but so far any exaggerated demands, nor in our negotiations or in our closing of salary agreements. I don't know, Annette, if you have something to add there on the wages.
Nope.
Okay. I think your second question was about cancellations and kind of how safe we feel with the order book if the market would go sour. Of course, even if we have contracts and even if we have down payments, there is no such guarantee in our industry. What I think we learned back in 2009 was that, because of course we had similar contracts with some or part of the order book also back then, you know, if a customer can't take delivery, to force it upon a customer that is out of cash or suddenly can become non-financial is not a very smart move.
You know, at the end of the day, we of course sit with a big part of the risk, and I think that's the cyclicality, and that's why we are valued as we are throughout the industry. No guarantees, but of course, to keep a very tight dialogue, to have as much information as possible, to be close to the customers and to have the connected data, I think are a number of things that we have improved a lot since the last crisis. I think we're better positioned. Of course, today we see that there are cancellations, or that there is resistance toward price increases. We need to be very careful.
You mentioned, do we see the truck demand changing? It's a small reduction. It's not double digit. It's a 6%, 7%, 8%, depends on market. It's not like that you see a big reduction in the newest forecast, and this is what we were referring to. It's a little bit cautious, but it's so small amount that we are not in fear that the market drops in a big extent.
No, absolutely. You can still say that we're still not balanced between our capacities to supply and the order intake. The order intake is still stronger than what we can supply and that's also what. Yes, it's not the balloon anymore.
Yeah.
Got it. Thank you.
Thanks, Daniela.
The next question is by Jose Asumendi, JP Morgan. The line is now open for you.
Thank you. It's José Asumendi, JP Morgan. Three topics, please. The first one on the profitability of electric trucks. Can you mention a little bit if they are margin dilutive or not to the current business and, you know, any comments around the pricing of those trucks. Second, I want to come back to the wire harness topic and which specific measures have you taken in the past months, weeks to establish the supply chain? Is the peak of disruption behind us? Three, I was thinking if you could please give us an update with regards to Navistar and the synergies you are looking to achieve.
You know, how far are we in terms of the plan you laid already, in maybe percentage terms, what are the sort of, the next milestones we need to think about with regards to the synergies with Navistar? Thank you.
José, what? On your first question, I didn't get you. The profitability of which trucks?
Electric ones. Electric trucks.
Okay.
The electric.
Oh.
Yeah.
Okay.
Okay, great. We have the BEVs, we have the wire harnesses, measures.
Navistar.
We have Navistar synergy.
Yeah.
Right? Potential synergies. Annette, if you go with the BEVs.
We believe, as you know, that on the long run, the BEVs will have the same contribution margin as a combustion engine truck. As you know, we are on the lower level at this point in time with BEV vehicles. They are more expensive at this point, but it's a small volume, as we mentioned. Wiring harness, we can evaluate on the measures that we have. As you know, one is, one of the supplier will bring their production from Ukraine to Romania to double the other lines that they have. We have a wiring harness production also in Turkey for buses, so that we can use, and we try to duplicate with other supplier too. Those are the measures that we do to really get rid of the shortage of wiring harness.
As you know, it's not done in a week. Yeah, we need a little bit more time. That's the reason why we ramp up on the lower side.
We're, of course, very, very pleased that our suppliers in Ukraine.
Still producing.
are now producing and are increasing production rates or else our complete stop would have been longer.
Yeah, we have really to praise them that they come to the plant, produce there, and then go to the bunker during night. Really this is a great work that they are doing there, this in Kyiv. That's really.
No, that's fantastic.
Yeah.
Of course, that's also why I said it's very hard to, of course, predict how will this ramp up continue. As long as they can go to work, I think their plan is to continue to ramp.
Yes. As Navistar, I think you can evaluate on the CB one.
Yeah. Exactly.
Project
We're currently then introducing this Common Base Engine, but also with a common gearbox, common rear axle gear, common aftertreatment system, and common software and control units in Scania. As someone asked before, it's going well. We are confirming the 8% fuel savings and more than 50% thermodynamic efficiency. We're very much looking forward now introducing that into the second brand, which is International Navistar products. That work has, of course, started. We're already in late testing. The market introduction is planned for the second half next year. That's where the ramp-up starts. That's where we get on top of a fantastic driveline that will of course offer big fuel savings to customers.
We start to capitalize our services business. This is for us as a supplier. This is really the game changer. Instead of being dependent on OEM suppliers, who then will do their best to capitalize their components from a service perspective, we will of course do everything and use all the tools that we have from the Scania world in terms of contracts and predictive and proactive contracts. Pairing that with building up TRATON Financial Services in the U.S., to be able also to offer this over leasing contracts, including service system. Super excited about then exchanging 50%-60% of the value of these trucks to European technology. Hope that answered your questions, Jose.
Thank you. That was great.
Good.
The next question is by Miguel Borrega of BNP Paribas Exane. The line is now open for you.
Hi. Good afternoon, everyone. I've got a couple of questions. The first one just on Navistar. How do you compare your margin performance relative to Q4 of last year? What has changed sequentially? Was it more chips available, better mix, perhaps pricing, anything on the cost base? Something to help us understand the EUR 70 million adjusted EBIT on a similar revenue base relatively. I'll start there.
Okay, thanks, Miguel. I think I hand that one over to Annette.
Mm-hmm
sequential change over Q4.
Yeah
... on, Navistar.
Right. The main thing was really that we are able to deliver more trucks than in the Q4, yeah. This was one of the main drivers that we really were able to improve the side of Navistar. Keep in mind, they have still also supply shortages. They could even do better, but we have offline units also there. This is also for us in the next one, as everybody, how many supplies we get, you know, and if we get the trucks really delivered. I think this is also as Navistar, the question now, what is the outcome for the next orders?
You're right. They were not as severely hit as Scania, but they were severely hit by shortages throughout the first quarter. Also there, we expect improvements. Still disturbances throughout Q2.
Yes
as well.
Yes.
Thank you. Then, just coming back to the first question from Klas, the difference between the growth in deliveries and revenues at VWCO in Brazil is material, and I see that services was not much of a contributor there. You mentioned the product repositioning in Brazil. Could you give us more detail on that, and whether-
Yeah
This has had some impact on the margin as well?
You know, as you see, Volkswagen Caminhões e Ônibus as market leader in Brazil, yeah, they gained market share. While they gained also market shares, they extended the product portfolio. Now they have heavy duty trucks in the portfolio that are very well placed there, you know, in the market. They gained a higher margin out of this truck, I think to say this, yeah. They have also an increase in the service revenue because the utilization of the fleet, how many trucks there. In the last year, we had a big growth in Brazil, so it's a really good performance there. I think they also worked very good on the pricing side. You know, they are high inflation country. They are used to price inflation, and they were really successful to do this and to place the product very well.
I think they did a great job, so I cannot add anything. They are really on a good track. They will continue, but also here we have to say they have supply shortages, you know. Also here you can see the help from the group. MAN, when they stop production, delivered semiconductors to Volkswagen Caminhões so that they can produce. We really help each other in this group. I think this is also a positive sign that happened in the last weeks.
It's a good cost addition.
Thank you. My third question on the orders for electric vehicles. I see that your orders are somewhat below Q4, and I would expect that to ramp up faster. Is it because you're also restricting these orders, or and you are prioritizing diesel orders? Is it because perhaps your diesel offering is so much more attractive relative to electric? Just wondering if something more radical in the total cost of ownership needs changing, or is it just internally that you don't have capacity to take more orders on electric?
No, yeah. Good question. No, we're actually doing the opposite. I mean, we are giving priority to the battery electric vehicles. So of course, they contain a lot of semiconductors, but we want to ramp them as quickly as possible. The answer is, as you speculate, well, on one hand, it's really, you know, small volumes volatility between months and quarters. But of course, we are truly at the beginning of the S-curve. We mentioned a couple of times this 100+ units to garbage collection, Copenhagen. We are in discussions for more of these orders. So it means that the market is maturing.
The biggest question is, of course, around profitability, so total cost of ownership and total operating economy for the customers. Is that creeping closer to break even? Yes, for sure. That journey continues, but we're far from it in many segments. Can that be accelerated? Yeah, it can be accelerated, of course, by political decisions, and that's what we keep pushing for. Second answer, second question is always on the charging infrastructure. You know, where can I charge? How much can I charge? What it cost to charge? There is, of course, where we really look forward to getting our joint venture with Daimler and Volvo going so that we can pave the way for charging not only in depots and in destinations, but also along the roads where our customers are operating.
Finally, it's always the match with specification. You know, in the ideal world, our customers they would change from the exact specification they have right now, which is optimized to their transport demand, and just get electric on the very same one. I think that's the challenge, and that's where we're today competing in this industry to come as close as possible to the original specification, so that the risk for the customer is only shifting to electric, let's say, but not having to change anything about the load area or how they do their, how they optimize their business. Yeah, this we master differently well in different application and by different brands, but that is really the battleground.
To finalize, I mean, I'm really convinced that we start to see the beginning of an S-curve. It's still small numbers. It's ups and downs, but the interest from the customer base is just massive.
That's great. Thank you. If I could squeeze in just one more question. On margins for Scania, I understand your gross margins are only slightly down year-on-year, and you mentioned no pricing surcharges and indeed lower production levels. If I could push you on the margin outlook for Scania, you were saying full production capacity after Q3. Could margins go back to 10% or maybe above in the current inflationary environment, or are we still talking about maybe high single digits in 2022 for the remainder of 2022- 2023? Thank you very much.
You know, I'm totally unhappy every month we're below 10%. You know, that's not where we should be. This system is geared to be double-digit margin in hard times and difficult times, with or without semiconductors. Of course, we have a fixed cost base, and especially as we decided to keep the personnel on duty to be prepared, and that's of course what is hitting us when volumes go really low. I for sure, without trying to give any guidance on our margins going forward from Scania, but we are definitely seeing possibilities to go above 10% and do that quickly. Okay, Annette?
Yeah.
I'm saying too much again.
No.
No.
It's fine.
That's okay.
Okay.
Question. I hope that answered your question. Okay. Lars Martin? Did we lose them? No. Lars Martin, are you still there? It went very quiet.
Your phone is still on.
The next question is by Himanshu Agarwal of Jefferies. The line is now open for you.
Hi, Christian and Annette. Himanshu from Jefferies. Thanks for taking my questions. The first one is on the semi, the chip supply. One of your peers have been talking about the change in type of chips that are constrained this year versus last year, i.e., more common chips are in shortage this year, which is helping to improve the mix. However, last year, the shortage was more in the specialized chips. Are you seeing that as well? The reason I ask this question is because you have seen six weeks of production stoppage at MAN, and I believe you would have some excess availability of chips. Is it possible for you to use those chips into other brands? That's my first question.
Great question. No, we're not yet at the level of product synergy or product communality, so that we can reuse the chip. Not to my knowledge, at least, in the steering or the control units of the vehicles. Your first observation there is right. I think we're moving out of a problem that is more accentuated on specialized chip and that are really one-to-one with the vehicle and start to see more shortages on general chip, which is good because it also means that we can. We have numerous sources to look for.
We're also getting out of, normally, the area where we have homologated or certified a certain chip to a certain function, meaning that we can also create some internal flexibility, changing the product, which for instance is not the case in Scania, where the problem is the engine control system. You know, you don't fiddle with the engine control system. You don't change a chip on the engine control system motherboard without having to go to the authorities and recertify the whole thing. I hope that answered your question on chip. Annette, you have more-
The question you mentioned this already is, was that we really reallocate chips from MAN to Volkswagen Caminhões e Ônibus. Yeah, we do this already after the stoppage.
Okay. Understood. Thank you. Just following up on that, when you talk to your suppliers in terms of the chips, is it like they don't want to produce these common chips because they are probably cheap, and they want the OEMs to shift to more sophisticated chips? I.e., it becomes a structural headwind, or is it just a temporary issue and that'll gradually resolve?
No, I think everybody will go to the newer chips generation. Normally we have longer lead time in the truck because we have longer product cycle than a car, you know, but it will move to the new generation with the new common components and everything in the industry, I'm sure.
Understood. Just lastly, a clarification question on MAN orders. I see the MAN orders were broadly flat Y-o-Y. Were these all, like, new orders in Q1, or does it also include the renegotiated old orders, which were probably counted as new? Also, how did your customers take the renegotiation process?
One thing, I think we don't double count orders, so it's not that we have it, canceled and then we come in. We have net orders reported. Yeah. It's not that it's double counted. Yeah, sure. We, the customers, we scheduled some cancellation, but it's really slow, on a low level, so it's nothing to mention. We are happy at this point, but it's still an ongoing process, that you should know. It's not that we are finalized with the whole order book, so it's close daily work from the company at MAN. I think the order is still quite good at MAN, and I think we discussed the truck demand. The people still looking for trucks. You know, transportation demand is there.
Understood. Thank you.
Thank you, Himanshu.
There are no further questions, and so I hand back to you.
Thank you guys and everyone on the call for the good discussion. Thanks, Christian and Annette, for your time. We look forward to welcome you in about two weeks time, actually, very, very shortly at our Capital Markets Day at Södertälje. I wish you a nice afternoon, evening, or morning, wherever you are. Thank you for joining us today. Yeah. Thanks all.
Thank you.
Really good questions. Take care.
Bye.
Bye-bye.
Bye-bye.