Good morning, everyone. Welcome to the virtual TRATON Annual Results Conference 2023. Thank you for joining us today. Together with me are Christian Levin, our CEO, and Annette Danielski, our CFO. We will start with the presentation of the full year results 2022, and our outlook 2023, which we both have released this morning. After the presentation and a short break, we look forward to answering your questions. Before we start, let me make you aware of the disclaimer which you can see here, which of course is always the basis of our presentation. If you have not done so already, you can now download all relevant documents on our website, traton.com/ir. With that, I hand it over to Christian.
Thanks a lot, Lars, also from my side, a very good morning, and thanks everyone for joining in. Today we're summarizing 2022. In many ways, a very, very special year, full of challenges and to some extent the year that you'd rather put behind you. I would say that it took our super dedicated and focused team to a test. It really tested our flexibility and our entrepreneurial spirit. I'd say that we managed to make very strong progress, especially in our strategy execution, but also, our financial results. Let's have a look at the main results for 2022. We took incoming orders to a level of 335,000 units, despite having a very restrictive policy in accepting orders long into the future. Our deliveries, our unit sales were held back by supply chain bottlenecks.
We've been talking about that in our Q1, Q2, Q3. Nevertheless, we managed first time ever to come above 300,000 sold vehicles, not least thanks to the now fully integrated Navistar. Both top line and bottom line clearly improved. We did better volumes, but we also managed higher pricing, and we had a very strong underlying growing vehicle services business, which took finally our adjusted return on sales to a solid 5.1% for the full year. I think more importantly, we had a positive trend, especially throughout second half, we closed the year in a Q4 at well above 6%. Of course, more about that from Annette lately, later. Proud to say that we are taking sustainability to the next level.
We're taking the lead in TRATON, we're taking the lead in the industry by saying that in 2030, our target is 100% green batteries, 100% green steel, 100% green aluminum, and 100% green cast iron in our production. At that point, emissions will then be back to what is in the vehicle production, in the vehicle supply chain. If you just take the batteries on a BEV, it will stand for more than 50% of the CO2 footprint. This will support the overall transformation within Scania, as well as the whole TRATON GROUP towards being a more sustainable company. Another super important milestone is the introduction, the group-wide introduction of what we call the TRATON Modular System, so a common product platform for all the brands in the group.
The major milestone so far is, of course, the launch of what in Scania is called the Scania Super. Scania being the first brand in the group to introduce this 13-liter Common Base Engine platform, but including also a common gearbox, a common aftertreatment system software, and rear axle gear. It gives an outstanding fuel efficiency, and we have already won several independent tests. I'd say the most prestigious being the 1000 Points Test here in Germany, but also the Green Truck award for the sixth time in a row. Production started up early 2022, in a very demanding environment with, I must say, unfortunately several hiccups, but is now ramping up and is expected to accelerate throughout the first half and to be finalized during 2023.
Followed in this same year by Navistar, who launched during June last year and taking customer orders for deliveries during the second half of this year. I'm coming back to that a little bit later. Standardized components, that is good, that creates scale. To really achieve the combination of tailor-making with scale, you need to go to completely modularized system. Therefore, you need to introduce the three principles of modularization, and you need well-thought-through performance steps, and you need to apply to the principle, same need, identical solution. That's what we have decided to do inside the TRATON Group, and we of course, focus mostly on the future, meaning our battery electric vehicles and our software architectures that will be based on this and that will be shared.
To support that, we also need to optimize and change our structure. We have already a global central R&D unit, and we have a product management global central unit set up to define one roadmap for our products and services based on the unique customer needs from all our brands across the whole group. We foster more collaboration, more simplification within the group, and we take away waste, we take away friction, and we take away unnecessary coordination, meaning that we will be more efficient in the allocation of our resources. Lastly, in our strategy, we utilize the possibilities within digitalization and new business model to shape the future of transport and logistics ecosystems.
Here I'm proud to say that three of our brands, Volkswagen Truck & Bus, Scania, and MAN, all delivered self-driving truck solutions to customers in different stage of development, I would say, and across very different application areas, as you can see on this picture with a Brazilian harvester in a sugarcane field. These applications are all suitable for autonomous driving. In Scania, we continue to work with Rio Tinto now in the iron ore mines in Australia, and we have made lots of trials and reached some really good key milestones in 2022, where we can run complete with driver out, with simulating load and conveying cycle environments in the mine. New milestones to be reached throughout this year in that project. We continue to do field experience together with customer. We collect more data, we learn, and we improve.
This chapter, of course, has just about started. Before I'm handing over to Annette, let me sum up this first part and this 2022. We, TRATON, proved our resilience, and we delivered a robust financial performance in a most challenging business environment. We did record levels in both unit sales and in sales revenue. Our order books are well-filled, and they are supported by continued strong customer demand for our vehicles and services. We made very important steps in the execution of our TRATON Way Forward strategy along all the four key pillars. In addition, we managed to complete the disposal of our business activities in Russia. With this, Annette, the stage is yours.
Thank you, Christian. A warm welcome from my side as well. Looking back at 2022, the war in Ukraine has been dominating our business environment, but it is far more than that. It's a human disaster, and I feel with the people in Ukraine and their families. Two years into the pandemic, COVID was and is still part of our lives. Last year, we experienced a significant increase of prices for raw material, components, and energy. We faced shortages in semiconductors and tires and plastic part, wiring harnesses, and many more. Drivers were short in both inbound and outbound transportation. We saw strong demand, but the bottleneck in the supply chain, the production flows were interrupted, resulting in long lead times. We, as a global company, managed all of this highly professional, and we grew stronger together as one team. Together, we achieved a decent result.
With more than 300,000 units sold, sales revenue above EUR 40 billion, and an adjusted operating result of EUR 2.1 billion, all new record levels for TRATON. We achieved an adjusted return on sales at a level of 5.1%. Let us now have a look at our financial performance in the fourth quarter as well as the full year 2022 in more detail. Two indicators in our industry are unit sales and incoming orders, which you can see on the left of this slide. Starting with the full year, incoming orders declined slightly by 7%, but they remained on a healthy level, with a book-to-bill ratio of 1.1. In the final quarter, orders were lower year on year at 78,000 units. There were two drivers for this decline.
Navistar booked a retroactive adjustment of the full year order intake in Q4. We continue to be restrictive in accepting orders as we are tightly managing the supply chain situation and the input costs. Still, the development of order intake is more driven by supply and the ability to produce and deliver rather than by demand. Our very high order backlog is already covering the vast majority of 2023 production. Our unit sales, which you can see in the right graph, were significantly up by 16% in the full year 2022. Importantly, we recorded improving volume in each quarter of the year. This was supported by continued gradual easing of the supply chain shortages and improved production levels. Our global expansion was very successful. As a result, in 2022, we sold more than 300,000 vehicles for the first time in TRATON history.
Here you can see our sales revenue development with the separate vehicle service business contribution. Sales revenue increased by nearly 1/3, both in fourth quarter as well as in the full year. Top line growth has clearly exceed unit sale growth of 16% in Q4 and 12% in the full year, which I explained on the chart before. This was driven by gradually improved unit sales and strong pricing initiatives, and supported by positive effects from exchange rate movements. In addition, sales revenue from vehicle service business again delivered double-digit percentage increases. As a result, for the first time, the TRATON Group recorded a sales revenue of more than EUR 40 billion in 2022. With the dynamic quarterly revenue improvements throughout the year, we ended the year on a very positive note with EUR 11.8 billion in Q4.
This strong performance is proof of the ability of TRATON to quickly react to the changes in the environment. The group's resilience improved further as the vehicle service business continued to gain more and more traction. Moving to our operating results and profitability. Most importantly, we recorded a very positive development since the second quarter. The adjusted operating result came at EUR 724 million in the fourth quarter, a strong improvement compared to the final quarter of last year. This correspond to adjusted return on sales of 6.1%. The positive development was mainly driven by the higher deliveries and corresponding improvement in capacity utilization.
In addition, importantly, with the successful execution of our pricing initiatives, we were able to compensate for significantly increased input costs, both in the quarter as well as in the full year 2022. As a result, adjusted return on sales amounted to 5.1% for the full year. We reached, as forecasted, the lower end of the projected range of 5%-6%. Despite the significant challenges in our environment, we were able to almost reach the return on sales of the prior year. Again, these results underpin improved robustness of the TRATON Group. Let us have a look at the brand's performance with specific focus on the fourth quarter. Scania Vehicles & Services benefited from higher volumes, price and mix effects, and significant growth in vehicle service business.
At an adjusted return on sales of 10.5%, Scania returned to a double-digit margin. Nevertheless, margin was still held back by selected headwinds in the supply chain, tight logistic capacity, and material price inflation. The adjusted return on sales of MAN improved to 1.8%. This was driven by better fixed cost absorption through higher deliveries and growth in the vehicle service business as well as price effects. The significant cost increases for material and energy prevented a stronger result. Navistar showed a very compelling performance with a return on sales of 5.9% despite continued supply chain constraints. The development was mainly driven by increased unit sales, leading to better production utilization as well as strong implementation of pricing initiatives. Volkswagen Truck & Bus achieved a return on sales of 9.3%.
Again, improved pricing was a major driver. Production remained on a high level in the fourth quarter, whereas delivery of about 4,000 units were shifted to Q1, 2023, to manage the transition of the new emission regulation. Finally, the financial service business recorded a strong growth mainly on the back of the expansion of its portfolio. Higher funding costs had a counteracting effect on the margin, which should climb to 23.7% against a very high prior year basis. Let us have a look at the earnings after tax and the earnings per share in the full year. Starting point of the earning bridge on the left is the adjusted operating result of EUR 2.1 billion. The adjustment were mainly related to the war in Ukraine and especially the disposal of business activity in Russia.
Please note that we will record and adjust for a special effect of - EUR 108 million in the first quarter, 2023. This relates to the sale of the Scania Financial Services business in Russia, which was closed on January 17th after the year-end. The corresponding operating result came at EUR 1.6 billion, was EUR 1.2 billion higher than in the prior year. The earning per share more than double to EUR 2.28, up from EUR 0.91 in the previous year. Based on this good performance in a challenging year, the executive board and the supervisory board of TRATON will propose a dividend payout of EUR 0.70 per share at the Annual General Meeting in June. This correspond to a payout ratio of close to 31% of our earnings after tax. This leads me to our net cash flow development.
TRATON Operations achieved a strong net cash flow of more than EUR 700 million in the final quarter of the year. This brings the full year to minus EUR 625 million. Excluding the effect from Scania's payment related to the EU antitrust proceedings, net cash flow amounted to EUR 312 million. The guidance range of EUR 700 million-EUR 1 billion was not reached. The main driver for this deviation were working capital movements due to the supply chain headwinds and shortages in logistic capacity, which led to higher than expected inventory levels, the changeover to the new emission standard in Brazil, and higher receivables due to increased deliveries in the final quarter. Investment were slightly higher year-on-year at around EUR 2 billion.
Given the constraints in the supply chain, we increased the level of inventories to ensure a more constant production flow in our plants and to deliver vehicle to our customers as fast as possible. In Brazil, we increased our stock levels of finished vehicles in order to cope with the changeover to the new emission standard. By doing so, we were able to retrofit the production and enable deliveries to our dealers in the first quarter, 2023. With the implementation of these measure, we are well prepared for a good start into the year 2023 with a clear focus of further optimize working capital and to reduce our net debt position. Which brings me to the next page in of our presentation. As you can see, net debt of TRATON Operations increased to nearly EUR 3.6 billion by the year-end 2022.
Key drivers for this development was the settlement of legal proceedings and working capital movements. Adding the EUR 4.2 billion under corporate items brings the total net debt in our industrial business to a level of EUR 7.7 billion. Please note that the net debt figure is also impacted by cut-off date effects related to the sale of financial service activity of Scania and Russia. Net debt by year-end 2022 included a negative impact of EUR 670 million for the Russian entities. The related positive effect from the purchase price of EUR 400 million was booked in January 2023 following the closing of the deal. To wrap it up, the TRATON Group managed the challenges in this special year very well and improved its robustness based on the expanded global footprint.
We are well prepared for 2023 with a full order book, improving production rates in our plants, and with full focus on delivery vehicles to our customers and managing our working capital. We are strongly committed to deliver, we will. Now, let me hand back to Christian to present you the strategic focus areas for 2023.
Yeah. Thank you, Annette. Strategy. I'd say that our focus areas stay stable for 2023 and beyond. The top priority for the TRATON team is crystal clear. We need to execute, and we need to deliver. In doing so, we need to show sizable steps towards achieving our strategic financial targets. The team and myself, we believe more than ever that we are now heading in the right direction, and we have the right strategic priorities laid out. Of course, you always need to adapt, we have learned the hard way, throughout the last couple of years, to changes in the environment. Our strategy remains unchanged, and the priorities are crystal clear. Let me take you into all of our four strategic pillars on the upcoming slide. Starting with the first one, which is to be a responsible company.
The most important part of that is, of course, to decarbonize transport. As I said earlier, Scania starts the deliveries of the new 40-ton e-truck range for regional haulage to customers this year. This is a huge step on the way to come to zero-emission vehicles. We are expecting the electrified unit sales with this to strongly increase as we are now finally addressing what is the main segment of our total sales, not only in Europe, but also outside. In MAN, we are preparing the Munich plant to start up manufacturing of the electric heavy-duty truck at the beginning of next year, 2024. Lots of questions are coming on batteries, supply of batteries, and that is, of course, a strategic part of the shift over to battery electric vehicles.
We have come to the conclusion that we will source cells from external partners. Partners we will work very close with. Our battery models and our battery packs, they will be produced in-house, and they will be produced close to the main assembly lines. Because of that, we will in 2023 start up production in the already announced Scania plant that is in the final stage of construction right now in Södertälje and just next to the Swedish assembly line. Simultaneously, we have started up construction of a large series battery plant at MAN in Nürnberg, which will commence this year but intended to produce battery packs as from 2025. Total capacity above 100,000 packs per year.
This plus intensifying activities in the ecosystem, including the creation of Milence, the charging infrastructure, will take the first high-performance battery electric vehicles into operation and hopefully with a rapid ramp up. The second pillar is creating value. Value creation needs to improve in the TRATON Group, and a key part of that is executing the MAN's realignment program. It needs to be this time a sustainable change. 2023, we're all well aware, will be the decisive year when we need to show, and MAN needs to show the world, that it is emerging stronger than ever, and that the measures that have been put in over the last two years make a significant contribution to MAN's bottom line, but also the TRATON Group's financial performance. It's looking good.
MAN's transformation, however invisible on the 2022 result outcome, as Annette just showed, is visible in many other ways. You need to remember that MAN had a particularly tough year on the supply chain side and on the volume side as a consequence last year. We can see development on all three building blocks in this realignment. We see a leveraging on pricing, on volumes. We see a reduced impact from material cost, and most importantly, we see a new structure emerging, and emerging according to plan. Throughout 2023, a key structural initiative will start to materialize, and they will make a substantial contribution to the bottom line result.
Perhaps the biggest one is the sale of the Steyr site in Austria and the subsequent ramp down of production and shift of capacity, which is gradually happening as we speak, and coming to an end by the summer holidays this year. By that, we should really start to see a full impact on the P&L of MAN. By that, and further shifting of production capacity over to Kraków in Poland, to be expected, to be finalized in the end of the fourth quarter, we will see two-thirds of MAN's truck assembly to be located in best cost countries. Further on, we take, unfortunately, personnel measures as well in MAN. They are being executed this time, and they are well on track.
By that, we continue to create a more flexible company, a company prepared for changes, and a company that can take on changes in the environment and in its market. By continuing to work in MAN, the team has also decided themselves to start a restructuring of the bus operation, given that they don't see a sustainable profitability in the current setup. More about that in the upcoming quarters. Third pillar, TRATON Accelerated. Taking digitalization, new business models into what could be the best to our customers. One thing I want to highlight here is the creation of our group-wide financial services company. We have been prepared for almost a year now, and we are almost ready for launch.
We have most of the approvals from the regulatory bodies that we need. We have almost all the decisions needed to start operations. That's the expectations for this year. It's again, execution. It's to go live, and it's to stepwise ramp up back-office and front-office capabilities for all our four brands with all the financial services, all their products, so that they can be brought to the benefit of all customers of the group. As you know, we use Scania's highly successful financial services operations as a backbone, as a foundation for this creation, and create separate front office for each of the brands.
In Navistar, their financial services expected to start up during the beginning of the fourth quarter this year, whereas for MAN and Volkswagen Truck & Bus, it will be a gradual takeover of market by market from that is currently being served by Volkswagen Financial Services. We will of course, report on this throughout the remainder of this year. Moving on to what is perhaps the most important pillar in the execution part of the strategy of TRATON, to roll out the common product platform, t he TRATON Modular System. The next visible step of that strategy, that journey, is the launch of the International S13. That is the name that Navistar has given the engine and driveline platform in the International heavy truck range.
It's based on the CBE, where we already have a highly competitive integrated powertrain, and it will start to deliver to customers in the second half of this year. It's impressing because together with an updated aerodynamic package, this powertrain will offer up to 15% improved fuel efficiency, which is a true game changer in the marketplace for Navistar. Not only the fuel efficiency is important, also for us that we can finally offer to the customers of Navistar an integrated in-house service offering based on captive components. Now, feedback from customers is extremely positive, and I'm very confident that we will see a very good pickup rate increasing over the years to come.
This ramp-up of this powertrain will first be supported out of Europe from Scania, but also later on from Latin America, where Scania is currently introducing the same driveline, but will gradually evolve into fully independent production at an upgraded Huntsville site in our Navistar plant there in Alabama. To support the rollout of this TRATON Modular System, we needed to implement a new steering philosophy and a new organizational structure. I already talked today about our global product management function that is headed by Catharina Modahl Nilsson, but also about our global R&D organization that is handled by Anders Williamsson. Today, I'm very, very glad to announce that we are also launching two new global functions, the one for purchasing and the one for production.
We have appointed Murat Aksel, who is currently board member for purchasing at MAN, to assume the group-wide responsibility for purchasing. We are appointing Stefan Palmgren as from today to be responsible not only for production at Navistar, but also to take the lead in the entire production network of the TRATON Group. This new steering and this new structure is necessary in order to strengthen the collaboration, the introduction of the Modular System, to have a coordinated system, a coordinated governance, instead of having waste, friction, and coordination. All of the industrial functions, all of the industrial operations will be represented in an extended TRATON truck board. Of course, the brands remain the backbone of the group's business performance.
The intersection between the brands and the overall industrial operation is the foundation for our sustainable value creation and our scale effects going forward. Moving to a topic that is also very, very close to my heart, it is the company culture. We decided to review our corporate values in the TRATON GROUP. We have a new family member with Navistar joining in, and we need to accelerate collaboration and execution throughout the entire group. This review has been completed, and I'm very proud today to introduce our new corporate values that will be rolled out as from today with the top management meeting later this afternoon across the entire TRATON universe. These are customer first, respect, team spirit, responsibility, and elimination of waste.
These values will be our North Star and orientation for collaboration between our employees and how we act as a company in our markets and in our environment. Values, they always work together. One by one, they don't make much sense, and they are completely depending upon each other. They also complement the TRATON purpose, transforming transportation together for a sustainable world. That takes me into the outlook and our main assumptions for the upcoming year. As the war in Ukraine, unfortunately, continues, it is still expected that global economies will grow, although at a slower pace. Prices for key raw materials have declined from their peaks, but uncertainty is high. We expect inflationary pressures to persist with interest rate likely to further rise. We have input cost inflation that will continue.
We will see incremental cost pressure now coming from wage increases and from energy, probably rather than what we have had up to now based on raw material. Our supply chains are expected to continue to ease gradually, but we will unfortunately still see selected bottlenecks and lack of logistic capacity making our life a continued challenge. We expect customer de-demand, though, in most global markets to be resilient to this economic fluctuations because there is a high need for replacement. The fleet age is growing in almost all of our market, and we continue to see a strong underlying demand for logistic services and hence transport capacity. That brings me in to the outlook for our key regions of the truck markets. In 2023, our truck markets are expected to continue to be robust with a different development in the key regions.
Most forecast for truck markets in Europe and in North America vary between a -5% to +10%, a slight expansion at the midpoint of these ranges. Whereas South America, these markets will experience some slowdown, triggered by the introduction of the new emission standard, PROCONVE P-8 in Brazil. Our current estimates are for a -15% up to a flattish development. We need not to forget, there is a very high degree of uncertainty in all of our market. We need, as a group, to be prepared to quickly react to any change in these forecasts. By that, I hand over to Annette.
Thank you, Christian. Now on to the full year outlook of the TRATON GROUP. As you can see, we changed the methodology and now provide the forecast ranges for all key KPIs to enhance understanding and tracking of our development. Our focus for this year is clear. We strive to achieve a significant improvement in our performance. We are looking on the fiscal year 2023 with optimism, and this is reflected in our financial forecast. Based on the high order backlog and improved supply chains, we anticipate a substantial increase in truck unit sales. By contrast, bus unit sales are expected to moderately decline. In total, we anticipate both unit sales and sales revenue to grow by 5%-15%.
Further, we expect adjusted operating return on sales in the range of 6%-7%, a significant improvement compared to the 5.1% recorded in 2022. We have our sights set firmly on our target return of 9% and intend to take a crucial step towards our target this year. This is strongly supported by the strategic initiatives we presented to you earlier. Finally, we expect a net cash flow for TRATON Operations in the range between EUR 1.3 billion and EUR 1.8 billion. Back to you, Christian, for your final remarks.
Great. Thank you, Annette. Before we move into the Q&A session, let me summarize the key takeaways from today's conference. In a highly challenging environment, TRATON provided its resilience and delivered a robust financial performance. We recorded a high level of incoming orders. We strongly improved unit sales and increased sales revenue to record levels, backed by a gradually improving supply chain. There is good momentum in sales, and profitability is positive despite being held back by supply chain bottlenecks and relatively low production utilization. Our focus for 2023 is very clear. We aim for significant improvement in our performance and to take crucial steps towards our target return.
In 2022, our strategy and our joining of forces to shape the transition to sustainable transportation entered into a new phase. 2023 will be the year to enforce execution of our TRATON Way Forward. We will deliver. Thank you.
Thank you, Christian. Have a short break before we will enter the Q&A session. Stay tuned. All right. Hello, everyone, welcome back to the Q&A session, which we will now enter. Before we start, let me provide a few housekeeping items to you. This Q&A will be recorded. If you would like to ask a question, please press star followed by one on your telephone keypad in order to enter the queue. If your question has been answered before actually it's your turn, you can dial star and two to cancel your question. If you have difficulties hearing the Q&A, press star and zero for operator assistance. Please, as always, restrict yourself to two questions per questionnaire. Of course, you can enter the queue any time again in case of any follow-up questions. Once your name has been announced, you can ask your question.
With that, now let us start the Q&A and take the first question and which comes from Klas Bergelind from Citi. Klas, the stage is yours.
Thank you. Thank you, Lars. Hi, Christian and Annette. Klas at Citi. The first one I had is on the price increase that you're pushing through. I think it's a pretty big carryover effect on pricing in, into the first half, but you're guiding unit sales and revenues at the same pace. Is this a negative mix impact that you have baked in, into that ASP number? Is it slower service growth versus higher unit sales as the bottleneck ease? I'm trying to understand what kind of pure price assumption, Christian, that is part of your guide. I'll start there.
Yeah. Thanks, Klas. I'll shoot that question directly over to Annette, who is,
Thank you for this.
the master of the guidance.
Okay. Thank you, Klas. Yeah, you're right. We will have impact from the pricing 2022 and 2023. We will see there also the full year effect. We also have then a different mix a little bit, and this is the main topic. Also the pace of the service business will continue, but it will be not on this high level that we saw in 2022 because the fleets will be renewed and new trucks came in, and this is why we are forecasting this increase the same as the sales increase.
Yes. Thanks, Annette. Great.
You can-
If I add, then Klas a little bit from the customer end. There is a little, maybe surprisingly little resistance now from customers as these price increases have been rather hefty...
Mm-hmm
both on the new vehicle side and on the parts side and service side. You know, we bundle that into monthly installments. Discussing with the customer didn't buy vehicles for a year or two, it starts to be a little bit cumbersome. But so far we're coming through in the main markets. Of course we need to somewhere expect that this cannot continue. We've chosen to be rather conservative.
Mm-hmm
on this. Therefore, we're guiding as we are. To be honest, so far in the first couple of months, we're getting continued price increases through and we compensate more than well for the raw material and energy cost increases. I hope that was a nice question.
No, that makes sense.
Mm-hmm.
Yeah, that makes sense. There is some sort of carryover, right, into the fir st half on pricing?
Yes.
Of course there is.
Yeah. Okay. My second and final one is on the deliveries. When we look at the VW delivery report, obviously Scania ended over 10,000 in December, but only 5,000 for January. I guess this is your seasonality after a strong year end. But it's quite a big difference and also relative to your quite bullish unit sales guide for the year. I know it's early days, right? How should we think about the shorter margin trajectory if Scania starts the year at a slower pace? Will we see sort of a weaker margin in the first quarter versus fourth before we ramp up on the Scania Super through the year, Christian?
I'm not gonna guide you on the margin in the Q1, as you know, but it's a good question and it has a couple of underlying reasons. Yes, of course, we were rather pushy in the end of the Q4. We were disappointed we didn't get volume through. We had all the problems in the world with the supply chain and as from November, we really came together and started to deliver. There was some kind of a catch-up effect and we also did a good job emptying our yards. We basically had nothing on the industrial yards and we had quite empty yards also at the dealerships, the captive dealerships. That explains the kind of overshoot in December.
We are planning 2023 to be above 100,000 trucks. To be there, of course, we need to be in the range of 8,000-10,000 per month. January is substantially lower. I would give you two main reasons for that. The first is that we stopped completely our Brazilian factory in São Paulo. We needed also there to rebuild, to take in the Scania Super, which is now and by the way, have had a very, very good start, as opposed to Europe, where we had a lot of trouble. From first of February, we are up and running fully with the introduction of the Super in Brazil.
In January, you lost that 120 per day in production capacity. The other is not production. Actually, we produced almost according to plan. We lost 5% in January in Europe. You know our system, so we emptied the yards of the dealers in Q4, meaning that we fill them up now in January, and that will continue throughout February. Yeah, this is kind of an overswing. I expect the system-
Okay
to stabilize in Q2, perhaps, where we will see a balance between really good factory output and also really good deliveries to end customers from the captive dealer network. These are the two main reasons why January was low in terms of volumes. We see other good things. We see margins. As you said, there is a good realization on pricing. We see service volumes continuing to grow at a very good pace. I'm not worried for Q1, to tell you the truth.
All right. Thank you.
Thanks, Klas.
Thank you, Klas.
Thanks.
The next question comes from the line of Michael Jacks from Bank of America. Michael? Good morning.
Thank you, Lars. Good morning, Christian and Annette. First up, congrats on a strong finish to the year. My first question is just on the cash flow guidance. How much of a working capital release are you factoring into the full year guidance? That's my first question. The second question is just on the MAN structural measures. Are you able to perhaps quantify for us the level of improvement expected in the second half from the closure of the Steyr plant, and from personnel measures? I guess also on the expected uplift from shifting production to Kraków, which I suspect will be more accretive for 2024. Thank you.
For the cash flow guidance, it does not include a positive impact from working capital because we have full order books for the year 2023. We also believe at the year-end, we will be have higher inventory. Due to the supply chain shortages that we experience, so we have to have a little bit higher inventory to run the plant on smooth production level. I think it's more important for us on this one. The improvement mainly in the cash flow comes really from our improvement in the operating result. Also for the capital expenditure and R&D, you saw the grease increase will also burden our cash flow. We still have a good guidance with a midpoint of 70%, cash conversion rate, and I think this is okay.
Yeah.
Do you want to add?
Yeah. No, I'm
Yeah
I think you covered it well on the cash side. Michael, you also asked about MAN, and we are, absolutely, we spent, me and Annette, we spent the day with MAN yesterday-
Mm-hmm
actually.
Yep
the bigger management team to kind of pressure test where are we and are we on plan. This is of course, a difficult industrial exercise that we're into, including the HR measures, that are not easy, and especially not in Germany. We are well on track, and we feel confident that we can, thanks to these measures, be up and running on the 7% return on sales level in MAN that we have set out to do on our more strategic path to take them to 8%.
Mm-hmm.
We're targeting 7% for the, for the year.
Okay. Understood. I would imagine then that there would be quite a big difference between the first half and the second half performance.
Yes. You will see a gradual increase throughout the year.
Mm-hmm
And especially as you were into there with the Steyr closure, that will quite dramatically reduce the cost per vehicle. We are expecting to see good results already from Q1 coming out of MAN. I mean, there has been many other measures taken into.
Mm-hmm
Into action already throughout 2021 and 2022. The main reason they did not come through last year was the lack of volume. Volumes are looking good. We're seeing a more stable production from MAN on the ramp up of the plant in Kraków is going actually according to plan this year. Touch wood.
Okay. Very good. Thank you.
Thanks, Michael.
Thanks, Michael.
Thanks.
We have our next question from Nancy Ni from Goldman Sachs line. Nancy, good morning.
Hi. Good morning, and thank you for taking my question. I've just got one on your EV battery investments. I thought the comment was really interesting. Some of your peers have actually decided to go sort of direct into cell manufacturing. I'm just kind of wondering why you're not considering the cell core and sort of who will you get your supply from? Also just in general on your EVs, sort of do you plan to produce on the same lines as your ICEs?
Great. Good question, Nancy. Yeah. You know, we classify all components that are in our vehicles in three categories. Either we classify them as core or as strategic or as non-strategic. Components that are core, we want to both develop and manufacture ourselves in-house. If they are strategic, we want to develop or co-develop, and we want to produce or co-produce with suppliers or partners. When it comes to the battery cell, it is of course important for the performance of the vehicle. It is not as important as the software which the platform is running on. We have taken the decision to classify this as strategic, not core. Hence, it's perfectly fine for us to supply the cells as such from a partner.
What is important here is it's not traditional supply-customer relationship, but it's really partnership where we have, on the cell side, on the cell chemistry side, we have lots of internal research, so we really co-develop with our partners. And, you know what, we are currently in Scania working prominently with Northvolt, where in MAN working with CATL. So we are developing this together. And we think that along the road, there will be not initial, but there will be sufficient battery cell capacity. It will of course be a bumpy road, but throughout that period we think there are plenty of chances to do really good collaborations with partners. So therefore we come to this conclusion. I don't know if you want to add, Annette, on the battery cell strategy.
No.
No. I will answer your second part of your question was how do we manage to manufacture? Both in Södertälje, right now actually, we are integrating the battery electric vehicles mixed in on the main assembly chain with the combustion engine vehicles, and we will do the same when we rebuild the MAN plant for the launch in end of 2024 or the deliveries in end of 2024. With our modularized approach, we do not need to build a completely new assembly line or a completely new plant. We manage to do this in an integrated way. It is challenging. It is difficult because we talk about very heavy stuff. These battery packs are up to 5, 6 tons.
We need to rebuild the lines, but done that we can work completely mixed. As we do today, by the way, between 2 axles, 3 axles, 4 axles, 5 axles, small cabs, big cabs, high cabs, low cabs, small engines, V8s, you know. I think we're in the industry quite good at handling these types of challenges. That's how we have planned to do it in TRATON. I hope that answered your questions, Nancy.
Oh, no, that was great. Thank you. I just maybe had a follow-up on that then, sort of given your investments into module and pack production then, do you think you have the required balance sheet flexibility?
We have to have. Yeah, this is one of our strategic priorities, to fund this way to BEV vehicles. As you follow us in the, in the last announcement, we announced EUR 2.6 billion that we want to spend for battery electric vehicle in five years. This is where we prioritize how we spend the money. As Christian explained, we really structured very well how we want to spend it and allocate it to the right way, and battery electric is one of our priorities in TRATON.
Yeah. That's where we probably need to invest more.
Yeah.
Whereas of course in other technology areas we have to scale back.
Mm-hmm.
That's part of the transformation.
All right. Thanks, Nancy.
Okay, great. Thank you very much.
Thank you.
Thank you. Next in line is Hampus. Hampus Engellau from Handelsbanken. Morning.
Thank you very much. two questions from me. Could you, Christian, maybe clarify a bit on the introduction of this commonality in the Modular System between the brands? I assume that it's going for using the same platform, same architecture, electrical architecture, gearboxes, and of course the Common Base Engine that you introduced. Will this be parallel to the existing ICE trucks and on the battery electric, or will the move into the common platform only be when you launch the electric platform? How should we think about that?
Yeah, great. Great question, Hampus, and we have of course struggled ourselves internally how to do this. We also suffer from some bad decisions of the past where we decided not to go common on some core components. The way you should think about it is really to become fully modular, we need to have common chassis, and we need to have common electrical architecture and software, because these two things are the backbones of the vehicles. You know, that's where you can start and talk about standardized interfaces. On the electric side, including software, we have a very solid plan. That plan is independent of whether it's ICE vehicles or battery electric vehicles. That plan is running for all the four brands independently.
It will of course take some time. There are legal requirements that has rather big influence on this plan, such as the cybersecurity, the global cybersecurity, legal, the international law actually coming into our market. This is running in complete parallel. You have the drivelines. The driveline is the other big chunk. The drivelines are of course depending on whether we talk ICE, we're moving over to the, to the 13-liter common platform. On the electric side, we will go common from the very, the very start. The big challenge is the chassis. Here we have of course struggled the most to come up with a strategy, how do we go common on the chassis as quickly as possible?
Every integration is kind of waste of money, even if the component is developed by the same team and using the same suppliers. We have come to the conclusion that we need to move towards common chassis as well, and we will end up with two chassis families in the group. I cannot give you the exact time plan of that. That is the work of Katarina, Anders, and their teams, and they're working intensively on this right now. The plan is to shift over before the market is shifting completely over to battery electric, which will probably happen given the proposed legislation from EU in the timeframe up to 2040. Accelerate this. It will be a bumpy road.
It will cost some money, but we think this is the fastest way to come to a really high-performing company. I hope that answered your question, Hampus.
Absolutely. Can I do more on a question on the outlook? The second question on the outlook is, how should we think about this, the range you're providing for 5%- 15% on unit? Is the 5% like just you are executing on what you have in the backlog or how should we think about that? What risk do you see in the backlog given that if I read you right, Christian, on the call here, that it's almost 10-12 months we're looking at in terms of backlog?
I say we presented the outlook on the market. As we look at today, the markets in North America and Europe may be little bit increased, not a lot. This is why we put the range together for the market forecast. If you follow this, what we see, it's a 5%, maybe 10%. We have the order backlog what we could not deliver last year due to the supply chain constraints. Order book is full, and it's confirmed. We believe it's a mix of both, is that the markets slightly increase, are stable, and that we deliver what we missed last year to our customer. This is how we should read the outlook, Christian will put a little bit more tense on the risk what he sees.
Yeah. I mean, it's also a very relevant question. There's always risk in an order book. And we learned the very hard way back with the financial crisis in 2009, where literally the order book just vanished and disappeared. As Annette said, the order book today is more stable, first because we have the end customer always signed. There is a written contract. There are penalties if you cancel, and it's all financed, you know. It's a solid order book. Of course, that doesn't stop the customer from canceling if that customer does not have a transport assignment. Looking to the outlook that is shared in the industry, North America looks very solid, we don't expect any cancellations from there.
Europe, solid, and I would say the same, maybe with one or the other market exception. Where there is, of course, risk is in Latin America, where not only you have the new emission legislation that made the price increases even more hefty to customers, but also the political instability. What happened after Lula's taking office and the Bolsonaro supporter storming, you know, governmental buildings, that was not good for the investment appetite in Brazil. You also have a not perfectly stable situation, if I phrase it like that, in Chile, in Argentina as usual.
Mm-hmm
but also in Peru.
Mm-hmm.
Some of our big markets there are with a little bit higher risk. Of course, in that type of environment, an order book is not worth so much despite the stability that we see in it. It's exactly like Annette says. It is difficult to forecast. We need to plan for going with full production, finally utilize it the way we have not been able in the last two years. We need also to be prepared to put the foot on the brakes, actually in all our market areas, but especially in Latin America.
Okay. Thank you.
Thanks, Hampus.
We will take the next question, from Himanshu Agarwal from Jefferies. Himanshu?
Good morning. Hi. Thanks, Lars. Hi, Christian and Annette. Himanshu from Jefferies. Thanks for taking my questions. The first one is on the pricing and supply chain constraints. I see you've mentioned that you're receiving some resistance from your customers in terms of price increases, and also you talked about supply chain constraints, and I think that's true for most of the European OEMs. When we listen to your U.S. peer, they are still quite aggressive on pricing as well as they say the supply chain constraints are largely behind them now. Why such a stark difference between OEMs, and has it got something to do with the region, regional exposure? Then I have a second one.
Okay. I can start.
Mm-hmm. Sure.
Annette, you can fill in. I of course, I can't answer for the others in North America, for instance. But what I tried to say on the first question here today when it comes to the negotiations with customers, I say that we are still coming through with price increases, and the price increases continue to be applied. We continue to offset, and we try to stay ahead of the inflation curve, so to say, with the pricing curve. But we are expecting that there is a point where this will not happen anymore. Customers do also follow the raw material price development for instance.
What also happens, also in the U.S. but more so in Europe, is that freight rates are stabilizing, so it's harder for our customers to pass on price increases to their customers. We are coming through with the price increases. We are fencing off inflation. We see that continuing. We are expecting at some point that this cannot continue forever, and we are expecting that to happen before in Latin America than in Europe. We're expecting that happens before in Europe compared to the U.S., but we are expecting that at some point to happen. Up until then, we are gonna be bullish. You know, we're just gonna keep trying. As long as our order book is up to 12, 13 months, you know, why should we not increase prices?
I think that's the message I would like to say. I don't know, Annette, would you like to complement-?
Yeah
that picture?
mainly what is our aim?
Yeah.
Our aim is really to compensate for our higher input cost. Yeah. This is where we were able in 2022, and we want to be also able in 2023. As you also follow, the commodity prices came down a little bit, so we are not at the peak levels that we are in the third quarter. We see also that get more moderated, so why we should overprice? We want to balance this, you know, also for our customer, and this is our main aim. Then you should keep in mind we have coming our colleagues here at Scania with a new Scania Super, with a new CPE, where we have a new pricing. The International S13 comes in place at the second half in the year. We come with a new product in Brazil.
The market is difficult, but we come with a new product there, with a new engine in. We have also pricing opportunities here that taken place and we will see. Also we believe that this is what we have to balance. The main really for me as finance is that we balance the input cost increase with our prices, and this we're still able, and react positive to the request from our customer. I think this is the main part, and you pointed it already out, and I think this is what we try. Yeah.
No, it was good with the complement, completing with the value part.
Yeah. Yeah.
If a customer in the U.S. sees a 15% fuel reduction, of course there is pricing-
Yeah
power behind that, for the new driveline.
Yeah.
That is kind of coming on top.
Mm-hmm. That's it.
Okay, you had a follow-up, question, Himanshu.
Yep. thanks for that. Just on the supply chain constraints, are you seeing any differences regionally or, and are they getting better sequentially? Yeah, at what level are you in terms of the production?
Yeah. it seems to be a little bit tougher in the U.S. than in Europe. In Latin America it has not been such a big challenge. Of course, part of that system we take from Europe, so they have been hit, and the Scania side especially a little bit, a little bit Volkswagen from AM components also from Europe. it is easing.
Mm-hmm
Actually, and it's not just one sector as it was, you know, it was only semiconductors for a period. Now it has really been a little bit of everything, and I think many of our suppliers, and they are, many of them are global, they run on really, really high capacity today. That is a little bit scary from our point of view as we are not yet as an industry back to the peak levels before COVID. As we see growing demand, and we have good order books, we of course expect our suppliers to continue to invest, to be able to keep up with further increases.
I think it's a, it's a very difficult market to read because you have this and then you have the kind of regionalization that is very counterproductive, that it's getting more difficult, more expensive, more unpredictable to ship components over the globe. Which is also, in a way then both making it more difficult to predict and plan, but it's also making it slightly more expensive. It's really not a world in order that we are handling, and I think the procurement and the logistics teams are doing a fantastic job to try to offset this the best they can. In the last quarter they were very, very successful. I hope that answered your question on the supply chain.
Yeah. Christian, maybe to add-
Yeah. Absolutely.
I explained before our main target this year is really to have stable production levels, you know. We also, as we explained, we increase the working capital a little bit to secure that the production can run smooth, and we get the product out. I think this we learned in the last year very well.
Yeah
With the supply chain shortages. This is now what we are doing. We really think that it will easily gradually ease away during the quarters, yeah, and get better. We will stop for missing parts still a day or two. We will not stand hopefully for weeks or we have really a lot of problems. This is so we learned about this and take the right measures to be more smooth production on a higher level in 2023. This is aim we have together.
Yeah. No, it's good you bring that up, and one illustration of that could be the cable harness problem...
Yep
we had
Yeah
with being supplied out of Ukraine, where we of course continue to be supplied out of Ukraine and we see heroic partners working there in that environment. For not to be hit again, we had to build up capacity outside of Ukraine as a fallback. Of course, that fallback capacity somewhere costs money.
Mm-hmm.
It costs capital and it has cost. That is an example of what you're saying, Annette.
Yeah. Yeah.
That's also why we on the working capital side, we need to be careful with our...
Mm-hmm
with our expectations, because it's more important to make the production system run now and really get good cost coverage for every product we manufacture.
All right. Thank you.
Thank you.
We have about 11, 12 minutes to go in the Q&A. We have six analysts in the line. I would like to ask you without being, I don't want to be rude.
You're talking to us now.
No. To restrict yourself maybe to one for the moment. The next question will come from Miguel Borrega from BNP Paribas. Miguel.
Hi. Good morning, everyone. Thanks for taking my questions. The first one, on the realignment of MAN, it seems there's a lot of changes in 2023. Just wanted an update on the operational side of things. First one, is the plant in Austria already sold? If so, what would be the financial impact of that? Start of production in Kraków in Q4, should we expect any changes in production from the transition? Lastly, personnel changes, on track, what would be the impact of the restructuring, the headcount reduction in Austria? Can you also quantify, maybe a follow-up to a previous question, the total cost saving of this whole transition? I think I heard you, Christian, mentioning a 7% margin at some point in the Q&A.
Not sure if that was H2 2023 or something else. Thank you.
Miguel, I would like to start. We sold the plant in Steyr last year already, yeah. We still have a contract that they deliver us at until the summer of this year, 2023. This is the main driver. The contract runs out, and we move a lot of the production to Kraków. We come to a better cost position out of this best cost country. This impact we will see starting second half of 2023. The full impact of the shift of the production to Kraków, is that we have now close 60%-65% out of the production MAN out Kraków, will really be shown in 2024. We have an impact already this year, but the full impact in 2024.
The profited for the sale of Steyr, we took already in 2022 . Yeah, was it two?
In one.
One. Sorry, in 2021. Sorry, I have to correct myself. In 2021.
Yeah. I'm okay.
The contract runs now under this, and then we see the benefit out of this.
There was also on HR, or on personnel. What happens is, on one hand, we're shifting production out of Steyr, partly out of Munich and into Kraków. We are shifting, from, let's say, indirect to direct workforce. The proportion will go from one to four to one to five. All of this with an increase of production capacity. The target is to be able to do this without increasing the total number of employees, in the company. I hope that gives, some guide and, guidance to the, to the headcount question. Then it was on the financial-
We already announced that with all the measurements of the restructuring program, we want to reach 7% return on sales on MAN. We are working.
strategically 8%.
Yeah.
Which is what we are targeting, yeah.
We're working on this.
This is a big part of it, of course, but as we said before, it's also pricing. We have a very good product. We have very good services in MAN. We need self-confidence. I think that is coming. It's also the supply chain. We work more in the group now together, and we work more professionally on the purchasing. That is also contributing and a number of other measures, that are done on MAN. again, it looks really promising that we should be able to achieve the 8%, in the longer time horizon.
All right. Thank you. We have.
Thank you very much.
Next question on the line from Anthony Dick, who's calling from ODDO BHF. Anthony.
Yes. Yes, hello. Thanks for taking my question. Could you maybe provide some further granularity?
Just try to-
into the individual business unit performance?
speak up a bit.
Yes, sorry. Could you maybe provide a bit more granularity into the individual business unit performance like you've done for MAN? If I look at VWCO, for example, you expect the market to be declining quite significantly next year. I know this is a business where you have quite a bit of a lot of variable cost in your cost structure. What kind of incremental leverage should we expect there? And also if I look at the Q4 performance of some business units, the operating leverage was quite limited versus the very strong performance at Scania, for example. Just wondering what held back the performance there. Thank you.
Anthony, if you understand the question right, it was on MAN Q4 and the development of MAN or I'm wrong?
No, I think it was on the others, actually.
On the others?
Yeah.
Did not hear.
To give some input. One question was, I understand, on Volkswagen and
Okay
how we see their performance going forward given that Brazil might retract as a total market. I would say, Volkswagen, as you know, is already delivering well above the strategic target, and we expect them to continue to be on or above their strategic target also in a somewhat shrinking market. They have an export strategy that goes beyond Brazil, beyond Latin America. That will help when they have an updated product program. Navistar is, of course, the biggest lever we have, and to get production going and get volumes out from Navistar is our target number one this year. There we really expect the team to deliver towards their strategic target, probably not already this year, but at least in 2024. Scania, as you said, back on double digit, we wanna do more.
Also as CEO of Scania, I can say that we are focusing very hard to come back to 12%. The levers here are cost, fixed cost, has grown too quickly in the company, especially compared to volume, and the volume is the other lever. We are of course pricing also, as we always do, being the price leader in the market. Volumes needs to come back, and as I replied to Klaus on the first question, we see a positive volume development now as production is stabilizing, and we can finally deliver the customer orders. I know that was a quick run-through, Anthony, but as we are short on time, I hope that was giving you some guidance.
Yes. That's great. Thank you very much.
Thanks, Anthony. The next one comes from the line from José Asumendi from JP Morgan. José, good morning.
Morning. Thank you, Lars. Just one question, please. Could you share with us, please, the output you're planning for long haul Navistar units in 2023 North America, and if you could comment on the gross margin illusion between electric truck and internal combustion engine? Thank you.
To Anthony , we would not guide on a brand, to be true. I think you see the outlook for the long haul, and we already pointed out that we want to gain slightly market share back. I think you can estimate out of this, hopefully, what is our estimation here.
1%-2% market share gain per year.
Yeah
is what we.
We already put this out, and so I think you can-
That's where we're guiding this.
follow us, yeah.
Yeah. The split between battery electric and ICE, it's a little bit different in different brands. We have, with Scania, we have said that by 2025, we should be at 10% BEVs, and by 2030, 50%. MAN has a similar trajectory, a little bit delayed. With Navistar, we have not set up a firm target, just yet. Was that okay, José?
That's perfect. Thank you so much.
Thank you, José.
Thanks. Thanks, José. We have a next question coming from Nicolai Kempf, from Deutsche Bank. Hi, Nicolai.
Deutsche Bank. If I may launch just one question, maybe it's about dividend. You decided to pay dividend for 2022 despite generating a negative free cash flow, and that, given that you're still in net debt, and also keep in mind that your biggest shareholder maybe doesn't need the cash. My question is, why did you decided to pay a dividend?
Really, we stick to our commitments, José. If you follow us since the IPO, we committed that we pay 30%-40% of our annual earnings after tax to our stakeholder. We aim to be a reliable partner to the capital market. Really, what we really do is reducing net debt is our priority, but we also want to stick to the promises that we have. That's the reason why we decided to pay the EUR 0.70, and as you know, on the lower end of the range we already showed in the IPO prospect.
If I may add.
Mm-hmm
it's also sending the signal that we're confident that we can reduce our net debt position.
Yeah
in the upcoming years. Well, knowing that, as you said, that is a top priority, we don't wanna be where we are.
Yeah.
All right. Thank you, Nicolai.
Okay. No problem. Thanks. Congrats.
Thanks.
Thanks, Nicolai. We have a next question from Shaqeal Kirunda from Morgan Stanley. Good morning, Shaqeal.
Hi, guys. Hi, good morning. Thank you for taking the question. Congratulations on the quarter. Just some measures of the MAN restructuring plan were not concrete during the CMD, and we saw the bus improvement plan included now. Can you quantify how much this adds? Are there any further measures which you can share at this stage? Also, can you just confirm the time period on the 7% target? Thank you.
I think we should really make clear the programs that we put with restructuring is we really track very hardly. The MAN team does a good job. Also, if you have the headwinds that we experienced in the last month for supply chain, increased wages, increased logistic costs, so they have to offset all the headwinds to still keep the program on track. This is the reason why include the bus program to really reach the program target that we put out. It's really an enabler to still be on track with all the headwinds they have. I think this is the most important, that they are looking every day for new measures to offset if something comes with a negative impact. I think we saw this yesterday.
It's a very good proof how they do it and how they track the measures. Would you to add to the other?
Yeah. In a way, we are kind of running a little bit behind-
Mm-hmm
on buses then.
Yeah
starting two years later. We're taking more or less the same type of measures-
Mm-hmm
but adapting to the bus business. We're taking into account that we don't see the bus market growing back to pre-COVID levels for MAN. The team, and encouraged by us, has decided that they wanna be the bus team in MAN, they wanna be as profitable as MAN, meaning that they should contribute to the 8% in the long- term, and they need to deliver on that level. Right now they're far from that. It is a big effort that they need to put in. You can ask why didn't we include that if you go back three years, I don't really have an answer to that question. I think it's good that the team is picking that up themselves.
I hope that give you a little bit more on flesh on the bone, Shaqeal, on MM.
Thank you. That's clear. Just a very quick follow-up. On the Common Base or the Common Modular System, which divisions are set to benefit the most and what kind of margin impact could that be?
Well, I think it's very hard to quantify. You know, you have a different rules of thumbs where you talk about double volume, get 10% lower cost. I think for us, what is very clear is that we need to take away all the double work that is ongoing by having multiple development ongoing on several platforms at the same time. Can't have that, can't have a lot of coordination work, can't have friction between teams, and that's why we need one head of R&D who can implement one strategy, one roadmap. We have said, and I think we said at the CMD, that we have up to 30% waste in the R&D organization, and the R&D organization is close to 15,000 people. I'd just say, without giving you any number, that there is substantial opportunities.
Of course, it also comes with a big effort to do the integration and do that in a time when we, when we do a lot of other transitions, like the one to battery electric vehicles. We should also not be expecting too much too quickly out of this transformation. There is a lot of benefit to take out financially on R&D cost. I stop there.
Okay. Great. Thanks for your time.
Yeah. Thanks, Christian.
Thank you, Shaqeal. Our final question will come from Eric. Eric Gourdon from SEB. You have the honor to ask the final question. Choose wisely.
Well, I actually won't because they've all been asked these last two, three sessions. It was on the electric ramp and balance sheet priorities. Thank you.
Thank you.
Thank you, Eric.
Thanks, Eric.
Thanks.
With this, we are coming to the end of our Q&A session and also the conference. Thank you all for joining us today. It was a great session. Please reach out to the investor relations team whenever you need anything or have any additional question. For now, I wish you and we wish you all a nice remaining day. Thank you.
Thank you.
Thank you all.