Dear ladies and gentlemen, welcome to the Q1 2020 conference call of TRATON SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode, and after the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star followed by zero on your telephone for operator assistance. I will now hand you over to Rolf Woller, head of treasury and investor relations, who will lead you through this conference. Please go ahead, sir.
Thank you very much. Everyone welcome here from our side, from Munich office. We hope that everybody who is dialed in is in good health, and that also your families are well. Together with me here in Munich, sitting in almost three different offices are several members of the core team. Of course, our CEO, Andreas Renschler, our CFO, Christian Schulz, we have Klaus Schartel, head of law department, Annette Danielski, head of finance, Julia Kroeber-Riel, head of corporate communications, and myself. Before we start to give you an update on how TRATON did during the first three months of 2020, I have to make some initial remarks, as you know them. We hope that you have all seen the material which we have published in the course of this morning. It should be the press release, the three-month quarterly note, as well as the IR presentation.
If you have not received them, you will find them on our webpage, on the TRATON website. I should make you aware of the disclaimer, which is on page two. I also wanted to state the obvious right upfront. Any questions on Navistar, you know the proposal is out since January 30th, and there is no change actually in status. Therefore, we currently have nothing to add to what has been publicly announced so far. How do we proceed today? First, we have Andreas, who gives us an overview over the current situation, and once he has finished, he will hand over to Christian, who will guide you through all the financials during first quarter, and our status outlook.
Last but not least, we will close the session with a question answer session where I would like to remind you that you please limit your questions to two to three questions per person actually who is asking. Otherwise, it will be a very cumbersome and then boring approach here, just having one interviewing all of us. With that, I hand over to Andreas. Please, Andreas, the floor is yours.
Thank you, Rolf. Also welcome to all of you. Before Christian will elaborate on the financials for the first quarter, let me make some introducing remarks on the current situation. With the COVID-19 pandemic, global economy is faced with unprecedented situation, even not comparable with the global financial crisis already more than 10 years ago. Caused by the pandemic, we have seen and continue to see falling demand, supply chain interruptions, temporary closed factories, and companies focusing on securing their liquidity. Driven by the standstill of nearly all industries around the globe, the economic outlook for 2020 has been clearly reduced. In some countries, to levels not seen during the Great Depression. This has accelerated the down trend in commercial vehicle markets globally, even so, expectations before the pandemic has been already low, in particular for the U.S. and Europe.
Furthermore, as global supply chains are not restarted in unpredictable frameworks with many unknowns, the bandwidth of the listed forecast illustrates the high uncertainty for the weeks and months to come. Even American Transportation Research Institute, a leading publisher of commercial vehicle industry data for the North American market, recognized, let me read it. There are too many unknowns to form expectations with confidence. This, of course, affected, and it's still affecting us across the board, but we implemented effective countermeasures. First, we assured to protect the health of all our employees around the globe. Suspension of production was in line with the availability of parts, given the impact of the COVID-19 pandemic, government requirements, the development of sales markets, and resulting modes of operations of the plants. Administration employees working from home wherever it's possible.
We introduced unemployment assistance to strengthen our financial position during the production stop and further focused on safeguarding liquidity by several actions. Just give you some more light into that. We introduced short-term work, so-called Kurzarbeit, for the majority of our employees at MAN, and where possible in group functions based in Germany. Further, in Sweden, we put roughly 19,000 people into kind of a similar unemployment assistance program, and in Brazil, we entered into so-called forced vacation. As the transportation industry is systemically important, system critical, we continued our service and replacement parts operations with more than 10,000 employees supporting the daily needs of our customers. Important innovation projects are being continued. We also supported society and joined the effort to overcome the corona crisis with targeted relief campaigns.
TRATON, for instance, supports the DocStop for European Truck Drivers Association, which provides for an improvement in medical care and working conditions for bus and truck drivers on the road. Meanwhile, we prepared our production for a gradual safe restart by coordinating the reliable supply of parts by our suppliers, as well as the organizations of our own work processes while protecting our colleagues, but also initiate measures to stimulate demand for commercial vehicles. Scania has initially tested the stability of its supply chain and its production line processes in Sweden and the Netherlands successfully, and further continued to ramp up their operation at sites in France and Brazil. MAN Truck and Bus restarted its bus and truck production step by step and will continue in the weeks to come.
Some holds, the same is valid for Volkswagen Truck & Bus in Brazil, who started the assembly line of its main plant in Resende back into operation on April 27. The plant of Volkswagen Truck & Bus in Mexico is scheduled to reopen today. We are restarting administration function depending on COVID development and regulation in the respective countries. Clearly, for our company, a sound balance sheet and the necessary liquidity are the names of the game in this crisis, and so to say at the moment. In general, our balance sheet position is strong, with an equity ratio within the industrial business of higher than 37%, and a net debt-adjusted EBITDA ratio of only 0.1 x. After the end of the DPLTA between Volkswagen AG and TRATON SE, terminated as of December 31, 2019, EUR 1.4 billion were transferred in February 2020.
That also holds true looking at our liquidity. We have initiated additional measures in the current environment in order to monitor liquidity even more closely, identify bottlenecks at an early stage, and make additional liquidity reserves available to us. With unrestricted cash of more than EUR 2 billion and credit lines of more than EUR 5.5 billion, we are able to safeguard liquidity in these uncertain times. By implementing strict cost management across Group, further reducing operational costs within our plants, and reprioritize investments and R&D, we took decisive action. As I highlighted before, we already implemented our gradual restart. Clearly, we as TRATON are well prepared to get back to old output levels, but it is obvious that the pace to get there is determined by a combination of factors.
Supply as well as demand disruption can, in turn, fear our gradual ramp-up and force us to prolong or adjust the ramp-up steps from today's perspective. Similarly, the influence of economic policies and overall health and safety measures will decide on how fast we can proceed to fully establish our operations. Simplified, there are three scenarios on how the economy can develop. First, the most desirable option, the V-shape scenario, where we return to the pre-shock level at the same growth rate. That would mean a fast recovery as a catch-up effect. Second, the U-shape, where we could expect growth at a lower level than before, but at the same growth rate leading to a delayed recovery. Most unfavorable, is the so-called L-shape scenario.
This scenario would mean to end a period of growth at a much lower level in combination with a lower growth rate, which then can be summarized as no recovery or a recession. Besides the mentioned three scenarios, of course, further manifestations are possible, like the V-shape or W-shape scenario. Overall, the next weeks and months will show how the combination of the beforementioned factors will affect our business. It's at the time not so clear that we have the crystal ball available that we can see how things are developing, but we are preparing ourselves for the different scenarios, test out productions. We still have a good order backlog that we can use now and then it depending on the order intakes that we can see the next couple of months how we can run further and increase production rate.
With that, I hand over to Christian, who gives you more detail on the financial figures.
Thank you, Andreas. A warm welcome also from my side. Let me briefly summarize our first three months of 2020 from a CFO's perspective before we go back into the presentation. I think it is fair to say that we were running ahead of schedule in January and February of 2020 on both sales revenue and operating profit, despite an expected weak market environment for Europe. Starting mid-March, the decline in European market accelerated and led to a disproportional decline in operating profit in the industrial business in Q1. The net cash flow in industrial business, however, improved year-over-year, amounted to EUR -167, and was therefore better by more than EUR 200 million compared with the first quarter of 2019, if you adjust for the sale of the Power Engineering business by that time. You know the rest of the story quite well.
Due to the COVID-19 pandemic, we had to shut all our plants gradually, starting from mid-March onwards. Since the environment continues to be characterized by substantial uncertainties regarding the duration and the severity of the disruptions, the impact resulting from COVID-19 on customer demand, the supply chain and production can currently not be accurately forecasted. Therefore, an updated prognosis on our business development in 2020 is still not possible. However, with operations almost completely shut since late March, we achieved to gradually restart our production operations at the end of April. With the continuation in May being a further month of the stepwise ramp-up of production, we expect a substantial drop in sales revenues in second quarter, which will affect all other key figures negatively. What can we say? We started from the very beginning on to have close look at cash and liquidity.
As per end of April, as Andreas has mentioned, we had more than EUR 2 billion of cash available and more than EUR 5.5 billion of credit lines. I think it's fair to say that this gives us some freedom to address the challenges ahead with determination. With that, let me return to the presentation and to page eight. Unit sales were down by 20% to 45,990 units in first quarter. As you know and we already discussed, we have seen a deceleration in the overall trend, which already started back in the second half of last year. The reduction in Q1 was mainly driven by the truck business, with markets down as expected in the EU27+3 region. The impact of COVID-19 in March further accelerated the decline and curbed the growth in Brazil and Argentina.
Scania and MAN saw double-digit percentage declines, whereas volumes were stable at Caminhões e Ônibus compared to first quarter 2019. TRATON Group sales revenue decreased by - 11% in first quarter and fell less than unit sales, mainly due to product mix. Sales revenue in the bus business showed an increase of 11%. The after-sales business posted a slight growth of 2%. The operating profit in first quarter was down to EUR 161 million, but it is still positive. Operating leverage arising from the volume declines and increasingly difficult used vehicle businesses, together with higher depreciation and amortization charges, as well as costs in relation with the rollout of the new truck generation at MAN Truck & Bus, led to the margin decrease.
Looking on return on sales by brand, Scania return on sales was coming in at 8.6%, compared to - 240 basis points to first quarter of 2019, and Caminhões e Ônibus at 3.1%. Both are resilient in that environment. Whereas the operating leverage was higher at MAN Truck & Bus, we expected MAN to be weak in Q1 because of the dual production cost, as we have discussed, coinciding now with the decline in the European truck market. COVID-19 led to the deterioration of the situation in the second half of March, and by this, operating profit margin declined to - 3.4%, a significant reduction compared to first quarter 2019. Profit after tax declined to EUR 96 million as a consequence of the low operating profit and less favorable financial results, and an increasing tax ratio of 27%.
Last, as you can see, cash flow in the industrial business was EUR -167 versus EUR 1.607 in the year before. As said in my intro, please have in mind last year's investing cash flow was supported by the sale of Power Engineering with EUR 1.978 billion. Excluding this effect, industrial cash flow year-over-year improved by more than EUR 200 million despite the slump in operating profit. Just a word to the annual general meeting. We decided to postpone the AGM for fiscal year 2019. It was previously scheduled for May 28th. Due to the strong spread of the coronavirus, we will now announce a new date in the due course of time. Let us have a look into the two segments. I'm on page number nine now. You can see industrial business, the first two months of 2020 were on track despite the expected weak European truck market.
Key figures in March were then negatively affected by COVID-19. As you know, March is seasonally the strongest month in the first quarter. Incoming orders softened and declined by - 16% year-over-year in first quarter. The incoming orders for trucks went down by 18% in Q1. Looking at the incoming orders with the truck business, there was a considerable decrease in the European region, driven in particular by the economic downturn and the acceleration due to COVID-19 in March. A similar trend was visible in South America, especially in one of its main markets, Brazil. Incoming orders increased in the Middle East and Asia Pacific regions. The incoming orders in the bus business were up, with a strong increase in January and February, but a significant reduction in March based on the COVID-19 pandemic outbreak. The coach business came to an abrupt halt.
Unit sales, as already mentioned, were down by -20% compared to previous year. The book-to-bill ratio in the industrial business for first quarter was up to 1.2. Sales revenue in Q1 in the industrial business was down by -12, less than unit sales decrease. The operating profit was down to EUR 135 million, and the ROS stood at 2.4%. Return on sales was impacted by declined sales revenue, additional cost due to the rollout of the new truck generation in MAN Truck and Bus, and an increasingly difficult used vehicle business. In addition, measures taken in connection with COVID-19, in particular, the closing of all our plants, had a negative impact on sales revenue. We already mentioned the net cash flow. Let us now focus on the financial services business. Our net portfolio in Q1 was up by 3%, and the penetration rate was on a level of 39%.
The financial services operating profit was down by EUR 7 million -EUR 26, driven by lower margins, higher operating expenses, and bad debt provisions. Page number 10, very briefly, you see sales revenues and return on sales quarter-over-quarter comparison. This is for your reference. If we go to page number 11, as you can see, and as I mentioned before, European truck market developed according to our expectations in the beginning of the year. As you see, in March, it declined significantly. The growth in Brazil slowed significantly as COVID-19 pandemic started to spread in March. Russia and South Africa also saw declining truck sales. Overall units followed the trend and declined by 20%. TGE units on the MAN side, one more time up with 10% growth year-over-year in first quarter, but in that environment, not continuing the strong growth rate of the last year.
Lastly, bus unit sales were lower with -4%. The European region was slightly down, and we saw a slightly positive development in Brazil. We go to the next page. Looking at this chart, we have to note that the comparison is not always like to like, as we are mainly heavy-duty truck, but not exclusively. At a time, like between deliveries and registration might be possible. However, taken as an indicator, it gives us quite good feeling of how we trend. For the first quarter, as already indicated quite a while ago, European markets for heavy-duty trucks were down in the first two months as expected, and the downtrend further accelerated in March. Our unit development was a notch worse with 35%, largely due to the rollout of the new truck generation at MAN, as planned and discussed before, and the time length that I mentioned on deliveries and registrations.
A similar market trend was visible in Germany, being down -26% versus our volumes, -32. In South America, where Brazil is about 80%, we grew by 4%. Looking in detail into the Brazilian market, the market declined -5%, whereas we increased unit sales by +5 in comparison. The incoming orders declined but remained on a relatively stable footing in Q1. March incoming orders in HDD trucks were down about 20% from February. Cancellations only a bit higher in Q1 than one would expect normally. However, incoming orders in April contracted significantly. Our order backlog should last for several months when operations restart properly. As we said, we will watch the difficult situation in the European market as well as other major truck markets very closely. Our book-to-bill by brand for first quarter reads as follows.
Book-to-bill was 1.33 x at MAN, +1 3 basis points better than Q1 2019, followed by Scania on a level of 1.14, compared to prior year's level and 0.97 for Caminhões e Ônibus. Page number 14 is for your reference only. As well very briefly, only on industrial business sales revenue and return on sales. You can see again how it developed further after sales grew slightly in Q1 with a share of more than around 23% of overall sales. We already focused on the levers on return on sales before. Page number 16. This leads me to the discussion of the bridge by brand. Sales revenue was down at all brands in a similar magnitude and then up to the 12% sales revenue decline in industrial business. Regarding return on sales, as mentioned in the beginning, Scania was the most resilient, still showing 8.6% return on sales in Q1.
Volkswagen Caminhões e Ônibus at 3.1, and MAN showed the biggest deviation, driven by the effects that I've further mentioned. It was the introduction of the new truck. It is an increasing burden of the used vehicle business, and it is on higher operating leverage. Let's now focus on financial indebtedness and net liquidity within the industrial business. The net financial indebtedness increased by EUR 1.6 billion, mainly driven by the cash outflow of EUR 1.404 million from the end of the domination and profit and loss transfer agreement with Volkswagen AG for the fiscal year 2019. I think we all debated it lengthily, in the due course of the capital structure discussion in the IPO, so you should be aware of that effect. Other than that, you can see in that bridge that there are no bigger unexpected things, and this let us end up at EUR 162.
If you go to the next page, you can see our leverage ratios, comparing by the quarters and over the year. On the left side, we see that our gearing ratio increased to 1% as it was negative at year end 2019, meaning we had net cash instead of net debt, and in general, we show a strong balance sheet position in the first quarter. On the right side, we see a net debt adjusted EBITDA ratio with 0.1 x only slightly positive, and again, at the end of the domination and profit/loss transfer agreement with Volkswagen AG for the fiscal year 2019. It is mainly explaining the change in those ratios. From the overview now to the financial services business, you can see here sales revenues at 31st of March were up 6%.
Return on sales was at 12% as operating profit decreased by 21% to a level of EUR 26 million. Some more detail about the decline in operating profit. Well, our portfolio growth was positive. There was a negative effect, first from lower margins, secondly, higher operating expenses in particular for IT, for example, and partly due to an increased share of bad debt provisions. Because of that coronavirus outbreak, our customers' payment ability has started to deteriorate. We are working closely together with them to support them in these tough times. On the next page, the year-over-year net portfolio grew on a sequential basis, declined by 6% versus 2019. The main driver for the decline was exchange rate.
The penetration rate was sequentially down by 237 basis points to 39% in Q1, and the financial services book value of equity decreased compared to year-end to EUR 933 million compared to 971 in 2019. Again, here, financial exchange rate was the effect and the driver. We now continue with the last section of today's presentation before the chance to exchange in a Q&A, and giving a status update in a heavily volatile time. The environment continues to be characterized by substantial uncertainties regarding the duration and the severity of the disruptions. As stated in the beginning, the impacts resulting from COVID-19 on customer demand to supply chain and production can currently not be accurately forecasted. By this, consequently, an updated prognosis on our business development in 2020 is still not possible. We need now to see how April is coming in and most probably also May.
The second quarter with the ramp up of the production gives us a better feeling how the markets overall will develop. Nevertheless, we expect a substantial decline in unit sales for the current quarter, and this will for sure affect all key performance indicators. Another two topics at the bottom of the chart to mention, regarding the proposal to acquire all outstanding common shares in Navistar, there's nothing to be added to what has been publicly stated on January 30th, and the merger squeeze out of the non-controlling shareholders of MAN SE is planned as publicly stated on February 28th. Next page you see the outlook on markets. We did not yet reflect in here how COVID-19 will have an impact. You can see widely from ACT, from all other externals.
For everybody, it's a glass bowl, and we need to see what the second quarter tells us here for the outlook of the remainder of the year. slide 22 and 23 are not containing any updates. With that, we are happy to take your questions, and I would like to get back to Rolf in order to facilitate to do this session.
Yeah. At this time, it is a little bit different actually than usual. I will try to moderate the question answer session, with regards to the questions casted, just simply because we are sitting here in two different rooms and can't see each other. Don't feel reminded of old Volkswagen times, but this is just for the sake, actually, of handling this properly. Moderator, if you could start actually with the Q&A, that would be great. Thank you.
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 your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero and two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Klas Bergelind, Citi. Your line is now open. Please go ahead.
Yes. Good afternoon, Andreas and Christian. It's Klas from Citi. I hope you're both safe and are keeping well. The first one is on the margin there at Scania ex the Finco. If I back out the currency, I get the drop through or operational gearing to around 40% on a 10% organic sales decline. That's a bit bigger than I thought. It's despite ARPU and services being strong in the quarter, and there is no major impact from capitalized R&D. Obviously get that, you have write downs on the secondhand trucks, but that should be a little bit more at the MAN side. My question really is, I'm trying to get a sense for that margin in March, the exit rate at Scania. Is that a break even number or better? I will start there. Thanks.
Yeah. This is for Christian, I would say. That's very easy.
Yes. I think, if you look on both MAN and Scania, you can basically say that even without Corona, MAN would have been negative. You can consider 50% of what you see in Q1 on the MAN side being an effect out of the COVID-19 market decline. On Scania, I would say it's a bit better than break even and they're managing very well. As you say, we have a couple of effects when it comes on used trucks. That's also into the bad debt increase that I mentioned on financial services. Overall, I think you can see Q1 was still very substantially positive on the Scania side. MAN was a little bit more affected, of course, given the situation they were in anyhow with the ramp up and the issues around it that we have discussed before, Klas.
Thank you, Christian. My second one is on orders and deliveries at the start of the quarter. I guess two questions in one, I suppose. It seems like orders in April must be trending down at 60%. Could you please break that down maybe between Europe, Brazil, Asia? I guess, I mean, Asia is very strong. Europe may be near zero. Brazil down 70, 80. On deliveries, you say that you have a backlog for a couple of months, but deliveries undershot my expectations and can be down more than what the backlogs suggest. A big part of Europe is closed for business, so a feeling also for deliveries in the beginning of the quarter would be great.
Well, giving detailed outlooks here is difficult. I would rather like to have that myself to give the capital market an update on the prognosis. I would say, generally you can say we see the Asian markets recovering a bit with an increasing demand from Taiwan, Korea, and China. That gives some positive feeling from that end on the coming months. We do currently, as you have rightly said, see, of course, a significant reduction in March and also April being very difficult when it comes to order intake. As we have stated in the press call this morning, we see, let's say, stability in the order program for a couple of months now. Is it three, four, five? Quite honestly, it's hard to tell. As I said before, we need to see now April and May, how they are doing.
One thing for sure, Asia helps a little bit more on the Scania end. MAN is a little bit more focused on the European market, and thus has a little bit more difficulties from the market side, as you have rightly estimated.
Okay. My very final one is for Andreas on fleet renewals. You talked about during the press call. What is the feedback so far from the government versus you guys now lobbying for it? Just to try to get a sense where in the order of infrastructure investment in tunneling, road network versus truck renewal programs, where would we sit? It's obviously a very solid proposition, but just to get a feeling on the feedback in your discussions, Andreas, with the different parties.
I think, first of all, it's not only for the investment good truck that we recommend this to the different governments on a European level and also on the German level. It's a program that will help to increase the investments in the different areas. It could be in the equipment, machinery, and what else. Because I believe totally, if we don't manage it a lot of countries have managed this pandemic, from a health point of view, pretty good. Now we can argue back and forth, but basically, I think we see in all these areas decreasing numbers, so they have done pretty good. we have to make that same intention when it comes to the economic situation, that we are not going into a real recession. for that, my recommendation to them is always look at investment contribution to all of these industries.
One part of it could be for us, a truck renewal program that we can increase the number of trucks with Euro 6d, in this case, and with Euro 6 Euro norm. Of course, that we can really improve also the CO2 and also the NOx emissions. That means at the same time, we can do something for the overall climate. At the same thing, we see there a potential. If we are looking it from in the investment industry, that we are not postponing investments, that we are pushing them, that could have a good input or it's a good driver in the economic situation. From my point of view, this makes some sense. It's not only for us, it's for the overall investment industry. We can do, in addition, something to renew the old fleets.
I think one sort of the fleet in Europe is still Euro 3 up to Euro 5. We have some potential here. The reaction of the government is so far okay. They listen. Of course, they are much focused on how they can solve the issues at the moment. They are starting a discussion, or they are having, in the meantime, intensive discussions about that, and we will see what the next couple of months are bringing in this field. There is a kind of willingness. I'm not judging how China dealt with the pandemic overall, but how they are doing to support the economic situation at the moment, I think that could be also a good indication for our government to do certain things.
Thank you.
Next question is from Hampus Engellau, Handelsbanken. Your line is now open. Please go ahead.
Thank you very much. Three questions from me. Maybe starting off on MAN and the drop for you in the quarter. I guess that most of the run rate was planned, maybe 50% drop in Europe this year. Would it be possible to maybe for you to discuss the drop-through if we adjust for the launch cost and, maybe if you can also quantify the launch cost? Second question is on backlog and also if you look at the order intake. How was the cancellations in April? How much of Q1 orders were canceled in April? Or have customers wanting to postpone delivery, or how should we think about that? On the last question is more related to the service business. I know the service development during the first quarter, but we have heard rumors of activity being down 20%.
How that does correspond with your view of the service business looking at April? I'll stop there. Thank you.
Okay. Hampus, thanks for your questions. First, I would say on MAN, I tried to say that before. Without Corona, I think MAN would have been already, if you take 50% of the loss in Q1, that would have been the performance. We do not communicate on detailed level what is operating, what is ramp-up cost, like we have discussed before. You can say the operational performance without Corona would have been on that level. When it comes to the orders, these are net orders. That means the slump that you see already in April was on the level that we have discussed in past questions on the level of 60%, 70%. Now the question is: What will April and May tell us? We have seen a couple of cancellations, but not in a magnitude yet. The third one on parts and services business.
We have seen, obviously, if you have less transportation, a certain effect also on aftermarket and parts business. Of course, on the level of Scania, parts and performance is always a little bit stronger given the higher level of vertical integration in that the impact now needs to be seen also if Europe is ramping up again in production and everything, and then you see how the trucks are moving. That will for sure also then give us some information on how parts and services business is going to improve or is it going to remain on the current level.
I think it's very important to know, we are looking with our connectivity to a lot of trucks and how much they are used. In the top of the crisis in Spain and Italy, it was 40% of the trucks were not running. In the meantime, this improved already. It went to 35%. I think actually it's between 20% and 25%. With this number, when it increase, you will see a recovery on the service as well. It depends everything on the economic development. If there is no transportation need for a full fleet, for European fleet for a second, then you will see some issues and we will have some issues at service as well.
At least it looks like that when they are restarting, also in Italy and Spain, that we can see some more mileage on the trucks again, and that will help us, of course, also in the service business.
Thank you very much.
The next question is from Demian Flowers, Commerzbank. Your line is now open. Please go ahead.
Hi. Thanks very much for taking my question. The first one's going to be on working capital. Now that your plants are reopening, and I think you've given us some good information about how the mechanics of that are working this morning. That should be a key step to helping you limit your cash burn. Can you talk about how the working capital has developed since the start of Q2? Obviously, Q1 was okay. How do you view the maximum working capital risk for the upcoming quarter? Secondly, just on the dividend. How do you think about paying this year's already declared dividend? I think Volkswagen is a bit unclear about what exactly it's going to do. Maybe you can confirm that you will still pay it when the AGM is finally rescheduled. Thank you.
Okay. Thanks, Demian. Let me take the questions. Question one, we've improved working capital last year, second half, as you can see. Inventories in particular went down. In Q1 now, we saw that we managed on the ordinary business well in January, February. As I said before, the used truck environment continued to be challenging. By this, we already saw now in March certain effects. Despite all measures we are taking at the moment with the ramp-up of production, we see the biggest drain on the working capital side in the third quarter of the year 2020. Of course, it's very high on the agenda in the brands and also in the truck board.
Having all these ramp-ups also then in MAN with the new truck and everything, and if market's coming back, we expect in our current scenarios, most probably Q3 to be the hardest on the working capital side. When it comes to the dividend that we have indicated, as you know, annual general meeting will decide about the dividend payment. We do continue to keep on our level of 30% - 40% of our net income. We'll propose this for discussion, and then the annual general meeting, once it has taken place, will decide on that.
Okay. Maybe just to follow up briefly then. On the P&L, would you see the maximum launch cost impact in Q2? On the cash side, you said it's Q3.
It's not only the launch, because it was an example for the working capital ramp-up. In general, you see, our plants have been down. We are ramping up now currently during May. We need to see if there's a second dip from the infection rate that will lead to more restrictive production. Most probably, if the market is coming back in Europe in certain levels, if then the production is ramping up, if you have your suppliers, if you have the launch costs in MAN, you will most probably see the highest drain in working capital overall and in there particular on the ramp-up.
That's great. Thanks.
Thanks, Demian.
The next question is from Daniela Costa, Goldman Sachs. Your line is now open. Please go ahead. We can't hear you at the moment. Perhaps you're still on mute.
Can you hear me?
Yes. Please go ahead.
Hello. Yep. Hi. Good afternoon. I wanted to ask two medium to long-term questions. The first one being, can you update us on how you're thinking regarding the MAN Financial Services has evolved over the last few months? The second thing, I wanted to hear from you a little bit about how you're thinking around fuel cells is on the back of some of your competitors' recent announcements. What is your take on that? Thank you.
Okay. Maybe on MAN Financial Services. We have continued, as we have set the discussions, also with Volkswagen, which is currently providing that for MAN. We have gained progress in there. We are currently assessing on pilot markets where we can do something together with Scania Financial Services. those are progressing, of course, Daniela, you will understand that in the current situation, with COVID and with the ramp-up of the new truck, we need to be careful which markets we take in order to start our pilots. the strategy is unchanged, and we work towards this direction, and we have a very good exchange, with Volkswagen Financial Services on that. Secondly, I don't know if Andreas, you would like to take the BEV questions, or should I refer to fuel cell? What do you think?
I can refer to the fuel cell as well. I think, as you know, we have a very good and also for a longer time now, a good alliance with our Hino colleagues. We believe, of course, in the fuel cell technology long-term, and that's the reason we are working very good together with Hino. As you know, Hino is connected with Toyota. We are working in the fuel cell business together with, let's call it this way, the most sophisticated in this industry when it comes to fuel cell, and that's very good. We are fine with that one. The same is on the BEV thing. We are looking into our global alliance partners and working together in these solutions. We are looking into modular systems for all of our different kind of trucks.
I totally believe this will be, at least for the next couple of years, the mainstream that we are following when it comes to alternative drivetrains. Not for all applications, but for a lot of applications. In addition, then we can see in, whatever, end of the century, maybe some other things in fuel cell. We're looking from that one in a good economic of scale already, and it's much easier to develop something from scratch instead of using existing one and you have to combine that one. In both things, we are good positioned when it comes to potential economic scales in the future.
Thank you.
The next question is from Tim Rokossa, Deutsche Bank. Your line is now open. Please go ahead.
Yes, good afternoon. Thank you very much for taking my questions. All three of you, Andreas, Christian, Rolf, you have multiple experiences with crisis in the past. Andreas, you said this one is unprecedented, and I think everyone would agree with that. Do you still see that the playbook, i.e., your reactions to it and how you manage them, is roughly the same as it used to be before? Did you have taken any steps that you would have never taken in the past and that are new to you? Secondly, we had this discussion a couple of times in the past, but when I discussed with investors in light of the prelims that we had already, the biggest disappointment still comes out of MAN. It was a big part of the equity story to turn around this business.
Now, you said 50% of the negativity, Christian, of the negative development came from COVID-19. That still leaves a fairly disappointing development on an underlying basis. I understand right now it's difficult to talk about restructuring in the current mind, and you probably don't want to do this at the moment, but what is your thinking post being back in a more normal situation again? Do you see that the demand for restructuring is increasing? Also does this impact the ideas that you had about launching the new truck generation on the MAN side? Finally, Andreas, maybe for you specifically or Christian as well. Your previous colleague, Martin Daum, gave a fairly upbeat interview over the weekend, actually talking about being back at almost full capacity by the summer already.
That obviously doesn't pair too well with you asking for incentive programs on the same morning. I think a lot of people in the industry are asking themselves where he takes that optimism from. Can you help me to understand it?
Let me answer the last one. The better thing, you ask him. I know our figures and my statement before that I see not a lot of positive developments without incentivation. Incentivation will help the economic situation, and then we will see. It's a different kind of question until when can you achieve a certain production utilization. With all the, like Christian mentioned before, the order backlog we have, and it's not a big undertaking. If you have the health measurements in place and if you can do it, then you can achieve close to full production maybe before June or July. It depends at least on the order intake. I would not see it like that so far. It depends on April and May and what happens in the overall situation economic-wise.
The best thing is you ask him, and maybe he can tell you then in detail where he gets it. You asked with MAN. Of course, our strategy was and is, first of all, we found here organization that has the oldest truck in the industry. We put the first restructuring program into place very early, and then we said, now we have to do much more. That was the first step, was the new truck generation. This was done now successfully with the organization. With this new truck generation, we can change all the processes, and that's still valid besides Corona. That had nothing to do with Corona. This allows us to make the next big step.
Of course, it's now a little bit postponed, yeah, because if you have the people at home anyway, maybe it makes no sense to start this one. We are there, not in negotiations, but we are there in talks and we are looking in the development of the next couple of weeks and months, we will see there. This program is already in a working process. That means we know what to do and we have our ideas, and now we have to look that this comes one step further in the next couple of weeks and months, like I said. Things are valid, and of course, you can always question what is most important. If you have a totally efficient company without a new truck generation, you could not change the processes. The question was always, what is more important after the first program?
We said very clearly the first, that we need a new truck generation to change processes. That goes now into very detailed. You have to change product documentation, production kind of things to change the sales process. For that you need such a new entrance. Now we look into the next big step. I had to bring MAN back to a more competitive field when it comes to profitability. Your question about playbook, this is a very good question. I thought very often about it. Of course, you can use some measures you have taken there. The big difference, and this was the first time in my 30, whatever years now of working in this auto industry, that the whole world was shut down. Nothing happened any longer. The logistical chains went down.
We saw this from a global perspective, and this was, of course, something totally new. In the financial crisis, you still had some markets that could deliver, let's say, 40% - 50% of the demand. This time it was from acceptable demand. January, February, middle of March was better than expected, and then it was coming down to zero, something like that. This was an experience I never had before in my life. Of course you can look to certain things and countermeasures you have taken in different crises. It's right for the truck industry. It's always up and down. We had a lot of crises in the history. I'm pretty sure that we have all measurements to overcome this.
You will use some of the kind of things you made experience with it, and you will have to define some new ones. This is what brought me to a more positive attitude that I saw last week already, that the plant startup, that we could do it with the supply chain, that we still have a lot of suppliers in Italy and in Spain, and they are producing already. That logistics is starting again, the motivation of the people is very high. We can do it now. It depends really not only on the order backlog, that's fine, but like Christian said, cancellation is very limited. We have to now to look how the economic situation is developing. The truck business is, if the economy is doing good, we are doing good. If there is a lot of transportation.
If it's not, and we only have to transport toilet paper for the German customers, it will be not enough for our fleet. This is the issue that I want to raise again. With this kind of economical support, I think we will see in the industry of investment, of the whole industry of investment goods. I think there would be a good chance to stabilize the situation.
Thank you. I really like that reference of you with the toilet paper. I will check with Martin and let you know what he says on this.
The next question is from Xing Lu, UBS. Your line is now open. Please go ahead.
Hi, Xing Lu from UBS. Thank you for taking my question. Firstly, on Scania orders, I think it declined over 60% in Latin America, I think, which is a lot more severe than the market. Was this due to high comps, or was it due to weakness being more skewed towards heavy-duty sites in Latin America? That's the first one. Secondly, do you see any delays to the joint common-based engine that is originally planned for next year? Lastly, for MAN, could you maybe comment on the reception so far? I appreciate that it's been pretty tough times, particularly in March, but even before COVID. How have customers been talking about your new truck generations? Thank you very much.
Maybe start briefly with Brazil. You remember last year we have discussed thing that community is not improving like Scania was because Scania is just heavy duty, and this is now this year turnaround. The heavy duty segment has been under pressure, and this is why you see the effect on Scania being higher than to what you see for the overall market in Brazil. That might be the point. If not, I think we can specify more in detail afterwards with Rolf and the team. Secondly, I think, Andreas, the joint engine is not for disposal. It comes as it is planned. We planned it for 2021 in Scania, and this is also the part of the investments that we do not touch on. Finally, maybe you can refer to the new heavy-duty truck on MAN, Andreas.
The new truck generation was received very, very good. A lot of interest from the customer that came also to the order book. It's not only interest, but the most important thing is that they order trucks. Of course, now we had to postpone the ramp-up a little bit, but in the new kind of re-ramp-up after the crisis, the slowly start of production, we try to fulfill, of course, with the new truck generation, the demand of our customers. The acceptance was pretty good. This new truck helps us again to change processes. This is, for me, similar important than the new truck generation. With these new processes in the sales area and other things, we are positioned much better. Maybe one word to Brazil, because you mentioned Brazil. Brazil has, of course, also the Corona crisis.
The second thing is that they have, at the moment, a political crisis as well. As you know, the president fired a lot of very well-accepted people, the two ministers, I think, one for health and the other one for legal question, police or whatever. In addition to all this kind of issues with the Corona, they have, in the meantime, a political crisis. We have to watch this really the next six to eight weeks, what will happen there. This is a very severe situation because a stable political situation will help you much better than to handle such a big crisis. This on top is not easy to foresee what will happen in Brazil.
Thank you.
The next question is from Kai Mueller, Bank of America. Your line is now open. Please go ahead.
Hi. Thank you very much for taking my question. The first one is really on the used truck pricing that you mentioned. You said there's been significant or definite pressure that you've seen from now on. Can you give us a little bit of a magnitude? What is really the driver? Have you seen that even before COVID, or is it really COVID being the starting point of that pressure? A second point is on your dealership network. Some are captives, but also on the independent, as I think we've obviously seen in the automotive industry, many dealers are struggling really under the current lockdown situation. Is there any idea or have you had dealers asking for help on that side, which you would then help on some sort of working capital terms potentially?
Again, I know the question was asked earlier, but just sort of a clarification again. On your aftermarket business, we've obviously heard one of your peers talking, saying that aftermarket revenues will go down over the coming quarters because of lower activity. Can you give us a little bit of a magnitude, or if you think you will have the similar effect? I know you mentioned Spain as an example in terms of how much it was lower, and then you've seen that ramp up. Should we expect that to be hurting your margin again in Q2 or maybe even also all the way into Q3 in the back end of the year?
Okay. Thanks, Kai. Let me take it that way. After sales first. We also see it coming down. We do expect 10% - 15% over the next quarters. As I said before, and the question that I received in the beginning also from Hampus and the other colleagues, it depends on how market will come back in third and fourth quarter. If transportation, as Andreas has rightly said, is going to pick up. 10% - 15% on after sales is something that we would maybe imagine in current scenarios. When it comes to dealers, what we do currently see, we have a way higher range of captive dealers within Scania, but also in particular, some of the captives in MAN. For the non-captive, we do see rescheduling, of course, as we see it with other customers. That's one main impact.
When it comes to financial strength and to liquidity, we are in discussions via our dealer network operations, and I think we handle it at the moment still very well and do not see more effect in there. the one or the other might come there on the agenda, but it's probably monitored by dealer network management. For the used truck, you saw in Q3, Q4, when you look into our inventory documentation that we put on the IR website, that it was a little bit of trend that used truck was already going up with markets being closed, in particular in the Middle East.
On these ship routes. Of course now with the situation in transportation industry, we have customers that return their vehicles and depending on the situation, like Andreas has referred this morning in the press call also today, is how you pick up demand. You will also see a correlation obviously to used truck as business in there. Pretty much a European subject. We do see in our scenarios that the ramp-up will go up, like I discussed before on the working capital question, where we do see most probably an impact also during Q3 also. When it comes to market pricing, I think there are a couple of external analyst company where one can see how different the tractor prices are between main competitors. I do not want to refer to our fellow competitors in here, but this data I think is available.
There is some difference when it comes to the tractors in long haulage highway. We all coping with the same issue, basically. The question is how do you assume the market to going to continue?
Okay, perfect. Very helpful. Maybe just to follow up, just on your truck business, in MAN, obviously with Scania, you own the Finco. How is the risk-sharing with the VW Finco and your MAN business? Are you taking all the hits in your MAN business, or is there a sharing agreement in terms of if there are defaults or delays on payments?
We take it.
You take it. Okay. The Volkswagen are simply a financer, and are not taking the risk.
There is a complicated model behind, but that's the nutshell, yes.
Okay. Thank you very much.
Either side, in my next life, I will be also in the financial service area with no risk and have a lot of money.
Let's go to the next one. Thanks, Kai. Thanks a lot.
Thank you.
The next question is from Jose Asumendi, JP Morgan, your line is now open. Please go ahead.
Thank you. Jose, JP Morgan. Hi, Christian and Andreas. Andreas, can you talk please about two topics, please? The first one on MAN. You mentioned some of the measures you're taking on the brand. Could you give us an overview, please, of some of the structural measures you plan to take to improve the profitability? Maybe as much as you can talk about please, headcount reduction and any measures you could take around this topic. Second, can you talk a bit about Navistar collaboration, the latest. Where do you stand on collaboration with Navistar? As you think about a potential full merger, are there any projects that you think you are not able to achieve in the current shareholder structure? Do you think you're able to tackle all of the projects? That would be the second one.
Christian, can you help us a bit on the leverage into the second quarter? I know it's difficult. Obviously depends on the outlook and the market and Q2 demand, et cetera. Can you talk a bit about leverage and which levels do you think you feel comfortable with, and what kind of scenarios are you thinking about for 2020? Thank you.
Okay. Jose, maybe, let's take the Navistar question first. As we have discussed, the alliance projects continue to go very well. We discussed last year on the procurement joint venture on the components, and nothing that is on the table there is impacted on the other discussions. The alliance project's going to continue as it is planned. As we said before, the offer is on the table. There's no new information currently. Please understand that we do not communicate to running discussions and transactions.
When it comes to the third quarter, I would love to have my sales and revenue for the next two quarters being identified. We work with scenarios, obviously among those, that Andreas has explained in the morning with the V, U, and L shape and what that means for operating leverage in the third quarter. Giving all indicators we see at the moment, it's for sure most probably into a negative direction somehow, but it's very difficult to make forecasts there. Maybe Andreas, you can take the question on the MAN measures if you would like.
I think the Navistar question was already answered. I think, like I tried to explain a little bit before, we started with a restructuring program called Pace. After that, we concentrated on the new truck, the new truck generation allows us in a lot of areas, to improve the costs. Basically it's very important in this case that, when I'm talking about process changes, that will gives you a kind of a direction. It will be more a majority what I will be doing in the indirect phase, that fit in other words, in the white-collar area. With the new processes, we are able to be much more efficient and have a different kind of potential there. The majority of everything what we are doing is in the indirect or white-collar area. Still, we have to look in other fields as well.
Like I said, we are in early talks with our labor representation, now it was postponed a little bit because of the kind of situation we had the last two months. Hopefully very soon we can announce this then and tell you in detail what kind of measurements we will take. Basically, it will be majority in the indirect or white-collar areas.
Thank you very much. Appreciate the call. Thank you.
Thank you, Jose.
There are currently no further questions, so I hand back to the speakers for closing remarks.
Yeah, thank you very much. Thanks for the very lively discussion we had. Yeah, interesting times. I hope, or we hope, that you're all staying healthy and we are very much looking forward actually to answer any questions which might pop up in the aftermath of this call. If we don't speak, then we hear us latest when we going to announce our half year results, which will be in August. Thank you very much and have a good rest of the day and a good rest of the week. Thank you. Bye-bye.
Thank you. Bye.
Stay healthy.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.