Traton SE (OTCPK:TRATF) Q3 2022 Earnings Conference Call October 28, 2022 6:30 AM ET
Company Participants
Lars Korinth – Head, IR
Christian Levin – CEO, COO & Chairman
Annette Danielski – CFO & Head, Group Finance
Conference Call Participants
Daniela CR de Carvalho e Costa – Goldman Sachs
Miguel Borrega – BNP Paribas Exane
Michael Jacks – Bank of America Merrill Lynch
Klas Bergelind – Citi
Nicolai Kempf – Deutsche Bank
Anthony Dick – ODDO BHF
Erik Golrang – SEB
Operator
Dear ladies and gentlemen, welcome to the analyst and investor conference call of Traton SE. At our customer’s request, the conference will be recorded. [Operator Instructions].
May I now hand you over to Lars Korinth, Head of IR at Traton, who will now start the meeting.
Lars Korinth
Thank you, Emma. Dear investors and analysts, welcome to Traton’s Third Quarter 2022 Conference Call. Thank you for joining us today. Together with me are Christian Levin, our CEO; and Annette Danielski, our CFO. Before Annette provides some insights into the drivers of the group’s financial results in the third quarter, Christian will comment on the main developments and the overall performance. Finally, we will discuss our outlook for the full year ’22. And as always, after the presentation, we will look forward to answering your questions.
But before Christian starts, let me remind you that you can find all relevant documents on our website, www.traton.com/ir. And finally, let me make you aware of the disclaimer on Page 2 of our presentation.
With that, I hand it over to Christian.
Christian Levin
Wonderful. Thank you very much, Lars, and good morning, good day, good afternoon to everyone in the call as well from my side. And then we shift slide, great. I would like to start with a few highlights from this quarter. Starting with Navistar. Navistar just launched its brand-new international S13 Integrated Powertrain at a live event in August in Las Vegas. The new powertrain offers up to 15%, which, in our industry, is huge, 15% gain in fuel efficiency benefit for our customers and a game changer for Navistar and the international brand.
Importantly, it is based on our Common Base Engine, the CBE and was designed using the modular system approach. The TRATON Modular System enables efficient cross-brand development and production, while still allowing for regional and brand adaptations. In what is a first for Europe, Scania and the heavy logistics are piloting the use of fully autonomous vehicles to transport commercial goods in regular traffic conditions between different logistic hubs.
The pilot will see the autonomous truck drive between Södertälje and Jönköping in the southern part of Sweden, a 3-hour journey of around 300 kilometers. The first and the last mile are being handled manually. Let’s go now Volkswagen and Volkswagen Truck & Bus that are also entering into the era of autonomous vehicles and it’s currently testing its first vehicle. It will be used by harvesters in fields and sugarcane crops in the area of Sao Paulo providing greater productivity and efficiency in real operations.
Staying with Volkswagen in addition, Volkswagen Truck & Bus started exporting the e-delivery vehicle, but first electric truck, 100% developed and produced in Latin America. So in Mexico, 5 units of the vehicle have been delivered to operate in the beverage distribution of the Grupo Modelo, which is an affiliate of the Anheuser-Busch InBev Group.
MAN celebrated the exhibition premier of the new series prototype of the new MAN eTruck at the IAA transportation in September in Hanover. The MAN eTruck will be delivered to customers from 2024 and is, due to its high charging capabilities suitable for heavy long haulage transport with daily ranges of between 600 up to 800 kilometers per day.
Last but not least, Scania has announced far-reaching measures to decarbonize its supply chain by 2030. Together with Scania suppliers, we have outlined an ambitious industry-leading strategy to eliminate the largest carbon emission sources from the most common production materials and batteries.
The 2030 target is 100% green batteries, 100% green steel, 100% green aluminum and 100% green cost iron in production. This will have a significant impact since all put together, these materials represent more than 80% of the carbon emissions from our vehicle production materials.
As you can see, we are moving ahead despite an extremely challenging geopolitical and economic environment. That brings me into Page #5. The war in Ukraine, unfortunately, is continuing with severe effects on the global economy. Meanwhile, it is common understanding that key economies are entering into recession, which is poising high risk for the industrial outlook.
In Europe, energy security and gas supply risks remain the key area of concern and the center of the political debate. But at the same time, truck demand remains robust. Demand for transportation capacity remains high. We continue to see strong replacement needs with an elevated average fleet age and customers are waiting for new trucks up to 1 year. As a result, also the demand for used trucks and their pricing levels continues to be on the high side.
Supply chain bottlenecks remain every day’s reality in the entire industry. While the situation in semiconductor supplies have gradually eased, supply chains for imported raw materials and pre-products remain tight and are partially disrupted, especially logistics capacity bottlenecks have further intensified throughout the third quarter for both inbound and outbound transport.
Prices for input materials, pre-products and energy continue to rise resulting in unprecedented inflationary pressures. As a result, companies across sectors face significant wage demands. This surge in inflation has put consumers, industrial goods and governments under strong pressure. As one consequence, we see fast increase of interest rates.
But rest assured, that our Traton team and all our brands continue to work hard to offset these effects with our strong product offerings, our improved pricing and our better product mix. And the third quarter is a strong evidence that we are successfully doing so.
So moving into Slide #6 and the key facts of our performance in the third quarter. By the way, the first quarter, where we have — we’re quick cleaning of the consolidation effects from the acquisition of Navistar in the summer of 2021. So incoming orders, as you can see, at almost 92,000 vehicles in the quarter is on a relatively high level. However, they are 6% below the very strong third quarter of 2021.
Our unit sales improved significantly by 16%, coming up to almost 80,000 vehicles. Sales revenue increased more sharp by almost [indiscernible]. And alongside the higher volumes, we benefited from our pricing initiatives and our product mix as well as a strongly growing vehicle service business across all brands.
Adjusted operating results came in at €549 million, corresponding to an adjusted return on sales of 5.2%. So strong improvement compared to the second quarter this year and last year’s third quarter and a good achievement given the highly challenging environment that we are currently operating in.
Finally, the net cash flow for TRATON Operations in the third quarter amounted to a plus of €61 million. And Annette will provide more background on the cash flow, but all the other figures in just a few minutes.
On to Slide 7, where you can see the recent development in incoming orders and unit sales in comparison to the medium-term trend. Following a low second quarter, we experienced a strong comeback of incoming orders. MAN recorded exceptionally high order intake, catching up from the production stops in the spring.
At the same time, our brands continued to be restrictive in accepting orders, in particular, Scania, because of already high order backlog and long delivery times well into next year and in order to limit risks from volatile and rising product costs. Our book-to-bill was clearly above 1, reaching 1.2 in the individual quarter. Momentum is also positive in our unit sales, supported by easing headwinds in the supply chain, production levels improved.
Nevertheless, unit sales were still held back by the shortage of semiconductors and other supplied components and especially by constraints in outbound logistics capacity. Most importantly, the market outlook for the remaining quarter in 2022 and the year ahead remains robust, and we continue to see strong demand from our customer, which are placing orders despite the up to 12 months long lead time.
So why is that despite a macro environment that is characterized by geopolitical turbulence, high inflation and a looming recession? Well, there are a number of reasons. The industry is still heavily supply-driven as the continued shortages in raw materials and pre-products prevent high deliveries. And the elevated fleet ages with significant needs to replace rundown fleets in many markets create a high demand, not only for new vehicles, but also for the vehicle service business.
Further, freight demand is far ahead of available transport capacity. As a result, freight rates continue on a high level. Our connected vehicles’ industries are showing high utilization of our equipment, except for markets bordering to Russia. Of course, that doesn’t mean that the transport industry will not be affected by the global economic downturn. For sure, it will, but it’s not foreseeable for our business so far.
Despite the challenging environment, we’re not losing focus when it comes to be the first — to the first of our 4 strategic pillars to be the responsible company and the sustainable transport of the future. This was evidenced by Traton’s appearance at the IAA Transportation Fair in Hanover few weeks ago. Our European brands, Scania and MAN showed their way forward to battery. [indiscernible] its slot latest next-level battery electric trucks for regional long haulage.
And for the first time, MAN revealed its all-electric large sales truck and open order book for the vehicles that will be delivered to customers as from 2024 onwards. And not to forget, electrification is also playing an increasingly important role in the bus sector, and today with strong momentum compared to trucks.
All our brands have a very competitive product offering already in the market today. For example, the MAN Lion’s City E, the winner of the prestigious Bus of the Year award this year, where the prize was handed over to MAN during the IAA Fair. The MAN electric bus went into cereal production already in 2020 and a total of over 1,000 orders have been received to date, a success story that moves and it’s far from over, which brings me then to Slide #9.
We continue to expand our already broad and competitive electric product portfolio across a wide range of different applications. Already today, we make a difference. In the third quarter alone, we delivered more than 400 full electric vehicles, bringing the number close to 1,300 in the first part of the year.
Yes, figures are still relatively low, and we’re just starting the race towards fully sustainable transport. But when we talk to customers, they are really interested. Because we can help them to achieve their sustainability ambitions and especially because battery electric vehicles are becoming and, in some applications, already are a more cost-efficient alternative to ICE.
So demand is growing amongst customers. In total, we received orders for 526 electric vehicles in the third quarter and 1,622 in the first 9 months. Meaning the book-to-bill ratio in the third quarter continued to be well above 1, and our customers’ interest in battery electric trucks at the ERR was huge, giving us confidence that we will continue to grow this momentum.
So moving into Slide #10, and this is my final slide. As most of you already know, we have added a new component to our TRATON Way Forward strategy called Strategy Execution. A crucial part is the introduction of a group-wide implementation of the TRATON Modular System. And also here, we are making strong progress. The start was made with the introduction of the extremely efficient group-wide powertrain, the CBE presented by Scania last year.
It is the world’s most sustainable powertrain with a 13-liter Common Base Engine offering up to 80% of all its fuel savings compared to the already very economical former predecessor engine. And later on, in August this year, Navistar launched the International S13, which is its version of the Common Base Engine, with amazing results and up to 15% less fuel consumption compared to its predecessor.
It also offers better efficiency, better reliability and sustainability as well as increased service and solution offerings and therefore, represents what is a major milestone for Navistar’s future, which triggered very positive feedback from customers and the specialized press, and most importantly, strong interest in already now placing orders. The International S13 will be delivered to customers from late summer next year.
And the next member of the Traton family will follow in the coming years in 2024, MAN is planning to launch the CBE, and later followed by Volkswagen Truck & Bus in 2028.
And with that, let me hand over to Annette. Annette the floor is yours.
Annette Danielski
Thanks, Christian, and a very warm welcome to everyone on the call from my side. I’m now on Slide 12, which shows incoming orders in unit development for the third quarter with minus 6% incoming orders that’s slightly below the high comparison base in the prior year quarter. As already mentioned from Christian, MAN orders bounced back to more than 34,000 units, more than twice the level in the second quarter, which has suffered from the production stops.
But despite, MAN and Navistar and especially Scania continued to be restrictive in accepting orders. Order intake at Volkswagen Truck & Bus was robust. Still the development of order intake is more driven by supply and the ability to produce and deliver rather than by demand.
Our unit rates were significantly up by 16%. This was supported by a credit easing of supply chains audited and improved production levels. Nevertheless, existing pressure on the supply chain and temporary disruption continued to affect production levels. In addition, we are facing constraints in outbound logistic capacity, holding back deliveries of vehicles to customers.
Moving to Slide 13. In our sales revenue development with a separate physical service business contribution. Sales revenue increased by nearly 1/3, clearly exceeding limited growth. On a side note, Traton’s revenue exceeded €10 billion mark for the first time on a quarterly level. Besides the higher unit debt, this was especially due to very strong pricing mix.
In addition, Sales revenue from vehicle service business again delivered double-digit percentage increase across all brands. With a 21% share of total sales revenue, the vehicle service business makes a major contribution to the company’s success. We continue to invest and now further expand our service business to drive growth as well as taking advantage of a stabilizing effect on trading sales revenue and earnings.
Moving to Slide 14 and to our operating side and profitability. Although here, we have seen a positive momentum in the third quarter. The adjusted operating result came in at €549 million, a strong improvement of €354 million compared to the third quarter last year. This corresponds to an adjusted return on sales of 5.2%.
The increase was mainly driven by a higher volume and the cost per improvement and the capacity utilization. In addition and importantly, with the successful execution of our pricing initiatives, we were able to compensate for the significantly increased tire costs for raw materials, energy and boarding components as well for logistics services in the quarter as well as the first 9 months of the year.
As announced in September, we recorded significant onetime impairment related to the disposal of business activities of MAN Truck & Bus and Scania in Russia. In total, operating results were impacted by a onetime effect of about €600 million. As a result, the operating results, as booked, declined by €238 million year-on-year to minus €52 million in the third quarter.
Let us have a look at the brand’s performance on Slide 15. Sales revenue at Scania Vehicles & Services improved strongly by 24% year-on-year, mainly benefiting from higher volumes, price mix effects and significant growth in the vehicle service business. Scania’s adjusted return on sales, nevertheless, was 0.1 percentage points lower at 7.6%. Volumes and the margins are still held back by supply shortages and tight logistic capacities. In addition, material price inflation, higher cost for projects in production, logistics and R&D had a counteracting effect.
Now move to MAN. Thanks to the positive price effects and strong growth in the vehicles service business and average increased sales revenue by 9% to €2.8 billion. Even so, unit sales were below last year’s level. However, the adjusted return on sales decreased by 1.1 percentage points to 1.5%, mainly driven by lower production utilization and higher material and energy prices. This was partly offset by improved margin in the used vehicle and vehicle service business and continued benefiting from this execution of the realignment program as well as a strict cost management.
Navistar showed a very compelling third quarter performance with an increase in sales revenue by 77% year-on-year and improved return on sales by 3.4 percentage points to a level of 5.9%. The development was mainly driven by strong increase in unit sales, leading to a better-fixed cost absorption through higher production utilization as well as strong implementation of pricing initiatives.
Despite slightly lower unit sales, year-on-year, Volkswagen Truck & Bus achieved a 42% increase in sales revenue. Again, improved pricing was a major factor. The brand also benefited from favorable exchange rate movements. Overall, Volkswagen Truck & Bus was able to more than compensate the strong increase in material prices and recorded an impressive 11.6% return on sales in the third quarter. This corresponds to an increase of 2.4 percentage points year-on-year.
Let us have a quick look at the segment performance in the third quarter on the next page. In total, TRATON Operations, with some of our brands, recorded sales revenue of €10.4 billion, up by 31% year-on-year. Adjusted return on sales came at 5.8%, corresponding to an improvement of 80 basis points.
Financial Service continued its strong underlying performance and increased sales revenue by 23%. The segment recorded an adjusted operating result of €71 million, a similar level as in the first and the second quarter. Adjusted return on sales at 22% was on a good level. However, the margin was 7.7 percentage points below the exceptionally strong prior-year quarter.
Corporate items reduced the group’s adjusted operating result of €128 million. Please bear in mind that this number includes the effects of the purchase price allocation, which stood at €85 million in the third quarter. Excluding the purchase price allocation, Traton’s adjusted operating results would have totaled €634 million and an adjusted return on sales of 6%.
On Slide 17, and the net cash flow, now again referring to TRATON Operations. Cost cash flow at €1 billion in the third quarter improved versus prior-year level and the second quarter mainly as a result of a better operating performance. [indiscernible] movement remains a significant headwind.
We recorded a further buildup of inventories related to the ongoing supply bottlenecks for boarding components and logistics shortages as well as higher trade through filling this. In total, net cash flow for TRATON Operations was slightly positive at €61 million. This leads me to the net debt, which is on Slide 18.
Compared to the second quarter 2022, the net debt position of TRATON operation increased by around €350 million to €3.3 billion. With a slightly positive net cash flow, the increase was mainly due to exchange rate effects. We included the net debt position for corporate items to provide a full picture of TRATON GROUP’s net debt position, excluding the financial service business.
Corporate items added €4.1 billion which brings me to a total net debt of a level of €7.4 billion at the end of the third quarter and slightly up compared to the second quarter. Our ambition for the final quarter of the year and the priority for next year is clear, to release a significant part of the cash tied in working capital and to improve the net debt position of the group.
Moving on to the full-year outlook, starting with the truck market. As already discussed, our markets continue to be robust. It is expected that our core markets will continue to grow in 2022 with expansion rates varying from region to region. Most market forecasts have seen an increase of the truck market in Europe in a range between 0 up to 10% for the year 2022.
The South American market current estimated range between minus 5% to up plus 5%. For North America, market participants continue to be more optimistic. Truck market growth within the region is forecasted. — let me remind you that there are still a high degree of uncertainty and significant geopolitical and economic risks. This leads me to this next slide, the financial outlook for the TRATON GROUP in 2022.
As always, our financial outlook is based on our latest internal planning, the market expectations and our performance to date. We confirm our expectations for unit sales and project a substantial year-on-year increase. At the same time, we continue to expect a very sharp increase in sales revenue in the fiscal year 2022.
Further, we confirm the benefits of our expected range of adjusted operating return on sales of 5% to 6%. However, in a still highly uncertain volatile environment, and given the ongoing supply chain challenges and taking into account the performance in the first 9 months, we anticipate ending the year more towards the lower end of this range. Our guidance is including the effects from purchase price allocation, which is expected to range between €300 million to €320 million. This is above our prior expectation due to changes in the U.S. dollar to euro exchange rate.
We confirm that our net cash flow of the TRATON Operations is expected to range between €700 million and €1 billion. Please note that this does not include the mentioned cash out in connection with the EU antitrust proceedings.
Now let me hand back to Christian for his final remarks.
Christian Levin
Thank you very much, Annette. Before we then enter into the Q&A session let me summarize the key takeaways of today’s investor call. In the third quarter, in a continued highly challenging environment, Traton delivered a robust financial performance and continued the stringent execution of the strategic agenda.
We recorded a high level of incoming orders, improved unit sales and strongly increased sales revenue backed by a gradually improved supply chain. The momentum in adjusted operating results and profitability is positive, even though it has still been held back by supply constraints and relatively low production utilization throughout the quarter. Our net cash flow returned to positive territory despite further significant buildup of working capital. Net debt remained stable at a high level.
While we continue to see high risks in our environment, we confirm our outlook for the full year and expect improved earnings momentum and net cash flow in the final quarter of 2022.
Lars Korinth
Thank you, Christian and Annette. Let us now open the floor for the Q&A. Emma, can you take over from here?
Question-and-Answer Session
Operator
[Operator Instructions]. The first question is from the line of [indiscernible] with Goldman Sachs.
Daniela CR de Carvalho e Costa
It’s actually Daniela. If I may ask 3 questions. So first, I just wanted to check on your slide where you had the EV orders and helpful to hear you talking about the launches. But the orders seems to have start to go down. Can you comment on, like, is there anything specific there and you see the strong reversal of that? Just a little bit surprised to not see sort of more of an upward momentum there. And I know it’s small numbers, but just any color there would be interesting.
Second question, just wanted to check in terms of, like, when we think about next year, wage negotiations, where are those, in your view, coming out to? And contrast that maybe with pricing ability to still price further up next year given the market outlook you just flagged.
And then the third one is just, I know you don’t guide on ’23, but to the extent that you — some of your peers have put numbers out there, it sounds like Europe and the U.S., broadly similar-ish to 2022. Are there any observations on why you think that could be materially different for those scenarios, if you can elaborate as we look into ’23.
Christian Levin
Okay. Thanks, three good questions. And obviously, I’m going to start the question here with the orders. So we have — as we say here in this reporting, we have been a little bit restrictive in taking on orders and that’s particularly in the Scania brand. And we — we’ve had — we introduced this strategy or tactics rather around last summer. So in the comparable figures from last year, you have — you don’t have that way of working.
So the way we work now is that we basically only accept orders that are within 12 months. And then we open up month by month. And whereas in the other brands, we work more with a completely open order book. And you see the very good bounce back of MAN, for instance, orders in — coming into the order book after the complete stop in production where we, of course, also have to stop order intake.
But why are we doing that in Scania? Well, on top of the general complications, we all live in with difficulty to predict product costs and therefore, difficulty to get pricing exactly right. We also are introducing the completely new driveline and that is — I mean that might not sound big, but that is changing more than half of all the components on the vehicle, changing both engine gearbox, rear axle, after treatment and a lot of software engine control systems.
So — and with that, we’re also changing a number of suppliers. So we have an additional complication on the Scania and that makes us additionally restrictive when it takes — when it comes to taking on orders. So what I can say is that the demand is still there. And when we open up a new month, we get very fast response from our importers and dealers and quickly fill up these orders. So when it comes to the demand, as we say, it continues to be strong.
Daniela CR de Carvalho e Costa
Apologies, I might not have been clear maybe on my question. I was asking about Slide 9 on your EV orders. It’s a fairly small number. So I take the point on Scania on…
Christian Levin
Okay. Sorry for that.
Daniela CR de Carvalho e Costa
No worries. It’s helpful anyways to know about Scania.
Christian Levin
Yes. Sorry. Thanks for clarifying. I didn’t get the EV part. So yes, when it comes to EVs, we are clearly at the beginning of an S curve. And we are further or soon going to see a rapid increase as the TCO parity is coming closer in more and more applications. So what we, of course, see is an effect in Europe, for Scania of the ongoing energy crisis because of the war Ukraine. Where many customers are, today, hesitating, because they don’t see where electricity prices are going to end up.
And of course, they also suffer price increases that we had to introduce, because of the very high raw material prices affecting batteries. So there is a little bit of short-term cool down on electric vehicles. We see, on the other hand, higher demand for the hybrid solutions. And my best estimation is that this is just going to be a short-term effect.
I think as Europe especially realizes that the dependency on fossil fuels from markets outside Europe is not sustainable in any way, we’re going to see political initiatives in order to make it even more attractive to change over. So there might be a short delay to — the catch-up effect is really hitting this market, but we are absolutely sure it’s coming, and we continue to invest in both R&D and production equipment to be ready when the effect is coming. But I would like to hand over also to Annette to…
Annette Danielski
Yes, Thank you very much, Christian. Another thing is really, when you go with the bus, this the main tender. So we have orders there. A big — a few tenders there, and not. And we should remind you that this big program in the U.S. from the government that we have €5 billion program out of electrified bodies.
We have a lot of customers applying for this program with incoming orders will come later. So we have also, here, not always a swing up. So also the bus is more a tender-driven business. So you will see also there a little bit up and down whether the tender comes in or not, and we are really hopeful that we will see increasing rates in the next month.
Christian Levin
Okay. I think the second question was on wages development. Maybe Annette you take that one.
Annette Danielski
Still, we — as we mentioned, we are very able to price the increases in inflation here.. And now it’s upcoming the new contracts on wages. So we’re also working on this with our union colleagues in close discussion. And we believe that we are able to price it, but it could be a gap when the inflation is in and then we can really realize the prices with the full order book. As we mentioned in the last call, we have scheduled order. We have deferred charges with the delivery of instrument, but the gap could open a little bit and could be delayed that we can pass it through. But I’m very positive that we can do this.
Christian Levin
And then on the third part of your question, which was around the total markets. We also see a stable outlook for Europe and for North America. Where we do see the market coming down is in Latin America where we have a new legislation coming into Brazil, the economic, like, which is basically Euro VI. So there, we see a slight downturn. We’re not guiding on specific numbers, but I think that is the tendency that we see. And of course, North America and Europe are also based on the very strong order books that we see.
Operator
Ladies and gentlemen, in the interest of time, we kindly ask you to limit your questions to two only. The next question is from the line of Miguel Borrega with BNP Paribas.
Miguel Borrega
The first one just on Navistar. Can you provide us the FX tailwind on adjusted EBIT for Q3? And then also a little bit more color on what is really driving the surge in volumes over recent months? I mean 8,000, 9,000 units a month. You haven’t seen that since 2019. Is this the new normal in terms of production rates? Can it go higher? Or will it normalize a little bit from here? That’s question number one.
And then the second question, I was quite interested in the autonomous where you mentioned some pilots in Scania. Are you testing to effectively removing the driver entirely? And if so, how soon? And how different would this partnership be from the one that you have with TuSimple. I know they are mostly in the U.S. But apart from that, any differences in the software, the partnership?
And if I can squeeze in 1 more question, just with regards with your majority shareholder, have you had any recent conversations about their position? How are they seeing the execution of the plan and any other more comments.
Annette Danielski
So I can start with Navistar, with rising, here, so sure, we had positive translation effect due to Europe and euro to U.S. dollar, but this is a positive impact, but it’s not so high as mentioned. We have seen that the production level now at Navistar goes up and we see a little bit better supply chain. They have still missing parts, but we see that it’s really improving and that we have higher production rates and S13.
If they have a decent sales volume, they can make a good result. And that is you say, proved in the Q3 and this is a positive sign for us and a very good sign on the, mainly, startup. The talks with our majority shareholders are ongoing and very positive, but ongoing talks, as I mentioned already in the half-year closing. We’re on good track and good communication with them and working on possible solutions.
Christian Levin
Okay. To add on the autonomous technologies and in Scania in particular. So yes, you’re right. So we’re aiming on full driver-out. Of course, this is a promising technology that, as someone said, remains promising. We can’t really say when we have the whole — all the conditions in place to really take the driver out but we’re learning fast. We’re learning every day.
And that example I gave you, we do have a logistics experience that we’re doing now in Europe as the first one of all brands in the market is giving us more and more learnings. So we’re absolutely aiming also in real traffic conditions driver-out. We are already operating, as you know, in mining, so in closed areas without the driver. So that’s where we’re aiming. Thanks.
Operator
The next question is from the line of Michael Jacks with Bank of America.
Michael Jacks
My first question is just on order intake in North America. Given the 12-month lead times, and I’m referring more to the market share rather than Navistar specifically, do you think that order intake levels reflect some pre-buy positioning ahead of COP 2024 regulations potentially? That’s my first question.
My second question is on Financial Services. Can you please just comment on the impact of rising interest rates on monthly lease payments for customers and whether or not you think this could become a restrictive factor in the months ahead? And then maybe just one small add-on to that as to whether or not there are any indications that you may need to tighten up on lending standards there.
Annette Danielski
So first, for the order intake in the U.S., I think we are sure there are already some orders for COP24, we’ve got, but still, the demand is very high when you follow [indiscernible] high demand still on transportation. And also the fleet is in the U.S., very odd. There are also replacement needs. So it’s a mix, I think, of everything, demand tightens, replacement needs and COP24 ahead of us. So both — I think this really drives the incoming orders in the — from my point of view.
Christian Levin
And if I can add also that we see the transport rates, even if they came down from the most extreme levels, remain on a historically very, very high level. And — which we’ll also be earning from transport companies continue to be on a good levels. So that is also not restricting order intake. Let me see the second that was on Financial Services.
Annette Danielski
Yes. I did not get 100% the question on Financial Services.
Christian Levin
I think it was on whether the higher interest rates are restrictive in the Financial Service business and whether we would give up a part of our cushion to push that. Okay…
Michael Jacks
Sorry, the second part of that is just whether or not you would need to tighten up on lending standards there because overall conditions in the marketplace — in the marketplace are tightening up.
Christian Levin
No, I wouldn’t say that we see any of that. Of course, we see that the interest rates are rising. We are passing that on to customers. We see that competition is still fierce, and there is still capital available. So no such sign, Michael.
Michael Jacks
And then maybe just on the first one. Sorry, Lars, just coming back on that. Just in terms of the impact of rising interest rates on monthly lease payments for customers, is that significant? Is there also a financing portion on other services that get bundled into those monthly repayments? Or is it just on the selling price of the truck?
Annette Danielski
It’s not bundled, and it’s more on the price in my point of view.
Christian Levin
Yes. As you know, I mean, if you sell an operating lease, you have the whole package in. And there, of course, it has an impact. But given the price increases that we are already pushing through on the basic vehicle, this is a very small proportion that is coming on from the financing costs as part of that operational lease. So Annette is right.
Operator
Your next question is from the line of Klas Bergelind with Citi.
Klas Bergelind
Christian, Annette and Lars, Klas at Citi. So first on Scania, delivery is in line with what I thought, but the margin is again on the weak side. I thought the margin would be up more quarter-on-quarter with the high deliveries. And to what extent, Christian, is driven by extra cost inflation from supplier compensation linked to energy as we’ve seen at some of your peers? Or is it wages? It looks like more cost inflation quarter-on-quarter in a bridge, keen to understand what the drivers are for starter.
Christian Levin
Yes. Thanks, Klas. So what’s happening in Scania is that we’re working really, really hard to continue to increase our production output. We have, in the third quarter, a good run, but we couldn’t invoice all of it as it was stuck in outbound stock. So a lot of restrictions there to actually push the vehicle through the system and, of course, further on by the fact that we own the majority of the dealers.
So that was not — we expected better, to be honest. And then we continue to struggle with supply chain bottlenecks. So September was very good, and we are long — we’re out of the semiconductor shortages, but we have other shortages that are hitting us as we gradually increase production. So I think we’ll have to unfortunately leave with further restrictions. And I doubt that we’re going to see the 10,000 mark per month throughout the fourth quarter, but probably have to wait until next year. But that’s what we see.
When it comes to order intake, I mean, it is continued deliberate action not to fill up the complete order book for next year. We first want to finalize the ramp-up of the new so-called Scania Super, the Common Base Engine with a complete driveline, because the changeover of supplier base between the 2 programs. So it’s just one complication too many to have, both the ramp-up, the change-over of suppliers on the very long order book to handle at the same time. So therefore, we have taken this drastic decision to only open up for a month at the time.
And then your last question is, of course, what we’re working very hard on and what is making me most frustrated and that is the margins. I mean we see very good price increases. We see very good mix effects by prioritizing the high-priced markets, and we still don’t see the vehicle margins where they should be.
On one hand, it’s, of course, the effect of not utilizing the capacity that we have with full manning and full investments in our factories. And on the other, it is, of course, cost increases as you’re into. And it’s partly on the product where we have cost increases, we have the energy that is a very sharp increase, but we also have component cost increases from suppliers, partly based on energy cost, but also raw material costs, which we’re trying, of course, to fence off but don’t completely manage.
So — and then, of course, we have a general cost situation in Scania, which we are addressing now, where we see that, okay, if we can’t get out the volume, then we have also to address the general fixed cost level which we’re also working in order to get the performance back where it should be. So that’s — I think that’s a few — I mean there’s more to it. But to give you a flavor of what we’re fighting within Scania.
Klas Bergelind
Yes. No, I get it. My second and final one is then on Navistar and the underlying margin. It looks pretty solid, no major FX boost. Volumes are higher, but could still be higher if it wasn’t for the bottlenecks. So what level do you think Navistar would have delivered at this quarter on a more normalized volumes? The backlog is still quite big. I’m trying to understand how much the margin drag was because of bottlenecks. Because if you think about this, your target is 9%, I mean, are we underlying almost there? I don’t know if this is possible to quantify, Christian.
Christian Levin
Yes. I mean we — as you know, we are investing in a new production facility in San Antonio and Texas, which is perhaps Navistar’s additional complication that is partly influencing the ability to ramp up. But of course, we’re aiming to do about 10,000 per month. And with that kind of volumes, we are definitely going to see a much higher EBIT figure. And yes, we had a taste here in the third quarter and particularly in September, where we had a really, really good run and a really strong EBIT performance in the individual months. So you’re right, we’re expecting more on both.
Lars Korinth
Thank you, Klas. We have to cut back to 1 question per question, please, because we’re running already out of time. We’re really sorry for that, because of hard cuts today. Yes, Emma, please.
Operator
Your next question is from the line of Nicolai Kempf with Deutsche Bank.
Nicolai Kempf
Nicolai here from Deutsche Bank. Well, if I have to limit down to one, I would just ask about the suppliers that you may have supported in the third quarter. You know that one of your Swedish competitors had some troubles on the margin side because they supported suppliers here. Have you done something similar?
Annette Danielski
Now, so we really watch very closely and work closely together with our suppliers. And starting already with the cohort, we have really good connection with the supplier, watch them — the health of the supplier and we don’t see this as a major impact. It’s normal that we have with this increase in prices. Our supplier also struggle, but we find ways together how to solve it.
And I think this is on our watches. We are not blinded there, but we work together in the brands and find the best solution together. And I think this is a very on-topic. The other thing is really how much we then also can pass on to the pricing with all the discussions that is ongoing and get it closer.
Operator
The next question is from the line of Anthony Dick from ODDO BHF.
Anthony Dick
I had a question on Scania. My question was you mentioned the order book extending out to 12 months, which seems a bit longer than most of what your peers are doing right now. So with costs still fluctuating quite a lot, how do you manage the pricing on that order book to manage that with viability looking out for 12 months out?
And then in terms of the production, you mentioned the issues with the ramp-up of the Scania Super. Could you give us an indication when you expect these issues to dissipate? And could you share with us what this Scania represents of your — Scania Super represents at your Scania sales today?
Christian Levin
Let me start then from the end there. You asked the question on how much is Scania Super represents right now or in this quarter, rather. It’s 14% of the sales. And we are, right now, building more than 100 per day. So it’s increasing rapidly. But yes, we are behind the plan. And that’s — as I said, that’s one reason why we are limiting the number of orders to make sure that we can — we’re not making customers disappointed because, of course, there is a high pressure on us to deliver the Scania Super with the fuel saving. So that’s where we are. So that’s sharing.
I mean — and the complications are many. We are ramping up a new foundry, brand-new. We’re ramping up new suppliers. For instance, when it comes to the famous engine control system that has been limiting us in the current series, if you remember throughout the spring, we’re changing some of the key suppliers there. Okay. I think I stop there with respect to time.
Operator
In the interest of time, I hand back to Lars Korinth for closing.
Lars Korinth
We can take another 1 or 2 questions, of course.
Operator
Okay. We will move on with Erik Golrang with SEB, please.
Erik Golrang
My question would be on battery cells. You had a competitor saying that it starts to become a high-volume battery cell manufacturer by the end of the decade, given your electrification plans. What’s your thinking on that topic right now? And if you’re going there, do you think you have the balance sheet to manage it?
Christian Levin
Yes. Thanks, Erik. Well, it has nothing to do with the balance sheet, even if it might have been a restriction. Now we have not classified the battery cell as such as a core component that we need to manufacture in-house. We have classified it as a strategic component. It means that we want to have full control of the design and the chemistry in it, but we are perfectly happy with having supplier partners delivering the components into our own module and pack production which we have them classified as core.
Operator
Final question is from the line of [indiscernible] with UBS.
Unidentified Analyst
Just a very quick question. On the Scania backlog, how many of these have you actually managed to convert into the new Super line orders? And when you have done so, I imagine you’ve been able to negotiate a higher price.
Christian Levin
I didn’t get you. I think that is the point. What do you mean? Whether we get higher prices for the new — sorry?
Unidentified Analyst
For the — from converting any, like, existing older Scania model orders into the new BA orders, if you’ve managed to convert them? And if so, have you managed to increase the price? So negotiate a higher price for that engine?
Christian Levin
We — if I get you right, of course, we get the higher price for the 80% fuel saving. And we’re turning around somewhere around 5%, 6% price increase on the Super platform. But when you say conversion, of course, as since we launched this driveline already last year, the majority of our customers would like to have it.
The restriction is rather our ability to supply. So in many cases, we have had them to finalize on the current driveline instead and the penetration rate, as I said earlier, on the new one was 14% in the quarter, but we are, throughout the first half of next year, planning to come to 100%. So that’s the plan. So by mid-next year, we should be done with the introduction.
Operator
This concludes the Q&A, and I hand back to Lars Korinth for closing comments.
Lars Korinth
All right. Yes. Thank you, Emma, and thank you for everyone in the call, and of course, also for you, Christian and Annette for answering all the questions. Thanks for the interest and the good discussion. And I’m pretty sure that there are still remaining questions because we were running out of time, and I apologize that it’s very close in the end.
Please reach out to us in the Investor Relations team in case of any questions or remarks, and I wish you all a very nice remaining day and a nice weekend because it’s starting today. Thank you for joining us today and stay safe. Bye-bye.
Operator
Ladies and gentlemen, thank you for your attendance. The call has been concluded. You may now disconnect.
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