Iveco Group NV

MIL:IVG

Earnings Call Transcript 2022-Q1

[Operator]

Good morning and afternoon ladies and gentlemen, and welcome to today's Iveco Group 2022 First Quarter Results Conference Call and Webcast. [Operator Instructions]

At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations.

[Federico Donati, executive]

Thank you, Sandra. Good afternoon everyone. We would like to welcome you to the webcast and conference call for Iveco Group's first quarter financial results for the period ending March 31, 2022. This call is being broadcast live on our website and is copyrighted by Iveco Group. Any other use, recording or transmission of any portion of this broadcast without the express written consent of Iveco Group is strictly forbidden.

Hosting today's call are Iveco Group's CEO, Gerrit Marx and the Group's CFO, Francesco Tanzi. They will use the material available for download from the Iveco Group website.

Please note that any forward-looking statement we might be making during today's call are subject to the risk and uncertainties mentioned in the safe harbor statement including the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company prospectus published on the November 11, 2021, as well as other recent reports and filings with the authorities in the Netherlands and Italy. The company presentation may include certain non-IFRS financial measures. Additional information including reconciliation to the most directly comparable IFRS financial measures is included in the presentation material.

I will now turn the call over to Gerrit.

[Gerrit Marx, executive]

Thanks Federico and welcome to all of you joining our call today. To start, I would like to reemphasize our deepest concerns and detestation about Russia's war on Ukraine and the terrible consequences for so many families. Iveco Group immediately stopped the import of goods to Russia and initiated focused support in Ukraine and its borders, wherever we could make a difference.

Today is our first quarter earnings release in the first year of independent operations and I'm pleased to report solid profitability performances, notwithstanding persistent pressure on the supply chain from continuous component shortages that have caused delays, lowered our outputs and affected our inventory levels with some unfinished products remaining to be shipped to our final customers in the second quarter.

I would like to praise the entire Iveco Group team for the highly conscientious management of our cash which resulted in a better season of cash flow absorption actually from industry activities compared to the first quarter of last year, of which a large amount sits in those mentioned inventories, which will deplete over the course of the next month.

Looking at our financial results, the consolidated net revenues were up almost 2% versus prior year, with the adjusted EBIT margin at 3.3%. Adjusted diluted EPS was EUR 0.15 per common share. We ended the quarter with a solid net industrial cash position at EUR 765 million, a figure that includes an expected one-off negative cash impact of EUR 141 million related to our line-by-line consolidated Chinese Engine Joint Venture that will be largely offset by year-end. Francesco will provide more granularity around this later in the presentation.

Seasonal free cash flow absorption was EUR 166 million, EUR 137 million better than Q1 2021, mainly driven by lower working capital outflow. Available liquidity was at EUR 3.4 billion at the end of March 2022, including additional EUR 200 million committed revolving credit facilities signed in February and March 2022 in addition to the EUR 1.9 billion syndicated facility signed in January 2022, which we commented in our last earnings call on the full year results of 2021.

Finally, our reported net loss of EUR 50 million includes a negative after tax impact of EUR 51 million in connection with our Russian and Ukrainian operations primarily due to the impairment of certain assets, specifically receivables and inventories.

In summary, the Iveco Group team achieved a good first quarter in our first year of independence with record high order books, which we unfortunately could not turn into higher revenues and vehicle registrations as scheduled, due to the well-known component shortages.

On the next slide, is a summary of some of the main events that occurred during the quarter. On March 4, 2022, we signed an MOU with Hyundai Motor Company to explore possible collaborations on shared vehicle technology, joint sourcing and mutual supply. We are absolutely delighted by this collaboration with one of the most innovative and competitive players in the automotive industry. We are making good progress in our joint effort with our shared goal of translating this initial MOU into several win-win collaborations across various areas of mutual interest from light commercial vans to heavy buses.

During the quarter, we also communicated a new investment plan of BRL 1 billion to promote sustainable growth in South America. An investment that would further reinforce our commitment to increase and improve our traditional presence in the region. This contribution targets the development of products and services, the expansion of the dealer network, the localization of parts and components, improved process productivity and increased hiring.

On the 25th of February, Iveco bus signed three framework agreements with DPP, Prague Public Transit Company, for the supply of up to 253 buses between 2022 and 2027 to the Czech Republic's capital. The agreement cover the purchase of 3 different Iveco bus models to meet the needs of TPP, up to 10 Crossway Low Entry 14.5 meter, up to 100 Streetway 12 meter and up to 143 Streetway 18 meter buses. All the buses will be equipped with the latest Cursor 9 engine developed by FPT Industrial ensuring that the vehicles comply with Euro 6 standards and achieve over 95% NOx conversion efficiency.

And finally, on March 30, we signed a memorandum of understanding with Enel X, the Enel Group company dedicated to developing and selling innovative energy services and solutions for the electrification of mobility. Under the terms of the non-binding MOU, Iveco and Enel X will explore possible collaboration that will unlock the potential of E-mobility for commercial vehicles in Europe, with a focus on light commercial vehicles, heavy duty trucks and buses.

The two companies will assess how Iveco's electric vans, trucks and buses can support the transition of Enel's fleet to zero emission vehicles while examining new joint opportunities in other transport segments. The collaboration also aims to develop a joint offer addressing the E-mobility of commercial fleets.

Iveco and Enel X will leverage on their research and development and technical expertise to evaluate the interoperability of the Enel X charging infrastructure with Iveco's E-vehicles and the potential joint development of advanced services, such as smart charging and vehicle to grid.

Moving to the next Slide #5, you can see the industry volume performance for Q1 2022 with a change in percent versus previous year. I will not go through number by number here, but just let me say that this change occurred notwithstanding some negative percentage numbers on a year-over-year basis, mainly driven by the continuous supply chain issues and with more evidence on component shortages that are affecting the entire industry.

When we look at the performances of the industry by segments in light duty trucks on a worldwide basis, the market was down double digit with only in South America positive on a year-over-year basis. The European market was down 20% with all European countries down year-over-year. Industry volumes in the medium and heavy duty trucks were flat on a worldwide basis and down slightly about 1% in Europe, with medium down 14% and heavy almost flat year-over-year.

In buses, the European market was down 3% and up 2% on a worldwide basis. This clearly does not reflect the actual demand with record high order books. However, the market is entirely determined by the weakest link in the collective sum of supply chains of all OEMs.

On Slide 6, we show our usual channel inventory statistics. Truck's channel inventory was up 9% year-over-year on a worldwide basis, up 10% and 6% in light and medium and heavy duty trucks respectively. Looking at the company inventory, light commercial vehicles alone was up 21% and medium and heavy was up 3% versus last year.

In the quarter we overproduced retail at 12% in trucks with an overproduction of 14% in light, 8% in medium and heavy on a worldwide basis. If we look at Europe, only medium and heavy retail sales were down 12% with production versus flat retail. For trucks, our expectation for the full year is for a low single digit overproduction versus retail on a worldwide basis.

Moving on, I'm on Slide 7 now. We have introduced an additional disclosure on our deliveries and order intake level. You can find the table in the appendix with all the figures, but let me just provide you with some color on the quarterly performance shown on this slide.

Starting from light commercial vehicle trucks, deliveries were up 10% on a worldwide basis with all the region's contributing positively and in particular in Europe they were up 11% versus last year. Order intake was down 38% on a worldwide basis and down 40% in Europe. Book-to-bill was 1.05 on a worldwide basis and 1.08 for Europe alone.

Moving to medium and heavy duty trucks, deliveries were down 2% on a worldwide basis with Europe down 21% mainly due to component shortage, negative impacts and South America up 49% versus last year. Order intake was down 9% on a worldwide basis and down 30% in Europe versus the same period last year.

This year-over-year contraction in order levels needs to be seen as a consequence of the managerial decisions we've took to restrict the order slotting to counter large order books and delivery times and to foster pricing discipline throughout the entire distribution chain to pre and mid-term material cost volatility.

Book-to-bill was at 1.39 on a worldwide basis with Europe at 1.51 and South America and rest of the world at 1.51 and 1.21 respectively.

Currently for light and medium and heavy trucks, 30 plus weeks and 40 plus weeks of production are already sold respectively. Bus deliveries were up 14% on a worldwide basis with Europe up 44% versus Q1 2021. Order intake was down 20% on a worldwide basis with book-to-bill at 0.98. Looking at Europe only, order intake was down 12% and book-to-bill was 1.06.

Moving on to Slide 8. With our European preliminary market share in our LTV segment, we have been able to conquer market shares in a declining industry further demonstrating the strength of our brand and the unique positioning of our products. Looking at the upper end of this segment, we have further consolidated our leadership with 63.4% of the market, up from 60.9% in Q4 2021. We registered strong performance in the professional cab chassis segment as well and in the quarter up 450 bps versus Q1 2021 to 31.6%.

Looking at the entire LCV segment, we ended the quarter at 15.5%, 360 bps up versus Q1 2021. When looking at the performance of our medium and heavy duty truck, it is important to notice that these were the segments most severely affected by component shortages, particularly semiconductors, resulting in delays to ship our products to final customers.

Based on future component availability, we are confident we will recover from the current market share levels, thanks to our solid order intake. The demand for our heavy duty truck line has continued its strong momentum from prior quarters, yet most likely, we will see market share swings in the coming quarters, which will be entirely driven by an OEM's ability and plan to deliver, not by the order book itself.

On Slide 9, is a recap of operational excellence program drive, which we already described during our Investor Day on November 18 last year. We are planning to provide updates during the year as the work progresses. As disclosed during the Investor Day and included in our strategic business plan, we expect the program to generate about EUR 1 billion of profitability improvements by 2026 of which half a billion by 2024 and an additional EUR 500 million run rate in the remaining years by leveraging on basically 4 key areas.

Commercial with the goal of increasing the customer base especially with FPTs non-captive engine and optimizing pricing and mix. Innovation of the business model with the aim of moving towards a low-to-zero CV mobility and facilitating customer transition to alternative propulsion. Product cost and quality where the goal is redesigning the extended logistic systems, simplifying the manufacturing process, optimizing the direct material cost and substantially improving product quality. And cash by increasing the cash conversion rate and being resilient to business cyclicality including best practices in reporting and planning processes for better and more timely optimization of our cash and funding position.

Moving on to the next slide. As a global partner for the planet and people, last week, on Friday, April the 22nd which was the Earth Day, we published the Iveco Group 2022 sustainability essentials, a summary of our company's sustainability strategy, commitment and actions. We have a long history of investing in environmentally friendly processes and products and fostering a circular economy and we also aim to create an engaging, inclusive and safe working environment within the company and among our stakeholders.

We have identified 4 sustainability priorities. First, carbon footprint. Second, workplace and product safety. Third, lifecycle thinking. And fourth, inclusion and engagement. We intend to achieve our 4 strategic priorities by setting clear objectives along our entire value chain with specific reference to our people, our direct operations, our products and services and our value partners as included in our strategic business plan.

We have added a disclosure according to the sustainability accounting standards, SASB, the recommendations of the task force on climate related financial disclosures, TCFD, and the assurance statements by an independent certification body, giving considerable added value for our stakeholders.

As this is Iveco Group's first year, this document gives you an overview of our sustainability governance, key KPIs and some of our projects. Our first full sustainability report will follow in 2023.

I will now hand over the call to Francesco to take you through the full year financial highlights after which I will then conclude with final remarks and guidance.

[Francesco Tanzi, executive]

Thank you, Gerrit. And good afternoon also from my side to all participants on this call.

I'm on Slide 12 with our first quarter 2022 financial highlights. We ended the quarter with consolidated revenues at EUR 3.05 billion, up 1.7% versus the previous year. Financial services net revenue were at EUR 49 million, almost in line with the previous year. The net revenues from industrial activities were at EUR 3 billion, up 1.5% versus the previous year, mainly due to the positive price realization and a better mix.

Consolidated adjusted EBIT was down EUR 32 million to EUR 102 million with a margin at 3.3%. Adjusted net income was EUR 42 million, it was EUR 69 million in Q1 2021 and excludes a negative after tax impact of EUR 51 million in connection with our Russian and Ukraine operation from a reduced impairment of inventories and receivable as mentioned before. Adjusted diluted earnings per share was EUR 0.15 comparing to the EUR 0.21 in Q1 2021.

The reported income tax expense of EUR 22 million with adjusted effective tax rate of 38% in Q1 2022 comes with a reasonable expectation of further decrease looking forward. The adjusted effective tax rate reflect the different tax rates applied in jurisdiction where the group operates, the [indiscernible] benefited losses in certain countries and other discrete items.

Industrial free cash flow, as already mentioned by Gerrit in his opening remarks was negative EUR 166 million, an improvement of EUR 137 million over the same period of the last year. And we provide more granularity on both figures later in the presentation.

Net industrial cash remains solid at EUR 765 million and includes EUR 141 million already expected cash out from the restructuring of the Chinese joint venture performed in 2021. It is important to highlight that such amounts would be largely offset by cashing of approximately 80% of the total EUR 141 million within the end of the year. Our available liquidity cash and undrawn committed lines was up almost EUR 2 billion from the end of 2021 to EUR 3.4 billion.

Moving to the next slide, and I'm on Slide 13. We show our net revenues from industrial activities split by region and segment. I will not go through each single number, but let me just point out a few relevant ones. Looking at the split by region and percentage change on a year-over-year basis, you can see that net revenues were up 68% in South America, continuing the strong performance registered in full year 2021, mainly driven by trucks and powertrain. In Europe, net revenues were slightly down at 2% and were down 11% in the rest of the world.

Looking at the split by business unit, buses was significantly up versus last year at 21%, mainly driven by Europe. Trucks grew by 6%, mainly driven by South America and rest of the world. And specialty vehicles net revenues were up 4% versus last year. Powertrain net revenues were down 5% versus last year and on powertrain, I will comment on the next slide.

Now we're moving to slide #14, shows our industrial activities adjusted EBIT walk by segment and driver. Industrial activities adjusted EBIT was at EUR 82 million, with a margin of 2.7%, down from 3.9% last year. Pricing net almost offset production costs during the quarter at industrial activity level, with volume mix almost flat year-over-year and slightly higher SG&A for current valuation.

The commercial and specialty vehicles adjusted EBIT margin was at 3.7%, up 120 bps from Q1 2021. The EUR 34 million increase in adjusted EBIT was mainly driven by positive price realization more than offsetting raw material cost increase and positive volume in light duty trucks and buses in Europe and in trucks in South America.

Powertrain adjusted EBIT was EUR 45 million with a margin at 4.6%. Our progress in replacing the supply agreement with Stellantis with new third-party clients is proceeding at pace, allowing us to confirm that we will be able to completely offset the last unit by at the latest mid-2023, as already disclosed.

Positive price realization and lower quality costs only partially offset negative volume driven by component shortage and by the discontinuation of the agreement with Stellantis, which was still in place in Q1 last year. Higher raw material and freight costs also affected profitability.

Moving on to the next slide, with our financial services performance and now I'm in Slide 15. Adjusted EBIT increased EUR 2 million to EUR 20 million, primarily due to higher wholesale and retail portfolio from financing activities. The managed portfolio, including unconsolidated joint venture was EUR 5.5 billion at the end of the quarter, of which retail was 50% and wholesale 50%, up EUR 374 million compared to the same period of last year.

The receivable balance greater than 30 days past due as a percentage of portfolio was 3.6%, down from 5.2% in Q1 2021 and sequentially down 30 basis points from Q4 2021. Financial Services equity was slightly down from year-end at EUR 723 million, primarily due to the impairment of certain assets in connection with our Russian and Ukrainian operations.

Moving on Slide 16. We have highlighted our net industrial cash walk, including a snapshot of working capital behaviors. Our seasonal free cash flow absorption improved significantly, allowing us to end the quarter with a solid net industrial cash at EUR 765 million. As already disclosed before, it includes EUR 141 million cash out from the restructuring of the Chinese joint venture that will be largely offset by a cash-in of approximately 80% of the amount at a later point this year.

As you can see in the walk, we keep investing in our new energy future with investment up EUR 23 million versus the same period of last year. The working capital absorption was EUR 127 million, an improvement of EUR 276 million versus Q1 2021, mainly driven by higher payables. The higher inventory level was mainly driven by component shortage resulting in unfinished product remaining in our inventory.

Moving on to my last slide, before turning over to Gerrit, with debt maturity profile as of end of March 2022 and our available liquidity. As already mentioned, we ended the quarter with EUR 3.5 billion of available liquidity, of which EUR 1.7 billion in cash and cash equivalent and EUR 1.6 billion in undrawn committed facility. Our available liquidity more than covers all the debt maturities of EUR 1.1 billion for the upcoming years.

This basically concludes my prepared remarks on the financials, and I will now turn over to Gerrit for his final remarks.

[Gerrit Marx, executive]

Thank you, Francesco. I'm on Slide 19, in which we have highlighted our preliminary industry outlook. As outlined in the takeaway message at the bottom of the slide, this industry forecast is based on current visibility and needs to be seen together with the near-term uncertainties related to our supply chain, the evolution of COVID-19 and the Russia-Ukraine conflict development.

Our preliminary expectation is for the European market, excluding United Kingdom and Ireland to be almost flat across the truck segment. It was up 5% to 10% on our previous outlook though. South America is now expected to be down in light duty trucks and up 10% in medium and heavy. On a worldwide basis, the truck industry is expected to decline by approximately 5%.

In bus, we continue to see good momentum with all regions up year-over-year, resulting in an expectation for the worldwide industry to grow by 10% versus full year 2021.

Moving on with our preliminary financial outlook. The company expects the global supply chain to continue to represent the main challenge for the year, including raw material price increases and component availability. COVID-19 and the development of the conflict in Ukraine are also elements with increasing uncertainties, which we do monitor very closely. As already mentioned in my opening remarks, we expect that the second quarter will be the quarter most severely impacted by all of the above, with the most recent lowlight of severe challenges around the port of Shanghai.

Considering all these uncertainties and based on the preliminary industry outlook, we have just gone through, our preliminary expectations are for consolidated adjusted EBIT to be between EUR 350 million to EUR 370 million, in line with current consensus with substantial supply chain risks in the second quarter and potentially the third quarter as well. Net revenues of industrial activities shall increase up to 3%, SG&A to remain well below 6.5% as a percentage of industrial activities net revenues and net industrial cash to end the year above December 31, 2021, levels. Finally, our expectation is to substantially offset product costs with pricing on a full year basis, although in the second quarter we see difficulties to do that.

In conclusion, before opening up for questions, let me just provide you some final remarks. We are maintaining tight control of our working capital and inventory level, actively managing our order book to preserve healthier profitability. The available liquidity is solid and allows us to navigate through this challenging environment with a good level of confidence and to keep investing in our new energy future.

During the year and beyond, we will continue to pursue the our Iveco way, adding new partnerships and collaborations while making substantial progress in the Memorandums of Understanding already signed and the various identified areas of collaboration.

That concludes our prepared remarks, and we can now open it up for questions. Sandra, please go ahead with questions.

[Operator]

We will take our first question from the line of Michael Jacks from Bank of America.

[Michael Jacks, analyst]

My first one is just with regards to your comment on market share swings in the coming quarters that you expect in the medium and heavy truck segment, driven by OEM's ability to deliver. Which side of the spectrum do you expect Iveco to be gaining or losing share? That's my first question.

The second question is somewhat tied to that, on volumes. I'm just trying to reconcile the revenue growth guide of 0% to 3% with the price realization of around 5% that we saw in the commercial and specialty vehicle units in Q1. So any sort of comments on volume or more granular detail on volumes would be great.

And then my final question is just on order book mix in the commercial and specialty vehicles segment. Have you seen any customers switching out of gas trucks into diesel? And if so, what are the implications for margins and mix for the latter part of the year?

[Gerrit Marx, executive]

Thank you. Well, on the market share for the medium and heavy duty, we see ourselves on the -- when you look at this Q1 number that is on that page that was distributed. We see ourselves on the higher end of that number because we were very -- it was very difficult for us in Q1 to actually deliver our medium and heavy-duty trucks due to specific components that were not available at the scale we needed and we had produced quite a fleet at the end of Q1 with those -- in this segment. So the answer is it shall go back to the levels where it was before and continue from that level to perform well.

On the revenue guidance, reconcile this with pricing and with volumes or order books, I mean, we have in our top line guidance here, obviously, for the full year guidance, obviously factored in that we are going to go through still substantial supply chain disruptions in the second and the third, possibly third quarter. And with that, when you look at the price realizations that we have successfully accomplished and we just recently, we did another high single-digit price increase and without seeing the orders falling by the way.

These are orders that are basically coming to production in the first quarter next year. So when you look at this full year, the most recent price increases are going to benefit basically the first quarter next year. And on the other side, the 3% revenue increase is in the end, I mean, the guidance for the full year is in the end related to our very prudent view on what we can actually produce in light of the challenges that I mentioned.

And the order book mix, yes, we have seen -- we have not seen cancellations overall. What we have seen is customers switching from LNG to CNG trucks. So staying methane and LNG, let's say, gas tractors because the advantages of the gas tractors are very, very apparent. I mean this is the only available low-emission vehicle that you can use. And for the more regional distribution mission, this is in fact something which can only be countered by an electric truck, which would cost 3x or 4x more. In the end, the CNG shift is there.

We have also managed to convert where customers wanted to convert to diesel to do that. That did happen as well. And thanks to the significant pricing efforts and the substantially better S-way, i.e., our heavy-duty truck that we have launched in '19, and we have reworked it in '22 now with the model year '22, we have managed to substantially increase pricing to levels where the margins that we make, whether it's a gas or a diesel, when you also take into account maintenance and repair contracts, which are sold alongside with these vehicles are on, let's say, comparable levels more and more. And hence that type of shift is not for us a major economic disadvantage, if someone wants to shift from gas to diesel.

Nevertheless, we see very -- still very good order book for the gas segment. We see CNG or LNG, CNG shift coming. We also see LNG orders still. So therefore this is still alive. And when someone wants to shift to diesel, that is in the year 2022 for us economically comparable in terms of bottom line. I hope that did answer your question.

[Operator]

We will take the next question from the line of Monica Bosio from Intesa Sanpaolo.

[Monica Bosio, analyst]

The first one is on the volumes mix. Volumes were up for light duty and this was not the case for the heavy duty segment. I was wondering if you can comment a little bit more on the trend that we can expect on the heavy duty segment. And if you can give us some highlights on the duration of the backlog on this side.

The second question is on the impairment. Should we expect further impairments over the next quarters related to the current geopolitical context?

And the third one is on the free cash flow, which was much better than my expectation, to be honest. And it was due to the payable. Can you elaborate a little bit more on the evolution for the next quarters?

[Gerrit Marx, executive]

I will take the first question, and then Francesco will take the question on impairments and the free cash flow. In terms of order backlog, I think we call it order book. In the heavy-duty truck, we are still sitting at more than 40 weeks of production orders from here forward. So we are absolutely taking our orders for the first quarter and the second quarter. So this is happening as we speak.

And for the light, we have added a third shift to our plant, and so that one runs at full speed, if it can, given the component shortages. And there we have an order book that is 30-plus weeks in Suzzara and Valladolid, so this is where we are. And we can -- whatever the supply chain allows us, we will sell and we will get registered in the market. So quite an unusual situation, but we'll cope with it. Francesco, on the…

[Francesco Tanzi, executive]

Thank you, Gerrit. For what is [indiscernible] impairment, we are not expecting any impairment of asset or participation looking forward. We do not have, let me say, participation in area where we have these kind of issues. On the other side, what is concerning the cash flows, according to our seasonality, we have normally absorption Q1, very flat Q2, slightly lower Q3 and most of the cash flow is generating in Q4. So we guide the market to a, let me say, more important recovery from the second part of the year to be slightly positive at the end of the year. This quarter we manage very carefully the cash flow in relation to the situation of the market, the macroeconomic situation that force us to be very cautious on our spending. And so certainly the payables has -- give us some help. But I would say that in general, the attention that we have to the cash flow will remain there for the remaining part of the year and is really at the top of our priority.

[Monica Bosio, analyst]

So let's say that the payables trend in the first quarter is a sort of, let's say, one-off. Is it correct?

[Francesco Tanzi, executive]

No, I don't think it is a one-off. It's more related to the seasonality, more than our effort, I mean, especially in this quarter. So it's something that, it gives us the maximum attention also in the following quarter.

[Monica Bosio, analyst]

Can I add another question, please, just very quick? Can you just give us an indication of the corporate cost because in the first quarter the increased, just model, the full year corporate cost at the industrial adjusted EBIT level?

[Francesco Tanzi, executive]

Okay. In terms of corporate cost on a global full year basis, we are talking about between EUR 180 million to EUR 200 million.

[Operator]

We will take the next question from the line of Miguel Borrega from BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

I've got 2 questions, if I may. The first one, just on your group adjusted EBIT guidance for EUR 350 million to EUR 370 million. Can you give us some color on the margin trajectory? You say Q2 is going to be the worst quarter. But at the same time, I believe you also have more pricing kicking in your P&L. So just want to understand how you're thinking about the price cost spread given that Q1 is typically a quarter with lower production, as you said. Any reason why margins should be down sequentially from here?

[Gerrit Marx, executive]

So the price cost in Q2, we are targeting. But as I mentioned, it will be tough to offset the cost of price in Q2 in light of what we see unfolding in front of us. But we do expect that to turn positive in the second half of the year to have an overall positive balance inside those -- inside the guidance. So for the full year, costs will be offset by price. That's our target.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then my second question on free cash flow, the EUR 166 million negative. I see working capital changes was EUR 150 million negative in Q1, which compares to EUR 400 million last year in Q1. I remember last quarter, you talking about the EUR 400 million of receivables from CNH. Is that excluded from the free cash flow number? Or does it include the EUR 400 million?

[Gerrit Marx, executive]

No, it is completely excluded from the cash flow number.

[Operator]

Next question is from the line of Pope Goetzeler from Goldman Sachs.

[Daniela Costa, analyst]

It's actually Daniela here. I have a few questions. The first one was regarding your MOU with Hyundai, if you could tell us like when you set the medium-term targets, did you have that in mind already? Or is this further upside? And how could this collaboration eventually impact your CapEx or your R&D for new technologies, if there's any? What would be the tangible impact from this collaboration in your earnings profile and cash profile going forward? That's the first one. And then I'll ask the other afterwards.

[Gerrit Marx, executive]

The MOU with Hyundai was not included in any of our plans. It was not included in the numbers that we presented at the Investor Day or any other projection that we gave before. This partnership has multiple areas we are looking at. It's not just one. I mean, of course, it might entail engine supply from us to them. It might entail electric axle supply from us to Hyundai and their commercial vehicle business, and it certainly implies a component delivery from Hyundai to us, most notably the fuel cell. And these things are under discussion, and we'll further work on optionality around those. And from here, obviously, we can also consider, if things work well, and this would take at least another quarter or 2 to figure things out in greater detail, that we then also start joint development of platforms further down the road, which eventually and definitely will translate into synergies on the capital outlay on the CapEx as well as on the R&D side.

So this is certainly the case rather in the back end of the plan than the earlier parts for sure. But we wouldn't start this if there wasn't a, let's say, a quite profound set of mutually beneficial projects. So this is…

[Daniela Costa, analyst]

Is that something you plan to update us on like in an event or something in -- within this year or, no, it's we have to wait a little longer.

[Gerrit Marx, executive]

We plan to update you within this year, rather in the second half of this year, we have a major milestone coming in the second half, which is the International Auto Show in the IAA for commercial vehicles, I mean, in September. Let's see. But we are not rushing. We want to make things right and we take the time it takes to substantiate it. But I think in IAA, could be a good window to think more clearly about what this means.

[Daniela Costa, analyst]

Understand. And then my second question relates to the EUR 500 million of the Iveco-way that you talked about for the medium-term, obviously. But in your 2022, EUR 350 million to EUR 370 million, how much of that is contributing with some structural cost base or change? Or given you say net pricing is kind of flattish for the year, volume up to 3%. That shouldn't be a lot of operating leverage. How should we think about how much contributes from the plan this year?

[Gerrit Marx, executive]

Well, we kicked it off at the end of last year, this comprehensive plan. So we are working through the different initiatives. There are some minor contributions in the current year. We're expecting most of it to kick in actually next year and the following year, given that this year is rather the year of ramping these things and setting them well up for a run rate entering next year. So bottom line in that number, there is not too much of the EUR 500 million.

[Operator]

Our next question comes from the line of Francois Robillard from Intermonte SIM.

[François Robillard, analyst]

Just a quick one, trying to bridge between your former guidance on industrial EBIT margin and your new guidance on group consolidated EBIT margin. This does, I guess, include the EUR 53 million one-off for the Ukraine and Russia assets. Can you just give us a bit of a bridge of how you went from the former indication to this one? Basically, the former indication was of steady margins, if I at least say the margin, if I understand it well on the industrial side. If my understanding is correct, this new guidance might imply so a slightly lower EBIT on the industrial side. Is that likely to be seen everything more in the second quarter in your expectations? Or can we expect some flatter impact going forward?

[Francesco Tanzi, executive]

I don't say that for what is concerning the EBIT margin adjusted, certainly the second Q will be more impact, as Gerrit mentioned before in his speech. We are looking forward according to the guidance in terms of 350/370 at the end of the year to land certainly with industrial margin that offset from one side, the cost of the production but are certainly impacted by the other raw material and energy pricing. So this one certainly has an effect.

For what is concerning the Russian impairment on asset and inventories, this is one-off and nonrecurring items. So it's not entering into the EBIT adjusted that we have seen as a guidance.

[Operator]

Our final question comes from the line of Martino De Ambroggi from Equita SIM.

[Martino De Ambroggi, analyst]

The first question is on the recap on the guidance that you provided. First of all, can we say the duty trucks are profitable in your full year guidance? Or if not, what is the improvement -- the magnitude of the improvement this year? And if I understand correctly, prices will be positive at the end of the year compared to the production cost, I suppose, it's just slightly positive, if not a major contributor for the guidance this year?

[Gerrit Marx, executive]

The first question, was it about light commercial vehicles or heavy or all trucks?

[Martino De Ambroggi, analyst]

Sorry, heavy trucks.

[Gerrit Marx, executive]

Heavy, okay. Sorry, I didn't catch that word. So on the heavy trucks, the entire business segment itself, I mean, medium and heavy, by the way, that's the way how we look at this. If you take the medium and heavy-duty truck all in, it was positive, okay. So it was not loss -- is projected not to make losses.

And on the price cost, you're exactly right. The price will not be -- this is a marginal and smaller contribution to the full year, given the dynamics that we expect to see in the second half. So it will be larger, but it will be minor -- I mean, larger than cost, but minor in impact.

[Martino De Ambroggi, analyst]

And just a follow-up on the financial business guidance. Can we multiply by 4 the EUR 20 million in Q1, just to have an idea of what could be for the full year?

[Francesco Tanzi, executive]

Yes, slightly down versus the 4x the Q1, let me say.

[Martino De Ambroggi, analyst]

And very last on the Memorandum of Understanding with Hyundai. It's very clear there will be benefits in terms of cost, in terms of CapEx, technology and so on. But does it include or maybe in the future, could also include combined commercial initiatives or sharing of distribution networks becoming a larger scope of what it seems to be right now?

[Gerrit Marx, executive]

We have started with the discussions around mutual component supply and possibly joint platform engineering. And I think that's where we focus on at this very moment as our foundational work in the next couple of months and then we'll see.

[Martino De Ambroggi, analyst]

But it's not impossible to think about second step?

[Gerrit Marx, executive]

Yes, we are not thinking about this at this point in time. We want to first see what we can do together on the technical and the product side to harvest synergies for us as a Iveco Group, who we are and what we do today and then we'll see.

[Operator]

That will conclude the question-and-answer session. I would now like to turn the call back over to Federico Donati for any additional or closing remarks.

[Federico Donati, executive]

Thank you, everybody, for being with us today, and have a nice afternoon. Thank you.

[Operator]

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.