Iveco Group NV

MIL:IVG

Earnings Call Transcript 2023-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to today's Iveco Group 2023 First Quarter Results Conference Call and Webcast. We would like to remind you that today's call is being recorded. [Operator Instructions]

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

[Federico Donati, executive]

Thank you, Ben. Good morning, everyone. We would like to welcome you to the webcast and conference call for Iveco Group first quarter financial results for the period ending 31st March, 2023. 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 expressed written consent of Iveco Group is strictly forbidden.

Also in today's call are Iveco Group's CEO, Gerrit Marx; and the Group CFO, Francesco Tanzi. They will use the material made available for download on the Iveco Group website early this morning.

Additionally, please note that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent EU annual report 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 our CEO, Gerrit Marx.

[Gerrit Marx, executive]

Thanks, Federico, and welcome to all of you joining our call today. The first quarter of our transformational year 2 has just ended with solid profitability improvements across all segments despite continuous supply chain disruptions and component shortages, which affected in particular our light-duty truck segments in this quarter.

As a result unfinished products remained in our inventory for an amount of about 330 million negatively impacting our quarterly free cash flow performance. But as we demonstrated last year, we will recover this during the remainder of the year while expecting such supply chain disruptions to continue throughout the year.

The first quarter was also characterized by a string of news around our business momentum and transformation communicated to the markets and most recently, the latest announcement regarding Iveco Group's full ownership acquisition of the Nikola Iveco joint venture and related operations in Europe which I will comment on in more detail later in the presentation.

With a start on April 14, 2023, we initiated our share buyback program as authorized by the AGM on that date. During the period from April 14 to May 2, 2023 about 1.1 million of Iveco Group's common shares were bought back for a net total consideration of about EUR 9.2 million.

Our heavy-duty truck segment was a bit profitable on a standalone basis last quarter in a long time. This significant milestone is confirmation that our efforts since the launch of the S-WAY back in 2019 continue to deliver results. With the launch of the model year '24 across all our truck and bus segments at the end of this year, we will further also upgrade our heavy-duty truck presence including the now consolidated electric versions with battery and fuel cell electric power, continuing the very positive trend that will contribute significantly to our medium- and long-term group targets.

When we look at our financial performances, consolidated revenues were up 11.5% and the consolidated adjusted EBIT margin was 4.8%, up 150 bps versus last year despite the already mentioned continuous supply chain disruptions. Our adjusted diluted EPS at EUR 0.21 at the end of the quarter was up 40% versus the first quarter in 2022.

Our order backlog remain solid with 30 weeks of production already sold for light commercial vehicles and 28 to 30 weeks for medium and heavy. This is in line with our goal to decrease the number of weeks of production sold and forcing a tight order and price discipline.

We ended the quarter with net industrial cash at EUR 1.1 billion and a free cash flow absorption of about EUR 600 million. There would have been an absorption of about only EUR 260 million if adjusted by the aforementioned unfinished product. The total Q1 2023 absorption of cash into all our inventory categories was actually EUR 790 million driven by conscious management decisions to keep our business momentum while tackling challenges in our supply chain. We aim to normalize this throughout 2023.

Compared to this recent quarter, the first quarter of last year's free cash flow performance was positively affected by a one-off of around EUR 100 million derived from trade receivables versus CNH Industrial affected for the first time at that time. Also in the first quarter of 2023, we had higher one-off spending as we closed the acquisition of the U.K. company that we acquired into Iveco defense vehicles and we injected our joint venture share of cash into the joint venture with Nikola in January.

Francesco Tanzi will provide more details later in the presentation highlighting the delta performance on a year-over-year basis as well. Before moving ahead with the presentation let me just say that we are firmly committed to continuing to go beyond the obvious every day, enabling us to take on whatever we encounter as we continue our path of transformation, profitability, improvements, and energy transition across all our industrial businesses.

On Slide 4 and 5, we have highlighted as usually Iveco Group's main achievements reached in the first quarter and in the subsequent weeks leading up to today's release. All of these new items and related press releases are already public. So I will not go through each of them. Let me just say that we are proud of the success our electric bus is experiencing on the market as demonstrated by several large bids awarded in the last few months.

The recent inauguration of our Foggia plant is another milestone that will permit our bus business to further solidify its leadership in the city and intercity segments, reinforce its presence in Italy and better cover the region with the production of electric buses.

Also noteworthy is the letter of intent Iveco Group signed with Hedin Mobility Group for the sale of our Iveco Group-owned distribution and retail business for light, medium and heavy-duty trucks in Sweden, Norway, Finland and Denmark. This is another very important step to further improve our truck segment market share in Europe with the ultimate goal to reinforce our presence in the Nordics and benefit from the leadership that Hedin Mobility Group has in the development of vehicle services and spare parts -- deployment of vehicle services and spare parts in the region and beyond. The transaction is expected to close by the end of 2023, subject to regulatory approval.

Moving now on to Slide 6, where we have highlighted the upcoming transaction with Nikola to acquire the full ownership of the European joint venture by Iveco Group. I will start by stressing that this decision was jointly taken by the 2 partners after numerous successfully completed milestones and is governed by a shared conviction around the necessity to increase our both geographic and product focus while continuing our successful partnership by mutual supply of components and services. Iveco Group will also continue to be a shareholder in Nikola Motor in the future.

From now on, going forward, Iveco Group will focus predominantly on the European market and European vehicle configurations while continuing its strategy to be a pioneer in the electric-borne battery electric and fuel cell electric heavy-duty truck segment.

We've summarized in the chart the before and after in order to facilitate the understanding of how we are organized and how it will be. Looking at the before, combined with Nikola's 50% share ownership in the joint venture -- benefit -- the joint venture benefited from predominantly 3 things: license of Nikola Tre, proprietary technology, technical engineering services and vehicle controls and software. And from Iveco Group's 50% ownership, the benefit included license of the Iveco heavy-duty truck S-WAY, proprietary technology, technical engineering services and supply of components such as the cabin and obviously the electric axles.

The new entity for the moment, Iveco electric heavy-duty trucks Europe will continue to benefit from all of the above with Iveco as sole owner and provider, including especially the vehicle controls and software, which we take over from Nikola for the European vehicles in this transaction. Products made by the factory in Ulm, Germany will be branded Iveco, yet still maintain reference to the Nikola brand on some key components and parts of the vehicle.

As outlined in the takeaway message at the bottom of the slide, increased investment exposure from this transaction and subsequent funding requirements will be covered by the cumulative EUR 4.1 billion sum which we reprioritized and disclosed in our 5-year strategic business plan. The current plant capacity in Ulm is 1,000 vehicles per year per shift or 3,000 in total per year at this current stage. And that could be increased to up to almost 10,000 vehicles per year in 3 shifts, adding the remaining 2/3 of the plant currently utilized by the Magirus business. Indicatively, the time needed to realize such capacity increase would be around 18 to 24 months as we operate in a historical heavy-duty truck factory in Germany already.

On Slide 7, we have highlighted that our first sustainability report is available on our website. As our chair underlined during the recent AGM, our overall sustainability strategy remains based on 4 priorities: reducing carbon footprint, improving workforce and product safety, incorporating life cycle thinking and increasing inclusion and engagement. We have set ambitious targets in all these areas and linked the incentives of the group's management team to achieving 2 of them, namely carbon footprint reduction and inclusion and engagement as detailed in our recently published compensation report.

Our commitment to ESG matters is at the base of what we do every day, and our ultimate ambition is to improve our profitability while undertaking a path of sustainability.

Moving on to Slide 8. We show the total industry volume percentage change versus the first quarter of last year. As you can see, Europe, excluding the U.K. and Ireland, was up across segments with light-duty trucks ending the quarter up 8%. Medium and heavy were up 20% and buses were up 11% versus the previous year. Latin America industry volumes were broadly flattish in trucks and up 54% in buses. On a worldwide basis, the market was positive mid-single digits in light-duty trucks and positive 11% and 70% -- 17% for medium and heavy-duty trucks and buses, respectively.

The next Slide #9 has our recurring quarterly update on channel inventory statistics. Company inventories were sequentially up, both in light-duty trucks and medium and heavy, reflecting solid seasonal delivery levels in the last quarter of the year. Looking at the year-over-year level for light-duty truck company inventory, considering that this graph depicts just the products ready to be delivered, it was down almost 4%, while medium and heavy company inventory was up 66%. Dealer inventories finished the quarter higher than at the end of March 2022, serving a strong order backlog. We overproduced retail and light-duty trucks by 7%, and we overproduced retail by 10% in medium and heavy.

Let's move on to the next slide with order intake and delivery statistics at the end of the quarter. Deliveries were down 12% on a worldwide basis versus the first quarter 2022, driven by lower deliveries and light-duty trucks, down 26% versus last year, while medium and heavy and bus deliveries were up 18% and 15% respectively, versus the same period last year. Europe was down 10% with light duty trucks down 25% and medium and heavy up 43% versus the first quarter of 2022. Bus deliveries in Europe were up 15%.

When looking at order intake levels, for truck it was down versus the first quarter 2022, mainly on the back of continuous efforts to purposefully lower weeks of production already sold through a tight price discipline to preserve profitability on the back of a very solid and historically higher order backlog.

In bus, order intake was up 52% on a worldwide basis versus the first quarter 2022. When looking at Europe only, orders in bus were up 38% and for electric bus orders, they were up 2.6x. Worldwide total book-to-bill trucks and bus was at 1.16 at the end of the first quarter. As I said, our objective is to continue lowering the weeks of production already sold to a healthy 15- to 20-week level over the time and during -- over the year of 2023.

The next slide shows our market share performance in Europe, excluding the U.K. and Ireland in our light-duty truck segment and medium and heavy. Starting with the light-duty, our performance in the first quarter was affected by supply chain and component shortages. But even considering this, we ended with a solid 13.9% market share in the 3.5 to 7.49 ton segment. We maintained our market share leadership in the cab-chassis subsegment, ending the quarter at 30.9% and confirming our historical leadership in the upper end of the light commercial vehicle segment between 6 and 7.49 tons at 58.9%.

In heavy-duty, we ended the quarter with a market share up 160 bps versus the first quarter of 2022 to 7.7%. And in medium and heavy combined, up 150 bps to same period last year.

In heavy gas, we ended the quarter at 43.6% of our market share, up 90% percentage bps versus the first quarter of 2022.

In conclusion, despite starting the year with some supply chain issues and component shortages, specifically affecting our light-duty truck segment, we are expecting to recover what we were not able to deliver in the first quarter during the rest of the year. We count on maintaining and further solidifying our leadership position in the light-duty trucks with the launch of our eDAILY, for which we already took some 1,000 orders, of which 200 as the first tranche of the 2,000 eDAILY part of the MOU signed with Petit Forestier in France and continuing to improve our market share in heavy-duty trucks quarter-on-quarter.

I will now hand the call over to Francesco, who will take you through our first quarter financial highlights, after which I will then conclude with final remarks.

[Francesco Tanzi, executive]

Thank you, Gerrit, and good morning to our participants on this call. I'm on Slide 13 with our financial highlights. We ended the quarter with consolidated revenues at EUR 3.4 billion, up 11.5% versus the previous year. Financial services net revenues were EUR 99 million, more than double comparing to Q1 2022. Net revenues from industrial activities were at EUR 3.3 billion, up 10.6% versus the previous year, mainly due to positive price realization. Consolidated adjusted EBIT was at EUR 162 million, up EUR 60 million versus last year with the adjusted EBIT margin at 4.8%, up 150 basis points versus Q1 2022.

The industrial activities adjusted EBIT was EUR 134 million, up EUR 52 million versus last year with positive price realization more than offsetting higher raw material and energy costs. The industrial activities adjusted EBIT margin was at 4%, up 130 basis points versus Q1 2022. We ended the quarter with our adjusted net income at EUR 63 million, up EUR 21 million comparing to last year. The adjusted net income figure primarily excludes a negative impact of EUR 44 million from the agreed acquisition of full ownership of Nikola Iveco Europe.

The adjusted diluted earnings per share was EUR 0.21, up EUR 0.06 compared to the Q1 2022. Financial expenses were EUR 74 million, in line with our preliminary full year 2023 expectation of about EUR 280 million, mainly due to higher interest base rate combined with hyperinflation impact in Argentina and Turkey. The adjusted effective tax rate was at 28% coming from 30% in full year 2022. The adjusted effective tax rate reflects different tax rates applied the engine jurisdiction of where the group operates and some other discrete items.

Industrial free cash flow was negative EUR 593 million for the quarter, primarily due to higher seasonal working capital consumption, only partially offset by improved profitability. I will talk about our performance in more detail later in the presentation. Our net industrial cash position was at EUR 1.1 billion at the end of March 2023. Finally, the available liquidity, including undrawn committed credit lines, remained solid at almost EUR 4 billion at the end of March 2023.

On the next slide, I am on Slide 14. Our first quarter industrial net revenue split by region and segment as well as a walk versus Q1 2022. Looking at the split by region and segment, as you can see on the left side of the chart, all regions were up double-digit versus the previous year, except for the rest of the world.

Moving to the revenue split by segment. Also all our industrial segments were up by double-digit versus the same period last year. When we look at the contributors of the increase in revenues, as you can derive from the graph on the right hand of the slide, gross pricing was largely the positive contributor to the improvement.

Now I'm moving on to the industrial activities adjusted EBIT walk by segment and driver on Slide 15. As I mentioned before, net price realization was the main driver of the improvement in profitability with the lower stance volume and mix that were slightly positive. More specifically, the net price realization alone was able to more than offset the higher production cost, increase SG&A and R&D spending as well as negative FX translation effect. The adjusted EBIT margin ended the quarter at 4%, up 130 basis points versus last year.

Looking at the performance of each segment for the quarter, the commercial and specialty vehicle adjusted EBIT was EUR 127 million, a EUR 34 million increase comparing to Q1 2022, driven by positive price realization, partially offset by higher product costs mainly due to increased raw material and energy costs. Adjusted EBIT margin was at 4.5%, up 80 basis points versus first quarter last year.

It is important to highlight the performance of the heavy-duty trucks on a standalone basis that, as Gerrit said in his opening remarks, ended the quarter with a positive adjusted EBIT level. In powertrain, the adjusted EBIT was EUR 61 million, up EUR 16 million compared to Q1 2022, mainly due to positive price realization and higher volumes more than offsetting increased raw materials and energy cost. The adjusted EBIT margin was at 5.5%, up 90 basis points versus the same period last year.

The next slide, #16, deals with our financial services performance. The adjusted EBIT was EUR 28 million, an EUR 8 million increase comparing to Q1 2022, primarily due to higher receivable portfolio. In this regard, we recall that Iveco Group managed portfolio, including unconsolidated joint ventures, was EUR 6.5 billion at the end of the quarter, of which retail was 43% and wholesale 57%, up EUR 1 billion compared to the 31st of March, 2022. The receivable balance greater than 30-day past due as a percentage of on-book portfolio was still low at 2.5%, compared to 3.6% as of 31st of March, 2022.

Looking at our return on assets on the upper right hand of the slide, it remained solid and more than 2%. Just as a reminder, equity in the third quarter 2022 included the release of risk accruals of about EUR 12 million, which clearly positive effect on the performance of last year.

Moving on with our industrial net cash walk and related focus on main dynamics, as Gerrit said in his opening remarks, the first quarter free cash flow absorption, if adjusted by the cash outflows of EUR 331 million related to the unfinished products that remain in our inventory, would have been at EUR 262 million.

Let's have a look instead of the various component of the walk and related performance versus the same period last year. The adjusted EBITDA contribution was positive at EUR 49 million compared to last year on the back of solid profitability performance. Working capital cash outflows was at EUR 546 million compared to cash outflows of EUR 127 million last year, primarily due to the impact on inventory level, driving from high demand as well as component shortage and supply chain issues versus Q1 2022. Investments were up EUR 51 million versus last year.

On the bottom right of the slide, we show our free cash flow performance by quarter. We expect to be able to deliver the amount of the unfinished products throughout the course of the year, as already demonstrated during 2022.

Moving now to my last slide for today, which shows our available liquidity component and the debt maturity profile. Our available liquidity at 31st of March 2023 was at EUR 4 billion. This includes EUR 1.9 billion in cash and cash equivalents, and EUR 2 billion of undrawn committed facilities. And as you can see, our cash and cash equivalents levels continue to more than cover all the cash maturities for the upcoming years totaling EUR 860 million.

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

[Gerrit Marx, executive]

Thank you, Francesco. And let's conclude with the preliminary industry and financial outlook as well as some final takeaway messages. Our preliminary industry outlook for 2023 is broadly in line with what was stated when we released our full year 2022 results. The percentages change -- changes year-over-year by segment and region shown in the table reflect our current visibility.

Looking on a worldwide basis, the expectation by industry segment remained broadly in line with the previous preliminary outlook, with South America now expected lower than previously forecasted, counterbalanced by a slightly better performance of the industry in Europe and rest of world.

The next slide, #21, has our full year 2023 preliminary financial guidance. We are continuing to maintain a level of prudence, especially with regards to the second half of the year. However, with solid price realization, strong order backlogs and still no signs of unusual levels of order cancellations the company is updating upwards its full year 2023 guidance as follows.

Group adjusted EBIT increased at between EUR 600 million and EUR 640 million for the industrial -- and for the industrial activities. Net revenues increased up 3% to 5%. Adjusted EBIT from industrial activities increased at between EUR 510 million and EUR 550 million. SG&A over net revenues confirmed at around 6%. Net cash, including transactions already communicated and related impacts, excluding any share buyback or additional extraordinary transactions, at around EUR 2 billion. And investments in property, plant and equipment and intangible assets now forecasted up about 15% from EUR 775 million in the full year 2022, mainly due to the energy transition, model year '24 launches across all ranges and the consolidation of the investments that can be capitalized in relation to the new transactions announced.

In conclusion, let me summarize as usual, the messages we gave today in our presentation, providing some takeaway messages. We are still maintaining a certain level of prudence in our current outlook related to both industry and our preliminary financials for full year 2023. Such prudence is backed by continuous challenges in the supply chain, at least in the near term and industry dynamics in the second half of the year that will be potentially still impacted by as yet unclear macroeconomic developments.

It is important to highlight those transactions already announced and the related impacts on the net cash position have been included in the updated financial targets.

Our profitability path is continuing at pace and has been further reinforced by recent and expected solid marginality improvement across industrial business units.

Third, after the transaction announced with Nikola and related consolidation of the European joint venture, Iveco Group is now a complete full liner in the electric segment with electric solutions powered by batteries or fuel cells in heavy and light-duty trucks, in light to heavy buses and electrified powertrain components such as battery packs and electric axles. And we do explore the additional upside from using hydrogen in our combustion engines, which is considered a third zero-emission technology for commercial vehicles in Europe.

Fourth, we will continue our efforts to manage our order books and preserve profitability as well as maintain tighter control over cash. The incomplete units that affected our first quarter free cash flow are expected to be fully deployed during the year. Our commitment to maintaining a sound level of available liquidity is intact and will continue throughout the entire strategic business plan period.

And 6, the increased investments, including those associated with the announced transactions are covered by the cumulative and now reprioritized EUR 4.1 billion total investments communicated in our 5-year strategic business plan.

To conclude before opening up for questions, we are still maintaining a prudent approach in regards to the near future and our medium-term target. We will certainly not change that now. As I mentioned during our full year earnings release, we are on a long distance cross-country run. Our ability to be agile and quick will bring us continued success. Altogether, we will remain focused on each next step aiming always to go beyond to hold ourselves accountable and to collaborate to win every single day. That concludes our prepared remarks.

And we can now open it up for questions. Operator, please go ahead.

[Operator]

Ladies and gentlemen, we will take our first question from Daniela Costa calling from Goldman Sachs.

[Daniela Costa, analyst]

I just wanted to follow-up in terms of any color that you can give on sort of what pricing do you include in your commentary for this year? And then more broadly, thinking about pricing on orders now that we are on heavy-duty book-to-bill below 1 sort of orders sequentially declining. Can you talk through what you do expect the industry to maintain the discipline that we have seen? Is there a risk that some players might become more aggressive? How do you think towards '24 and your 4% to 5% target, how much pricing is a risk there?

[Gerrit Marx, executive]

Daniela, look, the price we expect throughout the year a positive to very positive price/cost relation. And we assume that the prices we have taken will -- in the current order book will actually be realized. However, as I said, we are taking a prudent view in the second half of the -- particularly the fourth quarter, where we carefully observe and watch what happens in the market and what competitive dynamics unfold. So far, we do not see any price erosion. The discipline about leveraging price cost is clearly there.

And as for 2024, I mean, look, we finished the year -- sorry, we finished the quarter -- the first quarter, with 4% industrial activities EBIT despite massive disruptions from supply chain, which will ease. But imagine that hadn't happened, we would significant -- we would be north of 4% industrial in the first quarter. And I think looking at next year's 4% to 5% industrial activities, EBIT, I feel very well on track to deliver that promise to you.

[Operator]

We will take now our next question from Miguel Borrega calling from BNP Paribas.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

I've got a few. First, on truck demand. This is the fifth consecutive quarter of year-on-year order decline. I understand you're trying to lower lead times, but how should we think about this? I know it's still early to talk about 2024, but you're effectively full for 2023. So how do you think demand will be once you open the books for 2024? And if demand is really strong, as you say, why don't you open the books earlier this year? Why don't you start locking in orders already? That's my first question.

[Gerrit Marx, executive]

Okay. Should I take them one by one? Or you want to give us all in one go?

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

Yes, go ahead. I'll ask.

[Gerrit Marx, executive]

Okay. Look, as I stressed, we are diligently working on our model year '24. And the model year '24 in -- across all ranges, in light as much as in heavy, is a substantial upgrade. We are launching our all-new engine with high single-digit fuel reduction benefits, and multiple new features and upgrades around digitalization, connectivity and the driver. Right now, we are taking only orders for the model year '22. So our very high focus on price discipline and selective order taking, and you're right, 2023 is in the process of being closed in terms of orders. We are very mindful when to open the model year '24 order book and how we close with the model year 2022.

Hence all of this is actually, as I mentioned, by design, shortening the order take because when we reopen them for model year '24 and that will happen in the third quarter, we will then restart into next year with a clear visibility overlapping model year '22 and '24, and how do we run out the previous version and ramp up the newer version. We are just simply facing a handover between 2 model years, and that is just a normal ordinary course of business that we now need to shorten the order books to avoid having model year '22 orders dragging into 2024. That's just normal business, I would say.

And across all of this, we keep a high pricing discipline, observing the market very, very carefully before we release and issue the pricing of the model year '24. It's ordinary course of business. This is not driven by anything else.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then on free cash flow, obviously, Q1 was heavily impacted by supply chain issues. Can you give us some detail about this specific issue? And what gives you the confidence this was sorted out in Q2 and Q3? And then just wondering if the performance in Q1, negative EUR 593 million, was already expected when you first gave guidance for 2023? And then what does that mean for the remaining quarters?

[Gerrit Marx, executive]

Well, to give you -- I can give you an example. One of the components that we were fighting with was the -- it's a steering component for our dailies that is supplied by Tucson Corp, and they are sourcing a semiconductor that comes from TI. And there was apparently a misplanning on the TI side. And so there was an undersupply and now we have entering in the second quarter into an oversupply. And this bouncing impacted the first quarter and that forced us to produce fleet. And then we will deplete the fleet now at least half or more than half in the second quarter.

These things still happen in the industry. And by the way, this is a component that is used by basically all light commercial vehicle OEMs in their steering systems. That is just an example. But we have a bouquet of these situations, and they require us to take decisions on -- to whether we shut down a plant for a few days or whether we keep it going and increase the fleet. In light of a fully booked 2023, we can -- production we lose in any given segment in any given week, we cannot recover that during the rest of the year given that we are running at full speed, all shifts and in some cases, including Saturdays.

So this is why we had taken a conscious decision to keep the products going -- production going, build the fleet for the depletion in the second and the third quarter in order not to lose overall volumes for the current year. That was the reason why we absorbed by design.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then in terms of the free cash flow?

[Gerrit Marx, executive]

The free cash flow, look, we knew that there were issues in several components when we closed last year, but you never get visibility from suppliers that tell you, okay, in April, I have a problem. They don't say it. They basically come to you and they say, "Okay, I can guarantee you 60% of your volume" and then over the course of the weeks before that actually then increases to 80% or 90% or 95% or even 100%. So it's a daily-weekly fight to get these volumes in. And that is not -- it is not uncommon, unfortunately, across the industry these days as we are using predominantly common components in -- to a large extent in our vehicles.

So it was not -- but the individual incident was not a surprise. The timing when it happens and how it happens is always a bit of a surprise because you are getting only incomplete information from your suppliers.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then lastly, on the Nikola JV, can you tell us what is really going to change? What happens, for example, with Nikola's proprietary technology and technical engineering? Is Iveco effectively capable of taking over the JV without any risk of losing the value add from Nikola? Just trying to understand the risk of the transaction. And then any financial benefits from this? Can you give us some details on the P&L and CapEx going forward?

[Gerrit Marx, executive]

Just a second. I take notes. Okay. Yes, but there's no risk attached. Look, the -- we've been working together over the last 4 years, 3.5 years on this truck program. We know each other quite well. We appreciate each other's contributions. And when it comes to the piece of vehicle controls and software that we are now developing further on our own with our own resources, we feel pretty confident that this is going to be a continuation of what we have done. And I don't expect any major disruptions from that end.

We enter vehicle validation phase right now. So the hardware of the vehicles are -- is performing really well and on the software side we are working now through -- now as Iveco, ourselves with great confidence working through the required homologation and regulatory requirements in order to get these vehicles registered on time. Most notably, obviously, functional safety, cybersecurity and all these things are of utmost importance, and we feel quite confident that we, as Iveco, have our hands around those items and continue from here stand-alone on our own with this only available electric truck platform in the industry.

Let me just highlight that everything else you see, whatever competitor is putting on the road, this is a diesel retrofit that they have. They take out the diesel engine, repopulate the space of components and call it electric. It is electric, but is effectively a diesel. And what we have done is we have started that 3 years ago to basically engineer and the ground up electric platforms starting with an electric axle and a modular architecture for battery electric and fuel cell, which is one of a kind at this stage and we believe to be ahead of the market with that kind of electric-borne platform by a few years already. So taking that over fully owning that -- the operations of this will greatly simplify as well for us the execution and launch of these vehicles to the market.

So that is -- it -- that's very much it about that point and when you said cash -- CapEx investments require to launch. I mean, by far, the bulk of the investments are already done. It's already invested, developed. And now we have, I think, for the current running year and the next year, there is about an exposure of EUR 100 million of cash that will be deployed to the now Iveco heavy-duty truck -- electric heavy-duty truck operation because the vehicles will be branded Iveco. They will carry the vin number of the vehicle, it will be Iveco, okay?

And there's about EUR 100 million. And then you ask yourself, so how much more than in your plan is that EUR 100 million? I mean we were expecting that EUR 50 million of the EUR 100 million would have been taken by Nikola in the 50-50. So in the end we had to compensate about just EUR 50 million in our EUR 4.1 billion overall capital outlay which was a re-prioritization of few things and that obviously synergies from now having it ourselves that wasn't the heavy lifting. So in the end, we are very happy about this and having now full control and ownership of this quite unique and first-borne electric platform for heavy-duty trucks.

[Operator]

Our next question comes from Monica Bosio calling from ISP.

[Monica Bosio, analyst]

Coming back to the Nikola joint venture, now that you can manage on your own the business. Are you open to potential partnerships, maybe with other players? I'm just wondering about Hyundai could be interested in the enlargement of partnerships, including also the joint venture. And as for the impacts in the future I understand the production will take 20-22 months. I was wondering if there will be some ramp up cost before launching -- before the start of the production and if this could be dilutive on the margins.

And another question is on the pricing, a follow-up from on the Daniela question. So do you still expect to fully offset the inflation also in the third and fourth quarter? And on the back also of the supply chain disruption, do you feel comfortable with the top end of your guidance? Or would you be more comfortable at the midpoint or the low range.

[Gerrit Marx, executive]

Thanks, Monica. So look, first of all, we are extremely excited about having full control and ownership of the legal entity that includes all the licenses and IPs and resources needed to complete the task and sitting in our -- one of our plans from the get-go. We are open -- as I said we are always open to partnerships that are mutually beneficial and I think you can imagine that a legal entity or let's say an entity that contains all of this is certainly an interesting playground to explore partnerships further down the road.

For now, we have greatly simplified the governance. We focus on execution, and that's what matters at this point in time. But if there are interesting conversations that are mutually beneficial coming up, we will not rule them out, okay? We have the freedom to do what we want with it, okay? That's, I think, a key message.

In terms of production, I think I need to correct something that you understood. We have production capacity available today, 3000 units per year, ready to go. Yes, we have it. There's no lead time nothing. It is existing. It's built. It exists. If we were to increase the production beyond 3,000 units, I said 18 to 24 months lead time to do that. But let me also give you a bit of color here. Under the regulations of CO2 targets in Europe in heavy-duty, which is minus 15% start in '25, and it will be -- it's still under discussion. Let's say, manage 50% by 2030. I mean just for -- I mean, minus 30% is currently the -- is the -- say, the announced target, but there is obviously a tightening going on. So it will be somewhere between 40% and 50%, let's say. And if that happens the volumes that we need to produce for electric trucks to stay compliant with this target curves is very well covered by already the 3000 units invested.

And if the vehicles, and that's what we obviously going to push for, will be a success in the market and we are having demand based need for increasing the capacity. We need to take that decision probably by the end of next year to then invest appropriately either a doubling of the capacity from 3,000 to 6,000 or we go full scale from 3,000 to 10,000 thousands.

And please don't forget as well, the Ulm site where we have the factory is a former heavy-duty truck plant. It is not a greenfield. We don't need to build new buildings, and we don't need to build new canopies. It is a truck plant. And we are basically turning an old brownfield into the most modern and electric truck site. So that -- yes, and that will be part of the plan. Some of it we have in our outer years of the plan but not in the near term years because it's not needed in light of the capacity.

We already invested, expensed and owned fully now. So pricing offset, yes, so pricing will more than offset inflation also in the third and the fourth quarter. We expect actually at this current stage, in our view, even a very, I'd say, significant offsetting of cost with price throughout the entire year, okay?

And in terms of -- what was the last point? Supply chain…

[Monica Bosio, analyst]

Yes, if you're comfortable with the top end or maybe that these are more reasonable?

[Gerrit Marx, executive]

Monica, after 5 -- let's say, after 4 quarters of me reporting, you should know me, okay?

[Operator]

The next question comes from the line of Martino De Ambroggi calling from Equita.

[Martino De Ambroggi, analyst]

The first question is again on the guidance for sales because you mentioned price will be positive without quantifying it. So my question is on the volumes component of this plus 3%, plus 5% just to have full picture. The second question is on the turnaround on the -- in the heavy trucks breakeven in Q1. So what is your reasonable expectation for the full year? Is it just a breakeven or maybe 1, 2, 3 percentage points, I don't know, in terms of profitability? And later, I have 2 follow-ups.

[Gerrit Marx, executive]

In terms of guidance of sales, I think we are -- look, if we take a very prudent view on the second half of the year, as I mentioned, and also in terms of supply chain disruptions without knowing we might be overly prudent here at this point, also saying 3% to 5% on top line now. Because if you do the math, and you take the order book, and you take the prices realized, and you hear me that I say we are holding the line on price, I think your model should come out higher than 3% to 5% top line.

What is the difference between your model and us is just caution about supply chain and what might happen in the fourth quarter where I, at this point, still I have no proof that it happens. But I am very cautious in light of where the truck site sits. So, so far so good, and I think from our guidance probably the 3% to 5% are rather the most conservative element. And on the turnaround of the heavy-duty I think we are looking at, let's say, on an average level more than breakeven, okay?

[Martino De Ambroggi, analyst]

And the follow-up on the heavy trucks is am I totally wrong in assuming that you are achieving the breakeven in Q1 with roughly EUR 900 million sales?

[Gerrit Marx, executive]

Including aftermarket, I don't have that number from the top of my head. Just a second. So it's the first quarter. Yes. I think a little bit more than that, rather a bit.

[Martino De Ambroggi, analyst]

And the last is on the finished products. So you quantified the amount in Q1. Could you remind me what was the amount in Q1 last year and at the end of '22?

[Gerrit Marx, executive]

So the -- in the Q1 of last year across all our plants, the total fleet was between EUR 150 million and EUR 200 million total fleet -- sorry, sorry, it's 2022 -- sorry, that's wrong. In 2022, it's around EUR 400 million, EUR 450 million in 2022, yes. And yes, that was the number.

[Martino De Ambroggi, analyst]

This is Q1 or year-end '22?

[Gerrit Marx, executive]

At Q1, end of Q1.

[Martino De Ambroggi, analyst]

In the end of '22, I don't remember if you provided it.

[Gerrit Marx, executive]

The end of 2022 was around EUR 100 million.

[Operator]

The next question comes from the line of Michael Jacks calling from Bank of America.

[Michael Jacks, analyst]

My first one, I'm just going back again to the Nikola business, but that's the case. Just to clarify, following the transaction, it sounds like there aren't any changes with regards to the rollout and timing of the electric truck. But will there be any changes with regards to the plans around fuel cell EVs later on? That's the first question.

And then the second question is just given what we've seen in the broader automotive space, it seems difficult to imagine that a dedicated EV business can be both cash generative and profitable in its early years. So it could be great if you just give us some sort of a sense for the impact that you expect to see from the consolidation of the JV near term and in the coming years as it ramps up at an adjusted or a group adjusted EBIT level?

[Gerrit Marx, executive]

Okay. Look, the -- on the timelines, nothing really changes. And to remind you, we plan to start in a small batch to start the battery-electric 4x2 heavy in the third quarter this year, I mean, with customers. And then we would continue that battery vehicle for, I'd say, a few hundred units, not much until the second quarter next year when the so called GSR B comes into place. GSR stands for general safety regulation and B is the second step. From that moment on, we are going to ramp heavily because that is then the run towards 2025.

The GSR A which is what we are now having on the road is, again, we expect that to be launched in line with prior timelines, and it will be a few hundred units between basically Q3 and then Q2 next year. And from that moment, we will launch.

The fuel cell time line is to launch it in the Q2 next year to customers. So Q1 start production, Q2 customers next year, and there's also no change in timeline on that one. Not at all. I don't know why we would. I mean, in case there is now as we are running the entire source code and the entire stack of data 100% ourselves if there is at some point the need, for example, to push more validation work and to go another loop or so I don't know yet. Yes, I don't have reasons to believe that this is the case but that would've been the ordinary course of business with or without doing this transaction with Nikola. Also that is irrespective of this transaction. So timelines are confirmed.

And in terms of cash and EBIT impact of the joint venture and its consolidation, right now we will from the moment we close this transaction still to be seen whether this is in June or July with we will see -- we will fully consolidate this X joint venture, which still needs a smart name, by the way. We are still looking for how we're going to call it line by line. And those effects are already fully reflected in the guidance that I gave in terms of cash and EBIT for the remainder of the year.

When ramping the business in working capital, we will be very prudent here as well to avoid absorbing too much cash into that working capital. And it is basically, no it is a build-to-order business. So we do not plan to build anything that isn't -- that hasn't an order behind. And the order book we are collecting makes us quite positive and optimistic for next year and the year to come when ramping the business.

As I also would like to add here, we expect that a part of those vehicles on the fuel cell side, maybe more so than on the battery side that will go through our gate pay-per-use fintech business that we have started in Iveco Capital. Gate will start its operation. Now in the second quarter towards the end of the second quarter with the electric dailies and we will put dailies on the roads on a pay-per-use all-inclusive basis where we will run our fintech payment backbone for customers -- selected customers at this stage. And when -- as the software and as the fintech piece of gate gets more mature towards the end of the year, we will start loading in as well those heavy-duty batteries and heavy-duty fuel cell trucks as they become available.

So there is a good mix also with our capital business and gates where we will have access to funding for 0 emission only vehicle portfolios. So that is what I can tell you. I can't give you exact guidance how this will tie into our financials next year or the following years because we will need to see how the split between BEF and fuel cell will go, how many customers will actually pay in cash, how many will lease and how many will go through the pay-per-use platform. But the interest for the pay-per-use is quite substantial.

In light of these vehicles being 3 to 4x the price of a diesel and as I mentioned in another occasion, no fleet that has 50 trucks in their fleet today and they need to replace 10 with -- 10 diesels with 10 fuel cells, none of them can go to their house bank and just ask for 4x the funding for 10 trucks of a Gen-1 technology. I mean, this is not going to happen. So the leverage with a strong fintech is essential to roll and scale electric vehicles especially in the heavy-duty segment.

[Michael Jacks, analyst]

And then just one additional question if I may. Used truck prices are continuing to correct in North America and I would imagine that this will happen in Europe too soon or later. Are you able just to provide some kind of a sensitivity of your earnings to change using residual values for used trucks and the impact on financial services business as well?

[Gerrit Marx, executive]

Well, look, we have been always very prudent when using used values and calculating our lease agreements ever since. We have enjoyed very nice used truck prices over the last quarters, and they have not moved in my -- from my point of view here in Europe at all at this stage. It's noteworthy to repeat, though, we have basically no used truck stock anymore. It's all gone. And whatever we get as light-duty trucks dailies from lease agreements, they are almost already sold when they enter the yard. And also here, pricing discipline has worked.

Similar, I mean, medium is very small and on heavy-duty trucks we will start to get our S-WAYs -- the first S-WAYs from end of '19 beginning of 2020 now back into the fleet which obviously selling at higher used truck prices than the Stralis, which was the previous version that we had in our used truck stock. So overall, I don't see that happening at the moment. And if it happens, we have good momentum and very low stock levels at this stage to manage the situation around the used trucks really well.

[Operator]

The next question comes from the line of Jose Asumendi calling from JPMorgan.

[Jose Asumendi, analyst]

Couple of questions, please. Can you talk little bit about the Latin America market and what actions are you taking there to withstand the declining volumes and when do you see market coming back on the van or heavy-duty side? Second powertrain division, this is a double-digit margin business. So what is dragging the profitability in the first quarter and how do you see that evolving into that maybe high single-digit path?

And then 3, final one, can you talk a little bit more about the Nikola Iveco collaboration. Where do you see this going in the next 3, 5 years? I mean there's a lot of moving parts and moving pieces in the short term. But what is a bit the end-game or the purpose of the collaboration with Nikola, in Europe or in the U.S., let's say, 5 years out?

[Gerrit Marx, executive]

Look, on Latin America -- Latin America is a build-to-stock market, not a build-to-order market. So what we have done is we have slowed down production when we saw that the market could possibly decline. So we have started to slow down, managing very tightly dealer inventories. So we are now at this stage, looking as well at slowing down the plants in any case, but also structurally releasing some capacity as we are going into the second half of next year as we do not expect Brazil in particular, to bounce back from the levels that we see at this point in time. So we are taking a prudent approach there.

From manufacturing, we are quite flexible, and this is what we are doing and managing cost and capacity before things happen at this stage living on a tightening dealer inventory to avoid oversupply. So that is basically what we are doing in LATAM.

On the FPT business, when we closed last year, I clearly said FPT has bottomed out its margin drag predominantly driven by the loss of the Fiat Ducato business, which was lost in end of 2019-2020. And then obviously, it takes a while until it runs out. And the last Ducato engines were supplied in 2021 then. Yes, and we have since -- well, since a few years since we knew that this would happen double down on order intake, backfilling this loss with other contracts and other customers, also from the agriculture and construction side, non-CNH, by the way, yes. We are selling these engines really well to other Ag and CE groups.

And I said that we were going to step up from now on FPT's margin by 50 to 100 basis points year-over-year from now on, back into the high single-digit. Maybe we are faster. Maybe there's a quarter where we go a little slower. But this quarter, we delivered, and it is 90 bps that we stepped up, yes, quarter 1 over quarter 1, and I have reason to believe that we will deliver that step up also for the full year. It comes step by step. It's not fashion industry engines, yes. You have a contract, you manage the cost and you gradually change the trajectory. The trajectory was for certain reasons going down. And now we have turned it around. And from now on, it goes 50 to 100 bps year-after-year up back to the high single-digit place where it belongs as you rightfully said.

And look, the Nikola Iveco collaboration is a great success, and we have delivered on the milestones along this entire trajectory regardless what was thrown in our way or regardless what was happened. I will not comment on whatever happened over the last 3.5 years, but it was a lot. And we delivered and we came to this point where we have now a vehicle which is clearly in its vehicle design and integration from a technology point of view, leading and who was at the International Truck Show in September last year could see that there are retrofits and they are really electric-borne ones and we were the ones having it.

So the success is clearly there from the partnership. But we need more focus and the conclusion of Nikola was that the focus is rather in the United States, and it is rather on -- also in combination on the energy side and that Michael Lohscheller commented on that in his earnings. And for us, clearly, the center is Europe. But we continue to collaborate and to support each other. We have -- we are supplying electric axles and cabins to Nikola from our network. There is technical engineering in the one or the other direction where needed, but it's not any more a structural element. This is over. But on an as-needed basis, we will support each other as we go on. And we remain a shareholder with EUR 5 million shares -- about EUR 5 million shares in Nikola further on.

So that is basically it. Where it will be in 5 years? I don't know. But I'm sure this focus will enable both of us, them and us to achieve the full potential from that focus on businesses and regions which we truly know and segments that we can, yes, penetrate with our operations more effectively and more clearly by having a clear single ownership of the product and the business.

[Operator]

And our final question comes from the line of Emmanuel Kirunda calling from Morgan Stanley.

[Shaqeal Kirunda, analyst]

Just a few more questions on the Nikola JV. Could you please confirm whether the plan was always to take control of the JV? And also could you confirm how much input is going to be from Nikola going forward? What level of support does technical engineering entail? Though the technology may be leading today, given that the very EV trucks are in its infancy, what gives you the confidence to continue independently? And then also on the revenue front, does this mean that Nikola will no longer sell to key U.S. customers that have operations in Europe and therefore, slightly improve your market in Europe?

[Gerrit Marx, executive]

Look, it was never the plan that we would buy them out from the joint venture. I mean that -- you start a joint venture to be a joint venture. And the idea was, at the time when we founded the joint venture a couple of years ago to continue to partner, to grow it. We had first was the manufacturing JV, then we added now engineering resources. So we have about a 100 folks in the JV that do that. And -- so no, it was never the plan. It was planned to grow. But in light of, let's say, the world around us and the things that happened, I think the next chapter of our partnership was an unplanned one yet, I think for both of us a financially and operationally very attractive one to be more focused and going that way. So no, it was not a plan. It's simply the consequence of the reality around us, and we feel pretty excited about this step. While we continue to be partners with Nikola, we are friends and partners, and we continue to support each other. So therefore, no, not planned, but it's clearly a great step for us.

The level of support is, I would say, 0. They don't support us in those activities anymore. We have now an interim period of a couple of months where we take things over and where things are being transferred in the left and the other -- the left and right because this deal as announced needs to close. It's a definite documents that were signed. So therefore, it is going to happen, but there's no support needed.

My confidence level that we are independently running this is very high. And the reason is the hardware of the truck, the backbones of the truck, how to put the truck together. I mean this is what we do since a long time as Iveco, okay? And having designed and having learned to design electric-borne commercial vehicles was a joint experience, and now we know how it's done and how to do this with its challenges on the left and the right side. It does come with a investment in software, which is not just because of this because we have done investments in software already years ago, software competencies, software coders. And to just emphasize this year, the software that runs in our electric daily is fully coded and programmed by our own Iveco resources just to make that clear. So we do know how to code an operating system of an electric vehicle. And now we are taking over the operating system of the heavy truck as well. And that comes with further step-ups in software resources and digital capabilities. But I'm very confident that we get there.

As I said from the beginning, we are the humble fighters of this industry, and we have done and outpaced and outsmart at the industry in several aspects before and we will continue to do so. And that is about speeds and the ability to deliver and which we have proven and which we will certainly continue to do so. Confidence level is pretty high.

Your question about customers, Nikola will sell in the United States to whoever wants a truck in the United States, and regardless of who the customer is. And we're going to sell in Europe to whomever the customer is as well. So there is no kind of key account over here. You can sell kind of arrangement that doesn't exist. There's no non-compete, there's no non-touch, nothing. We are, in the end, 2 independent players from this regard.

[Shaqeal Kirunda, analyst]

And then just my final question. Within the industry during Q1, we saw really strong truck demand in heavy-duty finally being served by improved supply chain. I know you said you were prudent, but how much does the improved market outlook and guidance rely on current supply chain conditions being consistent for the rest of the year? And also, given that we saw the quarterly profitability in heavy-duty truck, how much does that compared -- how much does that depend on a quarterly basis on these conditions?

[Gerrit Marx, executive]

Well, as I said, we have taken a very prudent view on the second half of the year, so which means that I do not expect supply chain to be fantastic. I do expect plan to have a continued challenged supply chain, which is reflected in the even updated and upward guidance that I gave. I mean, of course, if now things lighten up and I get everything I need, at least, let's say, 95%, I mean, we are -- we would have given you a different guidance, okay?

So again, I have no reason -- I have no substance and proof that there will be supply chain challenges in the second half of the year. However, the last 12 months and 18 months have proven that this is an industry of surprises. And while our supply chain team is doing a phenomenal job tracking and tracing and countering the effects of volatility in the supply chain, we have taken a very prudent view in the second half. And obviously, of course, if there was a shutdown on heavy or if there was a major impact on the heavy-duty truck production, that would certainly leave its traces also on the margin and the EBIT. But at this point, there is no such specific encounter planned in the numbers. But we are continuing to expect supply chain disruptions for the remainder of the year, which is reflected in the guidance.

[Operator]

And this now 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 very much, everyone, for participating in today's call, and have a nice day. Bye-bye.

[Operator]

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