Iveco Group NV

MIL:IVG

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to today's Iveco Group 2022 second quarter and first half year 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. Sir, please go ahead.

[Federico Donati, executive]

Thank you, A.J. Good morning, everyone. We would like to welcome you to the webcast and conference call for Iveco Group's second quarter financial results for the period ending 30 June 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.

Also in today's call are Iveco Group CEO, Gerrit Marx; and the Group CFO, Francesco Tanzi. They will use the material available for download from the Iveco Group website. 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 prospective publishing on the 11th of November 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. Before going into the quarterly performance and what we accomplished during the period, I would like to say a few words about BEYOND - Iveco Group Days. Our 5-day event that we held during the week of July 13 with around 4,500 guests on site and more than 1 million readers and online viewers on several media outlets and channels.

We've included a slide about the event in the presentation. But first, I would like to personally thank all the guests who participated, and our colleagues and partners who contributed in a decisive way to make this event a great success. The event was structured around 3 fundamental themes for Iveco Group and our industry; technology, sustainability and partnership.

We discussed and exchange ideas with value with stakeholders and partners with who we are moving forward together towards the connected and increasingly automated net zero future with the common goal of ensuring access to reliable and sustainable mobility.

Beyond was an opportunity to showcase Iveco Group's ability to innovate both its product and service offering in a fast-changing landscape that requires unraveling the future of road transport, urban mobility, powertrain and emerging technology, smart factories and a completely new business model.

Some of that have been -- has yet to be discovered. And -- but we cannot innovate and transition alone in this journey, which is why we have sought out strategic partnerships in our drive forward partnerships that benefit both parties equally and in a mutually beneficial way. As I emphasized during the event several times, change is good and offers the biggest opportunities for those like us who think -- who aim higher, think bolder and question established industry paradigms for the greater good of a more sustainable society.

Let's move now to our second quarter performance. I'm pleased to report solid profitability performance ahead of our preliminary indication at the beginning of the quarter, mainly due to net price realization, a better mix and higher volumes and price realization for used vehicles.

This came about notwithstanding persistent pressure on the supply chain from continuous component shortages that cause delays, lowered our output and further increased our net inventory levels with unfinished products, remaining to be shipped to our final customers in the upcoming quarters. This is similar to what we already experienced during the first quarter in 2022.

Our focus has remained on the conscious management of our cash. Free cash flow absorption from industrial activities was almost entirely due to the aforementioned increase in inventories resulting from unfinished products, which we will deplete over the course of the next month. Similar to our first quarter, and despite a continued investment into our future technologies, we are traveling at a free cash flow breakeven during the first half of 2022, if you adjust for the net increase of unfinished vehicles in our fleet due to the supply chain situation.

Looking at our financial results. The consolidated net revenues were up 1.5% versus the previous year with the adjusted EBIT margin at 3.5%. Adjusted diluted EPS was $0.20 per common share. Our order book remains solid with more than 30 weeks and more than 40 weeks of production already sold for light commercial vehicles and medium and heavy commercial vehicles, respectively.

There were no exceptional cancellations of orders during the quarter, and our order intake meets our expectations and plan. At the end of the quarter, our net industrial cash position was solid at EUR 625 million, notwithstanding a negative free cash flow of EUR 111 million in the quarter. And Francesco will provide more granularity around this later in the presentation. Available liquidity was at EUR 3.5 billion as of June 30, 2022, up EUR 105 million from March 31, 2022, including EUR 2 billion of undrawn committed facilities.

In summary, we have delivered a good second quarter, notwithstanding persistent pressure coming from supply chain and component shortages, particularly semiconductors. We expect the component availability situation to improve in the second half of the year, but remain quite volatile, permitting us to lower company inventory for the end of the year.

Regarding the supply chain, the expectation for the remainder of the year is -- for a similar level of criticality experienced in the first half with the raw material cost of energy and gas is expected to increase, but there should be no impact deriving from its availability when looking at our facilities. On a full year basis, we are still projecting an offset in production costs through pricing.

Before moving ahead, let me just inform you that on July 20, Iveco Group executed a dissolution agreement with the Russian joint venture, Iveco AMT, also formally presenting our withdrawal from the legal entity. Accordingly, the Iveco Group stake, which was 33%, was returned to AMT. The price was appraised at net asset value, license agreements, namely the tracker license and the Eurocargo vehicle licenses and trademark license agreement has been terminated.

Supply agreements for CKD units ordered, but not delivered due to sanctions have also been terminated. Warranty claims and technical support on assault vehicles will no longer be attributed to AMT.

On the next slide is a summary of some of the main events that occurred during the quarter. On April 28, we signed a letter of intent with Eni. The two companies will bring together their competencies to explore potential cooperation on sustainable mobility initiatives in the commercial vehicle sector in Europe and accelerate the decarbonization of transport in which both have seen -- have been active for quite some time.

Iveco and Eni aim to define an integrated sustainable mobility platform for commercial vehicle fleet by offering innovative vehicles powered by biofuels and sustainable energy factors, such as HVO, hydrotreated vegetable oil biofuel, biomethane, hydrogen and electricity and the related infrastructure, of course. Again, with Eni and together with CNH Industrial, on May 25, we signed an MOU for potential joint social development initiatives in countries of common interest in the areas of agriculture, sustainable mobility and education, each company contributing to their respective industries.

Specifically, the parties will focus on enhancing the value chain in the agriculture sector to promote food security, increase the efficiency of farming and farmers access to the market, including through the development of solutions for sustainable logistics and the movement of goods, and people of course. And finally, on June 20, Iveco Bus announced plans to restart production of buses in Italy. The vehicles will be based on state-of-the-art technologies, including those linked to electric battery and hydrogen propulsion.

The project will contribute to Italy's energy and ecological transition of public transport and will positively impact the development of the associated supply chain, the acquisition of new technologies and know-how for the country and employment in the area is concerned. More specifically, the expansion of engineering and manufacturing activities for electric batteries is being studied for the plant in Piedmont.

While the company is considering the installation of new lines for the final assembly of high-tech zero-emission battery electric vehicles and fuel cell electric vehicles and low-emission latest generation methane, biomethane and diesel, obviously, buses in Foggia, where we already have one of our biggest engine plants today. This initiative will also benefit the other group sites that are already dedicated to Iveco Bus production because the initial manufacturing steps concerning set new buses will be launched at these plants.

The process will then be continued and enriched with value-added technology in Foggia by means of alternative propulsion systems produced in turn and hydrogen fuel cells. Production will be completed in Foggia with additional components largely supplied by the Italian automotive mechanics supply chain. The research and development and manufacturing of batteries, as well as the supply of engines for the low emission vehicles will be entrusted to FPT Industrial, the group's brand specialized in powertrain technologies and the global leader in the design, production and sale of powertrains.

Subject to the approval by competent Italian authorities of our application for a development contract, the transition to an advanced design phase and therefore, an operational phase will take place by the end of 2022 with the goal of producing the first buses in spring 2023. This production will result in incremental volumes versus our business plan. More than 3,000 low and de emission buses in the first few years, then if the market responds positively with an annual rate of about 1,000 units per year, aiming for increasing substantially our current market shares in Italy and Europe.

Moving to the next slide, #5. You can see the industry volume performance for Q2 2022, with a change in percent versus the previous year. The truck industry in Europe was still negatively affected by component availability and the continued supply chain issues, resulting in volumes down 24% in light-duty trucks and 2% in medium and heavy. The South American market was positive for light-duty trucks, up 13% year-over-year, but down 5% from medium and heavy. In the rest of the world, for the same reasons I just mentioned, so shortage of components and other supply chain issues, both the light and -- light duty and medium and heavy-duty trucks were down double digits versus the same period last year. Moving to buses. The European market was down 11% and South America was down 4% for this last year.

On Slide 6, we show our usual channel inventory statistics. The truck's channel inventory was down 3% year-over-year on a worldwide basis, down 7% in light, and up 13% in medium and heavy trucks. Looking at the company inventory versus last year on a worldwide basis, light commercial vehicle alone was almost flat, and medium and heavy was up 39%, mainly due to finished goods shipped to body builders that will be deployed in Q3 as well as stockpiling in South America due to the introduction of Euro 6. Such increased shipments to body builders are a great achievement of our recently renewed heavy-duty truck [Indiscernible] such as the T-Way and X-Way.

Throughout the quarter, we underproduced retail sales by 3% in trucks with an underproduction of 12% in light and an overproduction of 16% in medium and heavy on a worldwide basis. If we look at Europe only, we underproduced retail sales by 70% in light and overproduced retail sales by 18% in medium and heavy. For trucks, our expectation for the full year is for a mid-single-digit overproduction versus retail on a worldwide basis.

Slide 7. Moving on. I'm on Slide 7 now with our deliveries and order intake level. There is a 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 down 20% on a worldwide basis, mainly driven by Europe, that was down 22% due to component shortage, negative impacts. Order intake was down 12% on a worldwide basis and down 10% in Europe as a consequence of conscious pricing actions to better balance the order backlog, new orders coming in and visibility on cost development. Book-to-bill was at 1.22 on a worldwide basis and at 1.23 for Europe alone.

Moving to medium- and heavy-duty trucks. Deliveries were down 1% on a worldwide basis with Europe down 3%. Order intake was down 7% on a worldwide basis and down 19% in Europe, versus the same period last year for the same reasons outlined before for the light commercial vehicles. Book-to-bill was 1.33 on a worldwide basis with Europe at 1.46. As already mentioned in my opening remarks, we continue to be laser focused on our inventory levels, managing our order book to preserve relative profitability. As a result, the year-over-year contraction and order intake level needs to be seen as a consequence of the managerial decisions to restrict order slotting to counter large order books and delivery times and to foster pricing discipline throughout the entire distribution chain to pre-end midterm material cost volatility. Looking at buses. Bus deliveries were up 20% on a worldwide basis with Europe up 12% versus Q1 2021. Order intake was up 26% on a worldwide basis with book to bill at 1.26. Looking at Europe only, order intake was up 17% and book-to-bill was at 1.3.

Let's move on to Slide 8, and our European preliminary market share. In our light commercial vehicle segment, we have been able to once again conquer market shares in a declining industry. Looking at the upper end of the segment, we have further consolidated our leadership position with 63.8% of the market, up from 63.4% in Q1 2022. We registered a strong performance in the professional cab chassis segment as well, ending the quarter up 390 basis points versus Q2 2021 to 33.4%.

Looking at the entire LCV segment, we ended the quarter at 15.3%, up 200 basis points versus the second quarter of last year. When looking at the performance of our medium and heavy-duty trucks, it is important to notice that these were the segments most severely affected by component shortages, in particular, the semiconductors, resulting in delays in shipping our products to final customers. Despite continued supply chain issues and component shortages, we have been able to improve our market share from Q1 2022 in medium and heavy as well as in heavy alone, confirming our confidence in recovering market shares based on our solid order intake. As already outlined in our Q1 earnings call, reported market shares do not serve as performance indicators for actual product success. It is rather a mirror for the different strategies OEMs deploy to navigate through this unprecedented supply chain situation.

Moving on to the next slide, #9. I would like to draw again your attention to our BEYOND Iveco Group Days event and in particular, on the 2 announcements released during the week of the event. Let me start from the 2 press releases. On July 12, 2022, we announced that FPT Industrial and Blue Energy Motors as zero emission truck technology company headquartered in Pune, India, and engaged in the manufacturing of clean energy trucks signed an agreement to introduce the first liquified natural gas LNG-trucks powered by FPT 6.7 liter engines on Indian roads by the end of 2022.

In China, natural gas-powered heavy trucks already account for close to 10% this year for newly registered vehicles. And we do see a similar trend to come in India yet with a very different timing and product configuration. This different -- this agreement is the first step in a potential long-term partnership to leverage the specific characteristics of India's commercial vehicle transport market.

A total truck running park of about 3.5 million vehicles and buying decisions strongly driven by total cost of ownership. Once the TCO parity threshold with traditional engines is reached, and considering India is increasing its stringent emission standards now comparable to EURO 6 already, the adoption of LNG technology is expected to be quite rapid. The engines will initially be manufactured in SPT's Industrial Turin plant in Italy, which specializes in producing this type of medium displacement engines.

On the following day, July 13, Iveco Group with Brand Iveco Bus announced that it will partner with H2 to equip the future European hydrogen powered buses with world-leading fuel cell systems. H2, the fuel cell system-based hydrogen business brand of Hyundai Motor Group was launched in December of 2020 as part of Hyundai's strong commitment to a hydrogen economy.

With its proven fuel cell technology utilized in Hyundai fuel cell vehicles, H2 is expanding the provision of fuel cell technology to other automobile OEMs and non-automobile sectors to make hydrogen available for everything. Moving forward quickly to spirit the mobility of the future, Iveco Bus is already participating in European tenders for fuel cell buses powered by H2.

Furthermore, the recently announced plan to restart production of buses in Italy that I talked about earlier will provide another opportunity to manufacture new buses powered by H2 hydrogen fuel cells. This initiative aims at leveraging the exceptional technology and competencies of both entities in the urgently needed renewal of Italy's public transport.

As mentioned in my opening remarks, from the 13th to the 17th of July, here Turin, we hosted our BEYOND event at the OGR, the former giant workshop for railway repair and maintenance. We were delighted to host representatives from some of our partners to speak along with leaders from different industries that we aim to discuss the three main topics: Technology, sustainability and partnership. The event also provided our guests with a chance to see firsthand our latest vehicles and powertrains, many of which will be making the commercial debut at the September International Truck Show in Hanover, IAA.

However, at the IAA, we are going to showcase numerous advancements of what we put on display in Turin last week. And additionally, several innovations such as the all new and all fuels capable heavy-duty engine, Cursor XV 13. It will combust liquids, as well as gaseous fuels such as biomethane, hydrogen or blends of both, which is called hithane.

Additionally, during the press conference that opened the event, we presented our company purpose. Why do we need a purpose? I mean, simply put it defines the reason our company exists and illustrates our products and services positively impact customers, stakeholders and the communities we serve.

So here it is. A vehicle group is home of unique people and brands that power your business and mission to advance a more sustainable society. Identifying our purpose naturally led to defining our corporate values with input collected from our 34,000 employees around the world. Our 5 values reflect our shared culture and the way in which we work. First, we go beyond of the obvious. Second, we contribute diverse strength. Third, we take ownership. Four, we do what is right; and Five, we collaborate to win.

As you see, going Beyond is the first of our values and the very foundation of our 5-day event, where we highlighted that we look beyond the obvious, beyond just vehicles, beyond what our business today and can be. Our industry transforms and the Iveco group goes beyond. We can take this even further because we also go beyond Turin, our hometown. We go beyond to where we see a relevant, profitable and sustainable future for the new vehicle group and all its employees, and we welcome like-minded stakeholders to join us on this fast-paced journey. I will now hand over the call to Francesco, who will take you through the full year financial highlights, after which I will then conclude with final remarks. Francesco?

[Francesco Tanzi, executive]

Thank you, Gerrit, and good morning also from my side to all participants on this call. I'm on Slide 11 with our second quarter 2022 financial highlights. We ended the quarter with consolidated revenues at EUR 3.4 billion, up EUR 1.5 billion versus the previous year. Financial services, net revenues were at EUR 60 million, up EUR 15 million versus the previous year. Net revenues from industrial activities were at EUR 3.3 billion, up 1.1% versus the previous year, mainly due to the positive price realization.

Consolidated adjusted EBIT was slightly down year-over-year to EUR 118 million, with a margin at 3.5%. Industrial activities, adjusted EBIT was EUR 91 million with a 2.7% margin with price realization substantially offsetting the higher cost of raw materials, including energy.

Adjusted net income was EUR 60 million, which excludes a negative after-tax impact of EUR 15 million from first-time adoption of hyperinflationary accounting in Turkey. The portion of the adjusted net income attributable to Iveco Group was EUR 54 million or adjusted diluted earnings per share of $0.20, comparing to the $0.26 in Q2 2021. Reported income tax expenses was EUR 29 million with an adjusted effective tax rate of 33% in Q2, 35% in H1 2022 and is confirming the trend that we anticipate to you during the Q1.

The adjusted effective tax rate reflects a different tax rate applied in the jurisdiction where the group operates and other discrete items. Net industrial cash remained solid at EUR 625 million, and includes an additional and final EUR 45 million cash out from the restructuring of our Chinese joint venture performed in 2021. It is important to highlight that this amount will be largely offset by a cash in of more than 80% of the total EUR 186 million, which is composed by EUR 141 million that we paid in Q1 and this EUR 45 million that I mentioned before. And this amount will be offset during the third quarter of this year for 80%, as I mentioned.

In natural free cash flow, as already mentioned by Gerrit, in his opening remarks, was negative EUR 111 million, mainly driven by negative working capital due to higher inventories entirely correlated to the already mentioned unfinished products, and lower payables due to a lower production level on a year-over-year basis. Our available liquidity, cash and undrawn committed lines was up EUR 105 million from 30 March -- 31st of March 2022 to EUR 3.5 billion, which includes EUR 2 billion of undrawn committed facilities.

Moving to next slide, we show our net revenues from industrial activities split by region and segment, as well as the net revenues work. As already mentioned in the financial summaries, why the improvement in industrial activities net revenues was entirely related to gross pricing, as you can see from the graph, more than offsetting the negative volume and mix. Looking at the split by region and percentage change on a year-over-year basis, you can see the net revenues were slightly down in both Europe and rest of the world, while up quite significantly in both South America and North America.

This is part of our planned trajectory for finding a better balance in our revenue sources in order to counter macro-regional cycles more effectively. Looking at the split by business unit, buses were once again significantly up versus last year at 19%. Trucks grew by 1% and Specialty Vehicles net revenues were up 10% versus last year. Powertrain net revenues were down 4% versus last year. And as a reminder, with regard to our powertrain performance, this was the last quarter with a tough year-over-year comparison stemming from the discontinuation of the Stellantis contract. Starting from Q3 this year, the performance comparability will be issued.

In the next slide, #13, we see our Industrial activities adjusted EBIT work by segment and driver. The Industrial Activities adjusted EBIT was at EUR 91 million with a margin of 2.7%, down from 3.3% last year. The price in net only partially offset production cost during the quarter at Industrial Activities level with volume and mix slightly positive year-over-year and slightly higher SG&A.

The Commercial and Specialty Vehicles adjusted EBIT was EUR 78 million, EUR 94 million in Q2 2021, driven by higher product costs mainly due to the increased raw material and energy costs, partially offset by positive price realization. The adjusted EBIT margin was at 2.8%. The Powertrain adjusted EBIT was EUR 47 million, EUR 59 million in Q2 2021, mainly due to unfavorable volume and mix related to the discontinuation of the Stellantis contract fully in line with our past forecast. Positive price realization offset the raw material cost increase.

Adjusted EBIT margin was at 4.6%. Once again, I would like to reiterate the progress in replacing the supply agreement with Stellantis with new third-party clients is proceeding in line with our expectation, and we will be able to completely offset the lost units by at least mid-2023, as already disclosed. Starting Q3 this year, comparison versus previous year will become more easier in terms of performance for our powertrain business based on the Stellantis contract discontinuation.

Moving on the next slide, and I'm on Slide 14 with our Financial Services performance, which continues to contribute positively to our overall profitability quarter after quarter. The adjusted EBIT increased $11 million to EUR 27 million, primarily due to higher wholesale portfolio and better collection performance on managed receivables. During the quarter, we also released some provision built up during the pandemic period. Excluding this release, the adjusted EBIT remained slightly positive compared to last year. The managed portfolio, including unconsolidated joint ventures, was EUR 5.76 billion at the end of the quarter, of which retail was 49% and wholesale 51%, up EUR 460 million compared to the end of June 2021. The receivable balance greater than 30 days past due as a percentage of the portfolio was 3.6% -- 4.7% as of 30th of June 2021, and was flat versus Q1 2022.

The financial services equity was at $752 million, entirely recovering the impairment of certain assets in connection with our Russian and Ukraine operation implemented in Q1 this year. Moving on, on Slide 15, we have highlighted our net industrial cash walk, including a snapshot of working capital behaviors and free cash flow seasonality. To explain the performance, I would like to kindly ask you to focus your attention on the 2 graphs at the bottom of the slide.

Let me start from the working capital components. As already explained, higher inventory was the major contributor to the absorption, as well a lightly lower payables due to the lower production volumes versus the previous year. Receivables were flat year-over-year on the back of our usual intercompany sales of receivable rolling activity in Europe. If we look at the graph on the right-hand side of the slide, adjusted for the increase of our unfinished vehicle stock and the related effect on the normal free cash flow seasonality, Iveco [Indiscernible] essentially a free cash flow breakeven in H1, meeting all investment schedule across its sample programs.

We expect to deplete the fleet in Q3 and Q4 this year. Consequently, our expectation is for a lower seasonal absorption -- solid lower seasonal absorption in Q3 and higher cash generation in Q4 versus last year. As you can see in the walk, we keep investing in our new energy future with investment up EUR 31 million versus the same period last year.

Finally, as already mentioned, when commenting on the financial summary slide, our net industrial cash position includes an additional and final EUR 45 million cash out from the restructuring of the Chinese joint venture performed in 2021. Such amount will be largely offset by a cash in of more than 80% of the total EUR 186 million that I mentioned before. And this amount will be cash in the third quarter of this year.

Moving on to my last slide before turning back to Gerrit Marx, we have the debt maturity profile as of 30th of June 2022, and our available liquidity. As already mentioned, we ended the quarter with EUR 3.5 billion of available liquidity, of which EUR 1.4 billion in cash and cash equivalents and $2 billion in undrawn committed facility. Our available liquidity more than covers all the debt maturities of 816 million for the upcoming years. 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. I'm on Slide 18, where 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 continuous uncertainties in the supply chain. New Covid-19 waves, political instability and energy price and supply challenges. Our preliminary expectation is for the light commercial vehicle worldwide industry to be down almost 10% versus last year, with all regions down on a year-over-year basis.

In medium and heavy, we see the worldwide industry flat versus 2021 with the European markets, excluding the U.K. and Ireland to be up almost 5%. For buses, we continue to see good momentum with all regions up year-over-year, resulting in an expectation for the worldwide industry to grow by 5% versus full year 2021, with South America up 10% to 15%.

Moving on to our preliminary financial outlook. The company expects continued uncertainty in the global supply chain, as well as issues related to raw material price increases and energy cost and supply. New COVID-19 waves are also elements of uncertainty, and we are monitoring the evolution very closely. As already mentioned, we plan to actively deplete our fleet sitting in our inventory during Q3 and Q4, resulting in a better year-over-year free cash flow seasonality. Considering all these uncertainties and based on the preliminary industry outlook, we've just gone through, our expectations are for our consolidated adjusted EBIT to be between EUR 400 million and EUR 420 million.

Net revenues of industrial activities to increase between 3% and 4%, SG&A to remain well below 6.5% as a percentage of industrial activities net revenues, and net industrial cash at around EUR 1.2 billion at the end of the year. Finally, our expectation is to offset product costs with pricing on a full year basis. In conclusion, before opening up for questions, let me just provide you with some final remarks. We expect headwinds to remain for supply chain and raw material costs, including energy in H2. While the expectation is for a better availability of semiconductors in the second half versus the first half.

We are maintaining tight control of our working capital inventory levels, actively managing our order book to preserve healthier profitability. The available liquidity is expected to remain solid. At the IAA Hanover exhibition that will take place in September, we will present new products and technology as well as officially open the order book for the electric daily and the Nikola Tre battery electric versus the European one, both of which will enter the market in 2023.

And finally, as already demonstrated during these 2 first quarters of 2022, with our numerous announcements, we will continue to pursue our Iveco Group way, adding new partnerships and collaborations while implementing existing projects with different partners in the various identified areas of corporation. This concludes our prepared remarks, and we can now open it up for questions. Operator, please go ahead with questions.

[Operator]

[Operator Instructions] Now we will take the first question, and it comes from Nancy Ni from Goldman Sachs.

[Nancy Ni, analyst]

I just had one first on -- well, clearly, it seems like kind of energy costs and raw material costs were a bit of a headwind this quarter. And I was just wondering sort of are you confident, you could stay above breakeven in the event of the energy crisis triggering kind of a European recession, and sort of what level of cancellations in the backlog would you be able to cope with.

[Gerrit Marx, executive]

We are confident to stay above breakeven here. We have run several scenarios in this regard. Obviously, if energy supply shuts down and the world comes to an end, I mean, then it will be hard to keep breakeven. But in a -- let's say, reasonable realistic scenario analysis, we should comply and stay above. That's our expectation.

[Nancy Ni, analyst]

Yes, I was going to say that's the second part.

[Gerrit Marx, executive]

Sorry, then second part?

[Nancy Ni, analyst]

I was just wondering what level of cancellations in the backlog would you be able to cope with?

[Gerrit Marx, executive]

Well, look, we have right now 30 weeks in light, 40-plus weeks in medium and heavy. A healthy level of an order book should be at around 20 weeks. I mean, healthy in the sense of confirming and delivering in line with expectations. So we are traveling in both cases, light, and medium and heavy at 2x this level. So far, we do not see any exceptional cancellations in our order books.

[Nancy Ni, analyst]

Okay. Great. And my second question was just on -- so kind of your industry volume guide since Q1 has gone down for European LCV and MH by kind of almost 10%, but also you sort of upgraded your net revenues growth guidance. So I was wondering how you think about bridging that? Is it kind of more market share, better pricing or...

[Gerrit Marx, executive]

No, this is entirely driven by the supply chain. I think the industry could have delivered a much higher market in the first half than it actually happened because of supply chain constraints. And what is happening in the second half now is as per the expectation that we can get a better rhythm in our plants in line with the suppliers so that we just keep delivering what we order and more -- what get ordered and more in order to then start to deplete the fleet, and this will all translate into the second half being stronger than the first half in terms of market...

[Operator]

Our next question would come from Martino De Ambroggi from Equita.

[Martino De Ambroggi, analyst]

The first question is on medium and heavy. Just to understand if they are able to approach -- they were able to approach the breakeven level in the first half this year? And what's your projection for the full year, so medium and heavy standalone? The second is on the free cash flow. I understand that the net working capital in your assumption, we have recorded in the second half. Could you quantify exactly what was the amount of unfinished products influencing the cash absorption of inventory? And if you could elaborate on more on the recovery in the second half, which is not unusual for you, but what are the basic conditions to achieve it? And I have a follow-up later.

[Gerrit Marx, executive]

On the medium and heavy business itself, we are quite content with its trajectory. So here, price realizations are helping us to get the whole goods business to a better place. So this is on a good trajectory. The combined medium and heavy business is approaching its breakeven. And we will see how the second half is going to play out in particular with regards to the depleting of the fleet inventory that we have. As you might have seen in -- or I might have heard in the prepared remarks, the second that was hit the hardest from a supply chain and semiconductor situation was indeed the BEV, particularly the heavy-duty side.

So we need to get these vehicles into customer hands. And then we'll see where we travel in this segment, but we are quite content with the trajectory of that business. And then in terms of the net working capital and the fleets, we have in the first half of this year, I mean, in terms of free cash flow, we are about negative 270, 280. I can tell you that the increase of our fleet is significantly higher than that, that we have accumulated since the beginning of the year.

[Martino De Ambroggi, analyst]

So the portion related to the unfinished products could be well in excess of EUR 100 million or EUR 200 million, sorry?

[Gerrit Marx, executive]

No, it's in excess of the EUR 270 million, I mentioned -- in excess of.

[Martino De Ambroggi, analyst]

Okay. Okay. And the follow-up is on the...

[Gerrit Marx, executive]

Sorry, may I just add to this. And this is just the increase since the beginning of the year, okay? The inventory levels that we had in unfinished goods ending last year were also not where we would like to see them on a normalized basis. So there is room to squeeze and we will squeeze now in the second half as the supply chain allows.

[Martino De Ambroggi, analyst]

Okay. Got it. The follow-up is on the memorandum of understanding with Hyundai. I know the full disclosure is pending, but does it include the possibility of common platform, A? And B, does it include both LCV and heavy as a potential collaboration?

[Gerrit Marx, executive]

Yes, the first 2 steps that we are diligently working through is a mutual component supply, as you know, starting from the -- on the fuel cell as we just announced, and we're also working through several other opportunities or future component supply. And as a consequence, on the platform engineering and the next-generation electric born, or let's call it, all propulsion technology born; because it will, in some segments like heavy, not only be electric. We do explore our ways to work together.

So this is, I think, quite obvious that next-generation vehicles that shall hit the market towards the end of this decade could very well benefit from a stronger collaboration between the 2 of us. But these are early days, and we're working through these projects diligently and are keenly looking forward to have some more messaging around those collaboration areas during the fourth quarter or even before during the IAA could be, we work on it.

[Martino De Ambroggi, analyst]

Okay. On both light and medium heavy...

[Gerrit Marx, executive]

Yes.

[Operator]

Our next question comes from Monica Bosio from ISP.

[Monica Bosio, analyst]

The first one is on the general side. I remember that during the last conference, the company was expecting positive pricing also in 2023. I was wondering if -- how do you figure out the pricing trend on 2023? And if it's still through -- if it is still reasonable to see a positive pricing even in case economic slowdown. And in relation to this, I was wondering if there is a portion of your backlog that is procured by advanced -- if yes, if you can quantify?

And the second question is on energy supply potential shortages. Do you see some disruption or some potential issue as for your plans? And if yes, just a flavor on what the company -- how the company is moving. And the very last, on the medium and AG. Can you just give some disclosure on the market share trend by year-end? What do you expect to land if it's possible to know.

[Gerrit Marx, executive]

Maybe Franceso, I'll start with the last 2 questions, and you take the first 2 on the backlog and advances and the pricing versus cost, taking orders now for 2023. So I might start with the very last, the market share trends on medium and heavy. Look, we were traveling at a good 8%, even higher ending last year. And supply chain has basically inhibited us from delivering that number, which we enjoyed last year so far. With an unconstrained supply of components and the depletion of our quite substantial fleet and the continued production of vehicles, obviously, we do expect from ourselves to see a continued recovery of the market shares that have started to turn in the second versus the first quarter.

Where this can go? It very much depends really on how everyone else is working through their order books and can deplete the fleets. But I would expect to further grow from here, as we have shown. On the energy supply security, certainty and costs, we have diligently gone through our own energy supplies and needs and feel well covered on that end, both in terms of availability and cost certainty. On the level of suppliers, we are in the process of working through those given that we need to pressure test obviously all of their exposures to energy and see whether their supply certainty is also working in a scenario where Russia might just cut gas supplies to Europe entirely by whenever, but definitely in the fourth quarter than in a risk scenario.

So we're working through this and we diligently follow through what the counter actions are put in place by government and we ourselves focus on energy -- saving energy, and playing things quite effectively and efficiently throughout our footprint. So energy supply is clearly very high. But we feel well covered as Iveco Group. And Francesco, on the first 2 questions, maybe.

[Francesco Tanzi, executive]

Thank you, Gerrit. For what is concerning the backlog, we have managing the backlog in the sense that we would like to have a healthier back order looking forward, we are fully booked for 2022. We're already taking orders for 2023. In general, our business, do not include advance for this order, with the exception of the defense sector, which is probably aside from the technicality of the business. And therefore, we manage it in order to be in a position to protect profitability and to increase the quality of the order book looking forward. But again, for what is concerning advance so far in the sector is something that we do not see, and we do not push to this extent.

[Monica Bosio, analyst]

Okay. For the pricing, should we still expect a positive pricing as you are just -- you are getting order that will enter in 2023? Is it correct?

[Francesco Tanzi, executive]

Let me say that our pricing policy will grow up to the end of this year. We see that there is some portion of the market, which already has been in a position to absorb some increase in pricing, but we will carefully monitoring according to what are the macroeconomic drivers of especially Europe, but worldwide in general. So this is something that is a work in progress also for the pricing for what is concerning 2023.

[Operator]

We will now take the final question, and it comes from Francois Robillard from Intermonte.

[François Robillard, analyst]

Just a couple of questions on your guidance. First one is on the -- your new industrial top line guidance implies for the second half of the year plus something around plus 6% of sales growth in the second half. Can you just give us some more granularity on what kind of -- how this is split between volume and pricing? Then on the EBIT side. So your new guidance still implies some contraction of circa EUR 30 million from what you achieved in the first half. Where does that come from?

I saw that in the second half, you had pretty good performance, again, on the financial side. Do you expect for the financial services to start reducing their contribution? Or would it just follow the overall trends you mentioned earlier on the industrial side, just to have some more granularity on that.

[Francesco Tanzi, executive]

Okay. If I may, Gerrit, I will start with the final question on the Financial Services side. Yes, the performance of the financial services was good in relation to the market trends. We see a flat quarter-on-quarter delinquency. We see that we can be in a position to, let me say, point out in P&L, a positive provision that we started during the pandemic and this trend probably is going to continue during the second half of this year. This is basically for what is concerning in the financial services.

Gerrit, do you want to address the...

[Gerrit Marx, executive]

Yes. We're very happy with our financial services business. So there's no slowdown. And on the top line; we, given -- again, the supply chain situation, we do have on a year-over-year look at 2022 versus 2021, there is a slight -- in the bridge that's a slight decline due to volume and mix simply because we just can't get the product out the door.

In terms of pricing, there is an uplift in top line expected between EUR 800 million and EUR 900 million for the full group, just on pricing, which is underlying our ability to price well in this market environment as we speak. And there is a bit of a headwind of exchange rates in the top line also between EUR 200 million and EUR 300 million depending on how the second half will go with the currencies where we have most exposure.

[François Robillard, analyst]

Those EUR 800 million, EUR 900 million for pricing at group level for the full year or the second half?

[Gerrit Marx, executive]

Full year, full year.

[François Robillard, analyst]

And just quickly, in the first half, how much was this impact?

[Gerrit Marx, executive]

Francesco? It's -- I think it was probably about half of it, maybe slightly less than half of it, 350...

[Francesco Tanzi, executive]

EUR 370 million, more or less.

[Operator]

At this time, speakers, there are no further questions. And that concludes today's call. Thank you all for joining. Have a nice day.

[Francesco Tanzi, executive]

Thanks so much.

[Gerrit Marx, executive]

Thank you.