Iveco Group NV

MIL:IVG

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and welcome to Iveco Group 2023 Second Quarter and First Half Year Results Call. This meeting is being recorded. At this time, I'd like to hand the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

[Federico Donati, executive]

Thank you, Sergei. Good morning, everyone. We would like to welcome you to the webcast and conference call for Iveco Group's Second Quarter and First Half Financial Results for the period ending 30 June 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 express written consent of Iveco Group is treated forbidden. Also in today's call are Iveco Group CEO, Gerrit Marx; and myself, Federico Donati, Head of Investor Relations, standing in for the financial part usually covered by our CFO, where we are in a transitional period, as you know, from prior announcement made by the company.

We 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 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 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-EU-IFRS financial measures. Additional information, including reconciliation to the most directly comparable EU-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. Our Transformational Year 2 is proceeding apace and another quarter just ended with strong profitability improvements across segments, particularly in Commercial and Specialty Vehicles, where adjusted EBIT margin was at 7.1%, up 430 bps versus the second quarter of last year. Also, FPT has consistently delivered well, stepping up EBIT by 120 basis points, aligned with our commitment to expand Powertrain margins, from now on, by about 100 bps every year recovering this pivotal business unit.

We are steadily improving the repositioning, hence, customer appreciation of all our vehicles across industrial segments, supporting a stronger price realization that has more than offset production costs. Supply chain disruptions and component shortages are continuing to affect our truck segment, in particular, notwithstanding some favorable availability of components during the latter part of June has permitted us to finish and deliver a good part of our fleet, thus supporting our quarterly free cash flow.

While such supply chain disruptions are expected to continue throughout 2023, although to a lesser extent than in the prior quarters, we expect deployment of the remaining unfinished truck and bus products, which still sit in our inventories over summer and during the remainder of the year. Early May, we announced Iveco Group's full acquisition of the Nikola-Iveco joint venture and related IP, software and operations in Europe, partially in cash, of which related net cash outflow was around EUR 24 million in the second quarter and partially in Nikola shares, about EUR 20.6 million of Nikola Group shares, Nikola NKLA shares, which will be provided to Nikola later in August.

Following this acquisition, and as already stated in our first quarter earnings release, Iveco Group will focus on the European markets and export opportunities for European heavy-duty truck configurations with electric traction continuing its strategy to be a pioneer in both the battery electric and fuel cell electric heavy-duty commercial vehicle segment. Furthermore, we will also explore opportunities around the hydrogen combustion engine as alternative electric generator to the chemically and technically very sensitive in price fuel cell power source. We remain a partner at minor shareholder in Nikola and continue to supply Nikola with components such as our e-axle and truck caps.

Our heavy-duty truck segment further improved its profitability level on a stand-alone basis, continuing its path to mid-single-digit EBIT margins midterm and our light-duty truck segment ended the quarter with double-digit EBIT margins. Looking at our financial performance at Iveco Group. In Q2 2023, consolidated revenues were up 24%, and the consolidated adjusted EBIT margin was 7.2%, up 370 basis points versus the same period of last year despite the already mentioned continuous supply chain disruptions. Our adjusted diluted earnings per share at EUR 0.57 at the end of the quarter was up almost 3x versus the second quarter in 2022.

Our order backlog remains solid with 27 weeks of production already sold for light commercial vehicles and around 25 weeks for medium and heavy. This is in line with our goal to decrease the number of weeks of production sold; enforcing a tight order and pricing discipline. We ended the quarter with industrial net cash at EUR 1.2 billion and the free cash flow generation of EUR 131 million versus a cash absorption of EUR 111 million in the second quarter of last year. Federico Donati will provide more details later in the presentation, also highlighting the delta performance on a year-over-year basis.

Before moving ahead with the presentation, I would like to wholeheartedly thank Francesco Tanzi for his efforts during his time spent in Iveco Group as our CFO. We have worked successfully together managing the spin-off from CNH Industrial, followed by our Foundational Year 1 and during the first half of our Transformational Year 2. Both personally on behalf and on behalf of the senior leadership team, I would like to wish Francesco all the best for his professional future. Francesco relied on an outstanding and strong team who will flawlessly continue in their proven fashion. The search of the new CFO is well underway, and we are targeting the appointment in the next few months.

Lastly, our share buyback program is continuing, as you have probably seen from our usual periodic update. During the period from April 14 to July 21, 2023, about 3.2 million of Iveco Group's common shares were bought back for a total net consideration of about EUR 25.5 million. On Slides 4 and 5, we have highlighted as usual, Iveco Group's main achievements reached in the 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 all of them. Let me just highlight you some important progresses made in the quarter.

As already mentioned in our previous earnings call, Iveco Group signed with Hedin Mobility Group, a letter of intent for the sale of our Iveco Group owned distribution and retail commercial operations for light-, medium-, and heavy-trucks in Sweden, Norway, Finland and Denmark. This is an important step to further improve our truck segment market share in Northern Europe, while simplifying our structures. Closing is expected by the end of the year. In June, following the finalization of the definite agreements with Nikola Corporation as per the term sheet entered in May, Iveco Group acquired the full and sole ownership of the Germany-based company, resulting from the former joint venture, Nikola-Iveco Europe, now to be renamed EVCO, for which we had a EUR 24 million net cash outflow in the second quarter, as stated before in my opening remarks.

EVCO stands for Electric Vehicles Company. We are going to consolidate all our electric heavy-duty truck activities inside EVCO, exploring options to re-partner for growth in zero-emission heavy trucking. I would like to highlight here again that EVCO resides inside the vast site of Iveco Magirus in Ulm, a large site which was dedicated to heavy-duty truck production up until 2012. Hence, it caters for all options to efficiently expand capacity and scope as needed.

An important milestone has been made with the launch of GATE in Italy, which provides a targeted pay-per-use offer based on the new eDAILY. While soon, the range will be expanded to include battery electric and fuel-cell electric heavy-duty trucks. Once this pilot will have been successfully proven in Italy, the plan is to expand the GATE business model to other European countries starting from 2024. I would like to highlight here again that GATE is not limited to electric vehicles made and distributed by Iveco Group, but GATE will also deploy vehicles of other brands as commercial flywheel driving electromobility at scale, regardless of the brand origin. At a later stage, we are going to share the ownership of GATE with strategic partners who will support the scaling of such brand agnostic platform.

Finally, our bus segment is keeping momentum, just winning yet again an important supply contract for 225 new full electric Iveco Bus E-WAY, with GTT, the public transport operator here in Turin. The supply of GTT will be a leading example in Europe for a term key contract for our electric buses. It includes not only our vehicles and recharging systems, but also through winning teamwork, the energy infrastructure with Enel X and spare parts and service with Iveco Orecchia, our dealer joint venture here in Turin. Naturally, it fills us with pride to know that the most modern electric buses produced by our company will circulate on the streets of the city where Iveco group is headquartered. In the first half 2023, we signed contracts for electric city buses for a total of more than 1,000 vehicles, which we expect to produce and deliver mainly in 2024 and 2025.

Next slide, Slide #6, with a snapshot on sustainability. During our first sustainability and diversity, equity, and inclusion week that took place in June, together with live streams and on-site events involving our people in all locations around the world. We launched our sustainability report Essentials, a concise version of our full 2022 sustainability report, which outlines our commitment to addressing environmental and social challenges while promoting sustainable business practices. It is available in the 8 official languages of Iveco Group.

With the publication of our first sustainability report, we have complete and detailed document available to stakeholders and in particular, to rating agencies and investors, which serves to show our commitment and results. Thanks to this, we managed to improve the rating of MSCI from BBB to A. The upgrade is mainly driven by increased disclosure in labor management and safety management practices. We are working on the different areas of our sustainability journey to improve even more. Our commitment to be best-in-class in sustainability is clear and at forefront of our main priorities.

Moving on to Slide 7. We show the total industry volume percentage change versus Q2 2022. As you can see, Europe, excluding the U.K. and Ireland was up double digits in truck segments, with light-duty trucks ending the quarter up 12%. Medium and heavy were up 18% and broadly flattish in buses versus the previous year. Latin America industry volumes were double-digit down in both truck segments and up 37% in buses. On a worldwide basis, the market was positive double digits across segments. The next slide, #8, has our recurring quarterly update on channel inventory statistics. Company inventories were sequentially up both in light-duty trucks and medium and heavy, reflecting high production activity to serve dealer demand. 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 up 21%, and medium and heavy company inventory was up 52%.

To a meaningful extent, this increase in company inventory was related to a higher share of rigid chassis versions versus ready to be delivered articulated tractors, queuing before body builders, awaiting finishing before being invoiced to end customers. Restarting our business with such rigid chassis versions, especially in our heavy-duty truck segment has been a key priority since the launch of the S-Way in 2019, and I'm happy to see how we have been building momentum in this healthier margin part of the market under also specialty versions such as X-way and T-Way.

Dealer inventories finished the quarter also higher than at the end of June 2022 for similar reasons, serving strong order backlogs. More than 80% of actual dealer inventory is already sold to end customers. Finally, looking at production activity versus retail, we overproduced retail sales, both in light-duty trucks and in medium and heavy by 19%, respectively, continuing a strong delivery trend. Let's move on to the next slide with order intake and delivery statistics at the end of the second quarter. Deliveries were up 23% on a worldwide basis versus the second quarter 2022, driven by higher deliveries in both light-duty trucks and medium and heavy up 24%, respectively, versus the same period last year. Europe was up 36%, with light-duty trucks up 31%, and medium and heavy up 53% versus second quarter 2022. Bus deliveries in Europe were up 24%.

When looking at order intake level for trucks, it was down versus the second quarter 2022, mainly on the back of continuous efforts to purposely lower weeks of production already sold through a tight price discipline to preserve profitability on the back of a very solid and historically high order backlog, as well as in anticipation of the launch of our model year '24 across segments that will start in the fourth quarter 2023 and for which we have not yet opened our order books. Worldwide total book-to-bill for truck and bus was at 0.7 and at the end of the second quarter. These book-to-bill ratios tracking below 1 are largely by design to shorten our order books for a healthy cutover and introduction of our model year '24, as already mentioned.

The next slide shows our market share performance in Europe, excluding the U.K. and Ireland. In our light-duty truck segment, and in medium and heavy, starting with light duty, we ended the quarter with a solid 13.5% market share in the 3.5 tonne to 7.49-tonne segment. We maintained our market share leadership in the cab-chassis subsegment, ending the quarter at 30.4% and reinforced our historical leadership in the upper end of the light duty from 6 to 7.5-tonne segment with market shares at more than 60%.

In heavy-duty, we ended the quarter with a market share up 70 bps versus the second quarter 2022 to 7.7%. And medium and heavy combined, up 80 bps to 8.5% versus the same period last year. In heavy gas, we ended the quarter at almost 50% of market share, up some 10% and versus the second quarter last year. In conclusion, despite supply chain issues and component shortages, which are continuing to challenge all our business units, our expectation, as already stated before, is to deploy remaining unfinished products throughout the course of the second half of 2023, bringing this part of our working capital back to normal levels by year-end.

Our eDAILY is continuing to perform well with more than 1,400 firm orders already taken at the end of June. Our unique market positioning in light-duty trucks and other electrified vehicle platforms across ranges confirm that our product portfolio is at the forefront, providing a great opportunity to further solidify our leadership positioning in both segments.

I will now hand the call over to Federico, who will take you through our second quarter financial highlights and after which I will conclude with some final remarks.

[Federico Donati, executive]

Thank you, Gerrit. I'm on Slide 12 with our financial highlights. We ended the quarter with consolidated revenues at EUR 4.2 billion, up 24% versus the previous year. Financial Services net revenues were EUR 117 million, up EUR 57 million compared to Q2 2022. Net revenues from industrial activities were at EUR 4.1 billion, up 23.4% versus the previous year, mainly due to positive price regulation and higher volume and mix.

Consolidated adjusted EBIT was at EUR 301 million, up EUR 183 million versus last year with the adjusted EBIT margin at 7.2%, up 370 basis points versus Q2 2022. The industrial activity adjusted EBIT was EUR 266 million, up EUR 175 million versus last year with positive price realization, higher volumes, and better mix, more than offsetting higher raw material and energy costs. The industrial activity adjusted EBIT margin was at 6.5%, up 380 basis points versus Q2 2022.

We ended the quarter with our consolidated adjusted net income at EUR 156 million, up EUR 96 million compared to the same period of last year. The adjusted diluted EPS was at EUR 0.57, up EUR 0.37 compared to Q2 2022. Financial expenses were EUR 83 million, slightly higher than in Q1 2023 with full year expectation of about EUR 300 million, mainly due to higher interest base rates combined with hyperinflation impacts in Argentina and Turkey.

The adjusted effective tax rate was at 28%, in line with Q1 2023. The adjusted effective tax rate reflects different tax rates applying jurisdiction where the group operates and some other discrete items. Free cash flow of industrial activities was positive for EUR 131 million, EUR 242 million higher compared to Q2 2022, primarily due to higher sales, positive price realization, and lower level of unfinished products due to increased component availability in the latter part of June, partly offset by the cash out related to the already communicated acquisition of the full ownership of the former Nikola-Iveco Europe joint venture.

I will talk about our performance in more detail later in the presentation. Our industrial net cash position was at EUR 1.2 billion at the end of June 2023. Finally, available liquidity, including undrawn committed credit lines remained solid at EUR 3.8 billion at the end of June 2023. On the next slide, our second quarter industrial net revenue split by region and segment as well as a walk versus Q2 2022. Looking at the speed by region and segment. As you can see on the left side of the chart, Europe was strongly up 33% versus the previous year, while other regions were flat or slightly up.

Moving to the revenue split by segment. All our industrial segment were up by double digit versus the same period last year with trucks up 32%. When we look at the contributors of the increase in net revenues that you can derive from the graph at the right-hand of the slide, both volume and mix and gross pricing contributed positively to the improvement.

Now moving on to the Industrial Activities adjusted EBIT, walk by segment and driver. As I've mentioned before, net price realization was the main driver of the improvement in profitability with a lower stand volume and mix that were also positive. The net price realization alone was positive for EUR 367 million, more than offsetting higher production costs, increased SG&A and R&D spending, as well as negative ForEx translation effects. The adjusted EBIT margin ended the quarter at 6.5%, up 380 basis points versus the same period last year.

Looking at the performance of each segment for the quarter. The Commercial and Specialty Vehicles adjusted EBIT was EUR 252 million, a EUR 174 million increase compared to Q2 2022, driven by positive price realization and higher volumes, partially offset by higher product costs mainly due to increased raw material and energy costs. Adjusted EBIT margin was at 7.1%, up 430 basis points versus Q2 2022. EBIT tracks on a stand-alone basis is continuing on its recovery path and in the quarter with another positive adjusted EBIT level with adjusted EBIT margin north of 3% following the Q1 2023 positive performance. We keep blinding through opportunities to continue this health trajectory.

In Powertrain, the adjusted EBIT was EUR 66 million, up EUR 19 million compared to Q2 2022, mainly due to positive price realization more than offsetting increased raw material and energy costs. Adjusted EBIT margin was at 5.8%, up 120 basis points versus the same period last year. The next slide, #15, deals with our second quarter financial services performance. The adjusted EBIT was EUR 35 million, up EUR 8 million compared to Q2 2022, primarily due to higher receivable portfolio and a better collection performance on managed receivables. In this regard, we recall that the Iveco Group managed portfolio, including unconsolidated joint venture, was EUR 7.1 billion at the end of the quarter; of which retail was 40% and we'll say, 60%, up EUR 1.4 billion compared to 30 June 2022.

The receivable balance greater than 30 days past due as a percentage of on book portfolio was 2.3% versus 3.6% as of 30th of June last year. Look at our return on assets on the upper right hand of the slide, it remains solid at 2.3%. Moving on with our industrial net cash walk and related focus on main dynamics.

Let's have a look at the various components of the walk and the related performance versus the same period last year. The adjusted EBITDA contribution was positive at EUR 470 million, up EUR 187 million compared to last year on the back of solid profitability performance. Working capital cash inflow was at EUR 46 million compared to a cash outflow of EUR 133 million last year, primarily due to lower inventory level deriving from high demand as well as heavier component shortage and supply chain issues in Q2 2022 versus second quarter this year.

Investments were up EUR 31 million versus last year. Our free cash flow figure includes a net cash outflow of around EUR 24 million related to the cash portion of the full ownership acquisition of the Nikola-Iveco joint venture. On the bottom right of the slide, we show, as usual, our free cash flow performance by quarter. As already clearly stated, we expected to be able to deliver the remaining number of unfinished products throughout the second half of the year, as already demonstrated in 2022.

Moving now to my last slide for today, which shows our available liquidity components and the debt maturity profile. Our available liquidity as of June 30, 2023 stood at EUR 3.8 billion. This includes EUR 1.7 billion in cash and cash equivalents and EUR 2 billion of undrawn committed facilities. As you can see, our cash and cash equivalents level continue to more than cover all the cash maturities for the coming years, totaling almost EUR 900 million.

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

[Gerrit Marx, executive]

Thank you, Federico. Let's conclude with the preliminary industry and financial outlook as well as with some final takeaway messages. Our preliminary industry volume outlook for 2023 on a worldwide basis is confirming light-duty trucks and buses to the level forecasted previously. While we are improving medium- and heavy-duty trucks now forecasted up 10% year-over-year versus previous forecasted broadly flattish on a worldwide basis. Improved industry volume forecast in heavy duty is mainly driven by a stronger demand in Europe and rest of the world and easing supply chain challenges, allowing to shorten order banks. The percentage changes year-over-year by segment and region shown in the table reflects our current visibility.

The next slide, #20, has our Full Year 2023 Preliminary Financial Guidance. While we are continuing to maintain a certain level of prudence here, especially with regards to the fourth quarter. However, with solid price realization, strong order backlogs, and still no signs of unusual levels of order cancellations, the company also on the back of strong first half results is raising its full year 2023 guidance, again, as follows.

Group adjusted EBIT increased at between EUR 750 million and EUR 800 million from the previous at between EUR 600 million to EUR 640 million. For the industrial activities. Net revenues, including currency effects, increased up between 5% and 8% from previous up 3% to 5%. Adjusted EBIT from industrial activities increased at between EUR 650 million and EUR 700 million from previous EUR 510 million and EUR 550 million. SG&A over net revenues confirmed at around 6%.

Industrial net cash, including transactions already communicated and related impacts and now also the full year share buybacks at around EUR 2 billion, still excluding any additional extraordinary transactions. Investments in property, plant and equipment, and intangible assets confirmed up about 15% from EUR 775 million in 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.

Prudence in our current outlook is backed by continuous though less severe challenges in the supply chain, at least in the near term, and industry dynamics in the fourth quarter of the year that will be potentially still impacted by yet unclear macroeconomic developments. It is important to highlight that the transactions already announced and the related impacts on the net cash position have been included in the updated financial targets to which we add the total buyback that will be executed during the year, including what has already been communicated.

Second, our second quarter's profitability, especially in trucks, has been visibly strong due to a steadily improving repositioning of our vehicles supported a strong price realization. Our profitability path is continuing at pace with the year-to-date results, reinforcing the solid trend, further confirming Iveco Group's ability to deliver a continuous year-over-year margin improvement.

Third, after the transaction announced with Nikola and related consolidation of the European joint venture announced in first quarter this year, Iveco Group is now working to find an equity partner to our firefighting business that shares the ownership of the business headquartered in Ulm. Our goal is to provide Magirus with the strength to compete more efficiently and effectively in its very specific markets, while focusing our group's activities on our core businesses. We are in discussions with various strategic partners, and we will target this transaction to close within a time horizon between end of this year and middle of 2024.

Fourth, as already clearly stated several times during our quarterly earnings call as well as during conferences or road shows, we will continue our efforts to manage our order books and preserve profitability as well as maintain tight control over cash and prepare for the best launch of our model year '24 full range. In November, we will present the market with a renewed and leading electric and combustion engine-based powertrain lineup for our light, medium, and heavy-duty trucks. Furthermore, the incomplete units that remained in our inventory still at the end of Q2 are expected to be fully deployed during the second half of the year.

Fifth, to maintain a sound level of available liquidity is our commitment and will continue throughout the entire strategic business plan period. And sixth, and last, we are planning to host a Capital Markets Day during the first half of 2024. With such progress made so far versus our plans presented during our Capital Markets Day in November 2021. We think it is about time to update our ambitions and provide more granularity to our individual segments, particularly to the comprising segments of commercial and specialty vehicles. We will provide you with more details of this Capital Markets Day later this year.

To include before opening up for questions, looking at the actual figures year-to-date and what we have delivered in Q2, we are certainly maintaining a good pace in our long-distance cross-country run. Since the creation of Iveco Group 18 months ago, we have worked hard as a united team on constantly improving our products and the efficiency of our processes, and this effort is already yielding returns. Therefore, we are once again lifting our targets for the full year 2023, with now an embedded expected adjusted EBIT margin at Industrial Activities level of around 4.5% already this year, 1 year ahead of what we committed to reach by 2024 as presented back in November 2021.

This is certainly something that makes us proud, but I can assure you that it doesn't divert us from a tight and tireless execution targeting the margin gaps to the very best players in our industry. We maintain a prudent approach regarding the near future and our medium-term targets. We are all focused on what we must do to always go beyond, continuing to move Iveco Group in the right direction, both in terms of margin improvement as well as competitive product offering.

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

[Operator]

[Operator Instructions] Our first question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I have 3, if possible. The first one, basically, can you comment on the heavy-duty segment margin where it was in Q2, if possible, in comparison. I think you gave some qualitative commentary in 1Q. That's the first one. Maybe I'll ask one at a time.

[Gerrit Marx, executive]

Daniela, yes, we commented that the heavy-duty EBIT margin was north of 3% in the second quarter.

[Daniela Costa, analyst]

Okay. Sorry, I missed that. And then just in terms of your slide where you have the dealer inventories, and I know this slide only extends to 2019, which might sort of be not so much of a normal period. But can you comment sort of like if we had there pre-2019, where do you think is a normalized level? I take your commentary that you're restricting the order book a bit to ensure a healthy, but if you give us some points of comparison because it does look like dealer inventories are already quite elevated in that chart, but I assume that's because from 2019 is not so relevant.

[Gerrit Marx, executive]

Yes. Daniela, when you compare it to 2018, our in, let's say, taking light actually, and we are measuring this in forward months hold. Our inventory levels now in 2023 are substantially healthier than what we had in 2018, and the percentage of inventory -- dealer inventory sold is around 80% so this is also substantially higher than in 2018. And a very similar message you can derive also for the heavy-duty or the other segments.

So we are in terms of dealer inventory, when you measure it as forward months sold, in a much better place and a lot more is sold compared to 2018 at this stage. And as you know, as I already mentioned multiple times on the used truck inventory, we are almost sold out. I mean we had quite elevated levels in 2018, and we have managed to bring that back down to levels where we just have a few hundred units per range in our inventory at this point in time. So overall, I feel pretty good about the health of the pipeline.

[Daniela Costa, analyst]

And then maybe just trying to bridge in the second half from your guidance upgrade at the group EBIT level to your guidance upgrade that free cash flow, but which is not as high. Can you help us out with sort of where inventories and interest are likely to be given? I guess, your new CapEx, you didn't change your guidance. But just to help us think about the inventories and also the interest, which seems to still be impacted by a few things on the second half.

[Gerrit Marx, executive]

I think on the inventory levels, we target a normal inventory level by year-end. And we also, as I mentioned, we are taking a prudent approach to the -- to, let's say, our ability to deliver everything that is scheduled for the quarter by -- before year-end, given the supply chain volatility. It's much better now, supply chain than we had in the first half, but there are still a few of those popping up in a fairly unpredicted way and we are, right now, we're very well trained to deal with those, but it's kind of annoying to deliver the full potential. Hence, we took a prudent approach here.

And regarding the fleet, just to highlight, we had the peak of fleet, which are the unfinished products last year in the second quarter, and we basically depleted most of it in this -- or all of it in the second, mostly in the fourth quarter. This year, we have already started to deplete the fleet in the second quarter, which certainly levels out that impact over the second half of the year.

[Daniela Costa, analyst]

And on interest?

[Gerrit Marx, executive]

We don't foresee any change in interest.

[Federico Donati, executive]

Interest expenses. As we stated during my prepared remarks, we are expecting a EUR 300 million this year, Daniela.

[Operator]

Our next question comes from Martino De Ambroggi from Equita.

[Martino De Ambroggi, analyst]

My first question is on -- is a follow-up on the heavy trucks. Just to have an idea of where do you plan to achieve -- what do you plan to achieve in the second half in terms of profitability? And am I right in assuming EUR 1.3 billion, EUR 1.4 billion in the first -- in the second quarter of the year just for this business?

[Gerrit Marx, executive]

We see the heavy-duty truck broadly in the second half, similar to where it is in the first half. So we expect that level to continue, well, first half similar to second half. The third quarter usually for all segments is given 3 weeks of shutdown in August. Usually, it is -- from a seasonality point a weaker quarter, and then the fourth quarter is coming back up again, and on average, we expect a similar margin than we have in H1. And on the sales side, also here, I think similar levels in the second versus the first. However, the supply chain situation might influence this a couple of EUR 100 million up or down depending on what we actually can deliver off the yards as complete vehicles by year-end.

[Martino De Ambroggi, analyst]

Okay. And the second question is on the full year guidance. I suppose it still includes the firefighting. Am I right in assuming EUR 30 million losses on a full year basis? And I don't know what is your assumption on R&D capitalizing this guidance. And if I look at the second half of the year, implicit in your midpoint of the guidance, I clearly understand your prudence, but what should justify 200 bps, roughly, 200 bps lower return on sales in the second half, apart from, I suppose, some seasonality, second half weaker and prudence on the volumes.

[Gerrit Marx, executive]

Yes, you're right in the first question. Magirus is included with 12 months in the numbers. And it is actually more than 10% negative in its -- so yes, I think your assumption of EUR 30 million to EUR 40 million loss is correct. So that's in the numbers. Regarding the margin in the second half of the year, the prudence that we have deployed is predominantly in the fourth quarter here around our ability to supply. And we have taken less but still cautious actions here forecasting the remainder of the year.

And what I would like to highlight, though, is that we have now fully consolidated in our numbers in the second half, starting from the closing of the transactions with Nikola, but we have now fully consolidated the operations in Ulm in our numbers. So that has been properly reflected as well in our CapEx guidance that we keep, as I mentioned, and in our capital outlay for the remainder of the year. So that is -- it's all included.

[Martino De Ambroggi, analyst]

And the R&D capitalized is much higher than last year, implicit in the guidance or not?

[Gerrit Marx, executive]

The capitalized R&D is at around EUR 500 million, EUR 450 million, EUR 500 million.

[Martino De Ambroggi, analyst]

Okay. And very last on your 2026 guidance because you guided for a 5%, 6% industrial adjusted EBIT. I understand there is a Capital Market Day next year but am I totally wrong in assuming this could be achieved at least 1 year earlier?

[Gerrit Marx, executive]

Yes. As I mentioned, one key trigger for us to have the Capital -- a couple of triggers to have this Capital Markets Day. When we first we owe you an update on our individual comprising business units. The deconsolidation, the projected -- expected deconsolidation of Magirus is another one that will allow us to unfold greater granularity of reporting. But also in terms of financial performance in the current year with the guidance that we have given, we already achieved the industrial activities EBIT 1 year ahead of what we forecasted or targeted for next year 2024. So in order to re-aim and to reset those ambitions on a more and pretty profound and solid basis, we aim at having this Capital Markets Day in the first half of next year.

[Operator]

Monica Bosio from Intesa Sanpaolo.

[Monica Bosio, analyst]

Coming back to the top line guidance. If I did well my math matter, the second half would imply an industrial top line at minus 5% flat versus the second half of 2022. I understand that you take some caution but I was wondering if you can elaborate on the pricing outlook that you are expecting for the fourth quarter and above all, when entering into 2024? And my second question is for the pricing environment as for the heavy duty. And the third one is for the new model year range. When do you expect to open the book for the new model year range?

[Gerrit Marx, executive]

Look, the -- on the top line, let me highlight one specific and that is actually an effect that is accounting for a couple of hundred million top line. We had a peaking fleet last year in the second quarter, which obviously helped the second half of last year when we depleted this fleet. This year, we had as well a peaking fleet in, let's say, towards the beginning of the second quarter, we could already start depleting the fleet during the second quarter. So it means the effect of building and depletion of fleet -- is this year more balanced between the 2 half years, while it was last year more geared towards the end of the year? That is the main factor and we do have, as I mentioned, the prudence in the supply chain still kept here.

In terms of pricing, pricing is stable. We do not see pricing on orders we take to decline. The pricing environment remains quite healthy. And as we are in the launch phase of our heavy-duty truck or, if you will, our entire model year '24 lineup, we do see space for our heavy-duty truck to even further increase, given that the new model year 24 heavy-duty truck, and I would like to highlight that here, is aiming at a fuel consumption reduction of about 8% or more percent versus our prior model. So with that is, let's say, a leading position in fuel consumption in the heavy-duty truck insights and with that, obviously a substantial improvement of total cost of ownership. Hence, also additional pricing power that comes with many other features that this new Model Year '24 has that are very much built around the driver, the driver centricity, digital clusters and better seat adjustability, better connectivity and many other features.

So the core is really an 8% plus fuel consumption improvement has TCO step-up, which will allow us to further keep the pricing upwards, bearing in mind that our heavy-duty truck in Europe is still among the cheapest when you look at the net pricing. And in logical terms, I do not see any technical product-related reason anymore that we should not further narrow or even here and there close the pricing disadvantage we have in heavy-duty trucks versus strong European competitors.

[Monica Bosio, analyst]

Okay. And sorry, maybe I miss the -- and as for the opening of the order book?

[Gerrit Marx, executive]

Yes, the opening -- it's not open yet, okay? And we are considering to open the order book on the light commercial vehicles in autumn and then towards at a later point this year also for the medium and heavy-duty trucks.

[Operator]

Miguel Borrega from BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

The first one, just on the margin in Q2. So pricing has obviously been very strong and the biggest contributor to your bottom line. I'm wondering how do you see the price cost spreads moving forward? Do you think pricing will come back down while maintaining the same level of cost or do you think you can sustain the pricing because component costs are also going up?

[Gerrit Marx, executive]

Look, for the remainder of the year, we expect a similar price cost ratio to continue, and we need to see what happens during the winter and what kind of energy shortages might await us, which we all don't know and we are not planning for those, obviously. But we do not expect component prices to increase significantly. I think the effects from the last 12 months or from end of last year over the winter, are largely reflected in the cost base, and we are confident that we can keep a similar cost level at similar prices.

However, I would like to add here that for 2024, I think the markets are in the heavy-duty truck side in the -- certainly not building on anything that would allow the market to grow, okay. So next year, I would expect maybe a flattish to moderate decline in heavy-duty markets, and that certainly might put here and their prices under pressure. But so far, for the orders we are taking, know for that what we have in mind, we do see any of that. And I've been commenting on this dynamic since the beginning of the year, and it didn't happen.

So for that point, we remain curious on how next year will unfold and in particular, our industry volumes will develop where we are having quite high confidence in the vehicle model year '24, which even in a flat to maybe even slightly declining markets will perform really well vis-a-vis competitors because don't forget, we are in heavy duty, a player that is about in terms of size, 1/3 or half the size of the next one where obviously, a very competitive product can clearly offset market weaknesses in this environment.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

That's great. And on the new model year, the orders that you think you'll take over the next couple of months or quarters, what kind of impact will it have? So can you give us a sense on the pricing differential relative to your current model? You said no reason why the gap shouldn't narrow. So give us a sense how that compares to your current model.

[Gerrit Marx, executive]

Well, look, I'm not commenting on pricing never in terms of clear numbers, but we do see a good headroom for these vehicles to further price as, again, on the heavy-duty truck side. It is aligned or even more than aligned, even better here and there than pretty well-known names in German companies, okay. And we will further push the product with its position where it belongs.

[Operator]

José Asumendi from JPMorgan.

[Jose Asumendi, analyst]

3 quick ones, please. The first one, can you comment on book-to-bill on light commercial vehicle? Is this basically market related or destocking related? Or what is the reason for maybe the weakness in Q2? Second, Powertrain used to deliver high single-digit margins with lower revenues. So can you comment a little bit around what are the changes there? Is there a change in product mix or anything we should be mindful of to see margins escalating higher from these levels? And then 3, Gerrit, Q3, do you think Q3 for commercial specialty is going to be substantially different from Q2? Do you see a slowdown in Q3 versus future? Thank you.

[Gerrit Marx, executive]

The book-to-bill for light in Q2 is clearly driven by our order discipline that we are having because we keep having a very high interest in our LCV yet for this one, we are going to open the order books for Model Year '24 the earliest. So basically, this one will be the first one to come. And in order to manage the cutover between the model at '22 and the '24, we are on purpose slowing things down here and therefore, the book-to-bill is in LCV in Q2, clearly by design. We do not see in light commercial vehicles in the market, any noteworthy decrease in TIV or so. So therefore, this is by design.

On Powertrain, as you might remember, back in 2020, a big contract was lost that with Fiat Professional or Stellantis today, and we have successfully managed to backfill this volume loss of engines with multiple other customers in on-road, but also off-road. So in the construction and agriculture segment, and these platforms are ramping and they are taking time to develop and mature in their also marginality. So this is why it takes time, but the FPT keeps delivering like clockwork, year-over-year margin expansion of 100 bps or even now a notch more, that is a pretty steady trajectory that will bring us back to high single-digit margins, and we are happily providing you more details on how this is actually unfolding during our Capital Markets Day early next year where we will unfold the strategy of FPT in greater clarity.

Another point in FPT to mention is we have become leaders in electric axles. I think I mentioned this at another occasion that in the current combustion engine world, powertrain consists of an engine, a clutch transmission, a prop shaft and an axle, and all of that in the future will become an electric axle. And we have pioneered heavy-duty truck electric axles in our partnership with Nikola and this axle is now in production, the strongest e-axle for heavy commercial vehicles to date. And we have by now complemented this lineup with medium- and light-duty electric axles, and we are in quite fruitful discussions with multiple truck OEMs to supply them such axles as the key power source of zero-emission propulsion and commercial vehicles of the future.

So all of this is, as well sitting in the numbers of FPT, we are developing these platforms, and we are ramping these platforms. So we are working through this transition. -- while growing our combustion engine business steadily back to the levels where we were. So that's a longer run, but it builds quite nicely quarter-over-quarter, year-over-year.

And your Q3 question, commercial and specialty vehicles, and that is then also true for Powertrain is we are running into the month of August. And in the month of August, on average, we are shutting down our plants by like some 2 to 3 weeks, and this is from a seasonality point of view, obviously impacting the financial strength of the third quarter, in particular. So Q3 is certainly traveling on a lower level than our second quarter just because of 3 weeks of shutdown in principle.

[Operator]

We'll now take our final question today from Shaqeal Kirunda from Morgan Stanley.

[Shaqeal Kirunda, analyst]

Shaqeal from Morgan Stanley. Congratulations on a great result. So I noticed the market outlook has changed for European LCV from plus 15% to now 10% to 15%. Have we seen outperformance in the LCV market driving upgrades at some of your peers? And clearly, Iveco has benefited, too. So just wondering what's driving this incrementally less positive view?

[Gerrit Marx, executive]

This is incremental, as you say, and I think I would not debate 5 percentage points left and right. I mean we are traditionally very strong in the cab-chassis segment that develops quite nicely as well, while I think probably our peers are commenting more on the light van segment, the door-to-door delivery for parcels and mail so I think that would probably explain the difference in outlook but I would not read too much into a 5 percentage points difference of market guidance.

[Shaqeal Kirunda, analyst]

Okay. And then also on the medium-duty market, obviously hasn't been the same since 2008, but volumes have been picking up recently. What's your kind of view on the drivers of that? And then do you expect it to last?

[Gerrit Marx, executive]

I mean the medium-duty market is fairly stable and small as a year up a year down. I would not read any trend into medium-duty markets increase necessarily. I mean, we have very nice orders in medium-duty for our CNG, Compressed Natural Gas, version of the medium-duty, which then goes into solutions and with bodies for municipalities because I keep highlighting this every time that if you want to drive the most economic and cheapest zero-emission medium-duty truck from a well-to-wheel point of view, there's only one.

And that's the Iveco Eurocargo CNG, running on biomethane that comes at a cost or price depending take the chassis that would cost you around, I don't know, EUR 80,000 on a medium-duty side while you would need to pay for an electric version like EUR 200,000. So I think there's a very clear business case for municipalities who have access to renewable biomethane from landfills or from biodigesters nearby to refuel these trucks and that is a little bit of a push in this fairly stable segment. So I would not read any trend into what you see at this point.

What we find particularly inspiring is, I mean, if you look at the 60% market share that we have in the DAILY segment in the 7.5 tonne segments. You can obviously start thinking about why don't we even stretch that DAILY into a heavier, more medium-duty part. I mean clearly, a question we wonder about. So I think the medium-duty segment is stable, but we rather will see it being probably penetrated from below and maybe also from above. So we'll see how the market evolves. But we are pretty much prepared for this further development of the medium-duty market.

[Operator]

This concludes today's Q&A session and now I'll hand 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. Have a nice day. Goodbye.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.