Iveco Group NV

MIL:IVG

Earnings Call Analysis

Iveco’s Q2: Stable Margins, Model Year Transition, Cautious Outlook

In Q2 2024, Iveco reported stable adjusted EBIT margins at 6.9%, slightly up from last year. Net revenues for industrial activities dropped by 5.8% year-over-year due to lower volumes and adverse forex in Argentina. Despite a revenue decrease, the bus and defense segments saw growth, with defense up 30%. The transition to Model Year 2024 truck impacted working capital, leading to a negative free cash flow of EUR 98 million. Iveco remains confident for H2 2024, upholding guidance for industrial free cash flow between EUR 350 million and EUR 400 million, and adjusted EBIT for industrial activities between EUR 790 million and EUR 840 million.

A Steady Start in a Challenging Environment

The Iveco Group's financial performance for Q2 2024 reflects a mixed bag of results amid external pressures. While consolidated net revenues dipped slightly by 5% year-over-year, the adjusted EBIT margin for industrial activities improved to 6.9%, up 10 basis points from last year's all-time high. This suggests that the company is finding ways to sustain profitability even as it navigates challenges such as lower volumes and adverse exchange rate effects, particularly in Argentina.

Segment Performance Highlights

In terms of business units, buses and defense units saw substantial growth. Bus revenues surged by 22.4% year-over-year to EUR 612 million, primarily driven by higher volumes and strategic pricing. Similarly, defense revenues increased by approximately 30% to EUR 285 million. However, truck revenues fell by 10% to EUR 2.6 billion and powertrain revenues decreased by 13.7%. The decline in truck revenue was offset somewhat by positive price realizations in light commercial and medium-duty trucks.

Cash Flow and Liquidity Management

Despite a challenging quarter that saw a negative free cash flow of EUR 98 million, the Iveco Group maintains robust liquidity with EUR 4.2 billion available, including EUR 2.3 billion in cash. They reaffirmed guidance for full-year industrial free cash flow to be between EUR 350 million to EUR 400 million, demonstrating confidence in recovering from the one-off working capital impacts experienced in Q2.

Outlook and Revenue Guidance

Looking ahead, the company expects a normalized order intake as the Model Year 2024 trucks are introduced, with anticipated momentum in deliveries through the latter half of 2024. Full-year adjusted EBIT guidance is maintained at EUR 920 million to EUR 970 million while truck revenues are expected to decline approximately 4% year-over-year. The robust order backlogs for both bus and defense units are expected to fortify the group's future revenue streams.

Market Dynamics and Strategic Movements

In the broader market context, global volumes for trucks and buses remain stable or slightly rising, despite the heavy-duty truck segment anticipated to see a downturn of around 10%. The European market shows slight signs of improvement, albeit with caution due to overarching economic conditions. I'veco plans to continue building on innovations, including partnerships in electric vehicle segments with firms like Foton, indicating a strategic pivot towards sustainability.

Operational Efficiencies and Cost Management

The company is focusing on reducing production costs to better handle cyclical market fluctuations. Overall, operational efficiencies are reportedly positive with continuous improvements anticipated in plant and product costs, particularly in Europe. Looking forward, the company aims to leverage its strengths in emerging markets such as electric trucks and buses to counterbalance slowing traditional segments.

Conclusion and Investor Sentiment

In summation, despite the apparent challenges, the Iveco Group seems well-positioned to navigate the second half of 2024 and beyond. The strategic emphasis on high-demand segments, coupled with operational efficiencies and sustained liquidity, provides a solid foundation. Investors should remain watchful of market trends and guidance updates, especially pertaining to cash flow recovery and profitability across varied segments.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to today's Iveco Group 2024 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 will now turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

[Federico Donati, executive]

Thank you, Alan. 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 June 30, 2024. This call is being broadcast live on our website and is copyrighted by Iveco Group. Any other use, recording or transmission of any portion of this broadcast without the express written consent of Iveco Group is strictly forbidden.

Hosting today call are Iveco Group, new CEO, Olof Persson; and our CFO, Anna Tanganelli. Olof and Anna will use the material made available for download on the Iveco Group website earlier this morning. Additionally, please note that any forward-looking statement we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material.

Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent annual report as well as other recent reports and filings with the authorities in the Netherlands and Italy.

The company presentation may include certain non-IFRS financial measures. Additional information, including reconciliation to the most directly comparable IFRS financial measures is included in the presentation material. Later here again, the 2024 financial data shown in the press release and in this presentation exclude Magirus and refer to the continuing operation only, unless otherwise stated. In accordance with applicable accounting standards, the figures in the income statement and statement of cash flow for 2023 comparative periods have been recast consistently.

I will now turn the call over to our CEO, Olof.

[Olof Persson, executive]

Thank you very much, Federico. And also from my side, a warm welcome to all of you joining our call today. To start, I'm, of course, very excited to begin my new role as the CEO of the Iveco Group, and I'm looking forward to continuing to build and expand on the solid foundation laid down in the last 2.5 years of the company.

As you know, I have been a member of the company's Board of Directors since the beginning and I have been involved in our strategic direction since then. And I have witnessed the first hand, the pride and passion our Iveco Group teams have not only for our businesses and brands, but perhaps most importantly for our customers.

I will, together with the team work hard to continue aligning the Iveco Group with a rapidly changing market, as we have laid out in our pathway strategy.

Moving forward, we are going to continue to accelerate on our ambitious pathway strategy. The strategic plan requires full focus and very consistent execution to achieve our 2028 targets. And this quarter shows that we are on the right trajectory.

Today, we are reporting our results for the second quarter of 2024, which follows our Capital Markets Day hosted in March this year in the first quarter with a very solid performance. As we announced in our press release issued earlier this morning, we have continued the year with consistent profitability improvements and resilience across all business units, leading to an adjusted EBIT margin for industrial activities at 6.9%, which is 10 basis points better than the all-time high second quarter of 2023.

During this quarter, we did not experience any unusual or unexpected increase in order cancellations on net price erosion. As we earlier reported, we opened the order intake for our new model year 2024 lineup in all truck segments in the first quarter to manage the transition from other Model Year '22, both in sales also in production.

As Anna will detail later in today's presentation, we have experienced a negative temporary one-off in our net working capital linked to extra effort in finalizing and getting a certain number of our Model Year 2024 vehicles ready to ship. The changeover from Model Year '22 to Model Year '24 has been a major task for organizations, all our truck models and configurations and all our European truck manufacturing sites were in both.

Despite the challenges, the team has done an absolutely fantastic job to secure quality and performance of the Model Year '24 trucks to get them ready for the market. Our expectations is that Model Year '24 trucks delivers will gain momentum in the latter part of the year and into 2025 and we expect to fully recover the one-off working capital impact during the second part of the year.

The order backlog in trucks by the end of the quarter was on a level what we would consider more normal with around 13 weeks of production already sold for light commercial vehicles and around 9 to 10 weeks for medium and heavy. More than 90% of the order book in light and commercial vehicles and more than 70% of the heavy, medium and heavy relates to our new Model Year 2024.

When looking at our BUS business units. The order backlog covers all of '24 and is now stretching well into 2025 with the first half of next year fully covered. In defense, we already disclosed that our order backlog referring only to orders already funded by customers, covers basically the entire top line for the business plan period, with a solid potential upside at the back end of our plan.

Recent signed contracts in both bus and defense further reinforce the solid order backlog, providing an even stronger foundation for their pathways. Finally, in Powertrain, we are well on track to reach our target of 100 basis points margin improvement per year, supported by our efficiency plan and an increasingly higher contribution from aftermarket activities.

When looking at our financial service business, delinquencies on book for less than 30 days remained at a historical low 2%, which is sequentially flat and 30 basis points better than last year. Finally, as discussed in our previous earning calls, we have made significant efforts together with partners to solve building capacity bottlenecks that slowed down the timing of deliveries to customers and affected as well other OEMs. The situation has substantially improved, and we expect it to normalize in the third quarter.

Then looking at the Iveco Group financial performance for the second quarter. Our consolidated revenues were slightly down versus last year, and consolidated adjusted EBIT margin was at 7.5%, which is in line versus the same quarter last year.

Our adjusted diluted EPS was at EUR 0.63 at the end of the second quarter, which is EUR 0.02 more than the second quarter of 2023. And during our Annual General Meeting held on the 17th of April this year, the shareholders approved our proposal to distribute a cash dividend of EUR 0.22 per outstanding common share, and this was paid on the 24th of April.

As you have seen from our periodic report on the buyback activities, as of 12th of July, we have bought back 859,000 common shares for a total net consideration of EUR 9 million.

Let's now look at the highlights of the Iveco Group's achievements during the second quarter, as you can see on Slide 4. On the fourth of June, we signed a Memorandum of Understanding with Foton, a leading commercial vehicle manufacturing in China to explore potential collaboration in the areas of electric vehicles and components as well as joint business opportunity for Europe and South America. The nonbinding agreement is intended to extend a relied commercial vehicle lineup to the gross weight vehicle category below the 3.5 tonnes.

Supply opportunities, including our powertrain brand, FPT Industrial will also be discussed. Also in June, we signed an important term loan facility for EUR 150 million with CDP and the loan will go towards our investment in research, development and innovation.

Finally, as we announced earlier this year, I also wanted to mention that the Iveco Group played a major role in supporting the heavy metal Metallica on the European leg of they were 2, from May to July, we provided multi-energy heavy-duty trucks as support of the Metallica Convoy that moved the band and its equipment between venues. This initiative has strengthened our marketing activities in Europe, reaching hundreds of current and new customers and reinforcing Iveco's brand awareness throughout all channels, and also aligning positively with our group vision of going beyond.

Moving to Slide 5. And in addition to the group's achievements, our individual business unit reached also important accomplishment this second quarter. And if we look at Slide 5, let's begin with our traffic business unit. In April, the Italian transport and logistic operators, Smet Group confirmed its order for 100 new vehicle S-Way Fuel Hero Trucks fueled with HVO to be delivered by the end of this year.

The order is the latest in the long-term partnership between Iveco and Smet Group, which shares a forward-looking approach and focus on innovation. In June, the Iveco S-Way won the prestigious Red Dot Award for product design, one of the world's largest design competition. And this award recognized the product functionality, aesthetics, ease of use, sustainability and responsibility.

Also IVECO BUS won Red Dot Award for product design, thanks to the all new front and dashboard on the CROSSWAY BUS. Our BUS business unit increased its presence in Brazil last quarter when it delivered the first 55 buses to Rápido Sumaré, a large urban transport operator in São Paulo, 18 more units will be delivered this year to contribute to our customers renew fleet in São Paulo.

IVECO BUS and Via, a market leader that combines software innovation services signed 2 Memorandum of Understanding in May. The first with Politecnico in Milano and the other with Humanitas. Both will implement pilot projects to offer customized and flexible demand response in transport solutions.

On Slide 6, we see the main achievements of our defense business units last quarter. In June, the vehicle Oto Melara consortium signed a contract to supply 28 state-of-the-art Centauro II vehicles to the Italian Army. Since we complete our customers' requirements for 150 units and includes 10 years of logistics support.

Commenting on powertrain, we see on the slide that in April, FPT Industrial and LONGEN POWER, a gen set in industrial power equipment manufacturer signed a comprehensive agreement to expand into global power equipment markets. Over the next 3 years, FPT Industrial will supply high-efficiency engines for long and post gensets and the companies will work together to promote the operation and development of gensets and industrial power equipment for the global market.

Moving then on to Slide 7, we show the total industry unit registration change versus the second quarter of 2023, and the quarterly performance of the industry in Europe, excluding U.K. and Ireland was solid across all segments. Light duty trucks were up double digits, while medium and heavy were up 8%. For buses, the industry in Europe was up 11% versus the previous year second quarter.

In Latin America, industrial volumes were down by double digits in light-duty trucks and down 7% in buses, while a double-digit increase in medium and heavy-duty trucks. As a reminder to all of you, our Latin America figures include Argentina, which is down year-over-year, particularly in the light-duty trucks.

On a worldwide basis, as you can see, the market experienced double-digit volume growth for light using trucks and a more -- more moderate 5% increase in medium and heavy duty trucks, while it was slightly down in buses.

Moving then on to Slide #8. And there, we have our recurring quarterly update on channel inventory statistic reflects only finished products. Company inventories were sequentially down, both in light duty truck and medium and heavy reflecting our effort to normalize the level of order pipeline due to normal seasonality.

Looking at dealer inventory, this was sequential down 10%, in light-duty trucks and slightly higher in medium and heavy due to the legislative requirements linked to our model year '22. As you can see from the takeaway message at the bottom on the slide, the percentage of dealer and company inventories already sold to customer cross segment has remained solid, around 70% for both actual dealer inventory and company inventory.

Lastly, looking at production activity. We have continued to adapt our production rate to the market demand for both light-duty trucks and medium and heavy duty trucks, production was sequentially down by 17% in light and 10% in medium and heavy.

Let me move on to next slide, with order intake and delivery statistics at the end of the second quarter. As disclosed previously, we are approaching a normalized level in our truck order book covering almost 13 weeks of production in light duty trucks and around 10 weeks for medium and heavy-duty trucks at the end of June.

Our Model Year 2024 has been very well received by customers, and our order book now represents more than 90% of the total light-duty trucks orders and more than 70% of the medium and heavy-duty truck orders. As I mentioned earlier, deliveries of the new model year will end momentum in the second half of 2024, particularly in the latter part of the year.

Our robust business unit order book covers the full year of 2024 and the entire first half of next year. Truck deliveries were down in the second quarter by 18% on a worldwide basis versus second quarter last year. Europe was down 22% in trucks with light-duty trucks down 18% in medium and heavy down 31% versus the second quarter of 2023.

Bus deliveries were up 42% on a over basis and up 2% in Europe. Order intake for bus was impacted in the quarter by our planned effort to normalize the order book combined with a focused pricing discipline during the phase-in period of model year '24 and the phaseout of model year '22.

Slide #10 is a new addition, it focus on electric product deliveries as for the first half of 2024. And let's start with our e-daily range. As you can see, deliveries have ramped up visibly and our order backlog is solid. On our eAxles side, product deliveries have increased quarter-over-quarter, and we expect that to continue going forward. And we actually have now an order book with more than 2,000 eAxles. Those eAxles will be delivered in the upcoming quarters.

In addition, the electric bus deliveries have continued to increase year-over-year. And based on our current order backlog already funded, we will deliver around 2,000 e-buses from now to the end of 2025. So this means, and as you can see, we're fully on track on ramping up all our electric products across the segments, and we are comfortably positioned to meet the upcoming European emission standard regulation.

Then moving to Slide 11 and talk a little bit about market shares and in Europe, excluding U.K. and Ireland in our truck and bus segments. In light-duty, we ended the second quarter strongly at a 14.8% market share in the 3.5 to 7.49 tonne segment. We further solidified our market share leadership in the chassis cap segment with a 32.5% market share, and we continue to maintain our historic leadership in the upper end of the light-duty segment with a market share of 63.6%.

In heavy-duty, we increased our market share with 120 basis points versus the second quarter of 2023 at 8.9%, and in medium and heavy combined, our market share was up 170 basis points to 10.2%, and we maintain a very strong position in the CNG, LNG heavy-duty truck segment with a market share of 43.6%.

For bus, we further solidified our leadership in intercity closing the quarter at 63% market share in Europe, up from already high 45.7% in the same period last year. You see the bus, we closed the quarter with a solid 13.3% market share.

And with that, I will now hand over to Anna, who will take you through the second quarter financial highlights. After, I will come back and conclude with some final remarks.

[Anna Tanganelli, executive]

Thank you, Olof. Good morning, everyone. Let's now take a look at the highlights of our second quarter 2024 financial results on Slide 13. Before we start, let me please remind you that in continuity with our Q1 results, for the financials shown on the next slide refer to our continuing operations only as our Firefighting business unit has been classified as discontinued operations following the signing of a definitive agreement for its transfer of ownership in March of this year.

As a result, in accordance with applicable accounting standards, also 2023 figures have been recapped consistently. For Q2 closed with consolidated net revenues of EUR 3.9 billion and net revenues of industrial activities of EUR 3.8 billion, contracting year-over-year by 5% and 5.8%, respectively, due to lower volumes, mainly in Europe and negative mix and the impact of an adverse foreign exchange rate primarily in Argentina compared to Q2 2023, partially offset by a positive price realization, particularly in trucks.

Financial Services net revenues totaled EUR 142 million in the quarter, up 21.4% compared to prior year. Group consolidated adjusted EBIT slightly decreased over the period by EUR 16 million, closing at EUR 295 million, while adjusted EBIT margin remained stable at 7.5%.

Adjusted EBIT of industrial activities reached EUR 264 million, with a very solid 6.9% margin, up 10 basis points versus Q2 2023. Financial charges confirm the positive year-over-year trajectory also in this quarter, closing at EUR 49 million as a result of the series of actions we have implemented to contain our foreign exchange exposure and to reduce our cost of hedging in Argentina, combined with a positive hyperinflation accounting impact.

In light of this very solid first half result, while we remain cautious on the evolution of Argentina economics also considering that market expectations since to a potential further devaluation of the Argentinian peso in the later part of this year, we now expect full year 2024 financial charges to close at around EUR 300 million. Obviously, this figure might potentially further improve should set a devaluation not materialize.

Reported income tax expenses for Q2 2024 were EUR 63 million with an adjusted effective tax rate of 26%, resulting in a 27% ETR for the semester. Consolidated adjusted net income for the period closed at EUR 182 million, up EUR 15 million compared to prior year. As a result, adjusted diluted EPS was EUR 0.63, up EUR 0.02 compared to Q2 2023.

As usual, in this slide, we report the adjusted net income attributable to Iveco Group, which totaled EUR 172 million and excludes the profit attributable to noncontrolling interests.

Moving to our free cash flow performance. Q2 2024 free cash flow of industrial activities was negative for EUR 98 million, primarily driven by a temporary exceptional working capital absorption, bringing to the extra effort to secure quality and readiness of the launch of our new Model Year 2024 truck range.

Finally, available liquidity, including undrawn committed credit lines remained solid at EUR 4.2 billion as of end of June 2024.

Let's now focus on net revenues of Industrial Activities on Slide 14. Looking at Q2 2024 net revenue split by region, as you can see from the chart on the top right-hand corner of this slide, all regions contract year-over-year, except for rest of the world, which was up 7% compared to prior year, mainly driven by Africa and Middle East.

As for the net revenues evolution by business unit, bus and defense were solidly up versus prior year, while truck and powertrain decreased by 10% and 14%, respectively, versus Q2 2023. In particular, truck net revenues totaled EUR 2.6 billion, mainly thanks to continuously positive price realization in both light commercial vehicles and in medium and heavy-duty trucks which partially offset the expected contraction in volumes compared to prior year and the impact of the adverse foreign exchange rate evolution made in Argentina. Bus net revenues increased by plus 22.4% year-over-year to EUR 612 million, underpinned by higher volumes and a better mix combined with the positive pricing evolution.

Net revenues of defense continued to grow substantially in the period at around plus 30%, reaching EUR 285 million, thanks to higher volume and the positive mix.

Powertrain net revenues were down 13.7% year-over-year to EUR 980 million, mainly as a result of a decrease in volumes in the period. Sales to external customers accounted for 48% in Q2 2024.

Turning to Slide 15. Let's now briefly comment on the main drivers underlying the year-over-year improvement in our adjusted EBIT margin of industrial activities. As previously highlighted, net pricing continued to be positive in the quarter, offsetting the negative impact of lower volumes in truck and powertrain and the impact of the adverse foreign exchange rate evolution in Argentina compared to prior year.

Overall production costs were substantially in line with Q2 2023, notwithstanding the solid operational and product cost improvement in Europe of around EUR 40 million, almost fully offset by the negative performance of the Argentina raw material inventory in the period linked to the counter inflationary trend. As a result, adjusted EBIT margin of Industrial Activities closed at a solid 6.9%, up 10 basis points versus Q2 2023.

Let's now take a look at each industrial business at adjusted EBIT margin performance in the quarter on Slide 16. First of all, all our businesses posted a robust profitability performance in the period both versus prior year as well as compared to the last 12-month period, confirming the growth path outlined in our strategic business plan.

Powertrain, bus and defense closed with a solid adjusted EBIT margin uplift compared to prior year. While truck profitability, despite the slight decrease versus an all-time high Q2 2023, reached a remarkable 7.4%. In particular, truck adjusted EBIT margin was mainly impacted by lower volumes, a negative mix and the year-over-year adverse foreign exchange rate effect partially offset, as we said by continuously positive price realization also in this quarter.

Production costs continued to solidly improve in Europe, but as we said previously, this trend was more than offset by the Argentinian raw material inventory trends. As for defense, adjusted EBIT margin posted a 70 basis point increase versus prior year, reaching an almost double-digit result at 9.8%, thanks to higher volumes and a better mix.

Bus adjusted EBIT margin closed at 5.2%, up 200 basis points, showing once again a remarkable year-over-year performance, thanks to higher volumes, a favorable mix and positive pricing.

Finally, Powertrain adjusted EBIT margin was up 80 basis points, reaching 6.6%, underpinned by a robust reduction in product costs, which fully offset the negative impact of lower volumes.

Let's now take a look at the performance of our Financial Services business unit during the quarter on Slide 17. Q2 2024 adjusted EBIT closed at EUR 31 million, slightly decreasing by EUR 4 million versus prior year, primarily to support the ongoing development GATE. The managed portfolio, including unconsolidated joint ventures, was up EUR 800 million, reaching EUR 7.9 billion as of June 30, 2024, of which retail accounted for 40% and wholesale for 60%, in line with March and 2024.

Once again, worth what to be highlighted here is that the stock of receivables past due by more than 30 days as a percentage of the overall on book portfolio remained at a historical low of 2% versus 2.3% of June 30, 2023. Finally, return on assets, as shown in the chart on the top right-hand corner of this slide remains solid and stable at 2%.

Moving to our Q2 2024 free cash flow and net industrial cash evolution on Slide 18. As said, in the second quarter of this year, free cash flow of industrial activities was negative for EUR 98 million, driven by a temporary exceptional absorption of our net working capital linked to some extra efforts in finalizing and getting a certain number of our Model Year 2024 vehicles ready to ship.

Our expectation is for Model Year 2024 deliveries to gain momentum later in the year. Therefore, our full year 2024 Industrial Activities free cash flow target remained unchanged at between EUR 350 million and EUR 400 million.

Adjusted EBITDA and cash out for interest and taxes were in line with prior year, while change in provisions and similar contributed positively before EUR 420 million compared to Q2 2023, thanks to the significant reduction of our financial charges.

Investment in the quarter were EUR 210 million, EUR 51 million higher versus Q2 2023, with total investments for full year 2024 confirmed at around EUR 1 billion. Finally, the EUR 67 million year-over-year improvement in the other changes line item is mainly linked to last year's negative one-off resulting from the full acquisition of the Nikola Iveco joint venture finalized in June 2023.

As a reminder, on 24th of April 2024, Iveco Group paid out the approved cash dividend of 2020 -- EUR 0.22 per common share. In addition, in the period, we continue to purchase U.S. linked bonds in Argentina, namely Devario as part of the previously mentioned actions and hedging strategy implemented in the country.

Moving now to my last slide for today, Page 19. Our available liquidity as of 30th of June 2024 stood at EUR 4.2 billion. This includes EUR 2.3 billion in cash and cash equivalents and EUR 1.9 billion of undrawn committed facilities.

Looking at our debt maturity profile, please note that in the period, we fully prepaid the EUR 400 million syndicated term loan facility maturing in October 2025 and bearing a progressive coupon step-up, replacing it with more cost competitive and diversified funding sources thereby extending our average debt maturity profile from 2 to 3.5 years, which confirms investors' trust in Iveco Group's creditworthiness.

Last but not least, it is immediately visible from the chart with our cash and cash equivalent levels continue to more than cover all the cash maturities foreseen in the coming years and totaling EUR 1.5 billion.

Thank you. I will now turn the call back to Olof for his final remarks.

[Olof Persson, executive]

Thank you very much, Anna. Let's conclude this presentation with the industry and financial outlook as well as would like to share my main observations after the 30 days I've been in the job. Our preliminary industry volume out for 2024 reflects our current feasibility and is broadly in line with what has already disclosed by some of other peers we release the financials before us as well as what we was already disclosed in previous earning calls.

On a worldwide basis, both light-duty trucks and buses are confirmed flat or slightly up year-over-year. While heavy-duty trucks are expected to be down around 10% with larger variances of subs declined by market. Europe, excluding U.K. and Ireland is expected to range from flat to slightly up in both light-duty trucks and buses, and heavy-duty trucks are expected to be down at around 15%. A slight improvement in the industry outlook for the full year reflects the solid first half performance while keeping the second half expectations unchanged.

The next slide, #22, as our full year 2024 primarily financial guidance, unchanged from previous call. And as stated at the top of the chart is financial guidance exclude Magirus a recertified the business unit and has been confirmed in its entirety in what was disclosed during the Capital Markets Day. The company is confirming its guidance as follows: at consolidated level, group adjusted EBIT at between EUR 920 million and EUR 970 million.

And for the industrial activities, net revenue, including currency effects to be down at around 4%. Adjusted EBIT from industrial activities at between EUR 790 million and EUR 840 million, industrial free cash flow at between EUR 350 million and EUR 400 million and investments in property, plants and equipment and capitalized intangible assets at around EUR 1 billion.

Guidance has been confirmed on the back of a convincing first half of the year and an evolving order backlog. As already disclosed in our previous earning calls embedded in our guidance for the full year is profitability improvement for powertrain, bus and advance business units, while our truck business unit will leverage a Model 2024 and on the sustained performance of the light commercial vehicles to mitigate the negative impact of the European market slowdown in heavy-duty trucks.

We will take decisions on how to navigate our production capacity during the second half of the year, in line with the lower market, especially in the third quarter to sensibly manage cost and cash in what is a seasonally weak quarter. And to recover the unit and also to recover the unfinished products that remained in our inventory at the end of the second quarter.

Our Model Year 2024 across truck segment is receiving very good preliminary feedback from our customers with deliveries to gain momentum in the latter part of 2024, robust order books for both bus and defense business units are continuing reinforcing the expectations. The group's objective is to keep a sound level of available liquidity is continuing and intact.

In conclusion, on Slide 23, let me just share with you some observations from my first 30 days. First of all, I found a very strong commitment and alignment at a senior leader team but also across all the business units to reach our medium- and long-term targets presented in the Capital Markets Day. It's really -- has been pushed down and it's accepted and worked on.

Our product strategy is solid and very well defined, perfectly in line with our long-term investment strategy and also in line with our technology road map in order to make sure that we continue to put very competitive and high-technology content vehicle out to our customers.

Thirdly, the operational excellence program is well underway with implementation plans that are defined and some that are under definition in order to reach the targets again that we have set out for 2028 with a year-by-year improvements.

Fourth, all in the organization and all the different parts of organizations are working hard in optimizing our working capital management in order to improve the free cash flow from our industrial activities.

In conclusion, and as already anticipated in my remarks, my appointment as the new CEO of Iveco Group is not and will not trigger any change in our medium- and long-term targets and pathway strategy, which are all confirmed in their entirety.

So that would conclude the prepared remarks, and we can now open up for questions. And to be mindful of the time, we can ask you to hold off any detailed modeling and accounting questions on which you can follow up directly with Federico and Investor Relations team after the call.

Operator, please go ahead.We will take our first question from Martino De Ambroggi, Equita.

[Martino De Ambroggi, analyst]

My first question is on prices, because you mentioned in the press release, you have a prudent approach for the second half of the year. So just to understand what's the visibility on the prices for the second half and your assumption embedded in the guidance?

The second is a more general question. So just for Olof, I clearly understand that you confirm all the medium and long-term targets. Two strategic questions on, one, the defense, if it's a core asset for you in your view in the medium and long term?

And second, would you consider any combination M&A deals for -- in the long term for Iveco which suffers as everybody knows of a smaller size compared to several big competitors.

[Olof Persson, executive]

So thank you. On the price visibility guidance -- thank you for the welcome. On the price visibility, what we have included in our guidance is I mean, we have an order stock that you see is going into the third quarter, and we're moving into the fourth quarter with limited visibility for 2 reasons. One is, of course, the market development, we don't see clearly. But also, you have to remember that we have a huge rollout now with the Model Year 2024 with a lot of marketing activities that have to go out.

We are absolutely confident that the pickup, as I've said a number of times, will come during the second half of the year and in particular, in the fourth quarter. When it comes to prices, we do see a reduction in the pricing and there is a pricing pressure and volume pressure as well in the fourth quarter, given the fact that we're now looking into the volumes we are. So basically, that is the answer to that question.

On defense, you see very clearly that defense is part of our 2028 plan. It is a contributor in. We're very happy with the defense when it comes to profitability, order backlog, future opportunities. So I think that is the answer to that.

On the M&A, I am not against M&A. But I think what we have hammered out, which I think is really, really positive for us is our reporting strategy. You're right that we are not the largest, but we do have access to with our partners, both in terms of technology, in terms of the products and in terms of cost sharing in those kind of things. So the partner strategy that has been laid out, I think it's a very, very fruitful and for us, a very suitable strategy to continue.

[Operator]

We will take our next question from Monica Bosio, Intesa Sanpaolo.

[Monica Bosio, analyst]

Yes. And welcome Olof. My first question is on the recovery in terms of free cash flow of what you lost in the second quarter, should we assume some recovery already in the third quarter, which is usually a negative quarter in terms of free cash flow. I can imagine that it will keep negative, but I'm just wondering if it will be less negative or alternatively if the recovery in the free cash flow will be mostly back-end loaded in the last part of the year?

And my second question is on the medium and heavy-duty truck. Can you give us any flavor on the profitability of the segment? And what do you expect by the year-end, also on the back of the model year? And the very last was on the Bus segment, which seems to be stronger than expected. So I'm just wondering if you can give us an insight on the backlog and the order if the orders are already covering 2025?

[Anna Tanganelli, executive]

Monica, it's Anna here. So let me get your answer to the first question. So on the cash flow, for sure, what we are doing in Q3 is to recover, let's say, from an -- reduction of the industrial stock perspective, and we are working hard to translate that also in cash flow. So that's why we are saying we will fully recover in H2. Obviously, our target is to try to see some benefits already in Q3. As you correctly said, Q3 usually for us is a cash absorbative quarter. It's in line with our usual seasonality.

We were very vocal in saying we are working to balance the seasonality. But obviously, it's not something we can do overnight. So 2024, we see the transition a year. So I think it's safe to say we will fully recover by year-end. Then obviously, we are working hard to pull it ahead as much as possible.

On profitability for medium and heavy, we are in Q2 in, say, in mid single-digit, say, area, excluding, obviously, the impact of the ASCO of the former Nikola Iveco joint ventures, and this trend will I mean, in our assumption, it will continue also in the second half. So we will continue to be around, I would say, single -- mid-single digit.

[Monica Bosio, analyst]

Sorry, with positive because -- so medium and will be mid-single digit. But as for the -- only for the heavy segment, should we still expect a positive -- more positive? Is it correct?

[Anna Tanganelli, executive]

I would say, a breakeven territory we hope to be in a slight positive territory as well, but let's say, between breakeven and slight positive.

[Olof Persson, executive]

And when it comes to past order backlog, I mean we already stated that we do have up to half year 2025 covered in our order backlog. What I can say, what I see, and when I talk to the bus people, there is a a lot of opportunities where the bus is well positioned, both in city buses and in intercity where we have a very strong position in particular on the market share. So -- but right now, to answer your question, it's going up to half year 2025 order backlog production.

[Operator]

We will take our next question from Daniela Costa, Goldman Sachs.

[Daniela Costa, analyst]

I have 2 questions. I'll ask them at a time to make it easy for you. But if we go into, I guess, the backlog exhaust this year, if we go into '25 where the end market still depressed with the pricing situation that that you've highlighted and with limited backlog. Can you recall like what levers do you have to keep profitability flat? Or would it go down, anything sort of in fixed cost that you can do? How will you deal with it if it is more prolonged?

[Olof Persson, executive]

Yes. quick. I mean there are a number of levers, of course, but it's all about the planning, right? So this is a cyclical business we have been up and down before. And first thing you have to do is to adjust the production rate. That is to make sure that you don't overproduce and thereby also not only our own production but the whole change back to the suppliers, so we don't get too much of material coming in. And that is, as you have seen, we have already started doing. We're going to have another look and we have very much the issue around that under control, and we will do production adjustment. Then we have the production costs. We have done a very good job, I think, both in last year and this year and actually reducing the product cost, meaning that we have a better sort of cushion in order to take care of the swings that is coming.

And then finally, I mean, we will definitely go when it comes to the truck business model year '24, had to work on the pricing as well, right? So it's a pricing issue. But your question was more related to really volume impacting.

Then we do see bus and defense is increasing. So I mean, this is what you talk about to the truck, but for the Iveco in total, bus and defense is planning to increase their output during next year as well. So I hope that covers your question.

[Daniela Costa, analyst]

Yes. And the second one is just a follow-up on the pricing, just to understand a bit more your comment regarding Q4 and what you're seeing. Is it across the trucks LCV and medium and heavy-duty? Or is it concentrated into one of the pockets that what you're mentioning? And related to that, is it your view that it might happen? Or do you actually see concrete signs from some of your peers dropping prices already?

[Olof Persson, executive]

I think the issues we have here is the visibility into the volumes in Q4, right? We do have, as I said, a very good visibility on Q3 based on our backlog. And we will have to gain visibility in there. In our guidance and in the full year numbers that we presented, we have assumed a price reduction and a model mix type of adjustment, but that is also then offset with our production costs through as well.

So I think we need here to see a little bit of visibility coming in. We need to make sure that we get the price positions also for our Model Year '24, right, super important, and I'm going to be heavily involved in that to make sure that we end up with the right price position there. And then we're going to have the visibility coming into Q4 a little bit later or something.

[Daniela Costa, analyst]

Sorry, what do you mean on the pricing for the Model '22? It is too expensive now? It is too cheap?

[Olof Persson, executive]

Sorry, I wasn't clear. Thank you for clarification. What I mean is that model year '24 is a new truck. It has new functionality, as new improvements for the customer has better economics for the customer. All of that needs to make sure that we now -- during the launch are getting a very tight and disciplined price policy for model year 2024 to get into the market because this is a really good track and we need to make sure that is and properly in the pricing, and that's what we're going to focus. Hope that clarifies, sorry for confusing.

[Operator]

We will take our next question from Miguel Borrega, BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

The first one, just to understand this change over to the new model year 2024 in terms of orders and deliveries? Or is that been obviously declining for many quarters now. And I do want to understand -- what's the impact from the changeover and the impact from a weaker market? Is there any way that you can kind of provide color on why are orders declining so much? Is it mostly because of the technical effect on the changeover? Or most of that is a weaker market environment?

And then how do you expect the leverage to evolve into the second part of the year in 2025. Should we expect a strong pickup in orders in the second half to support the 2025 deliveries or indeed the deliveries in 2025 are going to be materially down? I know it's still early, but just want to understand how you view the flow through orders and deliveries on the new model year?

[Olof Persson, executive]

So in our estimation for the full year, sequential now, sequential. We are anticipating a pickup in the order intake both on the light and on the heavy due to the Model Year '24 redo, which we're now rolling out. So we're rolling it up. The rubbers also hit the road. And in -- as we speak, we have sort of unlocked the temporary issues that we did have, I want to say that. And making sure that we now have a steady flow of vehicles coming in, first in the commercial in tory and then over to the dealer inventory and out to the customer. That creates a momentum by the sales organization that take these new products and go out and making sure that the implementation and the the rollout of this new model year is happening.

So we are in the midst of that right now. And I'm coming back to my comment earlier about the Q4 lacking visibility. And if Q4 lacking visibility, of course, the first half of 2025 is also very much like in visibility as we do right now. So we will need to form our sort of both the production schedule, the cost reaction targets, all the other targets we have set when we get a little bit more visibility into that.

But fact, as the matter is that I believe and I see and I truly believe that the customer will see it as well. We have a very good lineup now with model year '24 that will bring us a good position also going forward regardless of what kind of market development we see.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And then secondly, just a follow-up to the free cash flow question. Assuming Q3 is flat from last year, you would need about EUR 1.2 billion, EUR 1.3 billion in Q4 to achieve the midpoint of your guidance. Now given that the market is clearly weakening sequentially, how confident are you on a very strong Q4 kind of what you had last year, but last year, the market was much stronger. And you just mentioned that you already expect some pricing pressure into the second half. So given everything combined, how confident are you in more than EUR 1 billion of free cash flow in Q4?

[Anna Tanganelli, executive]

Yes. So as we said, first of all, we will reabsorb the gap entirely in H2. As I said earlier, while answering to Monica, obviously, our target is to try to put it ahead as much as possible. We are very confident to achieve our guidance. That's clear. We have actions in place to get there. Also because the drop in the volumes and the pricing pressure was already factored in our guidance.

So even assuming we will be exactly in line with the cash flow performance of H2 of last year. And the upside in H2 compared to H1 will be the recovery of the shortfall we suffered in Q2. And as I said, there was also -- I mean, the market performance was already factored in, in our guidance. That's why we are confident to achieve that guidance.

And also, please consider -- for now, we are very prudent on the evolution of Argentina. We already improved versus our last call the guidance on the financial charges. Obviously, we need to see how that situation also evolves because if the devaluation does not occur or occurs to a lower extent than what we have assumed that could also be an upside. So just to say, we have several levers we are already activating to meet that guidance. And as I said, most of these negative trends were already factored in when we gave the EUR 250 million to EUR 400 million target.

[Operator]

We will take our next question from José Asumendi, JPMorgan.

[Jose Asumendi, analyst]

A couple of questions, please. The first one, can you talk a little bit about the actions you took in the first half or second quarter to adjust your manufacturing cost base lower, specifically in heavy-duty. And do you have any of the benefits kicking in in the second half of the year? Or have you taken most of the benefits already in the first half?

And on this topic also related, can you confirm again that you're seeing order intake in heavy-duty stabilizing in Q3 versus Q2? And the second question, Olof, can you talk a little bit about the Foton partnership, joint venture collaboration that you have? I understand right now, it's it's basically on the EV WAN segment. But could you expand this partnership to grow in China? Could you also bring the heavy-duty architectural Foton into Europe. I will be very interested to hear about this partnership, please.

[Anna Tanganelli, executive]

I'll start with the manufacturing as the product cost evolution that was your question. So we had a positive performance in Q2. So first of all, sorry, to address your question, no, we expect benefits also in H2. As we said also during our Capital Markets Day, this year is predominantly the product cost evolution is predominantly linked to, let's say, the positive trend of our raw materials, which is for now being substantially confirmed.

As we said in Q2, you see a flattish product cost year-over-year performance was simply because the positive results we achieved in Europe, which accounted for EUR 40 million just in the quarter. And just to remind you, in H1, all in all, we had year-over-year almost EUR 150 million of product cost improvement.

However, in Q2, that was fully offset, I would say, by the negative impact of FIFO methodology for our raw material stock in Argentina. In H2, we will continue to see some of this negative effect. However, the contribution -- the positive contribution from raw material prices from all our commercial actions on the purchasing side, we have kicked off should be visible. And so you should see a positive net contribution despite the potential continuously negative FIFO effect in South America.

Same for manufacturing efficiency, plant efficiency, they are continuously positive. Obviously, Q2 was affected also by the Model Year 2024 launch, but the impact was not material. So the plant efficiency continues to be positive also in Q2 and will be continuously, let's say, bringing a positive result also in H2 of this year. I hope I addressed your question.

[Jose Asumendi, analyst]

Yes.

[Olof Persson, executive]

Okay. And thanks for your question about Foton just to underline that this is a Memorandum of Understanding, and we are now investigating to ensure potential collaboration. The main part of this and the absolute lion part of this is the electric kind of below the -- around the 3.5 tonne, which is then a lineup -- it increased our lineup for below the Iveco Daily tonnages. So that would sort of expand our market reach, expand our customer reach, and it will also be good for our dealers, right? So that is the absolute focus on it.

Then we have said that -- and that is for Europe and South America. And then we have said also that we -- if there are any supply opportunities with power brand, that is something that we also can discuss to see if there's anything there that can be. But from the heavy-duty truck, no, we have not discussed that at all. So this is light lights, you can say, it's below our normal Iveco daily 3.5 tonne.

[Operator]

We will take our last question from Shaqeal Kirunda, Morgan Stanley.

[Shaqeal Kirunda, analyst]

Shaqeal Kirunda from Morgan Stanley. Can you tell us about the challenges you've faced with ramping up the new model year '24 production and why we should be confident that this will be resolved by Q4?

[Olof Persson, executive]

Absolutely. I mean, first of all, we have realign the whole manufacturing system in Europe for trucks, right? So all plants are now only producing Model 2024. And that's why I sort of wanted to stress the major undertaking was the shift over this production. So we have our whole production setup and infrastructure at our disposal in order to produce both the lightweight, the medium and the heavy one.

So this is a full shift over that we have done in the second quarter, which was a major undertaking has resulted in many times explained what it is now. But again, I want to reinforce that we see the machine is now following through and we start to see the machines coming out to customers and everything.

So that -- I'm not worried about the production rate. We have our production rate that we can go up and down -- and it was related to in an earlier question, the whole manufacturing output is something that we are looking into very carefully and on a regular basis to make sure that we are in line with it. But ramping up, no problem.

[Shaqeal Kirunda, analyst]

And just a follow-up. So looking at the truck industry volume outlook versus the year-to-date volumes, you're expecting a strong market in the second half. And so far, both in light commercial vehicles and medium and heavy, Iveco deliveries have underperformed the market. So are there any other aspects to consider in comparing Iveco delivery to the market, such as country or customer mix? Or is it all going to be from this model year changeover?

[Olof Persson, executive]

I mean the model changeover is in Europe, right? So we are in -- and that's why were clear about European infrastructure. In South America, we are doing other types of vehicles or not the Model Year '24, let's put it that way. The issue about the market, and as I said before, we expect sequentially the market or our order intake to increase during the second half, so I don't really know the -- I didn't understand the question you had about the underperformance of the market.

[Shaqeal Kirunda, analyst]

Just comparing the deliveries of the Iveco to deliveries in the market in Europe?

[Anna Tanganelli, executive]

Yes. I see what you mean. Well, first of all, as we saw in the slide what Olof presented earlier, our market share, sorry, are up I would say, in all segments. In terms of number of units, first of all, our light commercial vehicles units were up year-over-year. We saw a drop on the, say, medium heavy or heavy side.

And then, as Olof was mentioning, the impact was in South America because as you very well know, we are not just present in Brazil, but also in Argentina, where most of our competitors are not present and you know very well the country is going through a recession. So if we keep South America side for the second we focus just on Europe, as said, maybe you see a drop on medium and heavy, but yes, this is linked to the shift of the sales out and phase-in of the model years. But to be honest, I said, our market shares are up. So we are quite satisfied with our Q2 results, then the question is more on the outlook, but Olof already addressed that question. So I hope we got you the answers you need.

[Operator]

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