Iveco Group NV

MIL:IVG

Earnings Call Transcript 2022-Q3

[Operator]

Good evening, ladies and gentlemen, and welcome to today's Iveco Group 2022 Third Quarter Results Conference Call and Webcast. We would like to remind you that today's call is being recorded.

[Operator Instructions] At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, Sir.

[Federico Donati, executive]

Thank you, Jessica. Good afternoon, everyone. We would like to welcome you to the webcast and conference call for Iveco Group's third quarter financial results for the period ending 30 September 2022.

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

Also in today's call are Iveco Group CEO, Gerrit Marx; and the Group CFO, Francesco Tanzi. Management will not go through every slide into their presentation, since the material was made publicly available for download on the Iveco Group website early this morning, including commentary on the presentation in the form of note pages. Instead, management will provide a summary of the quarter and the main facts allowing more time for the Q&A session.

Additionally, please note that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company prospective published on the 11th November 2021 as well as other recent reports and filings with the authorities in the Netherlands and Italy.

The company presentation may include certain non-IFRS financial measures. Additional information, including reconciliation to the most directly comparable IFRS financial measures is included in the presentation material.

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

[Gerrit Marx, executive]

Thanks, Federico, and welcome to all of you joining our call at this rather late time of the day. Due to travel constraints, I was not able to connect earlier for which I sincerely apologize.

I just returned from Brazil, where we made yet another impactful appearance at the Fenatran commercial vehicle trade show in Sao Paulo, launching several new vehicles, including our electric daily and the very successful heavy-duty truck S-Way in its lineup for Latin America.

As just mentioned, we will not go through slide by slide today. Instead, we will maximize the time dedicated to answering your questions, given the material was already made publicly available for download earlier this morning.

Before going into the quarterly performance and what we accomplished during the period, I would like to congratulate our team once again for successfully delivering on our financial targets, always going beyond through the personal dedication, a clear focus on cash and margins and our passionate commitment to sustainability.

For the third quarter in a row, we have achieved 3-digit adjusted EBIT, navigating in a persistently challenging supply chain environment, which is now more predictable, but still not at an optimal level, coupled with increased energy costs affecting both the company and suppliers.

On another front, semiconductor availability improved substantially during the quarter, permitting us to noticeably lower our fleet units, unfinished products in Iveco Group's inventories. However, we do see higher interest charges and inflation, especially in Latin America, which becomes visible in our net income. Free cash flow absorption was significantly lower than in prior years, mainly driven by higher profitability and our ability to manage lower seasonal working capital cash out. It is worth mentioning here that our combined medium and heavy-duty truck business will exceed the breakeven in 2022 for the first time since a long while with a continued positive trend into 2023.

It was a very active and dynamic quarter in terms of new initiatives and product launches. We are proceeding a pace with our Iveco Group way of partnering, announcing a new era of cooperation with Hyundai at the IAA in Hanover, where among our many launches in previous, we showcased the prototype of the future electric daily, fuel cell electric vehicle engineered by Iveco Group and powered by Hyundai Motor. This advancement is a tangible outcome of the collaboration between Iveco Group and Hyundai Motor Company, which began with the signing of the memorandum of understanding in March 2022. In addition, IAA visitors also saw the results of our partnerships with relevant like-minded game-changing organizations, such as Amazon Web Services, Hyundai, Microvast, Nikola and Plus, so which we are driving the transition to the mobility of the future together.

Also at the IAA trade show, Iveco Group demonstrated a strong commitment to the future of alternative propulsion, displaying a full range of sustainable solutions, including our approach to profitably commercialize those electric vehicles. Two of the group's brands actively participated Iveco Trucks and Bus as well as FPT Industrial.

We showcased innovations that represent a fundamental step forward in Iveco Group strategy to offer a full range of sustainable transport solutions for every customer, while contributing to its pledge to reach net 0 carbon by 2040.

More specifically, Iveco and Nikola Corporation gave substance to a new era in 0 emission heavy-duty long-haul transport with the commercial launch of the Nikola trade battery electric vehicle in its European configuration. We also unveiled a substantially matured better version of the Nikola Tre hydrogen fuel cell electric vehicle, which will enter the European market in 2024.

Both vehicles are based on the first-ever electric modular platform for articulated heavy-duty trucks for emissions -- permissions of approximately 500 kilometers for battery electric and up to 800 kilometers for fuel cell electric in their initial launch configurations. At the same time, Iveco also launched the new eDAILY, the electric twin of the best-selling van and cab chassis platform, covering the entire range between 3.5 to 7.49 tonnes with a total energy storage of up to 111 kilowatt hours containing 1, 2 or 3 batteries, driving range of up to 400 kilometers and charging that takes just about 30 minutes for 100 kilometers.

On September 20, Iveco and Petit Forestier Group, the European leader in refrigerated vehicle rental and leasing announced the signature of a memorandum of understanding for the supply of 2,000 electric daily chassis cabs with delivery of the first 200 planned for 2023.

The vehicles will be fitted with refrigerated bodies by bodybuilder Lecapitaine, a wholly owned subsidiary of Petit Forestier. The eDAILY refrigerated vehicles will join Petit Forestier extensive rental fleet advancing its energy transition to electric propulsion.

Sustainable Mobility is also a key focus for Iveco BUS and FPT Industrial. At the IAA, Iveco BUS showcased its 0 emission passenger transport solutions, the new e-way 100% electric city bus. Likewise, consistent with its coordinated multi-energy approach towards sustainable propulsion, FPT Industrial revealed 3 world premieres; a multi-fuel combustion, a heavy-duty 30 liter engine capable of running on liquid fuels, natural gas, hydrogen or blends of both, natural gas and hydrogen. A new generation of modular e-access for medium and heavy commercial vehicles and a new battery pack for buses. Iveco Group's commitment to offering breakthrough solutions to its customers also expands to the field of fintech and transport tech.

In Hanover, the group presented its answer to how substantially higher electric truck costs can get blended into an overall competitive commercial offer. GATE, Green and Advanced Transport Ecosystem, an independent entity, that will bring a revolutionary business model onto the scene. GATE is an all-inclusive pay-per-use long-term rental formula that will enable customers to access electric trucks and vans at competitive terms, lowering the barrier to adopt zero-emission vehicles into their fleet.

We expect to rollout GATE in mid-2023 at a small scale, initially offering its fully digital service to pilot clients and then expanding it to customers in different markets across Europe.

To sum up, we are moving fast with a strong commitment to new propulsion concepts, not only launching innovative products. It could be the alternative propulsion systems, but also introducing our revolutionary business model onto the scene. Electric trucks require new business models and packages to offset the inevitably lower aftermarket profits for OEMs in the electric area. We act now.

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

[Francesco Tanzi, executive]

Thank you, Gerrit, and good evening to all participants on this call. We ended the quarter with consolidated revenues of EUR 3.5 billion, up 19% versus the previous year. Financial Services net revenues were at EUR 73 million, up EUR 29 million versus Q3 2021. Net revenues from industrial activities were at slightly below EUR 3.5 billion, up 18.6% versus the previous year, mainly due to higher volume and positive price realization.

Looking at the performance by business. Commercial and Specialty Vehicles net sales were up EUR 528 million or 21.5% higher with the year-on-year increase, primarily driven by good performance in South America and Europe in almost all businesses and positive pricing in all regions.

Powertrain net sales were up EUR 90 million or 11% with the year-over-year increase primarily driven by positive pricing and volume. Volume recovery from the Stellantis contract discontinuation started in Q3 2021 is proceeding, the pace and was partially offset during the quarter by substantially lower-than-expected volumes in China.

Sales to third parties accounted for 56% of the total net sales versus 60% in Q3 2021. Consolidated adjusted EBIT was up EUR 44 million to EUR 101 million with a margin at 2.9%, up 100 basis points versus the same period last year.

Industrial Activities adjusted EBIT was EUR 64 million with a 1.8% margin with positive price realization, higher volumes and a better mix more than offsetting higher raw material and energy costs.

When looking at the performance by Industrial segment, Commercial and Specialty Vehicles adjusted EBIT was EUR 78 million, a EUR 37 million increase compared to Q3 2021, driven by positive price realization and higher volumes that more than offset higher product cost, increased raw material and energy cost with an adjusted EBIT margin at 2.6%.

As Gerrit already mentioned, our medium and heavy-duty truck business will be breakeven in 2022 on the back of better margin and tighter control of price and cost. Powertrain adjusted EBIT was EUR 34 million, in line with Q3 2021, mainly due to positive price realization offsetting raw material and energy cost increases and as I said before, substantially lower volume in China. This will remain a point of attention as the heavy-duty truck market in China is down some 60% versus 2021 and unlikely to recover during H1 2023. The adjusted EBIT margin came in at 3.8%.

Moving to Financial Services. Adjusted EBIT was at EUR 37 million, a EUR 13 million increase, compared to Q3 2021, primarily due to higher wholesale portfolio and better collection performance on managed receivables. The managed portfolio included unconsolidated joint venture was EUR 5.840 billion at the end of the quarter, of which retail was 47% and wholesale 53%, up EUR 710 million comparing to the 30 September 2021. The receivable grade balance greater than 30 days past due as a percentage of portfolio was 2.8% versus 4.4% as of the end of September 2021.

Finally, the increase in equity year-to-date was related to net profit, including the release of the previous year's risk accruals. Financial expenses in the quarter were at EUR 65 million.

The vast majority of this increase was related to hyperinflation, Argentina and Turkey and the overall common increase in interest rates. The company expects such hyperinflation to continue to negatively affect financial expenses also in Q4 and 2023.

Reported income tax expenses, was EUR 40 million with an adjusted effective tax rate of 17% and 32% for the 3 and 9 months, respectively. The year-to-date adjusted expected tax rate is in line with the current full year expectation and reflects different tax rate applied in the jurisdiction where the group operates and some other discrete items.

The group adjusted net income of EUR 30 million, EUR 50 million increase comparing to the Q3 2021, primarily excludes the gain on the final step of the Chinese joint venture restructuring. The portion of the adjusted net income attributable to Iveco Group was EUR 28 million or adjusted diluted earnings per share of EUR 0.10 compared to EUR 0.04 in Q3 2021.

Net industrial cash remained solid at EUR 561 million and included the final EUR 133 million cash in from the restructuring of the Chinese JV performed in 2021. This item partially offset the cumulative cash out of EUR 186 million that took place in H1 2022, EUR 141 million in Q1 and EUR 45 million in Q2.

Industrial free cash flow, as already mentioned by Gerrit, in his opening remarks, was negative EUR 232 million, an improvement of EUR 360 million versus last year, mainly driven by lower cash outflows from working capital. Such a difference is due to cash inflow from inventories, also correlated to the previous quarter and finished product deployment.

We finished the quarter with a solid available liquidity level at EUR 3.6 billion, with cash and cash equivalents at EUR 1.5 billion and including EUR 2 billion of undrawn committed facilities.

Cash and cash equivalents more than cover all the EUR 768 million total cash maturities for the upcoming years. On 28 of October, Iveco Group signed with a pool of international banks, a EUR 400 million syndicated term facility, having 2-year tenure extendable for up to an additional 12 months at the company's sole option.

The proceeds will be used to refinance the current term facility ahead of the final maturity, which would have been in January 2024. This new facility confirmed the firm support to Iveco Group from its key international relationship banks. Additionally, yesterday, we signed a EUR 100 million bilateral term facility with Cassa Depositi e Prestiti with a 3-year tenure.

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

[Gerrit Marx, executive]

Thank you, Francesco. Let's conclude with the updated and improved full year 2022 financial targets as well as with some final takeaway messages. Our total industry volume outlook has remained broadly in line with what we previously provided by region and by segment. Therefore, on the back of a solid year-to-date results and better availability of semiconductors, for the remainder of the year, we have updated our 2022 financial outlook. Notwithstanding is still challenging but more predictable supply chain environment. And the complex energy and inflation cost scenario expected to affect both the company and supply chain. We are now forecasting consolidated adjusted EBIT between EUR 420 million and EUR 440 million from a previous outlook of between EUR 400 million and EUR 420 million. Net revenues of industrial activities up 5% to 6% versus full year 2021, up from previous guidance, up between, 3% to 4% versus the previous year.

SG&A costs of industrial activity is lower than 6.5% of net revenues, net cash of industrial activities in excess of EUR 1.2 billion. We expect a stronger Q4 performance compared to Q4 2021, both in terms of profitability and cash flow generation. Pricing is expected to offset production cost in Q4 and to more than offset it on a full year basis.

We will continue to manage our order book diligently in order to preserve relative profitability, maintaining tight control on working capital. And we do remain very cautious reading possible signs of a recession and uncommon order cancellations.

However, so far, such signs are not visible. The available liquidity level is expected to be solid at the end of December, allowing us to keep investing in our new energy future. As mentioned in my opening remarks, our Iveco Group way is proceeding a pace with new partnerships and collaborations signed during the quarter, while we are continuing to implement existing projects with different partners.

In conclusion, I imagine that the financial market focus is now more scooped towards the 2023 forecast and related dynamics rather than on how we will conclude the current year. We are laser focused to deliver and possibly over deliver on what we promised at the beginning of our journey. This approach is valid for the current year and for the upcoming months as well. And we will remain prudent considering the many uncertainties of the economic and political scenarios. I've read what peer OEMs are starting to say about industry volumes for next year.

And while we are not used to providing any indications or preliminary targets for the following year, when presenting our third quarter earnings results, I can say that we do not disagree that the European truck market could be broadly flat compared to 2022.

In our view, the strong order backlog across the entire industry, coupled with old existing fleets that need to be rejuvenated in some European countries more than justifies this preliminary forecast for next year. That said, over and above what could be a preliminary view on next year's total industry volume, I would like to strongly reiterate with conviction that Iveco Group demonstrated during the pandemic and has continued so in the current year to be fast, agile and lean.

Our group is able to react promptly to any sudden changes in demand and to the general environment, maintaining a strict laser focus on preserving our liquidity level. We will provide a first guidance for 2023 during our full year earnings call next year.

But let me reiterate once more that we are committed to continuing to deliver on what we have promised and this remains our north star in the decisions we take every day.

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

[Operator]

[Operator Instructions] We will take our first question from Monica Bosio from Intesa Sanpaolo.

[Monica Bosio, analyst]

The first one is on the revenue guidance for 2022. Could you split the increase in revenues by price and volumes, and maybe give us some more highlights on prices and volumes in the truck business.

And skipping to 2023, within a likely potentially flat truck market scenario in terms of volumes and with the 2023 where raw materials should reverse, energy cost should be higher. Do you still expect to offset the cost inflation through pricing even in 2023?

Any highlights on this would be very helpful. And very last question is on the -- unfinished products inventories. I remember that unfinished products affected the working capital for more than EUR 270 million. There were EUR 270 million of unfinished products in excess in the first half. How is the situation as of today?

[Gerrit Marx, executive]

Thank you, Monica. Let me start with your last question first. We have substantially reduced our fleet, the unfinished goods. There's still some work to be done in the fourth quarter. But given also prior year's seasonality, I mean Q4 is anyway a very busy quarter for us. And we do expect to reach a normal levels of inventory by year-end, provided supply chain holds.

The second question was about 2023. We definitely target to offset or more than offset costs with price. And we need to look at what -- how next year will actually unfold and what market dynamics will come into play when and if we don't know, certain cost items will drop others might increase. I mean on the front of energy, we all don't know really what is going to happen next year. There are many forwards we can use as an indicator. But there's reason to believe that, for example, around gas, there will be possibly easing coming at around April, May after the eating season and then when the new LNG and the other gas supplies come into play towards the end of next year.

So energy per se, remains volatile and is definitely very high on our priority list. Yet we do remain very, very disciplined when it comes to pricing. And we have taken orders with -- in anticipation of such price increases already in the last couple of months.

And hence, we have the target clearly to offset cost with price across the entire next year, depending on how the seasonality will hit. There might be the one or the other quarter, where this is more a challenge than in another, but offsetting is clearly the way to go.

And on the revenue increase 2022 versus 2021, I think you can roughly assume this is half-half price and mix volume. So it's -- I think maybe -- and think of it rather 40%, 60%, I guess. So I think roughly 60% is gross, 40% is volume mix.

[Operator]

We will take our next question from Martino De Ambroggi from Equita.

[Martino De Ambroggi, analyst]

Gerrit and Francesco, you made some remarks on the breakeven point for medium and heavy trucks this year. I was wondering, first, if it was already at breakeven in the first 9 months or you need the boost of the last quarter of the year?

[Gerrit Marx, executive]

I think you probably want to first finish your question. Is this the only question?

[Martino De Ambroggi, analyst]

No, no. This is the first part. So one by one, if you prefer, I can tell everything.

[Gerrit Marx, executive]

No, look, we don't need the boost of the fourth quarter to reach the breakeven in that segment. So this is clearly a good performance across the quarters' that has built over the year. And that has a good trajectory into next year when taking the heavy-duty alone; we expect to have that crossing the breakeven, as I indicated also in prior calls.

[Martino De Ambroggi, analyst]

Okay. Am I right in assuming a normalized level of breakeven in terms of volumes in the region of 50,000 units on a full year basis?

[Gerrit Marx, executive]

The breakeven in itself is changing as we work on costs and also pricing. So this is changing. But if you take the full year -- the full year volumes of medium and heavy for this year, I think it's a good baseline to start from. But we keep changing cost and price. So this breakeven should also move more favorably in our direction.

[Martino De Ambroggi, analyst]

Okay. And last on this subject is there are so many moving parts. But what is the profitability you can achieve, maybe not next year, but in a normalized market in medium and heavy?

[Gerrit Marx, executive]

Well, we're not giving individual segment targets and financial targets by segment. But clearly, on the medium and heavy, we do see, let's say, a low single-digit, low mid-single-digit EBIT possible in the midterm, not in the short but in the midterm. This has to take time to build. Just to remind you that profitability in this segment is very much linked to the aftermarket revenues and profits. And aftermarket is directly correlated to the running park, the running fleet. And the running fleet only builds over several years. And with this growing fleet, obviously, also the harvest in the aftermarket farm, if you will, will grow. And that's why it's not a thing that happens in 1 year to another. But it builds over several years step by step.

[Martino De Ambroggi, analyst]

Okay. And skipping to another subject is on the free cash flow in Q4. First, what is the usual free cash flow you have in the first -- in the last quarter of the year under the new perimeter because we are not accusing to look at Iveco as a stand-alone entity? And what are your assumptions in your target in terms of net working capital and factoring for the full year?

[Gerrit Marx, executive]

Yes, I can take the first part, Francesco, if you can take the second part of the question. So the seasonal fourth quarter cash flow. I mean, last year, the free cash flow generated in the fourth quarter and that was a tough -- again, this was a tough fourth quarter in light of semiconductor shortages, et cetera, was at around EUR 500 million to EUR 600 million was last year, last year, tough fourth quarter was EUR 500 million to EUR 600 million. We expect this quarter to be better than this.

[Francesco Tanzi, executive]

Yes. For the other part of the question, I would say the working capital will be positive in the Q4. And what is concerning the factoring that you mentioned, you can assume a 13% -- 13% of the total revenues as a percentage of the factoring embedded in our forecast.

[Martino De Ambroggi, analyst]

Perfect. And very last on Hyundai. How discussions are progressing? And what is missing and what is close to be announced? I remember joint purchasing and other things which are not yet announced, so just to have an idea of what is coming?

[Gerrit Marx, executive]

Yes. The partnership progress is really well along multiple fronts. We just, this week, have emphasized and stressed also the collaboration between Hyundai and Iveco Group in Latin America. We were actually -- both of us were on stage. And we're describing what we have in mind. So the partnership runs very smoothly and in the right direction, I would say. Things need time to build. This is not speed dating, but these are long-term partnerships. And we need to build each piece of it solidly on a mutual understanding of the subject matter. So it goes according to plan. And we keep announcing and building on it step by step.

[Operator]

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

[François Robillard, analyst]

First one is on the sales guidance that you gave. So if my math is correct, it implies fourth quarter sales that are either flat or up plus 4% at the top end of the guidance. That's lower than what you achieved on pricing, if I'm not mistaken, over the last quarters. Can you just give us a bit of a bit more of what drives this, what looks like cautious, in my view, sales growth forecast for the fourth quarter? That's my first question. And I'll carry on later on as well.

[Gerrit Marx, executive]

Look, the -- as I mentioned in the prepared remarks, the semiconductor situation is much more predictable now.

But also the pipelines are empty, which means that we have no buffers in it. So what comes will be built. So this is now how we enter into the fourth quarter. And so far, we had a bit of a bump, for example, in October on a certain component, the vehicle line, which we now recovered in November.

And this is how we just walked through this quarter. So we are cautious solely related to supply chain. And here and there, the one or the other surprise that still comes up, although much more predictable. So it's a cautious view on our guideline is a cautious view related to the supply chain situation, again, which is much, much better and more predictable, but it's still not back to normal.

[François Robillard, analyst]

And then on the EBIT guidance. Can you just give us some more color on how much of it is driven by industrial activities and how much of it is driven by financial services in your current forecast? Looking at the third quarter as well, quite a lot of the positive surprises were driven by the stronger-than-expected performance in the financial services.

So yes, my second question would be that one, so a breakdown of your expectations for the fourth quarter EBIT between Industrial and Financial Services. And just to come back on the third quarter financial services performance and if we can expect such a performance to reiterate in the fourth quarter?

[Gerrit Marx, executive]

The third quarter financial performance from our capital team was anyway good. But it had a one-off impact in there coming from a release and risk accruals that were built several years back. And there is -- in the fourth quarter as well as strong performance expected in both industrial as well as on the financial services side. But I'm more focused in my comment and answer here on the industrial side, where we do expect a strong fourth quarter provided supply chain holds. And that shall then lift us into the guided range.

[François Robillard, analyst]

And sorry, about the third quarter, so yes, this accrual item here was included into the adjusted EBIT figure?

[Francesco Tanzi, executive]

Yes.

[François Robillard, analyst]

But it's a one-off. So no, it's not expected -- you are not expected to have any other…

[Francesco Tanzi, executive]

No, it's the usual provision that has been accrued by the financial services in the time of pre-COVID year. And this has been released in relation to the sustainability of the customer that is continuing to pay in this period. So it's entering in the normal activity, but certainly will, I mean, boost the Q3.

[Gerrit Marx, executive]

And I think the PowerPoint that we have uploaded, you have seen that there is a bit of a step-up in return on assets in our capital business from about 1.9%, 2.1%-ish usual performance of return on assets and that stepped up in Q3 to 2.5%. I would say a good portion of that step-up between, let's say, 2.1% and 2.5% is related to this, to this one-off release. I think a more normalized return on assets for our capital business, which is a very good number. It's around 2%.

[Operator]

Our next question comes from the line of Anthony Dick from ODDO.

[Anthony Dick, analyst]

I had a question on the order intake trends. Looking at your order intake, I mean, first of all, in Q3, we saw most of your peers reporting very strong order intake growth, which was not exactly the case you guys. I know you mentioned some of the one-offs of high deliveries in Q3. But if I also look by segment, it seems that the order intake trend is weak in the light commercial vehicle division. And that's also a division where overall market deliveries are lower. So I'm just wondering about the outlook for that type of business. Again, I think you mentioned a flattish business for trucks next year. But does that also include the LCV market because it seems that momentum is less buoyant in that segment?

And just a quick second question on the financial service. Could you actually just give us the number of that one-off that you benefited from in Q3? And just to confirm that you're not going to have any more of such effects going forward?

[Gerrit Marx, executive]

I think I'll let give the last question to Francesco. But we're not confirming that this is the last opportunity in this area. So Francesco will give you the number. On the order intake, I think if you compare us to competition, you also need to quite carefully compare to how order books were managed over the last, let's say, 12 to 18 months.

While the one or the other competitors just closed the order books or they just simply stopped taking orders or very, very few. We were using the momentum and opportunity to continue taking orders. Hence, when you look at it year-over-year or quarter-over-quarter, trend. We have never closed the order books. We have kept them opened. And we have continuously managed through the quarters and this is why the year-over-year quarter-over-quarter.

On our side, looks -- it's rather book-to-bill 1, with a bit down in this regard, while -- and I don't know which competitor you referred to, some of them have just closed the books. And now when they reopened it, it looks phenomenal, but don't forget what you compare to.

So that is my comment on the order books. But I think Francesco on the financial services question?

[Francesco Tanzi, executive]

Yes. We're talking about EUR 11 million, EUR 12 million.

[Anthony Dick, analyst]

Okay. Perfect. And then just, I mean, as a follow-up on the order book. I mean even looking at your 9-month order book, that's quite significantly down year-on-year. So again, I'm just wondering if there's -- and especially, if you could point to any differences if there are any between the light commercial market and the medium and heavy market with regards to demand?

[Gerrit Marx, executive]

Well, I'm not aware of being down anywhere in the order books. To be honest, we have been mentioning several times that our order books are huge and they are actually, in some places, too large. In the light commercial vehicle business, we have reached order book length of about 30 weeks forward, 30-plus weeks forward against the backdrop of 2 plants running on 3 shifts. So we can't go faster and 30 weeks is pretty much filling the third quarter next year.

Now -- which is a very large order book and we have been trying to reduce this or can shorten it by decisive pricing actions and selective order take. So we are there in full control, obviously, but that is an order book. I want to shorten further in light of, let's say, the economic best place an order book should have, which is rather in the, let's say, 15 to 20 weeks forward than 30.

And when you -- on the medium-duty side and heavy-duty side, the order book is -- continues to be in the neighborhood of 35 to 40 weeks. I don't remember Iveco ever having received order books of this size. So I don't see any negative trend there either. So I don't know where you compare us to. And also here, we are filling the third quarter next year already with the orders. And also here, the targeted order books over time should be rather in the 20 plus/minus weeks instead of 40 or 35. So this is too long. This is not helpful. And in some customer discussions, obviously, not easy to conclude then, with these long lead times.

So we are working on shortening them. But regardless of increased pricing and decisive order actions, we keep maintaining these, large order books, which is on the one side, a very good thing to have. On the other side, I want this to be -- to be more normalized into next year. I want this to be shorter because that's more effective for everyone.

[Operator]

Our next question comes from the line of Miguel Borrega from BNP Paribas.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

Just a couple of questions from my side. On your guidance following up, if we take the high end of the range, it seems kind of flattish revenues into Q4 sequentially, but slightly better margins. So I just wanted to understand what drives sequentially better margins on flattish revenues. If you ramp up heavy duty, shouldn't the margin dilute sequentially? So essentially, what is there in Q4 that wasn't in Q3? Is it pricing, more pricing kicking in outside there?

[Gerrit Marx, executive]

It's a blend of 2 things. One is, as you know, we have made decisive pricing actions throughout the year. And we made them at times when we had order books of 30-ish weeks or so. So the pricing that you now see in the fourth quarter is basically the pricing that we determined at the beginning of the year or the first quarter of the year. So this is now starting to come through, so the better pricing. That's clearly one element.

On the other side, the production will be a record high or will be at a very high level in the fourth quarter, and hence, the plant absorption is going to be at a very favorable place. I mean the third quarter, we had the summer month in August, the shutdowns here and there, that's just the seasonal. So the production output is not that high. And when you compare Q3 to Q4, don't forget the Q3 revenues were as well positively impacted by the fleet, the unfinished products that we basically built in Q2 that were carried over into Q3 and turned into revenues in Q3, but they were not produced in Q3, okay? So that's why the plant absorption in Q4 is better than in Q3 for obvious reasons. And the second element is pricing.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

That's great. And then on the Nikola Tre, can you give us a sense around the price difference to your BEV competitors? How many trucks do you also expect to sell by 2024? And maybe given that the capacity, I think it's kept at around 3,000 units a year. Will these be margin accretive even on low volumes?

[Gerrit Marx, executive]

I'm not commenting on orders. We are taking orders. And you will see even several press clippings and releases that the orders have started for this vehicle.

In terms of delta pricing, I think when you look into the battery electric world, the 101 on pricing for this vehicle is simply how much kilowatt hours of battery power you have in this vehicle. If you have 300 or you have 700, this is a huge difference when the, let's say, battery cost per kilowatt hour is -- depends on where you look at EUR 180 or EUR 200. And that's why a like-for-like comparison is not easily made because the competitor products that are in the market, some of them have just 300 kilowatt hours of battery power. And then you can sell them or you can see price packs that are at, whatever, 300,000; 350,000 or so. When you have twice the battery power in this vehicle twice the range and, let's say, usefulness when it comes at a different price. So there is no like-for-like. You need to kilowatt hour adjust all these prices and then these things are more or less falling into a similar place, which we obviously do on a regular basis.

The production of the battery electric truck for customers in Europe will start in the second quarter next year and the production of the fuel cell electric version, the longer-range version will start at the end of next year with customer deliveries in 2024. The demand we see or the interest is very, very high. But -- and I can guarantee you this also across competition. The amount of customers who walk into your retail shop and are willing to put EUR 300,000, EUR 400,000, EUR 500,000 cash on the table is close to 0.

These vehicles, they will sell. Some of they will sell with subsidies because there are several subsidy schemes in certain markets available. But these vehicles will come in financing and financial packages. As I mentioned in my prepared remarks, similar to what we call GATE, where these vehicles will become part of a long-term rental agreement with various different services included in order to become digestible for the small and also medium-sized fleets.

So this is pretty much where this is going. So when you hear and read sales of 5 here or 10 there, and then if it's all based on German purchase subsidies, it's okay. It's not discounting that. We do this as well, but this is not yet a real sale, okay? Real sale comes when customers buy it vis-a-vis diesel parity. And they buy it not in the 5s and 10s, but they buy it in significantly higher volumes. So -- and this is what is being developed over the next, I would say, 6 to 12 months as we go through 2023 as the electric truck market will develop.

And then I think it would be fair to assume which trucks -- electric trucks were sold with subsidies and which ones were not. And I think the real tangible proof of the pudding is which trucks were sold and commercialized without subsidies. That is then when it becomes scalable.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

That's great. And then I'll just have one last question. Taking a step back on your 4% to 5% margin target by 2024 compared to over the last 12 to 9 months, you did 2.4%. Can you just remind us from here the main drivers for margin expansion, roughly where does -- how much leeway do you have in light-duty vehicles versus medium-duty? Just wanted to get a sense of where the margin expansion will come from. Is it pricing purely on pricing, a little bit more volumes, more on the medium and heavy-duty or more work to do on the light duty? Just remind us on what gives you the confidence for margin expansion within the next 2 years, taking into account that probably will have a recession next year? And maybe just squeezing in one last question. I think you had EUR 168 million on FX in your cash flow. Where does that come from?

[Gerrit Marx, executive]

Okay. Francesco, you take that second question, there, FX impact one in an average. But on the 4% to 5% EBIT, the -- as we presented at the Investor Day in November last year, we have set up a program, which we call Drive, which is delivering. And we are not only in tracking in line with what we forecasted of EUR 0.5 billion of self-help by '24, but also more in the more longer term target of Drive, which was adding another EUR 0.5 billion post 2024.

The respective measures and actions are multifold. They cut -- they focus on costs. That has helped predominantly product cost and structural costs. But pricing is clearly a key lever to achieve this target in '24.

Besides price, also volume is an important element for us. We have not achieved my target, at least this year in terms of volumes due to the supply chain shortage. Nobody has actually achieved the targets. No other OEM either this year because of supply chain situation. But delivering these volumes on a more sustainable basis and recurring basis gives us much better fixed cost and plant absorption than what happened in this year, which was a year full of disruptions and interventions in our operating machine.

So cost is one. Volume is another. And pricing is always there. We just need to be mindful. We have lived through an era now the last 12, 18 months where we could price substantially. And if you take a, let's say, heavy-duty truck diesel standard configuration from 2 years ago and you compare it to today and you look at the net price difference, it's 20%, 25% higher. And that's true for everybody in the market. So the price level has substantially moved upwards and more recently because of energy costs and material costs.

So we need to watch what happens next year. But let's see, even if there is a price stagnation, we do not slow down on taking decisive actions on structural costs. I mean I mentioned 6.5% SG&A we have. We are not satisfied with that. We will go further down in percent of sales. That's our target. But also on the product cost and the volume side, we shall see those coming through by 2024. This is executing on the plan that we laid out last year.

Francesco, on the FX point?

[Francesco Tanzi, executive]

Yes. On the FX on the cash flow, we included exactly in this portion, FX and other, which shows EUR 168 million positive. A final EUR 173 million cash in from the restructuring of the Chinese joint venture performed in 2021, as I mentioned in my speech before. So this is basically the vast majority of this positive cash flow.

[Operator]

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

[Michael Jacks, analyst]

I have 3, which I'll take one at a time, if I may. Firstly, congratulations on reaching breakeven in heavy and medium trucks. I know that's an important milestone for you. But could you please elaborate a little bit more on vehicle mix in 2022 and how this has evolved relative to 2021 in terms of heavy truck versus medium truck and alternative powertrain versus diesel. And then based on the current order book, could you also then please shed some light on potential mix shifts into 2023?

[Gerrit Marx, executive]

Michael, starting -- well, medium heavy, both are substantially up year-over-year as a quantum. Hence, the ratio between the 2, I don't have from the top of my head. We might give you that afterwards. But I think the ratio between the 2 is more or less the same. So mix between the 2 hasn't really changed much. But I will ask Federico to maybe give you that number afterwards.

In terms of powertrain mix, we have this year given the gas prices, much higher shift or share of diesel in the S-way, the heavy-duty truck. We have a constantly good order take in medium and in heavy for CNG, compressed natural gas because that is and it's bio-methane, CO2 neutral. So that is -- continues to be very good.

On the LNG versus diesel side and heavy this year is -- the mix is in favor of diesel. And still, the breakeven is there. So that shows you how the marginality in diesel has improved over time. Was that the answer for this medium heavy mix?

[Michael Jacks, analyst]

Yes, I mean I guess just asking in a very brief way, should we expect mix improvement next year? Or should we expect it to stay the same?

[Gerrit Marx, executive]

We have -- look, we have even longer order books for medium than in heavy. So I would expect it to be largely the same.

[Michael Jacks, analyst]

Okay. Okay. Then my second question, in relation to the strong sales performance that you alluded to in South America, how significant do you think the pre-buy effect is ahead of new regulations next year? Is there perhaps a risk of a sharp drop-off in demand in the first quarter?

[Gerrit Marx, executive]

It's -- I don't see that really. I mean we have tripled our business in LatAm in the last 3 years, tripled. And we have taken substantial market share across all segments. 3 years ago, when we started -- sorry, when I -- we started decades ago. But we had 0% market share in medium duty in LatAm. Now we have 10%, 12%. We were always very strong in light. We are now in the cab chassis segment, again, the #1 with more than 30% market share in cab chassis in light. And our FPT engine division is even supplying the engine to Volkswagen's delivery truck.

So FPT and the light commercial vehicle in LatAm has probably more than 50% market share after we replaced comments in the Volkswagen product. And on the heavy side and that's another highlight, thanks for asking, actually, Michael, to highlight that is we just revealed this week the new heavy-duty truck for LATAM.

We have launched it now. We were running in Latin America on the old Stralis on the old highway. That is a 2016 model. And despite this quite old model in the market, we could reach in the region about 10% plus/minus market share in heavy.

And we are traditionally very strong in Argentina with more than 30%, 35% market share there. And we have now a new product there. So on the one side, you're right. We need to watch and we do watch the market, in particular, in light of the political situation there, the handover between the prior and the new President and the formation of the new government in Brazil. We also watch carefully what happens in Argentina. So there are instabilities and volatilities in the region, no doubt. But we feel very strongly represented there in market shares and with product that we just launched. So we will carefully watch what the region will bring. But I do not expect it to fall off a cliff. That's certainly not. So we will see what comes.

The Southern American market is strongly linked to agriculture in Brazil, in particular. And that is something that is quite robustly performing and you need trucks and vehicles, the transport goods across the country every day. So we watch what comes, but I don't see that what you see it basically.

[Michael Jacks, analyst]

Okay. And then my final question is on the anatomy of price decreases. I know its early days. But since raw material costs are coming down or have come down and not all global regions are dealing with the same extent of energy cost inflation. At what point in time do you think we should start thinking about price cuts? And how do you think that this could potentially play out? Would it be customer-driven or OEM led with a view to gaining market share? And given the importance of volume for your strategy might Iveco be that player?

[Gerrit Marx, executive]

Well, take the heavy duty as an example. I mean we have been -- 3 years ago, we were at the rock bottom of the price range of heavy trucks in Europe. We have accelerated from these levels with the new products. We have narrowed. And we are far away from closing at this stage, but narrowed the price gap versus competition on the heavy-duty side.

And we do still see quite some headroom for us in relative price positioning versus competition. I mean there are some premium brands who sell their vehicles at 140,000; 150,000 heavy-duty tractor where we are substantially lower than that for a product that is effectively doing the same thing.

And so there is room. But we are also quite cautious that when price -- when costs are starting to drop, competition will certainly heat up. And then we will see how the market will develop.

The demand for the trucks and I think the order books that the industry has collected is real and in line with demand. How this then will translate into final delivered vehicles and revenues, possibly predominantly in the second half of next year in light of possible.

I'm not saying likely, but possible cost reductions we will need to see. But as we were disciplined in pricing costs, we will very carefully watch and preserve margins as costs are dropping if they drop here and then preserving as much price as we can.

And then that will move the equation in the other direction. It worked in this way and it will work in the other way. So we will watch what happens. But right now, we are short in supply, all of us. We have all 30, 40 weeks of order books and that is a clear testament of demand.

And I don't expect that to make a -- to lead to a sudden shift in prices or volumes or so.

[Operator]

Our next question comes from the line of Jose Asumendi from JPMorgan.

[Jose Asumendi, analyst]

Jose from JPMorgan, and I'll take the questions all at once, just the interest of time. Gerrit, can you speak a little bit around heavy-duty Europe next year? You have a strong order backlog. You have a lot of visibility, probably well into May, June next year. So you're looking for the market being up in the first half and then down in the second half? Just sounds very cautious in the light of the strong order backlog.

Second, Francesco, can you speak a little bit around the pricing on any metric, if you want, but revenues or EBIT? Or how does it compare first half, second half of the year for the overall business just to try to understand a little bit the carryover into first half '23.

And then, Gerrit, again, just a final one. The old facility, heavy duty, can you speak a little bit around how much you have allocated for Iveco? How does it work in terms of capacity for fuel cell electric between Iveco and Nikola as well?

[Gerrit Marx, executive]

Yes. Next year, heavy-duty Europe, I would expect that if supply chain holes and we can all, as an industry, produce the order books that we have, I would expect the first half to be possibly stronger than the second half because we have right now no visibility into the second half, not much. But the first half will certainly be provided the orders the holding and the order books will be turned a strong first half.

How the second half will develop, we will need to see what the recession will actually mean for our industry in terms of goods on the road on mileage, in transport, we need to see. I believe that there is -- there are indicators that demand will stay where it is because the average fleet in several countries is very, very old. I mean just take Italy, which is our home town, our home turf and home country, the fleet is really old that are in the country.

And if there is a fleet renewal and there's the fleet renewal schemes coming, I think these will keep the industry going. So I think let's see, but first half looks good, let's see, but year-over-year, I think it's flat, as I mentioned, flat market environment.

And then let me answer Ulm and then Francesco, you take the middle question. Ulm is a site that historically produced heavy-duty trucks until 2012. Since then, Ulm is the home of Magirus. Magirus is our small firefighting business, actually the world market leader for ladders. But it's EUR 250 million, EUR 300 million revenue firefighting, fire engine business, and they occupy, I'd say, about 2/3 of the Ulm sites at Magirus, okay?

And there is Ulm the other 1/3 is covered by trucks. And here, we have on-site in Ulm our heavy-duty truck engineering team as well as the validation team, the prototyping team and other parts. And the Nikola operation itself in the plant of Ulm covers one specific place that we can triple in size because the building is already there.

And the 3,000 unit annual production volume for the Nikola Tre in 3 shifts referred to 1/3 of the building that is currently occupied with the joint venture production. So we can, in the site of Ulm in the same building, we have triple production without interfering with any one any other business.

We also have defense, the defense business on site for the Germany business market or the Amis Minister of Defense as well as some bus activities is also in Ulm predominantly in the area of used buses.

So it's a really mixed type. But the prime user is Magirus. The second is Iveco truck engineering, heavy duty. And then there is the Nikola joint venture production with 3,000 units annual capacity.

I hope that answered -- you asked the question about the most complex site we have? Okay. Francesco?

[Francesco Tanzi, executive]

Yes. For what is concerning the pricing and the ability for us to run this during the year. If you're talking about 2023, in this call, we are not giving guidance on pricing for next year and we will give when we present our forecast for 2023.

[Jose Asumendi, analyst]

But pricing was like, let's say, 5% to 8% in Q3, right? So -- and I guess what went will continue in Q4 and first half was probably weaker roughly on revenues, that a rough assumption?

[Francesco Tanzi, executive]

Could be a rough assumption, as you said, correct.

[Operator]

Our final question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

Actually, I only have one, and it should be relatively quick. But there is a question on the FinCo and to how to think about interest rates rising for the ROE on the FinCo.

I'm just thinking you have a backlog of 30 weeks. So -- and you've been running like that for a while. So I imagine you've when people put the orders, you commit to some financing for them. But then when the orders get delivered, you probably get the financing yourself to commit to that? Or how does that work coming? Is there a time lag that could have an impact on ROE of the FinCo given the rising interest rates in between -- which has been quite steep in this period of up to 6 months that the order book might last between order and delivery, if I made myself clear?

[Francesco Tanzi, executive]

Now, it's clear. Thank you. Thank you for that. I will take this question, Gerrit. Basically, FinCo works in portfolio. So they are not, I mean, working on a one single transaction in their books. So it's a sort of average of interest rate to be calculated when they are moving the portfolio in getting the receivable and financing the customer assuming that they would like to have any financing on any single product. Therefore, let me say that there is an average of time line, whereby they can also be in a position if they wish to hedge their global portfolio, not only the single transaction.

[Daniela Costa, analyst]

Should be no impact from rising interest rates because you're always…

[Francesco Tanzi, executive]

They will -- on the base rate, certainly, there will be impact, especially for more from the industrial perimeter, I would say, because we are moving our portfolio receivables to FinCo and FinCo, let me say, hedge also himself. But the rising interest rate has impacted more on the industrial perimeter than on the financial services.

[Gerrit Marx, executive]

And if I may just chip in an answer to an unasked question, Daniela, that you had in your first take on our numbers, which was about the -- on the EBIT side of FPT quarter 3 this year versus quarter 3 last year, where you commented or your colleagues commented that this was below expectation.

Let me just add here that last year, the Stellantis engine deliveries, the Ducato engine that we were producing and supplying to them, they did run out at the end of July. So we had a full month of this business in the third quarter last year. So it was not, let's say, Ducato Q3 last year. It was 2 months no Ducato in the quarter. So this is -- this is a number which is still diluting the year-over-year comparability. And with the fourth quarter coming, this will be now clean and there will be a substantial step up year-over-year. You will see that.

[Operator]

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

[Federico Donati, executive]

Thank you very much, Jessica, and thank you all. Have a nice evening. Thank you.

[Operator]

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