Iveco Group Nv

Good day ladies and gentlemen and welcome to today's iweku group 2024 second quarter and first half years result conference call and webcast we would like to remind you that today call is being recorded after the speaker remarks there will be a question and answer session and you'll be have you'll have the opportunity to ask questions this can be done by pressing star 1 on your telephone keypad if you require assistance at any time please press star zero and you'll be connected to an operator. At this time, I'll now turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

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 30 June 2024. This call is being broadcast live on our website, and it's copyrighted by EVECO Group. Any other use, recording, or transmission of any portion of this broadcast without the express written concept of EVECO Group is strictly forbidden. Also today called are EVECO Group new CEO, Olof Burson, and our CFO, Anna Tanganetti. Olof and Anna will use the material made available for download on the EVECO Group website early this morning. Additionally, please note that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent annual report as well as other recent reports and filings with the authorities in the Netherlands and Italy. The company presentation may include certain non-EU IFRS financial measures. Additional information, including reconciliation to the most directly comparable IFRS financial measures, is included in the presentation material. I reiterate here again that 2024 financial data shown in the precedes and in this presentation exclude Magirus and refer to the continuing operations 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.

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 EVECO Group. I'm really looking forward to continuing to build and expand on the solid foundation laid down in the last two and a half years of the company. As you know, I've been a member of the company's board of directors since the beginning and And I have been involved in our strategic direction since then. And I have witnessed firsthand the pride and passion our vehicle 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 vehicle group with the 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 Recapital Markets Day hosted in March this year and 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 or net price erosions. As we earlier reported, we opened 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 but also in production. As Anna will detail later in today's presentation, we have experienced a negative temporary one-off in our networking capital linked to extra effort in finalizing and getting a certain number of our model year 2024 products. 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 involved. 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. Though the 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 robust business unit, the order backlog covers all of 2024 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 this 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, the link prices on book for less than 30 days remained at a historically 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 bodybuilder capacity bottlenecks that slow 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 vehicle 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 63 cents at the end of the second quarter, which is 2 cents 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 the cash dividend of 22 cents 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 9 million euros. Let's now look at the highlights of EVQ Group's main achievements during the second quarter, as you can see on slide four. On the 4th of June, we signed a memorandum of understanding with Photon, a leading commercial vehicle manufacturer 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 non-binding agreement is intended to extend a relied commercial vehicle line-up to the gross weight vehicle category below the 3.5 tons. Supply opportunities, including our powertrain brand, FIT Industrial, will also be discussed. Also in June, we signed an important term loan facility for €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 Iveco Group played a major role in supporting the heavy metal band Metallica on the European leg of the World Tour. From May to July, we provided multi-energy heavy-duty trucks as a part 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's vision of going beyond. Moving to slide five, in addition to the group's achievements, our individual business units reached also important accomplishments this second quarter. And if we look at slide five, let's begin with our truck business unit. In April, the Italian Transport and Logistics Operators MET Group confirmed its order for 100 new Iveco SL 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 competitions, and this award recognized the product's functionality, aesthetics, ease of use, sustainability, and responsibility. Also, IRECO Bus won a Red Dot Award for product design thanks to the all-new front end 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 Rapido Samara, a large urban transport operator in Sao Paulo. 18 more units will be delivered this year to contribute to our customers' renewed fleet in Sao Paulo. IECOBOS and VIA, a market leader that combines software innovation with service design, signed two memorandums of understanding in May, the first with Politecnico di Milano and the other with Humanitas. Both will implement pilot projects to offer customized and flexible demand-responsive transport solutions. On slide six, we see the main achievements of our defense business units last quarter. In June, the Iveco Ottomilare Consortium signed a contract to supply 28 state-of-the-art Centauro II vehicles to the Italian Army. This will complete our customers' requirements for 150 units and includes 10 years of logistic support. Commenting on powertrain, we see on the slide that in April, FPT Industrial and Longan Power, a genset and industrial power equipment manufacturer, signed a comprehensive agreement to expand into global power equipment markets. Over the next three years, FPT Industries will supply high-efficiency engines for long-term power gem sets, and the companies will work together to promote the application and development of gem sets and industrial power equipment for the global market. Moving down onto slide seven, we show the total industry unit registration change versus the second quarter of 2023. And the quarterly performance of the industry in Europe, excluding UK 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's second quarter. In Latin America, industrial volumes were down by double digits in light-duty trucks and down 7% in buses, while double-digit increased 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 tracks. On a worldwide basis, as you can see, the market experienced sub-digit volume growth for light-duty tracks and a more moderate 5% increase in medium and heavy-duty tracks, while it was slightly down in buses. Moving on to slide number eight, and there we have our recurring quarterly update on channel inventory statistics, which reflects only finished products. Company inventories were sequentially down, both in light duty track 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 tracks 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 segments 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 done by 17 percent in light and 10 percent in medium and heavy. As I move on to the 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 30 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 truck orders and more than 70% of the medium and heavy-duty truck orders. As I mentioned earlier, deliveries of the new model year will gain momentum in the second half of 2024, particularly in the latter part of the year. A robust business unit order book covers the full year of 2024 and the entire first half of next year. Tracks 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% and medium and heavy down 31% versus the second quarter of 2023. Bus deliveries were up 32% on a worldwide basis and up 2% in Europe. Order intake for trucks 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 phase-out of model year 22. Guide number 10 is a new addition. It focuses 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 water bag stock is solid. On our e-access 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 e-access. Those e-access 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 confidently positioned to meet the upcoming European Emission Standard Regulation. I'm moving to slide 11 and talk a little bit about market shares in Europe, excluding UK 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 ton 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 historical 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 53% market share in Europe, up from already high 45.7% in the same period last year. In city 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.

Thank you, Olof. And 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, all the financials shown in 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 recast consistently. Q2 closed with consolidated net revenues of €3.9 billion and net revenues of industrial activities of €3.8 billion, contracting year-over-year by 5% and 5.8% respectively due to lower volumes mainly in Europe, a 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 142 million euros in the quarter, up 21.4% compared to prior year. Group consolidated adjusted EBIT slightly decreased over the period by 16 million euros, closing at 295 million euros. where adjusted EBIT margin remained stable at 7.5%. Adjusted EBIT of industrial activities reached €264 million, with a very solid 6.9% margin up 10 basis points versus Q2 2023. Financial charges confirmed the positive year-over-year trajectory also in this quarter, closing at €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 Argentinian economics, also considering that market expectations hint 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 300 million euros. Obviously, this figure might potentially further improve should said evaluation not materialize. Reported income tax expenses for Q2 2024 were 63 million euros 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 182 million euros, up 15 million euros compared to prior years. As a result, adjusted diluted EPS was 63 euro cents, up 2 euro cents, compared to Q2 2023. As usual in this slide, we report the adjusted net income attributable to Iveco Group, which totaled 172 million euros, and excluded the profit attributable to non-controlling interests. Moving to our free cash flow performance. Q2 2024 free cash flow of industrial activities was negative for 98 million euros. primarily driven by a temporary exceptional working capital absorption, linked to the extra effort to secure quality and readiness of the launch of our new model year 2024 track range. Finally, available liquidity, including undrawn committed credit lines, remain solid at 4.2 billion euros as of end of June 2024. Let's now focus on net revenues of industrial activities on slide 14. Looking at Q2 2024 net revenues split by region, as you can see from the chart on the top right-hand corner of this slide, all regions contracted year-over-year, except for the 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 units, 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 €2.6 billion, mainly thanks to a continuously positive price realization in both light commercial vehicles and in medium and heavy-duty trucks, which partially offset the expected contraction in volume compared to prior year and the impact of the adverse foreign exchange rate evolution mainly in Argentina. Bass net revenues increased by plus 22.4% year-over-year to 612 million euros, underpinned by higher volumes and a better mix, combined with a positive pricing evolution. Net revenues of defense continued to grow substantially in the period at around plus 30%, reaching 285 million euros, thanks to higher volumes and a positive mix. Our train net revenues were down 13.7% year-over-year to €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 track and powertrain and the impact of the adverse foreign exchange rate evolution in Argentina compared to prior years. Overall production costs were substantially in line with Q2 2023, notwithstanding the solid operational and product cost improvement in Europe of around 40 million euros. almost fully offset by the negative performance of the Argentinian raw material inventory in the period linked to the country 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 and 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 trend. 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. Buff 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 cost, 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 €31 million, slightly decreasing by €4 million versus prior year. primarily to support the ongoing development of Gates. The managed portfolio, including unconsolidated joint ventures, was up €800 million, reaching €7.9 billion as of June 30, 2024, of which retail accounted for 40% and wholesale for 60%, in line with March end 2024. Once again, worthwhile to be highlighted here is that the stock of receivables passed 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 30th, 2023. Finally, return on assets, as shown in the chart on the top right-hand corner of this slide, remained 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 98 million euros, driven by a temporary exceptional absorption of our networking 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 remains unchanged at between 350 and 400 million euros. Adjusted EBITDA and cash out for interest and taxes were in line with prior year, while changing provisions and similar contributed positively before 12 million euros compared to Q2 2023, thanks to the significant reduction of our financial charges. Investments in the quarter were €210 million, €31 million higher versus Q2 2023, with total investments for full year 2024 confirmed at around €1 billion. Finally, the €67 million year-over-year improvement in the average 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 Groups paid out the approved cash dividend of 22 euro cents per common share. In addition, in the period, we continued to purchase U.S.-linked bonds in Argentina, namely the BOP Real, 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 30 June 2024 stood at €4.2 billion. This includes €2.3 billion in cash and cash equivalents and €1.9 billion of undrawn committed facilities. Looking at our debt maturity profile, please note that in the period we fully prepaid the €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 credit worthiness. Last but not least, it is immediately visible from the chart that our cash and cash equivalent levels continue to more than cover all the cash maturities foreseen in the coming years, and totaling 1.5 billion euros. Thank you. I will now turn the call back to Olo for his final remarks.

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 of the 30 days I've been in the job. Our preliminary industry volume outlook for 2024 reflects our current visibility and is broadly in line with what has already been disclosed by some of our peers who released the financials before us, as well as what 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 such declining by market. Europe, excluding UK and Ireland, is expected to range from flat to slightly up in both light-duty tracks and buses, and heavy-duty tracks 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, number 22, has our full-year 2024 Premier League financial report. guidance unchanged from a previous call. And as stated at the top of the chart, this financial guidance excludes Magerius as a fight-or-fighting business unit and has been confirmed in its entirety in what was disclosed during the capital market stay. The company is confirming its guidance as follows. At a consolidated level, group adjusted EBIT at between 920 and 970 million euros. And for the industrial activities, net revenue, including currency effects, to be down at around 4%. Adjusted EBIT from industrial activities at between 790 and 840 million euros, industrial free cash flow at between 350 and 400 million euros, and investments in property, plants, and equipment and capitalized intangible assets at around 1 billion euros. Guidance has been confirmed on the back of a convincing first half year report 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 the funds 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 a lower market, especially in the third quarter, to sensibly manage cost and cash in what is a seasonally weak quarter. 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 segments 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 expectations. The group's objective to keep a sound level of available liquidity is continuing and intact. In conclusion, on slide 23, let me just share with you some observation from my first 30 days. First of all, I found a very strong commitment and alignment at the senior lead attempt, but also across all the business units to reach our medium and long-term targets presented in the capital market. It's really been pushed down and it's accepted and worked on. Our products today 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 roadmap 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 improvement. Fourth, all in our organization and all the different parts of our 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 OE Vehicle Group is not and will not trigger any change in our medium and long-term targets and pathway strategies, 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 kindly ask you to hold off any detailed modeling and accounting questions on which you can follow up directly with Federico and the Investor Relations team after the call. Operator, please go ahead.

We will take our first question from Martino D'Ambrogi. Equita, your line is open. Please go ahead.

Thank you. Good morning, everybody, and welcome, Olaf. 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 all of us, 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-long term. And second, would you consider any combination, I mean, a deal in the long term for defense? a vehicle which suffers, as everybody knows, of smaller size compared to several big competitors. Thank you.

So thank you. On the price visibility guidance, and 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 two 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 after. 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. 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, and 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 partner strategy. You're right that we're not the largest, but we do have access with our partners, both in terms of technology, in terms of the products, and in terms of cost sharing and those kind of things. So the partner strategy that has been laid out, I think it's very, very fruitful and for us a very suitable strategy to continue.

Okay, thank you.

We will take our next question from Monica Bosio in Tessa, Sao Paulo. Your line is open. Please go ahead.

Yes, thank you. Thank you for taking my question and welcome all of you. My first question is on the recovery in terms of free cash flow of what you lost in the second quarter last 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 and loaded in the last part of the year. And my second question is on the medium and daily duty track. 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 budget segment, which seems to me stronger than expected, So I'm just wondering if you can give us an insight on the backlog and if the orders are already covering 2025. Thank you very much.

Hello, Monica. It's Anna here. So let me get your answers to the first question. So on the cash flow, For sure what we are doing in Q3 is to recover, let's say, from a 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 were working to balance the seasonality, but obviously this is not something we can do overnight. So 2024 is still a transitionary 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 mid-single-digit area, excluding obviously the impact of the ESCO, so the former Nicola Iveco joint ventures. And these trends will, in our assumption, will continue also in the second half. So we will continue to be around, I would say, mid-single digit.

Sorry, with heavy positive? Because medium and heavy will be mid-single digit, but only for the heavy segment should we still expect more positive? Is it correct?

I would say break-even territory We hope to be in a slight positive territory as well, but it's between break-even and slight positive.

Thank you.

And when it comes to bus order backlog, I mean, we already stated we do have the 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, they always say, a lot of opportunities where the bus is well positioned, both in city buses and in intercity, where we have a very strong position, particularly on the market share. So right now, to answer your question, it's going up to a hot year 2025 order backlog production.

Thank you very much. Thank you very much. Thank you.

We will take Our next question from Daniela Costa, Goldman Sachs. Your line is open. Please go ahead.

Hi, good morning. Thank you. I have two 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 with the end market still depressed with the pricing situation 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 costs that you can do? How will you deal with it if it is more prolonged?

Yeah, 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've been up and down before. And the 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 chain back to the suppliers so you 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 the production adjustment. Then we have, you know, the production costs. We have done a very good job, I think, both in last year and this year in actually reducing the 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, have to work on the pricing as well, right? So it's a pricing issue. But the question was more related to, you know, really volume impacting. Then we do see bus and defense is increasing. I mean, this is what you talk about, the truck, but for the vehicle in total. bus and defense is planning to increase their output during next year as well. So I hope that covers your question.

Thank you. 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 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?

I think the issues we have here is the visibility into the volumes in Q4. 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 that a price reduction and a model mix type of adjustment. But that is also then offset with our production cost result 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 EF24 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 in to Q4 a little bit later.

Sorry, what do you mean on the pricing for the Model 23? It is too expensive now? It is too cheap?

No, no, no. 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. It has new features. improvements for the customer it 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 it's handled properly in the pricing and that's what we're going to focus on. I hope that clarifies, sorry for confusing you.

Absolutely, thank you very much.

Thank you.

We will take our next question from Miguel Borrega, BNB Paribas Exane. Your line is open. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. The first one, just to understand this changeover to the new model year 2024 in terms of orders and deliveries. Orders have 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 deliveries 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 I just want to understand how you view the flow through orders and deliveries on the new model year. Thank you.

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 readover, which we're now rolling out. So we're rolling it up. The rubbers also hit the road, and 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 inventory and then over to the dealer inventory and then out to the customer. That creates a momentum by the sales organization that takes these new products and go out and making sure that the implementation and the rollout of this new model year is happening. So we are in the midst of that right now and coming back to my comment earlier about the Q4 lacking visibility and if Q4 is lacking visibility. Of course, the first half of 2025 is also very much lacking visibility, as we do right now. So we will need to form our sort of both the production schedule, the customer action targets, all the other targets we have set, and when we get a little bit more visibility into that. But the fact of the matter is that I believe and I see and I truly believe that the customers will see it as well. We have a very good lineup now with the the modern year 24 that will bring us a good position also going forward, regardless of what kind of market development we will see.

Thank you. And then secondly, just to follow up to the free cash flow question, assuming Q3 is flat from last year, you would need about 1.2, 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 a billion of free cash flow in Q4? Thank you very much.

Thank you. 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 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 involved. 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 250 to 400 million targets.

Hello?

Hello?

We will take our next question from Jose Asmendi. JP Morgan, your line is open. Please go ahead.

Hello, Hannah, and welcome all of. 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 photon partnership, joint venture collaboration that you have? I understand right now it's basically on the EV van segment, but could you expand this partnership to grow in China, could you also bring the heavy-duty architectural photon into Europe? It would be very interesting to hear about this partnership, please. Thank you.

If you want, I'll start with the manufacturing major, the product cost evolution. I think that was your question. So we had a positive performance in Q2. So first of all, sorry, to address your question, we expect benefits also in H2. As we said also during our capital market today, 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, but simply because the positive result we achieved in Europe, which accounted for 40 million euros just in the quarter, And just to remind you, in H1, all in all, we had, year over year, almost 150 million euros of product cost improvement. However, in Q2, that was fully offset, I would say, by the negative impact of SIFO, of the SIFO 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 price effect in South America. Same for manufacturing efficiency, so plant efficiency, they're 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 bringing a positive result also in H2 of this year. I hope I addressed your question. Yes, thank you.

Okay, thanks for the question about photon. Just to underline that this is a memorandum of understanding, and we are now investigating to explore potential collaboration. The main part of this, and the absolute lion part of this, is the electric van, panoramic van, below the, or around the 3.5 ton, which is then a lineup with... increase our lineup for, you know, below the Iveco daily tonnages. So that would sort of expand our market reach, expand our customer reach, and it would 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 if there are any supply opportunities with powertrain, that is something that we're also looking 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 a light, light, you can say it's below our normal Irico daily 3.5 ton. Thank you. Thank you.

We will take our last question from Shaquille Kirunda. Morgan Stanley, your line is open. Please go ahead.

Thank you. Good morning. Thanks for taking my question. 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?

Absolutely. First of all, we have realigned the whole manufacturing system in Europe for trucks. All plants are now only producing model 2024. And that's why I sort of wanted to stress the major undertaking was a shift over this production. So we have our whole production set up 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 flowing through, and we start to see the machines coming out to customers and everything. So I'm not worried about the production rate. We have our production rate that we can go up and down, and as 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.

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

I mean, the modern year changeover is in Europe, right? So we are in, and that's why I was clear about European infrastructure. In South America, we are doing other types of vehicles, not the modern 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.

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

Yeah, but I see what you mean. Well, first of all, as we saw in the slide that Ola presented earlier, our market share are up, I would say, in all segments. In terms of number of units, first of all, our live commercial vehicles units were up year over year. We saw a drop on the medium heavy, so heavy side. And then, as Olaf 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 aside for a second and we focus just on Europe, as I said, maybe you see a drop on a medium and heavy, but yes, this is linked to the shift, the phase out and phase in of the two model years, but to be honest, as I said, our market shares are up, so we are quite satisfied with our Q2 results, and the question is more on the outlook, but Olaf already addressed that question, so I hope we got you the answers you needed.

Thank you.

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