CNH Industrial N.V. (CNHI) on Q2 2021 Results - Earnings Call Transcript
Federico Donati: Thank you, Sandra. Good morning, and good afternoon, everyone. We would like to welcome you to the Webcast and Conference Call for CNH Industrial Second Quarter 2021 Results for the period ending June 30. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use recording or transmission of any portion of this broadcast without the expressed written consent of CNH Industrial is strictly forbidden. We are pleased to have here with us today our CEO, Scott Wine; and our CFO, Oddone Rocchetta who will be hosting today call. They will use the material available for download from the CNH Industrial website. After their presentation, we will be holding a Q&A session and which also Gerrit Marx, President, Commercial and Specialty Vehicles to be created on highway company will be available to respond to questions alongside our CEO and CFO.
Scott Wine: Thanks, Federico. And welcome to all of those you joining the call. I recently equated our tireless efforts to manage this crazy supply chain situation to a game of whack-a-mole. If they ever make that an Olympic sport, I put odds on CNH Industrial who win a gold medal. Our entire team performed admirably in the second quarter, adroitly navigating supply chain constraints, rising commodity costs and ongoing COVID concerns to deliver robust financial results. Solid operational execution and healthy demand from our end markets drove strong net sales across all segments, which in combination with positive pricing and margin improvement activity helped us establish second quarter records for earnings per share and free cash flow. Impressively, Derek Neilson and his AG team delivered record EBIT margins of 14.7%. I’m extremely proud of the outstanding execution of our CNH Industrial team in the second quarter for keeping our employees safe, delivering for our customers and dealers around the world and making CNH Industrial a little bit better every day. Our industries are clearly in a cyclical upturn and our team’s tireless and innovative efforts enable us to capture much of the benefit. This very healthy demand environment along with the excellent second quarter performance of each of our businesses contributed to growth in both shipments and order books. With the acquisition of Raven Industries, we’re adding significantly to our precision agriculture capabilities and establishing the foundation for sustainable competitive advantage. We also continue to make progress toward the spin defining leadership structures and roles for each company with an emphasis on agility and customer centricity. Both SpinCo and RemainCo are laser focused on delivering for our customers throughout these activities, with market demand and customer sentiment rising, our production facilities moving mountains to satisfy customer needs, and a comprehensive plan being nimbly executed by our dedicated team, CNH Industrial is poised for a very respectful second half.
Oddone Rocchetta: Thank you, Scott, and, good morning, good afternoon to everyone. And now Slide 6 with our Q2 results highlights for. For the top line second quarter net sales increased 65% due to higher volumes mix and price realization across really all segments. Seeing our drivers also accounted for an 800 basis points increase in our gross margin. On the bottom line, Q2 adjusted EBIT increased by $757 million. We’ve got adjusted EBIT margin of 8.2% driven by strong performance across segments. Free cash flow in the quarter was a cash inflow of $1 billion due to the strong operating performance and positive working capital contribution. Industrial Activities net cash is $1.4 billion an increase of $800 million from March 31, 2021. Q2 adjusted net income was $583 million or $0.42 adjusted earnings per share to adjusted effective tax rate for the quarter was 25%. At the end of Q2 2021, our available liquidity stood at $14.4 billion, up $542 million sequentially. Turning to Slide 7. We focus now on Industrial Activities net sales, which were $8.5 billion, up 55% on a constant currency basis. As you can see at the bottom of the slides, sales by region and product in the quarter-over-quarter comparison were up across the board on natively easy comps, where there were almost 19% higher and constant currency basis were compared to the second quarter of 2019 with agriculture 30% higher. Foreign exchange translation had an impact of approximately 10% in the first quarter. Agriculture’s net sales totaled $4 billion, up 49% on a constant currency basis versus prior year mainly due to the higher industry demand, better-mix in the regions and favorable price realization. If we look at the performance by region, North America and Europe were driven by a better mix of high-horsepower tractors and South America was fairly strong across all product categories. Construction net sales were $808 million in the quarter, 86% on a constant currency basis. As a result of higher volumes driven by industry demand, channel inventory, destocking actions in 2020 and higher price realization. Commercial and Specialty Vehicles net sales reached $3.2 billion in the quarter, up 71% on a constant currency basis year-over-year, and 16% higher than 2019, primarily driven by higher truck volumes. Powertrain net sales totaled $1.3 billion in the quarter up 55% on a constant currency basis. Sales to external customers accounted for 42% of total net sales. That was 63% last year. It is worth noting that the comps on FPT are difficult on external sales as those sales remain strong to Chinese customer after the first quarter of 2020 and appear lower in 2021 in proportion to the recovery that is happening now in the other geographies. Additionally, in the back half of the year, we will start to notice – noticing the effect of this continuation of a large third-party contract for non-rolled engines.
Scott Wine: Thanks, Oddone. In the five weeks since the announcement of the Raven acquisition, our teams have made good progress, both towards confirming our initial assessment and defining a path towards realizing the synergies and strategic objectives we outlined on the call announcing the deal. Those are summarized here on the slide, but I will focus on developments. As we continue to actively plan for integration of Raven, we are both solidifying our plans for building out previously identified value drivers and identifying new areas of opportunity. Integration teams from both CNH Industrial and Raven are defined and engaged. Together, we are working towards obtaining the requisite regulatory approvals and we foresee no impediments to doing so in a timely fashion. We have seen firsthand how important Raven is to the Sioux Falls community, how deeply rooted they are in the local culture and closely tied to the residents and we are committed to upholding and extending this add more quality. Since the announcement, we have – we and our dealers have become even more excited about the opportunities that this acquisition will create for our shareholders, employees and farmers alike. I am confident that the combination will cement CNH Industrial as a leader in the precision agricultural space. IVECO launched several new products during the quarter, starting with the IVECO Driver Pal, a pioneering onboard voice activated driver companion built on the Amazon web services and Amazon Alexa features. This innovative system increases driver efficiency and safety by replacing numerous manual operations. The new IVECO S-WAY heavy duty truck is a 100% connected vehicle, reducing total cost of ownership via a new engine lineup and other advanced features that increase fuel efficiency. The new daily and daily minibus launch with state-of-the-art engine and after treatment system technology to ensure full Euro 6d final and Euro 6e compliance ahead of regulations. The minibus version also includes Airpro, an industry first adaptive, electronically controlled pneumatic suspension system that enhances both comfort and safety. Finally, the IVECO heavy range is completed with the new off-road IVECO T-WAY truck designed and engineered for the toughest missions in the most extreme conditions. We recently announced the management team for the post spin on highway company. Gerrit Marx will lead a CEO and Annalisa Stupenengo will become the Head of Industrial Operations, following her six years of successfully heading the FPT business. Additionally, Sylvain Blaise will assume responsibility for the Powertrain business unit within the Newco. Sylvain ran IVECO BUS since 2014 and prior to that, he ran a long stand of Case IH here in the United States. Succeeding Sylvain at buses will be Domenico Nucera, who has 20 years of experience in the auto industry and many years with us. CNH Industrial has appointed Scott Moran as Chief CNH Industrial Business System Officer, and Kelly Tolbert, as Chief Diversity & Inclusion, Sustainability and Transformation Officer. These executive appointments form part of CNH Industrials revitalized emphasis on customer centricity by evolving both our culture and our processes to engender this focus and further our commitment to diversity and inclusion and sustainability. We have designed and we’ll soon announce the first two levels of the new off and on highway companies. Our new organizations will involve fewer layers of management to strengthen communications, simplify processes and streamlined decision-making. We expect to develop clear accountability, functional excellence and a leaner more efficient business. While this reorganization is a tremendous first step forward or towards and more agile and accountable organization, it is just the beginning of our journey. There’s an enormous amount of work to do, both to put the new structure into practice and to capitalize on the potential that will be unlocked. Our spend timeline has been enriched, as we are now planning an on-highway event followed by a virtual road show in the second part of November. Preparation for the spend remains on schedule and is certainly supported by strong momentum across the on-highway portfolio. I’m pleased with the way our businesses evolving and the substantial progress the team has made over the past six months. Their efforts are even more impressive considering how hard they’re working to serve customers during these extraordinary circumstances, on precedent and supply chain challenges, continuing COVID-19 issues, the Raven acquisition, the spinoff of the on-highway business, and even these incredibly strong markets. Based on macro-indicators and the strength of our order books, we expect to maintain most of our momentum in the second half. As global pandemic recovery continues, there’ll be some costs that reenter the company, but we are determined to keep those to a minimum. There is much talk and more excitement about the U.S. infrastructure bill, but it is unclear what final form it will take and how impactful it will be for us directly. We are ramping up investments in both R&D and SG&A to support our products and brands and designing our organization to better serve our dealers and customers. The potential of our businesses is quite bright and not just because of our strong end markets. Going into the second half of the year, we will continue to rely upon the diligence and ingenuity of our tired, but still games, supply chain and logistics teams. We were one of the very few OEMs and our various peer groups who has not had to take any significant downtime in production and considering the complexity of our global manufacturing system. This accomplishment is one, all of our production and support team should be very proud of, as I am of them. That concludes our prepared remarks. And we can now open it up for questions. Gerrit Marx will be joining Oddone and I for the Q&A section. Sandra, please go ahead and open the line for questions.
Operator: Thank you. We will now begin the question-and-answer session. We’ll take the first question from the line of Steven Fisher from UBS. Please. Go ahead.
Steven Fisher: Great, thanks. Good morning. Good afternoon. The price versus cost was much better than I was expecting for the quarter. When were the pricing actions taken that flowed through the results this quarter? Are those fairly recent or was that sort of last year in preparation for this. And how should we think about the differential in the second half? Does it actually go negative on the price versus cost or is it sort of just neutralizing? Is it more in Q3 or Q4? Thanks.
Scott Wine: Steven, the pricing actions, I mean, the commodity markets, as you know, are incredibly dynamic. And across the global footprint, I mean, Brazil was very aggressive with pricing early. AG has also been and we’ve really just step-by-step taking the necessarily increases in prices that enabled us to get ahead of some of the stuff in the first half. The second half, the pricing is still going to be quite strong. I think we’re expecting more cost to come in just as we see what’s happening and you will probably be more balanced as we go into the second half than we were in the first half. But really, it’s, especially, in AG here in north America, the pricing has been very good and the team’s been on it every step of the way.
Steven Fisher: Okay. And then just as a follow-up, I noticed that it looks like you have trimmed your expectations for industry sales for North American tractors under 140 horsepower. Can you just talk about what’s behind that change?
Oddone Rocchetta: I think it’s the performance on the second quarter and that part of the market is much less relevant for us than it is the over 140 horsepower market. And remember the last year, lowest part that was new in North America already despite COVID-19.
Steven Fisher: Okay. Thanks very much.
Operator: We will take our next question from the line of Kristen Owen from Oppenheimer. Please go ahead.
Kristen Owen: Good morning. Good afternoon. Thank you for taking the question. So you talked about an inability to meet AG equipment demand in the quarter. Can you provide us a sense of how much volume was moved into the back half? And if you could comment on how much of that was the supply chain versus your own production capacity constraints.
Scott Wine: Yes. Almost all of it is related to supply chain. Again, I’ve said consistently, it’s the worst supply chain situation I’ve seen in my career. But as I said in my prepared remarks, I’m really impressed with how our supply chain industrial teams are handling it. They’re doing a really nice job. But the big issue for us is what we call, our fleet inventory, this stuff that we’ve built that doesn’t have all the parts to complete. And that’s several thousand units, I traveled to the Grand Island, where we’ve got combines and Wichita where we’ve got our construction equipment and it’s just – the teams, we have to continue to produce, because we’ve got so much demand and we don’t have the capacity if we just stopped the lines. But we’re producing without all of the parts and that’s been – I’m really impressed with how the team manages it. I mean, it’s really, really a difficult task. But certainly, we’ve got several thousand units that are in that state of needing to be finished and shipped.
Kristen Owen: Great. And then my follow-up is related to precision AG uptake. Can you just provide some additional color on what the uptake was in the quarter, maybe some areas where you’re seeing outsized growth? And just so that we can level set on the contribution of Raven going forward. Just provide a baseline view on what precision AG revenue is today. Thank you so much.
Scott Wine: Yes. We don’t provide specific precision AG revenue. I mean, we’ve looked at what’s our peer groups have reported and we think we’re slightly ahead of that. But we are seeing very, very strong demand with the new CH26 tractors that have gone out the magnums. We just – we see that uptake very high across the portfolio. And we know – I mean, the engagement we’ve had with Raven, again, they’ve been a great supplier to us for many years. And it was when we integrate that more fully into our products, we think we’ll offer better solutions for our farmers. And we expect that to grow even more. So we’re pleased with where we are with our precision capability. We’ve obviously got more work to do, which is part of the reason for the acquisition. But overall, I think demand is high and we believe as we move forward with integration of Raven, we’ll be able to meet increasing demand going forward.
Operator: We will take our next question from the line of Martino De Ambroggi, Equita SIM. Please go ahead.
Martino De Ambroggi: Thank you. Good morning. Good afternoon, everybody. The first question refers to the incremental margin. In your previous call, you indicated 20%, 25% range for the incremental margin for the group. I should pose, it has to be revised upwards considering the higher revenues expectation. And on the incremental margin in the AG business with such a strong top line growth, I would have expected a higher operating leverage, where I’m wrong. So performance is extremely good. So 13% is close to your historical peak, but am I wrong in assuming that you could have had a higher operating leverage in Q2?
Oddone Rocchetta: So Martino, the – on the quarter, of course the operating leverage was higher than what we say last time for the full year. And we expect that not to be maintaining for the remainder of the year. So we expect a lower operating leverage in the second part of the year. The – I’m sorry, I think we have an earthquake, but we are in the middle of a earthquake anyway. I was stopped. What was I saying, so the operating leverage – I think the operating performance at 14.7% margin for the quarter and AG is well above many expectation, I would say. As we said, within a half full – we didn’t fulfill completely the demand, so we could have some probably somehow better if we had all the units out in the market.
Martino De Ambroggi: Okay. So for the rest of the year for the group will be lower than what we saw in the first half.
Oddone Rocchetta: In Q2.
Martino De Ambroggi: Yes. Okay. Okay. But the expectation for the group for the rest of the year.
Scott Wine: I think we gave our expected – Oddone walk through that in his prepared remarks, really, as we see you know, just ongoing supply constraints, I just cannot say enough about how well the entire team is managing through this. And I think it’s – it won’t get any easier for us in the costs certainly get higher, but we still – we expect to deliver very, very solid results in the second half.
Martino De Ambroggi: Okay. Thank you. The second question on the Nikola’s trucks, how the testing activities progressing and what’s the updated timetable for the launch both in the U.S. and in Europe.
Scott Wine: Gerrit, you want to take that one?
Gerrit Marx: Sure, Scott. Hey, Martino. The testing activities and also the prototyping and the pre-series is all on track. We have produced five alpha protos, nine beta protos, we have now produced another two gamma, which means they are now entering into tri-production. So we basically started with gammas then. And we also have now started the first two fuel cell electric versions of the tray prototype in – all in Germany. So we are on track the manufacturing infrastructure in all of the elements being commissioned. We are getting ready for production readiness in Q4, for the battery electric U.S. version of the Nikola Tre as we initially announced in 2019. And we are on track with the European versions eventually leading them to the launch of the fuel cell electric European version by the end of 2023. So all is confirmed and we are progressing well.
Martino De Ambroggi: Okay. Thank you.
Operator: Thank you. We will take the next question from the line of Lawrence De Maria from William Blair. Please go ahead.
Lawrence De Maria: Thanks. Good morning. Good afternoon, everybody. I just wanted to ask a little bit more about, where Raven fits in, obviously, to more kind of now. It seems geared towards autonomy. Is that the technology that you think that CNH needs to own for the future? Or does this propel you further to this machine learning and field adjustment business that obviously gears is moving forward with. Do you expect to – in other words, have that internally with Raven or is still relying, let’s say, Harvyora some outside solution for that that kind of technology. Thanks.
Scott Wine: We’re very – as you heard in my prepared remarks, and then on the call we did – we’re just really excited about bringing the Raven team into the CNH Industrial family. There, what we really – I mean, they’re proven their understanding of how to take software solutions and make them beneficial to farmers is really what we like. And I think that can take many forms. Right now, I mean, their precision was sprayers is just – is unmatched. What we’ve seen with their autonomy programs, it’s got incredible potential. And we think with our capability matched with theirs, we can do a lot to facilitate and bring that to market, but really the culture and the team at Raven gives us confidence that there’s really not much we can’t do in the precision in digital spaces with their team and ours. And it won’t happen overnight, but we’re just very encouraged. I mean, it’s almost plug and play with the current capabilities they have, but as we co-developed together there’s just tremendous opportunities for us. And that, that really was what spurred us to pursue this.
Lawrence De Maria: Okay. Thanks. And maybe secondly, maybe could you just give us a little more color on the order board in AG to next year? Obviously that’s partially related to supply chain, but there’s also a strong demand. So maybe delineate a little bit about the two and how far into next year, and just overall trying to get the next year that sets up the first half already, obviously.
Scott Wine: Yes. Well, I mean, certainly North and South America, we’re just seeing incredible demand. We’ll probably into the second half of 2022 right now and again with solid pricing. So just encouraged by the way the market demand is improving and it’s as much as anything, it’s really can we execute and getting products to our dealers and customers, and that is the hard work that we’re doing, but certainly, the early signs are, and the orders continue to come in, but right now, we’re well into 2022.
Lawrence De Maria: Thank you.
Operator: Thank you. We will take the next question from the line of Ross Gilardi of Bank of America. Please go ahead.
Ross Gilardi: Good morning. Thank you. Scott, there was some public filing disclosures made recently about the background of the Raven buyout. I’m just wondering how much confidence that you have in closing this deal without interference from another bidder. And then on this the revenue synergy targets, can you say it all like what portion of the revenue synergies are? Are simply the CNH is existing distribution network be at Titan or your other existing dealers that, that simply could be buying a lot more Raven equipment that they could be where they’d be driving penetration to their customer base.
Scott Wine: Yes. Well, I mean, I’m – the proxy filing that came out provides a little bit of color about how the bidding went down. And I think it just showed how well our team executed that. Obviously, it was an attractive asset and we believe that we are the right owner for it. And I think the – we’re very, very confident in that we are the right owner for it. And our teams are working well. We’ve got working through the CFIUS filings and the SEC approvals. But we think that we’re going to bring this one home and quite confident. You never know. I mean, it’s – we have three markets for a reason, but all signs are right now that, this we’ll close as Oddone said, likely in the fourth quarter. And as far as, we’ve identified the value streams that we’re working on. And the very first one is exactly what you just described. How do we take our very, very strong global distribution network for both New Holland and Case IH, and facilitate greater sales of Raven’s existing products through that category. You mentioned Titan to me. They’re a great Raven partner today. So I don’t know how much more there is specifically with them, but they provide a great example of what can be done with Raven. And I think we’ll look obviously respecting that they’ve got a good channel. Now they provide really good support for their customers. And we’ll look to leverage that, but really we think the opportunity for global expansion through our network is certainly a good near-term opportunity.
Ross Gilardi: That’s great, because it would seem like the revenue synergies to your existing distribution network would be a number or something that would be much more perhaps under your control and having to cross sell to other customers, which in any event, so thank you. And then maybe this is sort of an oddball question, but I’m wondering what portion of Fiat Powertrain’s production volume is actually going to the AG market, obviously to your AG business. And I’m trying to get a better sense as to whether or not you’ll sustain some pretty meaningful AG exposure within the on highway spin simply as via powertrain goes on to supply the AG business. And just any color on when we should expect some type of announcement on the mechanics of that supply agreement.
Scott Wine: Yes. FPT has been a – just a phenomenal partner for us, over the last decade. And it’s just – it’s nice having them as part of the family. We’ve worked with a one that we’ve not – there’s no surprise that this spin is happening, right. We’ve known about it for a long time. There’s probably no single part of the spin that we spent more time on then drafting and getting this engine services agreement in place to manage it. And it’s – we – it’s – I cared – I call it shared need. We need each other in this case. We’re not – by far we’re not the largest part of the FPT business by any stretch of the imagination, but we are an important part of it. And we feel like that we’ve got a – it will be public at some point, but right now we’ve got an engine services agreement that both sides have agreed to that we feel very comfortable that we’ll manage these businesses for both of us successfully for the next five or 10 years.
Ross Gilardi: But just to be clear, I mean, something that’s going to make this spend different versus other truck OEMs is that the on-highway spin is actually going to retain some meaningful AG exposure, which is something that most other truck OEMs wouldn’t have. And I just want to make sure I’m thinking about that correctly. And I mean, is there any sense, I mean, is it 20% of their volume or 10%, 20%, 40%?
Scott Wine: I don’t have the number with me, you know roughly…
Oddone Rocchetta: Yes. It’s roughly 20% of the volume.
Ross Gilardi: Roughly 20%. Okay, interesting. Thank you very much.
Scott Wine: Thank you. And it’s not just us. I mean, they sell to other, some other AG customers as well
Ross Gilardi: Right, interesting. Thank you.
Scott Wine: Just validating your point a little bit more.
Operator: Thank you. Next question comes from the line of Marta Bruska from Berenberg. Please go ahead.
Marta Bruska: Hello, and thank you for taking my questions. I have to admit that I’m relatively new to this story. So I hope it doesn’t sound too naive, but this looking at your revenue development in the first quarter up 37% and second quarter up 60%. It seems just mathematically, relatively at a lower for the second half of the year with them other all revenue heading from between 24% to 28%, according to your full year guidance. So I’m just trying to understand for the second half, which parts of the businesses are you expecting to – and I have one follow-up question with regards to orders. Thank you.
Scott Wine: Yes. Well, I think the answer to your question is mostly related to the comparables throughout the year. I mean, obviously the first half of 2020 was severely impacted by the pandemic shutdowns less so in the second half. And as you know, or if you’ve looked back, we had improving results and revenue throughout the second half of 2020. So it’s more of the comparable than anything else. All of our businesses with the exception of powertrain, where we did talk about I’m losing one of our third-party customers are seeing significant growth in the second half. And again, it’s really driven by what we can produce because the demand is ahead of our ability to supply.
Marta Bruska: Okay, clear. Yes. It seems just feels a little bit like nearing the growth, but I get your point. So with regards to then the second question, I was just wondering, what is the dynamic in order intake in your agriculture business in the second quarter versus the first one so sequentially, and whether there was like a big pre-buying impact in the first quarter because of the price increases and to – I know this is not as being too long, but just like with regards to the previous cycle, what is your feeling for the developed – sequentially development in AG?
Scott Wine: We talked about in prepared remarks. I mean really the high horsepower tractors are seeing very, very strong demand as our combines with again orders well into 2022. So yes, that’s the – where we’ve seen the biggest demand, but it’s quite strong across the portfolio right now.
Marta Bruska: Its also sequential, not on year-on-year.
Scott Wine: Oddone, I’m clearly not answering that one quite well enough so.
Oddone Rocchetta: Yes. No, we were up in orders last quarter and we are up this quarter. We keep seeing orders coming in at a very good pace.
Marta Bruska: Okay. Thank you.
Operator: Thank you. Our final question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead. Daniela, your line is open. Can you please check your line is unmute on your side Daniela, please? The line of Daniela Costa for the final question is open.
Federico Donati: Sandra, we can take the Daniela question out. Do we have more questions?
Operator: In that case, that will conclude the question-and-answer session. And I will like to turn the call back over to Federico Donati for any additional closing remarks.
Federico Donati: Thank you, everybody, and have a nice day. Thank you.
Operator: That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
