CNH Industrial N.V. (NYSE:CNHI) Q1 2024 Earnings Call Transcript

CNH Industrial N.V. (NYSE:CNHI) Q1 2024 Earnings Call Transcript May 2, 2024

CNH Industrial N.V. beats earnings expectations. Reported EPS is $0.3148, expectations were $0.26. CNHI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the CNH First Quarter 2024 Results Conference Call. Please note that today’s call is being recorded. At this time, all participants are now in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Jason Omerza, Vice President of Investor Relations. Please go ahead.

Jason Omerza: Thank you, Brianna. Good morning, everyone, and we apologize for the delay. We’d like to welcome you to the webcast and conference call for CNH Industrial’s first quarter results for the period ending March 31, 2024. This call is being broadcast live on our website and is copyrighted by CNH. Any other use, recording or transmission of any portion of this broadcast without the express written consent of CNH is strictly prohibited. Hosting today’s call are CNH CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH website. Please note that any forward-looking statements that we might make during today’s call are subject to the risks and uncertainties mentioned in the safe harbor statement including 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 on Form 10-K as well as other periodic reports and filings with the U.S. Securities and Exchange Commission. The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable U.S. GAAP measures is included in the presentation material. I will now turn the call over to Scott.

Scott Wine: Thank you, Jason, and thanks everyone for joining our call. Before we review the quarter, I would like to address my upcoming departure from CNH. First, I want to sincerely thank the team here for delivering three straight years of record sales and profitability and our notable transformation into a customer-focused technology-forward culture. I’m proud of the team’s accomplishments, especially the acceleration of our tech development, the successful deployment of CBS and strategic sourcing to drive operational efficiencies and improving our through-cycle margins which we will surely be a key topic of our discussions today. I have full confidence in our strategy and our ability to achieve it even with slowing market demand.

We were early to get after productivity, our cost reduction targets are achievable, and we are on track to deliver them. Our tech in-sourcing work is progressing, and we have a line of sight to execute everything we set out to do. I believe in the team’s ability to continue delivering margin expansion while outselling our peers. Simply put, the business is solid. My reasons for leaving are personal and have nothing to do with the ag cycle, our strategy or CNH’s bright future. As of July 1, Gerrit Marx will rejoin CNH as the new CEO. Gerrit and I have worked closely together when he ran commercial vehicles for CNH, and he has been CEO of Iveco since its spin-off in early 2022. He’s a proven leader. He has my full support, and I am confident he will do well here.

Now on to our quarterly results. We said the first quarter would be challenging from a demand perspective, and that is how it played out, especially in South America and Europe. We also noted competitive pricing pressure where dealers are working hard to reduce their inventories. Nonetheless, we’ve maintained much of our pricing and profitability gains with construction even increasing both their absolute profit level and their margin percentage year-over-year. Cost efficiency remains a priority for us in this environment. We were ahead of the curve on instituting hard but necessary programs such as our SG&A restructuring to respond to the realities of operating in a cyclical downturn. We will build on the cost reductions already implemented and those savings will compound throughout the remainder of the year.

And we continue to advance our tech stack, expanding our team and integrating solutions from our acquisitions effectively into our business. We announced exciting developments in satellite connectivity and off-board management earlier this week, and we will continue to leverage innovation as a competitive advantage. In line with our expectations, first quarter consolidated revenues were down 10%, and industrial net sales were down 14% as the industry adjusts to even lower demand and to dealer inventory levels. We proactively addressed South America dealer inventory last year and furthered those efforts in the quarter. Industrial EBIT margin was just under 10%, down 180 basis points compared to last year. Despite the lower shipments, decremental margins were in the mid-20s, reflecting the positive price realization and cost reductions.

Competitive pricing pressure was the most acute in South America, but the team there is doing a great job managing the situation and keeping our operations profitable. Adjusted EPS was $0.33, down just $0.02 from a year ago. Throughout the quarter and across all regions, we saw decreased demand and the end markets. However, our retail deliveries in the quarter outperformed the overall market. Despite production cuts in the quarter, we did not make our desired reductions in dealer inventories, so we still have work to do. We continue to lean out and simplify our organization. We completed the first phase of our restructuring program in Q1 and further actions such as combining and rationalizing our commercial back office operations are on track.

We plan to conclude the restructuring program in Q2, but not our focus on cost. Derek Neilson and his agriculture team continue to execute in the quarter, achieving favorable price realization despite lower demand by working with our dealer partners on effective sales programs. Construction gross margins and EBIT margins were both up 150 basis points in the quarter. Although volume and mix were challenged, particularly in Europe, Stefano Pampalone and his team focus on quality and cost efficiency continues to support improving profitability. Our Financial Services business delivered strong results. Their net income grew on larger receivable balances, and despite some increases in delinquencies, we have a very strong credit portfolio. As we look at our strategic priorities, I want to start with some recent developments on the tech side.

Our obsessive focus on customer-centric development has shown us the importance of being the easiest to use OEM. This week, we introduced field ops, our brand-new web and mobile digital app. Field ops will lead the industry in usability and intuitive design. Everything farmers need to run their operations will be at their fingertips with a dramatically improved look and feel. The field ops interface simplifies farm management and makes data accessible from anywhere, all with fewer clicks to accomplish every task. It also streamlines our internal workflows as our universal approach to tech development means there is one single app for all customers. The field ops web and mobile apps launched in June and the overall customer experience is already garnering rave reviews from our beta testers.

This week, we also announced our collaboration with Intelsat, which brings multi-orbit satellite connectivity to more of our customers’ machines so they can access our full suite of precision offerings from remote locations. We have been judicious in our approach to connecting soil to space. We needed to partner with technology that would work in farm severe operating environments. Intelsat’s antennas had the proven – have been proven in critical applications and inhospitable conditions, so we can bring them to market quickly with confidence they will perform. We also serve customers in areas where low orbit satellites do not consistently reach, Intelsat’s multi-orbit constellation of satellites provides greater coverage with a stronger connection.

Becoming a more productive company is a key part of our strategy and successfully executing our cost reduction program plays an important role. We continue to drive production cost savings through procurement, logistics and manufacturing efficiencies. Some of those savings are held on the balance sheet at the quarter and as we build inventory for the coming season, but we are confident in our full year targets. The absolute dollar impact of these savings is somewhat continue upon production levels, which we will adjust as industry demand necessitates. As mentioned earlier, the first phase of our restructuring program has been implemented, and we have imposed strict discipline on our discretionary spending. We are already working on additional projects such as expanding support operations in low-cost countries.

I will now turn the call over to Oddone to take us through the financial results.

Oddone Incisa: Thank you, Scott and good morning, good afternoon to everyone on the call. First quarter industrial net sales were down 14% year-over-year to $4.1 billion. This decline was mainly due to lower ag volumes in all regions, partially offset by net price realization. Adjusted net income decreased by 11% with adjusted EPS down $0.02 to $0.33. Higher net income from financial services, lower tax rate from discrete tax adjustments and lower share count, all contributed to the relative strength of the unit’s earnings per share. Industrial free cash flow was an outflow of $1.2 billion. And outflow is normal in Q1 as we build finished good inventory in support of the Q2 selling season. And this year, we had additional working capital impacts from lower production levels.

In agriculture, the net sales decrease of 14% in the quarter was driven by lower volumes and the year-over-year impact of dealer stocking. Dealer inventories grew significantly in the first quarter of 2023 as our supply chain was dramatically improving, one in 2024 dealer inventory slightly decreased at the global level. Lower sales volumes were partially offset by favorable price realization despite some fierce competitive pricing pressure, especially in South America. Gross margin for ag was 23.8%, down from 26.2% in Q1 2023, but up sequentially from Q4. The main driver for the margin compression is the lower volumes with production hours 22% lower compared to the first quarter of 2023, which impacted fixed cost absorption. But we were able to reduce product costs for the manufacturing efforts despite continued labor equation.

As Scott mentioned, not all of the product cost actions implemented in Q1 were realized during the quarter at P&L. Units held in company inventory keep those savings on the balance sheet until they are sold to dealers. The SG&A savings of $33 million reflects our restructuring program and help mitigate the decremental margins. Adjusted EBIT margin was 12.5% to 100 basis points lower than last year. In Construction, net sales for the first quarter were down about 11%, mostly due to lower volumes with net pricing about flat. Gross margin increased by 150 basis points to 17.4% as improved product cost more than offset the volume impact. Adjusted EBIT also benefited from the lower SG&A expenses ending the quarter at 6.7% EBIT margin, well above last year’s group levels.

Net income of Financial Services was $118 million, a $40 million increase compared to Q1 2023. The notable improvement was mostly driven by solid market gains but the adjustment to higher interest rates is now largely completed on the receivable portfolio. We also had improved volumes across regions and a favorable effective tax rate. Retail originations in the quarter were $2.5 billion, up $300 million compared to the same period of 2023 as we continue capturing a high percentage of our end customers’ equipment financing needs. The managed portfolio at the end of the quarter was nearly $29 million – $29 billion, up over $4 billion compared to the prior year. You will note that delinquencies ticked up in the quarter, which is normal when market contracts.

Higher delinquency are in pockets of our portfolio and mainly in South America, where we are seeing more frequent late payments, but no increase in credit losses so far. The delinquency rates we are seeing now are at the same or lower levels than in previous downturns. Our credit reserves are properly set to protect our future profitability. Finally, just a quick note on our capital allocation priorities and specifically, on shareholder returns. We repurchased over $580 million worth of stock in the first quarter as we completed our $1 billion extraordinary buyback program and move on to the new $500 million program in March. We continue to buy shares now, and we pay our annual dividend of about $600 million in the coming weeks. CNH is a cash-generating business and net of any M&A needs, it is our goal to return back to our shareholders, nearly 100% of industrial free cash flow through dividends and share buybacks.

And with that, I will now turn it back to Scott and come back for the Q&A.

Scott Wine: All right. Thank you, Oddone. Reviewing the full year outlook for agriculture, our forecast for tractors is largely in line with previous projections, albeit moving more towards the lower end of our range. We have reduced our expectations for combined industry volumes in both EMEA and South America. In aggregate for our key markets, we now estimate that agriculture industry retail sales will be down about 15%, putting us at the low end of our previous guidance. Consequently, we are lowering our 2024 agriculture net sales forecast to decrease by 11% to 15% from 2023 versus our previous projection of down 8% to 12%. This reduction is related only to lower industry demand and our intention to keep channel inventory in check.

With this lower volume, we will decrease our EBIT margin forecast by 50 basis points to between 13.5% and 14.5%. In Construction, we have slightly improved our industry forecast for heavy products in North America but marginally lowered the projection for light equipment in APAC. In the aggregate, we still expect industry volumes to be down about 10%. We are reaffirming our net sales and EBIT margin forecast with sales down 7% to 11% and EBIT margins flat year-over-year at 5% to 6%. Combining the agriculture and construction net sales forecast, industrial net sales are expected to be down 10% to 14% versus last year, with industrial free cash flow now estimated at $1.1 billion to $1.3 billion. We’ve also trimmed the EPS projection by $0.05 to $1.45 to $1.55.

What I would like you to take away from our call today is that we are on track in executing our strategy which will see us through the downturn while strengthening our position for the inevitable upswing. We have built a leaner and more resilient company that puts our customers at the center of everything we do. We have a deeply ingrained focus on margin and market share improvement as we continue on the path of marrying great iron with great tech. We’ve simplified our capital market profile with a single listing in New York and we have an experienced team who under Gerrit’s leadership will take CNH to even greater heights. Gerrit and I have worked together since I joined CNH and he is not only a strong operator and a highly respected colleague.

He’s a good friend whom I have tremendous confidence in. I’m grateful for my time at CNH and would like to sincerely thank our hardworking team. I will remain a significant shareholder and a cheerleader. Thank you all. Brianna that concludes our prepared remarks. If you could open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Mig Dobre with Baird. Please go ahead.

Mig Dobre: Thank you. Good morning everyone. Well, Scott it’s a shame to see you go, and I understand your comments about the circumstances around your departure, but I do want to ask, timing-wise, you’re stepping down here before we’re really kind of seeing the fruits of your labor. You and the team over the past couple of years have done a lot to transform the business. So I guess two questions around that. As you’re sort of looking at the execution or operating momentum, how do you sort of frame that relative to your expectations when you first sort of designed the strategy and the plan? And the second thing is, how is Gerrit coming into all of this, right? I mean how familiar is he with the strategy that you put in place? Is it fair for shareholders to expect Gerrit to maybe take the company in a different direction than the course that it’s in? What is your communication with him been so far?

Scott Wine: Yes. Well, I mean, first of all, as I said in the prepared remarks, I’m just really thankful for the impressive work the team did delivering margin expansion, changing into a customer, all of the stuff that we’ve accomplished. Part of the reason that I’m comfortable leaving is that the team has really – and I said – I mean it’s an ingrained culture of focusing on customers and delivering margins and that doesn’t change. Part of – I mean, again, I have a tremendous vested interest in the ongoing success of this company. And Gerrit and I have had ongoing dialogues since this was announced. He didn’t run the ag businesses, but he watched in all of the operating reviews. He’s intimately familiar with how we do this.

Obviously, he’s going to put his spin on things, but you can’t – ultimately, if you think about – if you step way back, what our strategy is, it’s about margin share – market share gains and margin expansion. And I don’t care who’s running the company. Those are the two value creation levers that we’re going to have. Now how we get to those things could change. But if you look at the construction results that Stefano’s team delivered. You look at what Derek’s done over the last three years, there is a lot of momentum that’s going to carry forward, whether I’m here or not.

Mig Dobre: Understood. And my follow-up. Maybe a question on dealer inventories. I’d love to get your perspective as to what you’re seeing in the channel. And I’d appreciate it if you could comment by geography and also by segment. I’m curious what you’re seeing in construction as well as that. Thank you.

Scott Wine: All right. Well, I’ll start with construction. Stefano and his team continue to do well. That was a different scenario because we had – throughout last year, we got ahead of ourselves a little bit on agricultural shipments. But construction really never had that and especially the strong retail performance they had in the fourth quarter allowed us to be in a much better position overall on construction. So we’ll essentially shift to demand there throughout the year. On the ag side, again, we had a good market share performance in the first quarter. But despite somewhat significant production cuts, we still did not decrease dealer inventory at the levels we wanted to. So we’ve got work to do. We’ll get most of that done in the second quarter.

Combines are – we talked about that in the prepared remarks. Combines are where we’re seeing the most pressure. There’s used inventory building up. Demand is down quite considerably. So we’ll adjust that as we go forward. But interestingly, the North American tractor market is still pretty strong. But we’re overall committed to getting the biggest chunk of dealer inventory done in Q2. So probably some will carry into Q3, but I think we’re in pretty good shape there.

Mig Dobre: All right. Good luck, Scott.

Scott Wine: Thank you.

Operator: Your next question comes from Jamie Cook with Truist. Please go ahead.

Jamie Cook: Hi. Good morning and as well, Scott, sorry to see you going because you’ve done a great job with the company. So I guess my first question, just on production cuts, Scott, I know you said you have more to do in the second quarter. Can you talk to how much you think you’re going to underproduce retail demand? And do you still think that you will be in a position where as we exit 2024, that we should be able to produce in line with retail demand, given just your view of the market today? And then my second question, given the stock underperformance, based on concerns about the magnitude of the downturn, management changes that sort of weren’t expected. I’m sort of wondering how you guys are thinking about utilizing your balance sheet.

I know you’ve done a lot in terms of share repurchase. A lot of that was associated with the delisting, but just to give the market confidence, I guess, that there still is a cost and market share story there. So I’ll wrap up with those two. Thank you.

Scott Wine: Thanks, Jamie. No, we feel really good about – I mean, the production adjustments, Derek and his team because it’s mostly an ag phenomenon, but have really looked at the ongoing production for the next three quarters. And there’s – I mean, unless there is – I mean, obviously, we can’t predict exactly what the market is going to do. But given the ranges that we are expecting, we will be shipping to demand not only in 2025 but later in 2024. So that I’m pretty confident in. Oddone, you want to talk about the share buybacks and where we stand.

Oddone Incisa: Yes. So I had in my prepared remarks that we completed the $1 billion program. We started a new $500 million in March, and we are burying on that program. We’re going to pay $600 million in dividends this year. So if you add up, it’s a considerable amount of money that is going out to shareholders this year. And if we consider the behavior we are having now on share buyback and our dividend, we don’t expect to change our dividend policies. Basically, almost 100% of our industrial free cash flow will be devoted to – back to shareholders if we exclude any M&A that we may have considered that we don’t have any large M&A upside right now.

Jamie Cook: Okay. Thank you very much.

Scott Wine: Thanks, Jamie.

Operator: Your next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.