CNH Industrial N.V. (NYSE:CNHI) Q2 2023 Earnings Call Transcript

CNH Industrial N.V. (NYSE:CNHI) Q2 2023 Earnings Call Transcript July 28, 2023

CNH Industrial N.V. misses on earnings expectations. Reported EPS is $0.43 EPS, expectations were $0.48.

Operator: Hello, and welcome to the CNH Industrial Second Quarter Earnings Conference Call. I would now like to hand the call over to Jason Omerza, Head of Investor Relations. Please go ahead.

Jason Omerza: Thank you, Kevin. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial’s Second Quarter Results for the period ending June 30, 2023. 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 prohibited. Hosting today’s call are CNH Industrial’s CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH Industrial website. Please note that, any forward-looking statements that 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 on Form 10-K as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent reports and filings with authorities in the Netherlands and Italy. The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliation to the most directly comparable U.S. GAAP financial 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. In the second quarter, we delivered a solid set of results with record margins in both agriculture and construction. The impact of our CNH business system is accelerating and we recorded our highest ever level of price over cost both in dollar and percentage terms. Profitability was particularly strong in the second quarter with results exceeding our 2024 margin targets. Our ability to deliver record margins with moderate revenue growth is indicative of the earnings power we are building. In June, our EMEA team delivered record retail sales providing helpful momentum as we enter the second half. We also achieved our highest production of North American high horsepower tractors since 2015, but are still aggressively working to reduce backlog and restock our dealers in this fundamental product category.

Across the business strong execution and focus on serving customers drove our success. Our Lean Manufacturing programs are developing more efficient processes across the company. These initiatives are rooted in expanding productivity, improving quality and eliminating waste and have become a tenet of our culture. Make it simple is one of my favorite cultural beliefs and it is helping us streamline our business, and you can see the early results in our earnings strength. Consolidated revenue for the company was $6.6 billion, up 8% over last year’s second quarter. Industrial net sales were up 6% year-over-year reflecting a 19% increase in construction sales and improved shipments of high horsepower tractors in North America. Agriculture saw less robust sales growth in Q2, but we still see solid overall ag fundamentals.

Our lighter ag sales in the second quarter were primarily driven by two factors: first, while our team in South America delivered strong retail share performance in the quarter and year-to-date, much like earlier in the year the demand environment in the second quarter was shaky. With short-term demand in Brazil slightly lower than expected we reduced shipments to maintain lean dealer inventories; second, shipments of our new patriot sprayer were delayed due to production ramp-up issues and quality considerations. We will get those products to our customers in the second half. In North America first half combined demand was exceptionally strong. We are proactively working with our dealers to spur retail sales of both new and used combines in the coming quarters to mitigate potential inventory growth.

We remain confident in our full year sales guidance even with targeted production cuts. Industrial EBIT was up 26% on strong price over cost as we finished the quarter with an EBIT margin of almost 14%. Earnings per share was $0.52 for the quarter and $0.87 for the first half marking our best ever start to the year. Derek Nielson and his agriculture team set new quarterly records for gross and EBIT margins. This is not just a record second quarter but a record for any quarter. Their impressive execution across products brands and distribution coupled with the determined elimination of waste from our production processes enable us to better serve our dealers and customers. Our Construction segment also recorded record results in the second quarter, for the first time generating net sales over $1 billion.

Stefano Pampalone and his team introduced a plethora of new products at ConExpo and they are increasing manufacturing throughput to improve customer delivery. We continue to see solid benefits from our Sampierana acquisition. We started taking orders in North America for model year 2024 products, in June, and production slots for 2023 are full for most products in most markets. High horsepower tractor production is now fully booked and assigned to retail customers throughout 2023, and global demand for this segment remains high. We are taking orders into 2024 now, and we see order backlog like pricing normalizing above pre-pandemic levels. Our customers are increasingly asking for our suite of precision technologies. Precision Components net sales contribution increased 21% year-over-year in the second quarter, with a steady growth of factory-fit elements.

We continue to accelerate development and delivery of improved technical solutions for our customers. We launched the New Holland Straddle Tractor specifically designed for narrow vineyards that require stream maneuverability and compact dimensions. These new tractors will bolster our commanding presence in the orchard and vineyard segments, when they ship later this year. We also published our 2022 sustainability report during the quarter. The multiple initiatives illustrated they provide proof that our commitment to world-class environmental and stewardship for our company our communities and our end-customers. The construction team is making impressive progress in their pursuit of profitable growth. Our 2024 construction EBIT margin target of 5.5% to 6.5% was a significant stretch from our previous low baseline, but we surpassed that at 6.8% in the second quarter and we will likely be in that target range for the full year.

Sampierana is proving to be the right investment for us. It gives us both mini excavator IP and enhanced electrification capabilities that we are already integrating into other products. We recently opened a new assembly facility in Central Italy, expanding our production capacity for many excavators and the new many track loaders both of which we will soon export to North America. Construction continued to benefit from strength in the North American market, especially for Light Equipment. We are leaning into the customer synergies we have with our ag distribution network to create incremental construction sales opportunities with our New Holland brand. All this, plus, much more value we’re working to unlock to take margins still higher in years to come, demonstrates why our construction business is an important part of our portfolio.

Our company strategy is centered around, five key pillars: customer-inspired innovation, technology leadership, brand and dealer strength, operational excellence and sustainability stewardship. Today, I want to focus on our advances in operational excellence, especially our CNH Business System or CBS which is a key contributor to our $550 million plus cost reduction target, by 2024. CBS’ set of tools and an aspiration to leverage lean to constantly improve the way we run our business and serve our customers, and a commitment to using Kaizen to engage our employees and drive sustainable improvements. Whenever I travel to our plants around the world, I see consistent use of our daily management system to prioritize and solve systemic issues. Our leadership team uses strategy deployment to ensure rigorous execution of our most important priorities to achieve breakthrough results.

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The overriding goals of CBS are margin expansion through operational excellence and revenue growth through constantly improving execution and innovation. What does this mean in practical terms? As an example for revenue growth, we are accelerating our time to market by eliminating waste and rework and our new product development processes. For margins, we are improving our module design concepts and Friedrich Eichler, our new Chief Technology Officer brings a wealth of experience to help drive that effort. Across our manufacturing plants we are empowering our teams to refine processes to improve throughput and quality. I would like to highlight a recent example at our Contagem plant in Brazil, where the team held a Kaizen to improve their production throughput.

They addressed logistics bottlenecks and implemented a standard inspection checklist, making the process significantly more efficient. The result was a 58% decrease in fleet inventory buildup, a 14% increase in the daily line rate and a total annual cost benefit of $2.3 million. This is only one example of the many Kaizens we’re doing across the company and more than twice the rate of 2022 and we are starting to see the impact in our results as CBS continues to expand our results will as well. 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. Second quarter net sales of industrial activities of almost $6 billion were up 7% year-over-year at constant currency. This was mainly driven by favorable mix and pricing in both equipment businesses and by higher shipments in construction. Adjusted net income for the quarter was $711 million with adjusted diluted earnings per share of $0.52, up $0.09 on the back of the ongoing strong operating performance. The effective tax rate was 24% in the quarter and the full year tax rate will likely be in the 25% to 26% range. Free cash flow from industrial activities in the quarter was nearly equal to last year, up $386 million while the first half cash absorption is about $370 million lower than last year.

Looking at the segments. Agricultural sales were $4.9 billion up 5% at constant currencies supported by strong pricing improved factory deliveries for large equipment and favorable mix. Net sales were up in all regions except South America whose contribution to global agricultural sales is down to 18% from 20% last year. Gross margin was a record 27%, we are continuing our trajectory of very favorable price of our cost as we push now more on cost efficiencies and some of last year’s inflationary headwinds go away. Although we still experienced unfavorable product costs for higher purchasing economics in EMEA and South America. We have lower freight costs and multiple improvements in our operations as a result of our CBS efforts. High carryover pricing and cost inflation are persisting, but we will see both moderates as the year progresses with the price cost relationship remaining positive.

Net prices will revert to the historical level and there is no intention of lowering lease prices. This applies to construction as well. Increases in SG&A are largely driven by labor cost inflations and R&D spend was higher as we invest in the future of our products. Adjusted EBIT in agriculture increased by $158 million to reach $821 million with a margin of 16.8% up 280 basis points mostly driven by the gross margin improvement. Since Scott already spent some time covering our main achievements in the construction business I will focus on the financial KPIs for the last quarter. At over $1 billion construction net sales were up 20% at constant currency, driven by better volume and mix in North America and APAC offsetting lower sales in South America.

Gross margin was 16%, up 220 basis points, mainly due to higher volumes and pricing. Adjusted EBIT was $72 million, up 47% year-over-year with a margin of 6.8%. For our Financial Service businesses net income was $94 million substantially flat compared to the second quarter of 2022. We experienced favorable volumes in all regions, but this was offset by margin compression, higher risk costs, and increased labor costs. We also had a lower tax rate compared to last year. Retail originations were $2.8 billion in the quarter. The management portfolio including JVs at the end of the period was $26 million. The receivable balance greater than 30 days past due as a percentage of receivables was 1.8%, largely driven by delinquencies in Brazil where a large concentration of payments is due every May and creates a seasonal spike at the end of the second quarter.

We are confident that our collection efforts will bring the past dues back to lower levels in the coming quarters. Our capital allocation priorities continue to be investing in our business maintaining a healthy balance sheet and credit ratings and returning money to our shareholders. We completed $98 million of share repurchases during the quarter which is the highest level ever in one quarter and we are continuing to buy back shares in the third quarter under our existing $300 million repurchase program started last year. We have already announced that we intend to have an additional share buyback program in connection with the delisting from the New York Stock Exchange. To event we continue to be confident that the regulation changes needed for a simple delisting with concentration in a time frame allowing us to be single listed on the New York Stock Exchange by the end 2023.

More specific details on the Milan delisting and the related stock buyback program will be shared as soon as possible. Now, we’ll now turn it back to Scott.

Scott Wine: Thank you, Oddone. For our 2023 industry outlook, most of our estimates remain unchanged, but we have slightly lowered our projections in South America for combines and heavy construction. We also expect heavy construction equipment in APAC to be slightly worse than originally expected. On the other hand, we project slightly better full year industry demand for light construction equipment in both North and South America and for heavy equipment in Europe. We are reaffirming our previous guidance levels. We are catching up on our order backlog and staying vigilant to ensure that we keep a tight balance on dealer inventory. It naturally vary seasonally, but we are committed to taking the necessary actions to keep our dealers positioned for success this year and every year to come.

Where we land in the net sales guidance range will largely depend on retail sales levels, which is why retail sales execution is a primary focus in the second half. As previously announced, we have cut factory production on low horsepower tractors which will be down about 20% in the second half. We will of course continue to build as many high horsepower tractors as possible in North America. We are also reaffirming our SG&A guidance of up 5% or less. Admittedly, we saw a higher increase in the first half, but cost of the last two quarters will be in line with or below the cost of the 2022 second half. Last quarter, we said that 2023, we may approach or even meet our 2024 EPS targets from Capital Markets Day of $1.70 per share. With a strong first half behind us, we now have more data to suggest that we will meet or exceed that target in 2023.

As we move into the back half of the year, we are encouraged by our results in Agriculture and Construction segments. We are well positioned to build off this momentum, as we continue to optimize our business. Our new product offerings and tech stack are consistently improving and continuously expanding their contribution to profitable growth. These developments take time however, so our short-term growth is more reliant upon market share performance and dealer inventory management. We held firm in market share in the first half and expect to gain in the rest of the year and we are confident that we are controlling dealer inventory and stressing retail execution as well as anyone in the industry. We will increase the pace of CBS strategic sourcing and SG&A cost reduction programs which will accelerate into 2024 and beyond.

In closing, I would like to thank our entire CNH team for their dedication hard work and inspiration. That concludes our prepared remarks and I’ll open the line for questions.

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Nicole DeBlase of Deutsche Bank.

Nicole DeBlase: Yeah. Thanks. Good morning, guys.

Scott Wine: Good morning.

Nicole DeBlase: Maybe just starting with what happened with the North America spur production in the quarter. Can we just get a little bit more detail on why the delays start to production and whether or not you think you can kind of make up for that in the second half?

Scott Wine: Sure, Nicole. I’m really proud of Vilmar Fistarol who took over the North American business this year. We did a transition from the old sprayer to the new Patriot sprayer which we were really, really excited about the features and benefits that it brings. The model year changeovers are often challenging, we’ve had a much higher turnover in our Benson factory than we would normally have had and the transition did not go as well as expected. Rather than take risk on shipping products to our dealers that didn’t meet our quality standards. We halted production, ensured that we had everything right they’re now — we are now shipping those products. We’ll get them all out in the second half, but really just a prudent effort by Vilmar and his team to ensure that we’re delivering the highest quality.

When you introduce a really good new product like that. You want to make sure that that’s what’s delivered to our customers, not something that doesn’t perhaps meet their standards or hours. But really pleased that those are already starting to be delivered and we’ll fulfill that in the third and fourth quarter.

Nicole DeBlase: Okay. Understood. Thanks, Scott. And then maybe just secondly on what’s going on in South America. Are you guys now happy with your current dealer inventory levels there, or would you say there’s more to go with respect to inventory curtailment?

Scott Wine: No. Certainly nothing more we need to do on inventory curtailment there. I mean, we took our medicine in the quarter. We really feel like — remember the fundamentals in Brazil are still quite strong. It’s still a strong ag economy. The farmer income was pressured a little bit because of the dollar weakening and some soft commodity prices weakening. But overall the fundamentals for the market are quite solid and we are very well-positioned. We still have company inventory because we didn’t ship it to our dealers. So it’s not like we are at any risk of losing market share. We had really good market share there in the quarter, gained share in combines, held our own in tractors. And we feel like we’re very, very capable of performing better in the second half as we’ve already taken the — we’ve leaned out our inventories going into the second half.

Nicole DeBlase: Thanks Scott. I’ll pass it on.

Operator: Our next question comes from Mig Dobre of Baird.

Mig Dobre: Yes. Good morning, everyone. Thanks for taking the question. I guess, I’m looking for a little more color if I may on how you see demand in large ag playing out. Any insight into how farmers are thinking into 2024, as well that would be helpful? Thank you.

Scott Wine: Mig, what we’re seeing in cash crop really globally is still continued positive demand signals as we said in our prepared remarks, we’re going to make as many high horsepower tractors as we possibly can. The second half is always better for us in combines. There is — what we’ve heard from dealers, the used inventory not of our products, but our competitive products on combine specifically has gone up at a much higher level than it has been previously. So we are being careful to make sure we’re dialing in the retail programs, not only for new but for used products as well with our dealers. And Oddone’s financial services business is really capable of and smart about how we do those things. But there’s been a little bit of caution not to deal — our dealer inventories are in good shape for — on our combines across.

But I think people are just anticipating what can happen as the used inventory start to grow and we’re proactively getting after that. So really the North American market for large ag still is very positive for us and we don’t see signs of that slowing down.

Mig Dobre: Understood. As you mentioned financial services, pretty sizable increase in the managed portfolio. So I guess I’m curious as to how you see that progressing going forward. And also revenue as a percentage of the managed portfolio has remained fairly steady despite interest rate increases. I guess, the way I’m interpreting that is you’re essentially trying to offer good financing deals for your end customers. Is that a proper interpretation? Are you essentially — services as a tool?

Oddone Incisa: Look the growth of the portfolio is a mix of nominal growth, because we have higher prices of the equipment and also some increase in penetration. So we are financing more of the equipment to retail — to end customers, right? But also, of course, we had some growth in the dealer inventories over the last 12 months. So we have volume growth in there as well. We’ve had — of course we’ve had interest rates increasing all over the world. As we all know, we have — we tend to match our funding with our receivables. So we are increasing the price and the cost for customers. Unfortunately of financing, but we’re probably not doing at the full pace and we have had some margin compression in particular last year when we were delaying some of the deliveries by six to nine months of tractors and combines we have been generally honoring the condition that we had agreed with the customers when they order the tractor that comply.

We will revert to that and we will have — we target a margin of around 2% on assets on financial services and I’m confident we’re going to get back there.

Mig Dobre: Okay. Thank you.

Operator: Our next question comes from Steven Fisher of UBS.

Steven Fisher: Thanks. Good morning. Can you just give us a sense for how the pricing was in ag by region? I’m just trying to figure out if the volumes were down in every one of your regions. I know you talked about the sprayers, I guess in North America and the South American dynamics. But I guess I’m just wondering how broadly were the volumes down and in which categories and why?

Oddone Incisa: So in terms of units, we were marginally down globally. We were up on high-horsepower tractors in North America, up in combined in North America in terms of shipments. We are — in terms of nominal sales, so dollar sales we’re down only in South America compared to the second quarter of last year.

Steven Fisher: Okay. And sorry, what was Europe — was volumes were?

Oddone Incisa: Volumes were flat but there was a lot of pricing in Europe. So, I mean unit volume were flattish but a lot of pricing so sales were up in Europe.

Scott Wine: But just a reminder, in Europe we had our best June retail performance. So the team did a really nice job of creating opportunities for a better second half and we’re pleased about that momentum.

Steven Fisher: Okay. And then, with such good margins this quarter in ag but volumes down, I mean how should we expect operating leverage to look as you actually get volumes growing again more broadly? I mean to what extent is there even more margin upside here when you get that positive leverage and more cost benefits?

Oddone Incisa: The second quarter is typically the quarter with the best margin in the year. That wasn’t the case on the last year where we had a stronger third quarter. We think we’re going to revert to the normal seasonality this year. So I expect the third quarter to be sequentially lower than the second quarter in terms of margin but in line or higher than last year.

Steven Fisher: And what would be the biggest factor in making the third quarter lower — more production.

Oddone Incisa: Regional mix. Third quarter typically we have European plants down. We sell less in Europe. So, it’s mainly a mix and a sales story.

Steven Fisher: Okay. Thank you very much.

Oddone Incisa: All right. Thank you.

Operator: Our next question comes from Kristen Owen of Oppenheimer.

Kristen Owen: Hi. Good morning. Thank you for the question. A lot of puts and takes on the production commentary, so I was wondering if you can sort of consolidate that for us help us understand what the production cadence looks like across say high horsepower, low horsepower, combine and construction for the remainder of the year. And then if you could put that in context of some of the retail execution that you mentioned, how we should think about sort of mix of retail versus wholesale going into the channel? Thank you.

Scott Wine: Yes. Well for North America, we had Grand Island and New Holland our combined plants. And they really ran full for the first half of the year and I suspect they will continue to do so. With racing coming back online and I just couldn’t be more proud of the work that they’re doing there to both improve production and improve quality at the same time that’s encouraging. They also supply our Fargo plant, so that’s given them an opportunity there. So we’ll continue to run basically our North American plants at capacity for the remainder of the year. Brazil, obviously, we’ve taken a little bit of a slowdown to match demand there. But across all of our regions, the Derek Neilson and his team have really got good strong retail execution plans in the second half of the year.

And with the products that we have introduced, we’re very confident in our share positions. So, we think we’ll be able to take advantage of both markets being still solid and better share performance. So we’re encouraged about where we stand heading into the second half.

Kristen Owen: Okay. And just to clarify the mix of retail versus wholesale. I mean you mentioned this focus on retail but just as we’re looking at the order book, has that trended back to normal? Just any color on that?

Scott Wine: The order book is actually — we just started taking orders in June. For cash crop, we’re kind of booked out and we’ll start taking orders for 2024 here shortly. But no, we’ve got six to nine months across the board. So we feel good about how we are standing from an order perspective. But even though there’s an order in place, it takes a retail for dealers really to have spot for a new one. So that’s where we’re putting a lot of our energy right now. I think the team is dialed in on that and we feel good about the performance we had in June, and the ability to continue that throughout the rest of the year.

Kristen Owen: Okay. Thank you very much.

Scott Wine: Thank you.

Operator: Our next question comes from David Raso of Evercore ISI.

David Raso: Thank you very much. First question is on margins. In the first half of the year your margins were up 170 bps. But in the first half your sales were up around 9.5% but your SG&A was up 16%, the back half of the year you’re assuming revenue growth the same around 9.5%, but SG&A down 4%. So just given that notable swing from SG&A, up 16% in the first half to now down 4% in the second half. Can you help us understand a little bit on the margins we’re talking operating margins here. Should we expect a similar margin improvement as we saw in the first half. I know the comps get a little harder but I’m just trying to understand a little more.

Oddone Incisa: It’s a question of comps. Our SG&A grew a lot last year and in the second half were much higher than they were in the first half. So the comps are easier in the second half, getting to that level of SG&A is not going to be easier for sure. I mean we are looking at different angles of it. But we set this target and we’ve got to get there in the second half. So that’s for the SG&A. For the margin as I said, we expect the second quarter margins to be the highest in the year but we expect EBIT margin to be at the level, if not of last year in the third quarter which was a very good quarter and then likely higher in the fourth quarter.

David Raso: Is it fair to say the margin for ag is also supposed to reach the 2024, the targets this year?

Oddone Incisa: Yes.

David Raso: All right. That’s helpful. And then on the pricing cadence, can you help us a little bit you made a comment I believe, we do not expect a lower price for 2024 understand [indiscernible] I mean it could be incentives lower financing we’re not talking list. We’re talking actual realized price. The way you’re approaching the 2024 order books when they open up soon, should we expect the price increase? Just trying to understand a little bit because I mean the price does seem like it’s coming down maybe a little faster than people thought. Obviously, you’re getting the cost outs and the price cost has been obviously very strong. But just so we little get a sense of sort of a demand indicator, how you feel about pricing. Can you give us a little more color?

Oddone Incisa: We think on a 2% to 3% price – pricing power or price increase, which is a mix of this price and discounts of course.

Scott Wine: Remember, we were very aggressive maybe price leaders many of the quarters over the last. So admittedly, prices are moving up from a very high level. So I think we’re certainly not at all thinking about driving it but we recognize with dealers are not willing to accept continued double-digit price increases. So I think getting back to a normalized price is a good thing for everyone.

David Raso: All right. Appreciate it. Thank you.

Operator: And our next question comes from Tami Zakaria of JPMorgan.

Tami Zakaria: Hi, good morning, thank you so much. So I was wondering could you maybe share some color on how much of the volume decline in ag was due to the delay in sprayer manufacturing versus let’s say the weakness in South America you saw?

Scott Wine: It was probably two-thirds South America and one-third sprayer production, give or take a little bit.

Tami Zakaria: Got it. That’s very helpful. And then can you update us on the over $550 million operational excellence savings. Do you still expect one-third realized this year and two-third next year?

Scott Wine: No. I think we might have miscommunicated on that. We still expect more of that to happen in 2024. I think it would be more like 20% this year. And as we said we’re really encouraged by the CBS activities that we’re getting, really encouraged about pushing back on logistics costs that have crept in and some of the other costs. But really the ramp-up of both CBS activities our SG&A takeout and our strategic sourcing starts to really hit the road. So most of that hits in 2024.

Tami Zakaria: Got it. Thank you so much. That’s very helpful.

Scott Wine: All right. Thank you.

Operator: Our next question comes from Gabriele Gambarova of Banca Akros.

Gabriele Gambarova: Yes. Thank you. Good morning — for taking my questions. The first one is on your say relative performance in terms of revenues. Over the last couple of quarters you trade your competitors. And I was wondering if this has to deal with your choices in terms of production basically. And if this trend is going to possibly revert in the second half of the year? And the second one deals with your 2023 free cash flow guidance. Is it possible to understand what is your implied assumption in terms of working capital delta change? Thank you.

Scott Wine: Well for the first question on our revenue cadence vis-à-vis our competitors I think the best place to look is just the second half guidance. Our guidance — because we’ve kept inventories lean we still have the opportunity to ship to demand or in some cases replenish dealer inventory and those competitors that are taking down — if they’re having a sequential decrease it means probably they’ve got too high dealer inventory and can’t ship in as much. So I think that explains how we got where we are. Oddone, do you want to take this?

Oddone Incisa: Yes. On the working capital, I mean, we were very lead on working capital on finished good inventories at the end of last year. So we’re being a little bit more prudent at the end of what we expect to have at the end of this year. Of course, we’re taking working capital out of the plants as we are becoming more efficient there, but we have some prudence on the overall balance of where we’re going to be with — end up with inventories at the end of the year also depending on where we want to update our inventories today.

Gabriele Gambarova: Okay. Thank you. Thank you very much.

Operator: Our next question is from Jamie Cook of Credit Suisse.

Jamie Cook: Hi. Good morning. Nice quarter. I guess just two questions. One — can you just talk to your approach to the order book for 2024 whether you’ll just open the by region whether you’ll just open the order book or open and close it and manage it throughout the year specifically within the Farm Equipment segment? And then my second question back on the $550 million in 2024, can you just remind me I think that assumes sort of a flattish type market. And if we have volumes I’m just trying to think about could we have above-average incrementals in 2024 if the volumes do there and we’re assuming you get the majority of the $550 million? Thank you.

Scott Wine: So just to answer your second question first, because it’s easy. Yes we can absolutely — if we get volume upside have upside to that number. And I think the incrementals that we had in the second quarter kind of demonstrate what we can do. And what will happen is we’re going to have a little bit less price, but also a lot less cost. So the mix of how we get there could be different. But certainly the opportunity to overdeliver on the $550 million volume were to be higher is certainly there. So the order books for 2024 we’re going to be — we’ve gotten to the point where we’d like maintaining some level of discipline and having strong visibility. So we won’t open up the entire year at one point. We’ll probably do the first half of the year and then go into the second half because we’ll have obviously the model year 2025 pricing we’ll have to think about at that point.

But I think it’s more of a — not necessarily quarter-by-quarter but it certainly won’t be wide open as we go into it. But as we said with cash crop and the innovative products that we’re bringing we feel good about what the order of demand can be.

Jamie Cook: Thank you.

Operator: Our next question comes from Daniela Costa of Goldman Sachs.

Daniela Costa: Hi. Good afternoon. Thanks for taking my question. Just wanted to ask on three things real quick. But in terms of sort of capital allocation and just wondering if you could elaborate on how you’re thinking about the buyback and going forward once the current one finishes what are the priorities buyback versus M&A? Maybe comment on that. I’ll ask one at a time.

Oddone Incisa : Yes, Daniela, we have — we set up this buyback program in July last year for $300 million. We are executing on that. We are coming now pretty close to the end of it. What we have in our plan for the year since we are doing the delisting from Milan and single listing in New York, we expect that there will be some offloading of our shares from European investors there will be likely higher demand for North American investors. But we are prepared and we discussed with the Board last quarter, and we are prepared to have a specific program that will be announced where we announced — what we get in the final days of the delisting and that will be a considerable size. So we are keeping some balance sheet available for that.

Daniela Costa : Great. My — one of my questions was actually going to be for an update on timing of delisting, which you’ve said sort of slightly before end of year last time if that’s still on track based on your…

Oddone Incisa : Right. Right. We think that we are — we have all the elements for being online — on track with this end of the year.

Daniela Costa : Okay. Thank you. And then a final one just on delinquencies. I guess, what you show in the chart is still much longer — much lower maybe than periods over history, but it started to creep up whether do you think this has in any shape related to demand or interest rate situation or just is a normalization you see track to?

Oddone Incisa : It’s mainly linked to the Brazilian portfolio. We don’t see any increase in the other portfolios. We had some in India, but it’s a very small portfolio. It’s mainly Brazil. Brazil we have a concentration of payments in the month of May, and we typically have higher past dues in the second — at the end of the second quarter, which would typically reduce as the quarters move on. And we are confident that we’re going to get back to lower levels in the next couple of quarters. But there is really on the North American and European portfolio we don’t see any creeping of delinquencies.

Daniela Costa : Got it. Thank you very much.

Operator: And the next question today comes from Michael Feniger of Bank of America.

Michael Feniger: Hey, guys. Thanks for taking my questions. Scott, can we just frame you kept the 2023 sales guide, but you highlighted the sprayer issue in Brazil. Just curious if you could kind of frame how much of an impact that’s having on the full year guide?

Scott Wine : Zero impact on the full year guide. I mean, that — we are — like I said in the prepared remarks and in some of the follow-on questions, the sprayer issue, it was a short-term issue done for the right reasons, but we’ll make up — we’re already shipping those sprayers and we’ll get the full allotment out to customers in the third and probably some into the fourth quarter. So that was that. We took our medicine in Brazil in the quarter, so we don’t have to take it again. So dealer inventories it’s really about driving retail performance. Rafale and team down there are really doing a nice job on market share. We’ve got great plans, I think to continue to accelerate share gains in the second half. So therefore with leaner inventories and better share we should also get better performance. So we feel neither one of those would be repeated in the second half. In fact there are tailwinds actually for going into the second half.

Michael Feniger: Great. And Scott, just it seems like you’re taking a proactive approach on inventories. The slide you show, with the different equipment categories and your company and dealer inventories, when we get to the fourth quarter, how do we — how does that chart look in terms of dealer inventories on a year-over-year level, when we think of those equipment categories?

Scott Wine: We are anticipating that they’re kind of at peak levels. Remember, on some of the cash crop we’re still behind. So what will happen is, we’ll decrease low horsepower inventory and will increase still some high-horsepower inventory. But on balance, we’re trying to keep — we’ve seen the benefits of it, right? When we keep our inventories lean, we get better customer attachment rates on the other side, we get the whole price better. It’s just — it’s a lot of goodness lower dealer flooring cost. So we will — I mean part of what we have included in our guidance, is continued healthy management or in some cases improved healthy management of dealer inventory.

Michael Feniger: And just a follow-up with that Scott. Next year is production in line with retail sales you think next year? Obviously, we’ll have to see how retail plays out. But just in terms of, how you’re thinking of your production for — versus your retail in 2024?

Scott Wine: That’s where we would like to be. It’s hard to tell, but that is an efficient way to run the business and how we would like to run it. I mean obviously, if I could I would just run on a direct pull system. We can’t necessarily just — it’s complicated with our long logistics, lead times and whatnot. But that would be the aspiration.

Michael Feniger: Thank you.

Operator: The next question comes from Larry De Maria of William Blair.

Larry De Maria: Thanks. Good morning, everybody. First, question. Are you taking any plan to spray orders for next year just yet, and just curious if there’s any programs out and how they’re looking — if they are out there? And related to that, with this one Smart Spray collaboration. When is the commercial launch for green on green targeted spraying, I think some competitors are out next year with that?

Scott Wine: Yes. So we are taking into the first quarter, partly maybe the first — a little second quarter for sprayers. So, that’s good. We are — we have not disclosed, and it’s partly because I don’t think we know how quickly we’re going to have that one spray solution integrated. Just a reminder though, Raven is in — are experts at Sprayer technology. So — and they had a relationship with Bosch even before us. I feel confident that we will not be delayed in any — but we don’t have a scheduled launch for that yet, but we recognize there’s a competitive need to get that in market as quickly as we can.

Larry De Maria: Okay. Thank you. And then I know you’ve refreshed your tractor lineup, and then obviously. you had to deal with the strike and now you — like you said. you’re running kind of full tilt into the year-end on tractors. But can you talk a little bit about share? And if you think you can regain some of that share, given the interruption or if that’s a multiyear event, or can you just talk about some of the trends there?

Scott Wine: No. We’re already seeing our ability to get some of that share back. I mean, we feel really good about the stickiness of our customers there. But that is not really acceptable to me, or anyone that we just get back to where we were because we felt like we were under-punching our weight there. So — but we’ve seen with the deliveries, the quality improvements that we’re getting back to a — I mean I wouldn’t even call it an acceptable share, but we were at an egregiously low level. We’ve gained in the month of June about 500 basis points. So we saw that start to creep up. And we believe that we’ve got the opportunity to continue to advance again from low levels but back to level. And then, we’re going to continue to invest in that product.

It’s an incredibly important product category for us. So both on the iron side and the technology side. You’ll see us continue to lead in. But we feel really good about where we are currently with that Magnum product and then what the team is doing to get more and more of them out to our customers.

Larry De Maria: Okay. Thank you. Good luck.

Operator: The next question is from Marta Bruska of Berenberg.

Marta Bruska: Hi, good morning. I would just ask if you could please provide a little bit more color on Europe. So with channel indicators and some of your peers rather negative for this year for the region the SG&A shows still positive or flattish volume development year-to-date. Is that due to the product mix? And if so, the broader market in Europe is rather normalizing this year with potential upcycle maybe next year can benefit from that next year or just continue to moderate performance over four years please? And then I have one more.

Oddone Incisa: Yes Marta, there’s some interruption in the line. But I would say this mixed picture in Europe as always many countries different zones and also we have Middle East and Africa in Europe. And of course, we have Ukraine, which is potentially a large market and unfortunately disrupted. And so, I would say Southern Europe was most difficult this year. And of course, we have a large presence there. So Spain, Italy, some of France, whereas Northern Europe was stronger. But we feel that we are doing a good work. We have been doing a good work with our dealers in the second quarter of this year and we feel encouraged by the results we had in particular in the month of June. I think it was at the beginning of the prepared remarks from Scott. So, we think that we will — we are really stimulating retail there and we will improve our situation significantly.

Marta Bruska: Thank you. And then moving to Financial Services and some of the more volatile regions is Brazil. Can you do anything in terms of an adjustment to help the farmers realize that investing is probably we still want to make this year?

Oddone Incisa: I think there’s somebody in the line that needs to go mute because we are hearing at least from our side we are hearing two voices together. So you were talking about Brazil, Marta and…

Marta Bruska: Yes, more into kind of how do you managing that and whether you can do something with the lease term adjustments to kind of protect a little bit and stimulate the demand at the same time.

Oddone Incisa: Well, we — as always in financial services, we act both with our dealers with wholesale financing and with our customers with what we call the retail financing. Brazil retail financing is also influenced by government subsidies. And as you know, the programs for government subsidies are becoming smaller and smaller and they get consumed pretty quickly in the year. We are extremely competitive. We offer very fast service to our customers and to our dealers and we think that we can — we had a real help in getting — in fetching those subsidies for the customers that are attractive in getting them. So, we see ourselves as a service function to our dealers and to our brands to support their sales.

Marta Bruska: Thank you. That’s helpful. Thank you, very much.

Operator: And as there are no further questions at this time that does conclude the CNH Industrial Second Quarter Earnings Conference Call. We thank you all for your participation and you may now disconnect.