Q3 2019 Earnings Call
Good morning, after their ladies and gentlemen, and welcome to do they see an age industrial to sell some 19.
Quoted was sold confidence called for your information Todays conference call is being recorded after the speaker's remarks, there would be a question and answer session to ask a question that in the queue. Any session do you will need to press that <unk> telephone and wait for your name to be an hour.
At this time I, we like to turn the call over to fill that equal the knotty head to head of Investor Relations. Please go ahead.
Thank you appreciate it good morning enough and then everyone. We would like to welcome you to the webcast conference for CNH Industrial took quarter 2019 results for the PEO ending September 30. This call is being broadcast live on our website and he is copyrighted by CNH industrial any other use recording or transmission of any portion of the.
The broadcast we doubt that spreads we didn't cons adult CNH industrial is strictly <unk>.
We're pleased to happier with us today, our COO batches, monalisa and our CFO macchiato would be all seeing today cold they would use them on t. a lot able for download from the CNH industrial website.
After the presentation libbey holding a Q in isolation that final comment. Please know that any forward looking statement, we might be making during today's call out of subject to the risk and uncertainties mentioning the safe Harbor statement, including the presentation materials.
Each on information pertaining to talk to that could cause actual results to the fed multifamily is contained in the company. Most recent report 20-F and you are not report as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and equivalent though to do the net and eat study.
The company presentation includes certain non-GAAP financial measure.
Finally information, including reconciliation to the most directly comparable GAAP financial measures is included in the presentation material I will now turn the call it over to seal.
Thank you Frederico and good morning, and good afternoon to everyone. Our third quarter results reflect a progress and delivering on our transformed to win strategy and successful execution across our segments in uncertain market environments.
Our commercial and specialty vehicle and powertrain business is performing in line with our expectations.
Mike and see businesses are facing headwinds and the agricultural and construction end markets.
As we look to successfully navigate these different market segments and environments. It reinforces the strategic rationale behind our transformed to win strategy presented at all in September capital markets day.
We already benefiting from our self help initiatives and have advanced when I was streamlining and operational efficiency actions as well as a geographic footprint optimization.
These steps will better position all business segments to navigate current end market volatilities.
We're also continuing to invest in innovation technology, and new product introduction across all segments with a strong focus on delivering solutions to address the mega trends we face.
These innovations will not only allow us to grow our Shia in more profitable end markets, but also help us to gain market share with our core markets and most profitable segments.
Finally, the vision, we presented to create two independent global business is purely focused on the off highway and on highway markets provides a detailed road map for further value creation and I'm very pleased to say that we are fully on track with our plans and work streams to achieve this transformation.
Turning to the third quarter and yesterday highlights Q3 industrial activities net sales were down 3% in constant currency due to industrial demand deceleration and d. that de stocking actions.
Acting agricultural and construction segments like national specialty vehicles, and powertrain segments were flat.
For the year to date period net sales of industrial activities were relatively flat year over year.
We are addressing the current inventory overhang front and center with production adjustments that have negatively impacted our Q3 performance.
And the expectation that we will be able to exit the year with our inventory rightsized and ready to move into 2020 , where they cautiously optimistic view.
Industrial activities adjusted EBIT margin was down 30 basis points for the quarter due to a net price realization upsetting product cost increases where the negative volume mix impact inclusive of fixed cost absorption due to production adjustments.
For the year to date period, despite the deteriorated macro industry environment, we were able to maintain the EBIT margin flat.
Below the line no interest expense and an improved adjusted effective tax rate that you were flat year over year, adjusted net income and adjusted diluted EPS for the third quarter and is up more than 10% year to date.
I would go into a further detail at the end of the call but for now let me say that we have updated our guidance for full year 2019 slightly on the topline terrific. The deteriorated industry environment in Q3, why confirming the prior range gave you guidance on adjusted diluted EPS confident on what has been achieved here today.
Right.
Net debt of industrial activities guidance was also adjusted to reflect the M&A activity, we have announced since our capital markets day.
Moving onto slide four let me provide you with a high level industry update for Q3 industry volumes first let's look at the Act segment.
North America row crop markets were largely weaker due to continued uncertainty as to when the trade issues that have hung over the market would be resolved and water resolution would mean for government payments and increased exports.
Recent positive trends in commodity prices and the stability of used equipment pricing and high horsepower tractors and combines in North America give us some confidence that these early indicators pad with government payments and attended to phase one U.S., China trade deal will lead to stability and the market going.
Forward.
Your truck the demand remained positive in the quarter up 2%, but combines continued to underperform more than we would have anticipated down 13% due to partially be hang over of the chilling better conditions during the previous harvest season.
In South America, and Brazil, particularly <unk> pharma is how to get been funding between the early run off of the 2018 19, Moderfrota program and the new plan for 1920 that was announced at the end of June .
Following the resumption of funding during August we have seen lackluster and customer demand due to uncertainties in the macro and global industry environment.
In terms of construction end markets, we have seen a continuation of the trends outlined during the mid year called.
North America continues to grow but at a slightly tepid face due to uncertainty in many end markets caused by a combination of macro and government and juice barriers.
John or de stocking is fairly widespread and ended the patient that these challenges will be with the market's longer than initially hoped.
We have seen some strengths and wrote building and infrastructure, but this is mostly paving and repair work financed by local governments and doesn't require substantially new investments and equipment.
You, mark as or more or less unchanged with a slowing in the major markets, including due to Brexit uncertainties, South American volumes continued to improve due to support a financing but like trucks. This is often very low level in the major market of Brazil.
For trucks, the European truck market was down 1% year over year on the quarter with light duty trucks up 11% ahead of the September one implementation of Euro six step see.
Medium and heavy trucks were down 21% due to the pre registrational vehicles. In Q2 ahead of the new legislation related to travel crops and other safety equipment. There were required to starting June 15.
Why the economic growth has showed slowed a bit an elevated Brexit uncertainty is evident in the back half of the year. We continue to see the overall heavy duty truck market as flat at high levels. This year.
South America was up 20% with Brazil up 32% on Argentina down 30% from already low levels achieved last year.
For buses the European market decreased 4% this quarter, partially driven by Brexit related demand weakness, but to south American market increased 14% led by presale.
At this point I'll now hand, it over to Max for the financial overview of the presentation Max.
Thank you burritos and good morning, or after known to anyone on the call.
I will take you through our financial performance can be done.
Muted industry environment in agriculture, and unless vibrant than expected construction market. We have taken early on in the third quarter measures to adjust production to the revised end user demand and dealer expectations with mid teens production adjustment in Q3 versus our previous forecast in order to maintain our production rate in line.
With that he didn't markets the topline impact that's flowing through to PNM inclusive of a negative fixed cost absorption, but thanks to continued price realization in a disciplined approach to our cost structure, we have mitigated those impacts into a quarter results.
When we look at the nine month period, the persistence of a weaker industry environment and the uncertainty of democracy vitamins in most of the geographies, where we compete I've not limited our ability to deliver on our margin journey and wide. We are holding flat on EBIT margin. Despite increased R&D spend you have to date and decreasing you only deliveries.
We have been able to generate an uptick you know gross margin on a year over year basis.
Moving now to slide five and the key figures for the took worth it and you have to date, that's it's not industrial segments were down 6% on reported basis and down 3% in constant currency adjusted EBIT was down 12% in the quarter and 6% year to date net income was 643 million for the third quarter of 2019 as this guy.
Asked in recent regulatory filings and anticipate that you're into capital markets. They held on September 10, net income includes at 539 million noncash tax benefit due to the relieves a valuation allowance is uncertain net deferred tax assets as a result of a sustained period of come one or two pre tax earnings coupled with project.
Jones of future income before taxes in that relate to jurisdiction as a result of actions included in that transform to win strategic business plan.
Net income was also negatively impacted by pretax restructuring and other asset optimization on China, just over 177 million due to actions included in that dose form to win strategy, and namely 42 million in restructuring associated with our organizational and footprint optimization programs and.
That 135 million in asset optimization in our truck business to align residual values of pretty on trucks to the targeted to the marketing plan. Our commercial organization has recently put in place.
We reported a third quarter adjusted net income of 221 million basically flat from Q3 2018, why you have to date achieved 900 million.
Adjusted EPS was 16 cents into quarter, and 60 464 cents per share for the year to date period up 10% on a year over year basis.
The adjusted tax rate for the quarter was 28% down from Q3 last year, and we expected to be 27% portfolio 2019.
Net debt of industrial activities in the quarter was 2.4 billion up 0.9 billion from the end of Q2 free cash flow of industrial activities in the quarter was the usage of 1.1 billion due to an increase in net working capital primarily related to a lower trade payable balance and higher inventory reserve.
One thing from the typical seasonality in the third quarter further exacerbated by production adjustments due to a deceleration in industrial demand versus our initial expectations.
Available liquidity was 9.4 billion down 0.4 billion compared to June Thirtyth and up 0.5 billion compared to the end of December 2018.
Turning to slide six let's discuss the third quarter and you have today performance in our industry activities net sales excluding now the impact of foreign exchange Foreign exchange translation, which represented 2.5% and 4.5% in Q3 and year to date, respectively over let's say its percentage change here.
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In a quarter that sits at constant currency for industry activities decreased 3% agriculture equipment decreased 6% as a result will be industry volume deceleration paired with unfavorable mix permitted in North America and agenda industry weakness in most of the rest of the war geographies, where we compete partially offset.
By a sustained price realization performance of more than two percentage points and by sustain aftermarket activity.
There is nothing company inventory units overhang, which is primarily related to low horsepower tractors in earnest award is for the most bought a functional deliveries planned for Q4.
Construction equipment saves decreased 8%, mainly due to lower sales volume in North America is the result of the channel inventory rebalancing actions and in certain best a water markets. As a result of a weaker industry. These were partially offset by positive price realization in the quarter.
Commercial and specialty vehicle sales were substantially flat as a result of decreased volume and truck and bus, but admittedly related to the no repeat the fleet transactions in medium duty trucks in Europe , and extremely low industry demand in Argentina, offset by increased deliveries in specialty vehicles and sustain activity in aftermarket fine.
The powertrain says were substantially flat versus Q3 last year.
Turning to slide seven now with an overview of our operating results by driving adjusted EBIT was 401 million with and margin over net sales of 6.3%.
Down 10% over the primarily due to the lower volume, mainly NIAGEN as well as higher protocols to you don't want to you that entity of headwinds higher content and inflationary cost increases this was offset by positive pricing across the portfolio.
Turning now to the individual segment performance, starting with <unk> on slide eight worldwide Uni deliveries were down 9% interactive send down 10% incumbents and worldwide production was down 3% versus last year in the third quarter with production in their old crop sector in North America down between 25 and 30% yet.
<unk>, depending on product Oh that on the various product categories in the quarter, achieving an underproduction through retail I thought around mid teens.
Worldwide Company unit inventories ended up 43% interact first mainly in low horsepower invest award and 4% incumbents.
In terms of profitability adjusted EBIT was 152 million in the third quarter of 2019 with adjusted EBIT margin at 6.2% net price realization and sustain aftermarket activity, where more than offset by the unfavorable volume and mix impact lower fixed cost absorption from the said production adjustments as well as higher part.
Cost as result of increased raw material and tariffs and a higher product content.
Well certainly remain seemed agriculture and market related to that retention aim to negative weather events, which are impacting market sentiment and harvesting patterns. We believe the cyclical replacement demand remains in place with used equipment inventories are low level supporting new equipment sales in North America, the order book globally genotype.
He remains lower than last year with the exception of North America, fructose, which I've admittedly flat, while rest award combining set up sharply mainly due to low comes.
In most geographies, we have intervene starting in late Q2, and reduce our production program versus the previous cycle by mid teens in Q3 and will continue in Q4 as assuming that rate to maintain out inventory balance for the second part of the we reiterate that we currently expect to produce in line with retail in AG for 40.
2019.
Turning to the next slide construction worldwide unit deliveries were down 16% with compact down, 19% Jana construction down, 5% and little price down 15% in terms of production on a worldwide basis. It was down 11% versus last year with compact equipment down, 15% and the other markets more or less.
Split inventory and units were up 42% mainly in complex segment in North America.
Adjusted EBIT was 10 million in the third quarter of 2019 with adjusted EBIT margin of 1.5%. The decrease was mainly due to higher raw material cost and Todd and an acceleration of the spending related to our quality Excellence initiative as announced at the capital markets day, and some logistic cost inefficiencies.
So the equipment, where we don't have large market share widely used pricing continues to hold up well dealers are being cautious and are trying to further decrees inventory levels through the end of the as as a result, I'll order book is down in North America.
South America on the other hand continues to experience growth, especially in Brazil, or compact equipment or this or up sharply and where we have superior brand recognition some of them much needed infrastructure spending, Brazil or started to flow in some cases dictated by the increase need to have better routes to transport I commodities from the field.
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Like 10, now with commercial and specialty vehicles trucks worldwide production was down approximately 2%, but it was last year permitting like commercial vehicles, we company inventory units up 10% versus last year as a result of the transition from the old model year 14 to the new model year 19 daily line up and they're on top.
The new heavy S. way.
Like truck deliveries were down 7%, while medium and have you were down 13%, Boston University, where up 4% in Europe as demand for Eternity propulsion buses continue to increase both in the city bus and intercity brother segments.
The commercial specialty vehicle segment, adjusted EBITDA will 70 million that are quarter slightly up compared to the to last year. This includes 50 million pretax gain realized from granting Nicola access to certain Evanko technologies as part of the previously announced 150 million in kind contributions.
Consideration for they initially interested me color.
Send an equal again that just that it would've been 20 million a reduction of 48 million compared to the previous year, primarily due to higher production cost mainly related inflationary cost increases and supply chain inefficiencies in our truck and bust businesses due to the production transition from old to new models.
Mainly in our light and heavy brother line up and higher commercial expenses related to the launch of the newest way heavy duty truck.
Adjusted the bit margin, including Dinicola gain was 3% in that a quarter and was 0.9% excluding dinicola transaction as the importance of alternative propulsion and digital technologies to the commercial vehicle industry and our other industrial segments grows transactions such as Nicola may become more common in the future if not necessarily.
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In terms of alternative propulsion initiative LNG CNG demand came in below expectations. During the took water as a result of the current subsidy scheme insert a new countries being transition into the new fiscal year budget. At this point, we would expect an acceleration of this demand to return in the fourth quarter.
For the nine month period to September 30th natural gas penetration within Europe for the industry continues to grow towards the 2% of totally industry volume and is projected to increase further an elongated strong replacement demand cycle for those oriented that have competitive solutions.
The market share for trucks in Europe was 11.4% flat versus last year trucks book to Bill was 0.9 in you and 1.4 in South America with ordering take in Brazil up 57% from this time last year, but starting from a little bayes.
Ordering take for heavy trucks have improved substantially due to the phase out of older models and the ramping up of than U.S. way. This was upset by lower orders image.
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On a fire alarm it was just a bad line and we reconnected and we'll continue our conference call and please excuse this two three minutes of interruption sell Max can I ask you to continue.
Updating us on the financials. Thank you.
Thank you bear with Us So island I'm on slide 10, and I was just finishing their commentary about the EBIT of.
Going, especially commercial and specialty vehicles.
In terms of our alternative propulsion initiative LNG CNG demand came in below expectations. During the third quarter as a result over the current subsidy scheme in certain new countries being transition into the new fiscal year budget. At this point, we would expect an acceleration of this demand to returning to four quarter for the nine month period to September 30, and natural gas penetration.
Within Europe for the industry continues to growth over the 2% of total industry volume and is projected to increase further an elongated strong replacement demand cycle for those OEM that have competitive solutions.
The market share for trucks in Europe was 11.4% flat versus last year trucks book to Bill was 0.9 in new and 1.4 in South America with order intake in Brazil up 57% from this time last year, but starting from a low base.
Order intake for heavy trucks have improved substantially due to the phase out of older models and ramping up of the newest way. This was offset by lower order some medium and light due to alignment of dealer inventory.
Vast market share in Europe was 19% and book to Bill was one both in new and South America. You orders remained strong overall as public funds were made available to go the continent for fleet renewal.
If we move to the next slide power train continues to demonstrate solid results in light of a challenging end month end market environment net sales decreased 3% in the third quarter of 2019, but flat on a constant currency basis.
Due to unfavorable mix of engines.
Sales to extend our customers accounted for 51% of total net sales similar to last year. Adjusted EBIT was 81 million in the third quarter of 2019 were protocols in efficient efficiencies were partially offset by an unfavorable mix of engine sales increased product development activity and sell.
<unk> expenses related to the development of the third party business portfolio. It is worth noting that although these were some elevated expenses in the quarter. The new contracts associated with these will have a run rate revenue potential in excess of 150 million annually ramping in 2020 with the full amount run rate for 2020 .
One onwards.
Adjusted EBITDA margin was 8.6% in the third quarter up 20, bips compared to last year.
Moving onto slide 12, and our financial services business. The segment has continued to perform well in the quarter with retail loan originations of 2.4 billion flat compared to last year. The managed portfolio of 25 and a half billion at quarter end was up <unk> point 8 billion versus one year ago at constant currency with the bulk of the increase.
In South America and Europe .
From a performance standpoint, Q3, 2019 net income was 82 million as light decreased compared to the same period last year, mainly due to differences in risk cost accruals period to period, and an acceleration of aged used equipment liquidation.
Delinquencies continue to improve and reached an all time low of CNH industrial for CNH industrial of 2.8% in the third quarter of 2019 as a result of credit conditions stability operation in all markets.
This is a good sign that while sentiment may be negative financial stability of our overall customer base continues to be manageable to put this in context, a bit although net farm income in the US has dropped by 30% over the past six years from the record set in 2012, it is likely above the last six.
Our average for expected for 2019 as a result of the multiple arrays of stimulus. The U.S. administration is delivering in the current year to counter trade and whether imbalances, while fundamentals remain positive for the long term.
Moving onto slide 13, I'd like to discuss our net debt and free cash flow of industrial activities performance and provide an update on the balance sheet.
Net debt of industry activities at the end of September as said was 2.4 billion down 0.9 from the end of Q2 free cash flow from industrial activities was a users or 1.1 as mentioned in my opening remarks, moving to the working capital dynamics during the quarter. The main driver was a lower trade payable balance compared to June end of about.
700 million, resulting from the normal seasonality and.
As a result of recent production adjustments due to industry demand deceleration and to higher inventory.
At the end of Q3 are available liquidity was 9.4 billion as detailed in the capital market day in September the strong level of liquidity permits us to look at our capital allocation priorities with a diligent approach to first maintaining a solid balance sheet and protecting our credit rating second accelerate investment into our transform too.
When organic initiatives to foster future growth.
Sure identify and execute on opportunistic value enhancing M&A initiatives, as recently announced and fourth protecting our dividend policy and delivering on our buyback program.
Speaking of the buybacks during the course of 2019, we executed on the current program for the total amount of shares bought of more than 6 million units for total consideration of almost 60 million, bringing the total of the purchases to date to 600 264 million.
I have concluded my presentation, and we'll turn it back over to bear with us for the outlook on his final remarks. Thank you Max and please join me now on slide 15 for an updated industry outlook.
In the third quarter industry conditions in the main agricultural markets have further deteriorated due to market uncertainties, a negative farmer sentiment, particularly affected by poor year conditions in various regions. However, we continue to remain cautiously optimistic for the balance of the year as recent developments in us China trade negotiations.
And the related potential implications for commodity prices could have a positive impact on sentiment and accordingly revived some equipment purchases in the U.S and Canada towards the end of the year.
We also continue to have a slightly positive stands on demand in South America, Although we have not seen the increased penetration of Brazil into the grain export market reflected into incremental equipment purchases as of yet as a result of the slow start of the new subsidy scheme into the new harvesting season, 2019 and 20.
Additionally, during Q4, we will be exhibiting at agro Technicon, Germany, which should provide a positive stimulus as this is the largest actual globally and historically has been a show where especially European customers place orders.
The construction equipment market remained in positive territory during the quarter quarter, but elevated inventory level across the industry require a careful review of production levels, especially in the north American market during the upcoming quarter.
European demand for heavy trucks has been affected by the electronic Telegraph introduction at the end of June where the Prebuy effect in the second quarter. In addition negative sentiment in some of the major European markets has dampened demand for fleet replacement at a time when our commercial vehicle business is changing to new vehicle families. Both in the light.
And the heavy segment.
CNH industrial expect to demand the demand to remain soft during the fourth quarter of 2019 Wiley continues to ramp up production on the recently launched vehicles on the back of a good start of its order book with current orders for the new S way up 15% when compared to the same year to date period in 2000.
Gene and to complete the phasing out of the older models from the dealer network.
As far as the LNG and CNG sub segment, we expect pent up demand to return in Q4 and going forward, while maintaining our leading market share.
With us in mind AG and CE worldwide production is projected down double digits in Q4 compared to prior year to realign full year production and retail.
In commercial and specialty vehicles production will be realigned and European truck and bus as were phasing in the new heavy duty as way among other products.
Regardless of the current market volatility, where remaining cautiously optimistic on strong industry fundamentals and our technological leadership in the areas of digitalization automation and alternative propulsion.
On slide 16, we highlight our guidance for the full year 2019.
As a result of the updated end market outlook, we have updated our full year 2019 guidance as follows.
Net sales of industrial activities revised down by half a billion now seeing between 26.5 and 27 billion us dollars.
Adjusted diluted EPS confirmed.
Up year over year between five and 10% at a range of 84 to 88 cents per share.
And finally net debt of industrial activities at the end of 2019 revised 2.6 2.4 billion euros to dollars, reflecting now the announced M&A activity since our capital markets day.
Moving to slide 18, I would like to give an update on the implementation of our transformed to win strategy that we announced that our capital markets day in September .
As you might remember, we clustered our strategic initiatives into the three categories of grow performance simplify and optimize in order to increase long term bps and our IC.
We would like to share updates on some selected initiatives in these three categories. Finally, I will conclude with the status of our spinoff.
Turning to slide 19.
As a key growth initiative in our commercial vehicle segment I would like to take a moment to highlight some details around strategic partnership with Nicola that we announced on September 3rd and some near term Nick market next steps.
As you May now we have taken 250 million strategic stake in Nicola as the lead series D investor comprising over 100 million cash and 150 million in client such as licensing of intellectual property product development manufacturing engineering services and other technical assistance as well as supply of certain key components to access.
For rates to production timeline.
The product range will comprise the Nicola one us cap eight sleeper cab truck the Nicola to use class a day captrack and the Nicola today.
European cab over heavy duty truck.
Initial product launch targets include the industrialization of a Nicola Trey battery electric vehicles European style truck ready for 2021, and the Nicola to fuel cell power class eight truck for the us market with testing to begin in the second half of 2020 one.
In addition, a European 50, 50 joint venture is envisioned and agreed covering both electric vehicles and fuel cell electric vehicles.
I'm happy to announce that we will be holding a joint press conference intro in Italy with Nicola leadership on December 3rd to provide the market with the full view on the European Airlines as well as a global product plants.
We anticipate that for investors interested in participating there will be a live webcast of the event posted 12 upside.
With this partnership were once again, the front runner with an alternative propulsion system and will be accelerating the industry transformation towards emission neutrality of class eight heavy duty trucks in North America, and Europe through the adoption of battery and fuel cell technology.
On slide 20, we provide an update of recent acquisitions in our agricultural segment.
Building on the already announced acquisition of AG DNA in September we recently announced the acquisition of K line AG, the Australian Teligent crop implement manufacturer.
This acquisition will enable us to further grow share in our profitable crop production segment globally.
Secondly, just yesterday, we announced the acquisition of 18.
Manufacture of rubber track systems for high horsepower tractors and combine harvesters in an effort to confirm and strengthen our leadership position in these important product categories and to further gain market share.
All three acquisition position CNH industrial as a driver of industry consolidation in the agricultural market.
We anticipate the two new acquisitions to close during the fourth quarter of 2019.
The aggregate value of these three transactions will be approximately 85 million us dollars.
Moving now to slide 21, you can see an update on selective growth initiatives across our segments.
We have had another great quarter in terms of new products and awards, demonstrating our innovation capabilities are helping us gain market share.
Touching first on AG, our case IDH brand has announced the launch of the 150 Sears extra flow combined range to 50, Sears axle flow updates and Hedda upgrades with upgraded engine said mid stage five emission regulations.
For Shire, the experts CVT extends to stier tractor range in the 100 130 horse power performance segment.
Stier as chosen the experts CVT as the launch pad in the 100 plus horse power segments for has proven as control CVT transmission Astronics system.
It is a perfect proposition for operators looking for high performance tractor in a very compact form it ended reflect stiers brand positioning and ambition to become a pure play tractor technology leader.
Rounding out our AG brands at the CTV Innovation awards, the world's largest exhibition of wine all live and food vegetable production new hardened agriculture received the recognition of the jury panel who awarded the gold medal for its new self propelled create harvester and straddle tractor units.
New Holland as you know is a global leader in this market segment and as pioneered the mechanization of the vineyard working alongside our customers to help them achieve consistently high quality harvest improve their productivity and facilitate their work.
With these new award winning solutions, we take a step further and providing a solution for every job throughout the year from solid preparation crop protection dropped management, all the way to harvest.
In terms of awards in contracts Eco bus one a record order to supply more than 400 urban natural powered buses to the Parisian transport authority and five Echo defense over 1000, multi roll protected vehicles will be delivered to the Dutch ministry of defense over the coming years.
Moving now to slide 22, you'll find an update of selective strategic initiatives in the performance simplify and optimize categories.
In terms of Eightytwenty, we continue to reduce product complexity and Sq account in our North American construction business and are targeting 60% with benefits already in Q4 2019.
We are also progressing well in the North American AG business with a reduction of Eskimos of 60% identified for execution and 2020 .
You initiatives in AG end CV were started already during the third quarter with overall benefits ramping in Q4 of this year and on an annualized basis going forward.
Next let's review our organization optimization initiative that is taking shape through a widening span of control and a reduction of organization layers.
This initiative has led to a reduction in headcount to date of more than 500 white collar employees showing benefits starting from Q4 of this year.
Additionally, in terms of World class manufacturing, we are on track to achieve the 4% annual saving targets and during the past quarter Im proud to say that the vacco manufacturing facility and settle our gwas, Brazil Hasnt changed silver status in the program.
The footprint rationalization and asset optimization, we spoke about in September also well underway.
We announced the closure of our Perignon, Italy planned and additionally, we in the process of seizing production at our son, MRO, Italy, construction equipment manufacturing facility and converting dislocation into a parts depot.
We will start to realize the benefits from these initiatives starting in 2020 .
In terms of asset optimization, we have taken a charge of 135 million and the Mart remarketing of used truck inventories to directories, whether residual value is aligned with the market demand. These inventories will be reduced in the next week's adding to our year end cash flows.
As you may have seen from the other press release. This morning, we have two senior management changes to discuss first I'd like to welcome Jay Ivan Guar, who is joining CNH industrial as our new Chief Technology Officer.
She comes with an impressive technology background, having worked for prestigious companies along the mega trends of electrification and automation.
On top of that she will provide a valuable global perspective, having lived and worked in both India and the us.
Let me thank ellenberger for his services and we wish him the best for his future endeavors.
I would also like to congratulate Stefano pump alone for becoming the new president of our construction equipment segments.
Stefano has done an outstanding job in the APAC EMEA region way has achieved topline and profitability gross and he will continue to receive that region.
His leadership in CE is instrumental for this segment as we are moving from strategy to implementation being in the midst of its turnaround to earn is right to grow.
Once we see more sustainable profitability, we can start to make the first consolidation moves in the construction segment as well.
Let me also take the enrollment to thank cargo staff for getting construction to this point and we wish him well for his future Korea.
Let me now conclude the slide 23, and an update on the spinoff of our on highway business. We are moving with great pace and all the work streams of this important portfolio transformation that we announced during our September capital markets day are on track.
On this slide you'll find some of the key dates to keep in mind as we move through the next 12 to 14 months of this project with a view to trade as two independent companies by the beginning of January 2021.
As complete in my prepared remarks, and now I'll turn it back to Federica.
Thank you very much better. This concludes our prepared remarks for the third quarter results and we can now open up for questions operator over to you.
Thank you ladies and gentlemen, today's question and answer session will be conducted electronically as a reminder, please press star one on your telephone and wait for your name to the announced.
We will take our first question from Ein drilling plan from JP Morgan. Please go ahead.
Good morning, I think that Spain.
Hello, and as you and Diamond, yes, great to have you okay. Okay.
First let me ask you about chair outlet for our North America, Agriculture, and be you Sta recently issued their preliminary outlook for and Nexteras planting and for corn and bean prices corn prices are estimated to between alloys and 40 cents next year and back out that significant increase in.
Planting and corn is now to impacted by trade, our tariffs or anything more impacted by strong strong dollar. So uveitis could use scorecard that with your comments bad and North America AG being better next year or stable when impact it could take another step down on the corn inside.
Which is more important than beans.
Well and.
Two comments first first we don't want to guide in this quarter 2020 . So are we going to give the outlook for 2020 in our next call as you know and the outlook that we provided was for the end of the year, where we basically think there will be some purchase happening in November and December .
On the back of the positive news arbitrate deal and on the back of the tax incentives and stabilizing commodity prices.
Yeah.
Looking into 2020 , even though we don't want to give an outlook, we remain cautiously optimistic and I would like to keep it like that right. Now we do believe that that this trade deal that that use in China are going to sign hopefully very soon in Iowa as we heard right now.
<unk> is going to be very very important is going to provide stimulus for north American axle. Our outlook remains positive for AG in 2020 Maxi Wanna add something to that.
No no okay.
Okay, and if I can follow up and I was one follow up question Okay.
Okay, Okay, and my follow up there probably another one year after an answer but your competitor and guidance and significant decline in European truck going into 2020 may maybe away to ask the question is and how does your order book look I know, you're introducing new products would you expect Ted I'll pause.
On an end market, that's down as much as 20% year over year.
Actually I started then Max times, and we actually fairly positive for that for the truck business for next year, given that we come with with brand new product on the light and on the heavy side and the as way has been received extremely well by our customers with order books up 15% right now and you might remember that we walked away a little bit from market.
Share in this segment, because we didnt have a competitive product we now have it and if you follow social media and you follow these strong reception of that product I think we're going to be well positioned in the truck market in the heavy duty truck market for next year on top of that we do see that the LNG story continues to cap traction as you know that second.
That is up 100% versus last year and we also see.
Further increases in demand there, albeit the demand was a little bit postponed from Q3, two Q4 and into next year given that a lot of the European countries have moved the fiscal incentives for purchasing those equipments into their 2020 budgets, but if you also listen to the rhetoric and if you read the tea.
Press. It is very obvious that this is the only available short term solution to significantly reduce your two and NLX and I think it is also very important to note that not only trait and with Scania is now firmly in the market where the product, but also Volvo has fully committed to that and yes, it's right. There a couple.
Of competitors that are still sitting on the sidelines and it might be that they won't have a product, but those Oems that have a profitable and competitive product, we'll see gains in market share there and this would of course also help in a slightly muted truck environment for 2020 Max.
Nothing to add okay.
And then okay. Thanks, yes, because I won't but and you have one more question and okay. Because we ruined your last name. So please.
Well I know.
Okay. Okay can you talk about 135 million dollar charge for inventory reduction activity quite large and is the one and done how should we think about that are nervous.
Is there any risk on average digital values and going forward and just explain what that 135 million was little bit more thank you.
Good question Max will take it.
So obviously, we have we look at deserve reserve on our regular basis.
On the new piece of information this quarter is that the commercial organization set up a.
A program to let me say expand sales so pre owned trucks into areas that were previously not cover.
And so we had to adjust to the reality is ability of the value to market values that are achievable in those areas and we thought that this which is a good decision.
For our book of use business as we continue to manage.
Inflows and outflows from the veered short portfolio of the buyback as you know we have been reducing penetration of buy back in the last year and a half significantly which is very visible obviously in our market share performance in the recent history.
But we think that with these auction in place, we will be well position to manage.
The inflow and outflow of the buyback.
Going forward.
Thank you and.
Thank you.
Thank you and the next question comes from the line of Steven Fisher System. You vs. Please go ahead.
Thanks, Good afternoon, and I guess I should make my name more complicated to get more questions.
Yes.
But your price cost.
Relationship was overall less favorable the quarter I. It seems like some of it was product development costs, but also raw materials I would've expected the raw materials to start turning positive. So can you just maybe give us a sense for where you see that price cost dynamic headed in the next couple of quarters.
Sure. This is marks.
It is this.
As you said I mean, we also see in the incoming purchases a deceleration of the inflation right now, which potentially may turn to a positive stance in the following quarters. The issue is that as we book our inventory at five four we have to kind of flow through the inventory.
Sorry, the a the purchase of raw material before we can see the benefit into the cost of goods sold and so as we as we churn the inventory in the next couple of quarters, we will be able to stop seeing the benefit popping up in the.
In the early part of 2020 .
Okay. That's helpful and then just related to the can.
Yes.
Can I ask a follow up.
One follow up absolutely.
Terrific.
So just related to the construction equipment segment, our what do you sense, what sense you get from the dealer channel about how much of an inventory correction might be needed.
How long could go on and whether they have any retail indications for 2020 yet.
Again, we don't want to guide to 2020 , but as we have set in our prepared remarks, we're cutting back on production and specifically in North America, there isn't inventory overhang and were solving that and our expectation for 2020 used to produce in line with retail and and the market environment is little bit neutered, it's not completed down it's kind of a.
Flattish market environment that we're seeing right now.
Okay. Thanks for Virtus.
Thank you and the next question comes from the line up La Crosse Ilottery from Bank of America. Please go ahead.
Yes.
Good afternoon guys.
I wanted to ask as if it is the $50 million nickel again included in your $284 million of adjusted EBIT This quarter.
And is included in your adjusted EPS range of 84, 88 cents. If you take that out it feels like you've got the outlook by two to four cents, depending on the tax effect, but want to make sure I have that ray.
Yes. The answer is yes, and is work to set three cents in the quarter and rounded to two for the year to date period, the impact of the nickel again.
Okay.
And you've heard US you say you don't want to guidance 2020, but I mean I thought you did at your Investor day in early September amount, but you said that.
You gave a preliminary expectation.
I think it was somewhere in the low to mid 90 sand range for 2020, I mean are you walking away from that right now or no. How should I don't think about that commentary that you made.
Definitely don't walk away from that that EPS guidance was given for 2020 to have one goal post in the short term and we're moving firmly into into that and you're going to see that in our full guidance 2020 . What I said, we don't want to give guidance for net sales yet for cash and them and the other items that we usually guiding to because that we're going to do in the beginning of next year.
But the 95 to one dollar that we basically put out there the capital markets day, they stand there and we're firmly committed to basically and don't forget.
Our.
Strategic plan that we presented had a lot of self help initiatives in the first years of the plan and then had outgrowth in the second half of the of the plan and and as we have said here. We are moving very very firmly on all outperform simplify and optimize.
Activities, we've only given here selected overview of the initiatives that were right now driving and we feel very good about the positive as impacts that those will have in the short term.
Hope that was clear.
Well I mean, it just seems like your conceding that the demand outlook has got more difficult even though the self help is front end loaded in of and the forecast period. So an idea, but we were our honesty, we were right in the midst of the budget period, or where we basically see the market in 2020 as we have predicted in our strategic business plan. So there is kind of not a big.
The big change there, but again the detailed outlook as to the topline we're going to give soon but there are no surprises right now in that market that we see.
Okay. Thank you.
Thank you and the next question comes from the line of Martino de Ambroggi Unblocking from Equita. Please go ahead.
Good morning, good afternoon, everybody Martino de Ambroggi.
One more follow up on the 2020 EPS guidance as you mentioned Nicola has a positive contribution in this year guidance.
It's also a portion of Nikolai included in the 95 or one euro guidance for next year.
Well again, let's let's not push on on 2020 right now as we have said, we're going to see more of those Nicola deals going forward. We have 150 million in kind you will see this flowing through throughout BNL.
We said this country going to continuously and and again due to the guidance on esophageal 2020 stands the rest will come at the appropriate point in time, which is in the beginning of the I hope you understand that.
Yeah, I understand the and sorry, if I ask you want more they impact for the full year of Nicola for this year Riza.
How much.
Where was it already.
Hi lost they want to come for the first.
Because the 50 million as we walked in Q3 Theres no. Yes, but you also mentioned something for the full year expected in Europe , how that is not on a Max was mentioned, it's the 50 million that you're going to see and Max mentioned the impact on as for the full year, okay, but something more will come in Q4, probably.
Right.
We got some activity the ramping up on the technical assistance, but it's not going to be immaterial amount no.
Okay and the second question is on the.
Think honesty that said that you had your one question and you will follow up even though we got your name pretty wrong, but let's move has begun to save seven more people in the line and given that we had this this or interruption. So let's let's move on now with day vessel from Evercore I would say.
Okay, I will ask form of.
Thank you and then next question comes from the line of David Sasso from Evercore.
Please go ahead.
Thank you very much.
The inventory management this quarter and what you see for the rest of the year how to play out versus your expectations are few months ago admitted estimate I thought the inventory would come down a little bit more.
Sequentially for the company or even within the channel can you just walk us through how the inventory played out versus your expectations.
Yes, so they played out.
More or less in line.
Obviously, we need to remind ourselves we are affected by several uncertainties, including Brexit and we have manage some buffer of inventory to protect against the Brexit situation and the continued deferral on the Brexit the a deadline obviously is impacting also our stance.
The other piece there obviously is impacting inventory this year that was not there last year is the the engine stockpiling with the full impact this year until those engines are consumed.
As we navigate the transition to stage five in Europe . So net net we are probably I would say a couple of under million behind.
It's a number that is can be achieved is manageable for the fourth quarter historically.
We have been able to generate cash from inventory are in excess over billion in the fourth quarter.
So, let's see how that plays out but again, we have updated the guidance to mainly reflect a d. the M&A activity.
Between the 50 million that we pulled into any color as well as the 85 that we are flagging now on the AG acquisitions, and then we'll see we'll see at the end of the or how the quarter's plays out.
Enter some clear about the acquisition impact the implied fourth quarter revenues are up 1% year over year.
Much acquisition revenues in that number.
Very little.
So I guess I heard the production comments for the fourth quarter that were understandably down what's driving the sales sense of rough will be flat to up a little debt. Despite the production cuts, which is a lot of selling out of inventory I guess, partly the trucks that you mentioned going through a new market for used truck sales.
Javelin say that mountain that yet and when you sit yourself in the middle of the new range of revenue I will say for the quarter Q4, I would I will say that revenues are flattish, we don't assume a significant change in FX right now.
Which is kind of where we have been for the nine month. So yes, we have certain production cuts I assume the into particularly de again see business.
We also have there's let me say.
Pre owned trucks liquidation that will contribute.
Plus as you know yearend the activity on tenders tend to be higher so net net we expect to be in in that range.
That's helpful. Thank you.
Thank you very much.
Thank you and the next question comes from the line of task, We got from Deutsche Bank. Please go ahead.
Okay.
Hi, good morning, everyone.
Hi, Jeff.
Just wanted to actually continue on David's question. So just trying to understand some of the moving parts fourq of revenues.
How should we think about that from just the individual segment level.
Also just on the North American Order book I think you mentioned it was.
Slot exiting the year, but just wanted to understand slick water with the cadence was in terms of orders I mean are you seeing any acceleration or deceleration or anything that give you a little more confidence for four for for Q.
And you are talking odd right.
Correct.
So as I said, we see orders are in slightly improving on tractors in North America.
Versus the recent trend there.
The other markets are kind of the same over the last few quarters with the exception off combined same the rest of world, but again, it's an eighth a low comp comparison to last year.
Got it and I think it is noteworthy to say that we're gaining share right now on the combined side, because we have a very very competitive product. There. So so we have from four percentage point gain in the quarter in North America and also in Europe . So I think Thats also noteworthy that we have a good product there. So if demand comes back we should benefit.
Or proportionately.
Got it okay.
And then just on the commercial vehicle side I think you mentioned that you saw some slowdown and the LNG side.
As just regulatory agencies be sorted out.
To what extent are you seeing a rebound or how much pent up demand is there and then on other medium and heavy duty side.
Do you have any line of sight in terms of seeing a rebounded and market share and what do you need to do too.
With that kicked off.
Well I mean, I think I address that the LNG I mean, you can say soft impacting the quarter. However, this this segment is up 100% versus last year, we were around eight 1% last year, it's going to be around 2%. This year with expected it to be 2.5%. So it's 2% right now and that is really due to mainly German.
Are they moving their fiscal incentives into into the next year, but if you follow the rhetoric of all politicians and the European Union is very very clear that they will be very very supportive of that technology. So we will benefit from that and as you know we have more than 50% market share in that segment and as I've said two of our main competitors.
Our now firmly committed to LNG and have product, which is competitive however, not as competitive as ours, because we have been the first and the market makers. So to say for many many years on the LNG site. So our we're kind of generation number three where the others are starting with generation number one.
That is on LNG and then on the heavy duty truck I mean, it sits on a very high level, we don't see that falling off the cliff next year and has said we have moved away from the market a little bit so we have basically.
Reduced our share with the fleet deals because we didnt have a competitive and profitable product for us and we're now moving back into the fleets and that's going to allow US a couple of percent market share gain in next year's market. So these two should be a positive stimulus and an overall.
Kind of flattish overall truck environment next year.
Great. Thank you.
Thanks, Thank him and the next question comes from the line of loudly that Medea from William Blair. Please go ahead.
Hey, Larry Thanks, Hey, how are you guys and good morning.
Europe .
Typically been kind of a fairly stable market, but the sentiment indicators in channel checks et cetera.
Show or more of a coordinated weakness are heading into year end and moving forward after fairly positive time.
And some excess inventory can you just discuss.
The outlook for Europe kind of broadly why it may be looking more like a sustained downturn or not.
Well I again for 2020 I don't want to give you had an outlook and as we gonna see all of you guys next week at the architect because show I think thats going to be a great moment to talk a little bit about into industry sentiment that as you know this does lead agricultural technology show happens every second gear and and sentiment for the next years.
Really created there plus there is a short term purchasing inverters.
Derived from this from this show as we said because it is a retail show. So I think we should take that question next week when we see each other physically at the Agritech. Nick I think that has that is better and again I don't want to give yet a big outlook for AG sentiment 2020 okay.
Okay. Thanks, and then maybe secondly, obviously as discussed the cadence of your M&A in AG picked up.
Can you discuss maybe.
DNA is the Fms.
But it looks like maybe more of an AI play.
Where is that fit in is are you guys moving into the air space or is that more of an enabler and at some point should we be looking at maybe larger acquisitions.
Yes, I think as we said I mean, where we're just putting the money where most was in September we affirmed the moving ahead with smaller buying builds in in all fronts.
At DNA is really a far management, it's more software than than artificial intelligence as you know, we're very interested in the digital agronomists space.
So you want to see some more things there and as you also know we have started our incubator AG extend and by the way also next week when we see each other we're going to talk a lot about accent because you see a lot of technologies that were incubating, there and selling through our channels some of them being in the software space some of them being in our tissue artificial intelligence space and some of it just being.
Great Cool technologies that we're bringing to the market. So yes, you're going to see more smaller buying bills larger acquisitions. We don't have right now on the horizon is really a nice buying builds and and probably you know.
More to come.
Okay. Thanks, good luck.
Thanks.
Thank you and the last question comes from the line of Conklin Batterman from Goldman Sachs. Please go ahead.
Hi, Thanks for taking my question. The first line they want to come back to the production costs.
After 11, if I look at slide 27 independent nation seems like about 130 million headwind is coming from this item alone, which is about half of what youve seen in the year to date.
Just trying to understand how do we think about that line item as we look to into fourth quarter and laid Wendy.
Much.
The expectation is for the full year price to offset the production cost headwinds. The majority of those production cost headwinds are coming from raw material and sorry, if I would say more than 50%.
And then a and other relative chunk, maybe 25% to 30% comes from higher content as we continue to revamp our new launches and then the balance in the quarter, which is about 20 million comes from a the quality spender in.
In construction as well as the ER extra cost the inefficiencies related to the latest production adjustment both in construction and in AG.
Thank you and then just on your net debt guidance. So you see going down guidance by 200 million I understand about 135 is because of these acquisition.
So just want to make sure that the mid teen took action.
That you are targeting enac for the fourth quarter IB already baked in.
In your net debt guidance the benefit on inventories I turn that.
Thank you.
You have everything is in and their balance is a little bit of buffer.
We wanted to stay around that on the numbers yes.
Okay. Thank you.
Thank you. Thank you are going to your soon.
Yes.
Thank you that does conclude that Q and a session.
Sure. Thanks. Thanks, Yeah. Thank you very much for everybody and sorry for the little technical interruption and we look forward to Im seeing many of you next week at the advertising or so thank you very much take care bye bye.
Thank you that does conclude teleconference for today. Thank you for participate into me all disconnect.
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