Q3 2020 CNH Industrial NV Earnings Call

[music].

Good morning, and afternoon, dangerous and gentlemen, and welcome to today's C. N H industrial trying to 23rd quarter results Conference call.

For your information today's call is being recorded after the speaker's remarks, there will be a question and answer session. If you wish to ask a question you would need to crash the star and one on your telephone keypad.

This time I would like to check how Nicole over to Federico Denucci head of Investor Relations. Please go ahead Sir.

Thank you and good morning and afternoon.

Like welcome you with with the webcast in Congress called for C. N H industrial third quarter 2020, Ford Appeals ending September 30th.

It is being broadcast live on our website and is copyrighted by teenage industrial any other use a recording or transmission of any portion of these broadcasts without the express written concept up to an agent I started drinking forbidden.

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After they presentation of with you all being a Q&A session.

I'll get any forward looking statements me by me, making doing today called a subject to the reschedule uncertainties main trying to safeguard was taken including the presentation Lucky yet.

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Well I'll find out of and like once again, our team is gone that being from different dances, so peaceful get us equally.

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Thank you Federico and good morning, good afternoon, everyone.

She major industrials Q3, 2020 results were driven by a general improvement and market demand across most of our businesses and countries compared to the first half of the yeah with particularly shortly improvements in the agriculture sector North America. They also helped by a continued cost containment and cost preservation actions as well.

So we've reduced working capital in a call to the dish usually seasonally week, we've generated substantial positive free cash flow and we've increased now available liquidity.

As you know at the start of the pandemic is the leadership team we set ourselves three priorities looking after our people supporting the company for example by ensuring so sufficient liquidity and reducing cash out I'm looking after our customers dealers and suppliers. We expect these street parties to remain joined the coming months given the <unk>.

Creasing spread of COVID-19, however, alongside this we are also investing in new technologies across all our businesses. We are embracing the new ways of working that we've learned through the pandemic and we're positioning businesses. So strong unprofitable gross.

Work on the strategy that we outlined did at 2019 capital market stay has also recommenced, including the preparation for the spinoff was I on highway business.

Apple, which is also continuing it's try new C E O and his interviewed a number of very high quality candidates. We will of course update you on that process as soon as a decision is made.

I'm pleased with the results. So we've achieved in this quarter and the fact that through this period. We've continued to make substantial investments in R&D. We've still wanted to turn around about construction business and we've continued to be one of the most sustainable companies in our industry.

A company has the clear purpose of hiring sustainable transformation across the world and despite the challenges of this yep, we remain focused on doing that continuing to serve our customers who work in so many critical and markets to the best of our ability.

Oh now move on to slide story, which summarizes that Q3 results.

You will see here that knit sales of industrial activities for the quarter was $6.1 billion up 4% compared to the same caused the last yeah, mainly driven by an 11% growth 14% of constant currency in the attic segment and sales and commercial and specialty vehicles that was similar to those in the previous year.

This was partially offset by low isn't that sales and construction equipment and powertrain.

Industrial activities adjusted EBITDA of $238 million was down $46 million compared to the same caution last year.

[noise] positive price realization in agriculture, and commercial specialty vehicles and continues cost containment actions of approximately $18 million Nitsa foreign exchange effects with a quarter across all segments more than offset negative all human mix.

As a reminder, last year's result also included a 50 million dollar gain realize from Grunting Nicola Corporation access to Iveco technologies.

This was an in kind contribution to our partnership with Nicola.

Isn't that gate is excluded quarterly adjusted EBIT will be substantially inline ear on yeah, Nyssa positive foreign exchange effects.

Industrial activities had positive free cash flow of nearly $1 billion in this quarter.

This has resulted from both the 788 million dollar reduction in working capital and the for the cash preservation measures that we have implemented.

Net debt of industrial activities at $1.5 billion is now point $8 billion lower than it was at the end of June this year.

Adjusted net income for this quarter was $156 million and it just it done due to D. P. S was again, if 11 cents.

Finally, the company maintained strong available liquidity of $13.2 billion. This is up $1.5 billion compared to opposition at the end of June.

We all deliberately maintaining this liquidity for now given the continued uncertainty of this period.

Yeah.

On slide four I would now like to share with you some of the Q3 industry volume's as they will help put business results into context.

First let's look at the Act segment.

After some years of quiet I commodity markets, we've begun to see signs of recovery across the major crops with soybean corn and wheat prices strengthening due to the weather and trade related events. We've also seem favorable conditions and you'll just be go through the harvest.

Well, it's a month from China is notes back to historic levels. It has increased significantly over the summer and through Q3.

If we combine this with the support the government's have demonstrated that they are willing to give their fathers. We feel that are a considerable reasons to believe that replacement demand for I get equipment will continue to recover.

If we now turn to the details you can see that the worldwide agricultural industry demand was up by 29% for tractors and 12% for combines.

In North America demand for under 140 horsepower track just continue to be strong I was up by 24% while demand for over 140 horsepower track does showed groups. So the first time that she has I was up 8%.

Combined with me Meanwhile, up 16%.

Moving to Europe, you can see the tractor and come by market swap by 5%, 14% respectively.

In South America demand for combines was depressed and it was broadly flattish interactive.

It rest of World, we saw strong demand for both tractors and combines.

If we now move down the page to the construction site, where you can see that wall. The end markets in which we participate of be more impacted then I I could coach of markets. There is a slow although somewhat unpredictable recovery taking place, especially in residential construction in North America.

In addition, because do you the inventories of largely being depleted across the key and markets. We are well positioned to replenish stocks when demand returns.

Some key and market indicators have improved while others would be more negative. So we will continue to watch these markets closely.

Across the course of worldwide construction demand was up 10% compact and service equipment.

It was up 12% for general construction and it was down 7% for road building in sight preparation dim.

Demand was particularly strong in the rest of the world, especially incompact equipment in general construction, mainly driven by China.

Compact equipment demands was also up 14% in North America. However, demand was still depressed an old construction segments in Europe.

Against the smoking backdrop retail performance was also solid and up double digit year on year for the first time in 2020.

Lastly, but not least we I want to turn to the truck and bus markets.

The European truck market was up 7% year over year with signs of improvement after the strongly depressed market that we saw it in the first half of the year.

Within this how it but we so very different stories for like a medium and heavy trucks with light trucks up 13% for the quarter.

Madrone She's this improvement came from the call derives subsegment, while the truck derived subsequent in which we compete with a day they continues to like the recovery.

Medium or heavy duty trucks with me, while still down by 5% in Europe. Although this reduction is less pronounced than it was in the first half of the year.

We see a similar pattern in South America, where the market was up 9% light duty trucks and down 8% immediate heavy trucks.

Finally, as you can see he had the bus mark it was still down compared to last year across all regions with Europe down 17% in South America down 34%, we all have a expecting to see a lower decrease in the last quarter for this segment in Europe.

I will now move on to slide five which shows on data for I retail sales the red bars.

Ah wholesales I delivery, so D. Those the black bars, and I production of course I different divisions, the gray, but also for the third quarter of this year compared to the same period last year.

Before getting into the details let me say that in this call to all of our parts have been back up and running and we'd be managing production to reflect and market demand.

I was already anticipated at the end of last quarter. Our intention is to continue to manage our production in line with or just below retail demand. We will continue to manage inventory levels carefully as we approach the end of the year.

In this quarter, we have under produced retail enact by 7% for tractors worldwide and by 25% for combines.

However in line with normal seasonality with either produce north American very crop equipment by 13%.

As you can see a retail sales are up and this is being reflected in market share gains in South America for tractors and in all regions that combines.

Oh the book is now a mid double digits across all regions compared to last year I suppose tractors and combines and is particularly strong in South America.

For construction as a whole while we have under produced retail worldwide by 26% with North America under producing retail by 19%.

Is it allows us to reduce channel inventory significantly as we anticipated earlier in the year or the books and now up here every year in construction driven in particular by increases in demand in a compact equipment segment.

For a truck business, we underproduce retail worldwide by 20% in Europe, we underproduce retail and like Gucci trucks by 16%, while the medium and heavy trucks, we under produced by 22% in the third quarter.

Truck book to Bill the ratio of oldest we've received to the old just we shipped to build in the courtyard in the he was 1.37 and South America ended the course at 1.04, indicating the strengthening demand ordering taken Europe was up 13, million% compared to the third quarter of 2019 with light duty trucks up 41.

Sent a medium and heavy duty trucks up 35%.

In summary, the combination of this truck retail performance in the courthouse and solid order books cross segments make it makes us cautiously optimistic for the fourth quarter.

Moving that to slide six.

Yeah, we summarize the channel inventories by segment I won't go through them, all but as I indicated on the previous slide.

We have been able to reduce the trees by double digit percentages and across all categories. All sub segments of reduce the channel inventory by over 30% this positions as well as we exit this quarter, particularly since we've been able to clear out a large amount of quite aged inventory. Although we are continuing to monitor production levels close.

Usually mindful of the potential supply challenges that might occur in the coming weeks and months.

The reduction of between 14 60 per cent that we've achieved in our company inventory levels has also of course contribute you too I improved working capital and free cash flow, which you don't even describe later.

I will now turn the call over to a donee, who will take you through some of the key financial details.

Thank you Suzanne and good morning, good afternoon, everyone.

I was already mentioned in your opening remarks quarterly performance has been to authorize by a stronger than initially expected and market demand.

Like you know I've been called for the second.

Alright for to the dislike cashing cause cause the payment actions is confusing successfully across the company.

Working without a doubt reduction I wish it would provide more details later in the presentation has been strong, but particularly if we could bury with a normal seasonality thing the third quarter, allowing allowing us to recover a big portion of the cats, we have up so.

One and giving US a foundation to update the forceps forecasts generation for the full year barring any significant COVID-19 related these options.

Well, we're not after the key figures for the third quarter cause we they've been revenues, including financial service driving is was 6.5 billion octopus sent.

Ah reporting that income resolved will also have 932 million and includes 1.2 billion negative for everybody adjustments for the investment of nuclear Corporation cause.

As a reminder, would book a correspondent gain of 1.5 billion in the second quarter.

And my nephew of 82 medium from there and he's a valuation allowances of sort of the front of the box office.

That saves of industrial D V D 's, where a four.

4% of the quarter to 612 million.

Addressed the D V.

D V D. 's all wondering if the union was $46 million.

2019.

If you exclude from previous years performance 50 million being realized by your vehicle you connection with technology Tonsillectomy color you dropped the beauty was fluffy you know where to yet.

Income tax benefit for the corner. It was 15 million what we record the address with income tax expenses of 81, Michigan.

With a resulting augusta the effective tax rate of 38%.

Due to the like the food that philosophy jurisdictions with box benefits are not particularly nice.

Just the net income was $156 million and adjusted diluted EPS with a game of 11 cents.

Who could have their balance sheet, we finished the quarter with not of industrial D. V D 's or 145 billion sounds beautiful and he'd be didn't go back to the previous quarter as a result of the positive freakish little $1 billion.

Right now cause like eight we focus on industrial excuse me didn't that sales.

Foreign exchange translation at a negative impact of about 1% of the third quarter.

Say to break very reasonable direction in line with last year.

Sure rest of the ward.

At a golf consciousness sales sofa group instead of the beginning of the quarter, 14% on a constant basis versus by your yet.

He wasn't even mainly by higher volumes in North America, Europe, and the rest of the world.

Favorable fuzzy organization of pay per cent.

[noise] construction, let fail both of 576 million in the quarter sounds, 10% black off that currency gangs, maybe just the casino child and eventually the stuffing.

And we can price it environment find out in North America.

What happened North America.

A doctor can do I mean by 337% that he had them before the as we have seen as like six of these presentation.

Commercially sufficiently vehicles net sales vocal stupid for being in the quarter lock on the cuffs not gonna see business here and yoga you.

With higher volume of positive vibes.

Organization, So I bought any in South America, and the rest of the World All said, the Lord volume seem like you'd be Fox and specialty vehicles humor.

Art things that failed both of $990 in the corner down 6% of the cost of course, the babies by volume reduction maybe for like in the event you can Europe I feel satisfied excuse me less of the ward.

Facebook stomach Passiveness I've got 453 per cent of total sales got lost 51% the third quarter of 14 19.

Turning cause like nine now with a look at it that sucks D V D's adjusted EBITDA My segment a designer.

At a high level most of the victories of the year. They get babies will do put magazine volume of Nicks, except the dog.

Negative for an exchange related to South America, as well as the Bustier 50, Bingham game booked any vehicles.

He was was partially offset by higher not twice a year integration that she would be another culture uncle murfin, a specialty vehicles aggressive cost containment actions and lower east side.

If we take a closer look at each segment adjusted EBITDA was before agriculture was 274 million and adjusted EBITDA margin was over 10%.

Driven by higher volume positive price realization youth.

As your next fences demilitarized revision there was actually development.

Ah partially compensated by adverse affects translation.

For a construction adjusted he did loss will sweaty 4 million lowered volumes and I gotta be fixed cost absorption and instead of a processing alization, partially upset that are you interested in either direction.

Options implemented taught it usually doesn't even toys, particularly north American in Europe are not accomplished what pricing in the corner was didn't magazines. We expect Additionally, boom Wednesday, the fourth quarter.

Commercial specialty vehicles. Adjusted he did was also 7 million excluding the 2019 game I realize some grandkids and they got a corporation I said too.

But you don't really get because he was 27 median.

Even by unfavorable mix and I got to be impractical fixed cost absorption lower production levels.

I shall be upset by next hospitalization and Costco payment options.

Or trying to adjust the D V will 60 million or adoption of 21 billion, mainly due to book lower volume, partially offset by public cost efficiency and also here cost a big and actions.

Lastly, and not in his life.

I think he'd be definitely industrial activities and the water was for 156 million about $6 million to $7 million for instance last year.

Moving on to like done and all financial service business that income was 56 million Duncan six media, but not enough to go to a higher risk cost, but whatever for for getting off the bank in Europe, partially offset by higher hazards portfolio in South America, and the weather's G&A.

And the border Brigade, originations, where $2.6 billion and mashed portfolio, including J V. At the end of the deal was 24 $7 billion.

In England. She has went down sequentially like 40 basis Bongs, and we ran out of historical you little letters.

We expect our motives increasing delinquencies in the fourth quarter, reflecting the end of payment holidays, and when I called it to some of our customers in theaters to support those both the fact that they look they look thousand measures.

Say before.

We booked additional provisions for put at risk you know that to be prepared for unfortunately.

Possible.

Delinquencies and the foods she'll the economy. The comic consequence of the Pandemics and if he can be eaten up customers.

Next slide 11, I likes to discuss and that that I think I feel performance of our industrial activities.

And that that will be necessary Dvds was 1.5 billion of September 30th 20 down and approximately 0.8 billion compared to do 30 2020.

[noise] resolve the positive free cash flow of 987 million on the back of his tongue live actually working capital of seven eight $719, especially for good deals inventory reduction any gravy tables as we gradually with your Internet option you can think of.

Support if I could even see implementation of cats casually there they should measure what is normally.

She's a new week tour.

To the next slide with available liquidity them that much of a disco.

Company end of the third quarter of 2020 with an available equally to $13.2 billion, 50% versus do and I'm 2020 with a robot.

Liquidity coupla months, driving a ratio of 52 per cent.

The dark water once again actively worked somebody of some additional funding opportunities to secure and then prove I agree to be exact.

These actions and you're like you know to industrial Cabinet and then let's see you should 600.

Thanks for the amount of most students at 233.

October so soft sometimes to the corrupted to the end of the quarter. The company also issue 500, even they're not gonna get the principal amount of 1.8 75 notes.

2026.

Looking out of the remainder of 2020, who would maintain a strong predisposition will lead me that need their maturity, so probably gonna Mark is that.

With a longer term view the high level of liquidity with I lost with focus on a long time to level, you're shopping and have an opportunistic approach on your replacement funding.

East concludes like with their remarks from the financials and I will now turn it back to Suzanne.

Thank you Idoney.

Well some of the season's most significant global industry shows and events were cancelled all like today's cold I became virtual joined the school job at teams of continue to work hard to meet our customers needs and to launch new and innovative products.

One of these if I turn to page 12.

Cause of all of them.

New hold on just a moment of the C. H will say the harvesting combined which sets new standards for capacity versatility in case I hate just new tract, a cab, which makes it even easier for customers to take advantage of the day to transfer capabilities that are now possible on that machines. We've also introduce new features into a quote trek and star you've got a F.

[noise] connect series of practice.

On the on highway side about business. If it goes one a record older for its strongest N P. Natural gas powered tractor in South America, and we continued to see very good market share and strong order books in the LNG heavy trucks in Europe Ah.

Of course, all segments are these examples hopefully demonstrate we've continued to innovate and launch new products that will be more sustainable easier to use and enable our customers to improve their businesses.

In egg wave also continue to build a digital and precision farming offering.

Well, it's 515, we look at this across a number of different dimensions.

The first is field the classic precision farming area.

Just focused on increasing the yield and reducing the input cost of farming. We have in this quarantine launched 40, new field features so does she have to use them on a new next generation connected precision farming platform, which operates on a high horsepower and four wheel drive tractors, while the rest upgrades to our existing machine platform.

Holmes.

One of these new features for example will allow up to six machines to work in a synchronized way in the same field using real time data sharing another will enable farmers in the cab to see a three D map visualization of the implement data.

On the voice hand side of this slide you will see an illustration of a new solution for automating I combine harvesters.

This is being welcomed by the market in fact 50 per cent of our customers bought this with that harvest up when it was first introduced in 2018 and 90% of all doing it with their equipment today.

Recent releases mean that this really shouldn't Connecticut with more Krupp types. We most recently had to Bali and has become more precise.

With most of the common machine settings now automated this solution is made it far simpler for operators to manage their harvest. This this is one of the reasons why we've been gaming chair and I flagship harvest of business, a market, which we already had a strong position.

In the fleet here, if which focuses of maximizing the productivity of customers machines with more than double that connected actually T. Over yep and connectivity is now a standard feature in all I Lodge I platforms. We've added 10, new features to athletes solution. This year at 11 more in coming months.

One example, if they use as I removed uptime service, which enables us to identify technical issues in our customers machine remotely and provide idealist with easy tools to reserve. Those these issues before the machine is at risk of stopping during its active operations.

I could area focus here is form which helps farmers maximize the appropriate ability by bringing together a range of agronomic data, including soil, whether crop data to enable them to make better fall management decisions. For example, deciding when to say well harvest crops of which seats at most effective on their farms.

Acquisition of Act DNA, just over a year ago has enabled us to provide the state of the al platform for visualizing, the stator, which work someplace mobile devices and on the web.

Lastly, we are now expanding I I extend portfolio to include South America. In addition to Europe. As you may remember through I gave stem poke fun, yeah, we bring some of the newest and most innovative precision farming solutions to our customers. We've recently bought six new offerings into this portfolio including X.

Power, which is 100 per cent chemical free electrical weed control solution.

On slide 16, I know I want to turn into a heavy duty truck market and share with you. Some of the progress we'd be make you on a next generation and alternative propulsion vehicles.

In the third quarter Iveco increased its market share and heavy duty trucks by 3% compared to the same quarter last year.

Was it sharing creasy across all European countries.

In particular, we continue to be very strong and natural grass trucks, where we used cheap ah 65% market share in the quarter.

Or just for heavy duty trucks, and you're up over 50% in the third quarter compared to the same course lost yeah with diesel configurations up 17% and LNG up more than five times book.

Book to Bill stood at 1.3 Street over all at the end of Q3 with diesel at 1.31 and LNG at 1.4, all of which shows a very positive reaction the customers are having to these new products.

B S way will of course also be the back bone for the battery electric Nicola trait truck that will go into production in the last quarter of 2021 as well as the fuel cell trucks that will go into production at the end of 2023.

At the end of the last quarter I shared some of the details of the Nicola tray products with you and I just wanted the structure of the manufacturing J V. Today, therefore, I'd like to share a little more detail about the timeline for these products.

The JV is currently completing work on the first few battery electric prototypes of the nuclear tray I will begin testing them in the fourth quarter of this year.

It only 2021, we will then use the learnings from this testing and the second phase of testing says it by the fourth quarter 2021, the J vs Assembly plants, and Ooh, Germany can stop producing the tray.

Shortly after this the JV will stop going through a similar process with a fuel cell truck with production commencing in late 2023.

There's a lot of excitement both internally and externally around these products and we are of course conscious that many of our peers are also developing battery in fuel cell powered vehicles.

While the partnership with Nicola has suddenly accelerates a speed to market with these products. We will of course not be standing still and we are already working on how we can use our knowledge of innovative propulsion technologies more broadly across that business segments.

Turning to slide 17 here I wanted to share with you I'll update a view of the industry and market Spice segment for the full year 2020.

Please do bear in mind that although these are our best current estimates there is a significant amount of understandable uncertainty in the full cost this year.

If we look at the hog industry, we are expecting the recovery that we saw in the majority of regions in the third quarter to continue to the end of the year in North America, although at a slower pace for both track design combines we expect to cover it demand to recover in South America, and Europe and demand for combined slowed down and the rest of the <unk>.

World.

All of this will result in it and market demand in queue for that will be similar to what we saw in the same quarter last year.

For construction equipment, the fourth quarter will continue to be challenging with double digit industry decreases in Europe, and South America across sub segments.

The North American and market demand is however, expect it to be slightly positive and compact and service equipment and demand. The rest of the world is expected to be generally positive cross sub segments.

Demand for trucks and buses is now recovering after a tough first half of the year.

Well, yeah to date volume just still down about 20% on average across Europe compared to last year, we started to see some recovery in Q3. This was partly due to the economic improvements that we saw in many countries and we saw it most clearly in the light commercial vehicles segment.

Based on this within Crisafulli at all costs and now expect demand from like Douchy trucks to close around 10% down here on yeah, while medium heavy duty trucks unlikely to be closer to 30% down.

I lost slide shows I full yeah, net sales of free cash flow updated expectations for industrial activities.

These are of course very hard to predict in the current environment in particular, they assume that our end markets are not significantly impacted by the ongoing pandemic and with all the safety measures that are being put in place I factories, and our suppliers factories are able to keep operating with minimal disruptions.

On the basis of these assumptions, we've revised up with our outlook for the full yeah.

We now expect net sales of industrial activities to be down between 10% and 15% year on year, including currency translation effects.

We expect positive free cash flow of industrial activities to be between 8.4 dollars billion.

Billion in between and Oh point $7 billion for the year, we expect to maintain a solid available liquidity two year and I need to 2021 does that capital markets maturity of $600 million has already been covered by the 500 million note that we issues you help TOBA.

We're now focused on completing the rest of the she is strongly embracing and addressing all the challenges and opportunities it presents and assuring that we create a solid foundation for 2021.

In conclusion I'd like to thank each and every member of I global workforce for the huge efforts they've made together with idealism supplies to keep all of our people safe and to help us support our customers through this difficult period.

This concludes our prepared remarks, and I will now hand back to Federico.

[laughter]. Thank you very much for them to become cause that we're preparing us and we can now open up for questions Gracie all those new and.

Okay.

This question in that fashion will be connected electronically.

First question from the line of.

J P Morgan.

Hi, good morning in San diagnose.

Our afternoon wherever you are [laughter] morning can you just talk a little bit about bad like for 2021 and for free cash flow given that to have probably right sized your inventories by now you're probably produced to be titled going into next year and give them more your order books are particularly in an should wait.

Expect a significant draw I'm working capital at least in the first half a season leaves that's the way to think about going into next year. Thank you.

Thank you very much and we were not at the moment <unk> commenting on the 2021, we will obviously come of give further updates all matches, we get to the end of the when we go into next year. The first quarter next Yep. However, we all expected to produce in line with retail as I said in the prepared remarks, which means that I put.

Junction levels will be up year on year as we expected the markets to continue to strengthen.

And so if production is up inventories would be upset mathematically is that correct. So we're going to produce in line with retail. So I aim is to try and produce to retail. So we're not in not intending to increase inventory levels significantly.

Okay, but to meet demand you it'll have to.

So then on North American Agriculture, you commented that technology and the precision egg was helping you gain marketshare and combines could you expand on that it's quite unusual to hear the farmers will be making decisions about combines based on.

You know the the features such as precision egg rather them to come by and stuff. So I find that quite interesting could you just expand on that.

Yeah sure I mean, we are increasingly finding that farmers, making decisions based on the additional precision features that we can add into this equipment and it's one of the reasons why we've been investing very heavily in it increasingly farmers are looking for equipment offers that that frankly make it easier to use this equipment and a lot of the.

As I was describing to prepare for him out. So those are the features that we've pushing make these machines much easier it off right and of course as we have you know many farmers who off looking you know that they have other people who are using this equipment is actually very convenient to make this equipment much easier to use so we all findings up farmers all making decisions.

Based on this and we expect that to be a trend, which will continue which is one of the reasons why we're investing very heavily in this area I'm open teach do so lights through and in fact as a percent of as a percentage will be increasing up kind of R&D through next year.

Any comment on what percent of sales you'd think it will be.

It will be pier, one yeah, I didn't we're not we're not giving personalized tickets, but we all expecting that as a percent will increase increase on all R&D and it will be higher than we have had in the previous few years.

Okay I live in there in the interest of time I appreciate that thank you very much.

And the next question comes on the line or.

Okay.

Ah, Thank you and Hello, everyone.

Hello My.

My question is two fold I'd like to hear if you're if you're able to comment on the margin impact from 80 20, I don't know whether that's made a significant a difference in your your work flow your business yet and then also just on on you know what I was asking about on precision.

You, obviously have lots of things to invest in them and also a gaming chair and seeing some pause adult but so is that a positive lift to margins yep. Thank you.

Thank you very much. So H 20 is I'm showing number of listeners will know he was a a key feature of the plan that we put in place between now and we've been putting in place since the capital markets day last year I did eat something that we've been continue to pursue in the background actually 'cause, it's really dependent make them beyond we.

We haven't fully completed all of that work, but some of the some of the improvements that you'll see in these numbers and will continue to see through next year will come from that program, which is still on running in the background.

Oh, Okay. So so I mean, obviously you you've got a lot of work going on but you wouldn't say, it's actually had it's largest impact as you. How can you expect that more of a Joe and for 21.

We will continue to see improvements through that as we go through next year.

Okay, Great and then I'm, sorry, I'm precision because that a margin tailwind as yet.

So we don't as you know give separate figures for precision <unk> in terms of its impact, but I would expect that as a as these features become more important an issue as I sit in the prepared remarks. Many of them are now being kind of built into our machines in the factories. They will have a positive margin impact on that.

<unk>.

Okay. Thank you. Thank you so much.

The next question comes on the line of Martinez.

At what time.

Thank you good morning, good afternoon everybody.

The first question is and you just you know so you improve the free cash flow.

The older has improved too.

So should we assume dean because he's playing table my <unk>, two or three news except to be the same as it what was it the previous schools.

Thank you so much at the moment, we're holding the timing for the spin the same as it's been in the previous cool. So we've previously said 2021, well beyond and at the moment, we're holding that obviously at the moment with a degree of uncertainty that we have in the markets wouldn't would not in a position to confirm up that timetable. However has.

We've also said we we now have all of the work that we had pause you know for a smaller match time and they've got the first half of the Yep that is now fully underway a gate. So we are preparing for the spin, but we haven't yet set timetable for it you know obviously it will depend on with them as we are expecting the markets will continue to recover and obviously willing willing.

That will announce as soon as we can when we have the precise timing, but that will be.

Okay. Thank you and the second is M. D cost savings you say looked at <unk> Dot and D where the most important positive items are you up to date and will continue to be probably for that for the <unk> for the last year.

How much would use use it stuff too though.

And can you do 159 is Jamie and one of them did.

The amount of the cost savings.

Created do need the pandemic full support of customers either by a decision or even by regulation or government Monday things have been good as victims.

Those receivables would start paying or started pay now we're still relatively in a good position there and you'll see it in our in our delinquency numbers, we expect of an English two numbers to rule.

Moderately into for that.

We have taken additional provisions in the second quarter ended the third quarter compared to the level of cohesion is that we have lost ya.

Because of the potential impacts on a portfolio of diplomatic and economic consequences of it.

Thank you very much.

Okay. Your next question comes from the line Oscar.

Uh-huh.

Hi, Thank you for taking my question my questions on a high horsepower AG.

You mentioned agricultural equipment, a replacement van will continue to recover and you'll also notice channel inventories for agriculture or down you know, 30% to 40% year over year.

So that's just first for insight into retail demand.

Where do you believe current industry sales of high horsepower AG equipment or.

Versus replacement demand and.

And then for a look into wholesale demand within that order book commentary you have the the up double digits for AG what percent of that order book do you think is is related to a retail order and how much is a dealer inventory and obviously I'm kind of curious how those percentages or versus normal. So again, where do you think current sales are versus how you view a replacement demand for high school.

Horsepower egg in a sense of that order book, how much it has a retail invoice attached to it and how much is more for dealer inventory. Thank you.

Thank you so much so thank you so much David on high Horse My Attractors, you know what we're what we're seeing as I was gonna mentioning before is obviously concerning thing tomorrow. During the third quarter I was expecting that to continue to strengthen in the fourth quarter that does mean that we've got a very strong or the book.

But we will be you know.

We will have production that she kind of up here on yet in the fourth quarter, he compared to last year.

I think it's very very hard to tell to bilmes. How much of that is replacement demand. This is new demand, it's very hard to and how much of that just kind of pent up demand, but the fact that we have such strong notebooks implies that you know quite a lot of this is now going to continue to the end of the year hopefully into next year.

In terms of how much of it is is deena versus retail older again, you know we it's it's hard to get total visibility on that but actually they the demands as strong and so a lot of this for US now is is direct pool through from the from the kind of retail sidewalls and kind of Daedalus restocking Ah just because they they kind of reach.

Held them all that actually it at the moment to it most countries is really very strong.

So that's interesting is the retail demand strong enough.

First is your capability to produce that in moments like that often manufacturers will tell their dealers look we're gonna serve the retail demand before you get a chance to stock inventory is that's a dynamic driving it that demand supply on retail versus your production.

I'm just trying to understand why you wouldn't be willing to serve what appears to be dealers are looking to restock a bit.

[noise]. So suddenly if dealers are willing to restock will be looking to serve those dealers. We do expect in this quarter. However, given the likely shrimp retail demand that we will underproduce retail demand in this quarter because because of how we were predicting the market. So the maybe some day they'll be stuck in that takes place within that but I think a lot of it will.

B retail demand, but will oversee look to support at either shouldn't be stocking if they if they need to do that however in general one of the things I think we were quite pleased about that just happened joined the ship is that we've been able to reduce the amount to be able to treat both that kind of company level and it and the dealer level and that is one of the things that we would.

Like to maintain as we go into next year.

Thank you very much for the time I appreciate it.

I'm at home.

The next question comes from the line of Monica.

Okay.

Good afternoon, and thanks for taking my question set Barbara which has been already answered that coming back up today at market and attract though theme you might see [laughter] September if he got rid of very good and do you have a <unk> now 'cause tilde because.

And your speech you thought that you were expecting a and the last quarter of 2029 with the last quarter of 2000 1919, just some flavor on these [laughter] and could you. Please give us an indication on the Capex expected.

For the full yeah, and the an update on the tax rate on the back of their 38% in the last quarter. Thank you very much.

Thank you so much [noise], yes, yes, Monica as you as you say I think in the it's very very hard to predict the she is as we all know, but but from everything that we're saying we're expecting demand in the final quarter to be very similar kind of ear on yep to last year and that's what we're we're basing all about kind of predictions on at the moment.

And we called you know despite some of the you know some of the kind of difficult to the last few weeks. We we haven't seen any lessening of that do you want to make a comment on the Catholic side.

Yeah. So we have your box of course there'll be down your way to continue to be valley over here to be closer to the level of last year in the fourth quarter.

And you have another question of the tax rate, which is which we expect to remain on the high 34 D. Here.

Hi therapy, Okay got it thank you very much.

Thank you very much.

Uh-huh.

Question comes on the line of course.

Okay.

Hi, Thanks, I'm just curious if you can dig into a little bit more about the comments on order books being up your over your in construction I think you said it was primarily.

Driven by contact equipment, but if you can just you know how 'bout you know remind us how big the contact pregnant is uhm first general construction and road building and also just sure what's the order book for construction and it doesn't look like.

Thank you so much so I think it's very hard to know kind of how much does not that kind of that kind of a strengthening order book has come from built up demand from the first and second quarters and how much is how much is underlying demand. However, as as you said at night I could've said to.

Bad remarks, we started to see a central pick up in demand in Q3, I think we feel pretty good about how it looks ah through to the end of the year, but of course, we're watching this very very closely because the construction industry may will be impacted as we go through the next few weeks or months by what's happening in terms.

Kind of COVID-19.

Okay, and then you know I think you had mentioned you expect you know retail sales for I can be similar in the fourth quarter as in in the fourth quarter last year or do you have any expectations on the construction side.

On the construction side I think we we we see it's it.

It it probably won't be as strong as lost Ya, however weeks breaking up production to be up year on year.

But yeah on the on the kind of bank side, we all expecting kind of retail sales to be pretty much kind of level with lost yep construction is coming back up as I think I've said in the first two quarters. It it hasn't come up as quickly, but it's definitely strengthening and we expect to continue to strengthen into next year, but it it is more tends to be more impacted.

By the pandemic then the the act sectors, we all know.

When we all pleased on the construction side and we've talked about this is the first and second quarters. This year is that we have taken significantly step significant steps to reduce inventory both the at the dealer level and at the end at the company level, which means we're actually very well placed as as demand starts to come back on the construction side I'm will.

Will be looking to start to salts feel some of that inventory. However in the law school job, we will be careful and we'll do this into next year as well not to over produce we don't want to kind of go back to having very very heavy inventory levels.

Okay, but you will still be under producing in the fourth quarter, Yes, we will in the construction site on the construction side will under producing the first fourth quarter, partly because we want to manage inventory levels continue to manage it on the anxiety, we will smoke beyond to produce on the in the fourth quarter as well, but that's mainly because we're expecting retail demand.

To be very very strong so two two slightly different reasons for under producing on those.

Great. Thank you.

Your next question.

Oh.

Yeah.

That's where everybody.

Questions. First question is what are your thoughts about the dealer group in Canada. It's a big deal for you being taken private have you blessed that or do you have a preference on the outcome there.

Oh boy here when we got married on the on the axon will be of the group of course, he was an independent deceiving all I'll be on us all a rocky mountain so I wouldn't have gone to that.

Okay, and then obviously you talked about precision egg well I'm I'm, Sarah curious Ah maybe I missed it but can you talk about pay grade. So I know you said your embedding a lot of come.

Come into content to do it.

The equipment, but they're also add on so can you talk about the take race in other words, how much dealers and farmers are adding on to take those but there's not offerings and also maybe you know what kind of R O y.

You're kind of promising room for farmers are getting when they do get these high precision products.

[laughter]. Thank you for those questions. We don't as you know kind of really separate data on those what's the point I did in the prepared remarks fried chicken. She has some of what we're doing and the precision farming space on the seas as I as I kind of indicate your prepared remarks, and they were web first of all we're investing very heavily both through things like.

You spend in the acquisition of companies like Ankh DNA and it is something that we all seeing you know significant response do from our customer base, but we don't really separate day to match.

Okay. Thank you. Thank you.

Yeah.

My final question today comes from the line of Steven Fisher F.

Great. Thanks, Good morning, good afternoon, Suzanne It wanted to just ask you a little bit more about the C. E O search if I could you've been close to the company for awhile, but certainly even more so over the last six months or so and I guess I'm curious <unk>.

What you know about the company know I bet, you didn't know six months ago, and how does that help shape. What you think that the company really needs in in the next.

C E O and and what will be most important.

In terms of capabilities there in in any sort of challenges that you're finding at the moment in it's finding the right candidate.

Thank you so much well, you'll you'll write you know in the last six months I'd be much much closer to the company and not you know I feel kind of hugely privileged in a way to be able to get a get to know the company. So much more I think what I, what I've learned about the companies. It is hugely visit it and I think you know at the numbers that we've we've shown today kind of show.

Who's the resilience of the company not just the company actually but I D. The network in fact, they all the people that we have working with C. N. H a it's been a very difficult period I think for all of us, but we've put in places you know a very comprehensive safety measures across all of our plants and people have really pool together to get through this this pandemic so I I.

Kind of learned that resilience knife kind of seen it full first hand, it's also being very clever and I think we we we all knew this but I've I've can now seen it up close how complicated this company as we have multiple different divisions, we operated multiple different regions in multiple different markets. So in terms of a C. E O you clean need somebody who's going to be comfortable dear.

Without level of complexity and as a company that need somebody who couldn't both deal with some of the the kind of food a strategic questions and get very very close to the operations of the business and you need to be able to operate at both levels. However, as I say it didn't the prepared remarks, we have now into interviewed a number of.

Very strong candidates, we're not in a position to make any sort of announcement at this point in time, but I think there are some very strong people out there and I feel very hopeful that we'll be able to a point somebody who will be at a great leader for C. N. They try in the future.

Great and then just a quick question about the the commercial vehicle business you mentioned the the market share as soon as retail share of of medium and heavy duty can you give us what the order share in the quarter was just to get a sense of whether that 8.3.

Is heading higher from your and where where do you think that share needs to get to in order to to reach your margin targets.

[noise], yeah, whereas you as you probably know we don't release that kind of level of data, but just gonna give you a ah kind of sense of it I mean on the heavies, we we'd be very very pleased by the performance. The reaction as I think I said in the prepared notes to the S way and in particular to you know what we're doing in terms of.

I kind of gas powered vehicles has been very very positive for night I think it would be an incredibly encouraged by that and of course as I. As I also said that's gonna be the basis for this kind of Nicholas tray as well so that has enabled us to strengthen that heavies business quite significant like so.

Although we don't really set detail I think you you will see that the the kind of numbers on the heavy so very strong.

Okay. Thank you very much thank you very much.

Okay that will conclude the questioning.

I like to go back over to Frederick how can I do for any additional closing remarks.

Thank you to everybody over to call and have a nice day. Thank you.

[noise] and Canada.

And that does computer calling for today. Thank you all for it had been and.

And you may 9th disconnect.

[music].