Q1 2021 CNH Industrial NV Earnings Call
Good morning, and afternoon, ladies and gentlemen, and welcome to today's Fiat.
And that's just trying to tie them to you on first quarter results conference call. It C. O information todays conference is being recorded.
So to speak SRAM market that would be a question and answer session. Josh. Good question, you will need to press star one on your T cells.
At this time I would like to turn the call over to fit that equally then Archie.
Investors. Please go ahead.
Thank you Sarah good morning, and good afternoon, everyone. We would like to welcome you to the webcast and conference call for Cna's Industrial first quarter 2021 results for the P. O ending March 31st is call is being broadcast live on our website and is copyrighted by teenage industrial any other use recording or transmission of any portion of this blog.
Without the expressway from concept Doxy and AG industrial just strictly forbidden.
We are pleased to have you here with US today I wish you all Scott line and our CFO Dunning. She is that what would it be asking today call. They will use the material available for download from the <unk> industrial website. After a day presentation, we will be holding a Q&A session. Please note that any forward looking statement, we might be making during todays call are subject to the risks and uncertainties mentioned in the <unk>.
Safe Harbor statement included in the presentation material.
Additional information pertaining to factors that could cause actual results to differ materially is contained in the company. Most recent report 20-F and EU why not report as well as other periodic reports and filings with the U S Securities and Exchange Commission and the equivalent they'll tell it is in the Netherlands and Italy.
The company presentation may include certain non-GAAP financial measures additional information, including vehicles in deviation to the most directly comparable GAAP financial measures is included in the presentation material one find out once again, our team is connecting from different countries. So please forgive us EBITDA.
Our moments of silence during the call while we manage the transition between speakers I will now turn the call over to Scott.
Thanks, Federico I would like to begin by commending our entire C and H industrial team, especially our supply chain and production personnel for their exceptional efforts not only to keep our factories working for our customers, but also to drive margin improvement in this very turbulent environment.
We're seeing very strong market demand across the board in every region in each of our segments. This rapid acceleration is typically a more positive scenario and certainly upside remains but in conjunction with COVID-19 related slowdowns in other unique capacity constraints. This spike in demand as excess exacerbating the commodity shortages and shipping.
Restrictions, we are creatively working to address for.
For example, Tom Verboten and his team's adroit management of an excessively long list of lagging parts and services has both kept operations running and increased inventory turns leading to strong revenues and lean stock levels at the end of the quarter.
A robust start to 2021 exceeding both the first quarter of 2020 and the first quarter of 2019 results reflects the team's ability to deliver solid top and bottom line growth, while overcoming the aforementioned challenges and of course assimilating a new CEO.
It is a testament to the commitment drive and ingenuity of our global workforce as well as the wisdom and drive of our senior leadership team, which together are our foremost competitive advantage.
Next I'll review the industry volumes that we saw in the quarter to better put our business results in context.
The AG machinery industry was quite healthy in Q1 due to a range of factors, including rising commodity prices, improving trade with China and replacement of aging fleets tractor.
Tractor sales worldwide were up over 50% and global combine sales were also strong.
We expect the agriculture segment to continue performing well in 2021, given that our order backlog now extends deep into the second half of the year with production for cash crop equipment fully covered through year end in North America.
Construction equipment again saw growth in light machines, driven by the ongoing surge in the residential segment and we were pleased to see fleet demand drive expansion in heavy equipment as well.
Our regions outside of Europe demonstrated vigorous year over year recoveries, albeit from fairly easy comps.
For an industry that for years has been driven almost solely by China. This renewed global strength is encouraging.
The European truck market was up over 22% year over year in the quarter recording the highest quarterly industry volume since the third quarter of 2019, and only marginally below the first quarter of 2019.
In total light trucks were up over 20% year over year for the quarter, driven by Europe, but with double digit growth across the board.
Medium and heavy duty trucks were up 16% also with strong performance in all of our end markets.
Finally, the worldwide bus market continues to lag driven by effects of the pandemic on travel as well as delayed spending in municipal and regional transportation authorities.
Despite supply chain constraints and higher than projected retail demand, we out produce worldwide tractor retail by 5% in the quarter. While in combines we overproduce by 14% worldwide and by 41% in North America the.
The company inventory levels for tractors and combines versus year end 2020 was therefore up 25% and 60 per cent, respectively ahead of the key ordering and delivery season for these machines.
These elevated production levels enabled us to keep pace with demand, but I'll put challenges remain as our AG order book more than doubled year over year per boat tractors and combines.
Very strong growth in North America for tractors in South America per combines is keeping pressure on our factories, but thanks to the determined execution of Derek Nielsen and its AG team daily production rates will increase progressively throughout the year.
Construction equipment overproduced retail worldwide by 14% in the quarter, but just 5% in North America, where demand was exceptionally strong.
Company inventory for light and heavy equipment was up 38% and 13% respectively versus previous year end levels. Our order books remain up year over year in all regions for both heavy and light construction.
Trucks overproduced retail sales worldwide by 18% in the quarter in Europe, we overproduced retail and light duty trucks by 18% and by 16% in medium and heavy trucks company inventory was up 38 per cent and light trucks and 4% for the medium and heavy segments.
Truck book to Bill was 1.92 for Europe, and 1.29 for South America.
Market share in Europe for trucks was flat overall versus the first quarter of 2020.
If that goes LNG market share was at 53% and industry penetration for LNG trucks was approximately 4% more than 100 basis points from 2020.
With improving economic conditions government stimulus and another round of tightening engine emissions requirements order intake in Europe was up almost 100 per cent compared to the first quarter of 2020 with light duty trucks up 95 per cent and medium and heavy duty trucks up 101 per cent.
Order intake for natural gas powered trucks, nearly tripled driven by Poland, Germany and Italy.
This combination of solid retail performance and very healthy order books gives us confidence in the strength of our sales through most of 2021.
I will now turn the call over to a donate to take you through some of our key financial details.
Thank you Scott and good morning, good afternoon to everyone on the call and I was like six with our Q1 results highlights.
But the top line first quarter net sales increased 41% with higher volumes mix and price realization across all segments.
Likewise, he's drivers accounted for 700 basis point, increasing our gross margin also benefited from higher production levels.
Moving down the P&L first quarter industrial activities adjusted EBITDA. So it gets to 545 million with an adjusted EBIT margin of seven seven per site driven by strong performances across segments.
Free cash flow in the quarter was a cash outflow of day out of the $71 million, reflecting seasonal capital absorption in.
Industrial activities net cash ended the quarter at $591 million are the keys off point 2 billion from December 31st 2020.
Q1, net income was 425 million or <unk> 30 per share.
Net income was planned other than 54 million, while adjusted diluted earnings per share of 32 cents I think as a $520 million compared to the same quarter of 2020.
The adjusted effective tax rate for the quarter was 25 per cent.
At the end of Q1, our available liquidity stood at $13 9 billion down 2 billion sequentially.
Turning now to slide seven they focus on industrial activities net sales, which were up two 1 billion up 36% on a constant currency basis.
Sales in region and.
And product in the quarter over quarter comparison, we're up across the board certainly helped by the initial COVID-19 impacts in the prior year period, but also significantly supported by accelerated demand.
Foreign exchange translation and an impact of approximately 5% in the first quarter and net sales split by region was Directionally in line with last year, but with continued margin in rest of the war <expletive>. There that's the wallet share increase.
Agricultural net sales still a little television in the first quarter up 34% on a constant currency basis versus prior year, mainly due to higher industry demand better mix favorable price realization of four 2% cross gross and lowered the stopping actions.
If we look at net performance by region, North America, and Europe showed better mix in high horsepower tractors and combines in South America, we had strong have us the sales.
Construction net sales were 656 million in the quarter at 55% on a constant currency basis as a result of higher volumes realignment of the other inventories to Ohio retail deliveries and better price realization.
Commercial and specialty vehicles net sales reached $2 8 billion in the quarter up 30% on a constant currency basis year over year, primarily driven by higher truck volume Sakkos allegiance and already strong COVID-19 impact in Europe in March like with like.
Powertrain net sales totaled $1 2 billion in the quarter up 52% on a constant currency basis, driven by stronger demand.
So if the external customers of SPT accounted for 47% of net sales.
Almost 44% last year.
Let me now to slide eight where the industrial activities adjusted EBIT by driver and by segment.
Volume and advising what are the primary drivers for earnings to increase across all segments in the quarter.
Q1, 2021 adjusted EBIT thrive.
It was 399 million with an adjusted EBITDA margin exceeding 13% driven by strong sales better mix and positive price realization.
For construction adjusted EBIT was $25 million with a three 8% margin and it takes a while other an $8 million due to the positive price amortization cost containment lower quality related charges and favorable volume and mix.
Commercial and specialty vehicles, adjusted EBIT was 76 million with adjusted EBIT margin of two 7% driven mostly by favorable volume and mix in Europe, and South America and positive pay that price realization on the back of stronger demand.
It was the highest Q1 profitability for this segment since 2013.
Powertrain adjusted EBIT was one other than $15 million, an increase of 84 million with adjusted EBIT margin of 19, 3%. Thanks to higher production of salt sales, partially offset by higher freight costs and higher R&D spending.
On the right hand side of this page you can appreciate the gross margin performance across segments.
It was driven by price utilization high production volume and lower quality cost despite any short of raw material price impacts and raising price trade calls.
Moving to slide nine and our financial services business net income was 91 million up 11, menial compared to quarter one 2020.
Primarily because of lower credit lease provision favorable week, a loan and lease margin in North America and better results from the sales of off lease use of Cleveland.
In the quarter every day to originations were $2 4 billion and the managed portfolio of Green Jbs at the end of the period was $25 $8 billion.
Delinquencies were down 50 basis points, whereas the same quarter last year and remain at historically low levels.
Yeah.
That sounds like then the likes of this cash the net financial position and free cash flow performance of our industrial activities.
The cash flow what S activities was negative $371 million.
Oh, historically low seasonal working capital growth with inventory increase partially offset by higher payables.
Consolidated debt, including financial services like it'd be a day was $23 $8 billion at March 31st 2021, and industrial activities net cash position of 591 million decrease from 78 $786 million as of December 31st plenty plenty.
During the quarter the industrial activities cutoffs net that decreased 14% to $6 3 billion from $7 $3 billion at the end of December 2020.
He was in large part accomplished by exercising the make whole coal from the resort 360 million euros A&H industrial finance view of notes due in May 'twenty to 'twenty, two and the early repayment of value as bank facilities due in early 2022 from $440 million.
This is in line with our capital allocation that includes an effort to lower industrial activities gross debt, while our operating operations team flow their financial performances.
On this note I will ask Scott to comment on a growth path and that'd be back for the Q&A.
Thank you Don a well we remain firmly committed to our ongoing efforts to lower industrial that we do intend to hasten our organic growth by investing heavily in research and development equipment and infrastructure.
We see this as a multiyear escalation in R&D funding as we strive to accelerate market share gains and profitable growth.
We will continue to make strategic inorganic investments intended to accelerate growth innovation and margin expansion.
During the first quarter, we acquired C. G. Our long time distributor in South Africa, enabling us to improve margins and better serve our customers in the region.
We also took minority stakes in three key technology companies monarch tractor, Benjamin and augment our to accelerate our alternative propulsion and autonomous strategy.
Manta is a technology company based in Greece focused on automating farming operations through real time processing of on the edge computer vision and artificial intelligence for crops sensing and overall machine automation.
These partnerships underscore C and H industrials ongoing commitment to targeted investments in advanced agricultural technologies, facilitating the creation of an open innovation ecosystem that will strengthen our entire range of products and solutions.
This ecosystem will enable us to offer customers rapid and easy access to breakthrough architecture, agriculture technologies, which enhances both farming productivity and sustainability and we will also reinforce the product portfolio of AGGY extend the company's accelerator for tech startups.
As a leader in sustainability, we intend to take a pioneering role in the development of the circular economy and alternative propulsion with plans to deliver complete net zero carbon solutions.
In March we completed the acquisition of a minority stake and Benjamin LT Limited a U K based technology company that specializes in producing LNG with their proprietary cryo cooler liquid vacation technology, using bio methane from organic farm waste or agricultural waste their.
Their technology also provides flexible methods of packaging LNG tanks on smaller vehicles.
Sentiments technology for capturing fugitive methane will allow us to offer our customers end to end solutions unlocking the power of Biomethane through all four stages of the value chain, capturing process storage distribution and use from a variety of organic waste sources.
We believe alternative propulsion in AG is anchored around the potential of renewable natural gas with battery electric vehicles as an alternative on smaller machines.
This context drove our minority investment in monarch, a California based specialized electric tractor startup focused on developing full electrified propulsion with autonomous functionality.
Their technology has the potential to significantly enhance our electrification autonomy and agronomy capabilities over.
Over the next few years, we intend to introduce products across various power ranges and applications using these and other technologies and we are very excited to start testing them with customers.
Our ambition is to become the preferred partner for net zero carbon farming and create a sustainable defensible competitive advantage in the process.
Generally speaking, we have increased our market expectations across all regions and all segments in light of increased commodity prices and resurgent demand supported by uneven, but promising global rollout of COVID-19 vaccines.
We now expect the AG industry recovery, we saw in most regions over the next last several quarters to continue and perhaps significantly escalate.
We see notable strength in north and South America for combines and tractors with overall solid demand across all agri genes.
Farmer sentiment is improving driven by higher commodity prices and carryover incomes as well as surging soy and corn demand from China lowered.
Lower dealer inventories across the segment are also encouraging both new retail sales and inventory replenishment.
For construction equipment, we see the industry demand continuing to recover with heavy equipment now contributing meaningful to the up cycle, while an infrastructure bill was not yet formalized the United States contractors and dealers are starting to factor that as potential spending into their order activity.
Demand for trucks continues to show significant industry recovery in 2020, one with heavy and medium truck volumes in Europe, increasing by about 40%.
Truck orders began an up cycle in the third quarter of last year and that trend has accelerated in the past few months. We expect this positive momentum to persist contingent upon the resurgence of the main European economies and the ability of the supply chain to keep up with demand.
While buses still lag the overall market recovery.
The business should also benefit from the pent up demand, we see in other segments as the reopening spreads across Europe, and eventually South Africa.
The company's 2021 outlook assumes a progressive improvement in economic conditions as populations end markets adjusted less COVID-19 more stimulus and overall better circumstances.
Considering our strong first quarter financial results and a robust order book. So we see for the remainder of the year, we have chosen to update our financial guidance as follows.
For 2020, one we now expect net sales of industrial activities to be up between 14, and 18% year over year, including the effects of currency translation.
We will continue to keep SG&A lower than or equal to seven five per cent of net sales.
We anticipate positive free cash flow to be slightly higher for industrial activities in a range between $600 million and $1 billion.
Finally, R&D and Capex are projected to be about $2 billion combined for the year.
Towards the end of the first quarter, we terminated discussions around the sale of Iveco, though we.
We've maintained friend of relations with that counterparty.
This decision was primarily based on two factors confidence and speed.
After considering all inputs, including the strengthening performance of our on highway business.
We determined that singularly focusing on executing the spend was our most certain and fastest path to separation.
We now have all necessary resources dedicated to our original strategy of spinning the on highway business or Newco from C. N H industrial by early 2022.
Our defense fire fighting and F. P. T businesses will be included in the spend as they are closely aligned with the types of products and engineered manufactured by our commercial vehicle business. Additionally, the fin co will be split into two parts. So that both C and H industrial and newco will be able to extend best in class financing to our dealers and customers.
Ahead of the spin, which pending regulatory approvals will occur in the first quarter of 2022, we will hold an investor Road show for the on highway business and an extraordinary general shareholders' meeting in the fourth quarter of this year, we will provide regular updates to our stakeholders throughout the process.
Yeah.
I will conclude with a few summary comments before turning to Q&A.
Demand across our end markets remains quite strong and this should continue for the remainder of the year and likely into 2022 for some segments.
We expect most of the supply chain pressures present in the first quarter to persist in the near term, but we believe we are positioned to protect our gross margins through pricing actions and careful management of procurement and logistics.
The spin execution is well underway and our preparations are starting to go here.
Strong execution and a solid order backlog the robust first quarter performance of our future on road highway business, hence at the potential of this newco.
There are still questions and challenges to be resolved, but other than customary regulatory approvals. We believe we are in control and they can execute the necessary steps to meet our goals.
We are scaling our investment in both innovative products and services not only through taking various stakes in leading edge technology startups, but by hiring talented new members to the team.
In April we appointed Parag guard, because our Chief Digital Officer, Mark commercial is the new Chief Information Officer of our off highway business and this follows the March appointment of Kevin Barr as our Chief Human Resources Officer.
Kevin has extensive leadership experience in the industrial equipment industry will be instrumental as we align our organization and enhance our culture to become more customer and dealer centric.
Parag will spearhead our crucial digital technology efforts, leading the charge to build precision agriculture and construction into a competitive advantage and Mark will champion improvements to our information technology infrastructure security and end user accessibility, providing a robust framework for future growth.
These higher signify that we are moving with purpose and pace to improve accountability and agility and ultimately execution for all stakeholders.
With growing momentum in our end markets flexible and improving execution across our business and an ambitious but achievable strategy in place the C and H industrial team is well positioned for the rest of the year and beyond.
I will now turn the call over to Sarah to open the line for questions.
Today's question and answer session will be conducted electronically.
Okay.
From an NAV.
Got it from J P. Morgan.
Hi, good morning, everybody.
And just two.
Two quick follow up questions one.
You mentioned in your opening remarks, just there that Dan and demand is as strong across several sectors, which of course, we understand that and but it's likely to spill into 'twenty 'twenty. Two so could you comment on that beyond North America row crop I think we all understand the fundamentals there, but beyond North America row crop.
Where else do you anticipate and demand remaining strong into 2022, and then as my follow up can you size the specialty business for us and both revenue and profitability. Just so we can update or some other parts valuations yeah.
Thanks, and you know obviously the other north American market is driving the vast majority of our significant confidence in the in the AG market going forward, but we did see I'm encouraging strength than in Europe and in South America is still especially with combines remains a very strong market that we think is likely to.
Get better as the global economy continues to improve.
Okay.
So it was all agriculture and that you were referring to when you think 'twenty 'twenty two strength and then my question on useful place Yeah, No I think that most of the 'twenty 'twenty two strength that we see right now is in North American AG, Although I would tell you I'm very encouraged by the performance of Stefano Pompe loading in the the <unk>.
Construction team because that that business is as strong as we've seen it in quite some time, so not quite pushing into 'twenty 'twenty, two but likely will before too long.
And especially if they've been on that.
Is that.
Don't you want to take that one yeah. So on the second question. If you look other details of our net sales split them. The specialty our specialty vehicle is what is at least with US others A&D C. S. N V. So it's around 6% of sales.
Okay.
And we will get there.
As soon as we have the package is ready we will come with the with the numbers little in eyewear and I'll follow with some additional details.
Okay I appreciate that I'll get back in queue. Thank you.
We will now take our next question from.
Moving to see from UBS. Please go ahead.
Thanks. Good morning, good afternoon, obviously very strong pricing ahead of costs in the first quarter can you just talk about how you see that developing the cadence of it over the course of Q2 to Q4 and it sounds like it's going to ultimately be a net headwind, but just wondering how quickly that.
That translates from the strong positive in Q1 to that.
More challenging position.
Thanks, Stephen obviously with commodity inflation like we're seeing across the space pricing has been a better environment than we've seen in quite some time and I really across the board in each of our segments. We're seeing strong pricing and we think that's likely to persist through the remainder of the year.
<unk> and as we said we're not sure it's going to go quite cover every aspect of the cost that we incur but I'm certainly the team as they demonstrate in the first quarter feels confident that they can can get get most of it.
Okay.
And it sounds like your order book gives you much better visibility for the second half and you had just three months ago.
Curious why or where do you see the biggest uncertainties at this point.
Guess thing, you're gonna say broadly supply chain, but I'm wondering how much risk do you see to actually delivering your targets versus restricting any are any upside or if there's any any other areas of T uncertainties you'd call out.
Well I mean, you you you surmised right the biggest challenge and uncertainty is in the supply chain, but you know as we saw the team in the first quarter I'm managing the industrial machine really did a nice job of I mean, essentially you're not managing its micro managing the supply chain and they did that.
Well I think we see near term pressure in the second quarter that we just have to work through I mean, obviously you you see that but there's we do we believe based on our actions and what we see that it's going to get better throughout the second quarter, and we expect a better situation in an improving situation in the third and fourth quarter.
You know, we've just got to the semiconductor fortuitously haven't impacted the overall business or because we've the team has done a very good job managing it we have a specific issue with iveco that we're handling with heavy duty trucks and a key supplier.
That will likely impact a little bit in the second quarter, but overall I think you know we do see our way through managing it and we'll look to capture as much upside as we work through the year as we possibly can.
Terrific. Thank you.
We will now take our next question from Mike.
Oh Gee from equities.
Please go ahead.
Thank you good morning, good afternoon everybody.
The first question is when the incremental margin if I look at I N C. They were astonishing in excess of 40 per cent I clearly understand its a.
Comparing two very different quarters are there is a forex scene, but are affecting their performance, but could you elaborate on what these day reasonable incremental margin.
Different divisions in the current environment.
And the second question is on the failed the divestiture of our E vehicles I understand that what you mentioned at the beginning but the.
Can we say is there any one or two reasons are justifying the change are particularly justifying the change of the.
The decision and one set you spin off the business.
In my view are the less likely scenario a user to see the on.
On highway businesses being as a stand alone entity.
Am I right or totally wrong in this assumption.
Yeah.
Don do you want to take the incremental margin and I'll pick up on.
The spin.
But I think you commented well I mean, I think the margin to be for the first quarter last year, our I'm not that significant and.
We are looking at incremental margin for the remainder of the yet that I.
Hi.
Let's say.
A shape that it seemed as though the incremental margin would typically have when we have growth growth in sales. So.
I would say meet double low.
Low double digits 20, plus.
Consider that we have additional R&D.
R&D expenses in the second line, which will affect.
The market.
Okay.
And as it relates to the the spin or the <unk>.
Failed discussions that we had you know really you know we've always from the beginning of felt like we had a clear path to create a newco anchored you know with some key shareholders that we would share but in that that was was and remains our primary goal, we did get a and interesting.
Bid from a counterparty that we all know and we thought that was worth pursuing and I will tell you that we vigorously pursued that there was tremendous effort on both sides and I, we thought if it could be executed if it would be a very good path forward lots of scale benefit.
For the business and quite frankly, we worked as hard as you can possibly imagine to try to get that to fruition and as we really assessed things when we backed away. We did not see after all of that energy and effort that there was a clear path to do that in a reasonable time frame with <unk>.
Reasonable certainty and that really is what drove us to move a different way and I think if you look at the industrial landscape.
And search for successful you know Chinese mergers or acquisitions.
The European or U S companies, it's not very prevalent I mean, it's a very difficult task and ultimately as we worked through it we saw that.
Yeah and for the future once it is spun off.
Yeah, well I mean, obviously.
Our friends at Daimler have seen the same thing that there's an opportunity to create a separate drug company, we think that benefits us I mean remember that go is showing improving results and I you know feel like that with the lead we've got in LNG in the partnership.
To use Nicola to bring in additional alternative powertrain technology, we feel like that they can be a leader in that space and with very strong brands and in southern Europe.
And then obviously with the the key resources of F. P T.
And and our very strong defense business currently.
We think it's a very very.
Positive opportunity for shareholders I'm going forward.
Okay. Thank you Scott.
We've taken the next question from day to address.
From Evercore ICI.
Got it.
Thank you my question relates to how the 2021 dynamics are setting up 22.
Normal seasonality for your business on a revenue given the strong start to the year. The normal sequential trends would suggest that revenues could be up over 25 per cent and you're guiding 16.
So I'm just trying to get a sense of is that sort of a fair representation of how you're digesting the supply constraints where it's.
Call it roughly.
<unk> 10 per cent restraint on your revenues because when you look at even how you changed your industry outlooks.
Well you raised your revenues only as much as you raised the retail demand and I'm curious how does that make us think about inventory at the end of the year. It doesn't seem like there's any inventory rebuild at all.
And then lastly, with that setup are you handling 22 order books differently, you know some of the plants or early order programs seem a little earlier I'm just curious how youre addressing twenty-two given all these dynamics and particularly of course, if you're willing to provide it how are you thinking about price.
If you're opening some of these order books up earlier.
Yeah.
Good questions David as it relates to I mean, obviously the the near term is is limited I mean, we're going to run.
Our plants at capacity for the year and you know what we're able to yield a baseline supply chain is is what will take we've got we're actually having more discussions around 2022. The next year than would be typical because of the fact, you know obviously to get inventory.
Both in the channel.
And our factories, where we need to be it's likely.
And ultimately to stabilize the supply chain, you've got to stabilize your orders and then I think we're working through that dynamic right now.
But you know right now it's you know with geopolitical concerns as much as they are it's it's very difficult and probably not smart to predict too much too far ahead, but I will tell you that your early signs at this point are that it's going to be quite strong and that means pricing actions should continue to be strong throughout the year and into next.
<unk>.
But can you provide some sense of are you like the plant early order programs seem to lose it seemed a little bit earlier to me than I've seen in the past are you opening up the ability to take orders for 'twenty, two but of course I assume the customer wants a price point with it. So I'm just trying to understand them you mean the inventory.
<unk> where are they today because it doesn't sound like there's any inventory build the rest of the year, so not not to push here, but just trying to get a little quantification, you know inventories or X percent below normal now just so we can think about that as a setup exiting the year.
Don you want to take that because I can't compare to what we've done historically, yeah, I wouldn't say inventories are lower than we would like them to be even though they are much lower than what they were last year and and for part of the previous years right.
We overproduced in the first quarter on top of those income biased probably little Devil Overproduce board, but demand was stronger than we expected.
We keep producing as cost saves at full capacity and we are all seeing pacing the capacity with some of our plants for the for the latest bottle day yet.
Alcohol of course goes against where the other constraints with oak about in supply chain and our supply is also needed to.
<unk> will increase to increase production.
We have some leaving limited inventory built in in in the fourth quarter.
But a lot will depend on how the demand will end up playing.
In in.
The later part of the year.
Thank you very much I appreciate it.
Our next question is from the line of Brad.
From that that you could research. Please go ahead.
Hi, Good morning, all day.
Wanted to come back to add margins, obviously very strong in Q1 are in what is typically a seasonally lighter revenue quarter versus Q2.
If I go back historically and just look at that seasonal lift Q1 to Q2, it's been around 400 basis points.
Is that the right level, we should be thinking about sequentially here just trying to.
Think about the phasing for the for the year.
You're talking about sequential margins are quick sequential growth.
Sequential margins.
I would not make that assumption given what we're seeing in the supply chain right now again I I was really impressed with the way the team managed through.
Supply chain issues I mean, you know obviously, we all know what they are in the first quarter. We are not seeing them abating. In fact, we saw them get worse towards the end of the quarter. We managed through April it was difficult and we expect it to be difficult, but get slightly better as we managed through the year. So that's what we're seeing but theres no reasonable way.
Two we expect that we're going to be able to take the first quarter margins and grow them going into the second quarter. It is a challenge that we're working through and and we will we're very focused on delivering for our customers. We're very focused on.
Getting getting the price to cover our activities, but it's not our external scenario with the supply chain that I would I would bet on margin enhancement going into this from from first quarter to second quarter. Obviously, we do expect things to them, we will manage them and they'll improve throughout the year, but.
That that first quarter to second quarters, not one I would bet on.
Okay. Thanks for that and then just one more on precision farming I was wondering if you could just update on how pull through looks on new technologies, and if you might be able to quantify the revenue run rate for that platform the precision farming and digital within the AG business.
Yeah, well you know we've been working on this for for many many years and I would say the the energy effort and money being spent to advance from where we are now to where we're going with precision AG.
You know I think the positive news with precision is what the what the most farmers need right now we've done the research we're extremely competitive and where we're trying to make sure is when that next big transition goes is that we're also competitive and we talked about some of the minority.
We took to position ourselves there and obviously, bringing parag on board you know just truly a digital precision I'm you know somebody that I believe can really help us step up our efforts here and you know the work the J I N garden. The technology team have done I mean, we're really reasonably well positioned.
To the extent that that drives our specific current revenue stream. It's not nearly you know where we think it can it ultimately will be so we don't really break that out specifically, but what.
What we see we have seen it increase you know quarter over core quarter over time, and we think there's a step function increase coming.
Got it thanks, a lot congrats on the good start to the year.
We will take our next question is from the line of Kristen.
Please go ahead.
Hi, Good morning, good afternoon, everyone I'm, just as a follow up to that last question. If you could dig in a little bit more on sort of the corporate venture capital that you've participated in.
These three deals that you announced over the last quarter.
Can you talk about how these early stage investments sort of play into the overall capital allocation framework and then how we should think about the commercial opportunities presented by the investments as they mature.
Yeah, We you know obviously.
Have a tremendously capable and talented engineering team.
Team within the scene industrial C and H industrial network, but we certainly don't believe that we're the only ones that can come up with good ideas and new technologies and so we have a pretty good ability and because of our strong brand presence and global presence.
You know theres a lot of opportunities that people approach us about bringing their technologies to market and in leveraging our networks and so sometimes we go find them and sometimes you know they they find us but every time, we do it. It's a it's certainly an immaterial investment from a financial standpoint, but it you know are small.
All investment from US can mean, a lot of difference to get these startup companies.
To get a little more perspective, but it's not just the money much most of the time, it's access to our platforms. Our distribution channels that really brings them to us. So it allows us to get in with not a ton of money, but also to build something and as I said in my prepared remarks I mean.
We certainly plan to take many of these technologies and help us advanced products that we can bring to market for our customers and that's the that is the goal.
Great and then as a follow up question you talked about the strong rates that you had them in LNG and seeing that continue and relative to your development work and in battery electric and fuel cell electric you know as the overall market comes back can you provide some commentary around cut.
Or appetite to experiment with some of these longer dated technologies first is more of what we consider as sort of the transitional fuels like natural gas and can you just talk about what you're hearing from your customers in that regard.
Yeah, well you know we have some unique challenges in our.
End markets in that the use cases are very different than automotive, where I think battery electric has been.
You know more and more popular but still.
Quite de Minimis share of the overall automotive market. So some of those challenges and that's really the work that that Garrett marks and his team are working through partly with the Nikola joint venture, but also with.
The work that we're doing is is how do you bring those technologies into different use cases in different.
Requirements and I think the work that they've done with with LNG and you know it's it's very small still are four per cent of the overall market, we've got more than half the market share. So we've got tremendous experience. There really LNG is is hurt if you will by the lack of government support and subsidies, if we could get that and we'd certainly be.
Lobbying for it that would help in the on highway segment, but because of the significant experience. We have in on highway. That's why we believe you know with the potential for a you know the circular economy.
Economy of of.
Fuel and on a farm environment with methane that that could be a very attractive opportunity for us because of the similarities.
With the with LNG and in what we've already learned how to do so we're positioning ourselves really with the alternative fuels, but with.
Various partnerships feel like we can bring the battery electric solutions, if they will work in our environment. So I think we're well positioned with alternative fuels than electric as has anyone.
Great. Thank you so much.
We've taken the next question is from the line of Larry Demaria from way back.
Please go ahead.
Thanks, Good morning, everybody.
You discussed a little bit about the mi of monarch etcetera, but earlier in the call. I believe you said you'd want it you're going to increase investment in R&D. So can you give us an idea of absolute or percentage R&D. We should model for remain co and it is a change in strategy now to do more internally overtime or is this more of a catch up because we haven't invested enough. Thank you.
The I've done the percent of the remain co sales I can't figure it out on the back of my paper here, but I will tell you. It is it is not necessarily a change in strategy. It is a continuation of a strategy that was put in place several years ago that day.
Wants to expand both.
Annick growth, but also margin enhancement and that does taken an incremental investment in R&D and really a lot of our effort is related to alternative powertrains and precision technology and digital and I think you know it's.
It's no secret that we're in a good position, but not as good as we can or should be when it comes to those categories and I think that's the area, where you'll see us make them a good bit of investment, but just if we look.
Across our portfolio, we like to have market leading products in all of our categories and then I can tell you as we look at it we're not there now and.
Where we're putting the money to ultimately you can't do it all at once but you know, we're making the investments to try to position the portfolio to be very very competitive across the board and that does take incremental R&D dollars.
But I did hear about growth and margin expansion, it's not it's not just growth we've got to deliver improving margin at the same time.
And with US with the comment I've got a specific to AG or the increase or was it overall R&D increase and then just to clarify this question Avi.
We officially sold out in larger this year OE or are you still taking some orders for the fourth quarter.
Yeah.
Four.
We're taking orders for the fourth quarter and in most markets not much available in North America right now.
And I'll tell you our investments again I commented on the improving results and in the construction equipment segment and ultimately you know that's an area, where we've talked openly about we need some some product across the.
Portfolio, we need to a strengthening of products. So that that will be an area that gets investment as well.
Understood. Okay, Thanks, and good luck.
Your line.
Next question from.
Yes.
Please go ahead.
And did that they don't have to other than things that they can make right now.
I apologize maybe I lost a part of the conference I was wondering if you can give us an indication of what might be the lean back on the first quarter and if its possible and likely scenario of the total impact adjusted for a real my T V.
Over the full year I'm, just trying to figure out the pricing increase that he's able to offset that at least the real much value in Pakistan.
Even that if that is the issue of the Sydney conductor sharp edge and then.
And then second question is on that and you get these net sac.
First growth out of it was really.
Daisy didn't pan out profitability I understand that the R&D is going to increase that are they is the challenging environment and think that most supply chain that I'm supposing that is it reasonable to expect a double digit margin.
Well above EBITDA margin in time on that day to day, Eddie demand by yellow and.
And is it reasonable I am around it thank you very much.
I've added to donate.
Yeah, so on the raw material, we say during the call that.
Definitely we see it all the theaters in case of the headwinds and we also see headwinds in freight cost.
And by moving parts from from one plant to the other than from our supply to our plants.
But we also say that that we expect to cover most of it with pricing and the environment has been favorable.
From a pricing through all of them most of last year and easier and we expect to work more on that.
Your second question was on on margin.
I'd like to what day, we commented that we don't expect biogen over several quarters to be better than the first quarter.
Contrary to typical seasonality.
And we expect to have more of this day is raw material headwinds in our supply chain headwinds on a on the other second part of the year, although in the remaining part of the I would say.
But again, we will we'll contrast, most of it but with price.
Okay. Thank every magic. Thank you for that clarification I lost part of the cool. Thank you.
Yes.
We always take a next question from Rob.
From that you see.
Net.
Hi, Thank you and I appreciate all the discussion of technology, how do you kind of a narrow question on that subject.
The other ones.
Okay.
Electric tractor is obviously kind of big row crop stuff, just a ton of energy and I'm not sure electrical get there, but maybe from your knowledge of duty cycle you have a view on how broad that could be within you know within the smaller tracks with thing I don't know if it covers 10 per cent of the range of 40 or potentially more interest in general your philosophy. Please on how you intend to invest.
From technology do you intend to sort of continue the partnering like with me and Mark on on more niche areas and focused hard on your core what do you think is most important for four she answers itself to invest in.
Well. Thank you monarch was an interesting one as you may or may not know we are a leader in specialty tractors. So we do very well in grape harvesting and interestingly that is where their initial focus is so its a specialty market our specialty need and you know one other things as we're trying to become more customer send.
It can really design the exact products that our customers need marks kind of given US. An example of how to do that they are spending tremendous time in the vineyards in and making sure they understand the entire customer need and experience. So that they can meet that need with their autonomous electric tractors.
Obviously, we bring a lot of experience ourselves so the combination.
It does make sense as you indicated I think the smaller specialty tractors as a as a more likely a near term benefit are we don't you know we don't see our.
Big combines and tractors are high horsepower going out with you know pure battery electric anytime soon but I think the specialty market and we believe monarch is very well positioned to help.
Them and us.
I'll take that bring that technology to market.
And then as far as how we look at technology investments.
We really look at our portfolio and try to understand what it is our customers want and need and then we just determine the best path to get there obviously when we can we preferred to develop it organically, but there's both a a time and cost.
Benefit you have to weigh as you look at these things so sometimes it's better to go out and make an acquisition in and allow you to essentially a rapidly accelerate your position. So we'll look at that both scenarios and I mean.
I think in the next several years, you'll see us make a lot of progress organically and then probably some inorganically as well.
Okay. Thanks, and then just you know where do you see the biggest opportunities.
Input savings as it in big data around how to improve yield is it.
Automating different features I mean, I'm just little bit curious, if you're able to tell you tell us what you think is the most appropriate pathway and I'll I'll stop there. Thank you.
Well I mean, it really I think as you as you look at the market the requirement if.
If you will for.
Lower emissions is gonna be a key driver. So we're gonna make investments there as we talked about.
We believe the the need for less use theirs.
The acreage is not going to grow and to be able to get yield from.
From the acres that we have and all the things we can do that without putting more you know necessary, but not always helpful things into the ground. So I think a lot of the technology, we're investing in them give us the ability to both improve yield.
For the farmer and ultimately.
Their their returns as well, but also good for the environment. So those are you know where we're making the investments in those other things. We think we can get paid for it.
Thanks.
We will take a next question from the line of.
Ross Gilardi from Bank of America.
Yeah.
Yeah. Thank you good morning, good afternoon everybody.
No.
Yes look Scott I understand the supply chain challenges and how that can constrain you know this year from a margin perspective, you covered that.
Many times already this call, but but the guide clearly seems to be implying next to no revenue growth in the second half and I guess, that's where I'm a little bit confused you are saying you were able to overproduce in the first quarter, you've actually been able to build some inventory or you're getting pricing. So are you concerned about your ability to keep your factories running.
Due to supply chain constraints I, just don't really understand why revenue growth.
Would slow that sharply.
Given your comments on.
Do you know the order book and many of the other things that you've said.
Well remember the comps get more difficult as we go through the year, so the fourth quarter.
Growth is it's not a lay up but we're going yet so that's that's part of what's driving it but it's also and obviously, we're running our factories at capacity through the year. That's the plan and to the extent you know we were able to deliver that but right now and that as I talked about with Iveco in the air.
S ways, we've got just the transmission problem, that's going to cause us to set you know a few thousand units at the end of the quarter. So it's those kind of things that we have to manage through them and to the extent, we can as I said in prepared remarks theres. This likely upside if we get some of that stuff behind us, but we're just not willing to to look right now and to say that.
We can do that with certainty. So it's a combination of the comps getting tougher and our uncertainty about the ability to navigate significantly better throughout the year.
Okay.
And then what do you think you'll you'll clarify your your thoughts, particularly on add margin through the cycle and any any initial thought youre willing to share I mean, one one competitor is saying they can do 10% and other.
Saying, 15%, which now looks conservative I mean are you willing at all to commit to being somewhere in the middle and say the 12% to 15% margin range through the cycle for AG. If not just when do you think you'll you'll make that a bit.
Clear obviously, yet you know you had the Investor day, you know before your arrival, but.
Certainly the market will be clamoring to know what you think on profitability through the next cycle given everything that.
You you guessed right, but I'm not going to prognosticate on where margins are going to go through the cycle at this point, but I will tell you from what I've seen so far.
You know, what what Derek Nielsen and his team have done in a very difficult environment in the first quarter and there's a tremendous amount of improvements that we can drive to take that to another level of performance. So I don't think we're anywhere close at this point to what we can do.
In the future. It's just the challenger in the near term, but I think our long term margin potential is up significantly from the current standpoint, and I'll put a number on that as we get closer to the spin.
Okay very good thank you very much.
Our final question comes from team from day to go ahead.
Good day.
Yeah, Scott. Thank you for the time, you actually just to dovetail on that last.
Thread there lots of discussion on the call regarding near term margins and price cost and all that but.
I'm curious as you've had more time to look under the Hood, how do you feel about it.
The initial kind of takes you had was that you thought the company as a whole had a lot of opportunity just from a gross gross margin perspective. So how do you think about whether that's it on the cost side pricing side or both how do you feel about again, just some of the opportunities there relative to your initial.
Our expectations and then the.
Second question was on there was an earlier question around pre sales and I'm curious you know it.
And this is maybe more north American AG centric or it is more north American centric, but.
And that's historically not been.
As well utilized and my my view anyway, maybe you disagree, but that's probably the case new Holland dealers in North America. Do you think is there an opportunity now just given how far out you are and with potentially a longer runway of growth ahead of us.
That that Theres, an opportunity to increase that obviously dealer who have to be involved in that but how do you feel about the opportunity to increase that.
Pre sell.
As a percentage of net total wallet. Thank you.
Yeah well.
You know we've already demonstrated without just the work that's been done in our pre sales improved year over year going into 2021, and I'm extremely confident that theyre going to improve rather dramatically going into 2022. So that that's already starting to happen. You know I was encouraged you know on the last call by what I'd see.
I'm very confident and encouraged about what our future potential is now really this this business is as these industrials do it comes down to product brand distribution, and we really have an opportunity to get notably better I think we're better at product in most cases, our brand and distribution is a huge opportunity we talked a lot about technology work.
Gonna make investments with both precision and digital to move up the scale. There you know are but I I feel really really good about the the outlook for this company and I think as we talked about on the call even the spin off of the on highway business I'm encouraged by what what Gary and the team has done and I think they're well positioned.
<unk> as well so that's the overall strategy was laid out I think is the right one and you know with our investments.
That we've talked about and a little bit tighter execution, I think I'm the future for our AG and construction.
Construction is really really bright both from a revenue growth and a margin expansion perspective.
Thank you.
So I can get that question.
And I would like to turn the call.
That COVID-19 to Sydney.
For any additional.
Good day remarks.
Thank you everybody and have a nice day. Thank you.
That will conclude today's conference call. Thank you for your participation ladies and gentlemen.
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