Q4 2020 CNH Industrial NV Earnings Call

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Good morning, and afternoon, ladies and gentlemen, and welcome to today's C. N H industrial 'twenty 'twenty fourth quarter and full year results conference call.

For your information today's conference call is being recorded.

After the Speakers' remarks, there will be a question and answer session. If you wish to ask a question. During this time. Please press star one on your telephone keypad and wait for your name to be announced.

At this time I would like to turn the call over to Saturday cause Donati head of Investor Relations. Please go ahead Sir.

Thank you Jody good morning, and good afternoon, everyone. We would like to welcome you for the webcast and conference call for CNA G industrial fourth quarter and full year 2020 results for the P. O ending December 31st this call is being broadcast live on our website and is copyrighted by C 19, gotcha any other use recording or transmission of any.

Any portion of this broadcast without the expressed written concept obviously an agent that is strictly for beta.

We are pleased to have here with us today, our chairperson unable our CEO, Scott wine and our CFO, Don and she's a whole would be Austin today coal they would use them like any other unable for download from the C. N ancient outside website. After day presentation, we'll be holding a Q&A session. Please note that any forward looking statement, we might be making during today's call.

Subject to the risk and uncertainties mentioned in the Safe Harbor statement included in the presentation Latvia.

Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20-F annual report as well as other periodic reports and filings with the U S Securities and exchange for mission and if people didn't know what it is in the Netherlands and Italy.

The company presentation may include certain non-GAAP financial measure additional information, including reconciliation to the most directly comparable GAAP financial measures is included in the presentation material.

One final reminder, once again our team is connecting from different countries. So please forgive us if there are moments of silence during the call. While we manage the transition between the speakers I will now turn the call over to Scotland.

Thank you Federico I'm excited and honored to be part of the C. N H industrial team and I look forward to sharing our progress and plans today and for many quarters to come our fourth quarter results and the positive momentum we developed across the portfolio throughout the second half of 2020 reflect the capability and dedication of our.

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Suzanne and the senior leadership team ably positioned the business for solid improvements heading into 'twenty 'twenty, one and I am motivated by the challenge of accelerating our progress in realizing the potential of the CNI industrial businesses brands.

It is now my pleasure to turn the call over to Suzanne who will review, our fourth quarter and 2020 results.

Thank you Scott.

I would like to start by welcoming you as well for the school and underlining your comment about the great potential that there is in the CNI industrial businesses and brands I know I'm echoing the for use of the board for the senior leadership team and colleagues across Anh industrial when I say, how much I'm looking forward to working with you to realize that potential in the coming years.

We define this as a year for us for many different reasons facing the pandemic has been challenging for all of US as you know from our previous calls going into the crisis, we prioritize protecting the health and safety of our workforce supporting our dealers and customers and actively managing our supply chain.

I'll wear now guardedly optimistic about the impact of the vaccine rollout the current global Spike in COVID-19 cases means that we must continue to safeguard our employees and our businesses from the pandemic.

C N H industrial delivered solid results in Q4, ending 2020 with year over year profitability improvements across all industrial segments. The net financial position for industrial activities at year end was $800 million. This is the first time that this figure has been positive in our company's history and it demonstrates.

Straights, the effectiveness of our cost containment and cost cash preservation actions.

The other with a significant reduction in working capital. This enabled us to deliver positive free cash flow of $1 $9 billion for the full year.

During 2020, we invested in new technologies embrace new ways of working and position the company for strong profitable growth. We are continuing the preparation work needed to spin the company into two parts as we outlined in our 2019 capital markets day.

We are now entering 'twenty 'twenty, one in a strong position ready to support our customers and dealers.

And increasingly profitable feature under Scott's leadership.

Turning to slide for I would like to share with you some of the industry volume that we saw in Q4 as these will help put our business results into context.

As you can see here the AG machinery industry has continued to do well. This strong performance has been due to a range of factors, including rising commodity prices growing chain trade with China and the replacement of aging agricultural machinery fleets.

Trying to sales worldwide were up 27% day rule and was strong in all geographies, especially north and South America for.

For combines the picture was a little more makes with the global market up 8%.

As you can see industry was particularly strong in Europe, and South America. Although this was partially offset by a flat market in North America.

We feel confident that the agriculture segment will continue to perform strongly in 2021, given the order backlog that we're seeing in the first half of the year. We will discuss this order backlog for the later in this call.

I'll turn now to construction equipment.

Here, we have again seen strong growth in compact equipment, driven by the continuing continued strength in residential construction offset somewhat by weaknesses in other policy for the industry.

On a regional basis, North America, and rest of world markets have been particularly strong compact equipment sales underpinned the strength of the North American market, while rest of world is strong across all construction categories.

Within our truck segment, the European truck market was up 6% year over year in this quarter light duty trucks were also up year over year for the quarter, which means that the segment overall was down 97 per cent for the full year. Despite the negative performance that we saw in the first half for the year.

Medium and heavy duty trucks for flatting, Q4, but were down by 27% over the full year.

Finally, as you can see he is a bus market was still down in the fourth quarter compared to last year across all regions with Europe down, 4% and South America down 35%. This weakness is being driven by the effects of the pandemic on travel as well as delayed spending by municipal Unreached real transportation authorities.

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Moving on to slide five here, we lay out data for our retail sales thread for us our wholesales for deliveries to dealers, the black bars, and our production across our different divisions. The gray bars for the fourth quarter of this year compared to the same period last year.

I want to take a moment to describe our performance across the full year, but you can see from the closely bar graphs. On this chart what was driving the underproduction and how it compares to the same cadence last year.

For the full year 2020 worldwide tractors and combines under produced relative to retail sales was 13% and 19% respectively. While the North America row crop underproduction compared to retail was 17%.

<unk> order book is now up triple digits in some regions compared to last year as opposed to tractor in combines and is particularly strong in north and South America.

For construction as a whole we have underproduce retail worldwide by 28% with North America under producing retail by 36% in the year. This is allowed us to keep reducing channel inventory.

Our order books remain up year on year in most regions for construction equipment driven by increases in demand in our North American compact equipment segment and in our South American construction business.

For trucks, we underproduce retail sales worldwide by 8% in the film Yeah, and we overproduced retail by 11% in Q4, while maintaining a strong order book.

In Europe, we underproduce retail in light duty trucks by 6%, while the medium and heavy trucks, we underproduce retail by seven per cent for the full year.

Trunk book to Bill in other words the ratio of the orders that we've received to the orders that we shipped and billed in the quarter in the EU was at 1.96.

South America ended the quarter at one point knowing for.

Market share in Europe for trucks was slightly down for the year with medium and heavy up 220 basis points, a b basis.

Basis points versus the previous year LNG market share was at 55% higher than the previous year a market penetration for LNG trucks was about 3% increase from about two per cent in 2019.

Order book in Europe was up by almost 150 per cent compared to the fourth quarter of 2019.

In summary, the combination of this truck retail performance in the quarter and the very strong order books that we're seeing across segments gives us confidence in the strength of our end markets in the first half of 'twenty 'twenty one.

On slide six we summarize the channel inventories by segment I won't go through them, all but it's worth noting that we've reduced inventories by double digit percentage is across all segments and sub categories compared to December 2019. However.

However, we have also kept our manufacturing inventory slightly higher than December 31, 2019 dispositions as well as we exit the year, we will continue to monitor our production levels and to monitor any supply chain challenges that might emerge in the coming weeks and months.

If it didn't learn both company and dealer inventories will support pricing in 2021, and it's put us in a much stronger position than we were at the end of 2019.

The substantial reduction in our company inventory levels has also contributed to our improved working capital and free cash flow, which you don't need will describe later.

I will now turn the call over to Danny to take you through some of the key financial details.

Thank you Suzanne and good morning, and afternoon to everybody Nicole.

I'm now on slide 17, which summarize Q4 and if we have results I think it is.

Worth, noting knowing that <unk> has really been a tale of two hubs with a strong back house, partially offsetting the vehicles. So stars were from Damian containment containment measures how to production went up labs and the non stolte and most of our segments.

For the top line fourth quarter net sales were up 12% due to a higher volume suppressed price realization, maybe in agricultural and commercial other specialty vehicles.

However for the full year net sales were down 7% due to high channel inventories other startup date, yet and get the first COVID-19 impacting the first half.

Moving down the P&L Q4 adjusted EBITDA.

219 million year over year, driven by strong performance across segments.

For the full year adjusted EBITDA was down 60% for speakers year impact for the industry demand disruptions like I say absorption caused by Destocking actions have got shoved out in each one.

So you'll start at cost containment and patients.

Q4, adjusted net income of 432 million with adjusted diluted earnings per share for 30 cents.

Then in case of one other than for 53 million.

Oh purchase like a Nike.

So there's a bunch of sites.

Share improvement versus the first quarter book at a game is entirely due to operating performance of other industrial segments.

For the effective tax rate for the quarter was 14%.

Adjusted EPS for the year up two point to stomach for Sun.

Our improved profitability and a more favorable jurisdictional mix of third party income during Q4 as well as not just take Pops therapies.

Yeah.

I will talk later in the call about a solid free cash flow achieved easier living largely from a reduction in working capital.

In conjunction with nominal strength one of those types of activities.

Other to an already strong liquidity position, which goes you're spending capital markets and bad debt.

So fourth quarter, we actually got an otherwise challenging plenty plenty of good blades and set the stage for 'twenty 'twenty, one preliminary guidance Scott will go through shortly.

On slide eight we focus on industrial activities net sales, which were up eight other than $21 million or 11, 4% on a constant currency basis.

You can see other bunkers lives saved per region or brought up in the quarter over quarter comparison.

Across the board with only one exception.

Foreign exchange translation had an impact of less than 1% in the fourth quarter.

But net can't speak but reasonable directionally in line with last year, but it was like a day to share the rest of the war like in previous quarters of UBS.

I mean, he talks from net sales totaled $8 for big and for the fourth quarter up 19% on a constant currency basis versus prior year.

The increase was mainly due to higher volumes in Europe, South America, and rest of the book and favorable price realization of around 8% globally.

Construction net sales was 752 million in the quarter up 8% on a constant currency basis, because of higher volume and positive price realization.

Commercial and specialty vehicles net sales reached $3 3 billion in the quarter up.

Seven per site still a.

Constant currency basis year over year, 500, driven by favorable volume and mix and positive price realization in all regions.

Our net sales totaled $1 2 billion in the quarter up 14% driven by higher ships in shipments across all regions and sales to external customers accounted for 50% still cause net sales.

Yes.

Moving now to slide nine we can look at industrial activities adjusted EBIT by segment and driver.

Volume and net pricing other drivers for the increase across all segments in the quarter.

And sequentially.

Pricing has been positive throughout the year for agriculture, and commercial and specialty vehicles segments, whereas in construction he actions to reduce dealer inventory weighted heavily on pricing for the first nine months of the year.

If we take a closer look at each segment Q4, 'twenty 'twenty adjusted EBIT for <unk> was 379 million.

And adjusted EBITDA margin was up over 11% driven by positive price realization higher volumes and continued reduction of SG&A expenses, despite higher variable compensation in the quarter compared with previous quarters.

But it is yet.

For construction adjusted EBIT was 10 million and it was a $7 million due to positive price.

Cost containment and favorable volume and mix, partially offset by costs associated with continuous improvement initiatives.

Commercial vehicles and specialty vehicles, adjusted EBIT was 100 and funding in dollars with adjusted EBITDA margin of 50% keep them by favorable volume and mix in Europe, and South America and positive price realization on the back of stronger demand.

While the train adjusted EBIT was 110 million on occasion was 26 million net adjusted EBIT margin of 9%, mainly due to favorable logging in mix and spending for regulatory programs, partially offset by higher product cost.

Moving out to like betting and I'll share not just the service business net income was $60 million down 33 million compared to Q4, 2019, primarily because of higher lease costs due to the expectation.

Credit conditions, and a lower average portfolio in North America, partially offset by improved performance on used equipment sales.

In the quarter retail originations were $2 9 billion and the managed portfolio in P and K visa at the end of the beta was $26 60 day.

Delinquencies were down sequentially by 40 basis points and remain at historically low level.

By the continuing low delinquency in the portfolio for financial services booked additional credit waste provision can be yet economic consequence.

The pandemic may have delayed impact on several other festival ability to service debt.

Next on slide 11, I'd like to discuss the net.

Financial position on free cash flow performance of other industrial activities.

Net cash of industrial activities for beautiful day at December 31st 2020 up approximately two points. He began from net debt position of $1 $5 billion.

32020.

As a result of Polish positive free cash flow a stupid for William on the back of a simple adoption of working capital for $2 billion, driven by continuous inventory adoption and accusing fabled as we ramped up production at the beginning of 'twenty 'twenty one.

Capital expenditure was.

Below 2019 levels due to both target investments.

Certainties and where.

At 2% from the net sales for the from here.

Yeah.

Turning to the next slide with available liquidity and debt maturity schedule.

The company ended the fourth quarter was plenty plenty available liquidity from that.

Median.

At 21% versus September 2020, without a bus capability for last 12 months' revenue ratio of 61%.

I won't go through them all individually here, but as you can see we have done quite a few capital market transactions in the quarter in order to take advantage of vehicles, particularly wage and completed the reduction of our financing cost, including our search Seo coupon notes to apply to the second floor.

Even though stronger cash flow performance into some in December the company paid 600 million bond commercial paper you should.

From a 'twenty 'twenty and maturing in 'twenty and 'twenty one as.

As well as 300 million income loans Stuart 'twenty 'twenty, one intellectual capital.

He's going to strike at our remarks from a financial partner for the presentation and I will now turn it over to start for you start other box.

Thank you for donor.

Despite the many distractions in 2020, we continued to develop our digital and precision farming offerings structuring our solutions across three dimensions of field fleet and farm.

Field is the classic precision farming area focused on optimizing yield and input cost to maximize profitability for our growers.

In the fourth quarter, we launched 23, new field features including one with further defines infield data collection.

When integrated alongside or automated into road turn in sequence automation, which is all controlled through our award winning displaying armrest. This innovation provides the ease of use and data accuracy that our customers demand.

Sleep is focused on improving the productivity of customers' machines and our connected fleet has more than doubled year over year.

We added 11, new features in our fleet solution last quarter and will add nearly 20 more in the coming months.

Farm helps farmers enhance their profitability by combining a range of agronomic information, including soil weather and crop data to deliver seamless visualization and M analysis of these data layers that facilitates better for management decisions customization can be executed in the field utilizing cloud sharing directly to the machine.

Yeah.

Lastly, we keep expanding our AG extend portfolio, which brings some of the newest and most innovative precision farming solutions to our customers.

We've recently added six new offerings into this portfolio and there will certainly be more to come.

Our next generation farming solution co designed by our customer and product teams is improving the performance of precision farming features auto guidance and a road turns section controlling more while greatly enhancing ease of use.

Take rates for precision technology features on our large machines are close to 100%.

This offers significant potential as we deploy across machine platforms, including smaller tractors were current technology take rates are considerably lower.

Our updated technology solutions are an excellent example of our customer focused innovation and importantly, a key driver of margin expansion.

During the quarter prototypes from Nicholas J V continue to be tested both on Arizona test tracks and in our own facility in Southern Germany.

Covid travel restrictions made a split the validation work to secure efficient and effective progress, which actually accelerated our development work.

As planned we will proceed to road testing in the coming months once we complete validation of crucial systems.

Our award winning Iveco S way will be the backbone for both battery electric Nicola trade truck that is targeted to enter production in the last quarter of 'twenty 'twenty, one and the fuel cell trucks currently scheduled for production at the end of 2023.

One of the key things that attracted me to this role with Suzanne and the board's unwavering commitment to ESG exemplified by C. N H industrial being confirmed as an industry leader in the Dow Jones sustainability indices for the 10th consecutive year.

Out of the 86 companies invited to participate in the machinery and electric equipment category. Only 13 were admitted of which C. N H industrial was ranked first.

Additionally, we were among the 273 companies, making the prestigious a list for CDP climate change comprising only three per cent of the almost 10000 disclosing companies.

We also scored an a minus in cdp's water security a list attaining maximum scores and governance and integration and business strategy.

[noise] emissions reduction initiatives and reporting on emissions.

We're also proud of the scores and recognition, but much more so over the progress we are making to be a better company for all of our stakeholders.

As we shift our focus to 'twenty 'twenty, one our opportunities to accelerate profitable growth are abundant, but we're cognizant of the significant headwinds, we face and the hard work required to capitalize on our potential.

We are committed to enhancing customer focus and maximizing shareholder value through the spin off of our on highway activities as soon as practicable.

And our team is working diligently to drive this forward.

Our strong balance sheet signifies the rock solid stability of the company. It also positions us for prudent investments that augment the key aspects of product brand and distribution to enhance our competitive positioning.

With a healthy dealer network and bullish customers in most segments. We entered the year with robust order books and CNI industrial is poised to deliver a strong start to 'twenty 'twenty one.

Our dealers are eager eager for growth and those that I've met with are enthusiastic about their opportunities to gain market share with our expanding and improving product and service offerings.

We see strengthening industries and rebounding economies in many of the geographies, where we compete.

There is solid demand opportunity as global markets continue to reopen.

We expect the AG industry recovery, we saw in most regions in the latter part of 2020 to continue.

At this point, we see notable strength in the northern hemisphere for combines and high horsepower tractors with flat to slightly up markets in the rest of our regions.

Farmer sentiment continues to track well driven by higher commodity prices. When we look at the W. A S. D E stock to use data as well as surging Chinese soy and corn corn demand.

Higher used equipment prices across the segment should also drive new retail sales and dealer inventory replenishment.

For construction equipment, we have simplified our reporting segments into just two parts as we feel this more consistent this is more consistent with how the industry views the market.

We see industry demand continuing to recover with heavy equipment finally, beginning to contribute.

Dealers and customers are cautiously optimistic and we believe that global demand will be up in 'twenty 'twenty, one driven by South America as well as pockets in the EU and other regions.

With the Democratic Party in charge of all three benches the government in the United States. There is conjecture regarding the possibility of an ex infrastructure bill, but it is too soon to count on anything, especially given their slender majority.

Demand for trucks and buses is where we see our most significant industry upside for 'twenty 'twenty, one with heavy and medium trucks, and the EU, increasing 20% to 25%, albeit not entirely returning to the 2019 levels.

Truck orders have started an up cycle since the third quarter of 2020 and that trend has accelerated in the past couple of months.

We expect that positive momentum to continue contingent upon the resurgence of the main economies in Europe.

While we anticipate production up double digits on an absolute basis versus 2020. Most of this increase is planned for the first half of this year.

This will lead to difficult sequential comps for the second half. So it is worth noting that we see 'twenty 'twenty one as it returned to our historical production seasonality profile.

Our intent is to produce closely in line with retail for the full year now and going forward with some slight overproduction for buffer inventory should markets recover faster than expected.

The financial expression of these markets and our execution is consistent with our long term focus on profitable growth.

For 'twenty 'twenty, one we expect net sales of industrial activities to be up between 8% and 12% year over year, including the effects of currency translation.

SG&A is expected to be equal to or lower than seven five per cent of sales.

R&D is expected to be around for 5% of sales.

We anticipate positive free cash flow for the year from industrial activities.

Between to be between $4 billion end point $8 billion.

Capex is projected to be in excess of two five per cent of sales.

With these results the board of directors intends to recommend to the company's shareholders an annual cash dividend of 0.11 euros per common share totaling 150 million euros for approximately $180 million subject to the approval of shareholders at the AGM.

Please note that this guidance assumes no further significant disruptions due to lockdown policies were substantial supply chain disruptions.

With only a month in this role I am facing a steep learning curve to help flatten it I am spending a lot of time talking to employees at all levels of the company.

Their insights and perspectives have been invaluable and one in particular drove home to me the importance of what we do.

I was told that well in my previous role we used to build cool stuff now I was part of an enterprise that was honored and proud to serve a noble customer base responsible for feeding the world.

That nobility equally applies to the drivers and workers, who alongside the farmers define our business. Our legacy is largely built on great products and brands and we will endeavor to improve those areas, while putting our dealers and customers at the center of everything we do.

Targeting our investments with that in mind, we made accelerating innovation, especially with digital alternative propulsion and sustainability.

We have made tremendous progress in these areas, but we'll double down to enhance our competitiveness and drive growth.

Profitable growth will be a primary goal and expedite and gross margin expansion will be a company wide priority.

World Class manufacturing as the C N H industrial vernacular for lean and these efforts alongside our quality and profitability focus will be encapsulated within a world class enterprise efforts.

Our company reaches to all parts of the world and wherever we are our commitment to operating safely and ethically remains steadfast.

Consistently executing these fundamentals and delivering to our customers will result in strong cash flow and consistent quality earnings.

I'm keenly aware of the notable challenges, we must overcome to achieve a higher level of performance.

But I'm equally confident that this C and H industrial team is up for the task our energy and efforts will demonstrate a constancy of purpose to define and realized very bright future.

This concludes our prepared remarks, and I will now turn the call over to Jodi to open the line for questions.

Thank you very much Sir ladies and gentlemen, today's question and answer session will be conducted electronically. Please press star one if you wish to ask a question.

We will take our first question today from.

Sorry, non from J P. Morgan. Please go ahead.

Hi, Good morning, it's Ann Dykeman.

And welcome Scott Thank you Ann.

Maybe you know you touched on them only being there a short period of time and talking to customers and employees, but maybe if we take a step back what do you consider your top priorities to be as you move forward between theirs.

Certainly a lot to bite off net C N H industrial side be interested to hear your perspective.

Well I mean first of all it's great to be here and joined the team with a lot of momentum and certainly what they accomplished in 2020 puts a foundation in place that is a great place for me to start you know my first priority is really to learn the business and at the exact same time get to work for our dealers and customers and stakeholders. I mean, there's there's no time for me to learn and for us to not made progress.

That we've done so that's a big challenge and one that I'm really looking forward to you know I'm a big believer in personal accountability and for me you know establishing as I say do ratio that means delivering on our commitments. So I've got to work on setting the right goals and priorities and I'll tell you just kind of how I prioritize and I went over this with the board of directors last.

Weak.

Our first priority I'm Susanna team led last year, we are going to focus on keeping our employees safe through this pandemic until we get to the other side really pleased with the work we've done in doing that but it's not done and will continue to make that a priority until we're on the other side of it.

Secondly, we're going to execute the spend for sure or an alternative transaction, but we're gonna create two customer focused businesses that allow us to reward shareholders with more importantly reward our customers.

I'm going to try to drive a mindset shift within the company to really put the dealers and customers at the center of what we do we're a really really good product and brand company, but a lot of times, we don't have that customer centricity that I think can really unlock much more potential.

And the company and worked to execute that through a more lean org model. So we can be more efficient as we do that.

Next we want to drive profitable growth I mean, it's much more enjoy it'll be part of a company that can drive growth, but certainly doing it without profitability is what I call almost worthless exercise. So we'll try to drive profitable growth going forward with a key focus on gross margin expansion.

The opportunity for us, whether it's material productivity driving quality improvements improving pricing actions I'll. Just those are all opportunities, but certainly there's an opportunity for us to significantly improve gross margin over the next several years.

Part of the way, we'll do that is through innovation, both inorganic and organic building on what we've done with precision AG driving faster and more with our digital efforts and then ultimately leveraging alternative powertrain technologies to make sure that we're a leader there and the off road segment, just like we have been with the on road segment.

And finally, just continuing to drive sustainability and leading with ESG. It's a great foundation for us as a company, but one that I think we can never rest on and we must continue to drive. So those are the priorities. It's a it's a lot of hard work, but I feel good about the team that I'm tackling it with and they are excited about what we can do in 'twenty 'twenty one.

Okay I appreciate that color and just as a quick follow up and you said on the truck side, the spin or alternative transactions does that mean that you're open to something like an outright sale and or something like you know what.

S back type spin off.

You know I think what we're committed to the the the spend I think it's a great transaction for us and I do think that we are.

We're primarily focused on creating two customer centric organizations and maximizing shareholder value. So I think if there is an alternative transaction out there.

You know where that would be better for customers and shareholders. We would certainly pursue that.

I don't I don't believe there would be much consideration for a for a spec or the quality of our businesses is too. Good we can handle the due diligence of our road show and I don't believe we would need to go down that route ever consider going down that Avenue.

Okay. That's good to know actually I appreciate that I'll get back in line in the interest of time. So thank you.

Thank you very much. Our next question is from Steven Fisher from UBS. Please go ahead.

Yes.

Great. Thanks, and welcome Scott just a follow up on Ann's question, there about our priorities and and your goals just anything that stands out initially as really kind of low hanging fruit to address and I'd say the first six months.

In terms of either margin improvements or any of your priorities and in a sense of what maybe is really underappreciated versus.

What expectations are and what you've found so far.

But steven Thanks for the question I really don't think there's any low hanging fruit the work that Suzanne and the senior leadership team did last year to basically take advantage of all of those opportunities to deliver the cash flow that it didn't in the improving results throughout the year.

That doesn't mean, there's not significant opportunity here, but I don't think it's low hanging fruit theres a lot of work to be done I think there's a general under appreciation for.

For the the strength of the brands and the commitment of this team to win I mean, there's a just as I'm and I'm spending a lot of time talking to people at all levels of the organization all over the world and consistently the pride they have in the willingness they have to do more I do think if there are opportunities there really is.

This idea of recognizing our dealers as partners and our customers as the ones that drive our innovation does offer us an opportunity it's not low hanging fruit, but it's a mindset shift that we will make and I think ultimately we can be better for all of our stakeholders as we drive towards that you know I'm used to a lean organization.

And I think there's a little bit more.

There's an opportunity for us to be a little bit more efficient from an organization standpoint, as we work to serve customers, but the gross margin stuff really the most largest opportunity because of the spend is in material productivity and I'm I'm very confident we can get after that it's just going to take a little while to do its not quick wins, it's gotta be a sustainable mood, but will drive that and quality improvements.

And ultimately drive a commitment to long term consistent gross profit improvement.

Great. Thanks, and just for a follow up Bugs Suzanne you mentioned, having good confidence in in the first half of the year, how uncertain would you say that the second half of the year is how far out does your order book extend and what do you see as the biggest uncertainties for the second half.

Thank you very much so and as I mentioned I think for kind of first half is is looking is looking strong we've got a very good order book across the different across the different segments and of course, we're coming into this year are in a much stronger position in terms of inventory levels.

Second half of the year is harder to predict I mean, there's as many of you will know we tend to.

Have stronger sales in a normal year, we have kind of stronger sales in the first half for the year that we do in the second half of the year, that's kind of normal pattern.

Pattern that we would see obviously that was with this last year because of the pandemic I think we're expecting to see the share goes back to a more more kind of normal.

<unk> curve through the year, but it is quite hard to predict because of course as we all know we still have the pandemic sadly going on so a lot of other factors will play into this but certainly the first half of the year is looking strong just based on the order book for already seen.

Okay I'll turn it over thank you.

Yeah.

We will take our next question from David Reis Se from Evercore. Please go ahead.

Hi, Thank you and welcome Scott.

We're up on that question about the second half first half just to be clear. The second half are you more just concerned or just hedging let's see what happens in the second half for year on fundamentals or is there also a supply chain issue to be thoughtful about on our part on your ability to meet demand I mean, just given the order book shrank the age.

For the fleet the pricing power and you know just how much you under produced retail last year to set up the easy comp on production for for 'twenty. One and then I have a quick price price cost question is a follow up Oh I'll address the this seasonality.

For the question first no I think as Suzanne mentioned you know the order books are very strong covering the first half of the year. The second half we do get into more difficult compares but really it's I think about us being prudent what's going on in the global economies and wanting to make sure that we built we worked hard in 2020 to get our dealer inventory levels too.

A very good point and we want to make sure that we're consistent and really our goal.

It's really to produce to retail throughout the year. So if we see retail acceleration in the second half I'm very confident that our supply chain and our plants will be able to deliver for that but really it's just I'm not not feeling overly confident in the demand in the second half at this point, but certainly we're going to position ourselves to be able to fulfill that.

The supply chain constraints are more I would say in the near term now and the team's doing an excellent job of working through those but.

But we don't we don't expect.

Things to deteriorate from a supply chain perspective throughout there, we actually expect them to improve but.

Tony I'll turn it over to you for the cost and pricing question.

Yeah, I'd, just say no that I mean, the other ideas obviously the right now the prices doing very well versus the production costs that you've outlined in the waterfall waterfall charts, but can you help us a little bit how do we think about.

The full year price cost and sort of related to that the R&D now going to four five per cent of revenue should we think of that is now more of a run rate for the company going forward versus the historical less than four per cent of revenue.

Now, let's start from the R&D.

And of course, we have as you know we have curtailed some of the R&D. This year. That's about 2020 also because some of our facilities were closed.

For many and we.

We have we started in Q4 and you've seen that Q4 is higher than what we had in the previous year and we plan to have higher R&D until 'twenty 'twenty, one and and Scott will say before we have a number of initiatives.

Activities, where we need to invest more.

In terms of price cost with.

They are happy with what were they in pricing easier.

Just wanted Twenty-twenty NOG.

We want to continue on that trajectory.

The cost side, we know that there's going to be some headwinds in 'twenty and 'twenty one.

Due to raw materials and.

Some bottlenecks, we may have and so Blake supply chain, we haven't seen that into for and will continue.

<unk> probably seen in Q1.

But but we are you know what.

Pricing for one two for one tool faced most of it.

So I mean long story short that the price cost is probably a drag on margin right. Even if it's equal price costs, that's a drag on margin or it might even be negative, but you have the volume ramp and it sounds like isn't from the higher margin businesses like North America High horsepower AG can you can you help us a little bit with the margin color I know you gave SG&A and.

R&D, but I'll leave it here with that last question about any sense on the gross margins for the year or if you want to speak to the EBIT margin. So we can level set.

How are you thinking about the operating leverage thank you.

Yeah, I think it's probably early to go debt definitely we'll have we'll have incremental margin to pledge for 'twenty.

And and I would say I would look at 2019 is about normal idea and and beat the margins at that level.

Sounds good thank you so much.

Thank you we will take our next question from Ross Gilardi from Bank of America. Please go ahead.

Yeah. Good morning, good afternoon, everybody and let me add my welcome to you as well Scott. Thank you.

I just wanted to follow up on the off highway separation.

You know, there's obviously been a number of press articles about approaches for Iveco and.

And are you at least willing to say if you're leaning more heavily towards the sale over a spin versus your initial.

Thought process at your 2019 capital markets day, and if you were to sell the business are there any tax leakage considerations.

To take into account.

Yeah.

Well, thanks for the question and I, both Suzanne and I said in our prepared remarks, we are very committed to the spin and separating the businesses, which we think were confident well unlike value for for both segments.

You know, we're not going to comment on speculation in the press, but you know there has been and we we communicated it at least engagement with one interested party.

But I would say, it's it's far at this point from saying that we prefer a sale versus a spin.

And then any way I mean, we are still committed to to separating the businesses and ultimately we'll find a way that has the best transaction I mean, we're not we clearly aren't going to speculate on.

On tax implications or anything else for something that we're not going to comment on but recognize that our commitment to and our efforts to execute the separation or a rock solid Suzanne anything you want to add color to what I didn't say no.

No I think that summarizes it very well thank you Scott.

Okay. Thank you and then Scott you mentioned a couple of times the opportunity on gross margin expedite the progress for the for the company can you say, what you're baking in for 2021 and can you comment on what.

The aspirational view would be on gross margin.

Yeah.

I think I'd only did a nice job of avoiding answering the gross margin pressure in a second ago and so I'll I'll be consistent with that I do think you know obviously mix is going to be a big benefit for us this year to a certain extent offset by you know we talked about commodity pressures. So that you know commodities drive higher demand, but they also drive higher cost.

And we'll work through to try to make sure we take advantage of debt, where we can again most of the the gross margin opportunities are more long term in nature, I mean, driving quality isn't something you flip a switch on but you. Its design, it's supplier quality and then and ultimately addressing things in the field faster, but we'll get that and that will ultimately be better for our.

Customers and the more we drive innovation and technology and quality the more pricing opportunities. We have so I mean, I really feel good about the long term gross margin I don't yet have.

The the work done to define the potential of that opportunity, but it's I would say it falls into the <unk>.

<unk> category for sure.

Okay, and just last follow up on the R&D expense of four 5% what would that figure look like for.

The other remain co off highway business, if you split out.

On highway.

I don't have you done that math yet.

More follow up on days.

If you don't mind.

Got it okay. Thank you very much.

Thank you.

Our next question comes from Martino de <unk> from equity. Please go ahead.

Thank you.

Good afternoon, and good morning, everybody.

A follow up on the on the spin off based on the improved for four months and improved market visibility.

Could spin off for a second half event.

And the state on the per meter.

The construction of keeping I know this question was already asked in the past, but the and maybe it's too early for you Scott.

Just arrived to to ask you about the.

Once the spin off is executed the construction that would be our quota setting, which you maybe look for acquisitions and mergers.

Or you believe are huge growth uses on you still believe.

To stay with us or to find an extra strength that you've Florida construction.

Well, let's start start with construction and then work our way back to the question I'm not going to give much clarity too, but stephano Pablo and he's really done a good job of I mean incredibly heavy lifting to bring stability.

Two the CE business is as exampled by exemplified by the improving our fourth quarter results I mean, there's still a lot of work to do there I I will tell you that we like the synergies between.

The construction business in our AG business, we think there's potential there I don't necessarily think we've put our best foot forward with construction.

So we're going to continue the turnaround there, which I think you've got a lot of legs, but there are certainly some strategic.

Aspects to that that we've got to figure out, but ultimately you know we are in no way shape or form looking at and actually in that business. We like it we think there's potential there and you know ultimately what we'll continue to revisit it overtime, but but we like the trajectory that we're on and we're gonna look to us to drive further profitable.

Growth in that category.

The timing of the spend is has always been said it would be you know early 'twenty 'twenty. Two is I think the best we could shoot for and there's a lot of work to be done to make that happen, but that's kind of what we're driving towards.

Okay. Thank you and the second question is on the guidance.

If I look at the incremental margin you recorded in the first in the last quarter, 29% are in and I guess more than 30 in the C V.

I understand that you do not provide any specific guidance from profitability for the current year, but should we think of maybe diesel or slightly lower incremental margin as a reference point for us for next year and on the free cash flow just to have an idea of what's the underlying assumption on net working.

Capital that probably there will be a reversal in the trend.

The current tier.

Don I am assuming you got that one.

Yeah, So I mean incremental margin remember plenty nine two for 2019, it wasn't a soft quarter for us.

And Q.

Q4, 2000 22020 other states consider is a strong quarter. So I wouldn't go that.

That far in projecting the same incremental margin for the remainder of the year.

On the working capital for for next year of course again will hump.

<unk>, a much better starting find easier.

So we are giving a guidance on free cash flow for the year.

The working capital component of it will be modest I would say.

Okay. Thank you.

Okay.

Our next question for today is from my from Melius Research. Please go ahead.

Hello, everyone.

And Scott you've come aboard on a time, where there's just a tremendous amount of change and exciting things happening. So.

With apologies you're brand new I'm going to ask a couple of kind of big picture questions and see what your take is if that's all right.

Sure.

The first the first interest on the AG investment.

For 100 per center very very high take rates on large AG is obviously indicative of a customer that wants to buy the product in this exciting what's your impression been of the investment to date and as the company invested enough is that the right way internal and external and the balance and just sort of maybe if you can talk about what potential you see there and the second one I'll just ask from bus at once is.

Your philosophy on operating systems and on how you saw the company when he came in on a culture of engagement continuous improvement et cetera, I'm not 100% sure. If I heard the words 80 20, the prepared remarks, and I don't know where you want to take operations. Thank you for sure.

Well first of all I am really impressed actually with the progress we've made with precision AG and some other tools I mean, it I think if you listen to the.

The public conversation, there's it's it's like we're way behind and we certainly are behind but there's there's been a lot of work done. So it's not like we're starting from zero.

Very directly answer your question, if if we had done enough or spent enough and invested enough we wouldn't be playing from behind right now that's just clear.

So there is an opportunity for us to do more and I think.

You know the whole digital and technology thing is hard, but ultimately you know as I tried to say in my prepared remarks, we've actually got to just start with the customer understand what the growers need to understand what the drivers and workers, Nate and and build capability that enhances their profitability of what theyre doing and an ease of use.

So that's what we'll continue to do it again, there's a lot of good progress ongoing we just need to accelerate it and I suspect that will be an area that we'll get additional investments going forward as.

As far as an operating system you know obviously everybody has a.

Has a different philosophy on operating systems I was really encouraged coming in to understand you know.

The the approach with World class manufacturing I'm really it's just a different word for lean and they've really done a lot of work specifically in the manufacturing plants to drive that I mean, what I like about whether you call. It world class enterprise or call. It lean is the concept says you start with a customer and then.

Nate waste all through the system to add value there and I think.

There is an opportunity from an operating rhythm standpoint, I'm just the rigor that I'm I've been just beat into me over the years is is really a rigorous accountability.

Starting with safety and quality and then driving that on a on a regular monthly rhythm throughout the organization and you know we're doing that now and I think we're gonna get you know.

A lot of opportunity for us to deliver better results, but you know certainly the team is in a strong place. The fundamentals are in a strong place and I feel like I'm entering at a time, where we have a lot of opportunity, but but much of it is within our own grasp to deliver.

That's super clear. Thank you and then if it's if it's fair to ask I mean I take it. The board is supportive of a higher level of commitment to amtech industrial AG tech or wherever you want to call. It than maybe it was the case several years ago.

Everybody's fully on board I assume.

I think everyone is very much on board with the fact that our if we look forward into the future digital farming is only going to become more and more important and one of the things that we did last year as he went through the pandemic as although we were very thoughtful about where we could reduce cash outflow we possess.

I love for that spending in this area, we consider it to be absolutely kind of fundamental to the piece for the company and I know the board feels that very strongly as well.

Thank you both.

Our next question is from Massimo Vecchio from it it'll be Banca <unk>. Please go ahead.

Good afternoon for everybody and welcome to the scope.

My first question is on the commodity prices I'm looking at the Super cycle, the 2015 level.

The current commodity prices are not that far away, but steel combines registrations in the U S are off the level reached in 2013.

So for them.

My question is looking into right direction can we expect in Florida.

Bond in the U S combines them this year and next.

Don't you want to take that.

Okay.

Yes.

Yeah, I would say that it's probably too early to call.

And you've seen our forecast for the year.

And we must take with that.

Okay.

I have a follow up.

I saw your underproduction to for I was wondering how much from debt was deliberate and a deliberate choice.

Drugs from a market share losses from in some geographies or income products.

No I think the underproduction was predominantly driven by higher retail demand than we expected and you know market share losses, probably I mean, our inventory is lower than it has been but certainly there's plenty of inventory in the field. So we don't think that was a driver of market share.

Okay.

And last question I really appreciate you you plan a capital market day anytime soon.

No.

Okay, Alright, thank you very much.

Our next question is from Larry.

But yeah from William Blair. Please go ahead.

Hi, good afternoon.

Welcome Scott Thanks, Larry question, Hey, guys.

First obviously ramping production.

In the first half and it's kind of a tale of two halves as of now but.

But what I'm curious about is your ability to satisfy all the seasonal first half demand.

Okay.

On a full now.

Getting pushed out.

And maybe.

Maybe you can tell us also.

When when you're taking from what are you taking orders for for some of the higher horsepower AG lines, how far out are those now.

Well, we're running the factories.

With demand and then net backlog as high as you know, where we're doing well to fulfill demand we do think.

We're trying to get to the point, where we just its production and delivery to retail, but you know there's a little bit of work to be done in the first half, but I think we're generally feeling like we can do that.

They're really the the team is working very very strong theres a couple of pockets of specific you know parts of it where we're having to expedite and certainly expedited logistics is one of the challenges that we're having to deal with but overall I think the team's done a nice job of putting us in a position.

To deliver in the first half what we need to deliver a the question is you know what is going to be the demand the take rate in the second half of the year and you know that we we've been prudent but I do think there's potential for that to be continue to be strong given what you said about.

Commodity cycle.

So I guess for them.

And as you know we sold out in the first half at this point or we can continue to ramp and then I guess my second question was.

You talked about for precision.

Obviously, you had a slide what are we going to see some of the first AI enabled.

Technology, obviously your competitors come out with price.

C N H version.

I don't think there's tremendous upside for production in the first half I mean, we again the order books for strong and we're going to fulfill that demand and get our inventories and are in a reasonable level, but probably not tremendous upside in the first half.

You know I'm not I don't have timing of AI implementation schedules I do know it's a it's a core part of what our team is working on but I I don't have a specific timing for that.

Okay. Thanks, and good luck Scott Thank you.

Our next question is from Andrea <unk> from Mediobanca. Please go ahead.

Yes, good afternoon, everybody and thanks for taking my question on the webcast Carsten congratulations for that.

A question on NAFTA My first one is about the.

The heavy duty trucks I remember.

Do you have a Q3 or at least that you guys have mentioned about some gain in market share. Yeah. How did you track can you give us an update about what you have seen in Q4 and my second question is about the Q1 production.

How do you guys or do you see any shortage for semiconductor, which could slow down your production activities in Q1.

Okay.

So we were encouraged by as Don had talked about in the prepared remarks encouraged by the work that that Garrett marks and the team are doing with Iveco business and ultimately gaining share.

And the.

And the year was a you know a cut.

Couple of points of market share was quite good lots of opportunity there going forward.

The.

The second question was I'm, sorry, it was related to.

It is weighted to the potential shortages, but semiconductors.

They just don't have mentioned, even this morning about a potential slowdown in the production activities.

You know, we're we're not immune from that certainly that has been a challenge we're working through but again, that's implied in our guidance and when we feel like that the team's done a nice job of managing that right now.

But certainly there is there is.

Those are just the things that we worked through but again theres a strong team in place to do that.

Okay. Thank you.

Thank you our final question for today comes from Courtney <unk> Yeah.

The ACA for munis from Morgan Stanley. Please go ahead.

Hi, great. Thanks for squeezing me in and welcome Scott I guess, you know you kind of characterized.

Some of your key goals.

And obviously you mentioned that you are not presented in the analyst day anytime soon but when we look back at the 2019 analyst day. There was some 2022 targets that we laid out kind of by segment.

Yes, I'd just be curious.

Look at those obviously they've had some paid for disruptions, but you know what.

Each of those do you kind of view at this point has been the most achievable and you know versus leased achievable and which I'm.

Just as we're thinking through with the operational improvement of the different segments, and then I guess, specifically on construction equipment. You know that's one where it is are you expecting to have positive margins next year in that segment came in debt.

You're starting to see this recovery here, it's not one that we could still see negative operating margin for next year. Thanks.

Well I mean, the 2019, you know analyst day was they did a lot of really nice work and I think obviously the big news out of that was the commitment to the spend which I think is gonna unlike tremendous.

Value I mean, the rest of the targets I think are very reasonable, but they were reasonable before the 2020 and then the whole Covid thing. So I cant comment now I mean actually I'll I'll admit I have not done the work to see if the math still works to get from the 20 the target.

At Analyst day numbers to 'twenty 'twenty two given what happened in 2020, that's worked I mean quite frankly, I want to make sure we're doing everything fundamentally right.

Before we go back and hit numbers that you know quite quite honestly I'm not.

I mean again, the the numbers as when they were committed we're very very good and items fully bought into what they said they would do I. Just don't know if we can still get there with what happened in 2020 I do know that other works to find out the done Theres a lot of potential that was realized in 2020 continued progress in 'twenty and 'twenty one.

You know the the ongoing profitability improvements in construction I think is real but theres a lot of really heavy lifting to be done still.

Okay, Great. That's helpful. And then I know you've done a lot of questions about the margin.

Outlook for 2021.

I think originally you guys were talking about you know only about a third of the cost cuts. This year falling through to next year is that still the assumption I know you talked a little bit about the R&D step up and they've given us some guidance on SG&A, but just wanted to make sure. When we think about in some of those temporary costs falling back in next year versus price cost for that.

It's the right way to be thinking about it.

No you've got that.

Yeah.

We gave them.

This guidance on the level of other G&A that we expect will have on revenues and I feel should be at the level of R&D and capex.

I think we demonstrated in 2020 day, we were able to adjust for that.

And.

Of course, some other costs that were taken out in place when he will stay out.

But the other costs will come in and we want to we want to leverage our business based on the how.

The actual performance.

Again, the right before vessel sales and revenue base.

Okay.

Yeah.

Yeah.

Thank you for a much ladies and gentleman that book complete the question and answer session I would now like to turn the call back if decided he cut Nazi for any closing or additional remarks.

Thank you everybody and have a nice day. Thank you bye.

Thank you Sir that does conclude the call for today. Thank you all for joining you may now disconnect.

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