Q3 2021 CNH Industrial NV Earnings Call

November 4, 2021

Good morning, and afternoon, ladies and gentlemen, and welcome to day to day C. N H industrial 2021 third quarter results conference call and webcast for your information today's conference call is being recorded.

The Speakers' remarks, there will be a question and answer session to ask the question. During the session you will need to press star one on your telephone.

At this time I'd like to hand, the conference over to Federico Donati head of Investor Relations. Please go ahead.

Thank you walking good morning, and good afternoon, everyone. We would like to welcome you to the webcast and conference call for <unk> third quarter 2021 results for the period ending September 30 at this call is being broadcast live on our website and is copyrighted by CNA.

Any other use recording or transmission of any portion of this broadcast without the expressed written consent. Obviously an agent that is 64 billion.

Well I think that they called out a teenage industrial feels calpine, if all done in cheese and get it my precedented commercial and specialty vehicles N C. A N C O designated for Iveco group they.

They will use the material available for download from the <unk> website.

Please note that any forward looking statements, we might make making direct during today's call are subject to the risks and uncertainties mentioned in the safe Harbor statement included in the presentation material.

Additional information pertaining to factors that could cause actual results to differ materially is contained and the company. Most recent report 20-F, and you Wanna report as well as other periodic reports and filings with the U S Securities and Exchange Commission and Cleveland, Intel shortages in the Netherlands and Italy.

My final remarks, once again, our time our team is connecting from different countries. So please forgive us.

There are moments of silence during the call while we manage the transition between the speakers I will now turn the call over to Scott.

Yeah.

Thanks, Federico and welcome to all of you joining our call.

Finalizing steps to prepare for the spin of Iveco group working to close two strategic acquisitions and reorganizing the company I'm extremely proud of our team for putting our customers and dealers first and finding a way to deliver for them and us in spite of the deteriorate deteriorating supply chain situation.

Our team produced solid results in the third quarter, including net sales and margin improvement across three of our four operating segments impressively our earnings per share of $1 10 for the first nine months exceeds any full year EPS in company history, which underscores the strength of our end markets and the outstanding execution of our global team.

While demand remains robust we are reducing our Q4 outlook due to a worsening component availability issue that is currently affecting many of our product lines. We are aggressively working to mitigate the situation and expect improvements throughout the quarter and limited impact on 2022.

In preparation for what will be two separate calls next year I'll be handing off to Gary for the on highway update today and will return after a donate financial review with my closing remarks.

The AG machinery industry remained strong as farmers seek to replace aging fleets with more advanced precision AG equipment that generates higher yields and reduces inputs.

Resultingly, our AG order book more than doubled year over year for both tractors and combines.

This was driven by healthy demand across all regions, particularly North America, where our high horsepower order book almost quadrupled for tractors and tripled for combines.

Overall, our AG and CE.

Segments performed quite well in this volatile global operating environment that combined supply chain related production constraints with rising input costs for our farmers and builders with.

With solid AG fundamentals promising infrastructure initiatives, historically low channel inventory levels and aging fleets. We are confident that our markets are cyclical momentum will continue well into next year.

From a company retail perspective vigorous demand persisted for combine harvesters with third quarter industry deliveries up approximately 30% across all markets versus the same quarter last year.

I worked for high horsepower tractor sales were bolstered by a similar 30% crease in North America with moderate to flat growth in other geographies.

Given our existing order backlog, which now extends significantly into 2022, our agriculture segment should continue to perform well.

Both light and heavy construction equipment grew steadily in Europe, and the Americas as in previous quarters light demand was largely driven by consistent strength in residential construction, while heavy benefited from increased contractor demand as well as preparations for the long awaited U S infrastructure Bill.

From a regional perspective, South American demand was particularly high supported by Brazil, While North America, and Europe moderated on a year over year percentage basis, largely due to elevated comps.

Construction equipment retail cadence was somewhat mixed with light slightly down sequentially due to low product availability, while heavily heavy was less affected in fact global supply chain constraints caused us to underproduce retail worldwide by 8% with company inventory down 33% versus the third quarter of last year.

Our order books are almost three X year over year for the segment with growth in all regions, demonstrating the strength of our dealers' brands and equipment.

We expect AG industry demand to generally remain strong across all regions farmer sentiment remains positive due to rising commodity prices and farm incomes as well as continued Chinese soybean and Gordon van However, the record high sentiment we had earlier in the year has been slightly muted by higher input cost inflation.

Localized drought situations and limited equipment availability.

For construction equipment industry demand continues to recover with heavy equipment, increasing its contribution to the up cycle.

Optimism from contractors alongside a strong housing market in the U S is driving sales and order books across the segment.

While we are generally optimistic about our end markets and increasingly about our internal business performance. The acute component issue impacting our fourth quarter will limit production and our ability to finish and ship all products.

In late June we announced our plan to acquire Raven industries, which represents a major move in our journey that jumped the curve towards industry leadership in precision AG and autonomy.

Working in concert with Raven, we will expedite growth and provide customers with the integrated solutions they require for more efficient and sustainable farming.

We are working closely with an administrative body to obtain final approval for the transaction and are optimistic it will close later this month our teams have been diligently planning for a bright future together and are extremely excited to hit the ground running once this truly transformative deal is finalized.

During the quarter, we also shored up key aspects of our construction equipment strategy with the announced purchase of the San Purion M.

Likewise expected to close in Q4, this acquisition will boast bolster our development capabilities for excavator technology and alternative power systems. It will also integrate euro commack mini and mini excavators into our existing CE portfolio alongside our current third party OEM partners. Furthermore, it confirms our commitment to invest.

And profitably grow the construction equipment business better positioning us in a high demand light excavator market.

We launched several new products during the quarter, which some of you may have seen at the farm progress show first is the new Holland seven heavy duty, which maintains the powerful performance exceptional agility and outstanding versatility that are hallmarks of this platform.

But also delivers a superior working experience with the brand new Horizon Ultra Cabot next generation P. L. M intelligence features and a related note just last week its sister product. The T. Six methane powered tractor was awarded sustainable tractor of the year at EMA in Bologna, Italy.

Yeah.

Using methane or biomethane process from foreign waste as a biofuel for tractors provides farmers with a circular energy system. The T. Six a first in the industry and is a key enabler for this holistic process, demonstrating <unk> industrial's long standing commitment to sustainable farming. Its methane propulsion system has drived from our <unk>.

Leading compressed and liquefied natural gas technology pioneered by F. P T industrial and Iveco for on road and heavy duty transport.

New Holland also launched the new speed ROE or plus series wind rowers redesigned from the ground up to provide more productivity precision and power than previous models to make new Holland hand, forged farmers more efficient and profitable.

Next the new case, IH Optum tractor a strong seller since its 2015 introduction it has been reengineered to create the new optimum at F. S connect range with a new cabin interior connectivity package designed to benefit both our operator and owners.

The new cab offers more space lower noise levels and improve vision.

And bind with asbestos.

Acute guide an accurate term pro the tractor eliminates the need to steer and the open field and allows the year over year repeatable accuracy to sub inch level savings farmers fuel labor fertilizer and more.

Our E F S soil command tillage prescription technology enabled farmers to very tillage settings based on their changing soil types field conditions conservation practices and topography.

Case age tools allow operators to address a range of soil management challenges optimize every inch of the field for planning and minimize erosion and preserve moisture where needed with increased field speeds tillage prescriptions helped enhance productivity by as much as 95%.

Last or two products from case construction first the all new television six 'twenty be the largest and most powerful compact track loader ever built.

This 114 horsepower 6200 pound rated operating capacity C. T. L delivers best in class breakout forces as well as many other standard features including a one year subscription to case site watch telematics.

Second as tobacco loader S V series, the highest performing most productive fuel efficient reliable backhaul loader available. The SBC S. D series features a new expanded cab with enhanced controls and the new F. B T stage five engine it delivers greater operator comfort increased productivity reduced emissions and lower.

Total cost of ownership all supported by case service solutions.

Our technology strategy is centered around our customers empowering them with innovative products and solutions across the industries we serve.

We are focused on three vital areas of technology connected ecosystem alternative alternative propulsion and autonomy.

With the connected ecosystem, we have created an F. L. A F. S. P. A L M connect solution with sufficient breadth to solve complicated problems across a diverse range of equipment the.

The next phase of expansion will offer seamless and simple workflows that deliver frictionless customer experience across various networks and brands of equipment.

Our investment in alternative energy began over 15 years ago and has generated numerous product and awards. The most recent being the aforementioned new Holland <unk> six methane tractor together with.

Sustainable power partners like Benjamin F. P T and others, we are paving the way to create true circular and energy independent farms.

Additionally, we are accelerating our efforts to deploy electric tractors through our partnership with monarch tractor a silicon valley startup.

Under this license agreement, we will enhance our electrification capabilities by emerging monarch advanced E beam technology with our industry leading iron.

Coupled with our extensive in house capabilities. This partnership will enable us to rapidly sequence and launch new advanced technology electrified platforms.

Lastly, we aim to leverage our vast experience in automation to drive the industry from one touch automation to fully autonomous.

Through the acquisition of Raven, we intend to generate significant value for customers by increasing the level of automated functionality on our products.

I've spent time with the Raven team as part of the integration activities and I'm excited about the opportunities we are about to unlock.

A perfect example is the omni drive solution presented at farm progress representing one of the many innovative solutions, we plan to roll out in the next few quarters.

Digital AG products, such as these are already delivering significant value for our customers exemplified by sales of precision AG technology growing 37% for the first nine months of the year.

I'll now hand over to Gary to take you through the on road highlights.

Okay.

Thank you Scott and good morning, and afternoon also from my side to all participants to this call.

On slide nine now the European truck industry was down 6% year over year in the third quarter due to widespread supply shortages and delays in recovering incomplete vehicles.

Light duty trucks were down 11% with a lower weight on temporary registrations and supplier shortages, causing production losses.

Partially offset by strong market demand boosted by the recovery funds and COVID-19 support plans.

Medium and heavy duty trucks were up 6% six percentage that due to post pandemic industrial trade reopening accelerating industrial activities government funded truck replacement schemes and again COVID-19 support clients.

Speaking registrations in a strong market, we're significantly constrained by various Oems ability to get product out of their plants in a timely manner, thereby accumulating very low order banks.

The over three and a half turn South American truck market increased by 34% compared to Q3 2020 due to economy economic recovery, mostly in Brazil, following the rebound from the Covid slowdown.

The European bus market.

Slight uptick in the quarter driven by post pandemic commuting increases and transportation authorities, adding back capacity in the CDN industry segment.

The market demand for long distance coaches remains very low despite the minor improvements, we still see bus registrations flat to slightly up for the year as tourism Hasnt restarted at full pace in most market.

For trucks.

Under produced retail sales worldwide by 6% in the third quarter predominantly due to supply chain constraints.

Judy trucks, underproduce retail by 12%, while medium and heavy duty trucks will but produce retail by 6% for the third quarter supported by completing vehicles to be carried forward at incomplete from the prior quarter with a shortage of semiconductors already impacted us.

Company inventory was up 28% of light and down 6% for medium and heavy duty trucks.

Chuck book to Bill in the EU was 187 with light duty trucks at $1 89, and medium and heavy at 183 of which heavy duty trucks. It at $1 73.

Our market share for trucks in Continental Europe was up overall from the third quarter of last year with a light up 270 basis points to 13, 5% and medium and heavy up 10 basis points to 95%.

Liquid natural gas market share for E Bay coal was at 55% and market penetration for LNG trucks remained steady at three 5% with a slowdown expected around the next one to two quarters in light of the considerably high gas prices delaying registration and this compares to about.

3% in 2020 and 2% in 2019.

Order intake in Europe was up almost 70% compared to the third quarter of 2020 with light duty trucks up 60% medium and heavy trucks up 90% order books of light medium and heavy trucks for European truck plants already range from 25 to more than 30 weeks.

<unk> recently announced capacity increases at our plant in Spain and Italy.

After significant supply chain impact in our fourth quarter, we should pick up the delivery pace again as the supply chain situation become less volatile than entering into 2022.

Demand for trucks continues to show substantial industry upside for 2021 versus the prior year.

Why do we have slightly lowered our outlook for Europe, all truck ranges with still show a fan increase on a yield basis due to the combination of consumer confidence and spending industrial activity as the initial grant from the use recovery funds.

We expect the positive momentum to continue into 2022 contingent upon the cadence of the main European economies and the ability of the most critical contributors in our supply chain to manage the recent productivity and keep up with demand.

The EU 27 markets of trucks I expect it to range at 690000 to 740000 for light.

228% to 32000 for medium and 270 to 310000 for heavy duty applications.

We still expect buses to be fairly flat for the year, mainly due to a still substantially depressed tourism and coach sub segments.

Turning to slide 11.

Let's do a quick update on where we stand with the Nikola Tre zero emission trucks as you may have seen our nicolet they could Europe joint venture recently unveiled the production version of the Nikola Tre battery electric a prototype of the Nikola Tre fuel cell electric as well as our production facility in <unk>, Germany, where the product with December.

The actual output by yen is subject to the availability of battery sales continued conductor enabled components at the required scale.

We are very excited that we were able to reach this milestone at record pace and meet the production window, we announced in September 2019.

The global pandemic and supply chain shortages.

Thanks to Iveco has proven expertise and established industrial basis.

We have provided a platform upon which Nicholas technology can fly.

Now our focus is on ensuring the success of this operation in Georgia, taking the lead when it comes to zero emission long in regional haul heavy duty transportation.

I think already offers almost feel truly neutral heavy duty truck technology, when the market heating CMG and LNG powertrain technology of F. P. T industrial is running on renewable biomethane.

Designed and projected at the safe reliable and high performance zero emission U S class eight or European articulate that heavy duty truck, the Nikola Tre and driving change for each sector.

Just on the Iveco S way truck platform with an electric axle co designed and produced by SPT industrial its features Nikola software battery and electric propulsion technology, along with a pronounced competence around the energy and hydrogen refueling ecosystem.

Together the teams have designed the first modular electric class eight platform capable of hosting both fuel cell and purely battery energy supply in the chest is suitable for the U S European and export markets at the later stage by launching the pure battery energy supply. Its first we will drive the maturity of the underlying platform.

Before adding the fuel so there's a range extender in second technology layout.

The first Nikola Tre battery electric models produced in those would be delivered to customers in the United States in 2022, along with the next customers in Europe, who cannot obtain exemptions for on road usage with along the U S. We use base and larger train circles.

Then 2023, we will launch the European version of the Nikola Tre as per our initial announcements in September 2019.

Turning to slide 12, we have now formally announced the post the name for the on highway business as the vehicle group corporate logo logo.

Vehicle group as the holding company of eight unique, but yet unified brands with SPT industrial and Iveco at its center.

Named it embodies the more than 150 year long journey of these industrial businesses have come up from eventually merged in 1975 with the formation of the industrial vehicle cooperation or E vehicle. Please.

Please allow me to highlight once more here.

Our powertrain business unit F. P. T industrial is going to continue and further enhance its offering to off highway customers.

Agriculture, construction marine and power generation I understand that the prior nickname on highway of our Iveco group may have caused confusion around spt's business focus.

Later this month on November 18, we will be hosting a virtual Iveco group Investor day with life screening available C. N. H industrial website. This would be followed immediately by itself tied round table discussion as a non deal roadshow, starting the next day on November 19.

I look forward to welcoming you at this foundation of state you voluntarily.

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

Uh huh.

Thank you right now is like 13 without two three years outside of life.

Top line third quarter net sales of $7 5 billion were up 23% at constant currency with everybody getting improvements across all segments on higher volumes and a 7% price realization.

Our sales went up 30% in agriculture, 34% in construction, 21% and commercial and specialty vehicles and 5% in powertrain.

More importantly, pricing and a higher volume drove an approximate 110 basis point increase gross margin of industrial activities.

On the bottom line Q3, adjusted EBITDA, Vanessa activities almost doubled to $469 million.

The EBIT margin of six 2% due to strong performances across the equipment segments.

I think I saw in the quarter was a cash outflow of $700 million seasonal adverse change in working capital.

And that's the activities in our cash was up seven.

7 billion I think he is a $600 million from the June 30, 2021.

Third quarter adjusted net income was 496 million or <unk> 36 per our adjusted EPS.

The adjusted effective tax rate for the quarter was 30% as a consequence, our bedroom transactional mix and some discrete items.

At the end of Q3, 2021 our available liquidity stood at $15 5 billion down 947 million sequentially.

Turning now to slide 14 would you look at the industrial activities adjusted EBIT by driver in this segment.

Volume and net pricing were once again, the clear drivers for inclusion in the quarter.

The pricing environment continues to be strong and help offset the rising commodity component tree freight and SG&A costs.

Looking at the individual segments.

Q3, 2021, adjusted EBIT was 415 million with adjusted EBIT margin at 11, 6%.

141 million increase was driven by higher volume favorable mix and 9% price realization, partially offset by higher raw material and freight cost as well.

Well as high it is G&A and R&D spend from somewhat constrained levels of the corresponding because of 2020.

Construction's adjusted EBIT increased 45 billion due to the favorable volume and mix and positive price realization, partially upset by higher product cost.

They'd have to raw materials and freight adjusted EBIT was up two 7%.

Commercial and specialty vehicles, adjusted EBIT was $51 million with adjusted EBIT margin of one 8%.

The 58 million increase was also doing well also here driven by higher volume and positive price realization, partially offset by higher raw material costs as well as higher freight and reward costs at our plants due to component shortages.

Our trains adjusted EBIT was $44 million down 60 million compared to Q3 2020.

What about mix positive price realization and lower quality cost in this business were more than offset by unfavorable supply chain cost.

Adjusted EBIT margin was four 6% as a reminder, in July 2021 at 50 ended the delivery of engines to this atlantes group for them to kind of like commercial vehicle. These represent a significant share of third party sales.

If it is gaining orders for newly introduced F. 'twenty eight off highways more engine family that will enter production in 2022.

In summary for the group on the right hand side of this slide gross margin was up across three of the four segments with price realization and increased fixed cost absorption more than offset modern affecting the higher important transportation cost.

Moving now to slide 15, and our financial services business net income was $118 million up $62 million compared to Q2 2020, primarily due to.

Volumes and remains at historically low levels.

Financial service is reorganizing its European operations and getting ready to serve the two groups have been it's been off with independent and dedicated credit and funding.

Next on slide 16, we have the financial position and free cash flow performance of our industrial activities.

Slow industrial activities was negative 728 million, mainly due to seasonal working capital absorption.

As a consequence of our strong ear to the progress and.

And then anticipated challenging fourth quarter, we have chosen to update our guidance as follows.

Four 2021, we now expect net sales of industrial activities to be at the lower end of the previous guidance, which had net sales up between 24% and 28% year over.

Yeah.

Our expectation for SG&A is confirmed equal to or lower than 7.5% of net sales, we anticipate free cash flow of industrial activities to be positive and approximately $1 billion.

And R&D in Capex would be up slightly from the projected 2 billion combined spent for the year.

Lastly, we now estimate them the fourth quarter to be the Peter most impacted by component shortages, why we see some raw material price to stay up for longer and freight costs to diminish in the course of 2022.

This concludes my prepared notes or the financials and I will now turn it over to Scott for his finals remarks. Thanks Sedona.

The next few months are gonna be busy as we marched towards the separation of Iveco group, while we still have much work to do we are confident that this transaction sets of both companies for success and will maximize value for shareholders. We're looking forward to unveiling a new strategic plan for the on road business later, this month and our off road business during the in person capital markets day event.

In late February 222, 22 to be exact which is scheduled to be held in Miami Beach, just prior to a few industrial conferences.

I am motivated by and sincerely appreciative of how our team has rallied to overcome many of the challenges presented by this crazy operating environment.

While supply chain disruptions in elevated input costs are likely to persist in the 2022 are pricing in in markets remain resilient importantly.

Importantly demand has shown no signs of subsiding instead, continuing to grow as customer seek solutions to get back to work more productively.

I wanted to take a moment to wish Garrett all the best in his new role as C. E O of a Echo group. He has done tremendous work and assembled an impressive team over the past few years.

They have carried the business through turbulent in interesting times and gained notable market share in Europe, particularly as the leader of the LNG heavy duty segment.

Darren is a bold vision and the demonstrated skills to lead his team and executing their plans and I look forward to cheering on their success.

Going into the final eight weeks of the year, we're confident our team will find innovative ways to improve the supply chain situation execute the key milestones ahead of us and continue to great create value for all stakeholders.

That concludes our prepared remarks, and we can now open the line for questions. Martin. Please go ahead.

Thank you ladies in 10 minutes, a reminder, at star and one on your telephone if you wish to ask a question.

First question today comes from the line of rock time off near Dallas Police ask a question. Your line is open.

Hi.

A couple of if I may on on technology Uhm.

You mentioned in your prepared remarks.

The demand from from farmer customers an.

[noise] advanced technology.

A lot of drivers out there I mean, there's a replacement cycle there is a.

High commodity prices revenues.

Revenues for them and then there's a technology I wonder if you have any customer surveys that have sort of disaggregated, whether this replacement cycle can really last as a result of all the new capabilities. You guys are delivering and then maybe relatedly I'll stop after this what do you think the biggest opportunities for C and they try are among the various texts dreams you personally. Thank you.

Oh, Thanks, Rob I I will tell you that we've done a tremendous amount of research you know obviously with the as we were evaluating Arabian acquisition understanding what the market look like and you know what we've seen is that the need for greater yield greater productivity and greater sustainability are kind of the key drivers and and we feel like.

You know, we're well positioned today and will be much better position to pursue those autonomy is going to be one of those key.

Productivity enablers and if you think about you know we demonstrated it in foreign progress.

And we believe the applicability, especially in farm cry in the cash crop is going to be quite good for for that type of technology, and our investment in and monarch and that the agreement. We just signed to allow electrification to come in and then the C. Six methane tractor you know, we're really seeing technology.

<unk> as a key competitive advantage and we believe we're putting the building blocks and enable together to be able to deliver on that for our farmers and customers.

And just your thoughts on duration cycling, but maybe it's an unfair question but.

And people continue to upgrade for several years, maybe different from past cycles.

Well again I I think it's really driven by this this productivity pushing me neither of us.

Farmers are not.

They they they can't avoid the labor shortage that the rest of we're seeing in our plants and other places so part of what they're looking for is a way to continue to get.

You know they're harvesting done if there's an example, with with lower labor input and I think that that is going to drive and really the precision what what we're seeing is our ability to dial in if you will precision capability to get you know even greater yield performance is something and I think it's that ability.

City to deliver more for the farmers, it's gonna make the the upgrade cycle continue to last and we don't think we're even close to being able to deliver the best that we can deliver for our our customers. So we certainly believe that especially in the cash crop segment, there's a long long way to go.

With what we can bring with technology.

Very helpful. Thank you.

Thank you. Your next question today comes from the line of entering in Australia Borgen. Please go ahead.

Yeah, Hi, good morning, and hopefully you've learned pretty quickly that farmers spend money when they have money not necessarily because of the ancient the complaint. So I am sure you figured that one out by now.

My question is around.

If we look at U S. In particular and dealers are paid based partially on market chair, which has notoriously through the cycles meant that over order double ordered kind.

Trying to make sure that they have equipment when they need equipment, how do you stop that from happening in this environment in particular, given the backdrop, where a farmer sentiment in the U S has deteriorated.

Rapidly and very strongly because of higher input costs and.

Everything that neither the strength of the dollar versus the reale and productivity in Brazil.

How do you stop just to repeat it the same one normal cycle, where dealers over order because they are paid based on market share.

Well and I think we found a very elegant solution to that problem and that's with components shortages that doesn't allow us to produce nearly as much as our customers need.

We're we're really struggling and this is in customer demand and we're actually differentiating.

How we prioritize prioritize shipments to dealers based on whether they have in in customer there that needs it and you're certainly right that they they buy when they have cash but they also buy when they think taxes are going up so.

We see.

Continued strength, there and I I don't believe I.

We've been asked this question quite often over over the last few months about how much of the demand is real demand and the more we dig into it it really is a lot of.

In customer demand that's driving this so I don't think we're seeing that and that's not just true for US I think it's true for our competitors as well.

Whether it's labor relations issues that are causing it or component issues that are causing it. There is just a an inability of the industry to meet demand for for and customers now not just dealer orders.

For the moment I am sure that is absolutely correct here point and then my my follow up question would be on European component shortages, you know as part of the problem there because it does seem to be exacerbated for C. N H industrial overall.

Is the root cause of that.

His inability to forecast accurately.

And that's.

The inability to get suppliers adequate lead times, and so when you're raising your outlook and raising your forecast suppliers just can't keep up because they have committed their capacity to other is is that the root cause of what's going on because it does seem that C. N H industrial has been impacted more than.

Other competitors in the region. If you could just talk to that that would be great and I look at their thank you.

I would actually counter that point and because I think the worked it.

The dare Nielsen and Tom provide and have done to manage the supply chain deliver the third quarter, which was really a challenging quarter from a supply chain perspective, and I think if you compare our results to others. I think we are delivering actually as well or better from a supply chain perspective than they are the guy down in queue for is.

One particular component supplier that we rely on for too.

To produce our engines and.

It's it's hits worse on our tier five.

Engines than others, but it had zero to do with our inability to guide on a <unk> basis, what our production needs would be it was really a issue with semiconductors that our supplier probably didn't get all of their order requirements in on time and you throw in some COVID-19 shutdowns in Malaysia.

And all of a sudden you've got a allocation from a critical engine component supplier that it's limiting our ability to produce and it's it's that simple and I think if it's happening it's affecting many of the auto suppliers in.

Some of our competitors have different.

Component suppliers, maybe they are less impacted but this is ultimately a semiconductor related issue that's affecting one of our main suppliers.

Okay. That's very helpful. I appreciate the insect great. Thank you all got back in queue.

Thank you. Your next question today comes from the line of Christian over enough Oppenheimer. Please ask a question.

Hi, Thank you for taking my question just to follow up on that last one there and specific to the 18th at you announced in October can you just put a finer point on the financial impact their positive or negative have to imagine. There are also some avoided costs that are related to that.

Yeah, but I I will I would say, it's mostly avoid revs.

Revenue Miss and is having units as we hinted to have any units unfinished at the end of the line.

Which and brinks rewarded cost and other kind of course, so I wouldn't dare some saving associated with that but he's.

My ideal, but one but a cost and by actually missing opportunity of serving customers that I'll need us wishes.

Right about for us.

Okay, and and any finer point that you could put on what what that actual quantify that impact.

See you couldn't read it through our guidance.

And.

And some impact was was a lady in.

In Q3 with the.

With the higher cash absorption in the quarter.

We had you and it's at the end of the line as I said in my in my prepared remarks.

That would've been sold otherwise.

Thank you for that and then as my follow up I did want to ask about the Raven acquisition. Yeah. It has come up several times now at the impact of rising input costs on on sentiment in margins just wanted to to see if you could discuss the influence of dance, having as he looked towards this first.

100 days of integration with Raven and and if there are any specific areas, where you see the opportunity to accelerate some of that development. Thank you.

Yeah, well you know Raven remains an independent company and you can see their results have been quite strong.

Is through the.

Time that we've announced the acquisition so they're they're continuing to see strong demand, they're actually more vertically integrated than we are and that's a competitive advantage for them. So I think they've been a little bit less impacted obviously one of the benefits that we think the merger can provide us are very.

Sophisticated global supply chain ability could could ultimately be an enabler for them to to do faster than to go faster and do a little bit more. So now we are encouraged by that and we believe that obviously, we spent extensive time with Dan Richardson his team, putting together a and agree.

Rest of integration plan and we're quite quite confident that we can get out of the gates are running as soon as that approval comes through and again, we expect that eminently now.

Thank you. Your next question today comes from the line of Martino down brought you peace ask a question.

Thank you good morning, good afternoon everybody.

My focus is on prices.

First.

One of your competitors in agricultural business mentioned, this euro plus five going fine and the similar.

Spectation for price increase next year.

So first are you align with these Ah view first second are you able to fully offset input costs through price hikes in each and every division.

And third always on prices and your last call you mentioned no problem and implementing price hikes in North America.

More difficult elsewhere has it changed or more or less the same picture.

So I would say the numbers you mentioned that as a price increase from from from a pier.

Roughly in line, if not a bit lower than the numbers that we have been seeing over the last few quarters.

And we.

Have we count on being able to have.

14 at the price increase price.

Realization also next year.

On the back of what we've built this year.

With say, they're not prepared remarks that in the fourth quarter.

We expect to have.

Fries not fully cover ink or.

Barely covering the cost.

Cost impact.

All.

Of the policy cost increase in cost inflation and fate that we're seeing right now.

We expect cost inflation to be here next year as well, we estate who aspect freight cost.

Fleet to diminish towards the end of next year.

In terms of pricing.

We continue be able to price.

We have been pricing strongly in North America, but also in South America.

And and also in Europe.

Kress product category.

Being able to price.

Okay. Thank you and the second question is on the profitability the normalized profitability of the powertrain division like going forward.

And if you can just to remind us what these be captive business the percentage of business today following the loss of to cut off there.

Yeah. So in the quarter I think was 37% the captive business percentage, which is lower than what we started really had.

<unk> is a component but also also of course, we had.

Higher demand from the captive segments.

And.

And we had somehow lower demand from.

A large Chinese customer.

To which we delivered engine seat in China.

The.

So we expect the impact of Lucado is which by the way accounts in the non captive after the business of course.

<unk> is stronger in the last couple of quarters.

Because we have less production unless deliveries.

Coming out of it.

We'll recover part of this production with the wedge it's being introduced habit.

Preparing mikes.

So that would basically be a ramp up of new engines coming out.

With new customers.

So the profitability recorded in the last two quarters.

<unk> so it should be back.

Back to the.

Usual or in the past few years.

Is is definitely the past two quarter are the most affected by these impact of a changeover from one customer with any historical production to new customer and the new engine.

But consider that SPD was also heavily affected by component shortages and more importantly to buy freight cost.

And that is something that we have been seeing started in the second quarter.

Very strong, but also the third Florida.

Okay. Thank you Donna.

You're welcome.

Thank you. Your next question today come from the line of payments were also if ever call. Yes. Please go ahead. Your lungs open hi, Thank you a little bit more of a near term question, the fourth quarter sales or implied down call at 10% to 12% can you help us a bit between the segments, where do you expect to be saving down more than.

That in less than that company average just for a baseline and then I had a follow up.

Well and and let's as you probably.

Understood from our prepared remarks, what if there was a decrease in sales it's going to be because we have component issues, preventing our ability to ship and that is really what's driving everything right. Now is is our ability to get products out the door.

So it's really dependent upon which types of chips and components, we can get in and which products. We can ship, but don't even want to add any specific color yeah, well first of all consumers last year fourth quarter share sales were particularly high.

Salt.

Padgett comparison will also be more difficult.

Where we are spect to be.

If you want to beat them more is in the commotion specialty vehicles and into politics business.

Okay and any help you can provide it all on how to think about decremental margins on those sales declines just giving you mentioned the price costs gets a little more challenging.

I'm sure. We're just trying to level set here a little bit how to how to think about it I mean, I know it's unique situation once it with the supply chain, but.

I'm trying to get some right.

I would consider it I mean, it looking at the fourth quarter alone.

I will consider that will.

Deals.

Slightly the the incremental margin that we have seen so far on those two segments.

But I wouldn't I wouldn't say it.

Take dent.

Okay, and then lastly, usually you come out of the fourth quarter and you're down.

Call, it 20% or so sequentially on sales sequentially.

Sequentially, but given the setup with the fourth quarter and what you know about the supply chain should we expect the first quarter to them and.

Abnormally.

Grow off the fourth quarter I'm, just trying to level set really it's all wrapped in the idea of how difficult. It is the fourth quarter, how much you've taken the pain by taking these extra shutdowns. So then we can start the year maybe not.

Not the traditional decline actually may be flat to up to start the year sequentially. Thank you yeah, I mean, we want to like.

Do everything we possibly can to avoid giving you any kind of guidance on 2022, but you know David you're exactly right.

The impact that we're seeing andoni referred to in his prepared remarks, we're going to end the year with with some vehicles built that just need a component and we put those in and we will have the opportunity to.

The ship in Q1, so it could be a better Q1 because of that and we've seen it. It really is largely dependent upon how much progress. We can make I mean, obviously this is the day to day and it it's hand to hand combat with a supplier trying to make sure we get our proper allocation and we're looking at everything we possibly can to increase.

Outputs and we've seen it improve thus far throughout the quarter.

And we'll just have to continue to manage it but that's gonna be the limiting factor on Q1 shipments is how much we can manage that situation again, it's been encouraging the progress of the teams made currently but that's the challenge we're looking for but the setup looks good right now to to do a little bit better than Q1 than we would normally do.

Alright, Thank you very much I appreciate it.

Thank you. Your next question today comes from the line of Cup really come borough of of Bunk Arkose. Please go ahead.

Yes. Thank you very good morning. My question is on your free cash flow guidance for 2021.

What kind of working capital assumption are you making.

Supporting these these guidance please.

Well the fourth quarter is typically a very favourable quarter for working capital.

On the.

We have both our guidance.

Slightly from what we had in the last quarter again, four days issue of having what we call fleet, which is complete vehicles.

Produced but not completed and not able to be sold so.

That's the challenge that we see 40.

For the fourth quarter.

Free cash flow.

Hi, everyone.

Higher manufacturing inventories.

Compared to what we would have an idea.

An ideal situation.

Okay.

To have an idea of what pieces.

The magnitude of these this item I mean, uncomplete vehicles laying on the time.

We have we have a few thousand of them.

At the end of September.

Will will complete them in the quarter, we expect to have a similar amount at the end of the fourth quarter.

As we have new production coming in and being incomplete.

Okay. Thank you very much.

And last question.

No that'll be cool I understood you sold.

50%.

These Chinese joint venture.

Yes, I remember you had a 50%.

Sure will veto any let's say in a comment on this will be interesting.

Getting you want to take it or anything.

[noise] no kidding.

Correct with.

31% of our 50% share in Nanjing, if it could not vehicle.

And and the share of 99% that allows us to keep this on a balance sheet.

How about you and do not consolidate the furniture.

Under the monthly or quarterly basis.

Okay. Thanks.

Thank you and we make take now or final question of today, which comes from the line of Ross you locked your bank of America. Please go ahead.

Oh, Thanks, guys for squeezing me and [laughter].

This isn't the 22 question. This is just.

A higher level question, but you earn $1.10 and three quarters I mean, if you ignore the production issues in the fourth quarter for a second and just annualize that figure began a journey.

Close to a Buck 50. This year you an order book has doubled your truck book the Bill is 187 I.

I mean, given all of that is there any reason why C and H as it exists today pre spend wouldn't have at least $2 of earnings power at some point in the cycle.

I mean, that's a lot of ifs in there [laughter].

But no no we certainly see that in our future. There's no doubt about that we have the ability to do that.

But you know the the.

The supply chain is really the limiting factor right now and you know this is a cycle. We're in you know obviously, we're benefiting from the upcycle now we don't think it will last forever.

And we're going to prepare for when things aren't as good and make sure. We're we're able to deal with that but no I think the the ability of the team to to navigate the difficult supply chain ramp up production meet customer demand is quite impressive as as the ability to seek price and I think that.

The more we provide innovative solutions to customers. The more we can price and I think we're going to continue to try to deliver on those type of solution. So you know I don't think there's a clear.

Straight line to two Bucks, but I think it's certainly achievable.

As we continue to work, but you know obviously, it's that's it the.

Not at the bottom of the cycle, but probably mid to the higher part of the cycle.

Gotcha, and then when when do we get this the actor foremost with terms and more data more more detail on the the capital structure for both sides of the of.

The business and then just just just lastly, maybe this is for a Donnie Griffin co revenue of 13 at 1.337, and net income 308 million year to date can you give us any just very very rough split between on and off highway.

Yes, salt two questions once we'll issue the prospectus for the spinoff in a common works.

And there there will be.

Quite good visibility about the balance sheets split.

The.

On the top of the financial service.

I would assume one quarter.

Of the profit.

Some of the debt income can be considered.

To be moved to the on highway business after Spain.

One quarter goes to Iowa, Okay.

Right goes.

Goes to on hiring right, we make a little.

Yep Gotcha.

Yeah. Thank you.

You know like.

Thank you that does conclude a conference for today, ladies and gentlemen, Thank you for attending today's call with us have a great evening and three.

[music].

Good morning, and good afternoon, everyone. We would like to welcome you to the webcast and conference call for <unk> third quarter 2021 results for the period ending September 30 at this call is being broadcast live on our website and is copyrighted by <unk>.

Any other use recording or transmission of any portion of this broadcast without the expressed written consent, obviously an agent that is <unk>.

64 billion.

Hosting todays call are teenage industrial it feels Scott wine CFO, Bonnie Zhang and get it not precedented commercial and specialty vehicles, and CA and seal designated for Iveco group. They will use the material available for download from the <unk> industrial website.

Additional information pertaining to factors that could cause actual results to differ materially is contained and the company. Most recent report 20-F, and <unk> report as well as other periodic reports and filings with the U S Securities and Exchange Commission and Cleveland and tell you what it is in the Netherlands and Italy.

The company presentation may include certain non-GAAP financial measures additional information, including reconciliation to the most directly comparable GAAP financial measures is included in the presentation material. One final remark once again, our Tam while our team is connecting from different countries. So please forgive us if there are moments of silence during the call while we manage the company.

Patients between the speakers I will now turn the call over to Scott.

Thanks, Federico and welcome to all of you joining our call.

Finalizing steps to prepare for the spin of a tobacco group working to close two strategic acquisitions and reorganizing the company I'm extremely proud of our team for putting our customers and dealers first and finding a way to deliver for them and us in spite of the deteriorate deteriorating supply chain situation.

In preparation for what will be two separate calls next year I'll be handing off to Gary for the on highway update today and will return after a donate financial review with my closing remarks.

The AG machinery industry remained strong as farmers seek to replace aging fleets with more advanced precision AG equipment that generates higher yields and reduces inputs resulted Lee our AG order book more than doubled year over year for both tractors and combines.

This was driven by healthy demand across all regions, particularly North America, where our high horsepower order book almost quadrupled for tractors and tripled for combines.

Overall, our AG and CE segments performed quite well in this volatile global operating environment that combined supply chain related production constraints with rising input costs for our farmers and builders.

From a company retail perspective vigorous demand persisted for combine harvesters with third quarter industry deliveries up approximately 30% across all markets versus the same quarter last year.

I worked for high horsepower tractor sales were bolstered by a similar 30% crease in North America with moderate to flat growth in other geographies.

Given our existing order backlog, which now extends significantly into 2022, our agriculture segment should continue to perform well.

Construction equipment retail cadence was somewhat mixed with light slightly down sequentially due to low product availability, while heavily heavy was less affected in.

In fact global supply chain constraints caused us to underproduce retail worldwide by 8% with company inventory down 33% versus the third quarter of last year.

Our order books are almost three X year over year for the segment with growth in all regions, demonstrating the strength of our dealers' brands and equipment.

We expect AG industry demand to generally remained strong across all regions farmer sentiment remains positive due to rising commodity prices and farm incomes as well as continued Chinese soybean and Gordon van However, the record high sentiment we had earlier in the year has been slightly muted by higher input cost inflation.

<unk> localized drought situations and limited equipment availability.

For construction equipment industry demand continues to recover with heavy equipment, increasing its contribution to the up cycle.

Optimism from contractors alongside a strong housing market in the U S is driving sales and order books across the segment.

In late June we announced our plan to acquire Raven industries, which represents a major move in our journey that jumped the curve towards industry leadership in precision AG and autonomy.

Working in concert with Raven, we will expedite growth and provide customers with the integrated solutions they require for more efficient and sustainable farming.

During the quarter, we also shored up key aspects of our construction equipment strategy with the announced purchase of sand Purion M life.

Likewise expected to close in Q4, this acquisition will boast bolster our development capabilities for excavator technology and alternative power systems. It will also integrate euro co Mac mini and mini excavators into our existing CE portfolio alongside our current third party OEM partners. Furthermore, it confirms our commitment to invest in.

Profitably grow the construction equipment business better positioning us in a high demand light excavator market.

But also delivers a superior working experience with the brand new Horizon Ultra Cabot next generation intelligence features and a related note just last week its sister product. The T. Six methane powered tractor was awarded sustainable tractor of the year at EMA in Bologna, Italy.

From our leading compressed and liquefied natural gas technology pioneered by F. P T industrial and Iveco for on road and heavy duty transport.

New Holland also launched the new speed ROE or plus series wind rowers redesigned from the ground up to provide more productivity precision and power than previous models to make new hauling hay and forge farmers more efficient and profitable.

The new case, IH Optum tractor a strong seller since 2015 introduction it has been reengineered to create the new optimum <unk> connect range with a new cabin interior connectivity package designed to benefit both our operator and owners.

The new cab offers more space lower noise levels and improve vision combined with <unk>.

<unk> guide and accurate turn pro the tractor eliminates the need to steer and the open field and allows the year over year repeatable accuracy to sub inch level savings farmers fuel labor fertilizer and more.

Our E F S soil command tillage prescription technology enables farmers to very tillage settings based on their changing soil types field conditions conservation practices and topography.

Last or two products from case construction, firstly, all new television six 'twenty be the largest and most powerful compact track loader ever built.

114 horsepower 6200 pound rated operating capacity C. T. L delivers best in class breakout forces as well as many other standard features including a one year subscription to case site watch telematics.

Second as tobacco loader S V series, the highest performing most productive fuel efficient reliable backhaul loader available. The SBC S. D series features a new expanded cab with enhanced controls and the new FPP stage five engine it delivers greater operator comfort increased productivity reduced emissions and lower.

Total cost of ownership all supported by case service solutions.

Our technology strategy is centered around our customers empowering them with innovative products and solutions across the industries we serve.

We are focused on three vital areas of technology connected ecosystem alternative alternative propulsion and autonomy.

With the connected ecosystem, we have created an F. L. A F. S. P. A L M connect solution with sufficient breadth to solve complicated problems across a diverse range of equipment the.

The next phase of expansion will offer seamless and simple workflows that deliver frictionless customer experience across various networks and brands of equipment.

Our investment in alternative energy began over 15 years ago and has generated numerous product and awards. The most recent being the aforementioned new Holland six methane tractor together with.

Sustainable power partners like Benjamin F. P T and others, we are paving the way to create true circular and energy independent farms.

Additionally, we are accelerating our efforts to deploy electric tractors through our partnership with monarch tractor a silicon valley startup.

Under this license agreement, we will enhance our electrification capabilities by emerging monarch advanced E beam technology with our industry leading iron.

Coupled with our extensive in house capabilities. This partnership will enable us to rapidly sequence and launch new advanced technology electrified platforms.

Lastly, we aim to leverage our vast experience in automation to drive the industry from one touch automation to fully autonomous.

Through the acquisition of Raven, we intend to generate significant value for customers by increasing the level of automated functionality on our products.

I have spent time with the Raven team as part of the integration activities and I'm excited about the opportunities. We are about to unlock a perfect example is the omni drive solution presented at farm progress representing one of the many innovative solutions, we plan to roll out in the next few quarters.

Digital AG products, such as these are already delivering significant value for our customers exemplified by sales of precision AG technology growing 37% for the first nine months of the year.

I'll now hand over to Gary to take you through the on road highlights.

Okay.

Thank you Scott and good morning, and afternoon also from my side to all participants to this call.

On slide nine now the European truck industry was down 6% year over year in the third quarter due to widespread supplier shortages and delays in recovering incomplete vehicles.

Light duty trucks were down 11% with a lower weight on Kemper registrations and supplier shortages, causing production losses.

Partially offset by strong market demand boosted by the recovery funds and COVID-19 support plans.

Really speaking registrations in a strong market, we're significantly constrained by various Oems the ability to get product out of the plants in a timely manner, thereby accumulating very low order backs.

The over three and a half turn South American truck market increased by 34% compared to Q3 2020 due to economy economic recovery, mostly in Brazil, following the rebound from the Covid slowdown.

The European bus market saw a slight uptick in the quarter driven by postpone them and commuting increases and transportation authorities, adding back capacity in the CDN industry segment.

The market demand for long distance coaches remains very low despite the minor improvement, we still see bus registrations flat to slightly up for the year as tourism Hasnt restarted at full pace in most market.

For trucks.

The produce retail sales worldwide by 6% in the third quarter predominantly due to supply chain constraints.

Light duty trucks, underproduce retail by 12%, while medium and heavy duty trucks will go produced retail by 6% for the third quarter supported by completing vehicles, we carried forward as incomplete from the prior quarter with a shortage of semiconductors already impacted us.

Company inventory was up 28% in light and down 6% for medium and heavy duty trucks.

Chuck book to Bill in the EU was 187 with light duty trucks at 189, and medium and heavy at 183 of which heavy duty trucks. It at $1 73.

Our market share for trucks in Continental Europe was up overall for the third quarter of last year with a light up 270 basis points to 13, 5%.

In medium and heavy up 10 basis points to 95%.

Liquefied natural gas market share for E Bay coal was at 55% and market penetration for LNG trucks remained steady at three 5% with a slowdown expected around the next one to two quarters in light of the considerably high gas prices delaying registration and this compares to about.

<unk>, 3% in 2020 and 2% in 2019.

<unk> recently announced capacity increases at our plant in Spain and Italy.

The significant supply chain impact in our fourth quarter, we should pick up the delivery pace again as the supply chain situation becomes less volatile than entering into 2022.

Demand for trucks continues to show substantial industry upside for 2021 versus the prior year.

While we have slightly lowered our outlook for Europe, all truck ranges would still show a fair increase on a year over year basis due to the combination of consumer confidence and spending industrial activity as the initial grant from the EU recovery funds.

We expect the positive momentum to continue into 2022 contingent upon the paydown of the main European economies and the ability of the most critical contributors in our supply chain to manage the recent volatility and keep up with demand.

The EU 27 markets of trucks I expect it to range at 690000 to 740000 for light.

So 28 to 32000 and for medium and 270 to 310000 for heavy duty applications.

We still expect buses to be fairly flat for the year, mainly due to a steel substantially depressed tourism and coach sub segments.

Turning to slide 11.

Let's do a quick update on where we stand with the Nikola Tre zero emission trucks as you may have seen our nikolay.

Joint venture recently unveiled the production version of the Nikola Tre battery electric a prototype of the Nikola fuel cell electric as well as our production facility in <unk>, Germany with a product with December.

Actual output by yen is subject to the availability of battery sales continue conductor enabled components at the required scale.

We are very excited.

We're able to reach that milestone at record pace and meet the production window, we announced in September 2019, despite the global pandemic and supply chain shortages.

Thanks to Iveco proven expertise and established industrial basis.

We have provided the platform upon which Nikola technology can fly.

Now our focus is on ensuring the success of this operation and jointly taking the lead when it comes to zero emission lull in regional haul heavy duty transportation.

You think already offers almost feel to neutral in heavy duty truck technology, when the market, leading <unk> and LNG powertrain technology of SPT industrial is running on renewable biomethane.

Designed and projected at the safe reliable and high performance zero emission U S class eight or European articulate that heavy duty truck.

The Nikola Tre and driving change for its sector.

Based on the Iveco S way truck platform with an electric axle co designed and produced by SPT Industrial It featured Nikola software battery and electric propulsion technology, along with a pronounced competence around the energy and hydrogen refueling ecosystem.

The teams have designed the first modular electric clubs a platform capable of hosting both fuel cell and purely battery energy supply and the chassis suitable for the U S European and export markets at a later stage.

Launching the pure battery energy supply its first we will drive the maturity of the underlying platform before adding the fuel cell is a range extender in second technology layout.

The first Nikola Tre battery electric models.

Produced in all of them will be delivered to customers in the United States in 2022, along with select customers in Europe, who cannot obtain exemptions for on road usage with a longer U S weird base and larger train circles.

They've been in 2023, we will launch the European versions of the Nikola Tre as per our initial announcements in September 2019.

Turning to slide 12, we have now formally announced that post the name for the on highway business as the vehicle group.

Corporate logo logo depicts Iveco group as the holding company of eight unique but yet unified brands with SPT industrial and Iveco at the center.

And named it embodies the more than 150 year long journey of these industrial businesses have come up from eventually merged in 1975 with the formation of the industrial vehicle cooperation or E vehicle.

Please allow me to highlight once more here with our powertrain business unit F. P. T. Industrial is going to continue and further enhance its offering to off highway customers.

Agriculture, construction marine and power generation I understand that the prior nickname on high rate of our Iveco group may have caused confusion around spt's business focus.

Later this month on November 18, we will be hosting a virtual Iveco group Investor day with live streaming available from B C and H industrial website. This will be followed immediately by a sell side round table discussion as a non deal roadshow, starting the next day on November 19.

I look forward to welcoming you at this foundation stage of voluntary.

I will now turn the call over to Donna to Teva.

Schools some of the key financial details.

Uh huh.

Thank you right now is like 13 without two three units outside of life.

Top line third quarter net sales of $7 5 billion were up 23% at constant currency with the ever going to get improvements across all segments on higher volumes and 7% price realization.

Our sales went up 30% in agriculture, 34% in construction, 21% and commercial and specialty vehicles and 5% in powertrain.

More importantly, pricing and a higher volume drove an approximate 110 basis point increase gross margin of industrial activities.

On the bottom line Q3, adjusted EBITDA went nuts activities almost doubled to $469 million.

The EBIT margin of six 2% due to strong performances across the equipment segments.

I think I saw in the quarter was a cash outflow of $700 million of seasonal adverse change in working capital.

And that's your activities in that cash was up seven.

7 billion I think he is a $600 million from the June 30, 2021.

Third quarter adjusted net income was 496 million or <unk> 36 per adjusted EPS.

The adjusted effective tax rate for the quarter was 30% as a consequence of better transactional mix and some discrete items.

At the end of Q3, 2021 our available liquidity stood at $15 5 billion down 947 million sequentially.

So they now are those like for keen with the usual look at the industrial activities adjusted EBIT by driver in this segment.

Volume and net pricing were once again, the clear drivers for the increase in the quarter.

The pricing environment continues to be strong and help offset the rising commodity.

Componentry freight and SG&A costs.

Looking at the individual segments Agriculture, Q3, 2021 of adjusted EBIT was 415 million with adjusted EBIT margin at 11, 6%.

141 million increase was driven by higher volume favorable mix and 9% price realization, partially offset by higher raw material and freight cost as well as higher G&A and R&D spend from somewhat constrained levels of the corresponding period of 2020.

Construction of the adjusted EBIT increased $45 million due to the favorable volume and mix and positive price realization, partially upset by higher product cost.

Related to raw materials and freight adjusted EBIT was up two 7%.

Commercial and specialty vehicles, adjusted EBIT was $51 million with adjusted EBIT margin of one 8% and.

58 million increase was also doing well also here driven by higher volume and positive price realization, partially offset by higher raw materials cost as well as higher freight and reward costs at our plants due to component shortages.

Our trains adjusted EBIT was $44 million down $60 million compared to Q3, 2020 favorable mix positive price realization and lower quality cost in this business were more than offset by unfavorable supply chain cost.

Adjusted EBIT margin was four 6%.

A reminder, in July 2021 at <unk> and the delivery of engines to this Atlantis group for them to kind of like commercial vehicle use represented a significant share of third party sales.

It is gaining orders for newly introduced F. 'twenty eight all filings more engine family that will enter production in 2022.

In summary for the group on the right hand side of this slide gross margin was up across three of the four segments with price realization increased fixed cost absorption more than offset modest affecting the higher input and transportation cost.

Moving now to slide 15, and our financial services business net income here was 118 million up $62 million compared to Q3 2020, primarily due to.

Volumes have remained at historically low.

<unk>.

And that can service is reorganizing its European operations and getting ready to serve the two groups have been it's been off with independent and dedicated credit and funding.

Next on slide 16, we have the financial position and free cash flow performance of our industrial activities.

Hello, industrial activities was negative 728 million, mainly due to seasonal working capital absorption.

The slowdown in production in many facilities due to supply chain shortages as electronics unique situation. What is the reason locked her that same trade payables from June 32021.

Well, a temporary increase in fleet inventories in our plants.

This is largely equipment waiting for missing parts before being shifting towards dealers and customers.

And based on current visibility for the overall production schedules, we expect to have an elevated level of leading banks in the fourth quarter, as well, which will likely sell through in early 2022.

Total debt was $22 7 billion at September 30, and industrial activities net cash position was zero point 17.

Liquidity remained strong at $13 5 billion and it is worth noting that the consideration for the acquisition of Raven industries will be fully paid out.

<unk> cash at the closing of the transaction expected in Q4.

Okay.

The company expects solid demand to continue across all relevant regions and segments and the last part of the year unstable and unpredictable component availability increase the impact of raw material and continued freight and logistics costs will be partially offset by positive price realization.

As a consequence of our strong year to date progress.

And then anticipate a challenging fourth quarter, we have chosen to update our guidance as follows.

For 2020, one we now expect net sales of industrial activities to be at the lower end of the previous guidance, which had net sales up between 24% and 28%.

Year over year.

Our expectation for SG&A is confirmed equal to or lower than seven 5% of net sales, we anticipate free cash flow of industrial activities to be positive at approximately $1 billion.

In R&D and Capex would be up slightly from the projected 2 billion from minus spend for the year.

Lastly, we now estimate in the fourth quarter to be the Peter most impacted by component shortages, while we see some raw material price to stay up for longer and freight costs to diminish in the course of 2022.

This concludes my prepared notes of the financials and I will now turn it over to Scott for his final remarks, thanks to donate.

The next few months are going to be busy as we march towards the separation of Iveco group, while we still have much work to do we are confident that this transaction sets of both companies for success and will maximize value for shareholders. We are looking forward to unveiling our new strategic plan for the on road business later, this month and our off road business during the in person capital markets day event.

In late February to 'twenty to 'twenty two to be exact which is scheduled to be held in Miami Beach, just prior to a few industrial conferences.

I am motivated by and sincerely appreciative of how our team has rallied to overcome many of the challenges presented by this crazy operating environment.

While supply chain disruptions and elevated input costs are likely to persist into 2022, our pricing and end markets remained resilient importantly.

Importantly demand has shown no signs of the subsiding instead, continuing to grow as customers seek solutions to get back to work more productively.

I want to take a moment to wish Gerry all the best in his new role as CEO of Iveco group. He has done tremendous work and assembled an impressive team over the past few years.

They have carried the business through turbulent and interesting times and gained notable market share in Europe, particularly as the leader of the LNG heavy duty segment.

<unk> has a bold vision and the demonstrated skills to lead his team in executing their plans and I look forward to cheering on their success.

Going into the final eight weeks of the year, we are confident our team will find innovative ways to improve the supply chain situation execute the key milestones ahead of us and continue the great create value for all stakeholders.

That concludes our prepared remarks, and we can now open the line for questions. Martin. Please go ahead.

Thank you, ladies and 10 minutes a reminder, its star and one on your telephone if you wish to ask a question.

Your first question today comes from the line of wrong time off mirrored yours. Please ask your question. Your line is open.

Hi.

A couple if I may on on technology.

You mentioned in your prepared remarks.

The demand from from farmer customers on.

Advanced technology.

A lot of drivers out there I mean, there's a replacement cycle there is a.

High commodity prices.

It is for them and then there's a technology I wonder if you have any customer surveys that have sort of a disaggregated whether in this replacement cycle can really last as a result of all the new capabilities. You guys are delivering and then maybe relatedly and I'll stop after this what do you think the biggest opportunities for CNA dry are among the various tax dreams, you're pursuing thank you.

Oh, Thanks, Rob I will tell you that we've done a tremendous amount of research you know obviously with the as we were evaluating the Raven acquisition understanding what the market.

Looked like and you know what we've seen is that the need for greater yield greater productivity and greater sustainability or kind of the key drivers and we feel like we're well positioned today and will be much better positioned to pursue those you know autonomy is going to be one of those key.

Hum.

Productivity enablers and if you think about we demonstrated it at farm progress.

And we believe the applicability, especially in farm and the cash crop is going to be quite good for that type of technology and our investment in in monarch and that the agreement. We just signed to allow electrification to come in in the T. Six methane tractor you know, we're really seeing technology.

As a key competitive advantage and we believe you know, we're putting the building blocks and enable us together to be able to deliver on that for our farmers and customers.

Sure.

And just your thoughts on duration of cycle, maybe it's an unfair question, but hum and people continuing to upgrade for several years, maybe different from past cycles.

Well again, I think it's really driven by this this productivity push I mean, you know theres the farmers are not.

They they they can't avoid the labor shortages that the rest of you know we're seeing in our plants and other places so part of what they're looking for is a way to continue to get their.

<unk> done it as an example, with with lower labor input and I think that that is going to drive.

And really the precision what what we're seeing is our ability to dial in if you will precision capability to give you even greater yield performance is something and I think it's it's that ability to deliver more for the farmers, it's going to make the the upgrade cycle continue to last and we don't think we're even close to being able to do.

Liver the best that we can deliver for our customers. So we certainly believe that you know, especially in the cash crop segment Theres, a long long way to go.

You know with what we can bring with technology.

Very helpful. Thank you.

Thank you. Your next question today comes from the line of Andrew or Trey people again. Please go ahead.

Yeah, Hi, good morning, and hopefully you've learned pretty quickly that farmers spend money when they have money not necessarily because of the ancient the fleet. So I'm sure you figured that one out by now.

My question is around you know if we look at U S. In particular and dealers are paid based partially on market share.

Which is notoriously through the cycle meant that they've over ordered double ordered.

Trying to make sure that they have equipment when they need equipment, how do you stop that from happening in this environment and in particular, given the backdrop, where a farmer sentiment in the U S has deteriorated.

Rapidly and very strongly because of higher input costs and.

Everything that neither.

The strength of the dollar versus the reality and productivity in Brazil, How do you stop just a repeat of the same old normal cycle, where dealers over order because they're paid based on market share.

Well and I think we've found a very elegant solution to that problem and that's with component shortages. It doesn't allow us to produce nearly as much as our customers need.

Where were really struggling and this is end customer demand and we're actually differentiating.

How we prioritize prioritize shipments to dealers based on whether they have an end customer there that needs it and you're certainly right that they they buy when they have cash but they also buy when they think taxes are going up so we see.

Continued strength, there and I don't believe we've we've been asked this question.

Quite often over over the last few months about how much of the demand is real demand and you know the more we dig into it. It really is a lot of in customer demand. That's driving this so I don't think we're seeing that and that's not just true for US I think it's true for our competitors as well.

Well you know, whether it's you know labor relations issues that are causing it or component issues that are causing it. There is just a and inability of the industry to meet demand for for end customers now not just dealer orders.

For the moment I'm sure that is absolutely correct to your point and then my follow up question would be on European component shortages.

You know as part of the problem there because it does seem to be exacerbated for CNA to industrial overall is the root cause of that the business is inability to forecast accurately and that's you know the inability to get suppliers adequate lead times and so when you're raising your outlook and raising your forecast.

Suppliers, just can't keep up because they've committed their capacity to others. It is that the root cause of what's going on because it does seem that CNA to industrial has been impacted more than others.

Other competitors in the region. If you could just talk to that that would be great and I'll leave it there. Thank you.

I would actually counter that point and because I think the work that you know the Derrick Nielsen and Tom providing they've done to manage the supply chain deliver the third quarter, which was really a challenging quarter from a supply chain perspective, and I think if you compare our results to others I think we are delivering actually as we.

Well or better from a supply chain perspective than they are the guide down in Q4 is one particular component supplier that we rely on for you know to produce our engines and.

It's it's it's worse on our tier five.

Engines than others, but it had zero to do with our inability to guide on a site basis, what our production needs would be it was really a issue with semiconductors that are supplier probably didn't get all of their order requirements in on time and you throw in some COVID-19 shutdowns in Malaysia and.

All of a sudden you've got a allocation from our critical engine component supplier that is limiting our ability to produce and it's it's that simple and I think if it's happening it's affecting many of the auto suppliers and.

If some of our competitors have different.

Component suppliers, maybe theyre less impacted but you know this is a ultimately a semiconductor related issue that's affecting one of our main suppliers.

Okay. That's very helpful. I appreciate the insight great. Thank you I'll get back in queue.

Thank you. Your next question today comes from the line of Christian <unk> of Oppenheimer. Please ask a question.

Hi, Thank you for taking the question just a follow up on that last one there and specific two to eight days that you announced in October can you just put a finer point on the financial impact there positive or negative I have to imagine there are also some avoided costs that are related to that.

Yeah, but I will I would say, it's mostly about.

Revenue in Mis and is having units as we hinted to having units and finish at the end of the line.

Which then brink's reward cost and other kind of cost so I wouldn't dare some savings associated with that that is.

<unk> deal, but one bite at cost and by actually the missing opportunity of serving those customers that'll Ddos wishes.

Right a lot for us.

Okay, and and any finer point that you could put on what what that actual quantify that impact.

Okay.

I think you can read it through our guidance.

And and some impact was was a lady in.

In Q3 with the.

Where the higher cash absorption in the quarter.

We had units at the end of the line as I as I said in my in my prepared remarks.

That would've been sold otherwise.

Thank you for that and then as my follow up I did want to ask about the Raven acquisition. Yeah. It has come up several times now at the impact of rising input costs on on sentiment and margins.

Just wanted to to see if you could discuss the influence that that's having as you look towards this first hundred days of integration with Raven and and if there are any specific areas, where you see the opportunity to accelerate some of that development. Thank you.

Yeah, well you know you know Raven remains an independent company and you can see their results have been quite strong.

Through the the time that we've announced the acquisition. So theres there continuing to see strong demand there are actually more vertically integrated than we are and that's a competitive advantage for them. So I think they've been a little bit less impacted down obviously one of the benefits that we think the merger can provide is are very sophisticated.

<unk> global supply chain ability could could ultimately be an enabler for them to do faster and to go faster and do a little bit more. So now we're encouraged by that and we believe that you know obviously, we spent extensive time with Dan Richardson and his team putting together an aggressive integration.

Ration plan and we're quite quite confident that we can can get out of the gates are running as soon as that approval comes through and again, we expect that eminently now.

Thank you. Your next question today comes from the line of Martino de <unk> of <unk>. Please.

Please ask your question.

Thank you good morning, good afternoon everybody.

My focus is on prices.

First the.

One of your competitors in agricultural business.

Mentioned this euro plus five going fine in the similar expectation for price increase next year.

So first are you aligned with these view first the second are you able to fully offset input costs through price hikes in each and every division.

And third.

Wisdom on prices in your last call you mentioned no problem and implementing a price hikes in North America.

More difficult elsewhere is.

Has it changed or more or less the same picture.

Yes.

So I would say the numbers you mentioned there was a price increase from from from a peer.

Are roughly in line, if not a bit lower than the numbers that we have been seeing over the last few quarters.

And we have we count on being able to have.

Latina with price increase price.

Realization also next year.

On the back of what we've built these year.

We said in our prepared remarks that in the fourth quarter.

We expect to have a price not fully cover Inc, or <unk>.

Barely covering the cost.

Cost impact.

All.

All deposit cost to increase in cost inflation and freight that we're seeing right now.

We expect cost inflation to be there next year as well we have space, we expect freight cost.

Our fleet to diminish at towards the end of next year.

In terms of pricing.

We continue be able to price.

We have been pricing strongly in North America, but also in South America, and and also in Europe.

The other category.

Being able to price.

Okay. Thank you.

The second question is on the profitability to normalized profitability of the powertrain Division.

Going forward.

And if you can just remind us what these be captive business the percentage of captive business today following the loss of two cut off there.

Yeah. So in the quarter I think was around 37% the captive business percentage, which is lower than what we historically had two.

<unk> is a component but also of course, we had.

Higher demand from the captive segments.

And.

And we had somehow lower demand from them.

A large Chinese customer.

To which we deliver engine seat.

In China.

The.

So we expect the impact of the Ocado is which by the way accounts in the non captive business of course.

Is stronger and in in the last couple of quarters.

Because we have less production unless deliveries.

And out of it.

We will recover part of this production with the wedge, it's being introduced as well I have the mic.

Our prepared remarks.

So that will basically be a ramp up of new engines coming out.

With new customers.

So the profitability recorded in the last two quarters.

Meaningful so should be.

Back to the usual CV ours.

Is is definitely the past two quarters are the most affected by this impact of a changeover right from one customer within historical production to new customer and the new engine.

But consider that SPD was also heavily affected by component shortages and more importantly by freight cost.

And that is something that we have been seeing studied in the second quarter.

Very strong funnels into Florida.

Okay. Thank you Donna.

We like them.

Thank you. Your next question today comes from line of David Raso Evercore ISI. Please go ahead. Your line is open hi.

Hi, Thank you a little bit more of a near term question, the fourth quarter sales or imply a down call. It 10% to 12% can you help us a bit between the segments, where do you expect to be say, even down more than that in less than that company average just for a baseline and then I had a follow up.

Well, let's as you probably.

Understood from our prepared remarks, what if it was the decrease in sales, it's going to be because we have component issues, preventing our ability to ship and that is really what's driving everything right now is our ability to get products out the door.

It's really dependent upon which types of chips and components, we can get in and which products. We can ship, but don't you want to add any specific color yeah, well first of all considered last year fourth quarter share sales were particularly high.

Salt that.

Padgett comparison will also be more difficult.

And where we expect to be.

Each one beat them more is in the commercial and specialty vehicles in the powertrain business.

Okay and any help you can provide at all on how to think about that.

Incremental margins on those sales declines just given you mentioned the price cost gets a little more challenging.

We're just trying to level set here a little bit how to how to think about it and I know its unique situations.

Supply chain, but just trying to get them right.

I would consider it I mean looking at the fourth quarter alone.

I would consider that.

Reduce slightly the incremental margins that we have seen so far on those two segments.

But I wouldn't I wouldn't say that.

Take that.

Okay, and then lastly, usually you come out of the fourth quarter and you're down.

I'll call, it 20% or so sequentially on sales sequentially.

Sequentially, but given the setup with the fourth quarter and what you know about the supply chain should we expect the first quarter to them.

Abnormally.

Not the traditional decline actually may be flat to up to start the year sequentially. Thank you yeah, I mean, we want to.

Do everything we possibly can to avoid giving any kind of guidance on 2022, but you know David you're exactly right. The the impact that we're seeing and I don't even referred to in his prepared remarks, we're going to end the year with with some vehicles built that just need a component and we put those and it will have the opportunity to.

The ship in Q1, so it could be a better Q1 because of that and we've seen it. It really is largely dependent upon how much progress. We can make I mean, obviously this is a day to day and it's it's it's hand to hand combat with a supplier trying to make sure we get our proper allocation and we're looking at everything we possibly can to increase.

Outputs and you know we've seen it improve you know thus far throughout the quarter.

And you know, we'll just have to continue to manage it but that is gonna be the limiting factor on Q1 shipments as how much we can manage that situation again, it's been encouraging the progress. The teams made currently but that that's the challenge we're looking for but the set up looks good right now to do a little bit better in Q1 than we would normally do.

Alright, Thank you very much appreciate it.

Thank you. Your next question today comes from the line of copper at a comeback of Banca <unk>. Please go ahead.

Yes. Thank you and good morning. My question is on your free cash flow guidance for 2021.

What kind of a working capital assumption are you making.

These are these guidance please.

Well the fourth quarter is typically a very favorable quarter for working capital.

The.

With both our guidance.

Slightly from what we had in the last quarter again, four days issue of having what we call fleet, which is complete vehicles are produced but not completed and not able to be sold so.

That's the challenge that we see for the.

For the fourth quarter free.

Free cash flow.

Hi, everyone.

Higher manufacturing inventories.

Compared to what we would have an idea of sort of one in an ideal situation.

Sure.

Okay is it possible to have an idea.

Ts.

The magnitude of these Oh this item I mean uncompleted vehicles suddenly all the time.

We have we have a few thousands of them.

At the end of September.

Well, we'll complete them in the quarter, we expect to have.

Similar amount at the end of the fourth quarter.

As we have new production coming in and being incomplete.

Okay. Thank you very much.

And last question, we've got a lovely cool I understood you sold it.

30%.

In these Chinese joint venture I guess I remember you had the 50%.

Shell Vito any let's say any comment on this would be interesting.

Yeah.

Gary do you want to take it or I take it.

No I can take it.

Yes, that's correct.

31% of our 50% share in Nanjing, if it could in a vehicle.

And the share was 19, 9%.

Allows us to keep this on all our balance sheet.

At fair value and do not consolidate the financials on a monthly and quarterly basis.

Yes.

Okay. Thanks.

Thank you and we make take now our final question today, which comes from line of Ross Gilardi of Bank of America. Please go ahead.

Thanks, guys for squeezing me in.

Scott. This is in the 22 question. This is just.

A higher level question, but you earned $1 10, and three quarters I mean, if you ignore the production issues in the fourth quarter for a second and just annualize that figure.

H earns you know close.

Close to about 50 this year your AG order book has doubled your truck book to Bill was 187 I.

I mean, given all of that is there any reason why C and H as it exists today pre spend wouldn't have at least $2 of earnings power at some point in the cycle.

Yeah.

I mean, that's a lot of ifs in there.

But no no we certainly see that in our future. There's no doubt about that we have the ability to do that.

But you know the.

The supply chain is really the limiting factor right now.

And you know this is a cycle. We're in you know obviously, we're benefiting from the up cycle now we don't think it will last forever.

And we're going to prepare for when things arent as good and make sure we're able to deal with that but no I think the the ability of the team to you to navigate this difficult supply chain ramp up production meet customer demand is quite impressive as is the ability to seek price and I think that.

Straight line to two Bucks, but I think its certainly achievable.

As we continue to work, but you know obviously, it's that's it.

Not at the bottom of the cycle, but probably you know mid to the higher part of the cycle.

Gotcha, and then when do we get.

The actor foremost split terms and more data more and more detail on the capital structure for both sides.

The business and then just just just lastly, maybe this is for a dominate the fin co revenue of 13, 1337, and net income 308 million year to date can you give us any just very very rough split between on highway and off highway.

Okay.

Yes salt.

Two questions once we'll E.

Issue the prospectus for the spin off in the coming weeks.

And there that will be.

Quite good visibility about the balance sheet split.

Hum.

<unk>.

On the top of the financial service I would assume one quarter.

Of the profit.

Of the net income can be considered them to be moved to the on highway business after spin.

One quarter goes to on highway okay.

Right.

It goes to on highway I believe I called group.

Yes, Scott.

Yep.

Yes. Thank you.

You like them.

Thank you.

Does conclude our conference for today, ladies and gentlemen, thank you for attending today's call with us have a good evening.

Q3 2021 CNH Industrial NV Earnings Call

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