Q3 2024 CNH Industrial NV Earnings Call
The End
Speaker Change: Good morning and welcome to the CNH third quarter results conference call.
Speaker Change: All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.
Speaker Change: If you would like to withdraw your question, press star 1 again. We do ask that you limit yourself to one question and one follow-up. Thank you. I will now turn the call over to Jason Omerza, Vice President of Investor Relations.
Jason Omerza: Thank you, Jeanne, and good morning everyone. We would like to welcome you to the webcast and conference call for C&H Industrial's third quarter results for the period ending September 30, 2024.
Jason Omerza: This call is being broadcast live on our website and is copyrighted by C&H. Any other use, recording, or transmission of any portion of this broadcast without the express written consent of C&H is strictly prohibited.
Jason Omerza: Hosting today's call are C&H CEO Gerrit Marx and CFO Oddone Anchizza. They will reference the material available for download from the C&H website.
Jason Omerza: Please note that any forward-looking statements that we might make during today's call are subject to the risks and uncertainties mentioned in the Safe Harbor Statement included in the presentation material.
Jason Omerza: Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent 10-K annual report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission.
Jason Omerza: The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable U.S. GAAP financial measures, is included in the presentation material.
Jason Omerza: In addition, the presentation has been updated for an immaterial revision to our reported joint venture results for 2023 and the first half of 2024, related to our unconsolidated Turkish joint venture, whose functional currency is the Turkish Lira.
Jason Omerza: The Turkish economy was deemed highly inflationary in 2022 and C&H has determined that C&H's translation of the joint venture results into U.S. dollars under highly inflationary accounting resulted in an immaterial overstatement of C&H's results.
Jason Omerza: In today's presentation, prior period results and variances to those results have been updated to reflect this revision. The impact by quarter can be found in the appendix of today's presentation materials.
Speaker Change: With that, I will now turn the call over to Gerrit.
Thank you.
Gerrit Marx: Thank you, Jason, for clarifying this point up front and thanks to everyone for joining our call.
Speaker Change: The third quarter marked my first three months as C&H's Chief Executive Officer, and I wanted to take a few moments to share some of my observations with you.
Speaker Change: As in every cycle downturn before, this is a financially challenging environment for most of our farmers.
Speaker Change: The depressed commodity prices continue to weigh on farm income, and sentiment remains muted and uncertain across regions. We've had low visibility on the industry cycle so far, especially as the retail pace has been slowing month over month.
Speaker Change: As in prior cycle swings, but in a more proactive way, we continue to work with our dealers as they reduce their inventory levels, which are above our set targets entering 2025.
Speaker Change: We know what needs to be done here, and our efforts to underproduce retail demand will continue into 2025.
Thank you.
Speaker Change: I have visited many of our manufacturing R&D sites, and I am encouraged by the desire and attitude to drive quality more consistently in everything that we do.
Speaker Change: We are on a very good trajectory here. With this spirit, we have also taken significant strides.
Speaker Change: to address quality issues stemming from a protracted labor strike, and we have the fixes in place to support our end customers. Overall, within 2024, we will have spent around $100 million to address various field quality priorities.
Speaker Change: We have also been diligent in pursuing cost efficiencies in our plants, and we are taking action to rebalance capacities where necessary. Beyond that, we are also evaluating options to simplify our footprint.
Speaker Change: I'm really excited about the strategic sourcing work we are doing and how it will transform our supply base and how we work with our supplier partners.
Speaker Change: We are taking many strategic actions to drive long-term value and efficiency across our businesses in continuation of the well-timed and properly targeted interventions Scott Wine launched some time ago.
Speaker Change: We have an outstanding product portfolio, and I appreciate the tremendous amount of work being done to bring our new tech to market with in-house solutions, both for factory fit and the aftermarket.
Speaker Change: We have a lot of great things in our product launch pipeline coming over the next few years and you will see our unprecedented lineup in about one year at the Architechnica 2025 show.
Speaker Change: Despite the headwinds we are experiencing in the macro environment, I'm very energized by the passion and expertise of our employees, and I thank them for their diligent work in delivering for our customers and for their daily suggestions on how to improve our business.
Speaker Change: As we work together as one team, we bring practical, reliable, and performing solutions to farmers and builders.
Speaker Change: There is a lot to do and to transform as we write our next chapter, and I am humbled and honored to lead our global team on this transformational journey.
Speaker Change: Turning to the quarter, we continue to execute our cost-reduction activities. As Oddone will explain in detail later, during the quarter we have saved an incremental $85 million in costs to shore up our gross profit, and we achieved an additional $45 million in SG&A savings.
These cost savings are an obvious must-do for two reasons.
Speaker Change: First, we must respond to the market reality and ensure we align our operating efficiency and effectiveness across all areas.
Speaker Change: Second, we must continue our journey to structurally improve our margins for the long term while investing in our future products and services. This is a daily and weekly grind and we'll progress inch by inch.
Speaker Change: Our refocused organization structure has been operating throughout the business for about two months now.
Our leadership team is working together more closely and frequently.
Speaker Change: than ever and that's helping to ensure the team is aligned on the ground and making well-informed decisions.
[inaudible]
Speaker Change: Following the successful progress of the first wave of our strategic sourcing program, we kicked off the second wave with our supplier convention in Orlando, Florida with 700 existing and potential future suppliers representing just about 2 billion in annual purchase volume.
Speaker Change: While one part of our team is working on implementing the Wave 1 contract worth around $2 billion in purchases, another part of the team is starting the supplier selection for the Wave 2 components.
Speaker Change: Such a comprehensive challenge of our entire supply base has not been done in a while and has already started to surface great new and existing relationships with our supplier partners.
Speaker Change: We are creating and aligning most of our commercial and qualitative supply terms for a mutually beneficial future.
In August, we fully launched Feodorps.
Speaker Change: Our new and long-awaited off-board farm management system that was developed in-house
Speaker Change: and we are already getting very positive feedback from our customers. This new web and mobile platform allows farmers to monitor their equipment, whether CNH or other OEM brands, and gather agronomic data with the tap of a screen.
Speaker Change: Field Ops relies on the same software foundation that will be fully integrated with a new onboard operating system rolling out in our equipment over the next couple of years. Our in-house technology journey is accelerating.
The End.
Speaker Change: The third quarter brought continuous challenges across the industry. We saw ongoing pressure on retail demand, but we have moved to reduce production and shipment volumes in response.
Speaker Change: which is reflected in the financial results and in our updated guidance. We are pursuing a material reduction in deal inventories by the end of the year and will continue our efforts until we reach our target levels.
Speaker Change: Third quarter consolidated revenues were down 22% and industrial net sales were down
Speaker Change: 25% as we work towards underproducing the retail demand to help our dealers to lower their inventories.
Speaker Change: Sales were down in all regions across both agriculture and construction, tied to a 27% year-over-year reduction in production hours, on top of the first cut of 10% in ag in Q3 2023.
Speaker Change: Our industrial growth margin reduced by 220 basis points versus the same quarter last year and the adjusted EBIT margin was 8.4 percent down 340 basis points compared to quarter three 2023.
Speaker Change: Primarily driven from the lower equipment deliveries partially offset by our cost reduction actions.
Speaker Change: I already mentioned how industry demands remained weak in the third quarter as farmers dealt with lower farm incomes and builders are largely caught up on their capex backlogs.
Speaker Change: Ag demand in Brazil and Europe continues to be weak, and the expected softness in North America row crop demand has begun to manifest.
Speaker Change: Dealers continue working through their new and used inventory, which is above our target levels. We estimate dealer new inventory is about 1 to 1.5 billion dollars or around 1 to 1.5 month too high.
Speaker Change: While we reiterate that in the current market, our primary lever for achieving channel inventory reductions is to lower production.
Speaker Change: We also took some focused pricing actions on specific subsets of inventory that are directed at retail sales and dealer support for used sales in the coming months.
Speaker Change: There's so much good that comes from a relentless focus on quality.
Speaker Change: From more efficient plant operations to lower warranty claims to healthier price realization and higher customer satisfaction levels.
Speaker Change: Our machines do very tough work, and the stress is exceptional at times.
Speaker Change: We not only have to get first time quality done right, but moreover the service performance for our end customer needs to be an area of attention as we redeploy our resources from the back end to the front end of our business. We are proud.
Speaker Change: that despite the industry headwinds, our teams remain steadfast in delivering excellence to our customers along all of those lines.
Oddone Anchizza: With that, I will now turn the call over to Oddone to take us through the financial results. Thank you, Gerrit, and good morning, good afternoon to everyone on the call.
Oddone Anchizza: Third quarter net sales of industrial activities of nearly 4 billion dollars were down 25% year-over-year.
Oddone Anchizza: This was mainly driven by the decrease of equipment delivery from lower industry demand compounded by the impact of dealer increasing their inventories in 2033 but needed to reduce them in 2024.
Oddone Anchizza: Adjusted net income in the quarter was $304 million, with an adjusted delivered earnings per share of $0.24, down $0.16 from Q3 2023.
Oddone Anchizza: Free cash flow for industrial activities was an outflow of 180 million dollars. This is consistent with the seasonality of working capital in the third quarter and is affected by the lower year-over-year activity levels.
Oddone Anchizza: Moving to the segments. Agriculture net sales decreased 24% for the period with lower volumes across all regions and an over-proportional reduction on sales of combined harvesters.
Oddone Anchizza: Production hours in our agricultural equipment plants were down 42% year-over-year in the quarter for our raw crop products, so for large factory combined, and 26% year-to-date for the entire product range.
Oddone Anchizza: Gross margin was down 290 basis points, at 22.7%. The margin results were driven mainly by lower volume in all regions and negative price realizations in South America.
Oddone Anchizza: as we launch a targeted campaign to support deliveries to end customers in the coming months.
Oddone Anchizza: We should expect net pricing to remain positive for the two years.
Oddone Anchizza: As union expenses were $46 million lower year-over-year, as labor costs were reduced to the headcount reduction and variable compensation.
Oddone Anchizza: Lower advertising and travel and structural improvements in our outsourced services continue to provide a partial shield to the quarterly earnings.
Oddone Anchizza: Out of the expense was $40 million less than last year and benefits from similar back office efficiencies while we have substantially maintained the flow of our engineering activities.
Oddone Anchizza: Variances in RGV income in the third quarter is included in the FAQs and other categories and accounts for about half of the 46 million delta shown.
Oddone Anchizza: The other half of the variance relates to an age-eventually refurbishing campaign and to effects translations.
Oddone Anchizza: Adjusted EBIT Margin ended at 10.2% with Decremental EBIT Margin at 28%, highlighting the importance of our cost savings.
Oddone Anchizza: During the construction, net sales for the quarter were $687 million, down 28% year-over-year, driven by lower volume in all regions.
Oddone Anchizza: In Construction 2, the team is seeking a reduction of challenging ventures.
Oddone Anchizza: Despite a lower sales, gross margin grew by 70.6% to 16.6%.
Oddone Anchizza: Lower volumes and pricing were partially offset by lower total costs due to lower material costs and better plant efficiencies.
http://www.youtube.com.au
Oddone Anchizza: SG&A expenses were down $13 million, and R&D was down $3 million compared to Q3 2023.
Oddone Anchizza: Third quarter adjusted EBIT margin was down slightly year-over-year at 5.8%, with sacramental EBIT margin of 8%.
All the financial services.
Oddone Anchizza: The income in the third quarter was $78 million, an $8 million decrease compared to 2023.
Oddone Anchizza: This is primarily due to high risk costs in South America, spurred by higher delinquencies in agriculture, for which we took additional provisions.
Oddone Anchizza: This was partially offset by favorable volumes and margin improvements in most regions and some favorable discrete tax items.
Oddone Anchizza: Retail originations in the quarter were $2.8 billion, down $0.2 billion compared to the same period of 2033. The managed portfolio at the end of the quarter was about $29 billion, up $2.2 billion on a constant currency basis year over year.
Oddone Anchizza: Delinquencies on book, which saw a seasonal spike last quarter, were down sequentially to 2.2%. However, they remained elevated from prior year due to economic factors, specifically in South America.
Oddone Anchizza: Delinquencies in our North America portfolio are below 0.8%. As a reference, they were at the highest 3% in 2009. We have increased our credit risk provisions to remain adequate and covert in case of increased loan defaults.
and Scott Wine. Thank you.
Speaker Change: As noted by Gerrit, our reduction cost reduction program continues to yield results, and we reaffirm our commitment to driving structural cost improvement throughout the company.
Speaker Change: For cost of goods sold, we have saved $213 million year-to-date with focused efforts on reducing logistics, manufacturing, and material costs.
Speaker Change: Fourier statings are forecast to be about 300 million, reflecting the lower production volumes.
Speaker Change: As we look ahead to 2025, we do expect to have a year-over-year gross carryover benefit from these actions of 70 to 90 million dollars.
Speaker Change: We will continue pursuing productivity improvements on the strategic sourcing program to drive forward reductions.
The End.
Speaker Change: Our SG&A savings, including the impact of our restructuring program launched in late 2023, have been $150 million in the nine months, and we forecast that we will reach about $180 million for the full year.
Speaker Change: That will lead to a gross year-over-year carryover saving of $30 to $50 million into 2025.
Speaker Change: Now, to put our capital allocation priorities in context, I want to mention some of the main industrial free cash flow dynamics as our 2024 outlook has reduced significantly in connection with the reduction in sales in the last half of the year.
Speaker Change: The biggest factor impacting our cash flow is our activity level and operating performance. Obviously, with higher demand, we produce more, we sell more, and generate more cash, and vice versa.
Speaker Change: but its follow-on effect on the net working capital when sales and production levels change.
Speaker Change: primarily linked to the divergent terms in our receivables and payables.
Speaker Change: Another factor is whether our balance sheet provisions or accrued liabilities are stable, growing, or shrinking. For example, for every unit we invoice to dealers, we set aside an adequate amount of money to support future retail sales by them.
in what we call Marketing Reserves for Pool Funds.
Speaker Change: When dealers shrink their inventories, those reserves are net payout. A net use of market reserves is a net use of cash.
Speaker Change: Without understanding of the cash dynamics and the proceeding impact of this year's free cash flow, we know that once production and sales realign, the usual conversion of income into cash will resume.
I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: And I want to finish up with a note on our capital allocation priorities, and specifically on shareholder returns.
Speaker Change: We reaffirm our policy to dividend 25% to 35% of adjusted net income to shareholders. We also reaffirm our intention that, after small M&A needs are funded, over the cycle, we will return essentially all excess free cash flow to shareholders through dividends and share buybacks.
Speaker Change: That does mean that in individual years, we may return more cash than we generated in that year, and in other years, we may return less cash than we generated in that year, and instead, pay down some debt.
Speaker Change: Over the course of the cycle, we intend to return essentially all the excess free cash flow.
Speaker Change: while keeping our balance sheet at levels that allow us to preserve our credit ratings.
Speaker Change: Since January 2023, we have repurchased over 100 million shares, reducing the share count by about 7%.
With that, I will turn it back to Gerrit.
Gerrit Marx: Thank you, thank you Ozone. Now let us review our revised Outlook for 2024.
Gerrit Marx: In agriculture, we have lowered the industry demand forecast for combines across the major markets by 5 to 10 percentage points.
Gerrit Marx: As KCIH and New Holland have a high product mix and combine, this market demand reduction is driving an unfavorable mix impact for CNH in this phase of the cycle.
Gerrit Marx: We also slightly lowered our outlook for high-output tractors in North America.
Gerrit Marx: We now expect global production hours to be down 36% year-over-year in Q4, on top of the 21% reduction we had in 2023.
Gerrit Marx: We do forecast ag pricing to be positive year over year in the fourth quarter and reaffirm our expectation for about plus 1% net pricing for the full year.
Gerrit Marx: With those factors in mind, we expect full-year ag net sales to be down between 22% to 23% year-over-year.
Gerrit Marx: We now expect agriculture's full-year EBIT margin to be between 10.5% to 11.5%, off from prior guidance of 13% to 14%.
Gerrit Marx: About 70 basis points of the change from the previous guidance is because of the change in joint venture accounting.
Gerrit Marx: The remaining change is due to the lower sales levels and lower production.
Gerrit Marx: In construction, we have slightly improved the industry projections for South America in an effort to keep our channel inventory levels in check.
Gerrit Marx: We are planning global production hours to be down 13% year-over-year in Q4.
Gerrit Marx: Net pricing in Q4 will be modestly negative, as it was in Q3. Therefore, we have slightly lowered our full-year net state forecast to be down between 21 to 22% year-over-year.
We still forecast construction EBIT margin to be between 5-6%.
Gerrit Marx: Combining the two industry businesses, we expect the full decrease in net sales to be between 22 to 23 percent.
Gerrit Marx: Industrially, the margin is now forecasted to be between 8 to 9 percent. About 60 basis points of the change is due to the accounting revision and the remainder is due to the lower production and sales levels.
Gerrit Marx: Free cash flow is expected to be negative, now an outflow between a hundred to three hundred million dollars, most notably because of our lower wholesale, considering the targeted dealer inventory reduction.
Gerrit Marx: But there are also other variables, such as our exposure to payables, with quarter-on-quarter declining production, or payout to dealers from marketing reserves as they sell new and used machines, as Oddone mentioned.
Gerrit Marx: The Q4 net cash generation of around $1 billion will not fully offset the year-to-date negative cash outflow.
Gerrit Marx: The drags on our Q4 and full-year cash flow will swing the other way when we see the market stabilize and production approaches retail levels.
Gerrit Marx: I will conclude with a few words on our priorities for the remainder of the year and some preliminary thoughts about 2025 and beyond.
Thank you.
and the other.
Speaker Change: Our efforts to reduce deal inventories has been challenged by a very difficult and evolving industry dynamics.
Speaker Change: We are still focused on reducing both our dealers and our own inventory in a price conscious way.
Speaker Change: Under-production to retail demand is likely to continue through the first half of 2025 with the target to produce in line with retail for all products in all regions by the second half.
Speaker Change: We are taking orders for model year 2025 equipment but the commercial environment remains challenging. For ag we are filling Q2 production slots for certain products in North America. For all other regions and products we are filling production slots for Q1 now.
Speaker Change: We continue to focus on cost containment and streamlining our processes in line with our new organizational structure, because as we look ahead to 2025, market conditions indicate the need for continued spending prudence.
Speaker Change: We still don't have enough information to make a call on retail demand next year, however at this point we do expect 2025 to see the bottom of the cycle.
Speaker Change: Whether or not we start to see some market recovery in late 2025 or if that will come later is unknown at this point.
Speaker Change: There are a lot of factors that we will be monitoring, such as soft commodity prices, age of the fleet, speed of dealer destocking of new and used equipment, and particularly how the South American market evolves, as it was the first region to turn down.
Speaker Change: At a higher level, we'll also be watching for geopolitical developments, including in Ukraine and in the Middle East, for global policy shifts around decarbonization efforts,
Speaker Change: especially in relation to renewable fuels and for now the new US administration under President Trump will impact farm and trade policies.
Speaker Change: We have obviously not cut back on R&D programs despite the market downturn and will continue to fully fund crucial investments in iron and in tech as we move into next year.
Speaker Change: But we will invest in R&D more efficiently, leveraging our fully staffed India Tech Center and other centers of expertise in the C&H world.
Speaker Change: We have executed well on our cost reduction programs, and this does not stop at the end of 2024. You have heard me talk relentlessly about quality and how important it is for our reputation, sales, pricing power, and cost.
and you'll keep hearing that from me from now on.
Speaker Change: And in addition to our strategic sourcing work, I mentioned earlier that we'll be taking a closer look at our manufacturing footprint and our options for some realignment.
Speaker Change: For example, yesterday, we informed our employees at our construction plant in Burlington, Iowa of our intention to permanently close the plant and to relocate the work to other CNH facilities in the U.S. and Europe.
Speaker Change: This is part of our ongoing global initiative to streamline operations, minimize costs and bolster competitiveness in a changing and more challenging market environment.
Speaker Change: We'll talk more about our strategic initiatives in detail next year at our Investor Day in New York on May 8th and the Tech Day around the Agritechnica show in Germany in November.
Speaker Change: This concludes our prepared remarks and we will now open the line for questions.
Thank you.
Thank you. Thank you. Thank you.
Speaker Change: Thank you. We will now begin the question and answer session of the call. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: If you would like to withdraw your question, simply press star 1 again.
Speaker Change: If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: Again, please let me yourself to one question and one follow up to allow time for as many participants as possible.
Speaker Change: We will take our first question from the line of Kyle Menges with Citigroup. Please go ahead.
Speaker Change: Thank you guys. I was hoping if you could just elaborate a bit on the plan to underproduce retail more so in first half of 2025 and is that really just an ag comment or should we expect that in construction as well and just if you could unpack just how you're thinking about underproducing retail by geography in the first half of 2025 that would also be helpful.
Speaker Change: Yeah, thank you. Thank you for the question. And look, when we take a look at the in agriculture, let's say tractors, for example, we expect to underproduce.
Speaker Change: retail in the fourth quarter by probably about 30 to 40 percent in the fourth quarter alone and then given the season coming we'll hold and make sure that we have you know fresh machines in the in the dealers.
Speaker Change: for the season to come. And that is looking for, when you look at combines, by the way, in the fourth quarter, we are also slightly underproducing retail. However, there the season usually starts a little earlier. So we have in tractors and combines.
Speaker Change: probably more aligned view in the first quarter and then we continue to underproduce retail in Q2 and look at basically having that matched again in the second half. So we are following the season here making sure that our network partners have the products they need.
Speaker Change: On construction, we continue to destock also here our retail channels, and that means we will on average underproduce retail here as well.
[inaudible]
Speaker Change: And so in construction, we should expect also underproducing retail demand in the first half of 2025.
Yes.
Okay, got it. Thank you.
Speaker Change: Our next question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.
Speaker Change: Hi, good afternoon, thank you. Two questions. One is actually just a follow-up on what we the question just before, just to make sure. So you expect to match production and retail in the
Speaker Change: by the second half. But dealer inventories, you said, are only one and a half months to elevate. Is that because you do think that the weakness in 2025 is going to be sort of to the magnitude on demand that we had this year, or sort of what's the implied assumption there?
Speaker Change: Retail, when you break it down to the very product, the demand has to be met with a certain product. And the demand, we have obviously now products in our retail.
Speaker Change: network and that speaks to my commentary before that we have put some extra sellout commercial campaigning around those products.
Speaker Change: where we need to have an extra push to get them off the yard. And what we produce fresh is obviously completely in line with the demand that we see in the market to come.
That is a more complex riddle, and hence that's why...
Speaker Change: We operate our industry machine by, you know, matching retail demand as we, you know, entering next year and then we underproduce again.
Speaker Change: in order to have a good balance of selling out the fresh.
Speaker Change: inventory that we add as well as keep selling off the the inventory that we have carried over to next year. So it's a it's a mix of the two. So inventory in the end breaks down into very specific products that meet a very specific customer demand. So it's a it's a matching task that takes a couple of quarters.
Speaker Change: And how shall we think about pricing going forward in the back of the demand backdrop and pricing now having turned slightly negative?
Thank you.
Speaker Change: of our inventory that has proven to fit a little heavier there.
Speaker Change: So, that is what happened in the quarter while, you know, as we move forward, we do expect and we absolutely plan to keep pricing as we go into next year as we manage production instead of pricing, as I mentioned a couple of times before.
Good, thank you.
Speaker Change: I think in a prepared remarks, Latin America and Europe is where we saw some softening in pricing in the third quarter, but we confirm that we see positive pricing for the year.
Speaker Change: and clearly the actions that we're taking on production and what Gerrit was explaining.
are directed at preserving or protecting power.
The End.
Speaker Change: Our next question comes from the line of Stephen Fisher with UBS. Please go ahead.
Speaker Change: Thanks, good morning. Just from a decremental and general margin perspective, I mean in ag it seems like we're doing in the neighborhood of about 30 percent. To what extent should we expect
Speaker Change: better than that in the first half of 25 given some additional cost savings. I guess part of what I'm asking is that, you know, it looks like we're now going to be down to single-digit implied EBIT margins in Q4 and ag. Is that...
Speaker Change: Kind of what we should assume for the first part of 25 as well
Speaker Change: It's early to talk about 2025, as you know, but clearly our costs have been reducing during the year. So when we compare quarter over quarter,
Speaker Change: In the first couple of quarters, we may be more favorable, but let's see when we talk about the year. That will be probably in January.
www.mytrendyphone.co.uk
Okay, and then...
You mentioned considering...
Speaker Change: Simplifying your footprint, and you gave one example in the construction business, I guess...
Speaker Change: As you think more about those opportunities, would that represent new and incremental cost savings efforts that would be on top of what you've articulated and quantified so far?
Speaker Change: It's definitely an adding, it hasn't been in the plan before and these are things we're going to work through and we'll let you know at the right point in time.
Okay, thank you very much.
Speaker Change: Our next question comes from the line of Jamie Cook with True Securities. Please go ahead. Hi, good morning. Just back to the manufacturing footprint discussion and the ability to hold, you know, decremental margins at a better level than history. Are some of these manufacturing footprint considerations, could that help 2025?
Speaker Change: do you sort of, that is, you know, later on, and then I guess
Speaker Change: And then I was just going to say, besides the COGS and the SG&A savings, is there anything else that you could point to that would allow C&H to continue?
Speaker Change: in 2025 to what looks to be a down year. And then a donate on the free cash flow.
Speaker Change: that you put out there, you talked about like the different buckets, you know, under, you know, the weaker demand, the dealer pool, or incentives and stuff like that. Can you just...
Speaker Change: put in buckets, you know what I mean, how much is related to each one of those, you know, sorry, pre-cash flow cut, like put it in buckets so we can bridge it. Thank you.
Speaker Change: Thank you. Let me take the first two questions. On the manufacturing footprint, the announcement we just made, I referred to, and also other work we are considering, none of that will impact 2025.
These are things.
Speaker Change: that in itself need quite some time to analyze and get properly set up. On the other side...
Speaker Change: We obviously are very carefully monitoring and watching the implications from the news elections and what it means in terms of tariffs and with those tariffs, depending on from where goods are shipped and what tariffs apply.
Speaker Change: what kinds of levels of, let's say, reshoring, reassuring or other activities will be would be needed in order to better manage in with the new framework condition. So there is analysis required and it will take
Speaker Change: I wanted to get these things into place, also factoring in the new framework conditions that will be in and around the United States.
Speaker Change: and obviously also when being executed it takes a while until these effects take place.
For 2025, other ways or...
Speaker Change: we are diligently working on to further improve the underlying run rate cost base that we carry over from 2024. You heard me say that we had about 100 million costs related to quality.
spent in, it's actually more than a hundred million,
Speaker Change: in 2024 in order to address certain challenges for some products that were in the field. And we absolutely went relentlessly after those and remediate those issues over the next couple of months.
Speaker Change: And I do not expect that to repeat next year. We will work further on upgrading our processes to be more robust and more consistent in quality delivery. Yet these one-offs that we had this year, I do not expect to repeat next year.
Speaker Change: Yeah, as I mentioned, the change in the free cash flow compared to the numbers we were discussing back in July.
Speaker Change: directly linked with the reduction in sales and the reduction in production that we decided to take.
Speaker Change: right after the summer break, I would say, when we realized that orders were lower and that the pace of retail wasn't getting at the level we wanted it to have.
Clearly, that brings a reduction in the operating performance.
Speaker Change: but also brings impacts on our working capital rebalancing and also something on the payout of reserves to the leader, which the leader being a positive tool to the cash flow.
Speaker Change: So that's a combination of this factor. I would say half of it comes from the basic operating performance and the rest from the working capital.
Thank you.
Speaker Change: Your next question comes from the line of Mig Dobre with Baird. Please go ahead.
Mig Dobre: Thank you for taking a question. If we can go back to the pricing discussion in ag.
Mig Dobre: It sounds like the pressure is really in in Europe and Latin America. Maybe you can expand on that a little bit
Mig Dobre: providing some some kind of a buffer is there something else going on here and and how do you expect pricing to evolve into 2025 given the fact that the environment is still pretty weak and you're still dealing with these stock
Speaker Change: Look, let's start with Latin America and Europe. Latin America, we knew from the beginning of the year that the situation became very competitive.
Speaker Change: because of just the amount of inventory that every player left on the field when, I mean, on the channel, let's say.
Speaker Change: when the market started turning down and the turndown of demand was, you know, quite rapid and I would say now prolonged compared to what everyone would have expected.
Speaker Change: You remember that we acted on our own inventory pretty early, but that doesn't mean that on competitive market if there's overall more inventory you will have, you sort of have to compete and that's our response to that.
individual actions that we have been taking for supporting
Speaker Change: retail sales of units that were already in inventory. Of course, as you know, as the pricing works, what we do is we accrue high reserves on the new wholesales and this is what has affected
the Q3 results.
Speaker Change: All in all, it wasn't a large reduction in pricing in Q3, and we expect Q4 to be slightly positive.
and the year to be will remain positive.
Speaker Change: As for next year, I would start commenting next year, but we don't expect a decrease in pricing.
Speaker Change: I'm curious as to what you're hearing from your dealers in that region. Obviously, the business is down quite a bit this year. Do you get the sense that we could be seeing sort of a similar cycle in EMEA that we're seeing in North America and LATAM?
Speaker Change: Is there hope that that market can stabilize before the other two? Thank you.
Speaker Change: Well, look, Nia, I mean, it really depends when you talk to which dealer subset in which market. For example, if you talk to certain dealers in...
Speaker Change: the Germany, France, so they will tell you it's not too bad, it's not great, but it's not too bad, and other markets are obviously heavier impacted, so therefore the European territory itself
It's quite diverse. The big unknown for Europe itself is...
Speaker Change: when and how the war in Ukraine or the conflict around Ukraine is coming to a standstill in a form of...
Speaker Change: A frozen conflict or a peace in whatever shape and form, that would determine when and how Ukraine would turn back to its prior crisis production levels of agricultural products.
Speaker Change: And how will Europe then deal with those crops and those commodities coming across the border? And if those commodities will be in competition with the products from Western European farmers? So there is this one...
even that...
Speaker Change: You know, we don't know when it will happen, but I think...
Speaker Change: What is going to have a pretty impact on the European environment for our farmers is what is going to happen in Ukraine, when it happens, and how it will impact the commodity prices, because it was a 15% or so relevant player in the global commodity markets. So I think that is determining a bit when and how the cycle will turn on that end.
Speaker Change: and we we have been traditionally also very strong in the in the reconstruction of Ukraine and I think when when the when the conflict is coming to a standstill there or when things turn to a better side we feel very well positioned to benefit from that country in itself as well.
Thank you.
Thank you.
Speaker Change: Our next question comes from the line of Kristen Owen with Oppenheimer. Please go ahead.
Hi, good morning. Thank you for taking the question.
Speaker Change: Forgive me here, maybe I'm a little rusty after a long week, but I'm still trying to piece together the pricing outlook.
Speaker Change: and appreciate some of the competitive dynamics that you called out, Oddone, but is there some kind of mixed effect or something?
Speaker Change: that enables you to re-accelerate your price in 4Q? Is it just that the comps are easier? Just help me bridge 3Q to 4Q. Why we should expect that that would turn back positive.
Speaker Change: I would say, yeah, there's definitely a mixed effect in there, but there's also an effect that some of the actions were targeted and specific.
and we don't plan to repeat all of them.
Maybe I'll give you a bit more color on this.
Speaker Change: The inventory that we have in Europe that is, let's say, nine months old or older, these are machines that were produced at a time.
Speaker Change: in configurations that are not exactly matching, I mean, not all the, not all the inventory, please, but there are some.
sets and pockets in there.
Speaker Change: that are not exactly matching the demands that we see right now in the market. So these are subsets and pockets in the inventory where we allocate more commercial action and more commercial focus on in order to clear that stock.
Speaker Change: So that is what we are not going to repeat in Q4. That was an effort we had in Q3.
Speaker Change: Well, two things. One, Finco plays a role in the financing of equipment to new customers, I mean to customers, and definitely Finco plays a role in financing
Speaker Change: use equipment sold by our dealers to end customers and with
Speaker Change: You know, pool funds that are accrued when we sell new equipment, the dealers are able to access
Subsidized financing from
Speaker Change: from the Finco, from the capital organization, to provide subsidized financing to their, to their customers that buy used units. So.
Speaker Change: Definitely, Finco is a part of the play of supporting the sales from our dealers, the retail sales. And obviously, this is...
Speaker Change: subsidized by the industrial operation as part of the pricing and it's either directly or through the pool funds I was mentioning before.
Speaker Change: We don't see, if the question was about the used equipment in relation with, sorry, the used price in relation with the used equipment.
Speaker Change: We don't see anything that is comparable to what happened in 2015 and 16, where, as you know, all of the captive companies found themselves with a lot of lease agreements coming back pretty young.
and prices that weren't competitive anymore, that's not happening.
And so, that's not happening just because.
Speaker Change: The way we all rebuilt our leasing portfolios in the last few years was not the way we built them back at the last peak of the cycle.
Speaker Change: So we are not doing short-term, we have not been doing short-term visits and we have been very prudent, I would say, in the underwriting and in the determination of the reasonable values.
Speaker Change: Thank you for the time. Thank you. That responds to your question.
Thank you.
Speaker Change: Your next question comes from the line of Tammy Zakaria with JP Morgan. Please go ahead.
Speaker Change: Hey, good afternoon. Thank you so much. So one question for clarification. I think you said inventory now is one to one and a half months more than your desired level.
Speaker Change: So after the underproduction in the fourth quarter, where do you see that going at the end of this year from that one and a half months?
Speaker Change: And whatever excess inventory is remaining, do you plan to underproduce on a prorated basis in 2Q and 1Q and 2Q to bring it down or could it be heavier in 1Q and then whatever is remaining you do that in 2Q?
The End
Yeah. Hi, Demi.
Speaker Change: Well, look, where are we going to land this year? We have obviously a target here and that would get us below one and a half months or one and a half billion. It depends on the market that we see ahead, right? And that depends on how effective we will be in the fourth quarter to set it out. So it will not be, certainly not less than a billion that we will carry over into next year.
Speaker Change: and how we're going to steer and manage the quarters ahead is really, we are running here with a visibility of give or take six months.
Speaker Change: Going through, for Europe in this case, going through what they see to come and how they see the market and what orders they have.
inside, and I think we are synchronizing ourselves.
Speaker Change: allow us to underproduce retail, as I said, on average, in the first half for sure.
Speaker Change: while always keeping an eye on the season and having sufficient fresh and you know matched and wanted machines available for our farmers and builders.
Speaker Change: Got it, got it. That is very helpful. My second question is on R&D. I think it stepped up as a percentage of sales in the third quarter, so...
Speaker Change: As you think about the next couple of years, I think you mentioned your in-house product innovation is progressing well, the pipeline seems strong.
Speaker Change: and you want to continue to enforce all of, most of it. So should we expect R&D dollars spent to stay at these levels over the next couple of years, even if in a weaker demand environment?
Speaker Change: on that level. We will get more work out of the quantum that we plan to spend as, from my comments, that we are going to work on our footprint as well. That is one commentary.
Speaker Change: You might wonder, why haven't you done that before? Why did you come now with this? I think the new organizational structure that we have built...
enables this now, before...
Let's say, the different pieces...
Speaker Change: the Indian Tech Center, our digital team and our product development team. They were sitting in different places and now this is all under one aligned lead under Jay Schroeder, our Chief Technology Officer who is going to…
Speaker Change: Obviously, synchronize and synergize among those very, very capable colleagues. And that means we will get out of the same spend probably more work, not probably, but very likely more work over the years to come.
Got it. Thank you.
Speaker Change: Your next question comes from the line of Mike Schliske with DA Davidson. Please go ahead.
Mike Schliske: Hi, everybody. Thanks for taking my question. I want to follow up on the R&D comments in the last question there. I was a bit surprised to see that it was a tailwind in both segments in the quarter. I know you mentioned there was some efficiencies there. I'm curious if you could just mention
Mike Schliske: The product launch cadence for 2025, has that changed at all in an environment where pricing is tougher to come by? Is it the right timing to be putting out newer and higher priced products? Just any thoughts as to the cadence.
That may be changing here.
Speaker Change: Well, that's a very good question. And the product launch, when I look at the most relevant product launches, the one that started first was the long wheelbase, our new heavy tractor, medium tractor, long wheelbase.
Speaker Change: that was launched and it's in the rollout and it's coming to a full swing.
Speaker Change: We are in the late innings of getting the new generation combined to our customers. We obviously started production, but we have...
Speaker Change: Now, a lot of production here that we validate like hell around the world, and every farm will work the equipment really, really hard, whether it's in Australia, New Zealand, whether it's in...
Speaker Change: and obviously the United States and South America and we collect the learnings from those field actions and I think our combine have left
Speaker Change: many market participants speechless in terms of performance and capability to deliver great yields for our farmers. And as we want to get that really, really right, we will look at the market, how it will develop over 2024, sorry 2025.
Speaker Change: And we would pace production with that in order to maintain pricing and the target pricing for those very big and very relevant machines, namely the combines.
Speaker Change: And we have other launches to come. I mean, we are planning to launch, we are going, not only planning, we are going to launch our new short wheelbase.
Speaker Change: line up in somewhere around the Agritechnica, that's at the second half of November.
Speaker Change: this year. And that's another very, very relevant launch, and we invest quite a bit of the R&D dollars that you can see here, also the quality validation team dollars here in the...
Speaker Change: in getting these machines right for the launch. So 2025 is a very, very relevant year for us, for launching.
Speaker Change: And if there's something good about a market that is slow, it's when you launch a product.
Speaker Change: And that might stress a little your supply base, that might stress a little bit your industrial machine too much. And again, I don't like cycle downturns, but if there's something good about it, it's the right time to launch products very thoughtfully and very carefully.
as a coordinated effort across the entire company.
Speaker Change: Got it. Thanks for that. I also want to ask about some of your comments about product quality. You mentioned it many times here during the call here. And you've been out in the field for six. Sounds like a lot of products that may have had some issues.
Speaker Change: Can you comment on whether you have lost share this year because of it, or any plans or thoughts about your market share next year, and any extra work that has to be done to kind of
Speaker Change: you know, regained farmer trust. Are the issues of quality that serious that you've had to you know, patch things over with like folks or make some changes?
And look, the quality...
Speaker Change: that I was talking about was related to certain launch quality and certain field quality.
Speaker Change: that we want to get clear and remediated prior to, you know, bringing the new generation into the field on the tractor side.
Speaker Change: We have very good combine quality, so there was never an issue with those. It is really about the tractors, and here the launch of the new long wheel and the short wheelbase will entirely renew.
our mid-range tractors in Europe and for the world.
Speaker Change: pretty well positioned to compete on a very different level from next year on or let's say from 2026 on and those need to be launched on the ground of proper quality and proper processes. That's why I've been mentioning that and on the market share side.
we have actually gained this year.
Thank you for watching!
Speaker Change: Our final question comes from the line of David Ratho with Evercore ISI. Please go ahead.
David Ratho: Hi, thank you for the time. Excuse me, quick question on the operating leases you have on the FinCo. Could you help us with where are the current carrying values, the resids on the operating leases versus market prices?
Dave O'Donohue
Speaker Change: We are fine with that. I don't have a report in front of me, but we have been realizing the values of the Unicef income going back without any issue.
I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: So the lease is coming off of late. They're not causing any losses on those terms.
Speaker Change: No. I'm not saying that it won't happen, right? It happened in the past and I'm not saying that it won't happen in the future, but from what I see now, from what we see now, there's no significant alteration.
Speaker Change: The balance has been coming down, but obviously you just get nervous. Some lease residues, we said a couple years ago, show up next year and we're underwater. That's why I'm just trying to think of a starting point for 2025. But at least from what you understand right now, they're not coming off the lease levels that the resale has lost.
Speaker Change: Real quick on the production costs for next year. I know the pricing is down, but some of the production costs came in a little more favorable than I was modeling. Can you give us any insight on early contracts, steel, you named the input, to how to think about production costs?
for 25.
Speaker Change: We're looking at it, but I wouldn't say that we have any...
Have a great week everyone.
which we are reviewing and...
Speaker Change: From the last review we had, as stated, nothing significant. Yeah, look, there's also, I mean, it's fair to add, we have made great improvements on production costs in the United States. In North America, you remember, we had this protracted strike in Racine.
Speaker Change: We had to get efficiency back into our sprayer plants, in Benson particularly, and we had to get...
Speaker Change: our operational efficiency back on track. We had a couple of plant leader changes also North America and that has paid.
Speaker Change: back really well and we have with the leadership team centered in the US with our manufacturing head, Cars of Quality Tune, we have the ones who go after these areas of quality and manufacturing cost quite diligently.
Speaker Change: That is going to continue, and that has been a great addition, particularly from the U.S. team across their plans, and we will grind through also the other regions to see them operating at a lower overall production cost level.
Speaker Change: Also next year, even at lower volumes, because you do not need necessarily higher volumes in order to get product efficiency. You can also do the things better with lower production volumes, and that is something that we expect to see also in the next year.
Speaker Change: And lastly, I know the call's been going long, sorry, the decision on Burlington, I mean, just given the backhoe, sort of what the construction business was built on over the decades, I know it's not the same product category it was, to close that facility
Speaker Change: Maybe I missed a comment earlier. How does that relate to your overall, and we've sort of discussed this already in the past, about strategic decisions around that business now as the CEO?
They're a bigger factory than just cost-saving salutum.
driving it.
Speaker Change: Well, look, we are further improving the business. It's part of our structure. There is a need for action. That decision has been very thoroughly prepared by the construction team for quite a while and Burlington today produces rough-terrain forklift trucks as well as TLBs.
Speaker Change: And as I said, we are going to relocate, just as an assembly plant, we're going to relocate those to existing C&H plants in the U.S. and Europe, and this move is similar to other moves the construction team has done.
Speaker Change: It is benefiting the business and it is the right thing to do, so we do it. Just because there are...
Speaker Change: considerations around strengthening the business further down the line, possibly with a partner, doesn't mean that we stop thinking and stop acting.
That's helpful. Thank you so much.
The End
Thank you.
That concludes today's conference call. You may now disconnect.