Q4 2024 CNH Industrial NV Earnings Call
Regina: Good morning and welcome to the CNH fourth quarter results conference call. My name is Regina and I will be your conference operator today.
Regina: 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, then the number one on your telephone keypad. To withdraw your question, press star one again. I will now turn the call over to Jason Omerza, Vice President of Investor Relations.
Jason Omerza: Thank you, Regina, and good morning, everyone. We would like to welcome you to the webcast and conference call for C&A Industrial's fourth quarter and full year results for the period ending December 31st, 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.
Speaker Change: Hosting today's caller, C&H CEO Gerrit Marx and CFO Adone Inchiza. They will reference the material available for download from the C&H website.
Speaker Change: 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.
Speaker Change: Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent annual report on Form 10-K, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission.
Speaker Change: 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. I will now turn the call over to Gerrit.
Gerrit Marx: Thank you Jason and good morning to everyone joining our call. I'd like to start by recognizing the CNH team
Gerrit Marx: our suppliers, and particularly our network partners, for navigating a challenging year with determination and hard work. While industry demand remained very weak,
Gerrit Marx: Through the end of the year, as expected, our global team maintained focus on what we
Gerrit Marx: can control. Reducing channel inventories, capturing operational efficiencies and quality upgrades throughout the company, innovating on cutting-edge technologies and executing on an even deeper level of our cost-saving initiatives.
Gerrit Marx: As we deliver the launches of our renewed tractor and combine line-up, one after the other, with in-house precision digital technologies,
Gerrit Marx: Our confidence grows in our competitive positioning to capture share and margin, and we know the measures we have taken set us up well for long-term success.
Gerrit Marx: As planned, we cut Ag production hours by 34% year over year to help bring down the inventory levels in the channel.
Gerrit Marx: The lower production, focused sales campaigns, and some improvements in market share helped dealers reduce their inventory by over $700 million in the quarter.
Gerrit Marx: There is still work to do on that front. As we said before, we remain price disciplined and will continue to underproduce to the retail demand at least through the first half of 2025.
to get our channel inventory down to lean levels.
Thank you.
Speaker Change: When I rejoined C&H about seven months ago, I was very excited and encouraged by the already ongoing efforts towards business optimization and strategic realignment throughout our organization.
Speaker Change: We exited 2024 with about $600 million of run rate savings, and that is on top of the $185 million in 2023.
Speaker Change: These are structural cost reductions that are important contributions to our good decremental margins in this challenging market environment.
Speaker Change: And those savings put us on sure footing as we move into 2025 and continue our push for better future returns on our investments in products, structures, and teams.
Speaker Change: And finally, as we continue our relentless focus on quality with an all-company mindset shift, we looked at issues where we have an opportunity to improve our customers' product and service experience.
Speaker Change: This is an investment that we are making with an eye towards claiming industry leadership and product and service quality jointly with our network partners.
Speaker Change: And we will explain in greater depth at our upcoming Investor Day on May 8th how we will undergo this total quality enabling transformation jointly with our larger and stronger multi-brand retail and service network.
Speaker Change: We knew from the outset that the fourth quarter was going to be tough because of the market conditions, but also because of the choices we had to make for adjusting our inventories and manufacturing cadence.
Speaker Change: We were not solely focused on delivering the highest possible financial performance in one quarter, but rather on making the best choice across several key business parameters that sets us up for 2025 and for the industry upcycle whenever it happens.
Speaker Change: Looking at the full year, there's no avoiding that 2024 was challenging.
Speaker Change: You all know the story told so many times by all the market participants last year. Depressed commodity prices weighed on farm income, which in turn led to softness in equipment demand.
Speaker Change: In the beginning of 2024, we saw it already in South America and Europe, and then later also in North America. Thus, full year 2024 consolidated revenues were down 20%, and industrial net sales were down 23%.
Speaker Change: Industrial adjusted EBIT margin for the full year was 8.2 percent, down 370 basis points compared to 2023, primarily from the lower volumes and partly offset by our cost reduction actions.
Speaker Change: Industrial decremental EBIT margin was 25% reflecting a more agile reaction to the sales downturn.
Speaker Change: Our Q4 results were low, as expected, as we focused on the goals of reducing channel inventory and maintaining pricing discipline.
Speaker Change: through some very targeted retail sales programs on pockets of aged or specialty inventory, and through the lower production, we accomplished both goals in a big first step.
Speaker Change: In 2025, we continue to work proactively with our ag dealers to reduce their inventory levels, which now becomes more granular as different product types in different regions are exposed to different demand cycles and require different stock availabilities.
Speaker Change: However, overall levels are still too high, assuming our 2025 market forecast isn't too conservative.
Speaker Change: While Ag is our core business, and that is where we put most of our focus, I also want to highlight the great achievements in our other two segments.
Speaker Change: In construction, we saw resilient gross margins supported by our tireless efforts on cost actions.
Speaker Change: Despite a 33% drop in net sales in the quarter, gross margins were flat year-over-year, and gross margins actually improved on a full-year basis, reflecting the outstanding work that the team has done to turn around that business. Well done, Team Construction, once again.
Speaker Change: In financial services, sound fundamentals and careful risk management has led to solid results. In fact, net income for the full year was slightly higher than in 2023, despite cautious and careful risk provisioning.
Speaker Change: Delinquencies are at reasonable levels and our return on assets is where we want it to be.
Speaker Change: Putting it all together, the team executed on our fourth quarter plans and positioned us well as we move into 2025, which will start with a very similar mix of levers between production and sales for the next few quarters.
Speaker Change: With that, I will now turn the call over to Odonat to take us through the details of our financial results. Thank you, Gerrit. Good morning, everyone.
Odonat: Four quarter net sales of industrial activities were down 31% year-over-year to $4.1 billion.
Odonat: This was mainly driven by the decrease of equipment deliveries on lower industry demand and our independent dealers' need to reduce their own inventories.
Fourier net sales were down 23% to $17.1 billion.
Odonat: Adjusted net income in the quarter was $196 million with an adjusted diluted earning per share of $0.15 down from the $0.39 of Q4 2023.
Odonat: Full year net income was $1.3 billion with EPS at $1.05.
Odonat: Q4 free cash flow from industrial activities was $848 million as we depleted inventories in line with the usual seasonality for our sales.
Odonat: As we described in our last quarterly call, there were two big items that negatively impacted the full-year cash flow, which ended at an outflow of $401 million.
Odonat: Since days in payable are greater than days in receivable in our industrial operations.
Odonat: Second is the cash impact of paying out retail incentives to the dealers when their retail sales are greater than the wholesales to them, consistent with their inventory reductions.
Odonat: In agriculture, net sales decreased 31% in the quarter, with lower shipment across all regions driven by lower industry demand, networked stocking, and unfavorable product mix, as there was a larger drop in cash crop equipment in North America and in combines globally.
Odonat: Full year net sales were down 23%. Pricing was positive for the quarter and for the year, even while our sales incentives include enhanced programs to support dealers in selling their new and used equipment.
Odonat: On top of the 21% production hour drop in Q4 2023, production hours were down an additional 30% year-over-year in Q4 2024.
Odonat: Agricultural production hours were down 28% for the full year, of which large ag was down 36%, and small ag was down 11%.
Odonat: The net sales contribution from precision-related components were about $800 million and were down in line with the overall drop in net sales.
Odonat: As a reminder, our current definition of precision-related components includes factory-fit solutions, aftermarket parts, retrofit kits, sales to Raven, and subscription fees.
Odonat: It does not include the machine itself, or what we call the iron. It is important to note that the sourcing mix of those components has shifted more towards our own in-house solutions.
Odonat: In 2023, about 60% of our precision components were developed and produced by CNH. But in 2024, that percentage went up to about 80%.
Odonat: And in-house solutions will continue to grow in 2025 as we increase the breadth and the take rate of our own factory-fit components and retrofit kits.
Odonat: Q4 Gross Margin was 20.6%, driven down mainly by the lower volumes, partially offsets with the cost reduction programs. Fourier Gross Margin was 22.9%, down 260 basis points from 2023.
Odonat: While we dramatically reduce the product cost in the year, this isn't immediately visible in the slide because of the additional warranty expenses that are enacted in the product cost categories as shown.
Odonat: SG&A expenses for the quarter were $61 million lower compared to Q4 2023, and $176 million lower for the full year. Due to the structural headcount reduction from our restructuring program,
Lower advertising and travel, and lower variable compensation accruals.
Odonat: R&D expenses were down $105 million for the full year and benefited from process efficiencies with no cutting or delaying of any major program.
Odonat: JV income for the fourth quarter was down 39 million dollars compared to last year.
Odonat: Adjusted EBIT margin was 7.2% in the fourth quarter and ended at 10.5% for the full year. When comparing to 2023 adjusted EBIT, the full year decremental margin was 28% for 2024.
Odonat: Turning now to construction, net sales for the fourth quarter were $718 million, down 33% year-over-year, driven by lower shipment volumes, mainly in North America, as the region reduced channel inventory by more than $100 million.
Two-year sales were down 22%.
Gerrit Marx: As Gerrit mentioned, despite the lower sales, gross margin for the 4th quarter was 14.8%, flat versus 4th quarter of 2023.
Gerrit Marx: Four-year gross margin was up 70 basis points, the decreased volumes and slightly negative pricing were offset by better product cost due to lower material cost and plant efficiencies.
Gerrit Marx: Four-year SG&A expenses were down $37 million, and R&D expenses were down $9 million year-over-year.
Fourth quarter adjusted EBIT margin was 2.5%.
And it was 5.5% for the full year.
Gerrit Marx: Fourier decremental limit margin was held to 8% as a result of the outstanding turnaround efforts from the team.
Gerrit Marx: In financial services, net income for the fourth quarter was $92 million, a $21 million decrease compared to the fourth quarter of 2023.
Gerrit Marx: Higher interest margin from favorable volumes was offset by high risk cost in North and South America and lower recoveries on used equipment sales. To this end, the realized sales values from lease returns remained substantially at par with initial residual values.
Gerrit Marx: Net income for the full year was $379 million, an $8 million increase compared to 2023, primarily driven by favorable volumes worldwide and margin improvements in most regions.
Gerrit Marx: The net income for the quarter and for the full year was affected by a one-off recognition of certain tax assets worth approximately $35 million.
Gerrit Marx: Retail originations in the fourth quarter were $3.2 billion and the managed portfolio ended the year at $27.8 billion.
Gerrit Marx: Delinquencies on book were down sequentially to 1.9%, but up from the 1.4% at the end of 2023, mainly due to economic and climate factors impacting farmers in South America.
Gerrit Marx: Our higher level of credit risk provisions on the balance sheet are set to cover the risk of higher delinquencies.
Gerrit Marx: We have been reviewing with you each quarter this past year the progress of our cost reduction efforts.
Gerrit Marx: These improvements didn't come easily, and they are the result of consistent focus and dedication of the team after we exited the post-pandemic period of supply and demand imbalances.
Gerrit Marx: About 375 million was in COGS, 304 realized in 2024, and 60 to 80 million that carry over into 2025, depending on future production levels.
Gerrit Marx: Combining the $375 million implemented in 2024 to the $185 million we did in 2023, we get to a total of $560 million, which is in line with the target we set for ourselves in 2022 for our cost of goods sold.
Gerrit Marx: In SG&A, we realized $186 million in 2024, and there is another $40 million that carries over into 2025.
Gerrit Marx: We will continue our focus on both COX and SG&A as we further optimize the business this year.
Gerrit Marx: Looking ahead, we have a number of helpful tailwinds, including the non-repeat of certain one-time warranty costs and the continuation of our strategic sourcing program.
Gerrit Marx: We're also aware of some headwinds that we will face in the year. Those are largely related to labor costs. There is also quite a bit of geopolitical uncertainty right now. We have done a lot of analysis on our global material flows. And as everyone else, we have run some sensitivities at different tariff levels.
Gerrit Marx: We have several options at our disposal for dealing with tariffs, such as resourcing components and passing the cost in our pricing.
Gerrit Marx: One of the pillars of our strategic sourcing program is to have global flexibility, including dual sourcing, where that makes sense.
Gerrit Marx: What we will actually do depends on the exact level of tariffs, on specific components, relative exchange rate impacts, competitive positioning, and the expected duration of the tariffs.
We are prepared to act as it is needed.
Gerrit Marx: We'll talk more about our cost-focused stretches into the year ahead during our Investor Day in May.
Gerrit Marx: Our capital allocation priorities have not changed. We will continue to invest in our business to bring the best products and technology to market for our customers, and we will do that while maintaining a healthy balance sheet and focus on our credit rating.
Gerrit Marx: In 2024, we return approximately $1.3 billion to shareholders through dividends and share repurchases. We will continue an annual dividend and will maintain our share repurchase program in 2025.
Gerrit Marx: We will also continue to seek strategic opportunities to improve our tech stack and product offerings, as more bolt-on acquisitions can further enhance our edge.
Thank you. Bye.
Gerrit Marx: Thank you, Odonna. Now let us review our outlook for Ag in 2025.
Gerrit Marx: followed by EMEA. North America was more resilient, but now it will likely reach trough levels in 2025 regardless of supporting policies launched by the new US administration.
Gerrit Marx: Most farmers will want to see at least one good earning year and more visibility and confidence in their end markets before engaging in equipment purchases over and above their replacement demand.
Gerrit Marx: In the aggregate, we expect the global industry demand to be down 5-10% from 2024. However, given our relatively high exposure to cash crop equipment in North America, which will be down the most, that looks more like a 10-15% industry decline on us.
Gerrit Marx: Going into Q4 2024, we estimated that our dealers had about one and a half months of new equipment inventory above our target targets based on our forward-looking sales expectations at the time.
factoring in the very good Q4 inventory reductions.
Gerrit Marx: Yet also, our latest retail demand forecast, deal inventory is still more than about one month of sales above our quite ambitious target levels.
Gerrit Marx: As a result, we expect production to remain fairly low at least through the first half of the year, during which we will make good use of the time by upgrading our production lines and processes and by training our colleagues around efficiency and quality.
Gerrit Marx: Our guidance assumes that our production line rates will be equal to the retail demand in the second half of the year, but we will use selective down days or extended shutdowns to further drive channel inventories to even leaner levels, if needed.
Gerrit Marx: Production hours are planned to be 15% to 20% lower in 2025 than in 2024. We will hold, if not grow, market share. Consequently, we are forecasting Agnet sales to be lower than 2024 by 13% to 18%.
Gerrit Marx: We will clear our channels, fix quality situations, reduce aged inventory, and pursue many more actions to set us up well for the cycle upturn. By when we will obviously need high quality and decent quantities of stock in our channels to capture the opportunities arising.
Gerrit Marx: We forecast ACK EBIT margin to be between eight and a half and nine and a half percent With a healthy decremental margin supported by structural cost improvements that we have and will continue to make
Gerrit Marx: In construction, we expect a lower demand in both light and heavy machinery in North
Gerrit Marx: Full-year pricing is expected to be flat to slightly positive in both segments.
Gerrit Marx: Less so in the first half, but with the opportunity to grow in the second half.
Gerrit Marx: R&D expenses are planned to be slightly lower than in 2024 at around 800 million, benefiting from our structural efficiencies but without cutting or delaying any programs, with capex estimated at about half a billion again in 2025.
Gerrit Marx: We are here for the long run and do not cut spending to deliver higher results in a specific quarter or year.
Gerrit Marx: This is a cyclical business, and doing the right thing requires a see-through view of the cycle with determination when it comes to deploying our resources to exciting new product and service programs.
Gerrit Marx: Free cash flow will be positive in 2025 between 200 and 500 million. Where we end up in that range will depend largely on the working capital dynamics.
Gerrit Marx: that we discussed earlier, and specifically how our production run rate and the wholesale-to-retail sales ratio at the end of 2025 will compare to those at the end of 2024.
Gerrit Marx: Our normal tax rate is between 24 to 26 percent and we expect to return there in 2025 after realizing some favorable discrete tax items in 2024.
EPS is forecasted to be between $0.65 and $0.75.
Gerrit Marx: I will finish up with our priorities for the new year and beyond. We are closely observing leading demand indicators. We expect the industry to reach the trough during 2025, but it is still too early to say how long we will remain at that level.
Gerrit Marx: We expect South America to show the first signs of recovery, but whether that is in 2025 or beyond is unknown at this time. We are still collecting orders for the second quarter, so we have limited visibility for the second half at this point.
Gerrit Marx: Besides soft commodity prices and the impact on farm income, we will be monitoring stocks-to-use ratios, used equipment prices and availability, and relevant geopolitical developments in areas such as Ukraine and the Middle East.
Gerrit Marx: Further, we are paying close attention to potential policy shifts around decarbonization or renewable fuels and the U.S. administration's approach to farm and trade policies.
Gerrit Marx: Because of our globally balanced exposure, we are uniquely capable of remaining flexible and adaptive to changes in policies or the operating environment. And I'm confident that we can thrive in any scenario that might come our way.
Gerrit Marx: We are obviously focused on achieving healthy levels of inventory in both our own operations and those of our dealers.
Gerrit Marx: Additionally, we remain committed to achieving further improvement of quality and customer service in everything that we do, and to making continued technology investments.
Speaker Change: As Odona mentioned, we will maintain our spending discipline, prioritize our cost optimization processes and implement structural changes to improve our position for the cycle rebounds.
Speaker Change: I look forward to meeting the challenges of the year ahead and demonstrating that C&H is a more profitable business across the industry cycle, which we will discuss in more depth at the Investor Day in May.
Speaker Change: This concludes our prepared remarks and we will now open the line for questions.
Speaker Change: Thank you. We will now begin the question and answer session of the call. If you would like to ask a question, press star followed by the number one on your telephone keypad. To allow time for as many participants as possible, please limit yourself to one question and then return to the queue for any follow-ups. We'll take our first question from the line of Tammy Zacharia with J.P. Morgan. Please go ahead.
Tammy Zacharia: Hey, good morning. Thank you so much. I was curious, could you comment on your pricing expectations for the two segments for 2025, especially maybe the first half versus the back half?
Of course. Sorry, my voice is a little gone.
Tammy Zacharia: While the second half of the year, given that we are now, at that point in time, matching the production line speed with retail, that gives us more momentum on realizing
Tammy Zacharia: A pricing but also gross margins and with that the second half is price positive to low-mid single-digit percent.
Speaker Change: Our next question will come from the line of Meg Dobre with Baird. Please go ahead.
Meg Dobre: Yes, thank you. Good morning everyone. I'm curious if you can comment a little bit more on how you're thinking about the impact, trade, tariffs, anything of the sort, and
Meg Dobre: I guess more specifically, given your exposure to Europe, what are some of the options that you're considering from a production standpoint, especially if European Union tariffs come into play?
Speaker Change: to what we import, like components and machines. And on the component side...
Speaker Change: However, you know, translating that all the way through to machine pricing, machine costs, this is a very, let's say, manageable impact on our side, which we will price through to our end customers.
Speaker Change: So, these tariffs will lead to immediate, obviously, pricing activities over and beyond what I just mentioned in reply to the first, in the first question. On the, on the new, on the, on the complete machines that we import.
Speaker Change: We seek for, you know, we are pursuing certain analysis around how and when and where such a reshoring or re-bringing back some kind of assembly processes to the United States might make business sense.
Speaker Change: But what we need to do that in the end for a decision is certainty on the key boundary conditions because just...
Speaker Change: of a messaging one day and then another message the week or the month later, we can't really base solid relocations of production. But you can be rest assured, we are running those scenarios.
Speaker Change: and we're having a few ideas to counter that. But whatever will hit us on the cost side will be priced to our customers.
Speaker Change: Our next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead.
Angel Castillo: Hi, thanks for taking my question. I just wanted to unpack that a little bit more, I guess, as you mentioned, you know, the thresholds or what you're, I guess, reviewing in terms of maybe what levels of tariffs might imply the need to relocate some production. Based on what you've done so far, I guess, is there a certain threshold that you're kind of thinking about, you know, compared to that kind of 25% and any impact or exposure to the China retaliatory tariffs?
Speaker Change: I can't help you with that modeling question directly because you know we have a huge Excel file where we have all the products in and we have all the let's say sending and receiving the receiving United States by sending regions in there as well you know those thresholds move with the scenarios across the various different tariffs that might might be applied
Speaker Change: But there are a few decisions or a few moves that are, let's say, no-regret moves and some others require more in-depth analysis, particularly if we were to relocate entire machine assembly from one place to another. It takes time. So these types of relocations, even if it's just assembly work,
Speaker Change: is nothing we can do earlier than 12 to 18 months from the day we take that decision, provided we are having a ground field facility available, which we have, by the way.
Speaker Change: So, the question is, what happens in those 18 months? Is there another swing in policies, is there another reconsideration, all the likes?
Speaker Change: So we are observing these things. As I said, there are some no-regret moves, and there are some others that we will, you know, carefully reassess over the next...
Speaker Change: Our next question comes from the line of David Rosso with Evercore ISI. Please go ahead.
Speaker Change: Hi, thank you. Two questions. I'm trying to figure out the core decremental margins before some of the ad backs.
Speaker Change: And also, if you could take us around the globe a little bit on your planned production versus retail, if you can give us some sense of the magnitude, say, in Europe under production versus South America and North America, if you could. And on the decrementals, all I mean is I understand the cost savings in COGS, the cost savings in SG&A.
Speaker Change: But the warranty swing, are you looking at the 146 million drag in 24 not repeating at all in 25, or is there a smaller magnitude that we should be thinking about as the benefit from lower warranty drag 25 versus 24?
Speaker Change: So, Dave, on the last question, we are assuming that we will recover that drag over the year. We'll probably still see some higher quality cost in the first half, but then we will recover
basically the whole amount throughout the year.
of the contained decremental margins in 2025 compared to 2024.
Speaker Change: core 30% and I'm swagging it add back to 146 add back to 70 cogs 40 SG&A and that's what gets us down to the roughly 19% decremental all-in
Right, right. That's what we have baking right now.
Speaker Change: And then the plan production versus retail, whatever you can provide, magnitude, geographic, would be helpful. Thank you.
Speaker Change: Yeah, look, in Q4 2024, as I mentioned, we were 34% down, and if you compare 23 to 22, it was already almost 20, I think 21 or 22% down.
Speaker Change: So our Q4 2024 in terms of production hours compared to 2022 is about minus 50 percent.
Right, if you compare 22 to 24, Q4.
Speaker Change: And that is needed in order to make the corrections in the channel inventory, as we mentioned. Production is entirely up to our decision. We keep getting orders. So we are seeing a good pace and we are, you know, having...
Speaker Change: We're giving priority of dealer orders, obviously, so we are not slowing anything down that has a definite end customer behind, but we see for 2025 that we will probably in the first half,
Speaker Change: run at minus 10, minus 15 percent production hours versus prior year.
Please bear in mind that you won last year was
Speaker Change: Quite quite a good production still yeah, and that is the inventory we are working through right now
Speaker Change: And then in the second half, that production should be rather 5-10% down or maybe even equal to prior year with the Q4 being positive. This is simply because we are seeing that as we exit 2025, we will see what is the production pace.
Speaker Change: overall, globally. So now, by region, when you think about Latin America, as I mentioned in the prepared remarks, we
Speaker Change: We have seen that region to go down first. It has now completed its third year of pretty low production and retail activities.
Speaker Change: And when I talk and my team talks to the farmers down there, they're holding because they first want to get certainty around their end markets. They want to understand the various different bilateral deals that are coming up with the new administration here in the U.S.
Speaker Change: And with that, we do expect them to re-engage in equipment purchases and inquiries towards the end of the year. So that is a market that turns positive as we go to 26 Latin America. So that is what we currently see and currently expect.
Speaker Change: On EMEA, there are a couple of unknowns there. So, you know, there is the question mark around Ukraine, and, you know, when and if there is a frozen conflict, and how and with what kind of commodities that country comes back to global commodity supply.
Speaker Change: and how those commodities will sit on top in terms of price and quantities on top of the European production volume.
Speaker Change: Certain uncertainty with our farmers in EMEA, so I wouldn't I would expect 25 to be
Speaker Change: slightly down still on the TIV side, total industry volume, as I mentioned, the prepared remarks, and then we'll see whether 26...
will provide a turnaround. And on the United States...
Speaker Change: A lot depends obviously on the Farm Bill and the farmer-supporting policies that are coming up.
Speaker Change: crop insurance, or is it the accelerated depreciation? Just to repeat the stuff that we all know, and now obviously there might be some additional efforts coming. We don't know those, but I would expect that there is a stimulus for farmers that should
Speaker Change: you know, catch the quite steep decline in large cash crop in 2025 that we expect to be down 25 to 30 percent.
Speaker Change: year over year in the United States and North America overall, including Canada. So we'll see whether that is a turn, bottoms out, and could mean a regrowing equipment sales in 2026.
Speaker Change: Too early to say, bear with us. I mean, we'll collect, you know, insights to the extent possible and share those during our Investor Day later this year in May.
Speaker Change: But we, you know, as you've seen, I mean, there were import duties announced on Mexico and Canada and they were delayed by a month just a few days later. We need to get more predictability in these things to make proper and sound decisions for the business going forward.
Speaker Change: Our next question comes from the line of Tim Tine with Raymond James. Please go ahead.
Tim Tine: Thank you. Good morning. Maybe one for Adonay, just in terms of the cash generation.
and the free cash flow guidance of $350 million.
Tim Tine: unique from and what a lot of your other off-highway peers
Tim Tine: I've been experiencing and you know those that that have a full captive ownership of their finance arm So I'm just trying to better understand
Tim Tine: As we think about looking out beyond this production down cycle, if there's prospects for maybe a bigger
Tim Tine: recovery or is there something else that that you say no it's just that that normal cash conversion is going to be
Tim Tine: flow it or mitigate it or what have you. I'm just trying to get better arms around that, because again, it doesn't seem terribly unique from what others are going through, yet the impact seems more pronounced. Thank you.
Right. Look, we still think that our...
Tim Tine: Mid-cycle cash conversion rate is at around 70% given our overall configuration, but with the low activity levels that we continue having in 2025.
Tim Tine: We still expect to have a lower than usual EBITDA performance. From working capital, I expect modest contribution during the year. Of course, it will not be as dramatic as it has been in 2024 when we had this.
sudden deterioration of production of activity levels.
and then consider that we still are reducing dealer inventories.
Tim Tine: And when we reduce dealer inventories, we set aside less marketing reserves and we pay more marketing reserves to the dealers as they retail their units. So that's a further drag.
Tim Tine: If you look at the overall conversion rate, also the fact that we're keeping CAPEX substantially at the same level that we had.
Tim Tine: in 2024 is also not contributing to the to the cash conversion rate.
considering the lower levels of net income.
Speaker Change: Our next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.
Jamie Cook: Hi, good morning. I guess my first question, understanding what you're saying about production in the first half versus the second half, Adonai, can you help us with how you think about the margin cadence within ag, in particular the second half? And Gerrit, to your point, you know, if 2025 is a trough and we sit here just trying to think about exit rate margins.
Jamie Cook: to gain share in 2025. Can you just talk us through where you think those opportunities are? Thank you.
Jamie Cook: So, margin cadence in agriculture, I would expect an inverse trend compared to what we had in 2024. So I would expect lower margins in the first and the second quarter with all what we said about production.
Jamie Cook: and constraints, and then a much better margin in the second half of the year going back into the double-digit margin zone.
Speaker Change: Our next question comes from the line of Calum... Sorry, I need to... Sorry, I need to... Sorry, I couldn't find the button here quickly. So...
Speaker Change: On the, as Udeno said, H1, H2, so we are really gearing towards a much better run rate on gross margin and EBIT in the second half. Still going through the required corrections and the required, you know, setting things right.
Speaker Change: in the first half on production and deal inventory, so the margins.
Speaker Change: will return to those levels you're used to, and we obviously continue to double down on cost containment actions. What builds as well, and we commented on that before, is we took those $150 million roughly over the course of the year 2024 as specific warranty accruals.
Speaker Change: situations where we believe that, you know, showing here the right attitude and showing here proactiveness in various different areas, where we can be just much better, is the right thing to do, which helps share. Now this helps our market share.
Speaker Change: Sorry, I mean market share. So that helps, you know, our percentage points there. And we will see great, we actually see a huge interest in our new product tractor lineup, the new long wheelbase that was just recently launched.
Speaker Change: which ranges all the way up to 340, 350 HP, which we will extend with a new top of the line offering all the way up to 450 plus.
Speaker Change: And this year we launched a new short wheelbase. We're getting really good feedbacks on those tractor lineups as well. And think of us when we enter 2026, that we will have in 2026 a completely renewed tractor lineup in the mid-range.
Speaker Change: And that sets us up really well to compete and take share in places where...
Speaker Change: I think here and there certain quality and certain functionalities that we still had to improve held us back from the success with our customers. So it's really a tale of two stories.
Speaker Change: H1, H2, and H1 is really by design that we keep production low and we get those inventory levels right. Because look, this is a long-term game here. It's not a game, it's a long-term business planning that we're doing.
Speaker Change: And a quarter or two to set things right is, in the long history of C&H, nothing.
Speaker Change: in the three regions, four regions, where we play by the end of this year. A lot to do and very carefully to observe the market, what happens. But again, Q1 and Q2 will not be pretty, okay? So that's just to tell you that, and that is by design, because we want it that way.
Speaker Change: Our next question comes from the line of Kyle Mingus with Citigroup. Please go ahead.
Kyle Mingus: just if there's any differences in the type of programs you plan to do in 2025 versus what you did in 2024. And then just would be helpful to hear your thoughts on your programs maybe versus competitors and just overall pricing discipline you're seeing on both the ag and construction side would also be helpful. Thank you.
Speaker Change: Thanks for the question. We had, and Odona you can also chip in, we had set up in Q3 a pretty broad and compelling set of commercial actions
Speaker Change: in order to, let's say, lower not only the channel inventory but also to go after aged inventory that we had.
Speaker Change: on the on the dealer side. Aged is for us a machine that is more than 365 days old and and those machines have to go and if you put specific commercial actions on those machines
Speaker Change: that does not harm your new machine's pricing, okay? So this is a prior model year, even prior functionality, prior setup.
Speaker Change: So, there's a very conscious targeting of those pockets of, you know, aged machines as well as specialty machines that we...
Speaker Change: to the yard and wants to make a choice, it's always, let's say, less helpful to have various different model years in one line-up. So this is going to continue in the...
Speaker Change: in the first half of this year, and we keep tailoring these programs as we manage to sell them out. And this is different for EMEA.
Speaker Change: as it is for the United States or for Latin America. I mean, think of North America now.
with tariffs coming.
for sure, the extent not yet entirely clear.
Speaker Change: We would expect, as reasonable business behavior suggests, that when, you know, prices will go up given the tariffs come, there will be some kind of pre-buy.
Speaker Change: from farmers towards dealers and from dealers towards us because the pricing is
It's still hard to determine how much it will be.
Speaker Change: customers tend to invest in those areas. While in Latin America you see high inflation...
You see high interest rates.
Speaker Change: So we'll see how that will kick in on that end. So it's very granular, it's many initiatives that go on across the globe and we keep adjusting them every quarter in order to align inventory levels with market appetite and specific areas of where we have need for action.
Thank you. Bye.
Joel Jackson: Our next question comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead.
Joel Jackson: Good morning. Thanks for the commentary about having about a month of inventory more than Targets across the platform. Could you maybe talk about by region what it looks like, including in South America, and then following up on that, maybe give a little more colour why you think South America will turn first and tackle the credit situation there? Thanks.
Joel Jackson: The question was about deal inventory by region. Sorry, we had a bit of a loudspeaker issue here.
Joel Jackson: Yeah, deal inventory by region, if you gave it globally, and then maybe breaking down to South America, then also in South America, maybe you could talk about why you think that that market's going to turn first, what you're seeing, and comment on the credit situation there.
Joel Jackson: Look, we are comfortable with the dealer destocking implemented in South America because this is now the third year and we could very well adjust deal inventory with the retail pace.
Joel Jackson: Some more reductions might be needed here and there in Latin America, but we feel quite well set up over there. In North America, we still have, and this comes with the still unknown, let's say, retail pace in 2026.
Joel Jackson: You know, provided that the market has a bit of pre-buy from inventories given the incoming tariffs and
Joel Jackson: Provided there is favorable policies coming our way, coming the farmer's way in 2025 that will lead to re-engaged equipment purchases in 2026.
Joel Jackson: I don't see big issues with our current level of North American inventory. However, as I don't know, I keep a very, let's say, conservative view of how the market will go, and that's why we keep reducing in North America.
Joel Jackson: inventories still over the course of 2025 by several hundred million dollars in order to get it to the levels that are required. And please don't forget in the time we re-engage again and restarting production it comes with a bit of lead time of course.
But we keep the seasons in mind.
Joel Jackson: And with those we review on a monthly basis whether the production pace is the right one and whether the, let's say, inventory reduction is still there. So North America might see
Joel Jackson: a little bit of a special demand here, again, pre-buy from tariffs maybe, and if the market is hit positively by the policies from the new administration.
Joel Jackson: we could see a better outlook on retail, which will obviously then also reduce our stock level targets.
Joel Jackson: And we will, in a very disciplined way, continue to underproduce retail in 2025 to get the deal inventories.
further down where we believe we have one more month.
Joel Jackson: to be reduced from five to four, and then we will see. And this is obviously different.
Joel Jackson: When you look at combines and tractors on the combine side, we see a faster achievement of our targets of required inventory levels somewhere around mid-year, while on the tractor side rather in the second half of the year on construction.
Joel Jackson: Our de-stocking action in 2024 brought already a 6% reduction over 2023 and in 2025.
Joel Jackson: We see that the year-end dealer, the 2025 forecasted year-end dealer inventory will be in line with what we considered as an ideal level. But again, if markets change one way or another, we can react.
Joel Jackson: with our industrial machine in a reasonable time and and adjust further from here, but I'd rather be on a
Joel Jackson: continue to push too high a deal inventory in front of us which is just aging month by month and it's not helpful when the market returns on your price realization. When you have prior model you're sitting right next to the new one.
Joel Jackson: As I mentioned before, we're doing the right thing, de-stocking, creating space for fresh machines when the market turns.
Speaker Change: Our next question comes from the line of Mike Schliske with DA Davidson. Please go ahead.
Good morning. Thank you. Can you share your expectations for
Speaker Change: income and financial services for 2025 if dealers have such a large inventory reduction and you just did actually shrink the portfolio a little bit in the fourth quarter. Just your thoughts as to whether there are any big
Speaker Change: big moving parts for the year that we should be thinking about.
Speaker Change: Yeah, so two things in the portfolio, we reduced dealer inventory and so we reduced dealer financing on the fourth quarter, and then there were quite significant currency movements when we translate the receivables from the other countries, from the other regions. In terms of...
income for next for 2025 we expect it to be
Speaker Change: roughly in line with what we had in 2024 where we have less of an impact of risk provision hopefully and some probably some constraint on the overall margin given where the interest rates are going.
Speaker Change: but consider it in line with what we had this year.
Speaker Change: Our next question comes from the line of Daniela Costa with Goldman Sachs. Please go ahead.
Daniela Costa: Hi, good morning. I have a follow-up in terms of the free cash and its use, but basically given sort of the more limited cash conversion this year, you still mentioned that you're aiming to pay a dividend and to do the buyback. How much are you willing to temporarily lever up for those and how do you think about the balance of what you will propose in terms of one versus the other?
Daniela Costa: Look, we have a stated policy for dividends which goes between 25% and 35% of net income of the previous year and we will be likely within that band.
And then we have an outstanding Share Buy Back program.
Daniela Costa: and I don't think we will need to have a new program.
Daniela Costa: In 2025, we can use what is left from the 2024 program.
Daniela Costa: Directionally, the overall spending will be in line with our ability to produce cash flow. So we will see, we will have the dividend in the first half and then in the second half we will adapt what is left on the share buyback.
Speaker Change: Your next question comes from the line of Kristen Owen with Oppenheimer. Please go ahead.
Kristen Owen: Hi, good morning. Thank you for taking the question. Two questions, both related to the cost side. First, on the $600 million of cost savings that you achieved. If I recall correctly, you kicked off the second phase of the procurement program last fall. So, any contribution from that that's embedded in the guide, or how should we think about anything on the procurement side being upside as we exit the year?
Kristen Owen: And then I'll ask my second question here, since it's on the same tone. R&D spending is guided down for 2025, about 10%. Just wondering how you're thinking about ROI on R&D at this stage, given that you've got a full lineup freshened coming into 2026. Thank you.
So I'll take the first question on the procurement side.
Kristen Owen: We kicked it off in 23, we have in 24 first results from the strategic sourcing program with in-year savings in the mid-double-digit million area.
Kristen Owen: But the run rate is obviously higher and the real savings from the wave one of four. Okay, so this is just wave one of four.
Kristen Owen: The procurement program will start to kick in now in 2025 with a low, let's say three-digit million, run rate positive impact.
Kristen Owen: And then we are layering in Wave 2, Wave 3, Wave 4. So this is an ongoing effort.
Kristen Owen: You can basically say on the $600 million that we referred to before, there is very little of the procurement strategic sourcing program in so far, by the nature of these types of activities. They take more time. And this is going to fuel our cost reduction efforts over the several years to come.
Thank you.
Kristen Owen: Our next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.
Kristen Owen: Oh, thanks very much. Sorry, I'm a little under the weather today. My question has to do with inventories again, and I wanted to kind of dig into, you know, new versus used inventories within the channel. From my understanding is is that, you know, most of the problems within the channel is really kind of on the use side.
Kristen Owen: Where do you see use being? What are you doing to help your dealers clear that out? And when you're talking about your inventory levels being normalized within the channel in the second half of 25, is that a combination of both new and used?
So, that's the question. Thank you very much.
Yeah, you're spot-on.
Kristen Owen: Typically, when a new machine is sold, the used is traded in and while the used machine takes the same space in the yard as a new machine, its value is about, whatever, 25-30% or so of the new machine. And selling those machines out and supporting our dealers to sell those used machines out
Kristen Owen: very much also the name of the game in 2025, particularly again in the first half and also the second half, in order to create space for the new sell-ins.
Kristen Owen: And that is also part of the commercial campaigning that we are having in place, executed predominantly by our financial services team, providing certain financing and certain floor planning activities. Here, while we obviously also look at spare parts and packages to get those machines.
into a good shape for selling it out again.
Speaker Change: You're right, I mean just reducing a new inventory isn't good enough, I mean that is the first step obviously.
Speaker Change: But the used machines that come back need to be sold out again in order to create financial and physical space to start selling in the new machines for the new upswing to come. And we are very much focused on that, as I mentioned, with our financial services.
colleagues across the year 2025.
And maybe there was a question from...
Speaker Change: Sorry, there was a question from Kirsten that wasn't answered before about, sorry about that, about the R&D. So, yes, we see R&D at around 90% of the 2024 level, but consider that within our R&D spending, we have all of the efficiency programs.
Speaker Change: scrubbing program by program and then looking at how we allocate the hours and looking at how we spend the money on R&D to be more efficient. We haven't really
Speaker Change: stop any major program or postpone any major program. We talked before about our CapEx investment as well. I mean, we're trying to be efficient, yes, but to continue investing in our product and our future.
Speaker Change: Hi, good morning. I guess on North American ag demand, when do you see declines in retail demand neutralizing? Should that be a 2025 thing or are you thinking that could push into 2026?
Well...
Speaker Change: Good question. We saw retail demand to decline already at the end.
Speaker Change: a little bit on the end of 23, then it held up across 24, but we saw it then go down quite substantially in the fourth quarter, third also, third to fourth quarter of 2024.
Speaker Change: So, I think farmers are now waiting for the farm bill to come out and to better understand what the bilateral trade deals will actually mean for their crop production and what is their...
Speaker Change: the role of renewable fuels as well, which was already, there was already an early debate on those.
Speaker Change: So, we in our plan, we assume retail demand in North America to only, let's say, first bottom out and then maybe slightly, but only slightly, increase again in 2026.
Speaker Change: And that might be too conservative, but for now it's a safe place to be and we'll see what the policies will bring.
Speaker Change: And if there is a change in that outlook, we can obviously adjust accordingly. But for now, we do not expect the North American large cash crop market to deviate from the guidance on the TIV side that we have given, which would be year over year down 25 to 30%.
Speaker Change: We expect that to be the good reference for planning at this point and if things become better
Speaker Change: And that concludes today's conference call. Thank you all for joining. You may now disconnect.