CNH Industrial N.V. Q2 FY2024 Earnings Call

Good morning and welcome to the CNH Second Quarter Results Conference Call. I would now like to turn the call over to Jason Omerza, Vice President of Investor Relations.

Thank you, Brianna and good morning everyone. We’d like to welcome you to the webcast and conference call for CNH Industrial’s second quarter results for the period ending June 30, 2024. This call is being broadcast live on our website and is copyrighted by CNH. Any other use, recording or transmission of any portion of this broadcast without the expressed written consent of CNH is strictly prohibited. Hosting today’s call are our new CEO, Gerrit Marx; and our CFO, Oddone Incisa. They will use them available for download from the CNH website. 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. 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. 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.

Thank you, Jason and thanks to everyone for joining our call today. Before I begin with the earnings results, I want to say that I am excited and energized to be back at CNH after 2.5 years at the helm of CNH spun-off on-highway business. I want to thank everyone for joining this call and look forward to working with this great team around the world. My first 30 days have been spent getting myself reacquainted with CNH. While I was CEO at the Iveco Group, CNH was my single largest customer of engines and we enjoyed a global partnership with financial services in Europe and Latin America. As such, I always remained up to speed on what was happening in the agriculture and construction industries. So in a way, I don’t feel like I ever really left CNH and the welcome I have received has truly been moving. But as I have gone – I’ve been going around the world, touring our manufacturing plants and R&D centers, meeting with our employees and visiting dealers and farmers I’ve been really impressed and recharged with the spirit and dedication of this collective team of practitioners to advance the noble work of farmers and builders. I am humbled and privileged to have this opportunity to lead this great company and to pick up and further refine the delivery of an ambitious plan from Scott Wine for whom I wish all the best in his future endeavors. I’ll come back to some of my near-term priorities at the end. But first, let’s look at the second quarter results. The agriculture industry is going through a down cycle and Scott and the leadership team had addressed this well in advance with decisive actions on structural costs, production cadence and dedicated efforts such as our strategic sourcing program. All of this will be, obviously, continued as we add additional elements to these improvements. I am also very pleased with the innovative products and technology that our team continues to unveil. These innovations showcase the world-class R&D and technology capabilities that are only found at CNH and I am committed to ensuring our business continues to embrace this creative and ingenious spirit. Companies are made of people and how we play as a team will determine how well we compete and gain in the end markets. Team play is driven by shared values and behaviors, all based on a profound sense of trust and belonging in performance. This will be a primary focus of mine while delivering financial results quarter-by-quarter. In order to create an even greater business focus and effective execution on key priorities, the Board and I agreed to further streamline our governance by designating agriculture as CNH's core business and my primary force. Our reinvigorated construction business will be managed as a distinct and fairly independent operation for its own agility and optionality to seek opportunities in its industry. We will obviously keep nurturing the synergies with construction, both downstream and upstream, but we need to recognize that agriculture is and will remain our home turf. The second quarter was very challenging, and that is reflected in the financial results. Low industry retail demand, coupled with the need for dealer destocking resulted in lower production and shipment volumes. Consolidated revenues were down 16% and industrial net sales were down 19%, while maintaining our pricing discipline. Sales were down in all regions in both agriculture and construction. To counter this on our bottom line, we will remain focused on cost optimization on all levels and retail efficacy throughout the second half of this year. Industrial adjusted EBIT margin was 11.2%, up 206 basis points compared to last year. While the lower sales and production affected revenues and fixed cost absorption, CNH was able to contain the impact on bottom line compared to previous downturns with our production cost and SG&A restructuring actions. Adjusted EPS was $0.38 compared to $0.52 last year. Now going into a bit more qualitative detail of the quarter. Both the agriculture and construction industries deteriorated during the quarter with agriculture retail demand further weakening amid depressed soft commodity prices. We continued our lower production output in an effort to support our dealers as they work through their inventory. Agricultural production hours were 30% lower than in the second quarter of 2023, with construction also down 20% and we will continue adjusting our manufacturing output as needed to further reduce our dealer and company inventory levels. We also continue to assist dealers with marketing their used inventory through pool fund access, financing incentives and technology retrofits. We cannot control the broader market, but we can control how we react and respond to it. The team has worked tirelessly to protect margins. And even in this period of diminishing volumes, we were disciplined on pricing. As the personal champion of continuous improvement and operational excellence, I am committed to ensuring that we operate with an eye forward towards efficiency across the company through our structural cost reduction programs. Oddone will give you a more detailed update on these programs a little later. Another one of my big focal points is product and service quality, adding the role of quality and customer advocacy to my top team. And while product quality has always been a priority at CNH, our Q2 results were negatively impacted by higher warranty costs as we expedited repairs in the field for products manufactured at our Racine plant during the recent strike. In total, these warranties weighed on our reported financials by over $40 million in incremental cost in the quarter and about $70 million for the first half of 2024. Racine today is back to top quality output levels and we are well prepared to work diligently through the pipeline of challenges jointly with our network partners. We will heighten our efforts in this area, making quality a mindset throughout the company. During the quarter, our restructuring program proceeded according to plan and substantially all the remaining actions needed to be taken have been identified. Now, this does not mean that we are concluding our focus on cost and efficiency, but we are starting to see the impact of the changes that were made over the last 6 months and this helped to reduce our SG&A costs by over $100 million compared to the first half of 2023. The streamlined leadership structure will help maintain spending discipline and deliver synergies from simplified and more direct governance. I will now turn the call over to Oddone to take us through the financial results.

Thank you and welcome, Gerrit and good morning, good afternoon to everyone on the call. Second quarter industrial net sales were down 19% year-over-year to $4.8 billion. This decline was mainly due to lower shipment volumes and lower industry demand, compounded by reduced dealer inventory requirements year-over-year. Adjusted net income was $485 million for the quarter, with an adjusted diluted earnings per share of $0.38, down $0.14 from Q2 2023. Second quarter industrial free cash flow was $140 million, down $246 million compared to Q2 of last year as a consequence of the lower sales and lower production levels. Turning to agriculture. Net sales decreased 20% in the quarter, with lower volumes in all regions. Although the team continued realizing price, mainly in North America, the lower volumes and lower production levels were the main drivers for the contraction in gross margin, which was down 260 basis points, at 24.4%. The continuing improvements from purchasing and from our cost optimization program are shown in the chart in the product cost category, which is $20 million positive, net of the $44 million increase in warranty expenses that Gerrit mentioned before. I’d like to remark here that at 24.4%, the gross margin we are presenting today is the second highest for Q2 after the record we set last year in completely different market conditions. SG&A expenses were $35 million lower year-over-year from the execution of our restructuring program, reduced non-labor cost and lower variable compensation. R&D expense was $28 million less than last year, mainly coming from engineering efficiencies as we did not cut any development program. Agricultural adjusted EBIT margin ended at 13.7%, down 310 basis points compared to Q2 of last year. Moving on to Construction. Net sales for the second quarter were $890 million, down about 16%, driven by lower volumes in all regions. This decrease was larger than anticipated and lowered our expectations for the second half. Net pricing was essentially flat, with positive pricing in aftermarket parts, offsetting higher incentives to our dealers in support of retail equipment sales. Despite the lower sales volume, our cost reduction program made it possible to improve the gross margin by 50 basis points to 16.5%. SG&A expenses were down $8 million compared to last year, and R&D expense was down $3 million. With $60 million of adjusted EBIT in Q2, adjusted EBIT margin was nearly flat year-over-year at 6.7%. In our Financial Service business, net income in the second quarter was $91 million, a $3 million decrease compared to 2023. Higher revenues and yields were offset by higher risk costs driven by increased delinquencies. Most of the growth in the past due payments was in South America from the seasonal concentration of yearly installments due from agriculture customers compounded by some of the economic and environmental factors out there. We continue to feel confident in the quality of our credit portfolio globally and delinquency rates are better than in previous industrial downturns. Retail originations in the quarter were $2.9 billion up slightly compared to the same period of 2023, and the managed portfolio at the end of the quarter was $28.5 billion. Back to the industrial activities, our cost reduction programs are continuing to yield results, and we reaffirm our commitment to driving structural cost improvements throughout the company. On the cost of goods sold side, we have saved $128 million year-to-year – year-to-date through focused efforts on reducing logistics, manufacturing and material costs. These savings show up in the agriculture and construction EBIT walks in the product cost categories, but they are partially offset by labor cost increases and higher warranty costs we discussed earlier. We are progressing in our strategic sourcing program. And as we implement Phase 1, we look forward to meeting many of our current and prospective suppliers as we kick off Phase 2 in September. Year-to-date, we have saved $105 million of SG&A versus 2023 and we will continue to realize savings in the second half as we implement the final steps of our restructuring program, and we will maintain our spending discipline going forward. Moving to our capital allocation priorities. In June, we issued €750 million under our updated medium-term notes program, and we renewed our core long-term revolving credit facility. This demonstrates CNH’s strong credit position and we want to thank the banks who assisted with this transaction. During the quarter, we repurchased $60 million worth of shares and paid $593 million for our annual dividend. Through the first half of 2024, we have returned a total of $1.2 billion to shareholders in dividends and share buybacks. Despite the lower sales, CNH remains a cash-generating business and our commitment to return free cash flow to shareholders remains unchanged. Lastly, a point related to our recent transition to single listing to the New York Stock Exchange. Based on the most recent market data, CNH will be a U.S. domestic filer for the purposes of U.S. Federal Securities Laws and Exchange requirements as of January 1, 2025. As you know, starting from the third quarter of 2022, we began voluntarily filing for our financial results under the periodic 10-Q and 10-K reporting forms. So this change would not alter the structure of our financial filings. With that, I turn it back to Gerrit.

Thank you, Oddone, for running us through the financials. Moving to the agriculture outlook. Given the further weakening of pharmaceutical demand, we project full year industry retail levels to be lower than previously forecasted. We have further lowered our projections for end market demand in North America, EMEA and South America. As a result, we are lowering our 2024 agriculture net sales forecast to a decrease between 15% and 20% versus 2023. This is in response solely to industry demand. Based on our expectations for lower volume with modestly positive pricing, partially offset by continued cost reductions, we are lowering our EBIT margin guidance by 50 basis points to be between 13% and 14%. Production hours in the second half of 2024 will be down around 25% when compared to the second half of 2023. And that reflects our plans to underproduce retail demand for the remainder of the year. Q3 production slots are almost fully covered by orders in all regions. We’re already taking orders for model year ‘25 raw crop products in North America, but it is still too early to draw any conclusion about 2025 demand. Turning to construction. Sentiment and leading indicators have trended negative during the quarter. And we have seen industry channel inventories start to tick up. This trend, along with expected lower demand through the rebranded channel, has brought us to reevaluate our sales outlook. Therefore, we are lowering our 2024 construction net sales forecast to be down 15% to 20% versus 2023. Despite this, we are reaffirming our previous EBIT margin guidance of 5% to 6% for the year on the strength of our cost reduction programs, compensating pricing pressures and lower production levels. Production hours in the second half of 2024 are being rebalanced with significant reductions in North America and Europe. Worldwide production will be down around 20% compared to the second half of 2023, assuming underproduction compared to retail demand for the remainder of the year. Q3 production slots are mostly covered by orders and order collection is in progress for Q4. Turning to Slide 15. Combining these update segment forecasts, we now anticipate industrial net sales to be down between 15% to 20% compared to last year. Industrial free cash flow is now estimated to be between $700 million and $900 million, reflecting the lower sales and the impact on net working capital of the lower production levels. We now forecast adjusted EPS to be between $1.30 and $1.40. I will conclude with a few words on my priorities for the next 90 days. While there’s a lot going on at CNH right now, we will not take our focus off delivering results in this challenging market environment. Our global leadership team was announced on Monday this week, builds on way more than 100 years of combined experience in our industry and is empowered to carry out faster and more effective delivery of the strategic priorities for profitable long-term growth with a simplified matrix structure and clearer accountabilities. As we focus on agriculture, as our core business, our brands, Case IH, New Holland, Raven and STEYR to name only the largest will claim their rightful turf and leave an enduring mark in their respective fields. We do not aim to follow anyone, but we will break new ground every day with every step we take. We will work jointly with our network partners to improve our commercial and brand effectiveness. Allowing our construction business to run more autonomously and to explore optional paths on their strategic map, we empower them to unlock even more value while retaining their synergistic benefits with agriculture. In 2021, CNH began its journey to bring its tech stack in-house with the acquisition of Raven. A tremendous amount of work has been done to marry our world-class iron with our enhanced suite of precision tech. An integrated approach to having technology embedded into our equipment from each new product inception will see our now combined engineering teams deliver more consistent results. We will accelerate our innovation engine and the convergence of iron and precision into a seamless user experience. Finally, I’m looking forward to meeting with many of our shareholders. Over the second half of the year, I hope to be able to engage with most of you in-person or virtually. I want you to feel as confident as I do that CNH is a great company and team with tremendous potential for value creation. We are planning our Investor Day for early 2025, and we’ll let you know as soon as we have set a date and location. I look forward to going into much greater detail around my vision for strength in the company’s value proposition and demonstrating how we win in a competitive marketplace. As I’ve traveled to our offices, plants, dealer facilities and our customer farms to meet with the many people who make up the CNH ecosystem, I’ve gotten up to speed on where most of our priorities sit. Our people are the most knowledgeable, capable and hard-working individuals I’ve encountered during my professional career. My goal over the coming months and years is to weave together our competitive advantages and overcome hurdles to unlock growth, value and industry leadership. I want to express my deep appreciation and gratitude towards everyone who is a part of the CNH family for welcoming me with open arms. I very much look forward to the journey ahead. That concludes our prepared remarks, and we will now open the line for questions.

Thank you. We will take our first question from Jamie Cook with Truist Securities. Please go ahead.

Good morning. And congrats on a nice quarter given the environment that is out there. I guess just two questions. Can you talk to what’s implied in your guidance in terms of pricing for the full year? One of your competitors yesterday lowered their pricing assumptions and this is specific to farm equipment from 1% to now flat. So I’m just trying to understand how you’re balancing price versus market share going forward? And then I guess my second question on the production cut. I think you said down 20%. It would be more concentrated in North America and Europe. Does that imply South America, Brazil is where you want to be now? We’ve rightsized that? And then sort of how are you thinking about if the markets get worse to what degree is the strategy to continue to cut production in 2024 to set you up for a better 2025? Thank you.

So let me take the pricing, Jamie. We confirm very low single-digit price potential price increase in agriculture, whereas we confirm that we are less confident on pricing on construction. So we are prepared to accept it to be negative in construction for the balance of the year because of the competitive position.

Yes. And on the production cuts, as we said, we have a 25% agriculture production cut in the second half of the year and 20% in construction for the second half of the year and a year-over-year view. And on the construction side, I mean, most notably that is because of the weakness in the U.S. residential sector, while the base infrastructure construction is obviously continuing to go reasonably well. Production cuts in LatAm are around those numbers as well. We have taken them down slightly earlier than the others, and we keep traveling on a very careful level of production there to continue lowering our dealer inventory globally where we see still for the agriculture segment, about $1 billion plus dealer inventory to be reduced by year-end to reach where we want to be entering into certainly flattish 2025 to be seen, but we need to have the dealer inventories significantly lower than today by about $1 billion plus globally.

But is the strategy to make sure like when we take the pain in 2024 to set you up for a better 2025. So if the markets get weaker, would you cut production further? Is it like – that’s the question.

We get ready for a good start into 2025, expecting similar levels of muted customer demand. And I mean, obviously, we can react quite swiftly if that is to change either way. But we get ready for 2025.

Our next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my question. I have two questions more regarding the announcement 2 days ago. One on the, you created this new role of Chief of Quality. And I guess sort of prompted you to create that. Was there something that you’ve seen that was missing? Why do we need that now? Or maybe that’s the first question. And then I’ll ask the second one.

Hi, Daniela. Well, I mean, Head of Quality was certainly there before in the segment. And now that I put myself on top of the agriculture segment, that position moves to a direct report, and we further strengthened this position across the globe because we believe that there is more work to be done in creating products that delight our customers. And as I said in my prepared remarks, we have gone through a quality challenge with the production from the Racine plant following the strikes. And hence, now we are clearing this and cleaning this. And we have successfully returned the Racine plant to very good quality output levels, but maintaining that and all bringing everyone else around CNH world levels, world class is a constant ambition that we need to live up to and hence, having quality in a direct line is something I’m very much used to and quality is the voice of the customer. And that person shall always be in every discussion that we have. So therefore, we call it quality and customer advocacy and that is a very needed position, I think, in any manufacturing company.

Understood. And then I guess sort of regarding construction equipment and the relation with the group, I guess you were back in 2021 when the decision to separate Iveco was there and construction equipment was considered a core part, it had some synergies with the rest. The language now seems to slightly shift. Can you talk about like what has changed? And how sizable are these synergies with the group? And could something change to make those synergies less relevant? How should we think about the roadmap for construction equipment?

Yes, Daniela, I think the – when we spun off the on-highway business or the trucks and engine business back in the days, that was truly different in most of its aspects from CNH, agriculture and construction. And while here with construction, I think it is to give this business that has led a tremendous turnaround and a very good success story, the freedom to explore all the options around – in its ecosystem to develop its full potential. The two businesses agriculture and construction, today, have today already separate manufacturing footprints. They have dedicated R&D resources. We have separate dealer networks and even separate sales organizations. The back-end synergies are predominantly and they are sizable. They are predominantly around procurement, joint procurement and back-office functions like finance, IT and the likes, but industrial businesses are already separated today and giving this team the agility it takes to capture the opportunities and their playground is requiring them to be at arm’s length, and I will focus my time on agriculture while having regular business reviews with the CEO, obviously, yes.

Our next question comes from Mig Dobre with Baird. Please go ahead.

Good morning, thank you for taking the question. I want to follow-up on Jamie’s question on inventories and production cut. If I look at your Slide 18, where you are discussing dealer inventories, looking at those charts, I struggle to see much evidence of dealer destocking thus far. You have a goal to take out $1 billion worth of inventory over the next couple of quarters. And I’m sort of curious if the 25% production cut will be enough to deliver on that goal considering the fact that production hours were down 30% in Q2. So are we doing enough here? How can we get the comfort that this cut is going to do that?

Yes. I think there is a certain time delay between production cuts and until that leads to actual retail inventory – dealer inventories to drop. So we have taken a 30% production cut in agriculture in Q2 versus prior year. And this is going to shine in already and shows already impact in the early innings of Q3. So there’s a certain time delay between those effects. And as we continue with the 25% production cut in agriculture in Q3 carefully watching what we might need to do as well in Q4. Maybe we don’t need to add further cuts, maybe we need to. We can make that decision in a few weeks from now. We are pretty confident that we’re going to reach those inventory levels on retail levels. The impact of Q2 starts to shine already.

And Mig, don’t forget that last year, in the second half of the year, we have already taken down production particularly in the low horsepower tractors globally on a quite significant way.

I appreciate that, Oddone, but given the fact...

The reduction that we’re showing is not sequentially year-over-year, right?

No. I get that. I’m just a little bit confused on why we really haven’t seen more of an impact already from your prior production cuts on dealer inventories. But I guess my follow-up here just to kind of move on is on construction. And again, your language around the segment is very different. And I’m wondering if – at the Analyst Day, that’s going to be upcoming in 2025, we’re going to be hearing some more concrete around strategic alternatives developing for this segment. Thank you.

Yes. I think we are working diligently on the full potential of both of our businesses. And I think on construction side, the optionality and trajectory the team has created will set the stage for interesting Capital Markets Day next year – or Investor Day next year.

Our next question comes from Kristen Owen with Oppenheimer. Please go ahead.

Good morning. Thank you for taking the question. Also looking to maybe double-click on the production and inventory levels. And more specifically on the agriculture inventory levels, maybe a bit by region. Given the outlook for underproduction relative to demand, if you can maybe help us break down where the inventory levels are, where you might be oversupplied versus regions or types of equipment where you feel like you’re more comfortably in the right range?

Yes. So I think, look, in Europe, we destocked in Q2 mostly combined, and we intend to reduce this even more in the second half and let’s see how the year-over-year change would happen there. And why we actually have reduced dealer inventories in APAC already versus the beginning of the year. So I think here, we are well set up. In North America tractors, we are planning to destock in Q3 and Q4 significantly underproducing retail that is lined for the second half. While we – for combines, we are lower than Q4 overall. In summary, we are pretty much aligned with our expectations as we have summarized on a global level here.

That’s very helpful. And then my follow-up, I think you mentioned in the prepared remarks that you’ve opened up the early order program for row crop in North America. Just any early indication, understanding it’s not necessarily representative for 2025, but what the book pricing is assumed for that 2025 early order program? Thank you.

We have implemented some modest pricing for our row crop in North America. It's still too early to provide any expectations for 2025 based on our current situation.

Our next question comes from Andrea Balloni with Mediobanca. Please go ahead.

Yes. Good afternoon. Thanks for taking my question. Welcome back, Gerrit. My first question is on cash flow. If I look at the midpoint of your guidance range, you basically reduced the target by circa $400 million. What does this explain this reduction if we consider that the cut in the net industrial EBIT is only $200 million? And again, on free cash flow, if you can give us an idea about the CapEx target we should expect for this year? My second question is on restructuring costs. If you can give us an update on the total reductions around we should expect? And my very last question is on the warranty cost, you have experienced in Q2 totaling $14 million, I am really sorry, I didn’t get what these costs are if you can explain it again? Thank you.

Andrea, let me take the last question first. The warranty costs that are inside our reported adjusted financial results for the for the second quarter are related predominantly to quality campaigns or fixing campaigns that we have already launched, and they are well underway. Correcting quality issues that came out of the Racine plant as a result of the strikes that we had endured last year. Those are topics we know and we are on top of. And in the interest of the customers, we very proactively are out there and fixing those issues as we speak. And that number is around $70 million for the first half of this year already. This is the reason. And on free cash flow.

On free cash flow, I would say the reduction is part of it through the EBITDA, as you mentioned, and the other part is on working capital dynamics when we reduce production and we reduced sales. And on CapEx, we are confirming the guidance that we paid at the beginning of the year. So we’re not – we don’t have big changes there.

Okay. Thank you.

Our next question comes from David Raso with Evercore ISI. Please go ahead.

Hi, thank you. On Slide 11, I just want to make sure I’m reading it correctly on the savings. So, for example, on the COGS, the $128 million listed in 2Q, that’s an aggregate year-to-date, right? So the idea for the full year...

That’s correct.

Okay. So basically, if you do both those for SG&A and COGS, the second half of the year has an incremental $255 million of savings, right? That’s what the back half provides. The spirit of the question is looking at your margins. So for example, the second half of the year, your ag margins are implied at 13.8%. Before last year, the company had never done 13.8%, right? I mean, basically, the margins are close in ‘22. So I think we’re all just sort of trying to figure out is ‘25 in another leg down? Or can these margins be viewed as at least close to a bottom, but obviously makes you nervous you look back and go, this company has never done 13 before except for one year and now people are trying to figure out the bottom. So the savings in the back half of the year, I can run the math and I get it. The back half of the year, the decrementals for the whole company are only 16, right? It’s impressive, the comp is easier, but even if you pull out the $255 million, it’s still less than 30% decrementals, which is still pretty impressive. So that’s a long-winded way of asking. Going into ‘25, what is left on the savings programs from actions already taken, just in case we want to model a couple of hundred bps pressure on pricing or another leg down, what are some of the savings that are already baked into ‘25 from actions taken?

There are a couple of opportunities for 2025. And let me name three opportunities. I mean we have this strategic sourcing program. We have structured in four waves. We’ve just done Wave 1, which is under implementation as we speak. And we have kicked off and will accelerate on Wave 2 in September later this year when we have all our strategic suppliers together at our annual supplier conference. And that will continue with Waves 3 and 4 throughout ‘25. So there is a continuous cost reduction coming year-over-year from these procurement programs. So the procurement itself has obviously already contributed in 2024, but it only really starts to show in the years ‘25 and after. So this is reason one or, let’s say, confident level number one on additional cost reductions. The second point was – is related to the quality side of things. As we said, we have in the first half of this year in the reported adjusted financial $70 million drag in the numbers from quality issues that we have in the current production of Racine fixed, okay? So we are living through this, and it is going to come to a closure at some point next year when we have basically those products hitting the market at larger scale at quality levels that we want. So in today’s numbers, there is, I don’t want to call it a one-off, but there is a quality fix in, and that is obviously our target to not repeat again, okay? So this is something that will certainly help 2025. And on the third element and that is not to be underestimated, we are going to have a full year impact of the SG&A restructuring that Oddone also commented on, which was the program launched with – by Scott and the team here that is under implementation in its last innings. And with that, we get the full year impact next year. So there is quite some cost reduction ongoing and in pipeline to help 2025.

I guess I’ll just ask the obvious question. Would you like to try to quantify a little bit when you think of the potential cost savings? Like this year is $488 million, a very significant number. Is it – I mean, roughly half that? So I’m just curious how you’re thinking about the magnitude of potential savings from the smaller items?

We will not quantify it yet because with – on the supplier side, we will have quite some work to do. And I’m pushing for the upside, as you can imagine. And on the quality side, I need to see the timing on when we are through this. And while on the SG&A we obviously have a number, but if at all, I would like to give you all three together, and we have sufficient time at our Investor Day next year to go deeper into those numbers and reduction opportunities supporting ‘25 and the years to come.

Our next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

Yes. Thanks. Good morning everyone. Welcome Gerrit. I guess maybe just starting with the cadence of earnings, how to think about the third quarter versus the fourth quarter? Any help that you can give us on the expectation for production cuts in agriculture versus construction, and any delta in the expected decremental margins between 3Q and 4Q? Thank you.

Yes. So, I think in the prepared remarks, we had the size of the production cuts in agriculture and construction is around 25% in agriculture and around 20% in construction year-over-year. We had a difficult Q4 last year. We expect all things considered from a profitability standpoint to be more balanced in the Q4 of this year. In Q3 is where we have most of the production cuts and Q3 is typically a quarter where we have our plans basically down in the month of August. So, it’s a more difficult quarter to from a profitability standpoint. But I would say, if we compare to last year, we expect to be more balanced on the fourth quarter than last year, where last year, we started to take the big adjustments in our production and our sales…

Okay. That makes sense. And then, Gerrit, I know you probably have a lot more to share at the Investor Day next year, but any early thoughts on capital deployment priority of the balance sheet is in a pretty strong position and thoughts around share buyback, etcetera. Thank you.

Look, Nicole, we are certainly going to return cash to – and value to shareholders through share buybacks and dividends. As per policies in place and prior distributions, as you can imagine, it’s pretty consistent how this group has performed. And I think we have no reason to change that as we move forward.

Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead.

Hi. It’s Grace on for Angel. Thank you for the question. Can you talk a bit more about the competitive environment you are seeing in large ag and small ag? And where are you seeing competitors being more aggressive? Thank you.

So, the competitive situation right now, I mean we have seen a pretty steep decline in this market, not competition, but the market in combines stronger than – global actually combines more than in higher horsepower or large tractors where we are leaders on the combined side, and we haven’t really seen competitive intensity to go up. And we have just recently launched our CR 11, our new flagship combine, or we call it the next generation, and that will next year also translate into CR-10 and CR-9. And with that, we are super well positioned in the Combine segment where, again, we are leaders with these new products to keep and further grow our market share. So, that is – that’s not that much. I mean on the high horsepower tractors, competitive intensity is always quite strong as you can imagine. This is a very – it’s a focused product and segment for all of us. But I haven’t seen that really changing much on a global scale. I mean we – after now that we have seen in our cash crop high or heavy horsepower tractors back in the market with really good quality, I think we will gain back market share there, which takes time, but that is something I think we will follow through. We will explain also during the Investor Day, we regain on that end. But I would not say that competitive intensity in the high horsepower or large equipment has significantly changed. On the small turf, on the very small ag on the Compact segment, when you start at that end of the market, we clearly see competitors from Asia in some of the markets coming stronger into our markets. And we feel very well positioned with the lineup that we have recently renewed and we continue to add to with products that will be also engineered and designed in Asia, most notably India, as you might have noticed from the organizational announcement that came out two days ago. I will have India as a market, specifically called out from Asia-Pacific as a separate market. And a member of our global leadership team. And that is also a reason related to not only the massive potential that India in terms of volume offers, but it’s also home to some players that we already see globally in the small ag segment, small turf. And being there, giving it the right level of priority is for us a necessity to counter competitive moves in the future from players that come out of Asia, in this case, most notably India for us. And I mean if you allow me that analogy, I believe that India for agriculture is probably comparable to China as it was 15 years ago for the passenger car industry, right, slightly not in the focus, but are differently treated. And hence, we – here at CNH, we take India extremely serious as a place to source, as we already said before, cost opportunities from sourcing components, from hiring talent from engineering products in India, which we do already today, but also as the market to sell. And in the end, it’s also the home of some uprising competitors that push onto global markets from the small turf and being there is key for us to counter that competition once they reach our home markets and also higher horsepower segments, which is not the case today, just to be clear. So, fairly unchanged competitive dynamics on the high horsepower and large equipment, on the smaller ones we see some moves and we counter them also not only – not limited, but also including our structural realignments and priorities predominantly on India.

Got it. That’s very helpful. And can you also talk about the level of incentives that you are seeing in the market? And where you see the greatest pressure or potential for higher levels of incentives in ‘24? Thank you.

So, we have seen some increased level of incentives, in particular in South America, where there has been in the market an overhang on supply starting last year. We have reacted to that as we said and by reducing production very early. But definitely, that has been a very competitive market in terms of incentives. We are very proud of our team in South America who has been able to remain profitable across the quarters. And in the rest of the world, what we see is some higher – as we mentioned in the call, some higher financial support. In terms of financing incentives, we are giving some incentives on for supporting the dealers on working on their used inventories and on trade-ins. But I would say it’s pretty normal conditions, nothing excessive. And that’s – you see that in our pricing performance, right.

Our next question comes from Tami Zakaria with JPMorgan. Please go ahead.

Hey. Good morning. Thank you so much for taking my questions. So, my first question is, I was hoping you could help me conceptualize this year as it relates to the theoretical mid-cycle level. Where do you expect to end this year’s production volume in the ag and also in the construction segment versus your estimate of the mid-cycle number for these two industries?

Well, I mean we expect the industry to be below the mid – what we can define the mid-cycle, let’s say, the average of last 10 years which that adversely to be at 90%, 95% of that. And we are producing less of the industry because we are adapting – we are adjusting our inventory levels.

Is that for ag, or ag and construction both?

That was mainly for ag. Construction is – I mean given also our market presence is much more difficult to the fact this compared to a global industry, if you compare to some of our peers that have a much more global presence.

Got it. Thank you…

So, I don’t think, I do not – sorry, go ahead.

Thank you. We have reached the end of the question and answer session. I'm sorry, but we cannot take any more questions. The call is now concluding.