CNH Industrial N.V. Q2 FY2025 Earnings Call

Good morning, and welcome to the CNH 2025 Second Quarter Results Conference Call. As a reminder, this conference is being recorded. I will now turn the call over to Jason Omerza, Vice President of Investor Relations.

Thank you, Julianne, and good morning, everyone. We would like to welcome you to the webcast and conference call for CNH's second quarter results for the period ending June 30, 2025. This live webcast is copyrighted by CNH and any recording, transmission or other use of any portion of it without the expressed written consent of CNH is strictly prohibited. Hosting today's call are CNH CEO, Gerrit Marx; and CFO, Jim Nickolas, who joined CNH in April. They will reference the material available for download from our website. Please note that any forward-looking statements that we 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. Our 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 good morning to everyone participating in the call. As anticipated, market conditions during the quarter were weak. In line with our strategy to underproduce relative to retail demand, we experienced a financially subdued quarter while working to reduce our channel inventories. Given the complexities and uncertainties in the macroeconomic landscape, our forecasting remains cautious. This applies equally to farmers and to CNH. The current market is characterized by low commodity prices, high stock levels of key commodities, and uncertain end markets, particularly in U.S. farm production, making it challenging for farmers to invest in equipment beyond their immediate replacement needs. Evolving trade dynamics add further uncertainty, which we are closely monitoring and considering in our decisions. Consequently, we are diligently collaborating with our prepared dealer network, maintaining low production levels to decrease dealer inventories and clear out aged stock while safeguarding our market share. Overall, industrial production hours fell by 12% year-over-year this quarter, with agriculture down 12% and construction down 15%. We are taking advantage of the slower production rate to refine our processes and implement decisive actions to enhance manufacturing quality and consistency. Our agricultural dealers have made progress in lowering their inventories, achieving a reduction of over $200 million this quarter. While some areas saw expected reductions, the pace slowed in EMEA, partly due to increased dealer and customer orders, particularly in Eastern Europe, which we were able to meet with our own inventory. We remain in alignment with our global dealer network and are on track to meet our target for newly built machine inventory by year-end, anticipating production in line with retail demand in the second half of the year and into 2026. As in the past two quarters, we are continuing targeted commercial actions to address aged agricultural inventory and used machines. We are encouraged by the decreases we observe in used inventories, not just at our ag dealers but throughout the industry. We are focused on making space for model year 2026 machines. Additionally, we are committed to driving operational excellence company-wide, advancing innovative technologies, and effectively executing our cost-saving initiatives with discipline. Both pricing and costs were favorable in our Agriculture and Construction segment this quarter. However, we do not expect this trend to persist in Q3 and Q4, as it will depend on the timing and impact of U.S. tariffs and potential retaliatory measures on our industry. We took some moderate pricing actions, but we cannot fully assess the tariff impact until the final trade agreements are established. In May, we announced a collaboration with Starlink to provide fast and cost-effective connectivity in remote areas for our farmers, which I will elaborate on shortly. Lastly, on May 8, we held our Investor Day 2025 and shared our new strategic business plan. The response to our straightforward strategy has been quite good. We presented a pragmatic approach to delivering top-tier products to our farmers and builders while also enhancing our margins. Everything we discussed is manageable and will be delivered as we diligently focus on our objectives. We value your engaged feedback and ongoing confidence in our long-term priorities. We will continue to provide quarterly updates as well as annual reports on our progress. Now, let’s review the financials. Our Q2 results reflect the anticipated market challenges and our intentional decision to limit production. I want to extend my gratitude to all our teams for turning this slow pace into an opportunity to improve our operations for the future. We are taking calculated and methodical measures to navigate the current market conditions while positioning the business for the next upcycle and long-term success. As Jim and I have emphasized, we manage day by day, report quarterly, and strategically position CNH for the next decade, even when it requires operational interventions and investments in technology that may affect our short-term financial performance. We are committed to the long term. Our consolidated revenues for the quarter decreased by 14% to $4.7 billion. Sales in our Ag segment fell by 17%, with Ag North America down by 36%. North America holds the largest industry profit pool for agricultural equipment, and historically, this is where CNH has generated the majority of its ag sales. The significant drop in North American retail demand—37% for high horsepower tractors and 23% for combines—along with our dealer destocking efforts in the region negatively impacted our results and margins. Industrial adjusted EBIT was $224 million, down by 55% compared to last year, resulting in an EPS of 17%. At our recent Investor Day, we outlined our strategy through 2030 and detailed our advancements in iron and technology while improving our mid-cycle margins. We emphasized five strategic pillars: expanding product leadership, enhancing our iron and tech integration, driving commercial excellence, operational excellence, and instilling quality as a core mindset. I'd like to highlight a recent advancement in iron and tech that was announced after our Investor Day. On May 15, we revealed our agreement to offer Starlink's satellite connectivity on Case IH and New Holland machines wherever Starlink service is available globally. This option, available as both factory fit and retrofit, will benefit farmers in areas with unreliable cellular connections. Integrating seamlessly with FieldOps, Starlink will assist farmers in staying connected and improving their productivity. We remain committed to delivering innovative solutions with a focus on benefiting farmers and enhancing soil health, which this initiative exemplifies. However, Starlink is just one of many ways we are enhancing iron and tech integration at CNH. By bringing more technology in-house, we achieve greater control over the sophisticated solutions we provide to farmers, available in both factory fit and retrofit options. At Agritechnica in November, attendees will witness our renewed commitment and innovation in this area, with a focus on soil health as a crucial asset for farmers. Moving forward, we will introduce multiple updates and enhancements to our onboard and offboard digital technology every year, accelerating our progress now that we have launched FieldOps. I would like to thank our precision and technology teams for their hard work in preparing the next software developments for our farmers. With that, I will now hand over the call to Jim to go over our financial results in detail.

Thank you, Gerrit, and good morning, everyone. Second quarter industrial net sales were down 16% year-over-year to $4 billion. This decline was mainly due to lower shipment volumes on lower industry demand, compounded by reduced dealer inventory requirements year-over-year. Adjusted net income decreased by about half with adjusted diluted earnings per share down from $0.35 to $0.17. Q2 free cash flow from Industrial Activities was $451 million, significantly better compared to Q2 of 2024 as improvements in working capital more than offset the lower industrial EBIT. In Agriculture, Q2 sales were $3.2 billion, decreasing 17% year-over-year. And as Gerrit mentioned, that includes a 36% decrease in our higher-margin North American region. To put that in perspective, the North American sales decline represents over 90% of the total decline in ag sales. The trend was mostly driven by lower shipments due to continued industry demand weakness and the network destocking. The exception to this dynamic was in EMEA, where, as Gerrit mentioned, dealer orders in the quarter were higher. Second quarter gross margin was 21.8%, down from the 24.4% in Q2 2024, affected by the lower production volumes and the very unfavorable geographic mix, partially offset by purchasing efficiencies and lower warranty expenses. Pricing was a bit better than neutral in the quarter as we continue our incentives for our dealers to retail aged and used inventories. Full-year pricing is still forecasted to be positive, especially as we start to see some benefit from the price adjustments that were effective on new orders after May 1. Production costs were favorable, even though production hours were down 12% as we didn't repeat some of the warranty adjustments from last year. We still expect to see improvement in warranty expenses on a full-year basis. It's also important to note that most of the units sold in the quarter were not yet heavily impacted by additional tariff costs. Those impacts will come more in the second half as the tariff impacted inventory flows through our production system. Q2 R&D and SG&A expenses were lower year-over-year, reflecting our ongoing efforts to improve our cost base. As a reminder, SG&A will start to grow on a year-over-year basis starting in the third quarter when we lap the variable compensation accrual adjustments that we made last year. Foreign exchange impacts were $6 million negative in the quarter and the remainder of other is mainly lower profits from our Turkish JV. Adjusted EBIT margin for agriculture was 8.1%, a sequential improvement from the 5.4% recorded in Q1 2025. Moving on to Construction. Second quarter net sales were $773 million, down 13% year-over-year, driven by lower shipment volumes, mostly in North America. Gross margin for the quarter was 15.7%, down from 16.5% in Q2 2024, mostly driven by the lower volumes. We recorded positive pricing and product costs year-over-year, which more than offset the FX headwind. Second quarter adjusted EBIT margin was 4.5% for Financial Services, second quarter net income was $87 million. The year-over-year decrease was mainly driven by higher risk costs in Brazil. That was partially offset by margin improvement in North America and EMEA and by favorable volumes in all regions except EMEA. Retail originations in the first quarter were $2.7 billion, slightly down from last year, but flat on a constant currency basis, reflecting higher penetration rates and a lower equipment sales environment. The managed portfolio ended the quarter at nearly $29 billion. There's always a seasonal increase in delinquencies in Q2 as certain annual payments in Brazil are due in the month of May. So the increase we see in Q2 2025 is partially explainable by seasonality, but the remaining increase is a result of the cyclical downturn and did merit an increase in our risk reserves. At our Investor Day, we reaffirmed our capital allocation priorities of continuing to reinvest in our business while maintaining a healthy balance sheet. Our strategy is centered on a disciplined approach that supports both long-term growth and shareholder value, striking the right balance between reinvestment and capital returns. As such, during the quarter, we paid approximately $320 million for our annual dividend. At our Annual Shareholder Meeting in May, shareholders reapproved and extended our share buyback authorization, and we are continuing to operate under the $500 million program that the Board approved last year. Before I turn the call back over to Gerrit, I want to review our exchange rate and tariff impact assumptions for the second half of the year. First, on foreign exchange, we have seen the euro strengthen against the U.S. dollar steadily since the beginning of the year. We now forecast the foreign currency translation impact on net sales to be minus 1% versus our previous assumption of minus 3%. The currency translation effect on our top line is different than on our bottom line. Approximately 15% of our overall industrial sales are transacted in euros. And when those euro sales are translated into the now weaker dollar, they appear larger in nominal terms. However, the profits from those sales don't look materially different as the cost base for those products is also predominantly euro-denominated. While this natural hedge protects us against extreme exchange-related profit fluctuations, it can be a little deceptive when comparing the top line and bottom line impacts. This quarter, margins compressed slightly when the top line grew without a corresponding bottom line benefit from a foreign exchange impact. The overall negative translation effect on net sales is coming from other areas: Brazil, Australia and Canada, for example. Now let's turn to tariffs. Last quarter, we outlined for you our tariff exposure on U.S. sales, and we reviewed what tariff assumptions were baked into our guidance. We have updated our tariff assumptions where specific agreements were reached as of July 31. We are monitoring countries such as India and Brazil that have a risk based on recent comments by the U.S. administration. On a net basis, the overall assumed tariff impact is roughly in line with the midpoint of our prior guidance. While tariffs on Chinese goods came down, steel and aluminum tariffs were doubled from 25% to 50%. And while CNH procures about 95% of its direct steel needs from domestic sources, domestic steel prices have risen along with the increase in tariffs. Steel futures have increased about 30% since the beginning of the year. And while we work with our suppliers to lock in our direct steel prices, a Tier 2 supplier may have steel content that can impact our sourcing costs. We are still calculating the 2025 impact on our business from tariffs imposed on U.S. imports of copper and potentially on semiconductor chips. This will depend on the current inventory levels at our suppliers, and we will work closely with them to mitigate as much of the impact as possible. Also, as they are unknown at this point, we have not included any potential retaliatory actions like other countries. As mentioned at our Investor Day, we continue to actively manage the impact of tariffs through a combination of strategic sourcing, pricing actions and operational efficiencies. With that update, I will turn it back to Gerrit.

Thank you, Jim. Now let's review our latest outlook for agriculture in 2025. Overall, our global industry forecast is similar to our prior outlook, down around 10% from 2024. We still expect 2025 to represent a trough level of global market demand. We are reaffirming our net sales and EBIT margin guidance. As Jim mentioned earlier, our top line foreign exchange translation impact is less negative than previously expected. Full-year pricing is expected to be positive despite the need for additional targeted incentives to help continue the dealers' new and used unit de-stocking efforts. Q3 production slots are full and Q4 slots are half full at this point, which is typical for this time of the year. In North America, Q4 slots are already nearly full for some products. We just opened up for model year 2026 orders about a month ago, and those begin shipping in Q4. At this point, we do not have enough information to make any prediction on 2026 demand levels. It is understandable that farmers in North and South America are waiting to see how the new universe of global trade deals will unfold, eventually allowing projections of commodity stock levels and plans for seeding and planting in the 2026 season. We are staying very close to our farmers to be ready to support our world-class machines, now with a converged tech stack of onboard and off-board solutions. Whereas our top line may skew a little above the midpoint of the guidance due to the less negative currency translation, the EBIT margin may skew a little below the midpoint as we absorb more tariff exposure than originally expected. The months of August and September should bring more clarity to our projections. In Construction, overall industry volumes are expected to be down about 10% from 2024, especially due to our heavy exposure to the North American market. As a reminder, the Construction industry tends to be more tied to GDP growth than Agriculture is. As with Ag, we are also reaffirming our prior guidance for construction sales and EBIT margin. Q3 production slots are full and Q4 slots are half full at this point, which is what we typically see. Similar to Ag, we don't have enough information on 2026 orders at this point to draw any conclusions about demand levels next year. As we have reaffirmed the guidance for the two industrial segments, we are also reaffirming the combined guidance for industrial activities. Our free cash flow will likely be closer to the upper end of the range as we expect the favorable working capital management we have experienced in the first half to be maintained in the second half. We are also reaffirming our EPS guidance at the prior range of $0.50 to $0.70. Let's finish with a look at our priorities for the remainder of the year. We continue to navigate the regional demand trends to ensure that we are responsive to ongoing shift in the market, especially as we are dealing with the rapidly changing trade environment. We are working very closely with our supplier partners to ensure we can procure our parts from the best locations for our global manufacturing footprint at better terms and conditions. We remain committed to driving operational efficiency by focusing on process improvements at our manufacturing plants and strategic sourcing to unlock more value. On that point, we are really encouraged by the momentum that we are seeing in our business in India. We have been investing in the region, not just for the market share improvements that we have enjoyed, but also because it is a great hub for engineering, sourcing and exporting into other regions. Our presence in India is increasingly important to CNH. Our global production levels will remain intentionally lower while we adjust for some rebounds we see in some segments and regions, and we have a clear path to our dealer inventory target levels for both Ag and Construction. By 2026, we will have aligned our production levels to the retail demand and reaching our targeted dealer inventory levels first will set us up for traction and wholesale momentum in 2026. Otherwise, we continue with the relentless focus on our homework and executing the strategy that we presented to you in May. Delivering high-quality products and services to our farmers and builders is of paramount importance to us. Capturing efficiencies in our operations and upgrades in our overall quality drive us to our margin goals. We continue to invest in leading iron and tech development, and we are excited to showcase the latest to you at the Agritechnica Show in November. That concludes our prepared remarks, and we are ready for the Q&A.

We'll take our first question from Angel Castillo from Morgan Stanley.

I wanted to discuss the production levels and inventory in the market a bit further. If I understand correctly, you previously mentioned last quarter that you had around $900 million in excess inventory in Ag. It seems like you've reduced that by another $200 million. Is that accurate? Can you clarify how much product remains in specific product lines and regions? Also, what gives you confidence in being able to reach retail sales production by the end of the year?

Thank you for your question. Yes, we were approximately $1 billion over our target. This figure is relative to our forecast for the upcoming 12 months of sales. As our sales forecast improves, we may find that our inventory surplus is less severe than initially thought. We have managed to reduce that $1 billion by another $200 million and we are making progress towards further reductions by the end of this year. This aligns with our overall goals. In addition, we are actively addressing the sale of used machines, which is a significant focus for all original equipment manufacturers in the market. We have developed specific programs for our dealers to assist in selling these units, including support from our financial services division. In North America, we have higher stock levels particularly for small and some medium tractors. It's important to note that these machines are imported, which means we have longer supply chains. We have taken careful actions to maintain a certain stock level in this region due to uncertainties around global trade and tariffs. Despite the elevated levels of smaller machines, I am not overly concerned given the current circumstances regarding tariffs and the restoration of global supply chains. In South America, we are largely where we want to be. In Europe, we are working through some of the used stock while preparing for the launch of our new short wheelbase generation, which will fill the lower end of the mid-range tractor segment, as well as the top-end of our long wheelbase tractors. These launches will require adequate inventory space at our dealers. Overall, we are on a positive trajectory towards our sellout goals for the year. As mentioned in our earlier remarks, we observed increasing retail activity in certain European markets such as Poland and Germany. This acceleration necessitated our involvement for destocking and filling those orders with our company inventory. Overall, we are well aligned with the objectives we outlined at the beginning of the year.

Our next question comes from Kyle Menges from Citigroup.

I understand you're not quite ready to comment on 2026 yet. However, your order books have been open for about a month now. I would like to hear some insights on what you're observing in the order books and how they have been trending during this time.

Kyle, I believe that 2025 will be the lowest point for us, and I don't have any reason to doubt that. For 2026, there are certain conditions we need to meet to gain more clarity. The tariffs are crucial; the recent legislation is beneficial for North America and will drive demand in the long term, although not immediately. Typically, when new bills are released in the U.S., farmers prioritize paying off their debts before investing in new equipment. While these supportive measures will positively impact the next year, they won't affect 2025. There’s still uncertainty surrounding tariffs, which we need to clarify. However, we're seeing promising early indicators in Europe, Africa, and the Middle East, with strong market shares in those regions. For Europe, I believe 2025 will also represent the low point, but 2026 should show improvements in retail activity. In South America, we are poised for success, with our inventories at desired levels and a strong dealer network in place. We have a complete line of locally produced products ready for farmers. What we lack is certainty, mainly due to discussions about tariffs and Brazil's 50% retaliation against the U.S. There's also ongoing conversation about the trade agreement between China and the U.S., with China recently revoking 600 tariff exemptions, which could result in either a new trade agreement or tighter restrictions for U.S. agricultural imports to China. These uncertainties directly affect Brazilian farmers, who may enhance their financial stability next year and possibly increase equipment purchases. We need clearer understanding regarding commodity imports and exports, particularly the dynamics between Brazil, the U.S., and China, to improve our forecasting. Overall, we anticipate a balanced production and retail pace by the end of this year, which should lead to increased production speed and thus positively influence our revenue. This aligns with our plans as we look towards 2026.

Our next question comes from Jamie Cook from Truist Securities.

And I guess, Gerrit, I just wanted to build on the latter part of your answer. Understanding we can't forecast what the markets can do, but can you talk to the different levers that you think CNH can pull to grow earnings in 2026 besides producing and starting to ramp production, maybe the cost savings, if you could quantify quality, some of those things? And I guess my second question. I think the market is very interested in how you're dealing with pricing. So it sounds like you want to price positive in 2026. Any color that you can provide on strategy and how to think about pricing by region?

Thanks for the question. Pricing will be positive for the entire year. We have increased pricing for the model year '26, mainly driven by enhanced functionality and also due to commercial needs, including tariffs. This increase will help cover the impact of tariffs. We are addressing tariffs through three approaches: pricing adjustments, collaborating with suppliers to manage their cost pressures and sharing those impacts, and focusing on cost discipline and reductions within our own operations. Our quality expenses year-to-date are significantly lower than last year's, and we are seeing a positive trend in this area. Pricing involves two components: the list price we set and the discounts we apply to manage individual deals, especially for larger orders, which varies by region. Some European countries are showing positive retail activity, allowing for better pricing opportunities as demand increases. However, in the U.S. and North America, while pricing is still possible, it is somewhat constrained by demand and competitive actions. We feel well positioned entering 2026, with several options at our disposal, particularly in terms of cost, quality, and sourcing. Pricing ultimately hinges on both the list price and discounts, influenced by market conditions. It should be noted that all players in our industry are affected by various tariff conditions, impacting pricing for our machines as the market improves.

Our next question comes from Tim Thein from Raymond James.

I have a question regarding channel inventory and your production compared to retail. I understand this chart can be interpreted in various ways due to different size ranges and geographies. However, looking at the trend on Slide 19, which compares tractor production to retail, I’m curious why we aren’t observing a larger divergence in production relative to retail given that this is a major area of focus. Perhaps it has to do with the different horsepower ranges included in this analysis. Considering the global emphasis on reducing tractor inventories, I wonder why we aren’t seeing a more significant difference.

You're correct, and I appreciate your question. Your observation about the mix is right. The dynamics of units and their value differ significantly, especially in high horsepower tractors where we're currently underproducing, particularly for large cash crops in North America, which is also the case for combines. Each machine is counted as one entity. If we were to analyze these figures in terms of value, the results would differ. Additionally, when we look at regional breakdowns, there are noticeable variations. For instance, as we enter the second half of 2025 in Europe, we are restocking certain combine lines based on seasonal expectations and market conditions. In contrast, in Latin America, we have intentionally underproduced retail units for combines to help reduce our existing inventory. Thus, these numbers represent more than just quantities; they reflect our progress in various regions and product categories. The reason tractors and their retail and production figures are closely aligned is that we're discussing units, not value, which varies across regions. Where production is ramping up aligns with retail demand.

Our next question comes from Kristen Owen from Oppenheimer.

Just wanted to follow up on some of your European comments because they do strike me as interesting, particularly in light of your adjusted tractor outlook for the industry. So maybe just help understand like where you're seeing green shoots? Is there something that's specifically working for CNH maybe in terms of share gain or geographic differences? Just unpack some of the Europe commentary there, if you would, please.

We currently see the demand trend mainly in tractors, while the momentum for combines has not yet started, which is why we are anticipating a shift there. We are actively increasing our inventory of combines, but the real movement is happening with tractors. We've managed to defend our market share in tractors and have even experienced slight growth in certain models and countries, contributing to a reduction in overall inventory and maintaining market momentum. We're gearing up for the launch of our new mid-range tractors at the end of November. In Eastern Europe, particularly in Poland, we've observed a successful purchase program and favorable seasonal conditions, leading to strong sales of both tractors and combines. Demand seems variable, heavily influenced by government initiatives to support farmers. However, there's a growing sense of confidence among farmers, as reflected in the updated confidence indexes, indicating a positive outlook, albeit modest. The primary focus remains on tractors, especially in Germany and Poland. Changes in the competitive landscape, such as significant inventory reductions by other market players, may impact future sustainability. While current market shares are satisfactory, we are optimistic about 2026 when we expect other countries to gradually increase their retail activities.

Our next question comes from David Raso from Evercore ISI.

I apologize if I missed it. However, I thought the second quarter Ag price cost was impressive. What are your expectations for the price cost for the full year? Also, to clarify, when we examine the waterfall charts, the tariff impacts will appear in the same category as production costs, and they won't be entered elsewhere. I just want to ensure we're specifically discussing Ag.

Yes.

Yes, we do anticipate it to be positive for the full year. This is Jim speaking. We've observed this year-to-date and expect it to continue throughout the year. It's aligning with our expectations. Given the low production levels, this is quite encouraging, and we foresee this trend persisting.

In the first quarter, there was a slightly negative year-on-year price performance. However, the second quarter is showing positive results, and this trend is expected to continue through the rest of the year due to increased adjusted prices implemented around May. Moreover, we have already taken steps for production in the fourth quarter, resulting in positive pricing overall. On the cost side, the positive performance in the second quarter was partly aided by FIFO in our materials, as some components were affected by a 10% flat tariff incurred during that quarter. Because of FIFO, the machines we produced and sold benefited from lower prior costs. A significant portion of the product cost improvement is also related to quality, which is structurally ours. However, we do not anticipate experiencing the same FIFO impact in the third and fourth quarters for clear reasons.

Our next question comes from Tami Zakaria from JPMorgan.

I wanted to get some color on the implied expectation for operating margin for the Ag segment as it relates to the third and the fourth quarter. Typically, we see a step down in 3Q versus 2Q and then it picks back up. Should we expect something similar, like a step down in 3Q, even though much of your underproduction headwind is dissipating sequentially? So any thoughts on how to think about 3Q versus 4Q for the Ag segment?

Yes. So we do expect Q3 to have a little bit of a step down versus Q2 as it's typical. And then, of course, a strong rebound in Q4. So the historical patterns and trends will repeat this year getting us back to our full-year guide that we put out for Agriculture. So you're right about that. Q3 had a slight step down and then rebounding strongly in Q4.

Our next question comes from Michael Shlisky from D.A. Davidson.

Jim, maybe this one is for you. I know you started just before the Investor Day a few weeks prior. So it's a little bit of an unfair question. But I mean, as you've been at CNH for a couple of months now, do you have any thoughts in your travels on operating performance, financial performance and talking with folks within the company? Are there any new initiatives you may have in the hopper here at this point? Or do you still plan to go with kind of what was presented just over in May in your first couple of quarters here?

Yes, that's a great question. What we outlined in May at Investor Day was spot on. Quality is a primary focus and it has to be. We are well on our way to improving it, as reflected in our year-to-date numbers, showing lower quality expenses that we expect to continue throughout the year and beyond. This will be a positive factor going forward, impacting not just immediate costs, but also resale values, net transaction pricing, perceived performance, and more, all contributing to an improved financial outcome. Quality is our top priority, and we are committed to it. Our focus on precision technology is leading to significant improvements in our tech stack, which we believe will translate to higher pricing over time. As we create more value for our farmers, they will pay more for the products, and we will see immediate returns from our new technology. What we presented in May aligns well with our quality and technology strategies. Additionally, our strategic sourcing efforts were already in motion before Investor Day. The benefits from this initiative are already being realized this year and will continue to grow in the coming years through 2030. Everything we've put in place is aligned, and I have nothing more to add. The diagnosis was accurate, and our recovery path is progressing as planned.

Our next question comes from Ted Jackson from Northland Securities.

I wanted to focus on the North American market. It seems that while there are some positive aspects, other regions have already reached their low points, and North America is the area that needs improvement. From what I’ve gathered, there is currently a significant gap in pricing between new and used equipment. If that’s accurate, how challenging is it for you to align North American inventory with demand? Does this mean you’ll need to be more aggressive with incentives to achieve that? Is this situation likely to have more impact in the latter half of this year as you clear out existing inventory, or will it be more relevant as you consider the new model year for 2026 and beyond? That’s my question.

Thank you, Ted. Yes, I can confirm that. The price difference between used and new machines has become more notable, especially with new machines back on the market and used machines accumulating in yards. This has led us to put in more effort and support to ensure these used machines find new owners at reasonable prices with our backing. Our retail plans, in collaboration with the dealers, are designed to guide us through the next six months, making sure our projected inventory levels for both new and used machines are aligned. It’s crucial that both categories reduce to allow new machines to be sold effectively, which we emphasize in our discussions with dealers. The newly launched model year '26 machines come with significant updates in both their physical design and technology, providing added value over previous models and older used machines. We are closely monitoring this situation on a dealer-by-dealer basis through ongoing communication led by our North American team. We are committed to addressing these challenges and have factored in additional financial measures in our overall forecasts.

Our next question comes from Avi Jaroslawicz from UBS.

Regarding the timing of the tariff impacts, when do you expect these costs to materialize? Do you anticipate that most of the effects will be felt in Q4, or could there be significant additional impacts at the start of 2026? I understand that Tier 2 suppliers may experience delays in adjusting their pricing to account for tariff exposure. What is your perspective on when these impacts will reach their full extent?

Yes, I expect them to grow during the second half of this year. There was virtually no effect in Q2, with almost all of it, around $120 million, impacting EBIT in the latter half of this year. We'll see what happens in 2026, as it’s uncertain how things will unfold. We didn't face any tariffs in Q1 this year and only a minimal impact in Q2. Year-over-year, there will be a headwind in Q1 and Q2 of next year since tariffs were not a factor during those periods this year. Therefore, we are actively exploring ways to mitigate this, such as collaborating with suppliers, reducing our costs, and considering price increases. A combination of these strategies will be employed.

Our next question comes from Daniela Costa from Goldman Sachs.

I wonder if you could quickly sort of touch on two topics. First, delinquencies, if there was any particular one-off on the trend given there was quite an increase. And then the second, you had paused the project on construction equipment to find a partner having originally announced it in the back end of last year. What could get you back on track for that project?

Thank you, Daniela. The increase in delinquencies was primarily due to issues in Brazil. Commodity prices are low there, and they have faced some weather problems with floods and droughts, making it a challenging period for farmers. We believe this situation is mainly confined to Brazil and has likely reached its peak. We expect improvements after this quarter and have made appropriate reserves for it. This is a specific issue affecting Brazil and not a global one, and we feel confident that our reserves are sufficient to manage it.

I will address the Construction question. We haven't really paused our efforts. We have temporarily set aside certain discussions due to uncertainties related to tariff effects on our profit and loss and the outlook for the Construction business. However, we have continued with several other discussions, especially regarding strategic partnerships in areas such as the larger excavator market and how we can improve our competitiveness through deeper localization in key markets. This progress is intentional, as our Construction team has been performing exceptionally well, navigating these challenges, leading the business, launching new products, introducing new compact machines, and developing new lines and attachments for our Construction lineup. This process could be distracting right now, so our decision was to focus on a few discussions that are clearly beneficial, while allowing the team to manage the current tariff situation and market cycle effectively. When we move past this uncertainty, we will be able to analyze our global setup more reliably. Discussions will certainly continue as they have, but this is not a race. We are very pleased with the machines coming from Construction that are integrated into our Ag network. There is no need to rush into decisions; every situation has its appropriate time, and we believe this is not the right time for Construction Equipment. We will remain attentive until conditions clarify, which will help us make informed decisions about advancing Construction Equipment into its next phase.

Our next question comes from David Raso from Evercore ISI.

I understand that your operations are more geographically diversified, but based on AGCO's performance in the first half of the year, two-thirds of the revenue comes from EMEA, and all of the segment profits are also from EMEA. Could you provide some insight into the relative margins across your different regions?

Yes. Generally speaking, North America is our highest margin region. EMEA is second this quarter, which is closer than last year's larger differential, but still in second place. LATAM comes in third, and Asia Pacific is a close fourth.

We have made significant changes to the governance and leadership of our European operations. The targets we have discussed and committed to with our team will not completely close the margin difference Jim outlined between North America and Europe, but they will narrow it. There is a substantial opportunity for us in Europe, and we need to ensure we are on a path that reduces the large margin differences between the two regions, as there is no reason for such disparities. If we execute well on quality, innovation, and technology, we believe we are on a good path toward this goal. Europe will be a special focus, and we plan to take bold steps in this region over the coming years. In the next few years, we will discuss how we can align our European operations more closely with our North American operations. Additionally, while India may currently represent a small part of our financial performance, it is expected to become a strategically important region for maintaining cost and price competitiveness in compact and utility machines globally. Therefore, these two regions will be key areas of focus for us.

We have no further questions. That concludes today's conference call. You may now disconnect.