CNH Industrial NV (CNHI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's CNH Industrial 2017 Third Quarter Results Conference Call.

For your information, today's conference is being recorded.

(Operator Instructions)

At this time, I'll turn the call over to your host, Mr. Federico Donati, Head of Investor Relations.

Please go ahead, sir.

Thank you, George.

Good afternoon and morning everyone.

We would like to welcome you to the CNH Industrial Third Quarter 2017 Results Webcast Conference Call.

CNH Industrial Group CEO, Rich Tobin; and Max Chiara, Group CFO, will host today's call.

They will use the material you have -- you should have downloaded from our website, www.cnhindustrial.com.

After introductory remarks, we will be available to answer the questions you may have.

Before moving ahead, let me just remind you that any forward-looking statements we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material.

I will now turn the call over to Mr. Rich Tobin.

Thank you, Federico.

Good afternoon and good morning, everybody.

Our third quarter results were largely in line with what we had projected earlier in the year, with demand increases in all 4 of our businesses, leading to revenue growth of 12% in the quarter in constant currency.

Stronger end markets and results from the previous periods' actions on our cost structure and manufacturing footprint are delivering promising results.

And as a result of the increased demand, we were able to increase our comparable production with the corresponding benefit to the Industrial Activities' operating margin.

Overall, we're encouraged with the development of our end markets and our performance in terms of market share, price realization, disciplined cost and inventory management, all of which have been achieved while delivering an improved comparable cash flow performance for the quarter.

A few highlights before we move into the overall results.

We achieved an adjusted net income of $148 million in the third quarter with a corresponding adjusted diluted EPS of $0.11 per share, both more than double of last year.

This was accomplished through a solid performance across all segments and increased activity levels resulting in an operating profit up more than 40% at 5.5% margin, while we continued to improve our interest expense and adjusted effective tax rate as previously anticipated.

Last week, Fitch Ratings upgraded both CNH Industrial N.V. and our financial arm, CNH Industrial Capital LLC to investment grade, which is now the second rating agency to upgrade us to investment grade in the past 6 months.

This is a promising development and it allows us to be eligible for the main investment-grade indices in the U.S. market.

We'll go further into this later in the call.

As a result of our year-to-date operating performance, coupled with updated foreign exchange assumptions that led us to raise our 2017 guidance for Industrial Activities net sales to $25 billion to $25.5 billion and adjusted diluted EPS to between $0.44 to $0.46 a share while slightly increasing the net industrial debt guidance to $1.5 billion to $1.7 billion as a result of the strengthening euro to the U.S. dollar and the translation impact on outstanding loan balances.

Finally, before we move on to the balance of our presentation, we had another strong quarter in terms of product awards and related accomplishments.

At the Farm Progress Show, we unveiled our New Holland methane concept tractor and launched the new Daily Blue Power family with new sustainable range for an unlimited delivery in urban areas.

Additionally, our Benson, Minnesota plant achieved the Bronze designation in World Class Manufacturing.

And once again, for the seventh consecutive year, we achieved the title of Industry Leader in the Dow Jones Sustainability Index.

I'll hand it over to Max for the financial review, and I'll come back for the segment results.

Max?

Thank you, Rich, and good morning and good afternoon, everyone.

I'm on Slide 5 now with Q3 financial highlights.

In the quarter, we achieved industrial net sales of $6.3 billion with an increase of 16% versus last year with solid contributions from all segments, of which 4% was currency related.

That translated into an operating margin of 5.5%, up 100 basis points versus last year, with positive performance in Agricultural Equipment, Construction Equipment and Powertrain.

Adjusted net income was up 120% year-on-year to $148 million, with an adjusted diluted EPS of $0.11 a share as -- beyond our improved operating performance, we continued to pull through benefits in our interest expense as well as the adjusted tax rate.

As a reminder, you can find the reconciliation from net income to adjusted net income in the appendix of the presentation.

But at high level in the quarter, we booked a pretax restructuring charge of $53 million in relation to our efficiency program, of which $47 million including $14 million noncash was specifically related to a capacity realignment action in our firefighting business, which will generate savings of approximately $20 million on a run rate basis by 2019.

We also had a charge of $39 million in relation to the repurchase of our notes with an interest expense saving of a similar amount over the remaining life of the 2 bonds part of the tender.

Net industrial debt was $2.6 billion at the end of September, up $0.5 billion compared to June 2017 due to the typical seasonal increase in net working capital.

Available liquidity, including undrawn committed facilities, was at $7.9 billion, down $0.4 billion versus June 2017.

Moving on to Slide 6, Industrial Activities net sales.

Let's review the total change at constant currency.

In total, net sales were up $650 million-plus at constant currency for the quarter, with Agricultural Equipment up $220 million or 9% as a result of a stronger end-user demand in all regions aside from NAFTA, which was flat.

Construction Equipment net sales increased $36 million or 6% as a result of end-user demand growth in all regions, particularly in light equipment in NAFTA and in APAC markets overall.

For Commercial Vehicles, net sales increased more than $300 million or 15%, generally as a result of positive market development with Europe up single -- low single digit and LATAM and APAC rebounding double-digit, but from a low base, particularly LATAM.

In addition, revenue increased as a result of gross price realization, increased fleet-related sales on heavy trucks and commercial vans and timing of specialty vehicle deliveries in EMEA.

Powertrain was up $173 million due to higher volume to both internal and external customers.

Finally, foreign exchange translation impact was positive for $200 million-plus, primarily as a result of the euro strengthening during the quarter.

On the next Slide #7.

In the quarter, operating profit of Industrial Activities was up 41% or more than $100 million versus last year with an operating margin of 5.5% with all segments, excluding CV, up year-over-year with a profit pull-through on the increased sales of about 20% on average in the 3 segments.

Operating performance during the quarter has been strong as a result of improved end-user demand and the continued disciplined approach to cost management.

Adjusted net income increased by $80 million, helped by the improvement in interest expense due to the efforts made last year and further accelerating this year plus the investment grade achievement to improve our debt structure by retiring high equipment bonds and replacing them with lower rate notes.

Additionally, the adjusted effective tax rate for the quarter improved to 34% from 46% last year due to favorable jurisdictional profit mix.

The rates have now started to move closer to our long-term target of mid- to low 30s.

As you can see from the bar chart to the right, the favorable change in PBT resulted in $34 million of additional tax expense, partially offset by $16 million lower taxes related to the improvement in the adjusted effective tax rate we just described.

Moving on to Slide 8 or change in net industrial debt.

Net industrial debt came in at $2.6 billion, which was up from June, as expected, due to the normal seasonal increase in net working capital primarily associated with decreased payable.

As you can see, net industrial cash outflow in the quarter was $285 million, an improvement of almost $200 million from 1 year ago.

The main difference was an improvement in cash flow from operations.

Next Slide #9, capital expenditures were down slightly to $112 million.

While the majority of the spending is in maintenance CapEx now, we're also investing in preparation of the upcoming Stage 5 for off-road applications.

And we are ramping up spending in the Precision Solutions & Telematics in order to support our connectivity platform.

We expect CapEx for the full year to remain largely above 2% of revenue.

Interesting to note, R&D instead has started to ramp up approximately 14% in the quarter in most of our businesses as we continue to invest in our future products.

Moving on to Slide 10, our Financial Services business.

Net income was up $9 million versus Q3 of 2016, primarily due to higher end-market activity in LATAM and APAC, lower provisions for credit losses, as we see improved creditworthiness and the positive impact of currency translation.

For the quarter, retail loan originations were $2.3 billion, flat compared to the same quarter last year.

The managed portfolio of $26 billion as of the end of September was up $1.2 billion, primarily as a result of the increased activity in LATAM and APAC.

Also, credit quality remained strong, with delinquency still low at 3.6%.

Slide 11 illustrates the company debt maturity schedule and available liquidity.

At the end of September, available liquidity, comprising $4.8 billion in cash and $3.1 billion in available undrawn committed facilities, was $7.9 billion.

We're holding liquidity to revenue ratio at around 30%.

During the quarter, the company repurchased a total of $800 million in principal amounts of the 6.25% notes due 2018 and 2.75% notes due 2019, issued by CNH Industrial Finance Europe S.A. and issued EURO 650 million in principal amount of 1.75% notes due in 2025.

Additionally, we announced today early redemption of all of the outstanding $600 million in principal amount of CNH Industrial Capital LLC 3.875% notes due July 2018.

These transactions further improve our financial ratios and will continue to reduce interest expense going forward.

On Slide 12, as Rich mentioned earlier, last week, Fitch Ratings initiated coverage and assigned its long-term issuer default rating on both CNH Industrial N.V. and CNH Industrial Capital LLC at BBB- with a stable outlook.

This action follows the one that occurred in mid-June when S&P upgraded the long-term corporate rating of CNH Industrial N.V. and CNH Industrial Capital LLC to BBB- with a stable outlook.

And so going forward, the company securities will eligible for the main investment-grade indices in the U.S. market such as the Bloomberg Barclays Index.

This concludes the financial review portion of our presentation.

Let me now turn back over to Rich for the business review section.

Thank you.

Thanks, Max.

Agricultural Equipment net sales increased 12%.

In EMEA, sales were up due to improved volume for combines and lower-horsepower tractors and to favorable net price realization.

We also saw a continuation of the positive trajectory in end-market demand in APAC and LATAM, primarily Argentina.

NAFTA was flat, whereby row crop has stabilized with good results in combine harvesters and crop production equipment being offset by hay and forage product demand declines.

Operating profit for the quarter was $208 million, a 34% increase from the third quarter of 2016.

Operating margin increased 1.2 percentage points to 7.8% as a result of favorable wholesale and production volume and product mix, positive net price realization more than offset raw material cost increases and improved quality cost.

As mentioned earlier, we're increasing our investment in R&D in our precision AG programs, leading to an increased R&D expense of 16% quarter-to-quarter.

In terms of unit stats, we overproduced tractors and combines compared to retail sales in the quarter, but continued to underproduce high-horsepower tractors in NAFTA as anticipated.

So moving on to Slide 7 -- 16.

Considering the channel inventory stats, the development of the NAFTA market in terms of demand, it is our hope that we can retire this slide in Q4 since we've been having that here now since 2015-ish, because of the progress that we've made in terms of channel reduction.

So NAFTA row crop production was 14% lower than last year, leading to an underproduction compared to retail sales of 9% on high-horsepower tractors and 16% overproduction in combines on increased demand and inventory balances.

We continue to manage our channel inventory down, maintaining our position as 20% lower than 1 year ago as a result of de-stocking actions in high-horsepower tractors and hay and forage products in NAFTA.

The ratio of high-horsepower tractor used equipment sales to new equipment sales in the U.S. used tractors are outselling new by a factor of 3, which is a positive trend and is encouraging for 2018 production to retail dynamics.

If we look at the chart for NAFTA combines, you can see we've reached an inflection point with ratios returning to the long-term averages.

Moving on to Construction Equipment.

Net sales increased by 8% in the quarter compared to last year from market growth in all the regions, particularly in light equipment in NAFTA and in APAC where we've been -- where we've seen a sustained rebound in demand since last year.

The current worldwide order book is up over 50% higher than the previous year, as end-user demand is moving up positively in major markets, while dealer inventory levels are quite low.

Operating profit was $13 million for the quarter with an operating margin of 2%.

The increase is mainly driven by higher volumes and favorable product mix as well as positive price realization as a result of channel inventory levels being in line with market demand.

Production in the quarter was up 8% with an overproduction in retail of 2%, similar to where we've been in the third quarter historically.

During the quarter, all regions for light and heavy equipment once again saw increased volumes, especially in APAC.

As mentioned, our order book is up significantly from the same time last year.

And we believe this trend should continue through the remainder of the year, driving further improvements in our profitability as our dealers' [months of] inventory supply are quite low.

Moving on to Commercial Vehicles.

Net sales increased 20% in the third quarter, as the market improved in all regions, especially LATAM and APAC.

LATAM is up, but coming off a very low Brazilian base.

Revenue increased in all regions and EMEA net sales increased as a result of fleet-related sales and heavy tractor trucks and commercial vans and the timing of specialty vehicle deliveries.

Operating profit of $59 million for the third quarter of 2017 and an operating margin of 2.3%.

It was a mixed quarter in terms of segment profitability as a result of negative product mix and larger fleet sales and heavy vehicles and standard van like Commercial Vehicles leading to comparable negative mix and pricing effect in the quarter.

We have also increased R&D spending by 19% in preparation for new product launches, particularly expansion of our gas vehicle lineup and new X-WAY heavy truck.

In addition, we had a negative comparable impact of foreign exchange in the quarter, largely as a result of the strengthening of the euro relative to the British pound sterling.

Finally, as pointed by Max, at the end of the quarter, we initiated additional capacity realignment actions in the firefighting business as part of our efficiency program in light of our commercial vehicle improvement plans.

In the quarter, quarterly underproduction versus retail was 3% and worldwide production level was up 5% versus the same quarter of last year.

For the quarter, European truck market was up 4% compared to last year.

LATAM and APAC markets were up 15% and 10%, respectively.

Market share of trucks in Europe were slightly down in light, but flat in medium and heavy.

On a year-to-year basis, market share was flat in Europe overall.

Order intake for trucks in Europe was quite strong at 23% for the quarter compared to last year due to increased adoption of new products and lower volumes last year due to Euro VI emissions changeover.

Truck deliveries were down 2% and book-to-bill was approximately 1:1.

Powertrain net sales increased 27% due to higher sales volumes for both captive and external customers.

Sales to external customers accounted for 48% of net sales, in line with the third quarter 2016.

Operating profit $88 million for the quarter, up $36 million as a result of higher volume, favorable engine mix and manufacturing efficiencies.

Operating margin increased 2.1 percentage points to 8.2% on volume leverage influenced by pre-Stage V stockpiling, which is expected to decline through the balance of the year, positive third-party sales mix and manufacturing productivity.

During the quarter, Powertrain sold 150,000 engines, an increase of 17%.

54% of engine units were supplied to external customers.

Additionally, Powertrain delivered 16,000 transmissions and approximately 42,000 axles.

Okay.

Moving on to the industry outlook for the balance of the year.

You can see that our industry forecast has changed modestly.

In NAFTA, we expect a modestly stronger market for tractors, combines and light construction equipment.

In EMEA, we see some slightly stronger demand for Construction Equipment.

In LATAM, we've raised the expectation for heavy construction, but this is off very low levels, so not overly material.

And finally, in APAC, most notably demand in China, we've increased the industry overall.

So nothing dramatic, up or down.

I think that if anything, the LATAM number is probably going to come in at the lower end of the range depending on how Brazil travels for the balance of the year.

I guess, we can deal with that in the Q&A.

And moving on to the final slide.

As mentioned in my opening remarks, market conditions across all major segments have been solid year-to-date despite continued inventory de-stocking efforts in high horsepower tractors in NAFTA and weak demand in hay and forage products.

The weaker U.S. dollar has had a positive translation impact in our revenues, but a less significant impact on profit because of our balance foreign currency positions between revenue and cost.

However, the strengthening of the euro is a favorable translation impact on the euro-denominated portion of our net industrial debt -- unfavorable translation impact on our euro-denominated industrial debt, but that's partially offset by better operating and -- operating results and cash flow.

So with all those factors in mind, we're increasing our 2017 guidance for sales and EPS.

We're slightly increasing net industrial debt guidance as follows: net sales of Industrial Activities of $25 billion to $25.5 billion, adjusted diluted EPS from $0.44 to $0.46 a share and net industrial debt at $1.5 billion to $1.7 billion, which equates to a growth of EPS of about 30% on a revenue growth of 7%.

So that concludes the presentation.

Federico, let's open it up for Q&A.

Thank you, Mr. Tobin.

Now we are ready to start the Q&A session.

George, please take the first question.

(Operator Instructions) Today's first question is coming from Mr. Joe O'Dea calling from Vertical Research Partners.

First on NAFTA production in AG and particularly in the high horsepower, I think a quarter ago, you were talking about waiting until you had a little bit more visibility into the end of the year around when to end underproduction in high-horsepower tractors.

Just any updated thoughts there, your comfort level of channel inventories?

And related, just what we're seeing a little bit of a split between overproduction in combines, underproduction in high-horsepower tractors, any kind of comments on what we're seeing there?

Sure.

I mean, I think I'll refer you back to the slide that shows used to new sales in NAFTA.

We've been -- we've felt that NAFTA in combine harvesters has been in balance since, let's call it, beginning to mid-2016.

So the fact that we're overproducing now is a reflection that we believe that the inventory has been in management for -- in balance for approximately 18 months.

So now it's just comes back to projecting retail demand and then with seasonality of when we're producing to that demand.

The stats look good for high-horsepower tractor.

We will see.

I think that we're feeling better about the ability to produce in line with retail in 2018, but I think that we'd like to see what kind of clearing we get in the fourth quarter to really update that figure.

Appreciate it.

And then on some of the moves of the debt in the ratings, any help just as we think about moving forward, taking into consideration some of the retirements that are now being eligible for investment-grade indices.

Just what that means from an interest expense quarterly run rate moving forward?

I'll go ahead and let Max answer that one.

So Joe, you can basically calculate yourself looking at the distribution of our maturities.

As a result of the reduced spreads that we are experiencing now in the market after the investment-grade announcement, we would suggest to hold on until we can come out with the '18 guidance, as we need to see how the exchange rate settles.

And we can probably give you a hard number for 2018.

Anything just on the normal spread?

Yes, on the spread, the bottom line is, it allows us to issue longer-dated paper, right, in the U.S. in both -- in euro and dollar.

So our expectation is that the duration table that's going to be retired extends pretty very much of what we've seen through this past year.

We will now move to from Palash Somani calling from JPMorgan.

This is Palash Somani on for Ann Duignan, JPMorgan.

My first question is, now that the NHI is rated investment-grade, are you guys exploring any spinoffs or feel of any of your current businesses?

It's a bit premature since we've just got our second rating upgrade.

Look, I really have no comment about that.

I don't think there's much relation between reaching investment grade and general corporate activity.

What else you got, Palash?

Okay.

Could you also update us on your early program -- early auto program for spring equipment and for combines into 2018?

Again, it's a bit early to start projecting 2018.

I think the trajectory for combine harvesters is good closing out 2017.

So I think that barring a change in commodity prices in -- commodity prices that we would expect that trajectory to continue.

On the tractor side, I think that the answer -- if you listened to the answer to the question I said before, it's -- we need to see where we are in terms of channel inventory.

But we don't have any expectation for any decline in demand in 2018 relative to where we're affirming net income as projected.

We'll now go to Mr. Martino De Ambroggi calling in from Equita.

The first question is on the AG business.

In Q3, showed an incremental margin of 18%, which is below what you mentioned as a normalized level of 25%, 30% assuming that the top line grew quite significantly.

So if you could elaborate on the reason why the incremental margin was not in the range you guided?

And maybe it's just a matter of currency impact, I don't know.

The second is on the commercial vehicle business.

You've shown negative prices in Q3.

So A, what should we expect for the rest of the year in terms of profitability and pricing in particular?

And B, I remember at the beginning of the year, you mentioned that you expected improvement in each and every division at the operating level.

Is that still the case for the CV business?

All right, let's go to the AG question.

There's really no FX in it and the incremental margin number that we've been using historically is weighted to the decline or the increase in NAFTA.

So we had a quarter with virtually no revenue increase in NAFTA.

So there's -- other than mix, there's no impact on incremental margins quarter-to-quarter because of that effect.

So that's why it's 18 rather than the 25 that we had talked about in the past when the NAFTA market was declining.

In terms of CV, the negative pricing is a bit of mix.

As we mentioned in the commentary, we had heavy weighting towards large fleet deals in heavy segment and more vans rather than cab-over in light commercial vehicles.

We're still trying to price for a lot of the Euro VI content.

Do we expect it to be better in the fourth quarter?

I think that our expectation is that it will be better in the fourth quarter.

Can they -- it's a matter of execution and foreign exchange of whether year-over-year Commercial Vehicles will be better for the full year.

My expectation is yes, but we need to execute in the fourth quarter.

If I may, just a follow-up on buyback of shares.

Now you are investment-grade for 2 rating agencies.

Should we expect an acceleration in buyback?

I don't think you're going to see anything more than we've announced in terms of the authorization for 2017, and we'll update the position for 2018 at the end of the year.

Today's final question is coming from Mr. Ross Gilardi calling in from Bank of America.

What is your guidance assumed for margins year-on-year in AG in the fourth quarter?

We don't give you segmental assumptions, Ross.

I think overall, we would expect to see the same trajectory of improvement that we saw year-to-date of that.

Okay, that's helpful.

And just a little bit more on high-horsepower tractors.

Demand hit your end market forecast in the fourth quarter.

Are your inventories where they need to be at the end of the year and are you able to produce more in '18 versus '17 for NAFTA high horse?

I -- no.

I think that there're still higher than we'd want them to be.

We think that the metrics of the clearing is good.

But overall, I would not expect the NAFTA to increase production for high-horsepower tractors in Q4.

We'd allow the position to clear.

I mean, we can catch up in Q1 next year if need be.

I'm sorry.

That was more of a question.

Like if your -- if demand hits your end-market forecast in your fourth quarter, are your inventories where they need to be if you could produce more in '18 versus '17?

I hope so.

But right now, I think if we could get in balance with 2018, we'd be pleased with that after the last 4 years.

But I think it's a little too early to tell, because we expect a significant amount of activity in Q4 on the use based on the numbers that we see in terms of the clearing.

Okay, thanks.

And then what was the -- you mentioned your order book up 50%.

There's just a lot of earnings calls today and there's a lot of detail provided.

So what was that number pertaining to?

Was that...

Construction.

Construction is up 50%, okay.

Ladies and gentlemen, that will conclude the question-and-answer session.

I'll now turn the call back over to Mr. Federico Donati for any additional or closing remarks.

Thank you, George.

We would like to thank everyone for attending today's call with us.

Have a good day.

That will conclude today's conference.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.