CNH Industrial NV (CNHI) 2020 Q1 法說會逐字稿

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2020 First Quarter Results Conference Call. For your information, today's conference call is being recorded. (Operator Instructions)

At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

Thank you, Priscilla, and good morning and afternoon, everyone. So first of all, apologies for this few minutes delay, was just to permit everybody to be connected. So we would like to welcome you to the webcast and conference call for CNH Industrial First Quarter 2020 Results for the period ending March 31.

This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use, recording or transmission of any portion of this broadcast without the express written consent of CNH Industrial is strictly forbidden.

We are pleased to have here with us today our Chair and acting CEO, Suzanne Heywood, and our CFO, Oddone Rocchetta, who will be hosting today's call. They will use the material available for download from the CNH Industrial website. After their presentation, we will be holding a Q&A session.

As a final comment, please note 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. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20-F and EU Annual report as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy.

The company presentation may include certain non-GAAP financial measures. Additional information, including reconciliation to the most directly comparable GAAP financial measures is included in the presentation material.

One final remark, as you can imagine, our team is connecting from different countries. So please forgive us if there are moments of silence during the call while we manage the transition between the speakers.

I will now turn the call over to Suzanne.

Thank you, Federico, and good morning, good afternoon to everyone. I want to begin today with a short update on how we're responding to the current pandemic, and our focus as we prepare to emerge from it. After that, I'll go into the Q1 results, where I'll give you as complete a picture as I possibly can in these difficult and very unpredictable times. Most importantly, I wanted to say upfront that our business is in relatively good shape to navigate this crisis with adequate liquidity to withstand the most pessimistic scenarios for our business that we have modeled. This financial resilience is important in enabling us to weather this crisis but so will be our ability to respond quickly to the changing market, government and social conditions in each of the countries in which we operate.

To do this, I have been chairing a daily meeting with the Global Executive Committee members of CNHI in which we've been focusing on 4 issues. First and most importantly, the health and wellbeing of all our employees, particularly as we now begin to open back up our production facilities. Secondly, the continuity of our business from a liquidity, cost management and market presence perspective. Thirdly, ensuring the strength of our dealer network and our supplier base. And lastly, making sure that our customers and the communities in which we operate in also emerge strongly from this crisis.

In doing all of this work, we've been very conscious of the role that CNHI plays in providing equipment that is essential to industries like transportation and agriculture on which our society depends. In addition to responding to the crisis in this way, we've also been continuing to work on the Transform 2 Win strategy that we presented at the Capital Markets Day in September 2019. We've accelerated our work, in particular, on the Perform & Simplify initiatives that we described then as it is now more important than ever for us to have a flexible and lean cost structure for our organization. We have also reconfirmed our commitment to spinning off our on-highway activities. However, we are extending the time table for that due to the market conditions into next year or beyond and will confirm the revised time table when we have more clarity.

Before going into our results, I would like to just take a moment to thank all our employees for their work so far in getting us through this crisis, with many of them continuing to work throughout the pandemic. I'm incredibly proud of our global team, and I know how committed they are to making sure we effectively support our customers, dealers and our wider communities as we navigate our way through this very difficult period.

I will now move on to Slide 4, which summarizes our Q1 results. Net sales of Industrial Activities for the period were $5 billion, down $0.8 billion or 14% on a constant currency basis due to the COVID-19 impact on the many markets in which our customers operate, coupled with previously announced actions to reduce dealer inventory levels. Industrial activities' adjusted EBIT was a loss of $148 million, sharply impacted by demand disruptions in March. Negative absorption caused by plant shutdowns and actions to reduce inventory levels that we started in the previous quarter.

Industrial Activities' net debt at March 31, 2020, was $2.3 billion. This was an increase of $1.5 billion from December 31, 2019, as a result of seasonal working capital absorption and the adverse impact of COVID-19 partially offset by actions to reduce company inventory and by other cash-preservation measures. Adjusted diluted EPS was a loss of $0.06, primarily driven by the adjusted EBIT loss of $38 million. Our available liquidity position was $9.9 billion at March 31, 2020. This is the second highest level in our company's history at the end of a first quarter.

On February 28, before the COVID-19 outbreak affected the global financial markets, we extended our EUR 4 billion committed revolving credit facility for 1 year with all lenders by exercising the first 1-year extension option. The facility will now mature in March 2025. Oddone will provide more details on our action to maintain strong liquidity later in his presentation.

Turning to Slide 5. I would like to share with you some of the Q1 industry volumes as they will help put these results into context. First, let's look at the ag segment. Worldwide demand for tractors was down 15% during the first quarter of 2020, as you can see on the slide, and demand for combines was down by 11%. The impact of the COVID virus was, however, particularly acute in March, and you'll see that we have a separate column for March on the far right-hand side of this page. As shown in this column, the demand slowdown for tractors in March alone was 36%. In North America, tractor demand was down by 9% in the quarter, primarily in the lower horsepower segment, under 140 horsepower, while combines were down 22%. In Europe, tractor and combine markets were down by 10% and 20%, respectively, with tractors down 24% in March alone, again, looking at that column.

In South America, the tractor and combine markets decreased by 6% and 30%, respectively. And in rest of the world, demand decreased by 17% for tractors and 2% for combines, with the tractor market slowing down by 43%, again, in March alone. So you can see across those different segments, how much the pandemic affected us, particularly in March at the end of the segment.

Moving to the construction segment. All subsegments experienced double-digit declines in all geographies. The one exception was South America where compact and service equipment was down by only 1%, while general construction equipment and road building and site preparation equipment were up by 12% and 13%, respectively. However, as you can see, again, in the right-hand column, this downturn was severe in March with construction activity stopping or significantly slowing down in most geographies.

Lastly, I want to turn to the truck and bus markets. The European truck market was down by 19% year-over-year in the first quarter, with light-duty trucks down 14% and medium and heavy trucks down 27%. Again, if we focus in on March, industry sales of light-duty trucks and medium and heavy-duty trucks in Europe declined by 34% and 38%, respectively.

The South American truck market was down by 17% in light-duty trucks and 6% in medium and heavy trucks in the first quarter, with the light-duty truck market down by 26% in March alone. For buses, the European market decreased 9% in the quarter, with a 30% decrease in March alone. The South American market for buses decreased by 14% in this quarter, with a 34% decrease in March.

While the heightened industry uncertainty means that we cannot give precise forecast, I would like to share with you for each of our major segments our sense of how the industry might play out this year. As I've just described, the COVID crisis has impacted all of our end markets in this quarter, particularly at the end of the quarter. However, across all of our segments, we expect the most severe impact will be seen in the second quarter of this year.

For agriculture, we expect the industry in North America, South America and Europe to be down in the second quarter by a minimum of 20%, with some regions and product lines reaching 40%. Europe will be the most heavily impacted region, we believe, with demand for both tractors and combines down 30%. In North America, we expect demand for high-horsepower tractors and combines, where, as you know, we are well positioned to be less impacted with the cash crop segments down less than the livestock and dairy segments. Although we, of course, have even less visibility on the second half of the year, we currently expect the ag industry to begin to recover through the third and fourth quarters.

I'll now do the same in construction, where we expect the market to be down at least 50% across all regions and subsegments in the second quarter of this year. With the exception of rest of the world, where it looks like demand will be slightly up year-over-year in the second quarter but, of course, our presence is more limited. We, again, expect some recovery in construction in the second half of the year, although we expect this to be less marked than it will be for agriculture. The second quarter will also be tough for commercial vehicles with demand expected to be down by almost 60% in Europe and around 70% in South America. In the second half, we again, expect some recovery in commercial vehicles, although like for construction, our expectation is that this will be more muted than it will be for agriculture.

I will now move on to Slide 6, which shows CNH Industrial specific unit statistics for retail delivery and production data sets in the first quarter of this year compared with the same period last year and also shows channel inventory levels. Before going into these details, let me remind you that the beginning on March 11, we closed our Italian production facilities to protect our workforce and from March 20, we suspended the majority of our European assembly operations. In North and South America, where production was already slowed down before the pandemic, we suspended the majority of our manufacturing operations from March 30. We closed our plants in India on March 23.

Despite these closures, we have managed to keep most of our parts depots, service facilities and dealerships operational through the whole of this quarter so that we could help our customers keep their machinery running through the crisis. In doing this, we fully complied with all of the safety measures mandated by law in each country, together with many additional measures agreed with our workforce.

As we announced yesterday, we are now bringing our manufacturing operations gradually back online, while ensuring that we remain in full compliance with all emergency regulations. In doing this, we have agreed and implemented a wide range of new safety protocols with our workforce to reduce the risk of virus transmission. You'll be glad to know that now more than 70% of our 67 plants around the world are operational, although most are not operating at full capacity. On a regional basis, more than 80% of production sites in Europe and some 60% of sites in North America, in South America and the rest of the world are already operational. In the case of the rest of the world, this proportion approaches 90% if you include joint ventures.

In bringing our plants back online, we have deliberately prioritized agriculture and powertrain manufacturing as they both serve essential industries in which the market demand for our products is greatest. These are being followed by Commercial and Specialty Vehicle manufacturing given the importance of transportation and civil protection sectors and afterwards, by construction equipment manufacturing plants. We plan to return to full operation at most sites by the end of the month but we'll modify this if local or regional situations deteriorate or if we need to respond to changes in end market conditions or to changes in our supply chain.

As I noted before, end customers, together with our dealer network have been fully supported through this quarter by CNH Industrial aftermarket solutions, and today, almost all of our 45 logistics hubs are operational, the majority of which are running at full capacity. Today, we also have 24,000 of our employees working -- are able to work from home, and about half of them are doing so. In agreement with our trade unions, we've also accessed government-backed employee salary support measures where they are available.

I now want to move to the quarterly performances that are shown on this slide, Slide 6. For ag, worldwide tractor and combine production was down 40% and 26%, respectively, for the month of March, and North American row crop production was down 16% in the full quarter. Our worldwide channel inventory for tractors was up 3%, predominantly low horsepower tractors, but down 3% for combines versus quarter 1 2019. North American row crop channel inventory was down 11% versus last year. The slight increase in inventory would have been greater, had we not already put in place plans to reduce inventory in this quarter in anticipation of weakening market demand. There's also an increase in retail deliveries of combines in the quarter. For construction as a whole, the company's worldwide production was down 23%, and channel inventory was up 1%.

If we focus on the EU portion of IVECO trucks specifically, since it accounts for approximately 80% of the sub segment's revenues, production for light trucks was down 28%, and medium and heavy trucks was down 21%, and EU channel inventory for trucks was down 9%. Our share of the EU truck market is 10.8%, up 40 basis points, with medium and heavy up 250 basis points to 8.5% on the back of strong retail deliveries of our newly launched S-Way heavy-duty truck. Truck book-to-bill in the EU was 1.44, and South America ended the quarter at 1.04.

I will now turn the call over to Oddone to take you through some of the key financial details.

Thank you, Suzanne, and good morning or afternoon to everyone in the call. Before I take you through the quarterly figures, I would like to, again, thank all of our employees, dealers, customers and other stakeholders who have been so supportive and dedicated during this very difficult period, including the office colleagues who have been all working from home for more than 7 weeks. It goes without saying that their passions and support have been critical to our operations.

Moving now on the key figures for the first quarter. Net sales in our industrial segments were down 14% in constant currency. Adjusted EBITDA in Industrial Activity was a loss of $148 million in the first quarter of 2020 compared to an adjusted EBIT of $278 million in the first quarter of 2019, mainly due to unfavorable volume and mix, which more than offset positive pricing and cost management actions. Our adjusted effective tax rate for the quarter was 31%, resulting in an income tax benefit of $23 million. For the first quarter, adjusted net loss was $66 million and adjusted diluted earning per share was a loss of $0.06. As mentioned earlier, we finished the quarter with net debt of Industrial Activities of $2.3 billion, representing an increase of $1.5 billion compared to the beginning of the year, and that available liquidity stands at $9.9 billion at the end of the first quarter. I will go into more detail later in my presentation.

On Slide 9 -- Slide 8, sorry, we focus now on our Industrial Activity net sales. Foreign exchange translations had a negative impact of 2.8% in Q1. The net sales split by region was almost unchanged versus previous year, with Europe accounting for more than half of our net -- of our total net sales and almost 50% when looking at the state by currency. Cash and net sales totaled $2.2 billion in the first quarter of 2020, down 7% on a constant currency basis. The decrease was driven by lower industry volumes across all geographies, some activity related with COVID-19 outbreak, coupled with the actions to reduce channel inventories in North and South America. Positive price realization across all regions only partially offset this decrease. Construction net sales totaled EUR 422 million in the first quarter of 2020, down 32% on a constant currency basis, as a result of deteriorating market condition across all regions, which were particularly severe in the month of March in most markets. Then this is combined with actions to reduce dealer inventory levels.

Commercial and Specialty Vehicles net sales totaled EUR 2 billion in the first quarter of 2020, down 13% on a constant currency basis, driven by the market slowdown in Europe linked to the pandemic with key markets for products significantly impacted in the month of March. Finally, Powertrain net sales totaled EUR 753 million in the first quarter of 2020, down 25% on a constant currency basis due to lower sales volumes in Europe and in China in the first part of the quarter. Sales to external customers accounted for 44% of total net sales with a 27% reduction in captive volume and a 33% reduction in non-captive volume.

Turning to Slide 9 now, with a look at the adjusted EBIT by segment and driver. Adjusted EBIT for the first quarter at the consolidated level was a loss of EUR 38 million with a negative margin of 0.7%. At a high level, the majority of the delta on a quarter-over-quarter basis was due to negative volume and mix, which includes the negative fixed cost absorption. Higher product cost due to many of our plants in various periods of shutdown as well as negative foreign exchange were partially or totally offset by positive pricing and cost-containment actions.

If we drill down to the segment-specific level, adjusted EBIT for ag was $24 million. Positive price realization, disciplined cost management and favorable purchasing performance were more than offset by lower wholesale volumes, market and product mix, negative fixed cost absorption, primarily in Europe, and higher product costs due to plant shutdown and costs associated with product quality actions. Foreign exchange impact was negative, primarily from South America.

For Construction Equipment, adjusted EBIT loss was $83 million. Net pricing was impacted by retail program enhancement in response to deteriorated market condition and the need to reduce dealer inventory. Product cost increased due to the plant shutdown, and costs associated with the continued quality improvement initiatives also affected quarterly performance.

Commercial and Specialty Vehicles adjusted EBIT loss of $56 million was negatively impacted by the critical market conditions, particularly in Europe in the month of March, generating lower volumes and higher product costs due to the plant shutdown as well as by unfavorable foreign exchange impacts, partially offset by positive price realization.

Lastly, Powertrain first quarter adjusted EBIT of $31 million down from $96 million in prior year, was mainly impacted by unfavorable volume and mix, partially offset by product cost efficiencies.

Moving on to Slide 10 and our Financial Services business. Net income was $80 million, impacted by higher risk cost in view of the expected deterioration of credit conditions and the negative impact of currency translation, partially offset by lower income taxes. In the quarter, retail originations were $2.1 billion, and the managed portfolio at the end of the period was $24.7 billion. Delinquencies were relatively flat to previous quarters with an increase of 10 basis points and remained well below the historical norm for the first quarter.

Next on Slide 11. I'd like to discuss the net debt and free cash flow performance of our Industrial Activities and provide an update on the balance sheet. Net debt of Industrial Activities at March end was at $2.3 billion as a result of seasonal working capital absorption and just adverse impact of COVID-19, partially offset by actions to reduce company inventory and by other cash preservation measures. The seasonal inventory growth in the first quarter was lower than in the previous year despite the abrupt worsening of our end market across regions. This was due to deliberate actions that were already planned to reduce inventory levels. The slowdown of production in many facilities determined a reduction of trade payables in the quarter, with a resulting negative change in net working capital of $1.3 billion compared with negative $1.1 billion in the same period of 2019.

Going to the next slide on consolidated available liquidity and debt maturities. We ended the first quarter of 2020 with an available liquidity of $9.9 billion, inclusive of $4 billion committed revolving credit facility that extended prior to the crisis outbreak for 1 more year through March 2025 and this remains undrawn. This is the second highest March-end available liquidity level in the group's history, with a solid liquidity to last 12 months revenue ratio of 37%. During the quarter, we negotiated additional funding transaction for a total of $1.1 billion equivalent that we drew in March for $800 million with the remaining part in April. Additionally, just last week, we issued a new CAD 466 million retail ABS and GBP 600 million in the commercial paper market through the Joint Treasury and Bank of England COVID Corporate Financing Facility. The excess to this facility demonstrates CNH Industrial's continuous effort to preserve a sound level of liquidity throughout this period of uncertainty.

Looking out at the remainder of 2020 and in 2021, we believe we will be able to maintain a strong liquidity position with no significant near-term maturities of capital market debt. To this point, on Page 13, we show the split of maturity between Industrial Activities and Financial Services. As you can see, of the $3.9 billion maturing in 2020, the clear majority with $3.7 billion relates to Financial Services and is matched to its receivable portfolio. We have 1 bond maturing in November 2020, and the rest is all bad debt, which we have historically been able to manage on a rolling basis. We have started working on the various renewal of the upcoming months and at this stage, we do not envisage any issue with our banking partners. On the bond market, we continue to have access to the capital markets, both in euro and USD, and we'll keep monitoring them opportunistically.

As a reminder, both the liquidity shown on Page 12 and the maturity shown on this slide do not include the additional funding transactions completed in April and indicated in the previous slide. The company will continue working to preserve its liquidity and ensure good access to funding. We are currently evaluating and implementing all possible and prudent actions to reduce costs and protect our financial position, our liquidity and capital structure and our corporate ratings.

This concludes my presentation, and I will now turn the line back to Suzanne, and we'll be back for the Q&A session.

Thank you, Oddone. At this point, I would like to share some more details with you of the emergency actions that we've put in place to keep our people safe during this period and to ensure that we are in full compliance with all the applicable national and state mandates.

First of all, as a manufacturer of essential products, we know that it is important for us to keep our facilities open, but we are also very concerned to do this in a safe and prudent way. We have, therefore, decided to apply globally across all our facilities the protocol mandated in March by the Italian authorities, which outlined safety procedures for returning to work and techniques designed to prevent the spread of COVID-19. In addition, to ensure that we can access a good supply of personal protective equipment for our workforce without depleting the global stocks needed for health care workers, we have decided to start our own production of personal protective equipment in facilities in both China and Italy.

Although we had to close many of our facilities from mid-March, we continued to support our customers and dealers through our aftermarket network. To protect the health of our business, we've also been working hard during this quarter, as Oddone mentioned, both to reduce our costs and to conserve cash. This has included a wide range of measures, including decreasing our CapEx, reducing our use of consultants and agency staff, renegotiating supply contracts, putting in place a hiring freeze and accelerating work on corporate rightsizing. We are also looking at our footprint globally for offices, R&D centers and production facilities to make sure that we maximize the efficiency and effectiveness of our operations while accelerating the digitalization of our processes.

As I mentioned before, most of our dealers have remained open through this period, and we have been working with them to help them access available government funding for them to find PPE for their employees and to help them support their customers. Many of our suppliers have also, of course, been affected by COVID-19 so we are similarly in very close contact with them, both to understand the potential supply restrictions to each of our production plants and, where required, again, to help them get through this difficult period.

We've also been mindful of the impact that this crisis has had on the many communities in which we operate. We have, therefore, put in place more than 80 initiatives globally to help support local health care or other efforts. And we've donated $2 million to charitable foundations that will work on COVID-related initiatives.

I will now move on to Slide 16. In the first quarter of 2020, our organic CapEx was $63 million, down 18% year-on-year, and accounting for 1.3% of our net sales. However, CapEx in new products and technology was up 9% versus last year. R&D spend in the quarter was also down, down 12% to $214 million, which is 4.3% of our net sales. In both of these areas, we've conducted detailed internal reviews involving all of our industry and functional leads to ensure that we are prioritizing our spend appropriately in this critical time. Total spending on new products was $117 million, up 6%, however, with the majority of this going towards our sustainable investments. While it's important for us to adjust our investments during this critical period, we remain dedicated to investing in future growth initiatives that will enable us to emerge from this crisis, ready to offer our customers a highly competitive and compelling range of products across all our end markets.

I'll turn now to Slide 17, which illustrates the continuing strength of our product innovation, which we're determined to maintain. During this quarter, case IH launched a new line of articulated 4-wheel drive tractors with the new cord track and Steiger AFS Connect series tractor. The range will include 14 models in total, covering the 420 to 620 horsepower range, with several upgrades such as a completely redesigned cab that offers greater comfort and connectivity. New Holland has also launched the WORKMASTER tractors. These will be available in 3 horsepower ranges and have been designed to provide unmatched comfort and a low cost of ownership.

Turning to construction. At CONEXPO in Las Vegas during March, the segment presented Project Zeus. This backhaul loader prototype is fully electric with 0 emissions, lower operating costs and reduced maintenance. IVECO also won the prestigious iF DESIGN AWARD 2020 this quarter in recognition of the design excellence of the IVECO S-Way heavy duty truck. While FPT was awarded diesel of the year for its F28 engine, which is Stage IV (sic) [V] final and Tier 4 Final compliant.

Next, on Slide 18, I would like to highlight a few of the inorganic growth initiatives from the past few months. You have heard in the past about our relationship with Nikola Motor Company, which continues to be an important part of the future product innovation pipeline for both IVECO and FPT. In this quarter, we announced that the production of the Nikola Tre would be in the IVECO manufacturing facility in Ulm, Germany. As part of the initial stages of the European JV with Nikola, EUR 40 million will be invested to upgrade this plant. The Nikola Tre currently in development is based on the new IVECO S-Way platform into which we are integrating Nikola's truck technology, controls and infotainment system. This Nikola collaboration, which is underpinned by an industry-disrupting business model, will enable us to begin production in 2021 of battery-electric 4x2 and 6X2 articulated trucks. These trucks will have modular and scalable batteries with a capacity of up to 720 kilowatt-hour and an electric powertrain that will deliver up to 480 kilowatts of continuous power output. Recent industry announcements confirm that fuel cells are increasingly seen as the future technology of choice for alternative propulsion in heavy-duty trucks.

In this quarter, FPT also announced the acquisition of Potenza Technology, a company specializing in the design and development of electric and hybrid powertrain systems. FPT also signed a memorandum of understanding with Yanmar Marine to develop and advance our marine engine capabilities. All of these initiatives will further the company's commitment to be the leading provider across a wide array of powertrain solutions for both internal and external customers.

In conclusion, I would like to thank each and every member of our workforce for the huge efforts they have made to help us, together with our dealers, customers, suppliers and the communities we work with to get through this crisis. We have, as Oddone has described, a strong liquidity position and have demonstrated our ability to access both government funding programs and to work with our banking partners to access additional capital. We have reduced our discretionary expenses, including purchase services, travel and entertainment; and our senior management, including the entire Board of Directors and almost 900 members of our broader management team have agreed to temporary reductions in their compensation.

Looking to the future, we are confident that we are well prepared to respond to the market as it evolves through 2020 and into 2021. While we cannot, of course, be sure of the future, we are determined to ensure that we are well placed to thrive and deliver profitable growth in the new normal that emerges. The continuing end market uncertainties, combined with possible further disruptions in our supply chain, did not allow us to provide helpful guidance on the second quarter or full year results at this time. However, we will continue to communicate with the financial markets and with all of our other stakeholders as the implications of the evolving business environment for our operations and performance become clearer.

And finally, before concluding my remarks, I wanted to say something briefly about the recent management changes at CNHI. As you know, 6 weeks ago, I stepped in as acting CEO of CNHI alongside my role as Chair. The search for a new CEO is now well underway. Headhunters have been appointed, and the work is being led by our Governance Committee. We will make this appointment as soon as we can and do not expect it to be unduly delayed by the COVID crisis.

This concludes my prepared remarks, and I will now hand back to Federico.

Thank you very much, Suzanne. This concludes our prepared remarks, and we can now open up for questions. Operator, over to you.

(Operator Instructions) We will now take our first question from Ann Duignan from JPM.

My first question is around Q2. You ended the quarter with 151 days of inventory or $7.3 billion. And with the comments on Q2, can you talk a little bit about how much cash you expect to burn through in Q2. Q2 would normally be a positive working capital quarter with shipments up, but it doesn't seem like that this year. So can you talk a little bit about how much cash you expect to burn versus the inventories at quarter end? And how are you going to reconcile excess inventory in an environment where market demand is going to remain weaker for longer?

So let me say something on inventory. And then, Oddone, if I pass over to you to say something on cash. So on inventories, I think, hopefully, I was clear in the prepared remarks, we've actually been very deliberately trying to take action on inventory. We're conscious that that -- we were conscious coming into this quarter that that was something that we needed to do. On ag, we'd actually already started to take action on inventory, which is one of the reasons why although we've ended the quarter slightly up on company inventory, we're nowhere near as far up as we would otherwise have been given the slowdown. We are, however, more up as you'll probably kind of see within construction, less so within commercial vehicles. So we actually have made quite a lot of progress in this quarter on inventory, but you're right. We -- the second quarter will still be tough across all segments, as I said in my prepared remarks.

Oddone, do you want to say something on cash in the second quarter?

Yes. I think we said when we talk about the market expectation for the second quarter, that's going to be the toughest for us and most probably is not going to be a cash generation quarter. But as we've shown on our liquidity, I mean we are well prepared to withstand whatever cash consumption we may have. And we expect the following quarters then to be definitely better.

But based on the, at least, qualitative guidance you gave to us for Q2, do you have any idea of how the magnitude of the cash required or cash burn?

I will say we'll be in the range that we had for the first quarter.

Okay. That's helpful. And then just a follow-up on FX. Can you talk a little bit about if the real stays where it is today? I think you said in your prepared remarks that was the biggest portion of the FX headwind. Is that, a, the case? And b, if the real stays as it is, should we take kind of Q1 impact as the go forward?

Well, Q1, we also had something coming from -- in the comparison with last year. I would say we will adapt our pricing in Q2 in South America to respond to the devaluation of the currencies. There will be headwinds, yes, but probably not of that magnitude.

Yes. We had a one-off effect in this quarter, kind of quarter-on-quarter. So I don't think it would be as large, but we would have to adjust pricing if we continue to get currency weakness there.

Okay. Can you quantify the one-off amount just so we know for our modeling.

I think the best way to look at that -- Oddone, do you want to kind of give an indication of that? I think it's kind of reasonably clear in one of our charts. I think the -- it's in the kind of unallocated -- in the FX other, you'll see on the adjusted EBIT walk.

I will take it in a range of $20 plus million.

Yes.

And we will take now our next question from Rob Wertheimer from Melius Research.

I wanted to ask 2 questions on agriculture. And obviously, I understand all the different, conflicting data points and signals. The first question though was just can you tease out how much of the 2Q kind of outlook or demand that you're seeing is related to your dealers being more conservative and destocking versus farmer pull? And the reason I'm asking is one of your competitors yesterday sort of noted that orders are down although up in Europe -- Western Europe, and that was a positive surprise. I don't know if you're seeing the same kind of positivity. I don't know if there's a distinction between their dealers loading up or your farmers being more or less conservative or not.

The second question is just, do you have an estimate of your livestock exposure in the U.S., given the dislocations in the protein market there, crops versus livestock?

So in North America, on the -- overall, the dealer inventory went slightly down in this quarter. And that's partly because of the actions that we were taking in support of our dealers. And I think we're kind of relatively well positioned in North America. As you probably know, we're very strong in the high horsepower segment in North America and in 4-wheel drives. So that's all fairly positive. When I first came in, we were modeling a number of different scenarios for the COVID impact. We actually took the most negative, and we've been working to that, which is one of the reasons why, as you will have heard in our prepared -- in my prepared statement, we've taken quite a lot of actions in this quarter to make sure that we're well prepared for the rest of the year. Actually, against that kind of worst forecast, we've come slightly back up in the second quarter. So it's still going to be a tough quarter, but I think, actually, what I'm hearing from the segment is that things are -- through the dealers, things are looking slightly more positive than they had thought a week or 10 days ago. But it's very, very difficult to give precise numbers of where that's going to go. There's so many moving parts, as you know. As you probably also know, we're very -- we're strong on the kind of row crop side.

Indeed, yes, I don't know your exposure to livestock in North America. I mean I didn't expect half the pork production to be shut in 2 or 3 weeks ago. It's obviously very variable. I don't expect that's the biggest impact for you, but I don't know if there was any quantification of it.

I don't think we would normally give quantification at that sort of level. But I can say, as I said, that kind of -- I think we're reasonably well positioned in that market, and some of the indications coming out are a little bit more positive than we did have a week or 10 days ago, but it's still going to be a difficult quarter. So I don't want to mislead anybody on that.

We will now take our next question from Steven Fisher from UBS.

Just really wanted to pick up on that last comment there. You've talked about starting up some of the plants, but really curious what the extent of where you're starting to see any stabilization in any elements of your business operationally. And from the demand side, it sounds like there's some elements of ag, like you were just saying. But curious, more broadly, any areas of stabilization?

So I think it's worth saying that on the manufacturing side, as we announced yesterday, we've been making significant amounts of progress with the kind of huge thanks to the team, which has been putting in a massive work, as you can imagine, to get the plants up and running, and up and running in a safe way so that everybody feels secure kind of coming to work. We now have over 70% of our plants open globally. And over 80% of our plants open in the EU. I think we're aiming to get pretty much all, or all but 1 or 2 open on the ag side in North America by next week. We are prioritizing, as I think I said in the prepared remarks, we're prioritizing ag, partly because it's such a critical industry, partly because the end market there is stronger. And as I was indicating, if anything, slightly stronger than we had been predicting a week or 10 days ago because we've been conservatively working to a relatively pessimistic set of scenarios, which I think is a wise thing to do, given the kind of nature of the crisis that we're working our way through.

I think in other markets, again, the kind of indications on the ag side is that it is beginning to strengthen a little bit, certainly above our worst-case scenario. And as I indicated in my prepared remarks, we are expecting to see it start to recover in the second half of the year, although it's very, very difficult to give predictions. And as you'll understand, one of the variables that we need to manage through is what happens with our supply chain, which we're working very, very closely with. Talking very regularly to our suppliers so that we can make sure that if we're bringing our plants back up, we're bringing them back up with adequate supplies coming in.

So I think, actually, overall, I would say, we're seeing a fair amount of stabilization, but we are working in very, very uncertain times.

Fair enough. And then did I hear you say in your prepared remarks that the spin-off as part of the Transformation (sic) [Transform] 2 Win could be extended beyond 2021? And I guess, even if not, even if it's still somewhere around the middle of 2021, as you were saying a few weeks ago, what would be the process for determining that timing? And what would be the hurdles that would needed to be overcome?

Yes, you're correct. In my prepared statement, what I said was that we've recommitted to the spin, which we absolutely have. I think all of the rationale that we had at our Capital Markets Day for why it makes sense to do the spin still hold. None of that has changed. However, I'm sure you all appreciate, given what's happened in the market and obviously, the impact on our business, we want to make sure that we do that at a point where we can spin 2 strong companies. We want the ag side of the company to be investment grade. We want the spun side of the company also to be very strong. So frankly, it depends on the performance of the businesses and the state of the markets. I deliberately said in the prepared statement that it would be next year or beyond. We're obviously interested in doing it as soon as it makes sense in the market, but we don't want to do it at a point where we're not going to be able to spin 2 strong companies.

And our next question comes from the line of Martino De Ambroggi from Equita.

Yes. The first question is on the prices because in the press release, you report price pressure on both new and used vehicles could be among the risks. So what do you expect in such a difficult environment? And is agricultural contract equipment at risk for the first time after many years in a row of positive price effect?

So as I think, hopefully, we'll be...

You should probably -- if I take this, Suzanne, you should probably read that comment more on the construction and on the truck side of the business, and more in Europe for the truck side of the business, for new and used equipment. We have been launching, as you know, a new heavy truck, the S-Way. And we've been positive in pricing there, and we've been gaining market share as well. So I mean our own performance is positive, but we need to see how the market would react with this drop in demand.

Okay. While agricultural is able to achieve a positive price effect?

Correct.

That's right. And I think you'll see that in the document, if you look on the document with the EBIT walk, you'll see that we've been able to maintain pricing in agriculture and Commercial and Specialty Vehicles. In construction, we've had weaker pricing as we've helped our dealers destocking.

Okay. And the second question is on the cost-cutting initiatives. Maybe I'm wrong, but you didn't quantify the sum of your actions. Knowing that the plan had $600 million savings, what should we expect in terms of push in cost-cutting actions due to the crisis this year?

So the work that we've been doing -- so first of all, as I said in my prepared remarks, we are continuing with the Transform 2 Win program, and we've been prioritizing the Perform & Simplify elements of that, which obviously have a lot of cost-reduction initiatives within those but we've actually doubled down on that effort in this quarter, as I described. Looking really at all of the elements of costs out of the business and challenging them and using this as an opportunity to make sure that we really minimize the costs going out of the business. At the moment, we're targeting reduced costs based on that work that we've done this quarter. We're looking at reducing cost out by about $1 billion but we are prepared to go further if required. One of the things that we've been doing very actively as you might imagine, and others are doing is we're modeling multiple different versions of how the year could evolve, and we have kind of further actions that we will take if we need to. Hopefully, that won't be required. And we are prioritizing, as I also kind of mentioned during my prepared remarks, things like our investment into new products, which we believe are very, very important if we're going to emerge from this crisis strongly.

And the next question comes from the line of Ross Gilardi from Bank of America.

Suzanne, you -- obviously, you guys are delaying the spin and you're very candid on that. It's clear that CNH is going to have to make some pretty difficult decisions in the next several years. And I wanted to ask you specifically about construction and the heavy-duty truck business. And whether or not any thoughts being given to just simply exiting the businesses? I mean these losses in the first quarter are pretty steep and are going to get worse in the second quarter. The multiyear outlook seems very challenging, whether COVID goes away in the next couple of month or 2 or not. And aside from the interesting relationship you have with Nikola, why not just exit these businesses rather than devoting significant time and financial resources to turn them around when the company has been trying to do that for years? And really what are the barriers to exit in those markets rather than focusing on turning everything around and splitting the company up?

So I think the answer to that is a little bit different in the 2 segments, actually. I think in construction, you correctly identify, and I am very conscious of it as is my leadership team that the performance in construction has not been adequate. As you know, we have changed over the leadership in construction. And as you can imagine, we now have a very thorough process going on to look at that business pretty much from the kind of ground up to work out where we're positioned and what we want to do with that business in the future. And we won't hesitate to make decisions to kind of bring that business back to profitable growth, and that will be one of my priorities in the kind of coming weeks and months because we need to take action on that business. And we're very, very determined to do so.

I think the situation on the commercial vehicles is a little bit different. As I mentioned in my remarks, first of all, we have the relationship, as you said, with Nikola, which is very much based on the S-Way. And actually, since the launch of the S-Way, which was a very successful launch, we have gained market share across all of the European markets on the heavy side. So I think we actually feel very positively about that. You're right that we are coming from a difficult position on the heavies, but I think we see a kind of clear path forward on that, and we remain excited about the joint venture that we have with Nikola, which is based on the S-Way frame as well.

Well, for the -- I was asking specifically about heavy, not the whole commercial vehicle segment because I know you have a very interesting position too in the light- and medium-duty side. But given what you just said, is there a time frame you have in mind where the company has just got to make a decision on whether it wants to be in these businesses or not? I mean it just seems like the easiest way back to profitability is to exit some of these divisions that never make money.

Well, as I just said, I think on construction, I'm very conscious that we do need to have a thorough look at that business and not delay making decisions. I think on commercial vehicles it's a very different situation where we are gaining market share, and I think we're very, very pleased with the launch of the S-Way and how that's been welcomed by the market, which is on the heavy side. And of course, as I said, that kind of plays into our joint venture with Nikola because it's the S-Way which will be the frame for the Nikola's joint venture, which will take us into electric and into the whole fuel cell space as well. So I think we feel quite differently about the 2, but we will keep all of our situations under review. But the Construction Equipment segment under its new leadership is very actively reviewing the business and looking at how to take it back to profitable growth.

Got it. And I realize that the company has got a lot on its plate, I just wanted to get your general view on that.

No, no. Absolutely.

And the next question comes from the line of David Raso from Evercore.

Just to clarify on the spin decision, we used to speak to both businesses being investment-grade ideally to be spun. Is that still a prerequisite for the spin to take place?

Yes. So I think it is one of the key considerations for us as we look at the -- as we look at circumstances for the spin. What we don't want to do, as I said before, is to be in a situation where we spin companies which are not going to be strong as they go into the market. So one of the things that we will be looking at and we'll be kind of actively thinking about is the investment-grade that both companies get. And that is one of the reasons why we're reconsidering that -- why we have said that we will be delaying the timetable for it.

Okay. So it's not a set in stone parameter for the spin, but it's obviously a key consideration?

It certainly is, yes.

And did I hear correctly, the second quarter, the cash flow comment, you said similar to 1Q. The industrial company in the first quarter had negative operating cash flow of over $1.3 billion, $1.4 billion. And while I appreciate it's not going to be a profitable quarter, you would think the working capital can do a little better selling out of inventory for whatever retail activity, wholesale activity you have. Did I hear correctly that you expect the operating cash flow to be as negative in 2Q as 1Q? If you can just clarify?

Oddone, if you want to take this one up?

I think we said in the range. I think we said that we are very cautious on our planning or on the scenarios we're looking at. A lot will also depend on how much production we will set up in the second quarter. As Suzanne said, we are starting our plants now or as recently as last week, so a lot will depend on how much we will also accumulate there in terms of production and also payables for our working capital.

That sort of dovetails into my question about, you had mentioned -- I think you said you expect a recovery in ag in the second half. I think there was some tempering of a comment, at least the way I interpret it, you expect some improvement in the back half in ag. And I think the magnitude of working capital later this quarter to get ready for the second half is an interesting question. Do you expect enough of a recovery in the second half that you won't be selling in a way materially out of inventory for a little while? I'm just trying to cooperate. Is it the cash flow is negative in the second quarter that much? In part, do you expect to be ramping into the third quarter that strongly, which I guess is a positive demand statement, but I'm surprised you're taking that strong a view? Or is it just the cash flow is that challenged in the second quarter because I'm not reading it properly that -- but I mean you should be selling out of inventory a little bit more than producing in 2Q. So I'm just trying to square up the outlook for the second half in ag? And how do I interpret the second quarter cash flow in relation to it?

Yes. I think we were talking about the entire company numbers and not just the ag segment. So if you take all together, and you consider the number that we have highlighted as possible scenarios for the Q2, then probably you can reconcile a negative cash flow number for the second quarter.

Yes. No, I can appreciate this is negative, it's just that magnitude. And related to that, I apologize, last question. The book-to-bill or how should we think about where ag stands going into the quarter? Or even if you have kind of through the end of April, just so we have some sense of the factories can open up, but what kind of order book do you already have in place? And thus, we can apply what kind of incremental orders you need to justify the level of ramp. So any sense of book-to-bill on orders or however you want to describe it for agriculture? That's it for me.

So Oddone, do you want me to kind of pick this one up? I mean to just give you a sense of how we see the year kind of playing out. So obviously, we don't have a crystal ball here either. What we're trying -- what we're doing is we are, as I mentioned before, we're kind of playing with a number of different scenarios and we're being kind of cautious and making sure that we have full liquidity and a full set of actions that we can take, depending on how it plays out. But the way in which it's looking at the moment is that we have a small buildup of company inventory in the first quarter. As we ramp up our production coming into the second quarter, we'll mainly be building to kind of retail need. And we think that we have a kind of a reasonable order book. So that's going to be -- that should be relatively clear. I don't think we'll be building up inventory in the second quarter. In fact, I don't think we'll be building up inventory through most of the rest of the year. I think we'll be kind of building to kind of customer need. And as I said in the prepared remarks, I think we see in the second quarter, we do see a degree of recovery on the ag side, less so on the commercial vehicle side and on construction vehicles. That's one of the reasons why we've been prioritizing bringing up the plants on the ag side first. Also, because it's a critical industry.

So ag positive but not to push, but any quantification of the order book at all, just some order of magnitude where it stands year-over-year? Just sort of give us some baseline of what's already on the books that when the factory start off, you already have some set backlog to service?

I think we'd be very cautious kind of giving that sort of data at this point, to be honest. And I think it's very hard to interpret that data as well because it's impacted by multiple things, as you can imagine, you end up with a -- given the kind of downturn that we've gone through.

And now we will take our last question from Tim Thein from Citigroup. (Operator Instructions)

And there are no further questions at the moment. So please go ahead.

That does conclude the question-and-answer session. I would now like to turn back the call over to Federico Donati for any additional or closing remarks.

Thank you, Priscilla. I would like to thank everybody for participating in today's call. Thank you, and have a good afternoon. Bye.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.