CNH Industrial

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2020 Third Quarter Results Conference call. For your information, today's call is being recorded. After the speaker's remarks, there will be a question and answer session. If you wish to ask a question, you will need to press the star and one on your telephone keypad. At this time, I would like to hand the call over to Federico Donigi, Head of Investor Relations. Please go ahead, sir.

Thank you, Tracy, and good morning and afternoon, everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's third quarter 2020 results for the period ending September 30th. 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 Haywood, and our CFO, Odonin Shiza, who will be hosting today's call. They will use the material available for download from the CNH and ASO website. After their presentation, we will be holding a Q&A session. Please note that any forward-looking statements we will be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement, including the presentation material. Additional information pertaining to factors that would cause actual results to differ materially is contained in the company's most recent report, 20F, 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, once again, 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, everyone. CNH Industrial's Q3 2020 results were driven by general improvement in market demand across most of our businesses and countries compared to the first half of the year. with particularly strong improvements in the agriculture sector in North America. They were also helped by our continued cost containment and cost preservation actions. As a result, we have reduced working capital in a quarter that is usually seasonally weak. We have generated substantial positive free cash flow, and we have increased our available liquidity. As you know, at the start of the pandemic, as a leadership team, we set ourselves three priorities. looking after our people, supporting the company, for example, by ensuring sufficient liquidity and reducing cash out, and looking after our customers, dealers, and suppliers. We expect these three priorities to remain during the coming months, given the increasing spread of COVID-19. However, alongside this, we are also investing in new technologies across all our businesses. We're embracing the new ways of working that we have learned through the pandemic, and we're positioning our businesses for strong and profitable growth. Work on the strategy that we outlined at our 2019 Capital Markets Day has also recommenced, including the preparation for the spinoff of our on-highway business. Our board is also continuing its search for our new CEO and has interviewed a number of very high-quality candidates. We will, of course, update you on that process as soon as a decision is made. I'm pleased with the results that we have achieved in this quarter and the fact that through this period we have continued to make substantial investments in R&D, We've started the turnaround of our construction business, and we've continued to be one of the most sustainable companies in our industry. Our company has the clear purpose of powering sustainable transformation across the world, and despite the challenges of this year, we remain focused on doing that, continuing to serve our customers who work in so many critical end markets to the best of our ability. I will now move on to slide three, which summarizes our Q3 results. You will see here that net sales of industrial activities for the quarter were $6.1 billion, up 4% compared to the same quarter last year, mainly driven by an 11% growth, 14% at constant currency in the ag segment, and sales in commercial and specialty vehicles that were similar to those in the previous year. This was partially offset by lower net sales in construction equipment and powertrain. Industrial activities adjusted EBIT of $238 million was down $46 million compared to the same quarter last year. Positive price realization in agriculture and commercial and specialty vehicles and continued cost containment actions of approximately $80 million net of foreign exchange effects for the quarter across all segments more than offset negative volume and mix. As a reminder, last year's result also included a $50 million gain realized from granting Nikola Corporation access to Iveco Technologies. This was an in-kind contribution to our partnership with Nikola. If that gain is excluded, our quarterly adjusted EBIT will be substantially in line year on year, net of positive foreign exchange effects. Industrial activities had positive free cash flow of nearly $1 billion in this quarter. This has resulted from both a $788 million reduction in working capital and the further cash preservation measures that we have implemented. Our net debt of industrial activities of $1.5 billion is now $0.8 billion lower than it was at the end of June this year. Adjusted net income for this quarter was $156 million, and adjusted diluted EPS was a gain of 11 cents. Finally, the company maintained strong available liquidity of $13.2 billion. This is up $1.5 billion compared to our position at the end of June. We are deliberately maintaining this liquidity for now given the continued uncertainty of this period. On slide four, I would now like to share with you some of the Q3 industry volumes as they will help put our business results into context. First, let's look at the ag segment. After some years of quiet ag commodity markets, we have begun to see signs of recovery across the major crops, with soybean, corn, and wheat prices strengthening due to the weather and trade-related events. We have also seen favorable crop conditions and yields as we go through the harvest. While demand from China is not back to historic levels, it has increased significantly over the summer and through Q3. If we combine this with the support that governments have demonstrated that they are willing to give their farmers, we feel there are considerable reasons to believe that replacement demand for ag equipment will continue to recover. If we now turn to the details, you can see that the worldwide agriculture industry demand was up by 29% for tractors and 12% for combines. In North America, demand for under 140 horsepower tractors continued to be strong, and was up by 24%, while demand for over 140 horsepower tractors showed growth for the first time this year and was up 8%. Combines were meanwhile up 16%. Moving to Europe, you can see that tractor and combine markets were up by 5% and 14% respectively. In South America, demand for combines was depressed and it was broadly flattish in tractors. In rest of world, we saw strong demand for both tractors and combines. If we now move down the page to the construction segment, you can see that while the end markets in which we participate have been more impacted than our agriculture markets, there is a slow although somewhat unpredictable recovery taking place, especially in residential construction in North America. In addition, because dealer inventories have largely been depleted across key end markets, we are well positioned to replenish stocks when demand returns. Some key end market indicators have improved, while others have been more negative, so we will continue to watch these markets closely. Across the quarter, worldwide construction demand was up 10% for compact and service equipment. It was up 12% for general construction, and it was down 7% for road building and site preparation. Demand was particularly strong in the rest of the world, especially in compact equipment and general construction, mainly driven by China. Compact equipment demand was also up 14% in North America. However, demand was still depressed in all construction segments in Europe. Against this market backdrop, our retail performance was also solid and up double digit year on year for the first time in 2020. Lastly, but not leastly, I want to turn to the truck and bus markets. The European truck market was up 7% year over year, with signs of improvement after the strongly depressed market that we saw in the first half of the year. Within this, however, we saw very different stories for light, medium, and heavy trucks, with light trucks up 13% for the quarter. The majority of this improvement came from the car-derived subsegment, while the truck-derived subsegment, in which we compete with our daily, continues to lag the recovery. Medium and heavy-duty trucks were meanwhile still down by 5% in Europe, although this reduction is less pronounced than it was in the first half of the year. We see a similar pattern in South America, where the market was up 9% in light-duty trucks and down 8% in medium and heavy trucks. Finally, as you can see here, the bus market was still down compared to last year across all regions, with Europe down 17% and South America down 34%. We are, however, expecting to see a lower decrease in the last quarter for this segment in Europe. I will now move on to slide 5, which shows our data for our retail sales, the red bars, our wholesales, our deliveries to dealers, the black bars, and our production across our different divisions, the grey bars, for the third quarter of this year compared to the same period last year. Before getting into the details, let me say that in this quarter, all of our parts have been back up and running and we've been managing production to reflect end market demand. As already anticipated at the end of last quarter, our intention is to continue to manage our production in line with or just below retail demand. We will continue to manage inventory levels carefully as we approach the end of the year. In this quarter, we have underproduced retail in ag by 7% for tractors worldwide and by 25% for combines. However, in line with normal seasonality, we have overproduced North American row crop equipment by 13%. As you can see, our retail sales are up, and this has been reflected in market share gains in South America for tractors and in all regions for combines. Our ag order book is now up mid-double digits across all regions compared to last year for both tractors and combines, and is particularly strong in South America. For construction as a whole, while we have underproduced retail worldwide by 26%, with North America underproducing retail by 19%. This has allowed us to reduce channel inventory significantly, as we anticipated earlier in the year. Order books are now up year over year in construction, driven in particular by increases in demand in our compact equipment segment. For our truck business, we underproduced retail worldwide by 20%. In Europe, we underproduced retail in light-duty trucks by 16%, while in medium and heavy trucks, we underproduced by 22% in the third quarter. Truck book-to-bill, the ratio of orders we've received to the orders we've shipped and billed in the quarter in the EU, was 1.37, and South America ended the quarter at 1.04, indicating the strengthening demands. Order intake in Europe was up 39% compared to the third quarter of 2019, with light-duty trucks up 41% and medium and heavy-duty trucks up 35%. In summary, the combination of this truck retail performance in the quarter and solid order books across segments makes us cautiously optimistic for the fourth quarter. Moving now to slide six. Here we summarize the channel inventories by segment. I won't go through them all, but as I indicated on the previous slide, we have been able to reduce inventories by double-digit percentages and across all categories. All subsegments have reduced their channel inventory by over 30%. This positions us well as we exit this quarter, particularly since we've been able to clear out a large amount of quite aged inventory, although we are continuing to monitor our production levels closely, mindful of the potential supply challenges that might occur in the coming weeks and months. The reduction of between 40% and 60% that we have achieved in our company inventory levels has also, of course, contributed to our improved working capital and free cash flow, which Adoni will describe later. I will now turn the call over to Adoni, who will take you through some of the key financial details.

Thank you, Suzanne, and good morning, good afternoon, everyone. As already mentioned in the opening remarks, quarterly performance has been characterized by a stronger than initially expected end market demand, particularly in our agricultural segment. Our effort to identify cash and cost containment actions has continued successfully across the company. Working capital reduction, which I will provide more details later in the presentation, has been strong, particularly if we compare it with abnormal seasonality in the third quarter, allowing us to recover a big portion of the cash we have absorbed in Q1 and giving us the foundation to update our forecast for cash generation for the full year bearing any significant COVID-19-related disruptions. Moving now to the key figures for the third quarter, consolidated revenues, including financial service revenues, were $6.5 billion, up 2%. A reported net income result was a loss of $932 million and includes $1.2 billion negative fair value adjustment for the investment in Nikola Corporation. As a reminder, we book a corresponding gain of $1.5 billion in the second quarter. and a benefit of $82 million from the release of valuation allowances of certain deferred tax assets. Net sales of industrial activities were up 4% in the quarter to $6.2 million. Adjusted EBIT of industrial activities of $238 million was $46 million, lower than 2019. If we exclude from previous year's performance, the $50 million gain realized by IVECO in connection with the technology transfer to Nicola the adjusted EBIT was flat year-over-year. Income tax benefit for the quarter was $15 million, while we recorded adjusted income tax expenses of $81 million, with the resulting adjusted effective tax rate of 38 percent, primarily due to the impact of free tax losses in jurisdictions where tax benefits are not recognized. Adjusted net income was $156 million, and adjusted diluted EPS was a gain of 11 cents. Looking at our balance sheet, we finished the quarter with net debt of industrial activities of $1.5 billion, down $0.8 billion compared to the previous quarter, as a result of the positive free cash flow of $1 billion. Turning now to slide eight, we focus on industrial activity net sales. Foreign exchange translation had a negative impact of about 1% in the third quarter. The net sales split by region was directly in line with last year, but with a slightly greater share of the rest of the world. In regards to agriculture, net sales totaled $2.7 billion in the quarter, up 14% on a cost and currency basis versus prior year. The increase was driven mainly by higher volumes in North America, Europe, and the rest of the world, and favorable price realization of 3%. Construction net sales totaled $576 million in the quarter, down 10% on a cost and currency basis. mainly due to continued channel inventory of the stocking and weaker price and environment primarily in North America. Depay deliveries were up in North America, bringing the reduction in dealer inventory to 37% at the end of the quarter, as we have seen in the right six of this presentation. Commercial and specialty vehicles net sales totaled $2.4 billion in the quarter, flat on a cost and currency basis year over year. with higher volume and positive price realization, primarily in South America and the rest of the world, offset by lower volumes in light-duty trucks and specialty vehicles in Europe. Power train net sales totaled $909 million in the quarter, down 6% on a cost-to-currency basis, driven by volume reduction, mainly for light and medium engines in Europe, partially offset by an increase in the rest of the world. Sales to external customers account for 53% of total sales. That was 51% in the third quarter of 2019. Turning to slide nine now, and with a look at industrial activities, adjusted EBIT by segment and driver. At a high level, most of the decrease on a year-over-year basis was due to negative volume and mix, except in ag, negative foreign exchange primarily related to South America, as well as last year's $50 million gain booked in IVECO. This was partially offset by higher net price realization achieving agricultural and commercial specialty vehicles, aggressive cost containment actions, and lower R&D spend. If we take a closer look at each segment, adjusted EBIT for agriculture was $274 million, and adjusted EBIT margin was over 10%, driven by higher volume, positive price realization, Reduced SG&A expenses, continued prioritization and research development are partially compensated by adverse effects translation. For construction, adjusted loss was $24 million to lower volumes, negative fixed cost absorption, and unfavorable price realization, partially offset by SG&A reduction. Actions implemented to reduce billion inventories, particularly North American and Europe, are not accomplished And while pricing in the quarter was still negative, we expect additional improvements in the fourth quarter. Commercial and specialty vehicles adjusted EBIT was a loss of $7 million, excluding the 2019 gain realized from granting to Nikola Corporation access to EVATO technology. The year-over-year decrease was $27 million, primarily driven by unfavorable mix and negative impact of fixed cost absorption due to lower production levels, partially offset by net price realization and cost containment actions. Our trained adjusted EBIT was $60 million, a reduction of $21 million, mainly due to lower volume partially offset by positive cost efficiency and also here, cost containment actions. Lastly, and not in the slide, our adjusted EBIT debt for industrial activities in the quarter was $456 million, down $67 million versus last year. Moving on to slide 10 and our financial service business. That income was 56 million, down 26 million, primarily attributable to a higher risk cost and lower average portfolio in North America and Europe, partially offset by higher average portfolio in South America and lower SG&A. In the quarter, retail originations were $2.6 billion and managed portfolio, including JV, at the end of the period was $24.7 billion. Delinquencies were down sequentially by 40 basis points, and we remain at historically low levels. We expect a modest increase in delinquencies in the fourth quarter, reflecting the end of payment holidays and moratoria accorded to some of our customers and dealers to support those most affected by the lockdown measures. As I said before, we're currently booked additional provisions for credit risk in order to be prepared for, unfortunately, but still possible, Growth of delinquencies and defaults showed the economic consequence of the pandemic significantly hit our customers. Next, on slide 11, I'd like to discuss the net debt and free cash flow performance of our industrial activities. Net debt of industrial activities was 1.5 billion on September 30, 2020, down approximately 0.8 billion compared to June 30, 2020. as a result of positive free cash flow of $987 million on the back of a strong reduction in working capital of $788 million, especially for continuous inventory reduction and increasing payables as we gradually resume production in Q3, and supported by continuous implementation of cash preservation measures during what is normally a seasonally weak quarter. Turn to the next slide with available liquidity and debt maturity scale. The company ended the third quarter of 2020 with an available liquidity of $13.2 billion at 13% versus June end 2020, with a robust liquidity to 12-month revenue ratio of 52%. In the third quarter, we once again actively worked on various additional funding opportunities to secure and improve our liquidity. As part of these actions, in July, CNH Industrial Capital LLC issued $600 million in aggregate principal amount of notes due in 2023, And in October, so subsequent to the end of the quarter, the company also issued $500 million in aggregate principal amount of 1.875 nodes due to 2026. Looking out of the remainder of 2020, we will maintain a strong liquidity position. We limited the term maturities of capital market debt. With a longer-term view, the high level of liquidity will allow us to refocus on our long-term deleveraging strategy and have an opportunistic approach on new or replacement funding. This concludes my prepared remarks on the financials, and I will now turn it back to Suzanne.

Thank you, Adoni. While some of the season's most significant global industry shows and events were canceled, or, like today's call, they became virtual during this quarter, our teams have continued to work hard to meet our customers' needs. and to launch new and innovative products. One of these, if I turn to page 12 further on, was New Holland's launch of the CH crossover harvesting combine, which sets new standards for capacity and versatility, and Case IH's new tractor cab, which makes it even easier for customers to take advantage of the data transfer capabilities that are now possible on our machines. We've also introduced new features into our QuadTrek, and Steiger AFS Connect series of tractors. On the on-highway side of our business, IVECO has won a record order for its Stralis NP natural gas-powered tractor in South America, and we continue to see very good market share and strong order books in the LNG heavy trucks in Europe. Across all our segments, as these examples hopefully demonstrate, we have continued to innovate and launch new products that will be more sustainable, easier to use, and enable our customers to improve their businesses. In ag, we have also continued to build our digital and precision farming offering. On slide 15, we look at this across a number of different dimensions. The first is field, the classic precision farming area, which is focused on increasing the yield and reducing the input cost of farming. We have in this quarter launched 40 new field features. 30 of these are on our next generation connected precision farming platform, which operates on our high horsepower and four-wheel drive tractors, while the rest are upgrades to our existing machine platforms. One of these new features, for example, will allow up to six machines to work in a synchronized way in the same field using real-time data sharing. Another will enable farmers in their cab to see a 3D map visualization of their implement data. On the right-hand side of the slide, you will see an illustration of our new solution for automating our combine harvesters. This has been welcomed by the market. In fact, 50% of our customers bought this with their harvester when it was first introduced in 2018, and 90% are ordering it with their equipment today. Our recent releases mean that this solution can now cope with more crop types. We most recently added barley and has become more precise. With most of the common machine settings now automated, this solution has made it far simpler for operators to manage their harvesters. This is one of the reasons why we've been gaining share in our flagship harvester business, a market in which we already had a strong position. In the fleet area, which focuses on maximizing the productivity of customers' machines, we've more than doubled our connected ag fleet year over year, and connectivity is now a standard feature in all our large ag platforms. We've added 10 new features to our fleet solution this year, and we'll add 11 more in coming months. One example of these is our remote uptime service, which enables us to identify technical issues in a customer's machine remotely and provide our dealers with easy tools to resolve these issues before the machine is at risk of stopping during its active operations. Our third area of focus here is FARM. which helps farmers maximize their profitability by bringing together a range of agronomic data, including soil, weather, and crop data, to enable them to make better farm management decisions. For example, deciding when to sow or harvest crops and which seeds are most effective on their farms. Our acquisition of AgDNA just over a year ago has enabled us to provide a state-of-the-art platform for visualizing this data, which works on both mobile devices and on the web. Lastly, we are now expanding our AgExtend portfolio to include South America in addition to Europe. As you may remember, through our AgExtend portfolio, we bring some of the newest and most innovative precision farming solutions to our customers. We have recently brought six new offerings into this portfolio, including X-Power, which is a 100% chemical-free electrical weed control solution. On slide 16, I now want to turn to our heavy-duty truck market and share with you some of the progress we've been making on our next generation and alternative propulsion vehicles. In the third quarter, IVECO increased its market share in heavy-duty trucks by 3% compared to the same quarter last year, with its share increasing across all European countries. In particular, we continue to be very strong in national gas trucks, where we achieved a 65% market share in the quarter. Orders for heavy-duty trucks in Europe were up over 50% in the third quarter compared to the same quarter last year, with diesel configurations up 17% and LNG up more than five times. Book-to-bill stood at 1.33 overall at the end of Q3, with diesel at 1.31 and LNG at 1.40, all of which shows the very positive reaction that customers are having to these new products. The S-way will, of course, also be the backbone for the battery electric Nicola Trey truck that will go into production in the last quarter of 2021, as well as the fuel cell trucks that will go into production at the end of 2023. At the end of the last quarter, I shared some of the details of the Nicola Trey products with you, and I described the structure of the manufacturing JV. Today, therefore, I'd like to share a little more detail about the timeline for these products. The JV is currently completing work on the first few battery electric prototypes of the Nikola tray and will begin testing them in the fourth quarter of this year. In early 2021, we will then use the learnings from this testing in the second phase of testing so that by the fourth quarter of 2021, the JV's assembly plant in Ulm, Germany, can start producing the tray. Shortly after this, the JV will start going through a similar process with the fuel cell truck, with production commencing in late 2023. There's a lot of excitement, both internally and externally, around these products, and we are, of course, conscious that many of our peers are also developing battery and fuel cell-powered vehicles. While the partnership with Nikola has certainly accelerated our speed to market with these products, we will, of course, not be standing still. and we are already working on how we can use our knowledge of innovative propulsion technologies more broadly across our business segments. Turning to slide 17, here I wanted to share with you our updated view of the industry end markets by segment for the full year 2020. Please do bear in mind that although these are our best current estimates, there is a significant amount of understandable uncertainty in these forecasts this year. If we look at the ag industry, we are expecting the recovery that we saw in the majority of regions in the third quarter to continue to the end of the year in North America, although at a slower pace for both tractors and combines. We expect the demand to recover in South America and Europe and demand for combines to slow down in the rest of the world. All of this will result in an end market demand in Q4 that will be similar to what we saw in the same quarter last year. For construction equipment, the fourth quarter will continue to be challenging, with double-digit industry decreases in Europe and South America across subsegments. The North American end market demand is, however, expected to be slightly positive in compact and service equipment, and demand in the rest of the world is expected to be generally positive across subsegments. Demand for trucks and buses is now recovering after a tough first half of the year. While year-to-date volumes are still down about 20% on average across Europe compared to last year, we started to see some recovery in Q3. This was partly due to the economic improvements that we saw in many countries, and we saw it most clearly in the light commercial vehicle segment. Based on this, we have increased our full-year forecasts and now expect demand for light-duty trucks to close around 10% down year-on-year, while medium-heavy-duty trucks are likely to be closer to 30% down. Our last slide shows our full-year net sales and free cash flow updated expectations for industrial activities. These are, of course, very hard to predict in the current environment. In particular, they assume that our end markets are not significantly impacted by the ongoing pandemic and that with all the safety measures that have been put in place, our factories and our suppliers' factories are able to keep operating with minimal disruptions. On the basis of these assumptions, we've revised upwards our outlook for the full year. We now expect net sales of industrial activities to be down between 10% and 15% year on year, including currency translation effects. We expect positive free cash flow of industrial activities to be between $0.4 billion and $0.7 billion for the year. We expect to maintain our solid available liquidity to year end and into 2021, since our capital market's maturity of $600 million has already been covered by the $500 million note that we issued in October. We are now focused on completing the rest of this year strongly, embracing and addressing all the challenges and opportunities it presents and ensuring that we create a solid foundation for 2021. In conclusion, I'd like to thank each and every member of our global workforce for the huge efforts they've made together with our dealers and suppliers to keep all our people safe, and to help us support our customers through this difficult period. This concludes our 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. Gracie, all with you.

Thank you. Ladies and gentlemen, today's question and answer session will be conducted electronically. We will now take our first question from the line of Anne Bougon from J.P. Morgan.

Hi, good morning. It's Anne Bougon. or afternoon, wherever you are. Good morning. Can you just talk a little bit about the outlook for 2021 for free cash flow, given that you have probably right-sized your inventories by now, you've probably produced to retail going into next year, and given where your order books are, particularly in ag, should we expect a significant draw on working capital, at least in the first half, seasonally? Is that the way to think about it going into next year? Thank you.

Thank you very much, Anne. We're not at the moment commenting on 2021. We will obviously kind of give further updates on that as we get to the end of the – when we go into next year, the first quarter next year. However, we are expecting to produce in line with retail, as I said in the prepared remarks, which means that our production levels will be up year on year as we're expecting the markets to continue to strengthen.

And so production is up, inventories will be up, mathematically, is that correct?

So we're going to produce in line with retail, so our aim is to try and produce to retail, so we're not intending to increase inventory levels significantly.

Okay, but to meet demand, you will have to. Okay, so then on North America agriculture, you commented that technology in the precision ag was helping you gain market share in combines. Could you expand on that? It's quite unusual to hear that farmers will be making decisions about combines based on the features such as precision ag rather than the combine itself. So I find that quite interesting. Could you just expand on that?

Yeah, sure. I mean, we are increasingly finding that farmers are making decisions based on the additional precision features that we can add into this equipment. And it's one of the reasons why we've been investing very heavily in it. Increasingly, farmers are looking for equipment offers that frankly make it easier to use this equipment. And a lot of the, as I was describing in the prepared remarks, a lot of the features that we've put in make these machines much easier to operate. And of course, as we have you know, many farmers who are looking, you know, they have other people who are using this equipment, it's actually very convenient to make this equipment much easier to use. So we are finding that farmers are making decisions based on this, and we expect that to be a trend which will continue, which is one of the reasons why we're investing very heavily in this area and will continue to do so right through. And, in fact, as a percentage, we'll be increasing our kind of R&D through next year.

Any comment on what percent of sales you think it will be?

It will be up year on year. We're not giving precise figures, but we are expecting that as a percent will increase on our R&D, and it will be higher than we have had in the previous few years.

Okay. I'll leave it there in the interest of time. I appreciate it. Thank you.

Thank you very much, Anne. Thank you. The next question comes from the line of Rob Wilkheimer from Milius Research.

Thank you, and hello, everyone. Hello. My question is twofold. I'd like to hear if you're able to comment on the margin impact from 80-20. I don't know whether that's made a significant difference in your workflow, your business yet. And then also just on what Anne was asking about on precision ag, you obviously have lots of things to invest in and also are gaining share and seeing some positive developments. So is that a positive lift to margins yet? Thank you.

Thank you very much. So H-20 is, I'm sure a number of listeners will know, it was a key feature of the plan that we put in place, which we announced and we've been putting in place since the Capital Markets Day last year. And it is something that we've been continuing to pursue in the background, actually kind of through the pandemic and beyond. We haven't fully completed all of that work, but some of the improvements that you will see in these numbers and will continue to see through next year will come from that program, which is still on running in the background.

Okay. And so, I mean, obviously you've got a lot of work going on, but you wouldn't say it's actually had its largest impact as yet, and you expect that more of a tail end for 2021?

I think we'll continue to see improvements through that as we go through next year.

Okay, great. And then I'm sorry, on precision ag, is that a margin tailwind as yet?

So we don't, as you know, give separate figures for precision ag in terms of its impact, but I would expect that as these features become more important, and as I said in the prepared remarks, many of them are now being kind of built into our machines in the factories, they will have a positive margin impact on our products.

Okay. Thank you.

Thank you so much.

Thank you. The next question comes from the line of Martino Ambroghi in Ecuador.

Thank you. Good morning. Good afternoon, everybody. The first question is on the spin-off. You improved the free cash flow. The order has improved. So should we assume the indicative timetable might accelerate or it remains exactly the same as it was in the previous course?

Thank you so much. At the moment we're holding the timing for the spin the same as it's been in the previous course. So we've previously said 2021 or beyond and at the moment we're holding that. Obviously, at the moment, with the degree of uncertainty that we have in the markets, we're not in a position to confirm up that timetable. However, as we've also said, we now have all of the work that we had paused for a small amount of time in the first half of the year. That is now all fully underway again. So we are preparing for the spin, but we haven't yet set a timetable for it. And obviously, it will depend on whether, as we are expecting, the markets will continue to recover. And obviously, we'll announce as soon as we can when we have more precise timing on when that will be.

Okay, thank you. And the second is on the cost savings. If I look at the EBIT bridge, SG&A and R&D were the most important positive items yet to date and will continue to be probably for the last quarter of the year. How much of this is structural and referring to the 159 SG&A and 104 million R&D cost savings?

Thank you. So this is, as I've said on previous calls, this has been a big focus for us as it has been for many other companies as we've gone through this very difficult period. We've been very concerned to make sure that we take actions to reduce cash out of the company. So by the end of September, we'd reduced expenses and cash outlays by around $700 million. I think it was $500 million when I updated everyone at the end of the second quarter. What we've been doing is trying to make sure that as many of those as possible we then take into more permanent reductions. We're expecting about 25%, 30% of those to be carried over into that. There'll be, of course, another kind of chunk of those reductions, which will carry over into an improvement in working capital, because, as I mentioned in the prepared remarks, some of those actions were around reducing inventory, particularly some of our aged inventory. So obviously that will also have a carry-on effect into the future.

Okay, thank you. And very last on the financial business, I saw a steep decline in capital in net profit, but the delinquency rate remained quite low. So just to, if you can elaborate a bit more on this, try to understand if there are risks that I do not see. Thank you.

Yes, as we say in the prepared remarks, the delinquency rate are low, but we have a part of our portfolio that has been rescheduled or renegotiated during the pandemic to support our customers, either by our decision or even by regulation or government mandate in certain jurisdictions. Those receivables will start paying or started paying now. We are still relatively in a good position there, and you see it in our delinquency numbers. We expect the delinquency numbers to go up moderately in Q4, but we have taken additional provisions in the second quarter and in the third quarter compared to the level of provisions that we had last year because of the potential impact on our portfolio of the pandemic and the economic consequences of it.

Thank you very much.

Thank you. Your next question comes from the line of David Russo from Evercore.

Hi. Thank you for taking the question. My question is on high horsepower ag equipment. You mentioned agricultural equipment replacement demand will continue to recover, and you also noted channel inventories for ag equipment are down, you know, 30 to 40 percent year over year. So that said, just first for insight into retail demand, where do you believe current industry sales of high horsepower ag equipment are versus replacement demand? And then for a look into wholesale demand, within that order book commentary you had, the up double digits for ag, what percent of that order book do you think is related to a retail order, and how much is the dealer inventory? And obviously I'm kind of curious how those percentages are versus normal. So, again, where do you think current sales are versus how you view replacement demand for horsepower ag in a sense of that order book? How much has a retail invoice attached to it, and how much is more for dealer inventory? Thank you.

Thank you so much. Thank you so much, David. On high horsepower tractors, what we're seeing, as I was kind of mentioning before, is obviously kind of strengthening demand during the third quarter. We're expecting that to continue to strengthen in the fourth quarter. That does mean that we've got a very strong order book and that we will have production actually kind of up year on year in the fourth quarter here compared to last year. I think it's very, very hard to tell, to be honest, how much of that is replacement demand versus new demand. It's very hard to – and how much of that is kind of pent-up demand. But the fact that we have such strong order books implies that, you know, quite a lot of this is now going to continue through to the end of the year and hopefully into next year. In terms of how much of it is DEMA versus retail order – Again, it's hard to get total visibility on that, but actually the demand is strong, and so a lot of this for us now is direct pull-through from the kind of retail side rather than kind of dealers restocking, just because the kind of retail demand actually at the moment in most countries is really very strong.

So that's interesting. Is the retail demand strong enough versus your capability to produce demand? In moments like that, often manufacturers will tell their dealers, look, we're going to serve the retail demand before you get a chance to stock inventory. Is that the dynamic driving it, that demand supply on retail versus your production? I'm just trying to understand why you wouldn't be willing to serve what appears to be dealers are looking to restock a bit.

So certainly if dealers are willing to restock, we'll be looking to serve those dealers. We do expect in this quarter, however, given the likely strength of retail demand, that we will underproduce retail demand in this quarter because of how we're predicting the market. So there may be some dealer restocking that takes place within that, but I think a lot of it will be retail demand. But we'll obviously look to support our dealers in restocking if they need to do that. However, in general, one of the things I think that we're quite pleased about that has happened during this year is that we've been able to reduce the amount of inventory both at kind of company level and at dealer level. And that is one of the things that we would like to maintain as we go into next year.

Thank you very much for the time. Appreciate it.

No problem at all.

Thank you. The next question comes from the line of Monica Bosio from Banker AMI.

Good afternoon and thanks for taking my questions, part of which has been already answered. Coming back to the ag market and the tractors in the USA, September figures were very good. Do you have some on October because in your speech you told that you were expecting last quarter 2020 in line with the last quarter 2019. Just some flavor on this. And could you please give us an indication on the capex expected for the full year and an update on the tax rate on the back of the 38% in the last quarter? Thank you very much.

Thank you so much. Yes, Monica, as you say, I think it's very, very hard to predict this year, as we all know. But from everything that we're seeing, we're expecting demand in the final quarter to be very similar kind of year on year to last year. And that's what we're basing all of our kind of predictions on at the moment. And we can't, you know, despite some of the kind of difficulties in the last few weeks, we haven't seen any lessening of that. Adonis, do you want to make a comment on the CAPEX side?

Yes. So we expect CAPEX, of course, to be down, to continue to be down year over year, but to be closer to the level of last year in the fourth quarter. And you had another question on the tax rate, which we expect to remain on the high 30 for this year.

High 30. Okay. Got it. Thank you very much. Thank you very much.

Thank you. Your next question comes from the line of Courtney Chakranis from Morgan Stanley.

Courtney Chakranis Hi, thanks. Just curious if you can dig into a little bit more about the comments on order books being up year-over-year in construction. I think you said it was primarily driven by compact equipment, but if you can just help us, remind us how big the compact segment is versus general construction and road building. and also just share what the order books for construction and road building look like.

Thank you so much. So I think it's very hard to know kind of how much of that kind of strengthening order book has come from built-up demand from the first and second quarters and how much is underlying demand. However, as you said, and I kind of said in my prepared remarks, we've started to see a substantial pickup in demand in Q3. I think we feel pretty good about how it looks through to the end of the year. But, of course, we're watching this very, very closely because the construction industry may well be impacted as we go through the next few weeks and months by what's happening in terms of COVID-19.

Okay, thanks. And then I think you had mentioned you expect retail sales for ag to be similar in the fourth quarter as in the fourth quarter last year? Do you have any expectations on the construction side?

On the construction side, I think we see it won't be as strong as last year. However, we're expecting our production to be up year on year. But on the kind of ag side, we are expecting kind of retail sales to be pretty much kind of level with last year. Construction is coming back up. As I think I've said in the kind of first two quarters, it hasn't come up as quickly, but it's definitely strengthening. And we expect it will continue to strengthen into next year. But it tends to be more impacted by the pandemic than the ag sector, as we all know. Where we are pleased on the construction side, and we've talked about this in the first and second quarters this year, is that we have taken significant steps to reduce inventory, both at the dealer level and at the company level, which means that we're actually very well placed as demand starts to come back on the construction side and we'll be looking to start to fill some of that inventory. However, in the last quarter, we will be careful, and we'll do this into next year as well, not to overproduce. We don't want to kind of go back to having very, very heavy inventory levels.

Okay, but you will still be underproducing in the fourth quarter?

Yes, we will. On the construction side, we'll underproduce in the fourth quarter, partly because we want to manage inventory levels, continue to manage it. On the ag side, we will slightly underproduce in the fourth quarter as well, but that's mainly because we're expecting retail demand to be very, very strong. So two slightly different reasons for underproducing on those.

Great. Thank you.

Thank you. Your next question comes from the line of Larry DeMaria and William Lea.

Thanks. Good morning, everybody. Two questions. First question is, what are your thoughts about the dealer group in Canada? It's a big dealer group for you being taken private. Have you blessed that, or do you have a preference on the outcome there?

Odone here. We wouldn't comment on the actions of the group. Of course, this is an independent decision of the owners of Rocky Mountain, so I would not comment on that.

Okay, thanks. And then, obviously, you talked about Precision Ag doing well, combines, et cetera. I'm curious, maybe I missed it, but can you talk about I know you said you're embedding a lot of, you know, incremental content into the equipment, but there are also add-ons. So can you talk about the take rates? In other words, how much dealers and farmers are adding on to take those Precision Act offerings, and also maybe, you know, what kind of ROI you're kind of promising or farmers are getting when they do get these high-precision products? Thanks.

Thank you for those questions. And we don't, as you know, kind of release separate data on those sorts of points. I did in the prepared remarks try to kind of share some of what we're doing in the precision farming space. And this is, as I kind of indicated in the prepared remarks, an area where, first of all, we're investing very heavily, both through things like AgExpend and the acquisition of companies like AgDNA. And it is something that we are seeing significant response to from our customer base. But we don't release separate data on that.

Okay.

Thank you.

Thank you. Thank you.

Our final question today comes from the line of Stephen Fisher from UBS.

Great. Thanks. Good morning. Good afternoon. Suzanne, I wanted to just ask you a little bit more about the CEO search, if I could. You've been close to the company for for a while, but certainly even more so over the last six months or so. And I guess I'm curious what you know about the company now that you didn't know six months ago, and how does that help shape what you think that the company really needs in the next CEO and what will be most important in terms of capabilities there and anything sort of challenges that you're finding at the moment in finding the right candidate.

Thank you so much. Well, you're right. In the last six months, I've been much, much closer to the company, and I feel kind of hugely privileged in a way to be able to get to know the company so much more. I think what I've learned about the company is it is hugely resilient, and I think the numbers that we've shown today kind of shows the resilience of the company, not just the company, actually, but our dealer network and, frankly, all the people that we have working with C&H. It's been a very difficult period, I think, for all of us, but we've put in place, as you know, very comprehensive safety measures across all of our plants, and people have really pulled together to get through this pandemic. So I've kind of learned that resilience, and I've kind of seen it firsthand. It's also been very clear, and I think we all knew this, but I've now seen it up close, how complicated this company is. We have multiple different divisions. We operate in multiple different regions and multiple different markets. So in terms of a CEO, you clearly need somebody who's going to be comfortable dealing with that level of complexity. And it's a company that needs somebody who can both deal with some of the broader strategic questions and get very, very close to the operations of the business. You need to be able to operate at both levels. However, as I said in the prepared remarks, we have now interviewed a number of very strong candidates. We're not in a position to make any sort of announcement at this point in time, but I think there are some very strong people out there, and I feel very hopeful that we'll be able to appoint somebody who will be a great leader for CNHI in the future.

Great. And then just a quick question about the commercial vehicle business. You mentioned the market share, retail share of medium and heavy duty. Can you give us what the order share in the quarter was, just to get a sense of whether that 8.3 is heading higher from here? And where do you think that share needs to get to in order to reach your margin targets?

Yeah, well, as you probably know, we don't release that kind of level of data. But just to kind of give you a kind of sense of it, I mean, on the heavies, we'd be very, very pleased by the performance. The reaction, as I think I said in the prepared notes, to the S-way, and in particular to, you know, what we're doing in terms of – our kind of gas-powered vehicles has been very, very positive, and I think we've been incredibly encouraged by that. And, of course, as I also said, that's going to be the basis for the kind of Nicola Trey as well. So that has enabled us to strengthen that heavies business quite significantly. So although we don't release that detail, I think you will see that the kind of numbers on the heavies are very strong.

Okay, thank you very much.

Thank you very much.

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

Thank you to everybody over the call, and have a nice day. Thank you.

Thank you, ladies and gentlemen. That does conclude your call for today. Thank you all for attending, and you may now disconnect.