CNH Industrial

Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrials 2021 third quarter results conference call and webcast. For your information, today's conference call is being recorded. After the speaker's remarks, there will be a question and answer session. To ask the question during the session, you will need to press star and one on your telephone. At this time, I'd like to hand the conference over to Federico Donati, head of investors relations. Please go ahead.

Thank you, Martin. Good morning and good afternoon, everyone. We would like to welcome you to the webcast and conference call for CNH Industrial Third Quarter 2021 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 fresh written concept of CNH Industrial is strictly forbidden. Hosting today's call are CNH Industrial CEO Scott Weintz, CFO Don Enchisa, and Garrett Marks, President, Commercial and Specialty Vehicles, and CEO designated for IVECO Group. They will use the material available for download from the CNH Industrial website. Please note that any forward-looking statements we might make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report to NTF, a new annual report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and 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 Scott.

Thanks, Federico, and welcome to all of you joining our call. Between finalizing steps to prepare for the spin of Aveco Group, working to close two strategic acquisitions, and reorganizing the company, I am extremely proud of our team for putting our customers and dealers first and finding a way to deliver for them and us in spite of the deteriorating supply chain situation. Our team produced solid results in the third quarter, including net sales and margin improvement across three of our four operating segments. Impressively, our earnings per share of $1.10 for the first nine months exceeds any full-year EPS in company history. which underscores the strength of our end markets and the outstanding execution of our global team. While demand remains robust, we are reducing our Q4 outlook due to a worsening component availability issue that is currently affecting many of our product lines. We are aggressively working to mitigate the situation and expect improvements throughout the quarter and limited impact on 2022. In preparation for what will be two separate calls next year, I'll be handing off to Garrett for the on-highway update today and will return after Adonay's financial review with my closing remarks. The ag machinery industry remains strong as farmers seek to replace aging fleets with more advanced precision ag equipment that generates higher yields and reduces inputs. Resultantly, our ag order book more than doubled year-over-year for both tractors and combines. This was driven by healthy demand across all regions, particularly North America, where our high horsepower order book almost quadrupled for tractors and tripled for combines. Overall, our ag and CE segments performed quite well in this volatile global operating environment that combined supply chain related production constraints with rising input costs for our farmers and builders. With solid ag fundamentals, promising infrastructure initiatives, historically low channel inventory levels, and aging fleets, we are confident that our market's cyclical momentum will continue well into next year. From a company retail perspective, vigorous demand persisted for combine harvesters, with third quarter industry deliveries up approximately 30% across all markets versus the same quarter last year. High horsepower tractor sales were bolstered by a similar 30% increase in North America, with moderate to flat growth in other geographies. Given our existing order backlog, which now extends significantly into 2022, our agriculture segment should continue to perform well. Both light and heavy construction equipment grew steadily in Europe and the Americas. As in previous quarters, light demand was largely driven by consistent strength in residential construction, while heavy benefited from increased contractor demand, as well as preparations for the long-awaited U.S. infrastructure bill. From a regional perspective, South American demand was particularly high, supported by Brazil, while North America and Europe moderated on a year-over-year percentage basis, largely due to elevated comps. Construction equipment retail cadence was somewhat mixed, with light slightly down sequentially due to low product availability, while heavy was less affected. In fact, global supply chain constraints caused us to underproduce retail worldwide by 8%, with company inventory down 33% versus the third quarter of last year. Our order books are almost 3x year-over-year for the segment, with growth in all regions demonstrating the strength of our dealers, brands, and equipment. We expect ag industry demand to generally remain strong across all regions. Farmer sentiment remains positive due to rising commodity prices and farm incomes, as well as continued Chinese soybean and corn demand. However, the record high sentiment we had earlier in the year has been slightly muted by higher input costs, inflation, localized drought situations, and limited equipment availability. For construction equipment, industry demand continues to recover, with heavy equipment increasing its contribution to the upcycle. Optimism from contractors alongside a strong housing market in the U.S. is driving sales and order books across the segment. While we are generally optimistic about our end markets and increasingly about our internal business performance, the acute component issue impacting our fourth quarter will limit production and our ability to finish and ship all products. In late June, we announced our plan to acquire Raven Industries, which represents a major move in our journey to jump the curve towards industry leadership and precision ag and autonomy. Working in concert with Raven, we will expedite growth and provide customers with the integrated solutions they require for more efficient and sustainable farming. We are working closely with an administrative body to obtain final approval for the transaction and are optimistic it will close later this month. Our teams have been diligently planning for a bright future together and are extremely excited to hit the ground running once this truly transformative deal is finalized. During the quarter, we also shored up key aspects of our construction equipment strategy with the announced purchase of Sampiriana, likewise expected to close in Q4. This acquisition will bolster our development capabilities for excavator technology and alternative power systems. It will also integrate EuroCOMAC mini and midi excavators into our existing CE portfolio alongside our current third-party OEM partners. Furthermore, it confirms our commitment to invest and profitably grow the construction equipment business better positioning us in a high-demand light excavator market. We launched several new products during the quarter, which some of you may have seen at the Farm Progress Show. First is the new Holland T7 Heavy Duty, which maintains the powerful performance, exceptional agility, and outstanding versatility that are hallmarks of this platform, but also delivers a superior working experience with the brand-new Horizon UltraCab and next-generation PLM intelligence features. In a related note, just last week, its sister product, the T6 Methane Power Tractor, was awarded Sustainable Tractor of the Year at EMA in Bologna, Italy. Using methane or biomethane processed from farm waste as a biofuel for tractors provides farmers with a circular energy system. The T6 is a first in the industry and is a key enabler for this holistic process, demonstrating C&H Industrial's longstanding commitment to sustainable farming. Its methane propulsion system is derived from our leading compressed and liquefied natural gas technology pioneered by FPT Industrial and Iveco for on-road and heavy-duty transport. New Holland also launched the new Speed Rower Plus series wind rowers. Redesigned from the ground up, they provide more productivity, precision, and power than previous models to make New Holland hay and forage farmers more efficient and profitable. Next is the new Case IH Optum Tractor, a strong seller since its 2015 introduction. It has been re-engineered to create the new Optum AFS Connect range with the new cab interior connectivity package designed to benefit both our operator and owners. The new cab offers more space, lower noise levels, and improved vision. Combined with AFS's Acute Guide and Accu-Turn Pro, the tractor eliminates the need to steer in the open field and allows the year-over-year repeatable accuracy to sub-inch level, saving farmers fuel, labor, fertilizer, and more. Our AFS soil command tillage prescription technology enables farmers to vary tillage settings based on their changing soil types, field conditions, conservation practices, and topography. Case IH tools allow operators to address a range of soil management challenges, optimize every inch of the field for planting, and minimize erosion and preserve moisture where needed. With increased field speeds, tillage prescriptions helped enhance productivity by as much as 9.5%. Last are two products from Case Construction. First, the all-new TV620B, the largest and most powerful compact track loader ever built. This 114-horsepower, 6,200-pound rated operating capacity CTL delivers best-in-class breakout forces that as well as many other standard features, including a one-year subscription to Case SiteWatch Telematics. Second is the Backhoe Loader SV Series, the highest-performing, most productive, fuel-efficient, and reliable backhoe loader available. The SV Series features a new expanded cab with enhanced controls and a new FPT Stage 5 engine. It delivers greater operator comfort, increased productivity, reduced emissions, and lower total cost of ownership, all supported by Case service solutions. Our technology strategy is centered around our customers, empowering them with innovative products and solutions across the industries we serve. We are focused on three vital areas of technology, connected ecosystem, alternative propulsion, and autonomy. With the connected ecosystem, we have created an AFS PLM Connect solution with sufficient breadth to solve complicated problems across a diverse range of equipment. The next phase of expansion will offer seamless and simple workflows that deliver frictionless customer experience across various networks and brands of equipment. Our investment in alternative energy began over 15 years ago and has generated numerous product and awards, the most recent being the aforementioned New Holland T6 methane tractor. Together with sustainable power partners like Veneman, FPT, and others, we are paving the way to create true circular and energy-independent farms. Additionally, we are accelerating our efforts to deploy electric tractors through our partnership with Monarch Tractor, a Silicon Valley startup. Under this license agreement, we will enhance our electrification capabilities by merging Monarch's advanced EV technology with our industry-leading iron. Coupled with our extensive in-house capabilities, this partnership will enable us to rapidly sequence and launch new advanced technology electrified platforms. Lastly, We aim to leverage our vast experience in automation to drive the industry from one-touch automation to fully autonomous. Through the acquisition of Raven, we intend to generate significant value for customers by increasing the level of automated functionality on our products. I have spent time with the Raven team as part of the integration activities and am excited about the opportunities we are about to unlock. A perfect example is the OmniDrive solution presented at Farm Progress, representing one of the many innovative solutions we plan to roll out in the next few quarters. Digital ag products such as these are already delivering significant value for our customers, exemplified by sales of precision ag technology growing 37% for the first nine months of the year. I'll now hand over to Garrett to take you through the on-road highlights.

Thank you, Scott, and good morning and afternoon also from my side to all participants to this call. On slide 9 now, the European truck industry was down 6% year-over-year in the third quarter due to widespread supply shortages and delays in recovering incomplete vehicles. Light-duty trucks were down 11% with a lower weight on camper registrations and supplier shortages causing production losses partially offset by strong market demand boosted by the recovery fund and COVID-19 support plans. Medium and heavy duty trucks were up 6% instead due to post-pandemic industrial trade reopening, accelerating industrial activities, government-funded truck replacement schemes, and again, COVID-19 support plans. Generally speaking, registrations in a strong market were significantly constrained by various OEMs' ability to get product out of their plants in a timely manner, thereby accumulating very long order backs. The over 3.5 ton South American truck market increased by 34% compared to Q3 2020 due to economic recovery, mostly in Brazil, following the rebound from the COVID slowdown. The European bus market saw a slight uptick in the quarter, driven by post-pandemic commuting increases and transportation authorities adding back capacity in the city and intercity segments. The market demand for long-distance coaches remains very low. Despite the minor improvement, we still see bus registrations flat to slightly up for the year as tourism hasn't restarted at full pace in most markets. For trucks, we underproduced retail sales worldwide by 6% in the third quarter, predominantly due to supply chain constraints. Light-duty trucks underproduced retail by 12%, while medium- and heavy-duty trucks were overproduced retail by 6% for the third quarter, supported by completing vehicles we carried forward as incomplete from the prior quarter where the shortage of semiconductors already impacted us. Company inventory was up 28% in light and down 6% for medium- and heavy-duty trucks. Truck book to bill in the EU was 1.87, with light-duty trucks at 1.89 and medium and heavy at 1.83, of which heavy-duty trucks sit at 1.73. Our market share for trucks in continental Europe was up overall from the third quarter of last year, with light up 270 basis points to 13.5%. and medium and heavy up 10 basis points to 9.5%. Liquified natural gas market share for IVECO was at 55%, and market penetration for LNG trucks remained steady at 3.5%, with a slowdown expected around the next one to two quarters in light of the considerably high gas prices delaying registration. And this compares to about 3% in 2020 and 2% in 2019. Order intake in Europe was up almost 70% compared to the third quarter of 2020, with light duty trucks up 60%, medium and heavy trucks up 90%. Order books of light, medium, and heavy trucks for our European truck plants already range from 25 to more than 30 weeks, reflecting recently announced capacity increases at our plants in Spain and Italy. After significant supply chain impacts in our fourth quarter, we should pick up the delivery pace again as the supply chain situation becomes less volatile when entering into 2022. Demand for trucks continues to show substantial industry upside for 2021 versus the prior year. While we have slightly lowered our outlook for Europe, all truck ranges will still show a fair increase on a year-over-year basis due to the combination of consumer confidence and spending industrial activity, and the initial grants from the EU's recovery fund. We expect the positive momentum to continue into 2022, contingent upon the cadence of the main European economies and the ability of the most critical contributors in our supply chain to manage the recent volatility and keep up with demands. The EU 27 markets for trucks are expected to range at 690,000 to 740,000 for light, $28,000 to $32,000 for medium, and $270,000 to $310,000 for heavy-duty applications. We still expect buses to be fairly flat for the year, mainly due to a still substantially depressed tourism and coach sub-segment. Turning to slide 11. Let's do a quick update on where we stand with the Nikola Tray Zero emission trucks. As you may have seen, our Nikola Evacuate Europe joint venture recently unveiled the production version of the Nicolatray battery electric, a prototype of the Nicolatray fuel cell electric, as well as our production facility in Ulm, Germany, where the product will be assembled. The actual output by Jens is subject to the availability of battery cells and semiconductor-enabled components at the required scale. We are very excited that we were able to reach this milestone at record pace and meet the production window we announced in January. September 2019, despite the global pandemic and supply chain shortages. Thanks to IVECO's proven expertise and established industrial basis, we have provided a platform upon which Nikola's technology can thrive. Now our focus is on ensuring the success of this operation and jointly taking the lead when it comes to zero-emission long and regional haul heavy-duty transportation. IVECO already offers almost CO2-neutral heavy-duty truck technology when the market-leading CNG and LNG powertrain technology of FPT Industrial is running on renewable biomethane. Designed and projected as a safe, reliable, and high-performance zero-emission U.S. Class VIII or European-articulated heavy-duty tractor, the Nikola Tray is driving change for its sector. Based on the IVECO S-WAY truck platform with an electric axle co-designed and produced by FPT Industrial, it features Nicholas software, battery, and electric propulsion technology, along with a pronounced competence around the energy and hydrogen refueling ecosystem. Together, the team has designed the first modular electric class A platform capable of hosting both fuel cell and purely battery energy supplies. in a chassis suitable for the US, European, and export markets at a later stage. By launching the pure battery energy supply at first, we will drive the maturity of the underlying platform before adding the fuel cell as a range extender and second technology layer. The first Nikola 3 battery electric models produced will be delivered to customers in the United States in 2022, along with the next customers in Europe, who can obtain exemptions for on-road usage with a longer U.S. wheelbase and larger turning circles. Later in 2023, we will launch the European versions of the Nikola Tray as per our initial announcement in September 2019. Turning to slide 12, we have now formally announced the post's thin name for the on-highway business as IVECO Group. The corporate logo depicts IVECO Group as the holding company of eight unique but yet unified brands with FPT Industrial and IVECO at its center. A name that embodies the more than 150-year-long journey these industrial businesses have come up from, eventually merged in 1975 with the formation of the Industrial Vehicle Corporation, or IVECO. Please allow me to highlight once more here that our powertrain business unit, FPT Industrial, is going to continue and further enhance its offering to off-highway customers in agriculture, construction, marine, and power generation. I understand that the prior nickname on highway of our IVECO Group may have caused confusion around FPT's business focus. Later this month, on November 18th, we will be hosting a virtual IVECO Group Investor Day with live streaming available from the C&H Industrial website. This will be followed immediately by a sell-side roundtable discussion and a non-deal roadshow starting the next day on November 19th. I look forward to welcoming you at this foundational stage of our journey. I will now turn the call over to Adona to take us through some of the key financial details.

Thank you, Garrett. I'm now at line 13 with our Q3 results highlights. For the top line, third quarter net sales at $7.5 billion were up 23% at cost and currency, with year-over-year improvements across all segments on higher volumes and 7% price realizations. Our sales were up 30% in agriculture, 34% in construction, 21% in commercial and specialty vehicles, and 5% in powertrain. More importantly, pricing and a higher volume drove an approximately 210 basis point increase in our gross margin of industrial activities. On the bottom line, Q3 adjusted EBIT of industrial activities almost doubled to $469 million, with an adjusted EBIT margin of 6.2% due to strong performances across the equipment segments. Free cash flow in the quarter was a cash outflow of $700 million driven by seasonal adverse change in working capital. Industrial activity net cash was at $0.7 billion, a decrease of $600 million from the June 30, 2021. Third quarter adjusted net income was $496 million, or $0.36 per adjusted EPS. The adjusted effective tax rate for the quarter was 13% as a consequence of better jurisdictional mix and some discrete items. At the end of Q3 2021, our available liquidity stood at $13.5 billion, down $947 million sequentially. Turning now to slide 14, with the usual look at the industrial activities adjusted EBIT by driver and segment, volume and net pricing were once again the clear drivers for the increase in the quarter. The pricing environment continues to be strong and help offset the rising commodity componentry, freight, and SG&A cost. Looking at the individual segments, Agriculture Q3 2021 adjusted EBIT was $415 million, with adjusted EBIT margin at 11.6 percent. The $141 million increase was driven by higher volume, favorable mix, and 9 percent price realization, partially offset by higher raw material and freight cost, as well as higher SG&A and R&D spend from somewhat constrained levels of the corresponding period of 2020. Construction adjusted EBIT increased $45 million due to the favorable volume and mix and positive price realization, partially offset by higher product cost related to raw materials and freight. Adjusted EBIT was at 2.7 percent. Commercial and specialty vehicles adjusted EBIT was $51 million with adjusted EBIT margin of 1.8 percent. The 58 million increase was also here driven by higher volume and positive price realization partially offset by higher raw material costs, as well as higher freight and reward costs at our plants due to component shortages. Our train's adjusted EBIT was $44 million, down $60 million compared to Q3 2020. Favorable mix, positive price sterilization, and lower quality costs in this business were more than offset by unfavorable supply chain costs. Adjusted EBIT margin was at 4.6%. As a reminder, in July 2021, FPT ended the delivery of engines to the Celandis Group for their Ducato-like commercial vehicle. This represented a significant share of third-party sales. FPT is gaining orders for newly introduced F28 off-highways model engine family that will enter production in 2022. In summary for the group, on the right-hand side of the slide, gross margin was up across three of the four segments, with price realization and increased fixed cost absorption more than offsetting the higher input and transportation cost. Moving now to slide 15 and our financial service business, net income here was $118 million, up $62 million compared to Q3 2020, primarily due to... and remained at historically low levels. Financial service is reorganizing its European operations and getting ready to serve the two groups of the spin-off with independent and dedicated credit and funding. Next on slide 16, we have the financial position and free cash flow performance of our industrial activities. Free cash flow industrial activities was negative $728 million, mainly due to seasonal working capital absorption. The slowdown in production in many facilities due to supply chain shortages has led to a unique situation where there is a large reduction in trade payables from June 30, 2021, as well as a temporary increase in fleet inventories in our plants. This is largely equipment waiting for missing parts before being shipped in to dealers and customers. And based on current visibility of our production schedules, we expect to have an elevated level of fleet inventories in the fourth quarter as well, which will likely sell through in early 2022. Total debt was $23.7 billion on September 30, and industrial activities net cash position was $0.7 billion. Dequities remained strong at $13.5 billion, and it is worth noting that the consideration for the acquisition of Raven Industries will be fully paid out of available cash at the closing of the transaction, as patterned in Q4 this year. The company expects solid demand to continue across all relevant regions and segments. In the last part of the year, unstable and predictable component availability, increased impact of raw material and continued freight and logistics costs will be partially offset by positive price realization. As a consequence of our strong year-to-date progress and an anticipated challenge in fourth quarter, we have chosen to update our guidance as follows. For 2021, we now expect net sales of industrial activities to be at the lower end of the previous guidance, which had net sales up between 24% and 28% year-over-year. Our expectation for SG&A is confirmed equal to or lower than 7.5% of net sales. We anticipate free cash flow of industrial activities to be positive at approximately $1 billion, and R&D and CapEx will be up slightly from the projected $2 billion combined spend for the year. Lastly, we now estimate the fourth quarter to be the period most impacted by component shortages, while we see some raw material price to stay up for longer and freight costs to diminish in the course of 2022. This concludes my prepared notes on the financials, and I will now turn it over to Scott for his final remarks.

Thanks, Adonay. The next few months are going to be busy as we march towards the separation of Aveco Group. While we still have much work to do, we are confident that this transaction sets up both companies for success and will maximize value for shareholders. We are looking forward to unveiling our new strategic plans for the on-road business later this month and our off-road business during the in-person Capital Markets Day event in late February, 2-22-22 to be exact, which is scheduled to be held in Miami Beach just prior to a few industrial conferences. I am motivated by and sincerely appreciative of how our team has rallied to overcome many of the challenges presented by this crazy operating environment. While supply chain disruptions and elevated input costs are likely to persist into 2022, our pricing and end markets remain resilient. Importantly, demand has shown no signs of subsiding, instead continuing to grow as customers seek solutions to get back to work more productively. I want to take a moment to wish Garrett all the best in his new role as CEO of Aveco Group. He has done tremendous work and assembled an impressive team over the past few years. They have carried the business through turbulent and interesting times and gained notable market share in Europe, particularly as the leader of the LNG heavy duty segment. Garrett has a bold vision and the demonstrated skills to lead his team in executing their plans, and I look forward to cheering on their success. Going into the final eight weeks of the year, we are confident our team will find innovative ways to improve the supply chain situation execute the key milestones ahead of us, and continue to create value for all stakeholders. That concludes our prepared remarks, and we can now open the line for questions. Martin, please go ahead.

Thank you. Ladies and gentlemen, as a reminder, it's star and one on your telephone if you wish to ask a question. Your first question today comes from the line of Rob Wertheimer of Milius. Please ask a question. Your line is open.

Hi, a couple, if I may, on technology. You mentioned in your prepared remarks the demand from farmer customers on advanced technology. There's a lot of drivers out there. I mean, there's a replacement cycle. There's a high commodity prices, high revenues for them. And then there's the technology. I wonder if you have any customer surveys that have sort of disaggregated whether this replacement cycle can really last as a result of all the new capabilities you guys are delivering And then maybe relatedly, I'll stop after this. What do you think the biggest opportunities for CMHI are among the various tech streams you're pursuing? Thank you.

Oh, thanks, Rob. I will tell you that, you know, we've done a tremendous amount of research, you know, obviously with the, as we were evaluating the Raven acquisition, understanding what the market looked like. And, you know, what we've seen is that the need for greater yield, greater productivity, and greater sustainability are kind of the key drivers. And we feel like you know, we're well positioned today and we'll be much better positioned to pursue those. You know, autonomy is going to be one of those key productivity enablers. And if you think about, you know, we demonstrated it in Farm Progress, and, you know, we believe the applicability, especially in the cash crop, is going to be quite good for that type of technology. You know, in our investment in Monarch and the agreement we just signed to allow electrification to come in and the T6 methane tractor, you know, we're really seeing technology as a key competitive advantage. And we believe, you know, we're putting the building blocks together to be able to deliver on that for our farmers and customers.

And just your thoughts on duration of cycle. Maybe it's an unfair question, but, you know, can people continue to upgrade for several years, maybe different from past cycles?

Well, again, I think it's really driven by this productivity push. Farmers can't avoid the labor shortage that the rest of we're seeing in our plants and other places. So part of what they're looking for is a way to continue to get their harvesting done, as an example, with lower labor input. And I think that that is going to drive And really, the precision, what we're seeing is our ability to dial in, if you will, precision capability to give even greater yield performance is something. And I think it's that ability to deliver more for the farmers that's going to make the upgrade cycle continue to last. And we don't think we're even close to being able to deliver the best that we can deliver for our customers. So we certainly believe that, especially in the cash crop segment, there's a long, long way to go you know, with what we can bring with technology.

Very helpful. Thank you.

Thank you. Your next question today comes from the line of Ann Dugan of JP Morgan. Please go ahead.

Yeah. Hi, good morning. And hopefully you've learned pretty quickly that farmers spend money when they have money, not necessarily because of the age of the fleet. So I'm sure you figured that one out by now. My question is around, you know, if we look at U.S. in particular and dealers are paid based partially on market share, which has notoriously through the cycles meant that they've overordered, double-ordered, trying to make sure that they have equipment when they need equipment. How do you stop that from happening in this environment, and in particular given the backdrop where a farmer sentiment in the U.S. has deteriorated significantly? rapidly and very strongly because of higher input costs and, you know, everything now at the strength of the dollar versus the real and productivity in Brazil. So how do you stop just a repeat of the same old normal cycle where dealers over-order because they're paid based on market share?

Well, Anne, I think we found a very elegant solution to that problem, and that's with component shortages, it doesn't allow us to produce nearly as much as our customers need. You know, we're really struggling, and this is in customer demand, and we're actually differentiating how we prioritize shipments to dealers based on whether they have an end customer there that needs it. And you're certainly right that they buy when they have cash, but they also buy when they think taxes are going up. So, you know, we see continued strength there. And I don't believe. We've been asked this question quite often over the last few months about how much of the demand is real demand. And the more we dig into it, it really is a lot of in-customer demand that's driving this. So I don't think we're seeing that. And it's not just true for us. I think it's true for our competitors as well. Whether it's labor relations issues that are causing it or component issues that are causing it, there is just an inability of the industry to meet demand for end customers now, not just dealer orders.

For the moment, I'm sure that is absolutely correct to your point. And then my follow-up question would be on European component shortages. You know, as part of the problem there, because it does seem to be exacerbated for C&H Industrial overall, is the root cause of that the business's inability to forecast accurately? and thus the inability to give suppliers adequate lead times. And so when you're raising your outlook and raising your forecast, suppliers just can't keep up because they've committed their capacity to others. Is that the root cause of what's going on? Because it does seem that C&H Industrial has been impacted more than other competitors in the region. If you could just talk to that, that would be great, and I'll leave it there. Thank you.

I would actually counter that point, Ann, because I think the work that Derek Nielsen and Tom Verbotten have done to manage the supply chain, deliver the third quarter, which was really a challenging quarter from a supply chain perspective. And I think if you compare our results to others, I think we are delivering actually as well or better from a supply chain perspective than they are. The guy down in Q4 is one particular component supplier that we rely on for know to produce our engines and you know it's it's it hits worse on our tier five engines than others but it had zero to do with our inability to to guide on a psyop basis you know what our production needs would be it was really a issue with semiconductors that our supplier probably didn't get all of their order requirements in on time and you throw in some covet shutdowns in malaysia and all of a sudden you've got an allocation from a critical engine component supplier that it's limiting our ability to produce. And it's that simple. And I think it's affecting many of the auto suppliers. And if some of our competitors have different component suppliers, maybe they're less impacted. But this is ultimately a semiconductor-related issue that's affecting one of our main suppliers.

Okay. That's very helpful. I appreciate the insight. Great. Thank you. I'll get back in the queue.

Thank you. Your next question today comes from the line of Kristin Owen of Oppenheimer. Please ask a question.

Hi. Thank you for taking the question. Just to follow up on that last one there, specific to the eight days that you announced in October, Can you just put a finer point on the financial impact there, positive or negative? I have to imagine there are also some avoided costs that are related to that.

Yeah, but I would say it's mostly about revenue miss and is having units, as we hinted, having units unfinished at the end of the line, which then brings reward costs and other kinds of costs. So I wouldn't There's some saving associated with that that is widely overwhelmed by the cost and by actually the missing opportunity of serving customers and our dealers, which is relevant for us.

Okay. And any finer point that you could put on what that actual quantify that impact?

I think you can read it through our guidance. And some impact was was already in Q3 with the higher cash absorption in the quarter. We had units at the end of the line, as I said in my prepared remarks, that would have been sold otherwise.

Okay. Thank you for that. And then as my follow-up, I did want to ask about the Raven acquisition. It has come up several times now. the impact of rising input costs on sentiment and margins. Just wanted to see if you could discuss the influence that that's having as you look towards those first 100 days of integration with Raven, and if there are any specific areas where you see the opportunity to accelerate some of that development. Thank you.

Yeah. Well, you know, Raven remains an independent company, and you can see their results have been quite strong through the – the time that we've announced the acquisition. So they're continuing to see strong demand. They're actually more vertically integrated than we are, and that's a competitive advantage for them. So I think they've been a little bit less impacted. Obviously, one of the benefits that we think the merger can provide is our very sophisticated global supply chain ability could ultimately be an enabler for them to do faster and to go faster and do a little bit more. So No, we're encouraged by that, and we believe that, you know, obviously we've spent extensive time with Dan Rickus and his team putting together an aggressive integration plan, and we're quite confident that we can get out of the gates running as soon as that approval comes through. And, again, we expect that imminently now.

Thank you. Your next question today comes from the line of Martino D'Ambrogio of Equita. Please ask a question.

Thank you. Good morning. Good afternoon, everybody. My focus is on prices. First, one of your competitors in agricultural business mentioned this year a plus 5.5 and a similar expectation for price increase next year. So, first, are you aligned with this view, first? Second, are you able to fully offset input costs through price hikes in each and every division? And third, always on prices, in your last call you mentioned no problem in implementing price hikes in North America, more difficult elsewhere. Has it changed or more or less is the same picture?

So I would say the numbers you mentioned as a price increase from a peer are roughly in line, if not a bit lower than the numbers that we have been seeing over the last few quarters. And we count on being able to have continued price increase, price realization also next year on the back of what we've built this year. We said in our prepared remarks that in the fourth quarter, we expect to have price not fully covering or barely covering the cost impact of of the cost increase and cost inflation and freight that we're seeing right now. We expect cost inflation to be there next year as well. We expect freight cost, hopefully, to diminish towards the end of next year. In terms of pricing, we continue to be able to price. We have been pricing strongly in North America, but also in South America. and also in Europe across product category in ag we've been able to price.

Okay, thank you. And the second question is on the profitability, the normalized profitability of the powertrain division going forward. And if you can just remind us what is the captive business, the percentage of captive business today following the loss of Ducato order? Yeah, so

In the quarter, I think it was around 37%, the captive business percentage, which is lower than what we historically had. Ducato is a component, but also, of course, we had higher demand from the captive segments, and we had somehow lower demand from our large Chinese customer base. to which we deliver engines in China. So we expect, I mean, the impact of Ducato is, which by the way accounts in the non-captive part of the business, of course, is stronger in the last couple of quarters because we have less production and less deliveries coming out of it. We will recover part of this production with new engines being introduced, as I have in my prepared remarks. So there will basically be a ramp-up of new engines coming out with new customers.

So the profitability recorded in the last two quarters is not meaningful, so it should be back to the usual in the past few years?

is is definitely the past two quarter are the most affected by this impact of a changeover right from one customer with an historical production to new customer and a new engine but consider that fpt was also heavily affected by component shortages and more importantly by freight cost and that is something that we have been seeing started in the second quarter very strong, but also in the third quarter.

Okay. Thank you, Adonis.

You're welcome.

Thank you. Your next question today comes from the line of David Razor of EvoCore ISI. Please go ahead. Your line is open.

Hi. Thank you. A little bit more of a near-term question. The fourth quarter sales are implied down, call it 10% to 12%. Can you help us a bit between the segments? Where do you expect to be, say, even down more than that and less than that company average just for a baseline? And then I had a follow-up.

Well, and let's, as you probably understood from our prepared remarks, if there's a decrease in sales, it's going to be because we have component issues preventing our ability to ship. And that is really what's driving everything right now is our ability to get products out the door. So it's really dependent upon which types of chips and components we can get in and which products we can ship. But, Donnie, you want to add any specific color?

Yeah. Well, first of all, consider the last year fourth quarter sales were particularly high. So the comparison will also be more difficult. Where we expect to be – if you want to beat it more, is in the commercial specialty vehicles and in the powertrain business.

Okay. And if any help you can provide at all on how to think about decremental margins on those sales declines, just given you mentioned the price cost gets a little more challenging. I'm just trying to level set here a little bit how to think about it. I mean, I know it's a unique situation with the supply chain, but just trying to get something. Right.

I would consider it, I mean, looking at the fourth quarter alone, I will consider that will reduce slightly the incremental margin that we have seen so far on those two segments. But I wouldn't say a big dent.

Okay. And then lastly, usually you come out of the fourth quarter and you're down, we'll call it 20% or so sequentially on sales. sequentially. But given the setup with the fourth quarter and what you know about the supply chain, should we expect the first quarter to then abnormally grow off the fourth quarter? I'm just trying to level set. Really, it's all wrapped in the idea of how difficult is the fourth quarter, how much are you taking the pain by taking these extra shutdowns so then we can start the year maybe, you know, not the traditional decline. Actually, we can maybe flat to up to start the year sequentially. Thank you.

Yeah, I mean, we want to, like, do everything we possibly can to avoid giving any kind of guidance on 2022. But, you know, David, you're exactly right. The impact that we're seeing, and Adoni referred to it in his prepared remarks, we're going to end the year with some vehicles built that just need a component. And we put those in and we'll have the opportunity to ship in Q1. So it could be a better Q1 because of that than we've seen. It really is largely dependent upon how much progress we can make. I mean, obviously, this, it's a day-to-day and it's hand-to-hand combat with the supplier trying to make sure we get our proper allocation and we're looking at everything we possibly can to increase outputs. And, you know, we've seen it, you know, improve, you know, thus far throughout the quarter. And, you know, we'll just have to continue to manage it. But that's going to be the limiting factor on Q1 shipments is how much We can manage that situation. Again, it's been encouraging, the progress the team's made currently, but that's the challenge we're looking for. But the setup looks good right now to do a little bit better in Q1 than we would normally do.

All right. Thank you very much. I appreciate it.

Thank you. Your next question today comes from the line of Gabriel Gambarova of Banca Arcos. Please go ahead.

Yes. Thank you. Good morning. Good morning. My question is on your free cash flow guidance for 2021. What kind of working capital assumption are you making supporting this guidance, please?

Well, the fourth quarter is typically a very favorable quarter for working capital. We have both our guidance from what we had in the last quarter, again, for this issue of having what we call fleet, which is complete vehicles produced but not completed and not able to be sold. So that's the challenge that we see for the fourth quarter free cash flow.

Higher...

higher manufacturing inventories compared to what we would have on an ideal solution, on an ideal situation.

Is it possible to have an idea of what is the magnitude of this item, I mean, uncompleted vehicles laying on the tarmac?

We have a few thousand of them. the end of September we will complete them in the quarter we expect to have a similar amount at the end of the fourth quarter as we have new production coming in and being incomplete okay thank you very much and another last question regards Navico I understood you sold a 30%

in this Chinese joint venture. I guess I remember you had a 50% share of it. So any, let's say any comment on this would be interesting.

Gary, you want to take it or I take it?

No, I can take it. Gabriel, yes, that's correct. We've sold 30.1% of our 50% share in Nanjing, Ibiko and Navico. And hence, a share of 19.9% that allows us to keep this on our balance sheet at fair value and do not consolidate the financials on a monthly and quarterly basis.

Okay, thanks.

Thank you. And we may take now our final question of today, which comes from Lionel Frost-Ghiolardi of Bank of America. Please go ahead.

Oh, thanks, guys, for squeezing me in. Scott, this isn't a 22 question. This is just a higher level question. But, you know, you earned $1.10 and three quarters. I mean, if you ignore the production issues in the fourth quarter for a second and just annualize that figure, D&H earns, you know, close to $1.50 this year. Your ag order book has doubled. Your truck book to bill is $1.87 million. I mean, given all that, is there any reason why C&H, as it exists today, pre-spend, wouldn't have at least $2 of earnings power at some point in the cycle?

I mean, that's a lot of ifs in there. But, no, no, we certainly see that in our future. There's no doubt about that we have the ability to do that. But, you know, the supply chain is really the limiting factor right now. And, you know, this is a cycle we're in. You know, obviously we're benefiting from the up cycle now. We don't think it will last forever. And we're going to prepare for, you know, when things aren't as good and make sure we're able to deal with that. But, no, I think the ability of the team to navigate the difficult supply chain, ramp up production, meet customer demand is quite impressive, as is the ability to seek price. And I think that the more we provide technology, innovative solutions to customers, the more we can price. And I think we're going to continue to try to deliver on those types of solutions. So I don't think there's a clear, straight line to two bucks, but I think it's certainly achievable as we continue to work. But obviously, that's not at the bottom of the cycle, but probably mid to the higher part of the cycle.

Gotcha. And then when do we get the formal split terms and more detail on the capital structure for both sides of the business? And then just lastly, maybe this is for Adonay, the FinCo revenue of $1.337 and net income $308 million year-to-date. Can you give us any just very, very rough split between on-highway and off-highway?

Yes. So Two questions. One, we will issue the prospectus for the spin-off in the coming weeks, and there will be quite good visibility about the balance sheet split. On the financial service, I would assume one quarter of the profit of the net income can be considered to be moved to the on-highway business after spin.

One quarter goes to on-highway. Okay. Right.

Goes to on-highway, right? Yeah.

Gotcha. Thank you. You're welcome. Thank you. that does conclude our conference for today ladies and gentlemen thank you for attending today's call with us have a good evening and day