CNH Industrial N.V. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Market Conditions: Market conditions were soft in the quarter with soft commodity prices, high key commodity stock levels, and uncertain end markets, especially for U.S. farm production.
• Production and Inventory: Produced very low to reduce dealer inventories and clear aged inventories. Ag dealers reduced inventory by over $200 million in the quarter, though EMEA inventory reduction slowed due to increased orders. On track to achieve year-end newly built machine inventory targets and expect production to align with retail demand in second half of 2025 and 2026.
• Technology Innovation: Announced collaboration with Starlink for satellite-based connectivity on machines, advancing iron and tech integration. Will update onboard and offboard digital technology annually.
• Investor Day: Outlined strategic business plan to 2030 with five key pillars: expanding product leadership, advancing iron and tech integration, driving commercial and operational excellence, and quality as a mindset.

Segment Performance

• Agriculture: Second quarter sales were $3.2 billion, down 17% year-over-year. North America Ag sales were down 36%, with lower industry retail demand and dealer destocking efforts negatively impacting results. Adjusted EBIT margin for agriculture was 8.1%, a sequential improvement from Q1 2025.
• Construction: Second quarter net sales were $773 million, down 13% year-over-year, driven by lower shipment volumes mostly in North America. Gross margin was 15.7%, down from Q2 2024.
• Financial Services: Second quarter net income was $87 million, with year-over-year decrease mainly due to higher risk costs in Brazil, partially offset by margin improvement in other regions.

Guidance

• Reaffirmed net sales and EBIT margin guidance for agriculture and construction. Free cash flow likely closer to upper end of range due to favorable working capital management. Reaffirmed EPS guidance in the range of $0.50 to $0.70.
• Foreign exchange: Euro strengthened against U.S. dollar, forecasted foreign currency translation impact on net sales to be -1% vs previous -3%, with overall negative effect coming from other regions like Brazil, Australia, and Canada.
• Tariffs: Updated tariff assumptions with specific agreements reached, overall assumed tariff impact roughly in line with prior guidance midpoint, monitoring countries like India and Brazil, and still calculating impact of tariffs on copper and semiconductor chips.

Risks

• Macroeconomic Uncertainty: Soft commodity prices, high stock levels, and uncertain end markets impact farmers' ability to buy equipment.
• Tariff Fluctuations: Uncertainty around tariffs on U.S. sales, including changes in steel and aluminum tariffs, and unknown impact of tariffs on copper and semiconductor chips.
• Exchange Rate Volatility: Euro strengthening against U.S. dollar affecting top line and bottom line differently, with overall negative effect from other regions.
• Brazilian Agricultural Risks: Cyclical downturn in Brazilian agriculture leading to increased delinquencies in Q2.

Q: Just wanted to touch here a little bit more on the production levels and the inventory, what you're seeing in the market. If I have it correctly, I think you had previously indicated last quarter that you maybe had like $900 million, I think, left of kind of too much inventory in Ag. And it looks like you might have reduced that by another kind of $200 million. So maybe can you just -- one, is that correct? And how should we think about how much product is left in which specific kind of product lines and regions? And kind of what gives you confidence in being able to kind of achieve retail sales type of production by the end of the year?

A: Well, thanks for the question. Yes, we were about $1 billion, too high. That is always obviously relative to our forecast of the rolling next 12-month sales. And as that improves, obviously, our, let's say, overstocking might be overstated. But yes, if you take the $1 billion we had, we have reduced another $200 million from that level, and we are continuing towards this path -- towards the end of this year. So that is overall very much what we want to see. And we push in parallel, obviously, the used machines, which is a point of attention for all OEMs in the market as well. And we have tailored programs for our dealers to help them sell out those units as well, including our financial services partner in our financial services business. Areas where we have, let's say, higher stock levels are, for example, in North America when it comes to the small machines, like the small tractors and some of the medium tractors. And here, it's important to bear in mind that these machines are imported. And so we have longer supply chains, and we took cautious actions, obviously, to keep a certain amount of stock in the region in light of uncertainties in global trade and tariffs. So while these levels on smaller machines in North America are elevated, I'm not too concerned about those in light of the current situation around tariffs and the restart of global supply chains. In South America, we are, let's say, pretty much where we want to be. And in Europe, we work through, particularly on the used side, some of that stock, but also here, we are getting ready for the launch of our new -- brand new short wheelbase generation, which is the lower end of the mid-range tractors and the launch of the top end of our long wheel-based tractors, which is the high end of the midrange. Those launches require obviously decent dealer stocks -- I mean, space in the dealer stocks. And also here, we see ourselves on a pretty good path on the sellout and hitting our targets by year-end. But as we had in our prepared remarks, we saw some markets in Europe with an increasing retail speed, markets like Poland or Germany and those markets have accelerated and hence, we had to intervene with the destocking efforts and backfill those orders with our company inventory. So overall, pretty well on track with what we said at the beginning of the year.

Q: I understand you're not quite ready to comment on 2026 yet. But -- I mean, your order books have been open for now a month or so. I just want to hear some of the color on what you're seeing so far in the order books, how they're trending in the month or so that they've been open?

A: Kyle, well -- look, I think the level of 2026, we expect the trough to be 2025. And at this point, I have no reason to believe that this isn't the case, so trough is 2025. And with 2026, I think there are a couple of boundary conditions and circumstances that need to happen in order to give us more certainty. I mean, first and foremost, obviously, the tariffs I think the Big Beautiful Bill is very helpful for North America. There are some elements in there that will, for sure, mid- to long-term drive demand, but not short term. That's my view at this point. When these bills come out in the U.S., usually, farmers use the financial benefits to help their own balance sheet first before engaging in new equipment purchases. And I think the actions that we -- the Big Beautiful Bill and other support actions will certainly pose positive elements for next year, but not for 2025. So that's another positive, I would say. Uncertainty remains around tariffs, as I mentioned, and we need to see what that means. However, I think with the early signs in EMEA of, let's say, Europe, in particular, Africa and Middle East has been very good for us anyway, and we are participating with very high market shares there, Africa and Middle East, I mean. So for Europe, I think there are early signs, and we'll see where this is going to take us in 2026. But it's fair also in that region to conclude this is definitely the trough in 2025 for Europe and 2026 should show signs of more life on the retail side. In South America, yes, that's a market we are ready to go. I think we have our inventories at levels where we want them to be. We have a great engaged dealer network. We have a full line -- renewed full line of products locally made ready for farmers. What's now missing sort of is certainty. There is this question around the tariffs and the retaliation from Brazil towards the U.S. with 50%, that's not confirmed, but it's obviously in discussion. And then there is the other conversation that hasn't yet really revealed much detail, and that is the trade deal between China and the U.S. We have recently observed on our side that China has removed some 600 exemptions for tariff reductions from their import policy. And that could go both ways. This could mean that there will be a trade deal between China and the U.S. coming soon also, including commodities. But it could also mean that this is not anymore possible for the U.S. to import commodities to China. So we don't know really how that will play. And both has obviously impact on the Brazilian farmers who will improve, I think, their financial health next year and who will continue to purchase maybe at higher levels also next year, their machines. But we need these certainties, particularly Brazil, U.S. and China, U.S. when it comes to commodity imports and exports. That is what we need to know to better forecast. But net-net, I think 2026 with production equaling retail pace towards the end of this year as we forecasted already beginning of this year. Once we are there, obviously, even in a flat market, we will increase production pace and with that wholesale, and that should be a positive helpful momentum for our own revenues. That is what we expect. That is what you expect, and this is still part of our plan as we are looking into 2026.