Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial 2019 Third Quarter Results Conference Call. For your information, today's conference call is being recorded. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would now like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir.

Thank you, Priscilla. Good morning and afternoon, everyone. We would like to welcome you to the webcast conference for CNH Industrial third quarter 2019 results for the period ending September 30. 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 expressed written concept of CNH Industrial is strictly forbidden. We are pleased to have here with us today our CEO, Hubertus Mühlhäuser; and our CFO, Max Chiara, who will be hosting today's call, they will use the material available for download from the CNH Industrial website. After their presentation, we will be holding a Q&A session. As a final comment, please note that any forward-looking statements, we might be making during today call are subject to the risks and uncertainties mentioned in the Safe Harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20-F and EU Annual Report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission, and 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. I will now turn the call over to our CEO, Hubertus. Hubertus Mühlhäuser: Thank you Federico, and good morning and good afternoon to everyone. Our third quarter results reflect the progress in delivering on our Transform 2 Win Strategy and successful execution across our segments in uncertain and market environments. While our commercial and specialty vehicle and powertrain businesses are performing in line with our expectation, our AG and CE businesses are facing…

Thank you, Hubertus and good morning, or afternoon to everyone on the call, I will take you through our financial performance in detail. In a muted industry environment in agriculture and a less vibrant than expected construction market, we have taken early on in the third quarter measures to adjust production to the revised end user demand and dealer expectations with mid teens production adjustment in Q3 versus our previous forecast. In order to maintain our production rate in line with the retail market, the topline impact has flown through the P&L inclusive of a negative fixed cost absorption but thanks to continued price realization and a disciplined approach to our cost structure we have mitigated those impacts into our quarter results. When we look at the 9-month period, the persistence of a weaker industry environment and the uncertainty of the macro environment in most of the geographies where we compete have not limited our ability to deliver on our margin journey. And while we are holding flat on EBIT margin despite increased R&D spend year-to-date and decrease in unit deliveries, we have been able to generate an uptick in our gross margin on a year-over-year basis. Moving now to Slide 5 and the key figures for the third quarter and year-to-date. Net sales in our industrial segments were down 6% on a reported basis and down 3% in constant currency. Adjusted EBIT was down 12% in the quarter and 6% year-to-date. Net income was $643 million for the third quarter of 2019. As discussed in recent regulatory filings and anticipated during the Capital Markets Day held on September 3, net income includes a $539 million non-cash tax benefit due to the release of valuation allowances and certain net deferred tax assets, as a result of a sustained period of…

Thank you, Hubertus. So I'm on Slide 10 and I was just finishing the commentary about the EBIT of - special commercial and specialty vehicles. In terms of our alternative propulsion initiative LNG CNG demand came in below expectations during the third quarter as a result of the current subsidy scheme in certain new countries being transition into the new fiscal year budget. At this point, we would expect an acceleration of this demand to return in the fourth quarter. For the 9-month period to September 30 natural gas penetration within Europe for the industry continues to growth over the 2% of total industry volume and is projected to increase further and elongate this strong replacement demand cycle for those OEM that have competitive solutions. The market share for trucks in Europe was 11.4% flat versus last year. Trucks book-to-bill was 0.9 in EU and 1.4 in South America with order intake in Brazil up 57% from this time last year but starting from a low base. Order intake for heavy trucks, have improved substantially due to the phase-out of older models and the ramping up of the newest way. This was offset by lower orders in medium and light - due to alignment of dealer inventory. Bus market share in Europe was 19% and book-to-bill was 1% both in EU and South America. EU orders remained strong overall as public funds were made available throughout the continent for fleet renewal. If we move to the next slide Powertrain continues to demonstrate solid results in light of the challenging end market environment. Net sales decreased 3% in the third quarter of 2019, but flat on a constant currency basis due to unfavorable mix of engines. Sales to external customers accounted for 51% of total net sales similar to last year.…

Thank you very much, Hubertus. This concludes our prepared remarks for the third quarter results and we can now open up for questions. Operator, over to you.

[Operator Instructions] We will take our first question from Ann Duignan from JPMorgan. Please go ahead.

Good morning. I think that's me. Hubertus Mühlhäuser: Hello, Ann, that's you. Ann Duignan, yes. Great to have you on the call.

Good. First, let me ask you about your outlook for North America agriculture. The USDA recently issued their preliminary outlook for next year's planting and for corn and bean prices. Corn prices are estimated to be $3.40 next year on the back of the significant increase in planting. And corn is not impacted by trade or tariffs or anything. It's more impacted by strong - the strong dollar. So, Hubertus, could you square that with your comments about North America ag being better next year or stable when, in fact, it could take another step down on the corn side, which is more important than beans? Hubertus Mühlhäuser: Well, Ann, two comments first. First, we don't want to guide in this call to 2020. So we're going to give the outlook for 2020 in our next call as you know. And the outlook that we provided was for the end of the year where we basically think there will be some purchase happening in November and December, on the back of the positive news, arbitrate deal, and on the back of the tax incentives and stabilizing commodity prices. Looking into 2020, and even though we don't want to give an outlook, we remain cautiously optimistic and I would like to keep it like that right now. We do believe that this trade deal that U.S. and China are going to sign, hopefully very soon in Iowa, as we heard right now, is going to be very, very important. That is going to provide a stimulus for North American ag. So our outlook remains positive for ag in 2020. Max, you want to add something to that?

No. Hubertus Mühlhäuser: No. Okay.

Okay. And if I could follow up then. Hubertus Mühlhäuser: And, Ann, as always, one follow-up question. Okay.

My follow-up is probably another one you're not going to answer, but your competitors have guided significant decline in European truck going into 2020. Maybe a way to ask the question is how does your order book look? I know you're introducing new products. Would you expect to outperform an end-market that's down as much as 20% year-over-year? Hubertus Mühlhäuser: Actually, I start and then Max chimes in. We're actually fairly positive for the truck business for next year, given that we come with brand new product on the light and on the heavy side and the S-Way has been received extremely well by our customers with order books, up 15% right now. And you might remember that we walked away a little bit from market share in this segment because we didn't have a competitive product. We now have it. And if you follow social media and you follow the strong reception of the product, I think we're going to be well-positioned in the truck market, in the heavy-duty truck market for next year. On top of that, we do see that the LNG story continues to have traction. As you know, that segment is up 100% versus last year and we also see further increases in demand there. Albeit, the demand was a little bit postponed from Q3 to Q4 and into next year, given that a lot of the European countries have moved the fiscal incentives for purchasing those equipments into their 2020 budgets. But if you also listen to the rhetoric and if you read the trade press, it is very obvious that this is the only available short-term solution to significantly reduce CO2 and NOx. And I think it is also very important to note that not only Traton and Scania is now firmly in the market with a product, but also Volvo has fully committed to that. And, yes, it's right, there are a couple of competitors that are still sitting on the sidelines and it might be that they won't have a product, but those OEMs that have a profitable and competitive product will see gains in market share there. And this would, of course, also help in a slightly muted truck environment for 2020. Max?

Nothing to add. Hubertus Mühlhäuser: Ann, because it is you - and we would --

Okay, thank you. Hubertus Mühlhäuser: But, Ann, you have one more question, Ann, okay, because we ruined your last name, so please. One more question. I know you have one.

One more question. Oh, okay. Okay. Can you talk about $135 million charge for inventory reduction? That seems quite large. And is it one-and-done? How should we think about that? Or, is there any risk on residual values going forward? And just explain what that $135 million was a little bit more. Thank you. Hubertus Mühlhäuser: Good question. Max will take it.

So obviously, we, we look at this reserve on a regular basis. The new piece of information this quarter is that the commercial organization set up a, a program to, let me say, expand sales of pre-owned trucks into areas that were previously not covered. And so, we had to adjust the reliability of the value to market values that are achievable in those areas. And we thought that this is a good decision for our book of used business as we continue to manage inflows and outflows from the virtual portfolio of the buyback. As you know, we have been reducing penetration of buyback in the last year and a half significantly, which is very visible, obviously, in our market share performance in the recent history. But we think that with this action in place, we will be well-positioned to manage the inflow and outflow of the buyback going forward.

And the next question comes from the line of Steven Fisher from UBS. Please go ahead.

And I guess I should make my name more complicated to get more questions. But your price cost relationship was overall less favorable in the quarter. It seems like some of it was product development cost but also raw materials. I would have expected the raw materials to start turning positive. So can you just maybe give us a sense for where you see that price cost dynamic headed in the next couple of quarters?

This is Max. It is, as you said, I mean, we also see in the incoming purchases deceleration of the inflation right now, which potentially may turn to a positive stance in the following quarters. The issue is that as we book our inventory at FIFO, we have to kind of flow through the inventory the purchase of raw material before we can see the benefit into the cost of goods sold. And so, as we churn the inventory in the next couple of quarters, we will be able to start seeing the benefit popping up in the early part of 2020.

Okay. That's helpful. And then, just related to the - can I ask a follow-up? Hubertus Mühlhäuser: One follow-up, absolutely.

So just related to the construction equipment segment, what do you sense - what sense do you get from the dealer channel about how much of an inventory correction might be needed, how long if you go on and whether they have any retail indications for 2020 yet? Hubertus Mühlhäuser: Again, we don't want to guide to 2020. But as we have said in our prepared remarks, we're cutting back on production. Specifically in North America, there is an inventory overhang and we're solving that. And our expectation for 2020 is to produce in line with retail. And the market environment is a little bit muted. It's not completely down. It's kind of a flattish market environment that we're seeing right now.

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

Yes. Good afternoon guys. I wanted to ask, is the $50 million Nikola gain included in your $284 million of adjusted EBITDA this quarter, and is it included in your adjusted EPS range of $0.84 to $0.88? If you take that out, it feels like you've cut the outlook by $0.02 to $0.04 depending on the tax effect, but I want to make sure I have that right.

The answer is yes and it is worth $0.03 in the quarter and rounded to $0.02 for the year-to-date period, the impact of the Nikola gain.

And, Hubertus, you say you don't want to guide on to 2020. But, I mean, I thought you did at your Investor Day in early September. I mean, I thought you said that you gave a preliminary expectation of, I think, it was somewhere in the low-to-mid EUR 0.90 cents range for 2020. I mean, are you walking away from that right now? Hubertus Mühlhäuser: No.

Or, how should we think about that commentary that you made? Hubertus Mühlhäuser: No. We definitely don't walk away from that. That EPS guidance was given for 2020 to have one goalpost in the short term, and we are moving firmly into that and you're going to see that in our full guidance 2020. What I said, we don't want to give guidance for net sales yet for cash and the other items that we're usually guiding to because that we're going to do in the beginning of next year. But the EUR 0.95 to EUR 1 that we basically put out there at the Capital Markets Day, they stand there. And we are firmly committed to basically - and don't forget, our strategic plan that we presented had a lot of self-help initiatives in the first years of the plan and then had outgrowth in the second half of the plan. And as we have said here, we are moving very, very firmly on all our perform and simplify and optimize activities. We've only given here a selected overview of the initiatives that we are right now driving and we feel very good about the positive EPS impact that those will have in the short term. I hope that was clear.

Well, I mean, it just seems like you're conceding that the demand outlook has gotten more difficult even though the self-help is front-end loaded in the forecast period. So, I would -- Hubertus Mühlhäuser: Yes, but we were, honestly, we were right in the midst of the budget period. We basically see the market in 2020 as we have predicted in our strategic business plan. So there is kind of not a big is not a big change there, but again, the detailed outlook as to the topline we're going to give soon, but there are no surprises right now in that market that we see.

And the next question comes from the line of Martino De Ambroggi from Equita. Please go ahead.

Yes. Good morning. Good afternoon everybody. Martino De Ambroggi. One more follow-up on the 2020 EPS guidance, as you mentioned Nikola has a positive contribution in this year guidance, is it also a portion of Nikola included in the EUR 0.95 or EUR 1 guidance for next year? Hubertus Mühlhäuser: Well, again, let's not push on 2020 right now. As we have said we're going to see more of those Nikola deals going forward. We have $150 million in kind, you will see this flowing through to our P&L. We said this continuously, and again, the guidance on EPS that we've given for 2020 stands. The rest will come at the appropriate point in time, which is in the beginning of the year. I hope you understand that.

Yes. I understand. And sorry if I ask you one more. The impact for the full year of Nikola for this year is how much? Hubertus Mühlhäuser: Well, we said that already.

It was at? Yeah, yeah. I lost it. Hubertus Mühlhäuser: $50 million, we --

It was $50 million that we booked in Q3? Hubertus Mühlhäuser: Yes.

No, yes, but you also mentioned something for the full year expected in your --? Hubertus Mühlhäuser: No, that is - , no, Max was - it's the $50 million that you're going to see. And Max mentioned the impact on EPS for the full year.

Okay, but something more will come in Q4 probably?

We've got some activity that are ramping up on the technical assistance, but it's not going to be a material amount.

Okay. And the second question is on the -- Hubertus Mühlhäuser: No, that's - I think, honestly, that's it. That you had your one question and your follow-up even though we got your name pretty wrong, but we got seven more people in the line. And given that we had this interruption, so let's move on now with Dave Raso from Evercore, I would say. Thank you.

Okay. I will ask one more.

The next question comes from the line of David Raso from Evercore ISI. Please go ahead.

The inventory management this quarter and what you see for the rest of the year, how to play out versus your expectations a few months ago? I admit - I have to admit, I thought the inventory would come down a little bit more sequentially for the company or even within the channel. Can you just walk us through how the inventory played out versus your expectations? Hubertus Mühlhäuser: Yes. So they played out more or less in line. Obviously, we need to remind ourself we are affected by several uncertainties including Brexit, and we have managed some buffer of inventory to protect against the Brexit situation. And the continued deferral on the Brexit deadline, obviously, is impacting also our stance. The other piece that, obviously, is impacting inventory this year that was not there last year is the engine stockpiling with the full impact this year until those engines are consumed as we navigate the transition to Stage V in Europe. So net-net, we are probably, I will say, a couple of hundred million behind. It's a number that is - can be achieved, is manageable for the fourth quarter. Historically, we have been able to generate cash from inventory in excess of $1 billion in the fourth quarter. So let's see how that plays out. But, again, we have updated the guidance to mainly reflect the M&A activity between the $50 million that we poured into Nikola as well as the $85 million that we are flagging now on the AG acquisitions, and then we'll see at the end of the year how the quarters plays out.

And then just so I'm clear about the acquisition impact. The implied fourth quarter revenues are up 1% year-over-year. How much acquisition revenue is in that number?

Very little.

So, I guess, I heard the production comments for the fourth quarter that were understandably down, what's driving the sales then to roughly be flat to up a little bit despite the production cuts? There's just a lot of selling out of inventory, I guess, partly the trucks that you mentioned going to a new market for used truck sales, but just so I can square up.

Yes, I would say that net-net, yeah, and when you set yourself in the middle of the new range of revenue, I will say for the quarter, Q4, I would, I will say that revenues are flattish. We don't assume a significant change in FX right now, which is kind of where we have been for the 9 months. So, yes, we have certain production cuts assumed into particularly the AG and CE business. We also have this, let me say, pre-owned trucks, a liquidation that will contribute. Plus, as you know, year-end activity on tenders tend to be higher. So net-net, we expect to be in that range.

And the next question comes from the line of Chad Dillard from Deutsche Bank. Please go ahead.

Just wanted to actually continue on David's question. So just trying to understand some of the moving parts of the 4Q revenues, how should we think about that from just individual segment level? And then also just on the North American order book, I think you mentioned it was flat exiting the year but just wanted to understand, I think, just what the cadence wise in terms of orders, I mean, are you seeing any acceleration or deceleration or anything that give you a bit more confidence for 4Q?

And you are talking Ag, right?

Correct.

So, as I said, we see orders in - slightly improving on tractors in North America versus the recent trend. The other markets are kind of the same of the last few quarters, with the exception of combines in Rest of World. But again, it's, it's a low comp comparison to last year.

Got it. Hubertus Mühlhäuser: And I think it is noteworthy to say that we are gaining share right now on the combine side because we have a very, very competitive product there. So we have 4 percentage point gain in the quarter in North America and also in Europe. So I think that's also noteworthy that we have a good product there. So, if demand comes back, we should benefit over proportionately.

And then just on the commercial vehicle side, I think you mentioned that you saw some slowdown in the LNG side as just a regulatory issues needs to be sorted out. To what extent are you seeing a rebound or how much pent-up demand is there. And then on the medium and heavy-duty side, do you have any line of sight in terms of seeing a rebound in end market share and what do you need to do to get that kicked off? Hubertus Mühlhäuser: Well, I mean, I think I address that. The LNG, I mean, you can say soft impact in the quarter. However, this segment is up 100% versus last year. We were around 1% last year. It's going to be around 2% this year. We'd expected it to be 2.5%. So it's 2% right now and that is really due to mainly Germany moving their fiscal incentives into the next year. But if you follow the rhetoric of all politicians and the European Union, is very, very clear that they will be very, very supportive of that technology. So we will benefit from that. And as you know, we have more than 50% market share in that segment. And as I've said, two of our main competitors are now firmly committed to LNG and have product which is competitive, however, not as competitive as ours because we have been the first and the market maker, so to say for many, many years on the LNG side. So our - we are kind of generation number three, where the others are starting with generation number one. That is on LNG. And then on the heavy-duty truck, I mean, it's on a very high level. We don't see that falling off the cliff next year. And as I said, we have moved away from the market a little bit. So we have basically reduced our share with the fleet deals because we didn't have a competitive and profitable product for us. And we're now moving back into the fleets and that's going to allow us a couple of percent market share gain in next year's market. So these two should be a positive stimulus in an overall kind of flattish overall truck environment next year.

And the next question comes from the line of Larry De Maria from William Blair. Please go ahead.

Good morning. Europe historically been kind of a fairly stable market, but the sentiment indicators and channel checks, et cetera, show a more of a coordinated weakness heading into year-end and moving forward after a fairly positive time and some excess inventory. Can you just discuss the outlook for Europe kind of broadly why it may be looking more like a sustained downturn or not? Hubertus Mühlhäuser: Well, again, for 2020, I don't want to give yet an outlook. And as we're going to see all of you guys next week at the AGRITECHNICA show, I think that's going to be a great moment to talk a little bit about industry sentiment. And as you know, this leads agricultural technology show happens every second year and sentiment for the next year is usually created there plus there is a short-term purchasing impetus derived from this show as we said, because it is a retail show. So I think we should take that question next week when we see each other physically at the AGRITECHNICA, I think that is better. And again, I don't want to give yet a big outlook for AG sentiment 2020. Okay?

And then maybe, secondly, obviously, as discussed, the cadence of your M&A in AG has picked up, can you discuss maybe - I know AgDNA is FMIS, but it looks like maybe more of an AI play, where does that fit in? Are you guys moving into the AI space or is that more of an enabler and at some point should we be looking at maybe larger ag acquisitions? Hubertus Mühlhäuser: Yes, I think as we said, I mean, we're just putting the money where our mouth was in September. We are firmly moving ahead with smaller buy and builds in all fronts AgDNA is really a farm management - it's more a software than artificial intelligence. As you know, we are very interested in the digital agronomy space. So you want to see some more things there. And as you also know, we have started our incubator AGEXTEND, and by the way, also next week, when we see each other, we're going to talk a lot about AGEXTEND because you see a lot of technologies that we are incubating there and selling through our channels, some of them being in the software space, some of them being in artificial intelligence space, and some of them just being great, cool technologies that we're bringing into the market. So, yes, you're going to see more smaller buy and builds. Larger acquisitions, we don't have right now on the horizon. It's really a nice buy and build and probably more to come.

And the last question comes from the line of Gungun Verma from Goldman Sachs. Please go ahead.

The first one, I want to come back to the production cost at the industrial level. If I look at Slide 27 in the presentation, it seems like about $130 million headwind is coming from this item alone, which is about half of what you've seen in year-to-date. Just trying to understand how do we think about that line item as we look through into fourth quarter and early 2020? Hubertus Mühlhäuser: Max?

The expectation is for the full year price to offset the production cost headwinds. The majority of those production cost headwinds are coming from raw material and tariff, I would say, more than 50%. And then another relative chunk, maybe 25% to 30%, comes from higher content as we continue to revamp our new launches. And then the balance in the quarter, which is about $20 million comes from the quality spend in construction, as well as the extra cost, the inefficiency related to the latest production adjustments both in construction and in AG.

And then just on your net debt guidance, so you've taken down guidance by $200 million. I understand about $135 million is because of these acquisitions. So just want to make sure that the mid-teen production cuts that you are targeting in AG for the fourth quarter, are they already baked in to your - in your net debt guidance, the benefit on the inventory side, from that? Thank you.

Yes, everything is in, and the balance is a little bit of buffer.

Okay.

We wanted to stay around that - on the numbers. Yes.

Okay. Thank you. Hubertus Mühlhäuser: Thank you, Gungun. See you soon.

Yes.

Thank you. That does conclude the Q&A session. Hubertus Mühlhäuser: Thank you very much to everybody. And sorry for the little technical interruption. And we look forward in seeing many of you next week at the AGRITECHNICA show. Thank you very much. Take care. Bye-bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.