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. [Operator Instructions]. At this time I would like to hand the call over to Federico Donati, 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 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 express written consent of CNH Industrial is strictly forbidden. We are pleased to have here with us today our Chair and acting CEO, Suzanne Heywood; and our CFO, Oddone Rocchetta, who will be hosting today's call. They will use the material available for download from the CNH Industrial website. After their presentation, we will all be in 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 could cause actual results to differ materially is contained in the company's most recent report 20-F and EU Annual report as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy. The company presentation may include certain non-GAAP financial measures. Additional information, including reconciliation to the most directly comparable GAAP financial measures is included in the presentation material. One final remark, once again, our team is connecting from different countries. So please forgive us if we -- 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 3 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 3 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 spin-off 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 have started the turnaround of our construction business and we have continued to be one of the most sustainable…

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 Agriculture 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 our normal 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%. Our 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 booked 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 Nikola, 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%, primarily due to the impact of free tax losses in jurisdictions where tax benefits are not recognized. Adjusted net income was $156 million,…

Thank you, Oddone. 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, it was New Holland's launch of the CNH crossover harvesting combine, which sets new standards for capacity and versatility, and Case IH is 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 cord track 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 new next-generation connected precision farming platform, which operates on our high horsepower and 4-wheel drive tractors, while the rest are upgrades to our existing machine platforms. One of these new features, for example, will allow up…

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

[Operator Instructions]. We will now take our first question from the line of Ann Duignan from JPMorgan.

It's Duignan. Good morning or afternoon, wherever you are. Can you just talk a little bit about the outlook for 2021 for free cash flow given that you've have probably rightsized 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 very much, Ann. 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, that -- 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 by combines based on the features such as precision ag rather than the combined, so I find that quite interesting. Could you just expand on that?

Yes, 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, many farmers who are looking, they have other people who are using this equipment is 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 we'll 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 do you think it will be?

It will be up year-on-year. I don't -- 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.

The next question comes from the line of Robert Wertheimer from Melius Research.

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 Ann was asking about on Precision Ag. You obviously have lots of things to invest in and also are gaining share and seeing some positive development. So is that a positive lift to margins?

Thank you very much. So 80/20 is, I'm sure a number of listeners will know, 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 we'll 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 tailwind for '21?

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 you -- 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.

The next question comes from the line of Martino De Ambroggi with Equita.

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 calls?

At the moment, we're holding the timing for the spin the same as it's been in the previous calls. 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 kind of 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 precise timing on when that will be.

Okay. 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 year-to-date and will continue to be probably for the full -- for the last quarter of the year. How much of this is structural? I'm referring to the $159 million SG&A and $104 million R&D cost savings.

So as I've said on kind of 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. And very last on the financial business. I saw a steep decline in net profit, but the delinquency rate remained quite low. So just to -- if you can elaborate a bit more on this, trying to understand if there are risks that I do not see?

Yes. As we said in the prepared remarks, the delinquency rates 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 provision in the second quarter and in the third quarter compared to the level of provisioning that we have last year because of the potential impact on our portfolio of the pandemic and economic consequences of it.

Your next question comes from the line of David Raso with Evercore.

My question is on high-horsepower ag equipment. You mentioned agricultural equipment and replacement demand will continue to recover. And you also noted channel inventories for ag equipment are down 30% to 40% 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 have, 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 high 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, so much David. On the high horsepower tractors, what we're seeing is, 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 be -- and 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, and how much of that is kind of pent-up demand, but the fact that we have such strong order books implies that quite a lot of this is now going to continue through to the end of the year, hopefully into next year. In terms of how much of it is dealer versus retail order, again, we -- 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 that 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 that, 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 inventories." Is that's a dynamic driving it, that demand supply on retail versus your production? I'm just trying to understand why you want to 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.

The next question comes from the line of Monica Bosio from Banca IMI.

Coming back to the ag market and the tractors in U.S.A., September figures were very good. Do you have some flavor on October because in your speech, you told that you are 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?

Yes, Monica. As you say, I think in the -- 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 -- despite some of the kind of difficulty in the last few weeks, we haven't seen any lessening of that. Oddone, do you want to make a comment on the CapEx side?

Yes. So we estimate 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 is -- which we expect to remain on the high 30 for this year.

Your next question comes from the line of Courtney Yakavonis from Morgan Stanley.

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's the order book for construction in the building look like?

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 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 kind of COVID-19.

Okay. 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, it probably 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 is more -- 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 quarter of 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 first -- 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.

Your next question comes from the line of Lawrence De Maria from William Blair.

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?

Oddone here. We won'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. And then obviously, you talked about Precision Ag, doing well, combines, et cetera. Curious, maybe I missed it, but can you talk about take rates? I know you said you're embedding a lot of incremental content in the equipment, but they're also add-on. So can you talk about the take rates? In other words, how much dealers and farmers are adding on to take those Precision AG offerings? And also maybe what kind of ROI you're kind of promising where farmers are getting when they do get these high precision products?

Thank you for those questions. And we don't, as you know, kind of release separate data on those sorts of point. I did in the prepared remarks, trying 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 AGXTEND 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.

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

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 a while, but certainly even more so over the last 6 months or so. And I guess I'm curious what you know about the company now that you didn't know 6 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 any sort of challenges that you're finding at the moment in finding the right candidate?

Well, you're right. In the last 6 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 CNH. 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 kind of now seen it up close how complicated this company is. We have multiple different divisions, we operate in multiple different regions in multiple different markets. So in terms of a CEO, you clearly need somebody who is going to be comfortable dealing with that level of complexity. And as a company that needs somebody who can both deal with some of the kind of broader strategic questions and get very, very close to the operations of the business, and 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, I assume is 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?

Yes. 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 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 Nikola Tre 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.

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.