Good morning and afternoon, ladies and gentlemen, and welcome to today's CNH Industrial's 2021 Third Quarter Results Conference Call and Webcast. 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 like to hand the conference over to Federico Donati, Head of Investor 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 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 consent of CNH Industrial is strictly forbidden. Hosting today's call are CNH Industrial's CEO, Scott Wine; CFO, Oddone Rocchetta; and Gerrit Marx, President of 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 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 the 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 Iveco 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 a $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 Gerrit for the On-Highway update today and we'll return after Oddone’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…

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 supplier shortages and delays in recovering incomplete vehicles. Light duty trucks were down 11% with a lower weight on temporary 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 banks. 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 inter-city segment. 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 under produced retail sales worldwide by 6% in the third quarter, predominantly due to supply chain constraints. Light duty trucks under produced 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…

Thank you, Gerrit. And now Slide 13 with our Q3 results highlights. For the topline, third quarter net sales of $7.5 billion were up 23% at constant currency with year-over-year improvements across all segments on higher volumes and 7% price realization. Our sales were up 30% in agriculture, 34% in construction, 21% in commercial and specialty vehicles and 5% in Powertrain. More importantly, pricing and 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 in 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 Activities net cash was $0.7 billion at the case 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 transitional 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 Industrial Activities adjusted EBIT by driver and segment. Volume and net pricing were once again, the clear drivers for 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%. The $141 million increase was driven by higher volume, favorable mix and 9% price realization, partially offset by higher raw material and freight cost as well as higher SG&A…

Thanks, Oddone. The next few months are going to be busy as we march towards the separation of Iveco 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, 02/22/22 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 Gerrit, all the best in his new role as CEO of Iveco 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 gain notable market share in Europe, particularly as the leader of the LNG Heavy Duty segment. Gerrit 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. [Operator Instructions] Your first question today comes from the line of Rob Wertheimer of Melius. Please ask your 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 is a high commodity prices, high revenues for them and then there's a technology. I wonder if you have any customer surveys that have sort of disaggregated well in 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 CNHI are among the various tech streams you're pursuing? Thank you.

Thanks, Rob. I will tell you that we've done a tremendous amount of research obviously with the – as we were evaluating the Raven acquisition, understanding what the market look like. 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 we're well positioned today and we'll be much better positioned to pursue those. Autonomy is going to be one of those key productivity enablers. And if you think about, we demonstrated it in farm progress and we believe the applicability, especially in cash crop is going to be quite good for that type of technology. In our investment in Monarch and the agreement we just signed to allow electrification to come in, in the T6 Methane Tractor, we're really seeing technology as a key competitive advantage. And we believe, we're putting the building blocks and enable together to be able to deliver on that for our farmers and customers.

And just your thoughts on duration cycle. Maybe it's an unfair question, but 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. I mean, theirs is – farmers are not – they 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 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 with what we can bring with technology.

Very helpful. Thank you.

Thank you. Your next question today comes from the line of Ann Duignan of JPMorgan. Please go ahead.

Yes. 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, if we look at U.S. in particular and dealers are paid based on partially on market share, which has notoriously through the cycles meant that they've over ordered, 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 rapidly and very strongly because of higher input costs and everything – 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, Ann, I think we found a very elegant solution to that problem and that's with component shortages that doesn't allow us to produce nearly as much as our customers need. We're really struggling and this is end 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 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 end 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. As part of the problem there, because it does seem to be exacerbated for CNH Industrial overall, is the root cause of that – the businesses inability to forecast accurately and 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 CNH Industrial has been impacted more than other competitors in the region? If you could just talk to that, that'd be great. And I leave it there. Thank you.

Right. I would actually counter that point and because I think the work that Derek Neilson and Tom Verbaeten 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 guide down in Q4 is one particular component supplier that we rely on for to produce our engines. And it's worse on our Tier 5 engines than others, but it had zero to do with our inability to guide on a [PSYOP basis], what our production needs would be. It was really an issue with semiconductors that our supplier probably didn't get all of their order requirements in on time. And you throw in some COVID 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 if it's happening – 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 queue.

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

Yes. I would say it's mostly avoided 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 dare some savings associated with that, but it's widely overwhelmed by the cost and by actually the missing opportunity of serving our 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 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 this 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.

Yes. Raven remains an independent company and you can see their results have been quite strong through 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 we're encouraged by that. And we believe that, obviously we've spent extensive time with Dan Rykhus 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 eminently now.

Thank you. Your next question today comes from the line of Martino De Ambroggi of Equita. Please ask the question.

Thank you. Good morning, good afternoon, everybody. My focus is on prices. First, one of your competitors in agricultural business mentioned this year plus 5.5 and a similar expectation for price increase next year. So first, are you align 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. And we said in our prepared remarks that in the fourth quarter, we expect to have a price not fully covering or barely covering the cost impact of the cost increase and cost inflation in freight that we're seeing right now. We expect cost inflation to be there next year as well. We expect freight costs awfully 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 have 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?

Yes. 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 some lower demand from our large Chinese customer 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'll recover part of this production with new engines being introduced as I had in my prepared remarks, so that 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 should be back to the usual in the past few years.

Yes. Definitely the past two quarters 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 costs. And that is something that we have been seeing starting in the second quarter, very strong, but also in the third quarter.

Okay. Thank you, Oddone.

You're welcome.

Thank you. Your next question today comes from the line of David Raso of Evercore 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, as you probably understood from our prepared remarks, it was a decrease in sale that'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 Oddone, do you want to add any specific color?

Yes. 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 be the more is in Commercial and Specialty Vehicles and in the Powertrain business.

Okay. And 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. We're just trying to level set here a little bit how to think about it. I know it's a unique situation with the supply chain, but just trying to get some…

Right. I will consider it – I mean, looking at the fourth quarter alone, I will consider that will reduce slightly the incremental margins that we have seen so far on those two segments. But I wouldn't say, take that.

Okay. And then lastly, usually you come out of the fourth quarter and you're down, 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 you take in the pain by taking these extra shutdowns so then we can start the year maybe not the traditional decline, actually maybe flat to up to start the year sequentially? Thank you.

Yes. I mean, we want to do everything we possibly can to avoid giving any kind of guidance on 2022. But David, you're exactly right. The impact that we're seeing and Oddone referred to 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 and we've seen. It really is largely dependent upon how much progress we can make. I mean, obviously, this is 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 we've seen it improve thus far throughout the quarter, and 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. Appreciate it.

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

Yes. Thank you and 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 slightly from where 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 manufacturing inventories compared to what we would have on an ideal situation.

Okay. 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 at the end of September. We'll 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 – and last question regarding Naveco, I understood you sold a 30% in these 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.

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

No, I can take it. Gabriele, yes, that's correct. We've sold 30.1% of our 50% share in Nanjing IVECO and Naveco and hence paying 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 the line of Ross Gilardi of Bank of America. Please go ahead.

Thanks guys for squeezing me in. Scott, this isn't a 2022 question, this is just a higher level question, but you earned a $1.10 in three quarters. I mean, if you ignore the production issues in the fourth quarter for a second, and just annualize that figure, CNH earns close to a $1.50 this year, your ag order book has doubled, your truck book-to-bill is 1.87. I mean, given all that, is there any reason why CNH as it exists today, pre-spin 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 the supply chain is really the limiting factor right now. And this is a cycle we're in. Obviously, we're benefiting from the upcycle now. We don't think it'll last forever, and we're going to prepare for 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 this 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 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 $2, 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.

Got it. And then when did we get this – the actual formal split terms and more detail on the capital structure for both sides of the business. And then just lastly, maybe this is for Oddone. 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'll issue the perspectives for the spin-off in the coming weeks, and there will be quite good visibility about the balance sheet split. On the top – 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, for IVECO Group.

Yes. Got you. Thank you.

You are 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.