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DATE
Friday, August 1, 2025 at 1:00 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Gerrit Marx
Chief Financial Officer — Oddone Incisa
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RISKS
Oddone Incisa reported that adjusted net income decreased by about half in Q2 2025, and adjusted diluted earnings per share was down from 35¢ to 17¢.
Oddone Incisa stated, "gross margin was 21.8%, down from the 24.4% in Q2 2024," due to "lower production volumes and the very unfavorable geographic mix."
Oddone Incisa cited, "The uptick in delinquencies was almost exclusively attributable to activity in Brazil," with higher risk reserves required.
Lower North American industry retail demand—down 37% for high horsepower tractors and 23% for combines—along with dealer destocking efforts in the region, had a very negative geographic mix effect on results and decremental margins.
TAKEAWAYS
Consolidated revenues—$4.7 billion, a 14% year-over-year decline for Q2 2025.
Agriculture segment sales—$3.2 billion, down 17%, with North American ag sales decreased 36%. Over 90% of the total ag sales decline was attributable to North America.
Industrial adjusted EBIT—$224 million, down 55% compared to last year.
Adjusted EPS—$0.17, down from $0.35 per share in Q2 2024.
Channel inventory reduction—More than $200 million reduction in ag dealer inventories; total excess ag inventory reduced from $1 billion to $800 million.
Gross margin—Agriculture segment gross margin decreased to 21.8% from 24.4% in Q2 2024, primarily due to lower production and adverse geographic mix.
Free cash flow from industrial activities—$451 million, an increase compared to 2024, driven by working capital improvement.
Agriculture adjusted EBIT margin—8.1%, up from 5.4% in Q1 2025.
Construction segment net sales—$773 million, down 13% year over year.
Construction adjusted EBIT margin—4.5%; gross margin for the construction segment was 15.7%, down from 16.5% in Q2 2024.
Financial services net income—$87 million. Year-over-year decline linked to higher risk cost in Brazil.
Managed portfolio—Nearly $29 billion at quarter end.
Tariff impact—Oddone Incisa said, "close to $120 million is our negative effect on EBIT in the second half of 2025," with minimal impact seen in the quarter.
EPS guidance—Reaffirmed at $0.50–$0.70 EPS guidance for the full year 2025.
Inventory alignment—Production levels expected to match retail demand by 2026, with targeted dealer inventory reductions on track by year-end.
Starlink agreement—New collaboration to integrate satellite connectivity into Case IH and New Holland machinery worldwide.
SUMMARY
The first mention of the company:CNH Industrial(NYSE:CNH) management identified 2025 as the cyclical trough year for both global agricultural and construction equipment demand, with overall industry volumes forecast to decline by approximately 10% compared to 2024. Executives reaffirmed net sales, EBIT margin, and EPS guidance for both industrial and segment results despite challenging macroeconomic and trade conditions. Currency translation effects on revenue were described as less negative than prior estimates, though tariff-related margin headwinds are now anticipated in the second half.
Gerrit Marx stated, "trough is 2025," with 2026 anticipated to show "production equaling retail pace" and set up for improved wholesale momentum.
Oddone Incisa specified, "Q3 2025 is expected to have a slight step down versus Q2, as is typical, followed by a strong rebound in Q4 2025."
Tariffs on steel and aluminum rose from 25% to 50% as of July 31, increasing sourced metal costs, despite the company procuring about 95% of its direct steel needs from domestic sources.
Oddone Incisa highlighted a "seasonal increase in delinquencies" in Brazil and added, "The uptick in delinquencies was almost exclusively attributable to activity in Brazil."
SG&A is expected to rise year-over-year in Q3 2025 as prior-year compensation accrual adjustments lapse.
CNH Industrial remains focused on cost discipline, operational efficiency, and advancing its "Iron and Tech" product integration strategy as cornerstones of margin improvement through 2030.
INDUSTRY GLOSSARY
Dealer destocking: The process by which manufacturers reduce the volume of inventory held by dealers, typically by lowering production and encouraging retail sales of existing stock.
Iron and Tech: CNH’s specific term for the integration of advanced digital technologies with its core machinery ("iron") product lineup.
FIFO: "First-In, First-Out," an inventory costing method where the oldest inventory items are recognized as sold first, potentially impacting cost of goods sold with commodity price fluctuations.
SG&A: Selling, general, and administrative expenses, which include all non-production operating costs.
Adjusted EBIT: Earnings before interest and taxes adjusted to exclude certain non-recurring or non-operational items for more consistent comparability.
Full Conference Call Transcript
Gerrit Marx: Thank you, Jason, and good morning to everyone joining the call. In line with expectations, market conditions in the quarter remained soft. Consistent with our decision to underproduce to the retail demand, we went to a financially muted quarter by design while reducing our channel inventories. Given the ongoing complexity and uncertainty in the macroeconomic environment, forecasting remains a careful scenario play. That's true for farmers, and so that's true for CNH Industrial N.V. Underlying the current market are some soft commodity prices, relatively high key commodity stock levels, and uncertain end markets, particularly for U.S. farm production, which all make it difficult for farmers to buy equipment above their immediate replacement demand.
Changing trade dynamics adds an additional layer of uncertainties and scenarios which we carefully observe reflect in our decisions. As such, we continue to work closely with our prepared and informed dealer network, keeping production very low to help reduce CNH Industrial N.V. dealer inventories and clear aged inventories while defending market share. Overall, industry production hours were down 12% year over year in the quarter, with 12% down in ag and 15% down in construction. We are making good use of the down days and slow production phase to review all our processes and take decisive action to improve our manufacturing quality and consistency.
Our ag dealers continue to make progress in reducing their inventory with another $200 million plus reduction in the quarter. While the pace of reductions was in line with our expectations in several territories, it slowed down in EMEA in part because of increased dealer and customer orders, especially in Eastern Europe, that we were able to fulfill through our own company inventory. We remain aligned with our global dealer base and are on track to achieve our target levels of newly built machine inventory by year-end, and we expect to produce in line with retail demand sometime in the second half and into 2026. As during the last 02/2026 machine to come.
Additionally, we remain relentlessly focused on driving operational excellence across the company, advancing cutting-edge technologies, and deepening the execution of our cost-saving initiatives with a great deal of discipline. Both price and costs were favorable in the agriculture and construction segment in the quarter. We do not, however, expect that this will necessarily continue in Q3 and Q4. It depends on how and when the U.S. tariffs and potential retaliations will impact our industry. We took certain moderate pricing actions, but we don't know if we have covered the full tariff impact until we know the final trade agreement by country.
In May, we announced a new collaboration agreement with StarLink, providing super-fast and cost-efficient connectivity in all remote areas for our farmers, and I'll touch on that a bit more in a moment. Finally, on May 8, we held our Investor Day 2025, where we detailed our new strategic business plan. The feedback on our down-to-earth strategy that we outlined has been pretty positive. We presented a no-nonsense approach to delivering leading products to our farmers and builders while growing our margins. Everything we presented is within our control, and we will and will be delivered as we focus on our homework, as I like to say.
We appreciate your thoughtful engagement and continued confidence around the long-term priorities that we laid out. And, of course, we will come back to you regularly with quarterly highlights and probably annually reporting back on our progress. With that, let's turn to the numbers. Q2 results reflect the expected and guided market headwinds and our conscious and painful decision to keep production low. I would like to send out a huge thanks to all our teams across our sites for turning the slow pace into an opportunity to rework our operations for the next phase.
We are taking deliberate and disciplined actions to navigate the current market conditions while simultaneously positioning the business for the next cycle upturn and long-term success. As Oddone and I have stressed many times, we manage daily, we report quarterly, and position CNH Industrial N.V. for the next decade. Even if it requires interventions in our operations and investments in our technologies that impact our reported financial returns in the near term. We are in this for the long term. Consolidated revenues for the quarter were down 14% at $4.7 billion. Our ag segment sales were down 17%, and Ag North America was down 36%.
North America has the highest industry profit pool in the world for agricultural equipment, and historically, that is where CNH Industrial N.V. has derived the highest share of its ag sales. The lower North American industry retail demand, down 37% for high horsepower tractors and down 23% for combined, our dealer destocking efforts in the region have had a very negative geographic mix effect on our results and decremental margins. Industrial adjusted EBIT was $224 million, down 55% compared to last year. And EPS for the quarter was 17%. At our recent investor day, we outlined our path to 2030 and how we are breaking new ground in iron and tech while expanding our mid-cycle margins.
As part of that, we highlighted five key strategic pillars: expanding product leadership, advancing our iron and tech integration, driving commercial excellence, operational excellence, and quality as a mindset. Today, I would like to draw your attention to an Iron and Tech advancement that was announced after the Investor Day was held. On May 15, announced that CNH Industrial N.V. had reached an agreement to offer STARLINK's satellite-based connectivity on Case IH and New Holland's machine. Wherever Starlink service is available around the world. This connectivity option, which will be available both as factory fit as well as retrofit, is a great alternative for farmers where cellular connections may be weak or unreliable.
With its seamless integration into field ops, Starlink will help farmers stay connected and enhance their productivity. We remain deeply committed to innovating with a farmer-first and soil health mindset, and this is just the latest in a long line of innovations that deliver meaningful value to those we serve. But StarLink is just one example of how we are advancing the integration of Iron and Tech at CNH Industrial N.V. Our efforts to bring more of our tech in-house give us greater control over these very sophisticated solutions that we are delivering to farmers, which they can get both on a factory fit and a retrofit basis.
At AgriTechnical November, you will experience our renewed pace and determination in this field, including our attention to soil health as the farmer's key asset. From here, we will deliver several updates and upgrades to our onboard and offboard digital technology every year, advancing our offering at a pace we could not have done before launching FieldOps. A huge shout out to our precision and tech teams who work tirelessly on getting the next stack of code ready for our farmers. With that, I will now turn the call over to Oddone to take us through the details of our financial results.
Oddone Incisa: Thank you, Gerrit, and good morning, everyone. Second quarter industrial net sales were down 16% year over year to $4 billion. This decline was mainly due to lower shipment volumes and lower industry demand compounded by reduced dealer inventory requirements year over year. Adjusted net income decreased by about half with adjusted diluted earnings per share down from 35 to 17¢. Q2 free cash flow from industrial activities was $451 million, significantly better compared to 2024. Improvements in working capital more than offset the lower industrial EBIT. In agriculture, Q2 sales were $3.2 billion, decreasing 17% year over year. And as Gerrit mentioned, that includes a 36% decrease in our higher margin North American region.
To put that in perspective, the North American sales decline represents over 90% of the total decline in ag sales. The trend was mostly driven by lower shipments due to continued industry demand weakness and the network destocking. The exception to this dynamic was in EMEA, where as Gerrit mentioned, dealer orders in the quarter were higher. Second quarter gross margin was 21.8%, down from the 24.4% in Q2 2024, affected by the lower production volumes and the very unfavorable geographic mix, partially offset by purchasing efficiencies and lower warranty expenses. Pricing was a bit better than neutral in the quarter, as we continue our incentives for our dealers to retail aged and used inventories.
While your pricing is still forecasted to be positive, especially as we start to see some benefit from the price adjustments that were affected on new orders after May 1. Production costs were favorable, even though production hours were down 12%, as we didn't repeat some of the warranty adjustments from last year. We still expect to see improvement in warranty expenses on a full-year basis. It's also important to note that most of the units sold in the quarter were not yet heavily impacted by additional tariff costs. Those impacts will come more in the second half as that tariff-impacted inventory flows through our production system.
Q2 R&D and G&A expenses were lower year over year, reflecting our ongoing efforts to improve our cost base. As a reminder, SG&A will start to grow on a year-over-year basis starting in the third quarter when we lap the variable compensation accrual adjustments that we made last year. Foreign exchange impacts were $6 million negative in the quarter, and the remainder of other is mainly lower profits from our Turkish JV. Adjusted EBIT margin for agriculture was 8.1%, a sequential improvement from the 5.4% recorded in Q1 2025. Moving on to construction. Second quarter net sales were $773 million, down 13% year over year driven by lower shipment volumes mostly in North America.
Gross margin for the quarter was 15.7%, down from 16.5% in Q2 2024 mostly driven by the lower volumes. We recorded positive pricing and product costs year over year, which more than offset the FX headwind. Second quarter adjusted EBIT margin was 4.5%. For financial services, second quarter net income was $87 million. The year-over-year decrease was mainly driven by higher risk cost in Brazil. That was partially offset by margin improvement in North America and EMEA, and by favorable volumes in all regions except EMEA. Retail originations in the first quarter were $2.7 billion, slightly down from last year, but flat on a constant currency basis. Reflecting higher penetration rates in a lower equipment sales environment.
The managed portfolio ended the quarter at nearly $29 billion. As certain annual payments in Brazil are due in the month of May, there's always a seasonal increase in delinquencies in Q2, so the increase we see in Q2 2025 is partially explainable by seasonality. But the remaining increase is a result of the cyclical downturn and did merit an increase in our risk reserves. At our Investor Day, we reaffirmed our capital allocation priorities of continuing to reinvest in our business while maintaining a healthy balance sheet. Our strategy is centered on a disciplined approach that supports both long-term growth and shareholder value, striking the right balance between reinvestment and capital returns.
As such, during the quarter, we paid approximately $320 million for our annual dividend. At our Annual Shareholder Meeting in May, shareholders reapproved and extended our share buyback authorization, and we are continuing to operate under the $500 million program that the board approved last year. Before I turn the call back over to Gerrit, I want to review our exchange rate and tariff impact assumptions for the second half of the year. First, on foreign exchange, we have seen the euro against the US dollar steadily since the beginning of the year. We now forecast the foreign currency translation impact on net sales to be minus 1% versus our previous assumption of minus 3%.
The currency translation effect on our top line is different than on our bottom line. Approximately 15% of our overall industrial sales are transacted in euro, and when those euro sales are translated into the now weaker dollar, they appear larger in nominal terms. However, the profits from those sales don't look materially different as the cost base for those products is also predominantly euro denominated. While this natural hedge protects us against extreme exchange-related profit fluctuations, it can be a little deceptive when comparing the top line and bottom line impacts. This quarter, margins compressed slightly when the top line grew without a corresponding bottom line benefit from a foreign exchange impact.
The overall negative translation effect on net sales is coming from other areas, Brazil, Australia, and Canada, for example. Now let's turn to tariffs. Last quarter, we outlined for you our tariff exposure on US sales and we reviewed what tariff assumptions were baked into our guidance. We've updated our tariff assumptions where specific agreements were reached as of July 31. We are monitoring countries such as India and Brazil that have a risk based on recent comments by the US administration. On a net basis, the overall assumed tariff impact is roughly in line with the midpoint of our prior guidance. While tariffs on Chinese goods came down, steel and aluminum tariffs were doubled from 25% to 50%.
And while CNH Industrial N.V. procures about 95% of its direct steel needs from domestic sources, domestic steel prices have risen along with the increase in tariffs. Steel futures have increased about 30% since the beginning of the year. And while we work with our suppliers to lock in our direct steel prices, a tier two supplier may get steel content that can impact our sourcing costs. We are still calculating the 2025 impact on our business from tariffs imposed on U.S. imports of copper and potentially on semiconductor chips. This will depend on the current inventory levels at our suppliers and we will work closely with them to mitigate as much of the impact as possible.
Also, as they are unknown at this point, we have not included any potential retaliatory action by other countries. As mentioned at our Investor Day, we continue to actively manage the impact of tariffs through a combination of strategic sourcing, pricing actions, and operational efficiencies. With that update, I will turn it back to Gerrit.
Gerrit Marx: Thank you, Oddone. Now let's review our latest outlook for agriculture in 2025. Overall, our global industry forecast is similar to our prior outlook, down around 10% from 2024. We still expect 2025 to represent a trough level of global market demand. We are reaffirming our net sales and EBIT margin guidance. As Oddone mentioned earlier, our top line foreign exchange translation impact is less negative than previously expected. It is expected to be positive despite the need for additional targeted incentives to help continue the dealer's new and used unit destocking efforts. Q3 production slots are full, and Q4 slots are half full at this point, which is typical for this time of the year.
In North America, Q4 slots are already nearly full for some products. We just opened up for model year 2026 orders about a month ago, and those begin shipping in Q4. At this point, we do not have enough information to make any prediction on 2026 demand levels. It is understandable that farmers in North and South America are waiting to see how the new universe of global trade deals will unfold, eventually allowing projections of commodity stock levels and plans for seeding and planting in the 2026 season. We have been staying very close to our farmers to be ready to support our world-class machines now with the converged tech stack of onboard and offboard solutions.
Whereas our top line may skew a little above the midpoint of the guidance due to the less negative currency translation, the EBIT margin may skew a little below the midpoint, as we absorb more tariff exposure than originally expected. The months of August and September should bring more clarity to our projections. In construction, overall industry volumes are expected to be down about 10% from 2024, especially due to our heavy exposure to the North American market. As a reminder, the construction industry tends to be more tied to GDP growth than agriculture is. At WoodAC, we are also reaffirming our prior guidance for construction sales and EBIT margin.
Q3 production slots are full, and Q4 slots are half full at this point, which is what we typically see. Similar to AG, we don't have enough information on 2026 orders, and this point to draw any conclusions about demand levels next year. As we have reaffirmed the guidance for the two industry segments, we are also reaffirming the combined guidance for industrial activities. Our free cash flow will likely be closer to the upper end of the range, as we expect the favorable working capital management we have experienced in the first half to be maintained in the second half. We are also reaffirming our EPS guidance at the prior range of 50 to 70 US dollars.
Let's finish with a look at our priorities for the remainder of the year. We continue to navigate the regional demand trends to ensure that we are responsive to ongoing shifts in the market, especially as we are dealing with the rapidly changing trade environment. We are working very closely with our supplier partners to ensure we can procure our parts from the best locations for our global manufacturing footprint at better terms and conditions. We remain committed to driving operational efficiency by focusing on process improvements at our manufacturing plants and strategic sourcing to unlock more value. On that point, we are really encouraged by the momentum that we are seeing in our business in India.
We have been investing in the region, not just for the market share improvements that we have enjoyed, but also because it is a great hub for engineering sourcing, and exporting into other regions. Our presence in India is increasingly important to CNH Industrial N.V. Our global production levels will remain intentionally lower while we adjust for some rebounds we see in some segments and regions, and we have a clear path to our dealer inventory target levels for both ag and consumer construction. By 2026, we will have aligned our production levels to the retail demand, and reaching our targeted dealer inventory levels first will set us up for traction and wholesale momentum in 2026.
Otherwise, we continue with the relentless focus on our homework and executing the strategy that we presented to you in May. Delivering high-quality products and services to our farmers and builders is of paramount importance to us. Capturing efficiencies in our operations and upgrades in our overall quality drive us to our margin goals. We continue to invest in leading iron and tech development, and we are excited to showcase the latest to you at Deep AgriTech Show in November. That concludes our prepared remarks, and we are ready for the Q&A.
Operator: Thank you. We will now begin the question and answer session of the call. To allow time for as many participants as possible, please limit yourself to one question. We will take our first question from Angel Castillo from Morgan Stanley. Please go ahead. Your line is open.
Angel Castillo: Good morning. Thanks for taking my question. 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 $900 million I think left of kind of too much inventory in ag. 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 and which specific kind of product lines and regions?
And what gives you confidence in being able to kind of achieve retail sales type of production by the end of the year?
Gerrit Marx: Well, thanks for the question. Yes. We were about a billion too, well, too high. That is always obviously relative to our forecast of the rolling next twelve-month sales. And as that improves, obviously, our, let's say, overstocking might be overstated. But, 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. 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 am not too concerned about those in light of the current situation around tariffs and restart of global supply chain. In South America, we are, let's say, pretty much where we wanna be. And then 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 midrange tractors and, you know, the launch of the top end of our long way based tractors, which is the high end of the midrange. Those launches require obviously decent dealer stocks. I mean, you know, 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.
Operator: Our next question comes from Kyle Menges from Citigroup. Please go ahead. Your line is open.
Kyle Menges: Morning. Thanks for taking the question. Understand you're not quite ready to comment on 2026 yet, but, I mean, your order books have been open for now a month. So we're just wanna 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? Thank you.
Gerrit Marx: Thanks, Kyle. Well, look, I think the level of 2026 we expect '20 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-long term drive demand, but not short term. That's my view. At this point.
When these bills come out in the US, usually, farmers use the financial benefits, you know, to have their own balance sheets 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, Middle East has been very good for us anyway, and we are participating with very high market shares there.
Africa, 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, you know, more life on the retail side. In South America, yeah, that's the market we are ready to go. I think we have, you know, our inventories at levels where we want them to be. We have a great engaged dealer network. We have a full line a renewed full line of product locally made ready for our farmers. What's now missing sort of is certainty.
You know, there is this question around the tariffs and the retaliation from Brazil towards the US with 50% that not confirmed, but it's, you know, obviously in discussion. And then there's the other conversation that hasn't yet really revealed much detail that is the trade deal between China and the US. We have recently observed on our side that China has removed some 600 extensions for tariff reductions from their imports policy. And that could go both ways. This could mean that there will be a trade deal between China and the US coming soon also including commodities. But it could also mean that this is not anymore possible for the US to import commodities to China.
So we don't know really how that would 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 machine. But we need these certainties, particularly Brazil US and China US, it comes to commodity imports and exports. That is what we need to know to better forecast. But, net, I think 2026 with, you know, production equaling retail pace, towards the end of this year as we know, forecasted already beginning of this year. Once we are there, obviously, even in a flat market, you know, 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.
Operator: Our next question comes from Jamie Cook from Truist Securities. Please go ahead. Your line is open.
Jamie Cook: And I guess, Gerrit, I just wanted to build on your the latter part of your answer. I'm understanding we can't forecast what the markets can do, but can you talk to the different levers that you think CNH Industrial N.V. can pull to grow earnings, you know, in 2026 besides, you know, producing and starting to, you know, ramp production, you know, maybe the cost savings, if you could quantify quality, some of those things? And I guess my second question I think the market's very interested in how you're dealing with pricing. So it sounds like you wanna price positive in 2026. Any color that you can provide on strategy and how to think about pricing by region?
Thank you.
Gerrit Marx: Thanks for the question. Look. Pricing will be positive for the full year for our entire year. And we have, obviously, at its top it's usually happening for the Q4 production which is the model year '26 now. We have increased pricing mainly driven by, you know, higher value functionality content, but also, let's say, for commercial cons know? Imperative imperatives, you know, one of which is tariffs. And so with that, we have increased pricing for the model year '26. Part of it is going to cover the tariff impact, of course, but we are always working on three ends, countering tariffs.
One is pricing, second is, obviously, we work with our suppliers through their pressures, and there is sharing involved. And we are doing that. And the third is we are quite focused on cost discipline and cost reductions in our own value chain, of which the I mentioned already, the sourcing part is clearly one quality is another one, and I'm happy to report out that our total year-to-date quality expenses are significantly below last year's quality expenses, and we continue to see a positive trend in this regard. So a lot of self-help, pricing is always as I was two elements.
One is then basically the boilerplate list price that you put out there, and then the second element is always the discount levels that you then apply in order to manage through, you know, the individual deals that are out there in the market. Particularly when it comes to larger quantities of machines. And that differs obviously by region.
As I mentioned before, we see some countries in Europe with positive signs in retail, and that is obviously always the opportunity to materialize pricing when demand picks up while in markets that are rather going sideways, like in this case, the United States or North America in total, that is there's still pricing possible, but it's, let's say, more muted by, in the end, the demand and, obviously, also competitive behaviors by every player in our industry. So we feel reasonably well positioned as we enter into 2026. We have all levers in our hands, most notably cost, quality, sourcing, Oddone alluded also to, you know, elements around structure cost in CNH Industrial N.V.
But pricing in the end is two elements, headline and discount. And the net of those is very much determined in the markets where we play. Yet, as we also alluded to in the last quarter calls is every, every player in our industry is significantly impacted by some versions and some combinations of tariffs. Whether this is in construction or this is in agriculture. And this is, you know, driving pricing for our machines in the industry eventually as the market is picking up again even more so.
Operator: Our next question comes from Tim Thein from Raymond James. Please go ahead. Your line is open.
Tim Thein: Yes. Great. Thank you. Good morning. I just had a question on this notion of channel inventory and in your production relative to retail, and, again, this I'm sure this chart can be misread in a bunch of different ways given the different size ranges and geographies, etcetera. But just looking at the trend on the Slide 19 in terms of the tractor production versus retail. I guess is the with that being a big area of focus, why aren't we seeing more of a divergence there in terms of production, again, relative to that retail?
Gerrit Marx: I'm just, again, maybe that's different horsepower ranges that get included in this. But just given the focus on, you know, tractor inventories globally and trying to work those down. I'm curious why we're not seeing more of a divergence. Yeah. Thank you. You already spot on. Thanks for the question. You already spot on with your point on mix, basically. Yeah? What we're doing here is units and the value would be quite different. Because, I mean, in the very high horsepower tractors, we are underproducing because this is mainly large cash crop North America. Same for combined. We count them all with one. Yeah. So every machine is counted with one ninth entity.
So I think if we had these lines and we have these lines, but, you know, for value, this would look different. And then if you split it out across region, obviously, that looks different. For example, when we are entering when we enter now the second half in 2025 for Europe, we are, you know, restocking on, for example, some combined lines in light of, you know, what the season will bring and what we see in the market. So that is enough. While in Latin America, we had, you know, in order to, you know, further deplete the inventory that we have, we have underproduced retail pace there in terms of combined.
So for us, this is not like just a number this is just not a line on units. This is what we report back to you, but the color is we are making good progress in the region, in the respective product lines, and the reason why, for example, the tractors and the retail and production is pretty much on the same spot. This is units, not value. It's very different by region. And where the regions start pulling actually production at above retail.
Operator: Our next question comes from Kristen Owen from Oppenheimer. Please go ahead. Your line is open.
Kristen Owen: Hi, good morning. Thank you for taking the question. So wanted to follow-up on some of your European comments because they do strike me as interesting, particularly in light of your adjusted tracker outlook for the industry. So maybe just help understand, like, where you're seeing green shoots. Is there something that's specifically working for CNH Industrial N.V. maybe in terms of share gain or geographic differences? Just unpack some of the Europe commentary if you would, please.
Gerrit Marx: We perceive right now the demand trend to be playing out predominantly in tractors. It hasn't yet started in combine, hence my comment that we are expecting it to come in. We have a bit of upstocking on the combined sites in progress. But this is mainly playing out on the tractor side. You know? And we have been quite effectively defending, and here and there, even slightly growing our shares in tractors, in some countries, with certain models, and that has obviously overall to reduce the inventory and keep the momentum in the market until we know, again, launch November our new midrange tractors quite a bit. Another comment is on Eastern Europe. We've seen Poland.
They had a purchase program there. They have, you know, not only a good season, but they also have, you know, support. And that was a pretty strong tractor sales and combined sales quarter in the country of Poland in particular. So it is spotty, would say, here and there. It gets influenced by some government decisions here and there to support the farmers. But it is also a growing confidence that you could see it in the confidence indexes that have been, you know, updated and distributed regularly. That farmers are regaining, you know, a positive attitude.
Not hugely positive, but it is at least as, you know, trust as well, I would say, far less confident here in the future. And with that, it's mainly tractors and it's mainly, let's say, Germany and Poland. And it was also here and there, we need to see driven maybe by a massive destocking by one other participant in the market. And hence, whether this is a sustainable development remains to be seen in the market. Yeah. We'll see. But market shares are fine. And we're looking forward to a 2026 where I would expect other countries also to jump start maybe not suddenly, but gradually, their retail activities.
Operator: Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.
David Raso: Hi. Apologies if I missed it. But the price cost for I thought the second quarter ag price cost was impressive. The full year, what do you expect price cost to be clear, when we look at the waterfall charts, the tariff impacts, that will show up in that same bucket, that production cost. It won't be put into other. Just so we make sure as we track it. We're talking ag, specifically. Yeah. Yeah. So it's
Oddone Incisa: We do expect it to be positive for the full year. It's Oddone speaking. And that's and we've seen it year to date, and we expect that to continue for the full year. So it's tracking what we thought it would be. Given the low production levels, it's quite encouraging, and we expect that to continue.
Gerrit Marx: And as I can maybe comment, we on the first quarter in the first quarter, you've seen a slightly negative price. Year on year performance in Q1. Yeah? So Q2 is now positive, and you will see it for the remainder of the year, in fact, because we have and we have we're doing have done it already now for production in Q4. So there is positive pricing is, to some extent, helped across the year. On the cost side, what you see in Q2, the positive cost side. To some extent, helped by the FIFO in our materials. Because, you know, some of the components were already impacted.
By the 10 for example, the 10% flat tariff that we procured throughout the second quarter, but in light of FIFO, machines we built and sold benefited from the lower cost before. A big part of the cost improvement for our cost improvement is also quality related, that's ours and structurally. But we do not expect this FIFO impact that we had for obvious reasons. In Q2 to repeat in Q3 and Q4.
Operator: Our next question comes from Tami Zakaria from JPMorgan. Please go ahead. Your line is open.
Tami Zakaria: Hey. Good morning. Thank you so much for taking my questions. I wanted to get some color on the implied expectation for operating margin for the ag segment as it relates to the third and the fourth quarter. Typically, we see a step down in 3Q versus 2Q and then it picks back up. Should we expect something similar like a step down in March even though much of your underproduction headwind is dissipating sequentially. So any thoughts on how to think about 3Q versus 4Q for the ag segment?
Oddone Incisa: Yeah. So we do expect Q3 to have a little bit of a step down versus Q2 as is typical. And then, of course, a strong rebound in Q4. The historical patterns and trends will repeat this year. Getting us back to our full-year guide. We put out for agriculture. So right about that. Q3, we have a slight step down. And they're rebounding strongly in Q4.
Operator: Our next question comes from Mike Shlisky from D.A. Davidson. Please go ahead. Your line is open.
Mike Shlisky: Good morning. Shay, maybe this one's for you. I know you started just before the Investor Day, a few weeks prior. It's a little bit of an unfair question, but as you've been at CNH Industrial N.V. for a couple of months now, do you have any thoughts in your travels on operating performance, financial performance, and talking with folks within the company? Are there any new initiatives you may have in the hopper here at this point? Or do you still plan to go with kind of what's was presented just over in May in your first couple of quarters here?
Oddone Incisa: Yeah. No. It's a great question. I think what we outlined in May at Investor Day was spot on. Quality is a primary focus. It needs to be. We're well on our way towards improving that. You can see that in our numbers year to date, lower quality expenses. That'll continue for the full year. And, I think, in the years beyond. So that is a tailwind going forward. And it has not kind of affected, as you can imagine, not just the immediate price or immediate cost impacts. But resale values, net transaction pricing, improved, PNL function. So quality is job one. That's gonna happen. That's the right spot to do it.
Our tech stack is dramatically making quick rebounds and it's gonna be in the form of higher pricing over time. As we create more value for our farmers, they're gonna pay more for the products. And we'll see the payback right away with the new technology stack that we're rolling out. So I think what we laid out in May is spot on from a quality perspective, technology perspective. And then, of course, the strategic sourcing was underway prior to Investor Day. It's the flywheel is up and spinning that is delivering benefits this year, and the benefits from that will grow in year two, year three, and year four all the way through 2030.
So those are all the right things. So I have nothing to add. I think the diagnosis was correct, and I think the recovery course that we're on is tracking.
Operator: Our next question comes from Ted Jackson from Northland Securities. Please go ahead. Your line is open.
Ted Jackson: Thank you. Good morning. I wanted to circle in on the North American market. It seems like, you know, I mean, there's pockets here and there, but, you know, you crossed out in the other regions, and North America is, you know, the thing that needs to right itself. You know, there's a pretty widespread right now between the pricing of new and used equipment. And if that's the case, North American inventory into alignment to demand does it mean that you're gonna have to be more aggressive with regards to acceptance to make that happen?
And would that be the kind of situation that would have more play in the second half of this year as you're clearing out things that are on the yards today, that we wouldn't have or importance as you think about the new model here? For 2026 and next. That's my question. Thanks.
Gerrit Marx: Thanks, Ted. I can answer yes. Yes. As always. Look, the efforts to there is a price difference between used and new, and, obviously, with new having returned and the yards having seen quite some used machines now sitting there, there is an increased level of effort and support to get those used machines into its next hand at a decent price with good support from our side. Yeah. So that is in the numbers.
We have programmed our retail plans with financial services, in partnership with the dealers in a way that will navigate the next six months or, let's say, until year-end our paths in a way that we have good the projected retail inventory levels for new and used machines because only if both come will both come down, the channel is open for new machines to be sold in. You're right, and that's of utmost importance and focus. In our dialogues that we have with our dealers. The machines that we are launching now with model year '26 have quite some update across the board, not only on the iron side, but also on the technology side.
So there is incremental and additional value on those newly made one g '26 machines to set them apart from both prior model year, new, and as well as, you know, three, four, one, two, three, four-year-old used machines. And that is the point of attention for us to carefully navigate that. And we're tracking that dealer by dealer, and we are having these dialogues to our North American team led by Scott Harris on an almost daily basis, and we are reviewing this regularly. So this is a point of attention. Yes. We have deployed additional financial efforts, and it is in our projections that we have here included in the overall guidance.
Operator: Our next question comes from Avi Jaroslawicz from UBS. Please go ahead. Your line is open.
Avi Jaroslawicz: Hi. Good morning. Thank you. So just in terms of the timing of the tariff impacts, and I know a lot of things remain in flux around them, but just in terms of when you expect those costs to flow through, you think most of them should be felt in Q4, or do you think there could still be a considerable incremental impact in the beginning of 2026? And I know I think you said there are tier two suppliers that may have more of a lag on their pricing to cover their tariff exposures. So really just, you know, what's your sense of the timing for when these impacts should be flowing through at a full run rate?
Oddone Incisa: Yeah. I think I would expect them to grow through this second half of this year. Virtually very little, in fact, in Q2, all of it, close to $120 million is our negative effect on EBIT. In the second half of this year. And I think, I mean, we'll see what happens in 2026 because we don't know where things shake out at. But we didn't have tariffs affecting us in Q1 at all this year and very little in the past quarter Q2. So on a year-over-year basis, it will be that'll be a headwind in Q1 and Q2 of next year because they didn't exist really in this year. For Q1 and Q2.
So, it's something we're working on, looking ways for offset it. It's Gerrit mentioned. Sharing with suppliers, taking costs out on our end, trying to mitigation efforts there or price increases. A combination of those things will be in play.
Operator: Our next question comes from Daniela Costa from Goldman Sachs. Please go ahead. Your line is open.
Daniela Costa: Hi. Good morning. I wonder if you could quickly sort of touch on two things. First, delinquencies, if there was any particular one-off on the trend given there was quite an increase? And then the second, you had paused the on construction equipment to find a partner. Having originally announced it in the back end of last year. What could get you back on for that project? Thank you.
Oddone Incisa: Great. Thank you. Thank you, Daniela. It's Oddone. I'll answer the first part. The uptick in delinquencies was almost exclusively attributable to activity in Brazil. Commodity prices are depressed there. They've had some weather issues with floods or droughts. And it's a cyclically tough time for farmers in Brazil. So we think the issue is largely isolated to Brazil. We think it's peaked. We don't we think it gets better after this quarter. And so we've reserved appropriately for that, but that's a uniquely Brazilian phenomenon. It's not a global issue. It's just it's just going on in Brazil. And we think we've put up adequate reserves to address that.
Gerrit Marx: Hi, Daniela. And I take the construction question. We haven't really paused it. We have said that we basically have, you know, put certain discussions on hold simply because of the uncertainty of the tariff impacts on the P&L and the outlook of the construction business. We have kept going with several other discussions, particularly around strategic partnering when it comes, for example, to the larger and large excavator business and how we can further enhance our competitiveness through deeper localization and some key markets. Yeah. So that is progressing.
So and there was also a conscious decision because the construction team has done has been doing an outstanding job, you know, not only navigating these markets, but leading the business, launching new products, new compact machines, developing new lines, new attachments to our construction lineup. And such a process can be quite a distraction. At this very moment, and so our decision was we focus on a few discussions to continue that are, let's say, definitely accretive, and, you know, we have the team concentrate to navigate the current tariff and cycle moments to be on top of things when, you know, some momentum returns to the construction market as well.
I think by the time we have gone through now this phase of uncertainty, and we can run numbers and our setup globally with a more reliable in a more reliable fashion. I mean, discussions would certainly continue as we had them. But this is not a race. And look. We are super happy about the machines and the compact machines that come from construction. That flows to our Ag network. And there's no need to rush in any way to do something.
There's always the time for everything, and this is not the time for CE, and we'll stay tuned till the days become more clear for us and the boundary conditions more certain, and that will certainly then also inform a good decision on how we take CE forward in its next chapter.
Operator: Our next question comes from David Raso from Evercore ISI. Please go ahead. Your line is open.
David Raso: Thank you for the follow-up. I know you're more geographically diversified, but seeing AGCO first half of the year, two-thirds of revenues EMEA, 100% of profit. Segment profits from EMEA. Would you indulge us at all and give us some sense of the relative margins by your geographies?
Oddone Incisa: Yep. Generally speaking, North America is our highest margin region. EAME is a comes to second. I'd say closer second this quarter. Maybe last year, the differential would have been larger. But still number two. And three would be LatAm. Coming in third. And then close fourth would be Asia Pacific.
Gerrit Marx: Right. And if I may build on that, we have, you know, now significantly changed governance and leadership on our European operations. And the targets that we have discussed and committed with the team are going to narrow, not close, but narrow the margin, let's say, differentials that Oddone just outlined between North America and Europe. But there is a big opportunity for us in Europe doing our homework and getting ourselves back on a track where basically we do not should see such large differences in marginality between the two regions as there is no reason for that. You know?
Once, you know, everything is done in a proper fashion, and we execute well on quality, and innovation and technology and as we said before, we're on a pretty good path to get there. So Europe is a special focus here, and we're gonna be pretty bold in our moves that we are, you know, venturing in Europe over the next years to come. So there would be some things we would be discussing in the next, let's say, few years how we are going to get our European operation closer to where the North American operation is.
As I mentioned also, India, although now from a P&L point of view, maybe rather small, but in the mid to long term, is going to be a strategically very relevant region to remain cost and price competitive in compact and utility machines around the world. So these are truly two regions that will be a point are a point of attention on our side.
Operator: We have no further questions. That concludes today's conference call. You may now disconnect.