CNH Industrial's 2026 Underproduction and Tariff Claims Clash With 2027 Margin Outlook

Date of Call: Aug 3, 2026

Financials Results

• Revenue: $4.8 billion, up 2% year over year, including about 2% positive currency impacts
• EPS: $0.13 per diluted share, down year over year due to lower EBIT and higher working capital investments
• Gross Margin: 9% overall, with agriculture gross margin down to 21.8% from 25.0% a year ago due to unfavorable product mix and tariffs, and construction gross margin at 11.9% from 15.7%
• Operating Margin: Industrial adjusted EBIT margin for agriculture at 5.2%, down from 8.1% in Q2 2025; construction adjusted EBIT margin at 1.7%, down from 4.5%

Guidance:

• Agriculture net sales for 2026 expected to be about flat year over year.
• Agriculture adjusted EBIT margin guidance narrowed to the high end of the previous range, now at 5% to 5.5%.
• Construction net sales guidance raised up to five to ten percent year over year.
• Construction adjusted EBIT margin forecast to be between 1.8% and 2%.
• Industrial net sales expected to be flat, with industrial adjusted EBIT margin between 3.2% and 3.8%.
• Free cash flow from industrial activities forecasted between $200 and $400 million.
• Adjusted EPS narrowed to between $0.40 and $0.46.
• Q3 agriculture net sales and EBIT margin expected to be about flat year-over-year; construction sales expected up low to mid-teens.
• Q3 financial services net income expected to improve year-over-year.

Business Commentary:

Agricultural Equipment Market Conditions:

• CNH's agricultural segment sales were up 1% year-over-year, with North America up 10%, EMEA flat, and South America down 27%.
• The challenging market conditions, particularly in South America, were driven by depressed farm incomes and macroeconomic uncertainty, impacting equipment demand.

Tariff Impacts and Mitigation:

• The updated Section 232 tariff rates reduced the expected 2026 tariff cost impact in agriculture to about 170 basis points, while construction is forecasted to have a 470 basis point impact.
• Despite the reduction, tariffs remain a net drag on margins, partially offset by cost-saving actions and positive pricing strategies.

Operational and Strategic Improvements:

• CNH is making progress in dealer consolidation and strategic sourcing, aiming to enhance quality, sourcing, and manufacturing efficiency.
• These efforts are intended to strengthen the company's foundation for future growth and improve performance amid current market challenges.

Financial Guidance and Outlook:

• CNH adjusted its 2026 industrial net sales guidance to be flat, with agriculture sales expected to be flat year-over-year and construction sales up 5% to 10%.
• The revision reflects moderated industry demand expectations, particularly in South America, alongside anticipated benefits from operational improvements and favorable currency translation.

Sentiment Analysis:

Overall Tone: Negative

• Management describes 'difficult point' and 'challenging market environment' with 'overall market conditions remain challenging' and 'farm profitability remains under pressure'. They expect an 'L-shaped recovery' with 2027 retail demand 'broadly flat' and cite 'continued softness in equipment demand' and 'tariff headwinds'.

Q&A:

• Question from Chad Dillard (Bernstein): Can you provide color on the moving pieces for the implied Q4 ag guide and the exit rate?
  Response: Q4 ag margins expected to benefit from lower 2026 tariff comparisons, favorable pricing, and sequential operational improvements.

• Question from Stephen Fisher (UBS): How do you reconcile the positive ag guidance revision with cuts to ag industry retail sales forecasts?
  Response: The revision reflects outperformance in Q1/Q2, baked-in prior risks (e.g., South America), favorable pricing, operational improvements, and lower Q4 tariffs, partially offset by increased underproduction in Q4.

• Question from Jamie Cook (Truist Securities): Can you frame the setup for 2027 earnings given a flat ag industry outlook?
  Response: Confident in 2027 earnings with higher production aligned to retail, continued price-cost outperformance, and ongoing operational improvements, expecting margins to at least match 2026.

• Question from Angel Castillo (Morgan Stanley): Is a double-digit adjusted EBIT margin in ag for Q4 2026 indicative of 2027 levels?
  Response: No, Q4 ag margin is not implied to be double-digit, but the operational momentum and tariff relief should provide a foundation for improvement in 2027.

• Question from David Rosso (Evercore ISI): Where is the 4% underproduction coming from and how much do tariffs boost Q4 ag EBIT?
  Response: Underproduction is mostly in North America and South America; Q4 ag EBIT uplift is driven by lower tariff rates and higher pricing.

• Question from Tammy Zakaria (JP Morgan): How should we model corporate expenses for the remaining quarters?
  Response: Model corporate expenses at $55-$60 million per quarter, with volatility possible due to unique activities like variable compensation.

• Question from Kyle Menges (Citigroup): Can you provide a margin bridge for 2027?
  Response: Not ready to detail the 2027 margin bridge, but factors include annualized lower tariff impact, quality initiatives, and cost savings.

• Question from Michael Schliske (D.A. Davidson & Co.): Did CNH gain any ag market share globally?
  Response: Yes, gained market share across tractors and combines in various regions, attributed to dealer network consolidation and multi-brand strategy.

• Question from Northland: What drove the negative industrial free cash flow in H1 and the guidance raise?
  Response: Q2 free cash flow lower due to trade payables not growing as production did last year; expecting reversal in H2, with improved profitability also boosting cash flow.

• Question from Northland: Was Europe softer than expected, and what are the ramifications?
  Response: EMEA was softer due to extreme heat, drought, and higher input costs, impacting farmer sentiment; managed production to keep on inventory reduction path.

• Question from Tim Thine (Raymond James): How does pricing outlook square with sizable dealer destocking?
  Response: Pricing improvement refers to sequential Q3 to Q4, with model year 2027 pricing kicking in, not a year-over-year comparison.

• Question from Daniela Costa (Goldman Sachs): Are Chinese or Indian competitors becoming more aggressive in exports, and how do you tackle that?
  Response: Sees Chinese and Indian competitors in some markets, but not at significant scale; competitive strength comes from local market success (e.g., in India).

• Question from Kristen Owen (Oppenheimer & Co.): Is dealer consolidation a drag, and what is the outlook for Brazil combines and FinCo?
  Response: Dealer consolidation is not a drag; it enhances effectiveness. Brazil combines at a low point, replacement demand to carry industry. FinCo remains a risk area with adequate reserves.

• Question from Northland: What is the outlook for construction into 2027?
  Response: Construction market is constructive due to infrastructure, data centers, and power generation; expects improvement in 2027 with tariffs stabilizing and self-help initiatives.

Contradiction Point 1

2026 Underproduction Magnitude and Timing

Conflicting statements on the size and quarterly distribution of 2026 underproduction.

Stephen Fisher (UBS) - Stephen Fisher (UBS)

2026Q2: The underproduction of $400-$500M will largely occur in Q4, similar to last year's pattern. - [Jim Nicholas](CFO)

Is the underproduction dynamic related to the $400 million to $500 million figure mentioned? - Jamie Cook (Truist Securities, Inc.)

2026Q1: An additional tailwind in 2027 would be that the company is underproducing vs. retail by ~4% in 2026, so producing at retail levels next year would be a natural tailwind. - [James A. Nickolas](CFO)

Contradiction Point 2

Tariff Impact on Ag Business

Inconsistent portrayal of tariff impact shifting between being a neutral factor and a headwind.

Chad Dillard (Bernstein) - Chad Dillard (Bernstein)

2026Q2: The Q4 ag uplift also includes lower tariff rates and some higher pricing. - [Jim Nicholas](CFO)

Can you provide more details on the factors contributing to the Q4 ag business results and the implied guidance? - Esther Osinaiya (Morgan Stanley)

2026Q1: For Agriculture, the net tariff impact is unchanged from last quarter, remaining a 210-220 basis point drag on margins for the full year... The impact shifted from IEEPA to Section 232 tariffs, but the net effect is neutral for 2026. - [James A. Nickolas](CFO)

Contradiction Point 3

2027 Earnings and Margin Outlook

Contradiction on the achievability of a double-digit EBIT margin for the Ag business in 2027.

Angel Castillo (Morgan Stanley) - Angel Castillo (Morgan Stanley)

2026Q2: The company is not implying a double-digit adjusted EBIT margin for Q4 ag. The Q4 ag performance shows momentum but is not a direct bridge for the full year 2027. - [Jim Nicholas](CFO)

Do you expect double-digit EBIT or adjusted EBIT margins as a target for 2027, all else being equal? - Kristen Owen (Oppenheimer & Co. Inc.)

2026Q1: In a flat industry 2027 scenario, earnings should benefit from... Continued price > cost dynamic... With increased production in line with retail demand and pricing, the company is confident in printing at least 2027 earnings similar to 2026. - [Jim Nicholas](CFO) and [Garrett Marks](CEO)

Contradiction Point 4

Ag Segment EBIT Margin Outlook for 2026

Contradiction on whether ag margins will be double-digit or not in Q4.

Angel Castillo (Morgan Stanley) - Angel Castillo (Morgan Stanley)

2026Q2: The company is not implying a double-digit adjusted EBIT margin for Q4 ag. - [Jim Nicholas](CFO)

Are you targeting double-digit EBIT or adjusted EBIT margins for 2027? - Kristen Owen (Oppenheimer & Co. Inc.)

2025Q4: For ag EBIT margin in 2026: ... these factors result in an expected ag EBIT margin of 4.5% to 5.5%. - [James A. Nickolas](CFO)

Contradiction Point 5

Production Alignment with Retail Demand for 2027

Contradiction on the timeline for production to catch up to retail sales.

Jamie Cook (Truist Securities) - Jamie Cook (Truist Securities)

2026Q2: In a flat industry 2027 scenario, earnings should benefit from: Higher production levels aligned with retail (less underproduction)... - [Jim Nicholas](CFO)

Can you discuss your ability to maintain flat earnings and provide commentary on the setup for 2027 earnings? - Edward Jackson (Northland Capital Markets)

2025Q4: Yes, as production aligns with retail demand in late 2026/early 2027, revenue growth could be achieved even without a full market turnaround. - [James A. Nickolas](CFO)