This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's first quarter results for the period ending March 31, 2022. 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 webcast without the express written consent of CNH Industrial is strictly prohibited. Hosting today's call are C&H Industrial CEO Scott Wine and CFO Adani Njiza. They will use the material available for download from the C&H Industrial website. Please note that any forward-looking statements we might be making during today's call are subject to the risk and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent Report 20F and EUN 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 reconciliations to the most directly comparable U.S. GAAP financial measures, is included in the presentation material. I will now turn the call over to Scott.
spk11: Thank you, Noah, and welcome to everyone joining our call. In our first quarter as a pure play agriculture and construction business, we delivered strong sales growth of 13% year over year. This demonstrated the tremendous execution of our team who successfully navigated significant supply chain challenges, raw material cost inflation, and a volatile geopolitical environment. I'm incredibly proud of what they've accomplished and for their deep commitment to making C&H Industrial better every day for our customers. We are spending more than normal on expedited freight and we continue to adjust production schedules to accommodate for part shortages. Unfinished machines in our factories and in transit inventory between our overseas locations were notably above plan at end of quarter. April production improved and we are confident that we will be able to deliver more for our customers in the second quarter. Judging from conversations and other insights, our customers and dealers are managing fairly well in this difficult environment. as increased soft commodity prices help balance farm income, which has been hurt by rising input costs. For construction, we are seeing high demand in all of our regions. Overall dealer inventories of both new and used machines are at historic lows, and service work and part sales are robust, providing reasonable support to our midterm outlook. In addition to positive progress with our Ray-Ban integration, We are also pleased to announce last week the successful divestiture of their engineered films division. While we no longer expect meaningful supply improvements in the second half and other external risks will likely endure, our original guidance included contingencies for such events. We remain confident in our execution and expect our ag and construction end markets to have more incremental resiliency than the general economy, so our outlook for the year remains unchanged. As a reminder, our ag segment now represents 70% of CNH industrial revenue and slightly more of our earnings. Derek Nielsen and his team are deftly managing their business and brands through the storm, driving net sales up 13% on a constant currency basis, supported by favorable price realization and positive mix in North and South America. For the quarter, ag pricing was up 12%, again, more than offsetting rising costs. Order books also remain strong, up 40% year over year for tractors and combines, and this number will certainly be improved in the coming weeks when we open up our order books for model year 23. The war in Ukraine is a humanitarian tragedy, and its ramifications have global reach. The impact on food supplies is concerning, and we are closely watching the volatility in commodity prices and various farm input costs. It is the repercussions of energy inflation, especially escalating fuel costs, that is most concerning, as they may have an even more adverse effect. We have suspended all operations in Russia and are offering financial and housing assistance for our employees based in Ukraine. We are supporting our Ukrainian dealers and have been able to redirect shipments, minimizing the war's financial impact on our business. Precision ag take rates continue to increase with our combination of factory fit and aftermarket digital offerings up almost 15%. With AFS and PLM Connect performing well and our overall precision offerings expanding rapidly with Raven, we are continuously developing better solutions for our customers. During the first quarter, we were excited to introduce the new Holland T6 methane tractor in the U.S., reinforcing our commitment to advance sustainable farming practices. This incredible machine is the culmination of a multi-year development project to build a tractor that runs on sustainable fuel, naturally generated by farming operations. Construction equipment may be the smaller of our two divisions, but the successful turnaround that Stefano Pompiloni and his team are delivering makes them a vital part of our future. Net sales in the quarter increased 23% on a constant currency basis to $803 million. Encouragingly, This was the segment's most profitable first quarter in over a decade, delivering $32 million in adjusted EBIT at a 4% margin. Pricing was up high single-digit to construction, which contributed to their improving profitability without deterring market share gains across various product categories in North America and promising results in Europe. Our improving CE performance is fundamentally sound with a strong focus on product quality and design and expanding our market reach to the Semperiana acquisition. Commensurate with this progress, order books continue to build up year-over-year for both light and heavy equipment across all regions. In North America, we are practically sold out for our 2022 production slots. As Case Construction Equipment celebrates its 180th anniversary, We're even more convinced that there is a profitable future ahead, both for it and our new Holland construction brand. Precision technology is an ambitious journey of transformation and growth, and it is exciting to see the highly capable team Parag Garg is assembling to accelerate our progress. We are partnering with customers to further enhance how our technology is used in the field, unlocking value with each software upgrade and expanding the number of connected vehicles in our new product launches. We're also optimizing auto guidance performance and releasing more tillage prescription features to increase farm productivity and reduce fuel and other input consumption. RAVEN is catalyzing further progress, supplying more robust architecture that satisfies the rigorous requirements for future ag features while enabling much faster progress for our advanced autonomy and automation developments. During the first quarter, we opened a new advanced engineering center in Scottsdale, Arizona, focused on artificial intelligence, and data science for our autonomous vehicle platforms and precision agriculture applications. Along with our new technology center in India, we are positioned to efficiently code to cab on an almost 24-hour basis. These and other initiatives have expanded and accelerated our software development capability and set the stage for future progress, and we look forward to seeing our customers reap the rewards. In February, we laid out five strategic priorities that will be critical to our long-term success. Much of our current energy goes towards solving ongoing supply chain challenges, but we also invest heavily to ensure we're making consistent strategic progress. Each quarter, I plan to provide highlights from a subset of these initiatives. Customer-inspired innovation informs all that we do. I was able to spend quality time with some of our largest customers and best dealers during March. Of course, product availability is top of mind for them right now, but with input costs rapidly rising, their comments centered on how we can enhance their productivity. Not long after those discussions, our board of directors and I visited Sioux Falls to see the advanced autonomous vehicles in operation, which was timely and rewarding. Field testing with customers will validate our technology and provide assurance their expectations will be met. Our dealers are as eager as we are to serve customers and earn new ones, and our CRM enhancements are making that easier. While the topic of brand government is not exciting, it is important to our dealers, and the improved profitability and progress it is driving is noted and appreciated. Operational excellence is about accelerating productivity, enhancing quality, and keeping our employees safe. Tom Verbotten and our supply chain team did that in the first quarter, while also accelerating executing creatively and often miraculously to ensure material was available to our factories and finished goods were shipped to our dealers. They've really delivered on our ambition to be the best for our customers. Executing on these priorities will continue to make us better for our customers, dealers, investors, and employees, translating into market share gains and higher profitability. I will now turn the call over to Adonay to take you through some of our key financials.
spk10: Thank you, Scott, and good morning, good afternoon, everyone. First quarter net sales of industrial activities of 4.2 billion were up 13%, mainly due to favorable price realization, despite the FX headwinds of around 1.5%. Gross profit margin was 22.2%, up 60 basis points versus last year, primarily thanks to mix and pricing. A RAC segment delivered 24.1 gross margin, 80 basis points better than the first quarter of 2021, As better mix and price realization, many in the Americas were stronger than the increase in product costs from raw materials inflation and expedited freight. CE gross profit margin was 13.3%, down 1% from the first quarter of 2021, and higher than any of the last three quarters. Adjusted EBIT of $429 million, up $36 million from Q1 2021, with an adjusted EBIT margin of 10.3%, down 30 basis points versus first quarter last year, on the back of higher sales and higher R&D expenses. Triggered flow from industrial activities was negative, 1.1 billion. This is higher than usual seasonal working capital cash absorption in the first quarter of the year. Late delivery from our plants and higher manufacturing inventories of raw material and partially finished goods led to higher than anticipated increase in overall inventories. Q1 adjusted net income was $378 million, or $0.28 adjusted below the DPS, up $0.02 from $0.26 in Q1 of last year. Reported net income $336 million reflects a one-off adjustment of Russian assets for $71 million net of taxes. This is the immediate impact of a CNH industrial suspending activities in Russia. Industrial activities net debt ended at $2.1 billion, an increase of $960 million from December 31st, 2021, largely due to working capital absorption. At the end of 2021, our available liquidity stood at $9.4 billion, down $1.1 billion from December 31st, 2021. Turning to slide nine, let's look in more detail at the performance for the quarter, with the usual walk of the industrial activities adjusted either by driver and by segment. We see that volume and mix was positive for both segments, while increased production costs were more than offset by positive pricing. A G&A variance reflects increased activity levels and R&D expenses increased as we are investing more on our precision agri-portfolio. Agricultural adjusted EBIT increased 27 million with a margin of 12.6% driven by favorable mix and price realization with positive contribution for the Americas partially offset by higher raw material and freight cost, and growing R&D expenses. Again, adjusted gross margin was 24.1%, up 80 business points from the same quarter last year. Higher volumes in construction equipment, liquid drastic input of 32 million, with a margin of 4%, thanks to favorable volume and mix and positive pressurization, partially offset by higher production cost. Gross margin for construction was 13.3%, that 1%, primarily due to raw materials and partially offset by better mix and favorable price realizations in our regions. For our financial services businesses, here on slide 10, net income was $82 million, up $4 million compared to the first quarter last year, mainly as a result of a higher recovery of used equipment sales in North America and a higher average portfolio in South America and EMEA. These were partially upset by additional risk costs in Eastern Europe, mainly because of the Ukrainian conflict and 15 million of one-off charges of Russian receivables, which is adjusted for net income when looking at the consolidated figures. For the quarter, retail originations were $2.1 billion and the managed portfolio, including JVs, at the end of the period was $20.8 billion. Delinquencies were again down year over year to 1.3% and remained at historically low levels. Next on slide 11, we have the free cash flow and exponential position performance of our industrial activities. Free cash flow of industrial activities was negative 1.1 million, largely due to seasonal working capital cash absorption. In the first quarter, we typically overproduced retail. Why this happened also this year? Due to the no supply chain disruption, we produced less than planned and later within the quarter. This created a situation of higher inventory of finished goods many of which are in transit on March 31st. These inventories were in fact lower than the already low levels of Q1 2021 in tractors and construction equipment, and only marginally higher in combines. In addition, we had again a large fleet of semi-finished equipment waiting parts before being shipped for numerous flights. Based on current visibility of our production schedule, we expect to sell through a large portion of this inventory in the second quarter. Total debt was $21.3 billion at March 31st, and industrial activities net debt position was $2.1 billion. Liquidity remained strong at $9.4 billion, although slightly down from a year ago, as we have funded working capital with available liquidity. During the quarter, we made progress on many of our capital allocation priorities, outlining during capital market day two months ago. Organic growth accelerated in the quarter with capex of 53 million, up 47% year-over-year, and already up 39% for the same period as we increase our digital technology spend. In February, Moody's Investor Service upgraded the company senior unsecured rating from BAA3 to BAA2 with stable outlook. This follows the Fitch upgrade of a long-term rating by two notches to triple B plus in early January. Additionally, during the quarter, the company repurchased 1.5 million shares for a total cost of approximately $18.4 million. The shareholders have authorized the additional purchase of up to 10% of the common-income shares and extended the period for an additional 18 months. While we have a spending program in place to opportunistically buy up to $100 million in shares. At the annual meeting in April, shareholders approved the proposed dividend of 28 euro cents per outstanding share, for a combined return of 380 million euros, which will be paid on May 4th to shareholders of record on April 20, 2022. In terms of inorganic growth, as Scott mentioned on the outset of the call and announced last Friday, we have divested Raven Films' business for $350 million and have invested parties for the sake of Raven business we want to divest. I will now turn the call back to Scott.
spk11: Thanks, Zorin. We expect global ag industry demand to remain resilient due to lower soft commodity reserves, geopolitical pressures, and the impact of recent adverse weather in parts of North and South America. While it remains generally positive, farmer sentiment has decreased during the first part of the year, largely due to price volatility and strained availability of fertilizer and equipment. High input costs are a challenge. but do prompt upgrades to more efficient and sustainable methods of farming and working, which is reflected in our technology adoption rates. Elevated commodity prices will continue to bolster farm incomes and encourage those who can to expand row crop planning. Comparing this 2022 Ag industry demand estimate with the one we issued at the beginning of the year, the only substantive change is lower volumes in Russia, Ukraine, and Turkey. For construction equipment, our industry estimates are largely unchanged, excepting South America where we see some upside to demand in an election year. With solid recent print of the ABI and demand for customers ahead of projects related to the U.S. infrastructure bill, there could be also potential upside to our North American market estimate. Our visibility and too often lack of parts availability continues to be challenged by the conflict in Ukraine ongoing supply chain lumpiness, and the effects of the pandemic, which are still a significant factor in some geographies. Despite risks, we are confirming our previous 2022 guidance for industrial activities. Full-year net sales are expected to grow between 10% and 14%, including currency translation. We will continue to invest to improve our business, but expect to keep SG&A at or below 7.5% of net sales. Free cash flow for industrial activities is expected to exceed $1 billion. R&D and CapEx will be approximately $1.4 billion combined spend for the year. Although supply chain challenges now appear to be a headwind throughout the year, we do expect production and retail sales to increase in Q2 and beyond. Of course, this may be quite volatile depending on the cadence of supplier shipments and the duration of fighting in Ukraine. From a broader economic perspective, I am less optimistic. The negative GDP print in the U.S. last week was a surprise, but we are anticipating weak reports from Europe. Interest rates are rising, inflation is rampant, and China is largely locked down, and thus we will not be surprised if there is a global economic slowdown in 2023. Nonetheless, as our current outlook indicates, we think that global food demand and associated productivity needs will support our industry better than others. While supply pressures persist, we will maintain our focus on managing them and minimizing any associated inventory buildup. As many of you have likely seen, our contract negotiations with United Auto Workers for our plants in Racine, Wisconsin and Burlington, Iowa hit a roadblock yesterday. Our previous contract expired on Sunday, May 1st, and on Monday morning, we were advised by the union of their decision to call the represented employees out on a strike. The union's decision to strike was disappointing. We had several weeks of constructive dialogue, but when the contract expired, we remained very far apart on some important issues. The very nature and purpose of a strike is to disrupt our business and create concern amongst our customers. Despite that intent, CNH Industrial is committed to reaching an agreement with United Auto Workers. We have made ourselves available to meet at the bargaining table at any time. We are determined to satisfy our commitments to our customers, the communities we serve, and our other employees. It is our intent to continue operations, and to that end, we are prepared with a contingency plan that should minimize impact to our operations. Our dealers and customers certainly need us to. Dealer views on the ag and CE economies generally remain robust and positive, which is validated by our order books. We endeavor to get them the products they need to support our customers and will be judicious in managing their inventory as we do. Elevated CapEx and R&D spending will continue as we invest in new vehicles, precision technology solutions, and alternative propulsion. Additionally, we are increasing the number of Raven products flowing through our global distribution channels. We are creating a constructive path to lower CO2 emissions and improve our product offerings as part of our science-based target initiative commitments. Between the new Patriot sprayer, the new Holland T7 tractor, and many other introductions, our model year 2023 products are exciting, as is the tremendous engagement and execution of our global team, who are truly breaking new ground. That concludes our prepared remarks, and we'll now open the line for questions. Nadia, please go ahead.
spk07: Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star and 1 on your telephone keypad. The first question comes from the line of Kristen Owen from Oppenheimer. Please ask your question.
spk01: Great. Thank you so much. I was wondering if you could talk a little bit about the pricing and currency assumptions that are now baked into the full year guidance versus what you initially guided a couple of months ago. It just seems like a lot has moved around in those assumptions and wondering if you can help us understand the puts and takes there. Thank you.
spk10: Yeah, I think we can say we have some more pricing as also we have some more cost on the other side and currency is now a bit more negative on our overall sales since the dollar is strengthening.
spk01: Okay, thank you. And then you called out market share gains in the prepared remarks. You talked at the Capital Markets Day about 200 basis points aspirational market share gain. Can you just give us a sense of the success that you had in the quarter? What's driving that and how sustainable do you feel like that can be? Thank you.
spk11: Yeah. Well, our ambition is certainly to have sustainable market share improvement over the planned period. The current environment really dictates that availability is the sole driver of market share movement. So I'm not reading much into what's happening right now because it's literally who has products and dealerships and get that out. Our team's doing a really good job with supply chain, but certainly... And some of our products and some of our product lines were really not as good as we could or should be. So while we did gain market share in some regions, in some product lines, it really is strictly around availability right now. And I don't think that's a sustainable way for us to look at it. So it's really the investments in new product offerings and the value that we can create with our precision offerings that I think is going to be the long-term contributors to market share. But that wasn't the case in the first quarter.
spk07: Excuse me, Kristen, have you finished with your questions? Yes, I'm all set. Thank you. Perfect. Thank you very much. The next question comes from the line of Tammy Zakaria from JP Morgan. Please ask your question.
spk12: Hi, good morning, everyone. This is Tom Semenich on behalf of Tammy.
spk11: Hi, Tom.
spk12: Hi. So last quarter, I think you commented that 30% to 40% of your backlog is backed by a retail order. Can you update us on the retail versus wholesale mix of your orders year-to-date?
spk11: Yeah, that has actually increased in most of our markets. We certainly shift a bit less than we expected to, and I think there is anxiety amongst most retail customers to be able to put their hands on iron when it does hit the dealership. So we've seen that number move up almost double from what it was at the end of the first quarter, more in the 70% to 80% range.
spk12: Thanks. And then just a clarification. I think you said that you're expecting your production levels to increase from the second quarter onwards. Can you confirm if that is contingent on a strike resolution?
spk11: No, I will not confirm that it's contingent on the strike resolution. The strike is very unfortunate, but we knew it was a possibility. And, you know, it's a It's very unfortunate. We certainly want to get our team in Racine and Burlington back as quickly as we can. But we built our plan so that we can operate. And really, it's two of our 38 plants. And we've got, overall, I think, well below 10% of our global production. And we are continuing to operate the plant. So I don't think it would... I would not say... the forecast we just provided was contingent upon any aspect there. We, we knew there was, we planned for higher labor costs. We knew there was labor risk and we've planned for those contingencies and we'll continue to, to work as quickly as we can towards a negotiated settlement. It's the beneficial of all parties.
spk12: That's very helpful. Thank you. I'll pass it on.
spk07: Thank you. The next question comes to the line of Rose Gillardy from Bank of America. Please ask your question.
spk02: Good morning guys. You guys, sorry, 11% revenue growth in ag in the quarter with what sounds like essentially no volume growth and now production is improving. So should we expect ag revenue growth to accelerate through the year? And then in terms of the normal seasonal pickup, the C and ag revenue, I mean, if we go back to most years for the last seven or eight years, excluding, you know, 2020 with COVID and I think 2015, which was a difficult time in the cycle. I mean, ag revenue normally goes up, you know, close to 30% in the second quarter versus the first quarter. And just given what you're seeing, do you expect to, you know, return to that, realistically expect to return to that type of growth trajectory Q1 to Q2? Thanks.
spk11: Yeah, Ross, appreciate the history lesson, and that's exactly how we're looking at it. You know, obviously, as we said about 16 times on the call, a lot depends on the supply chain, but the team's doing a really nice job of dealing with it. Dealer inventories are extremely low, so we would certainly expect that trend that you laid out to be what we're aspiring to deliver.
spk02: Okay, thanks, Scott. And then just... You know, your latest thoughts on your agriculture, you know, margins specifically. I mean, do you get back to a 20 to 25% incremental margin for the full year, you know, given, you know, what you did in the first quarter and just, you know, what you're seeing right now? And then just what about gross margin? I mean, your gross margin was up 60 basis points year on year and pretty much the toughest of all environments with all the production challenges and raw material cause pressure. I mean, is there any reason why? our gross margin wouldn't be up at least 60 basis points for the whole year. Thanks.
spk11: No, I mean, that's certainly how we're expecting. Derek and Stefano have really done a nice job with keeping price ahead of cost, and we expect to continue to be able to do that. There are some incremental costs coming in, but I think the team's demonstrated a nice job of working through those. We do have a number of new product introductions that will be helpful to margins as well. So, you know, we do feel reasonably good about it, but don't underestimate how difficult the environment is. It's a battle, and, you know, I'm proud of the way the team's handling through it.
spk02: Okay, thanks. And then just, you know, one last one, Scott. I mean, just overall on the ag cycle, I mean, how has your thought process evolved on the longevity of the cycle since the investor day and you know, Russia's invasion? Does the flattish, you know, planning assumption in 23 to 24, like, just seem more or less appropriate to you, or just any subtle, you know, changes in thought more on the longevity of the cycle?
spk11: Yeah, well, I mean, it was not exactly helpful that the invasion happened the day of our capital markets day, but the, I mean, it's so unfortunate for those that are impacted by it, so I shouldn't make light of it, but nonetheless, I You know, what we are seeing, and I said it in my remarks, that the global economy doesn't appear very good to me, but I'm probably more positive on the ag cycle than I was just because, you know, soft commodity prices are up so much and really weak, specifically, availability is down considerably. You know, and, you know, late planning in the U.S., it's just, it's really, you know, shaping up to keep the commodity prices, soft commodity prices high, which is offsetting some of the hard input costs. So I do think the ag cycles probably got a little bit more legs to it than I would have suggested several months ago. Thank you.
spk07: Thank you. The next question comes from Martino D'Ambroghi from Equitasim. Please ask your question.
spk04: Good afternoon, everybody. The first question is on the guidance. You are an underlying assumption on 115. You already had a question on this, but may I ask you what is the sensitivity rule of thumb of the dollar, euro-dollar rate on sales adjusted EBIT and free cash flow debt?
spk10: So, Martino, the Rule of thumb for revenues is, I would say, 1% lower revenues by every 5 cents of dollar appreciation, something like that. Then we have positive reais, US dollar, right now. So there's some positive in there. And for EBITDA, EBIT is not affected too much by our exchange rate as we have a good chunk of our costs in Europe.
spk04: And the free cash flow or debt as you prefer?
spk10: There may be some tailwinds on the debt conversion because of some of the Euro-based debt.
spk04: Okay, and this is not the main reason for the change in the free cash flow guidance?
spk10: No, it's not. But we haven't changed the guidance for the free cash flow. We kept the same, just above $1 billion.
spk04: Okay, okay. And the second question is on the operating leverage of the two divisions standalone, because under the new macroeconomic environment, probably something is changing. I don't know.
spk10: We still forecast revenue growth.
spk04: in both and so i wouldn't see an enormous operating margin change from historical so operating leverage change from historical performance okay and and the prices for the full year in your assumption for this operating leverage it was 11 12 percent in the first quarter should we expect a similar or even higher effect for the full year?
spk10: I will go for a similar rather than a higher.
spk04: Okay, and very last on... Sorry?
spk10: I will go for a similar rather than a higher, so stay to the same level that we happen to want.
spk04: Okay, and very last on prices, after the renegotiation of the labor contract, would you be able to also set these through price increase because typically are for production costs, raw materials and so on, but should we expect the ability to cover it?
spk11: I think it's probably better to assume that we anticipated higher wage inflation and put that into our pricing already.
spk04: Okay, I cannot ask you how much of... Good try. Okay, thank you. Thank you.
spk07: Thank you. The next question comes from Daniela Costa from Goldman Sachs. Please ask your question. Hi. Good morning.
spk08: Thank you. Just two questions from me. I wanted to follow up on the demand commentary. There are some categories that you mentioned, industry demand in the release has been down in the quarter. I think some categories have combined, for example. Shall we see those as more visit comps that influence those and they are more like one-offs and you're still... see overall a strong environment, I guess, sort of trying to think about farmer sentiment versus consumer sentiment versus low dealer inventories. If we should read anything from looking at those categories, they are down. And then the second question, just related thing to your backlog and the stickiness of that backlog, can you comment a little bit on the level of advances that farmers need to put when they order equipment and the things that we should look into to have confidence that all the backlog will be delivered and there's no cancellations if the more bearish macro scenario materializes? Thank you.
spk11: Well, first, on the demand question, I will tell you that I said it as it relates to retail performance and market share gains, but it also is true for the overall demand. Where we saw down markets, and I looked at what's happening in the industry as well as what's happening for us, it's solely related to product availability. So as we ended the quarter with much larger fleet inventory, that means product wasn't available for the dealers and, therefore, they couldn't take it. So it really was not related to anything. We talked about farmer sentiment being decreasing. It's still above the historical norm, but it is coming down with specifically the higher input cost and then the lack of availability of both fertilizer and equipment. But we're not seeing that in any demand impact at all at this point. You know, we're watching for it, but nothing is suggesting that anything other than availability is impacting demand at this point. And as far as the second question was related to, I'm sorry.
spk08: Backlog stickiness in terms of what's the level of advances? Yeah.
spk11: I don't think even our best dealers are getting significant down payments on backlog. We know that it could be canceled. I will tell you that what's happened, because of low availability of used farm equipment, there's a lot of times people, they really need to take it because they don't have something. They've sold something, so they need to get it in. I think that's probably better than any down payment we could get. So we're aware that some of these orders may fall out, but it's better to have a retail order at the end than just having it go into dealer inventory. So on balance, I think we're in reasonably good shape.
spk08: Got it. Very clear. Thank you.
spk11: All right. Thank you.
spk07: Thank you. The next question comes from Courtney Yacabonis from Morgan Stanley. Please ask your question.
spk05: Hi. Good morning, guys. I'm wondering if you can just, share a little bit of insight into the supply chain, what you're seeing in Europe versus North America, and if there's any sourcing issues out of China right now. Just where are the biggest pain points? And then I know that you are not providing a margin guidance, but can you just talk at all about how your expectations for improvement? I think last quarter you had told us you were expecting... semiconductors to be very similar this quarter as they were last quarter. Just any differences to how you're thinking about the supply chain at this point relative to last quarter.
spk11: I think the big difference from last quarter is that we are not expecting the overall supply chain situation, including semiconductors, to get better throughout the year. It is, at this point, you know, we believe going to be a battle throughout 2022 and potentially longer than that. Again, I'm extremely proud of the way the team has figured out how to navigate some of these challenges. And semiconductors is one that especially, you know, it's a brutal challenge. situation, but we've managed for five or six quarters now to handle it pretty well. And I think we'll continue to be able to do that. The overall, I mean, the situation with supply chain, obviously the lockdown in parts of China has not helped. The war hasn't helped. But, you know, we're dealing with three or four hundred suppliers that we're expediting. And, you know, that's an unprecedented number, but it's kind of consistent with what we've been doing for you know, the past few quarters. So the team's kind of built some muscle and capability to do it. But I'm not seeing, and again, you asked a question specifically around Europe. You know, early on, you know, foundries, when I say early on, early on in the war in terms, you know, the foundries were potentially shutting down because of higher electricity costs, and we were able to navigate around that. And we're getting through most of those issues. We are expecting there's additional hiccups that could come, you know, out of the rest of the Ukraine region. You know, pig iron is one that we watch really, really closely. But generally speaking, I hate to say it, Europe's no worse than North America. I mean, the supply chain is difficult, and it's a battle. But, again, I think, you know, I'm quite pleased and impressed with the way the team's managing through it.
spk05: Okay, great. Thanks. And then, you know, you mentioned a couple times, you know, on the call that, you know, sales is really a function of availability at this point. On your industry outlook, I do think you reduced some outlooks, especially on the construction side in Europe and slightly in rest of world. Is there anything that you're seeing that's impacting that industry outlook from a demand perspective, or is that also just a reflection of availability at this point?
spk11: I think that's probably related to Turkey, Russia, and Ukraine, which we're down there for sure. But our construction business in Europe specifically has had a rough decade or so, and the team's done a nice job of getting footing there, and with some periodic coming on, we are going to see construction growth and actually profitability for the first time in a long time. in Europe. So if there was negative numbers, I'm pretty sure it's related to the region affected by the war.
spk05: Okay, great. Thanks.
spk07: Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star and 1 on your telephone keypad. The next question comes from . Please ask your question.
spk06: Hi, everyone. Thank you for taking my question. Just a quick one to understand the new guidance. Was the previous guidance including all three divisions on sales? I mean, was the previous sales guidance including all three divisions of Raven?
spk10: And does the recent sale of the EFD division, is it reflected in your... François, we treated the EFD and the other division as out for sale. so we haven't included it in any of the numbers.
spk06: Even in the previous guidance?
spk10: Not in the previous guidance, not in the first quarter.
spk06: Okay, so not in both if I understood correctly. Correct. Okay. And on precision ag, you mentioned that raven penetration is increasing. Can you give us some more color on that and how you managed to navigate it notwithstanding the tough supply chain situation in the first quarter?
spk11: Yeah, I think one of the benefits of making the acquisition is instead of Raven trying to get into our dealers, we have all of our salespeople also helping to pull Raven through our channels. And I think that's what's driving the extra penetration. What ultimately is the main benefit and profitability driver is integrating Raven into our vehicles and equipment. But right now, we've got a great opportunity in the aftermarket, and that's what you're seeing us take advantage of.
spk06: Okay. Any change you can give us some estimate of an impact on your first quarter sales from this integration?
spk11: Donnie is shaking his head, so that means no.
spk06: Okay. Thank you.
spk07: Thank you. The next question comes from Stephen Fisher from UBS. Please ask your question.
spk03: I think I heard you say something improved in April. Did I hear that correctly? And if so, what exactly improved it and why?
spk11: It must have been a misstatement. No, I'm kidding, Stephen. No, we did see production improve in the quarter. You know, we talked about, you know, we ended with a much heavier inventory level. We were able to work through some of that in the quarter, but also see the plants be more productive. So it was a benefit of both.
spk03: Okay. And with supply chain not expecting to get better, should we expect retail sales to year over year kind of align with your own sales? Because I'm still a little unclear as to why your sales volume seemed to be ahead of retail sales for Q1. It seems like it should basically just be if there's, you know, farmers are kind of clamoring to Q1. get whatever machines are available, it seems like it should just be a fairly seamless pass-through.
spk11: No, I would agree with you. No, I would love to be able to get inventory in our dealers up a little bit throughout the year, but that's not in our plan.
spk03: Okay. And then maybe lastly here, I'm not sure what you can say about this, but it seems like there's a playbook for resolution of the labor situation so maybe you can just help us with anything that's different about your labor situation versus that of your competitor and how that was resolved late last year yeah so i think the big difference is um the number of their they had a much larger percent of their
spk11: hourly employers leveraged by the union. It's multiple factors higher than our 20%. That's the big difference. Also, we've got so many other factories where we can produce and we've got the ability to bring in. We have our salaried workforce and contingent labor helping us serve our customers, which is our primary goal. We're committed to reaching an agreement. Again, we had several weeks of good dialogue. with UAW, and we believe we made a very fair offer. We're continuing to be willing to negotiate. And, you know, we're optimistic that we can resolve this, and that's what we need to do for our employees and for our customers. But we can't look at the deer situation and make a that's the playbook we're going to follow because it's apples and oranges, really.
spk03: Okay. Thanks a lot.
spk07: Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star and 1 on your telephone keypad. There are no further questions. That will conclude the question and answer session.
Disclaimer