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spk16: Good day and welcome to the CNH conference call. At this time, I'd like to hand the call over to Jason Omursa. Please go ahead, sir. Good day and welcome to today's CNH conference call and webcast. At this time, I hand the call over to Jason Omertzer. Please go ahead.
spk01: Thank you, Sergey. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's fourth quarter and full year results for the period ending December 31st, 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 broadcast without their express written consent of C&H Industrial is strictly prohibited. Hosting today's call are C&H Industrial's CEO, Scott Wine, and CFO, Adone Nchiza. They will use the material available for download from the C&H Industrial website. Please note that any forward-looking statements that we might be making during today's call are subject to the risks 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 EU Annual Report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy. The company presentation includes 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.
spk12: Thank you, Jason, and thanks, everyone, for joining our call. We finished 2022 with solid results, as fourth-quarter revenues were up over 27 percent, driving full-year consolidated revenues up 21 percent. Deliveries and product mix improved in both agriculture and construction. Our strength was broad-based, with double-digit year-over-year price realization coming from all regions. We expanded profit margins in both agriculture and construction despite significant input cost increases. The industry faced many other headwinds during the year, including a choppy supply chain, elevated freight costs, and ongoing inflation. Late in the year, these issues began to modestly improve, and we anticipate that will continue into 2023. The CNH team's creativity, hard work, and strong execution resulted in company records for both adjusted net income of $2 billion for the year and adjusted earnings per share at $1.46, up 14% over 2021. We also generated $2 billion in free cash flow from industrial activities in the fourth quarter and $1.6 billion for the full year as we over-delivered on our plans to complete and ship our accumulation of partially built units. This benefited our dealers and put us in a net cash position well ahead of our plan. Last year, we launched two potent margin improvement initiatives, the Strategic Sourcing Program and the CNHI Business System, which we refer to as CBS. Continuous improvement is hard, especially in pursuit of breakthrough results, but our team has embraced this lean mindset and is poised to deliver value across the business. Looking ahead, we remain focused on executing our strategy, including significant investments in our tech stack and product development. Derek Nielsen and his team continue to drive exceptional performance, delivering a strong fourth quarter with full-year net sales for the ag business up 22%. This growth was largely propelled by robust industry demand and significant year-over-year price realization, especially in North and South America. We saw improved product mix, including precision ag revenues up 32%, which benefited from both an increased take rate for factory fit precision options and incremental Raven sales. Ag profitability remained healthy, with Q4 gross margins up 280 basis points and adjusted EBIT margin up 310 points, admittedly against an easy comp. Margins were down sequentially versus our record third quarter performance impacted by regional mix and the non-stated work required to finish units. Overall, I'm extremely pleased with the Ag team's performance and results. For 2022, Ag adjusted EBIT was nearly $2.5 billion, marking our highest profit in more than a decade. We are executing on our customer-centric strategy, and customers have responded with continued demand for our high-end products at prices offsetting increased escalated production costs. They have also recognized us with improved net promoter scores, 5% higher than in 2021. Derek and his team are ensuring that customers are at the center of all we do, driving the right behaviors and results. Stefano Pompilone and his construction team executed quite well in the fourth quarter, with strong momentum from the Sampiriana, integration, manufacturing improvements, and enhanced customer focus, we expect even better progress in 2023 and beyond. 2022 net sales were up 16% for both the full year and the fourth quarter, with noteworthy growth in Europe and South America. Organic growth accounted for about two-thirds of the increase in the remainder, with the remainder attributed to Sampirana. Their excavator portfolio and technology innovations have enhanced our ability to meet customer needs, and their EuroCOMAC platforms provide an outstanding foundation for electrification. Construction adjusted EBIT for the quarter was $34 million at a 3.5 percent margin. Full-year adjusted EBIT was up 38 percent to $124 million, and we are encouraged by the ongoing progress in construction. The team is well-positioned to deliver on their strategic initiatives, support their dealers and customers, and gain market share. This past December, we held an engaging tech day to showcase our extensive suite of precision ag technology. Attendees met our deep team of experts in automation, autonomy, and connected platforms to better understand the cutting-edge products we are developing. Through a series of live demo stations, the team exhibited the real-world applications of our groundbreaking smart iron. The products and technology that we demonstrated Tech Day that you see here on this page and those we will be releasing over the next few years prove our commitment to being a leader in precision agriculture. We reiterate our expectation to deliver over $1 billion of precision ag sales in 2023. I also want to highlight two recent investments made through our C&H Industrial Ventures arm. Stout Industrial Technology is a U.S.-based startup focused on AI-powered smart agriculture implements. Earth Optics has proprietary sensor technology that precisely measures soil health and structure. By taking minority stakes in these and similar companies through our ventures portfolio, CNH is staying on the cutting edge of emerging technology to develop solutions that provide real advantages for customers. T&H remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability. We have a strong history of sustainability performance as evidenced by our recognitions and our innovative products, including the New Holland methane tractor and electric mini excavator pictured here. In 2022, we pledge to set science-based targets that will enhance our operations, scope one and two emissions goals, and establish first-time decarbonization goals related to our products, which we'll announce later this year. With that, I will turn it over to Adonay to take you through our financial results. Adonay?
spk00: Yeah, thank you, Scott, and good morning, good afternoon to everyone on the call. So, four-quarter net sales from industrial activities of nearly $6.4 billion were up over 27% net of adverse effects impacts. Full year net sales of industrial activities of $21.5 billion were up 21% or over 24% at constant currency. Continued price adjustments were significant drivers for our top-line growth in the quarter, but volume and mix also accounted for around 15% sales increase from Q4 2021. For our industrial segments, fourth quarter gross margin was 21.7% and 22.2% for the full year. The year-over-year margin improvement of 1.5 points is mainly due to strong and profitable growth in South America and disciplined price realization globally, which more than offset rising production costs. Q4 adjusted EBIT came in at $680 million, up $302 million from 2021, with a corresponding EBIT margin of 10.7%, a 310 basis points improvement versus prior year. Full year adjusted EBIT of industrial activities was $2.4 billion with a margin of 11.3%, up 140 basis points from 2021. Pre-cash flow from industrial activities was $1.6 billion in 2022, which turned our initial industrial activities net debt into a net cash position of $362 million at the end of the year, as Scott discussed in his introductory slide. Adjusted net income for the quarter was $486 million, up $61 million compared to prior year. This resulted in adjusted earnings per share of $0.36, up $0.05 year-over-year, and full-year adjusted EPS was $1.46. Adjusted net income for the quarter was affected by a higher tax rate due to discrete items booked in Q4. The full-year adjusted effective tax rate was about 28 percent mainly due to the jurisdictional mix of pre-tax profits with higher rates coming from South America. And we will likely see the tax rate a point or two lower in 2023. Available liquidity as of December 31st was $10.6 billion. And at the AdWords General Meeting, the Board of CNH Industries is planning to recommend an annual cash dividend of $0.36 per common share totaling a little over $500 million in distribution to shareholders. In the fourth quarter, strong volumes in double-digit price realization continued to shield us from the steep increase in production costs. R&D and SG&A expenses were higher, tied to technology investments, inflation, and newly acquired businesses. Energy costs increased year over year, but still accounted for about half a percentage point of our total production costs worldwide. Agricultural adjusted EBIT increased by $287 million to reach $701 million, with a margin of 13.1%, up more than 300 basis points from the same quarter in 2021. The higher profits were driven by higher volumes and favorable pricing, which offset higher product costs, SG&A, and R&D expenses. Cross-profit was up 394 million compared to Q4 2021, exceeding 1.2 billion with a margin of 13.1%. For the full year, cross-profit was up 989 million or up 140 basis points from 2021, largely driven by strong price realization coming from all regions and better product mix, including margin-rich technology-related sales growing by about 32%. Construction equipment adjusted EBIT for Q4 increased by 14 million compared to Q4 2021, reaching 34 million with a margin of 3.5%. These results were driven by favorable volume and positive price realization, but production costs, including strike-related costs, were an outsized headwind for the business. Gross profit across the year was up $82 million compared to the full year 2021, mainly due to higher volumes and stronger pricing. For our financial service business, net income in the fourth quarter was $75 million, down $50 million compared to 2021. Factors include high risk costs, provisions linked to the termination of the construction business in China, increased labor costs, and compressed margin in North America, slightly mitigated by robust volumes across all regions, as well as high recovery of new equipment. Retail originations were $2.9 billion in the quarter, reaching $10 billion for the year, up to $100 million from 2021. The managed portfolio at the end of 2022 was $23.8 billion, up $4 billion on a constant currency basis. Delinquencies remain at a low level, up 10 basis points year over year to 1.3%. The increase from December 2021 is explained by the insourcing of the revolving credit account portfolio that was purchased in October 2022. CNH Industrial Capital America acquired the receivables previously held by Citi on a private label program that will now be run and booked by our company. Pre-cash flow from industrial activities in the quarter was over $2 billion, on the back of a $1.5 billion change in working capital, driven in large part by the reduction of manufacturing inventory, as we mentioned before. At the end of the year, the total gross debt for industrial activity was $5 billion, with a net cash position of $362 million. So within the first year of the spin-off, we were able to improve our net financial position by $1.5 billion on the back of the cash generated by the operations. This takes to our capital allocation priorities, and we have targets spending $4.4 billion in combined R&D and CapEx over the 2022-2024 plan period, almost doubling what we were spending in the previous three years. In 2022, we spent the first $1.3 billion of that, and we remain committed to investing in our business to fuel profitable growth. We are confident the products and services we will bring to the market with this spending will ensure higher financial performance in the near future, and more importantly, higher efficiencies to our customers. Strong cash generations helps us maintaining our investment grade rating, which has been reaffirmed or improved by all the rating agencies after the spinoff. We returned nearly $600 million to shareholders in 2022 through dividends and share repurchases. And as mentioned earlier, we proposed the proposed 2023 dividend itself will total above $500 million, and we plan continuing our share buyback program. We have the liquidity to fund inorganic growth, and you are seeing us use the ventures arm for minority investments when opportunity arise. We remain commitment to our capital allocation strategy and focus on maximizing value for our shareholders. This concludes my prepared remarks, and I will now turn it back to Scott. Thank you, Adone.
spk12: Overall, demand continues to outstrip the industry's ability to supply, at least in the near term, which despite record sales has actually dampened industry levels. Soft commodity prices are trending down, but they are still generally above pre-2022 levels, and fortunately for farmers, fertilizer and other input costs are dropping as well. In North America, elevated farm incomes are sustaining demand for high horsepower tractors and combines, while small tractor demand has slowed from the lofty levels seen over the past two years. We see the European ag industry flattening as the macro environment starts to impact equipment demand there. South America and Brazil, in particular, is a very good market for us. The business conditions in Brazil are in flux following the presidential election, but we believe that the fundamentals are still positive for agriculture in the region. We also see good long-term opportunities in APAC, but this year will likely be slightly down. In construction, global demand is trending lower, and we expect residential and commercial markets in North America and Europe to decline in 2023 due to rising interest rates. However, public construction spending at least partially fill in those gaps in the United States. In Europe and South America, construction markets will be down in reaction to the overall macro environment. We expect net sales of industrial activities to increase 6 to 10 percent. With confidence in the stickiness of our 2022 price increases, we expect to build on our margin gains by taking more cost out of our system. We are committed to growing market share, and we have the products, brands, and dealer network to do just that. Returning to full production in our North American plants will also help. Our SG&A as a percentage of sales remains one of the lowest in the industry, and despite inflationary pressures, we will severely limit SG&A growth. Free cash flow will be between $1.3 and $1.5 billion, a little lower than last year, as we have earmarked $1.6 billion for R&D and CapEx, up about $300 million from 2022. Even accounting for the increased R&D cost, our EBIT is projected to grow slightly faster than our top line. We are becoming a simpler, leaner company every day and expect to modestly improve our industrial margins throughout the year. Earlier today, we announced that our Board of Directors has determined that our shareholders will be best served by a single listing in the United States. The majority of our trading in CNH Industrial Stock has been shifting to the New York Stock Exchange since the spinoff of the VECO Group, revealing that CNH's new business profile and investor base better fit with a single New York Stock Exchange listing. Concentrating trading in one market will allow for increased liquidity of our stock, improve investor focus, further simplify the company's profile, enable broader index inclusion, and attract more passive investors. The current Italian regulations only permit the delisting of stocks when they are or will be listed on another EU exchange. By definition, the New York Stock Exchange does not qualify. CNH Industrial has an open dialogue with Borsa Italiana Euronext, and we told them of our intention to leave the European listing. The harmonization and modernization of the Italian financial system, which is underway, is expected to include the New York Stock Exchange as an acceptable exchange. This is our preferred path for a smooth delisting from Euronext Milan, but not the only option if this becomes untimely. We are targeting sole trading on the NYSE by the end of 2023, but that could shift into 2024, depending on the timing of the regulation change. Rest assured, we will delist as soon as it is legally possible. At this point, we do not intend to change our incorporation in the Netherlands or our tax domicile in the UK as part of the single listing. Therefore, we do not expect any material tax or trading consequences for our shareholders. Our board of directors and management team are grateful to Euronext Milan for being our listing venue for the past 10 years and excited about the company's full return to the NYSE. I want to stress that this does not change the company's longstanding commitment to Italy and the Italian market. CNH employs over 5,000 people in Italy, made a significant investment with Sampirana acquisition in late 2021, opened its fifth plant in the country in 2022. We also have three R&D centers in Italy developing products that are sold around the world. While the delisting is another step in our corporate simplification, real value creation comes from the business. We are now taking orders into Q4 in some markets, and overall demand remains strong. But the uncertain macro environment, especially toward the end of 2023, requires vigilance as we strive to support our customers, dealers, suppliers, and employees. We expect to escalate combined CapEx and R&D investment as we launch exciting new products and build out the tech stack. We have already introduced some Raven-enabled products and will unveil more in 2023. But the real payoff for these higher-margin precision solutions kicks in in 2024. We are happy to have finally secured a contract with UAW in North America. The agreement we reached is fair for our employees and sustainable for the company. Employees return to work this week, and we expect the two affected plants to ramp up to full production in the coming months. While the pace of inflation is slowing, it is still inflation, and we expect it to have an impact on our manufacturing, energy, SG&A, and R&D costs in 2023. On a more positive note, we are seeing modest supply chain improvements. Our primary margin improvement initiatives, strategic sourcing and CBS, will start to yield results in 2023. I want to close by emphasizing again how proud I am of the team for what they have accomplished and ensure you that we are ready to do even more in 2023. That concludes our prepared remarks, and I will now turn the recall over to Sergey to open the line for questions.
spk16: Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1 on your telephone keypad If you find that your question has already been answered, you may remove yourself from the cube by pressing star 2. And please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. Thank you. And our first question comes from Kristen Owen from Oppenheimer. Please go ahead.
spk06: Hi. Good morning. Thank you for the question. Scott, you talked about some of the industry demand outlook for 2023. But I was wondering if you could comment more on some of the order book trends that were outlined in the press release. You know, if I recall, last quarter you talked about some of the year-over-year declines being driven more by your intentional decision to keep order books relatively short. How far are you open now? And maybe just say more about how you view demand versus order levels for 2023. Yeah.
spk12: You know, as we talked about, the macro environment is – It's choppy a little bit. You see that in everything you read. But our order books really are not open. We haven't opened up Q4 in any markets yet. We still are allocating. So, a lot of what's happening in the order book is our choice to allocate markets. I'm not proud of the fact, but we have not delivered on a timely manner in much of 2022. The one market where we've been very clear is down is low-horsepower tractors. So we are seeing softness there. And I mentioned, I referred to the political situation in Brazil. It's really provide a... Just taking... Farmers, I think, are just taking a pause. We think the fundamentals in that market are incredibly strong. The world needs that agriculture production, and they need equipment in order to do that. But we're just watching that very closely. But overall, Europe... is, you know, a little bit slightly down, but we feel good about, you know, our ability to execute and keep that market relatively flat to the way it was in 2022. So, you know, overall, I think the demand environment is better than I would have expected it to be at this point. And, you know, we're really running our factories as fast as we can, as much as we can through the year. And just being careful as we look at the fourth quarter. The fourth quarter is where we are being cautious at this point. We don't have orders for that yet, but where we have talked about it, I think we could open that up and probably book it very quickly.
spk06: Okay, that's helpful. And then just as a follow-up to that question, just how you're thinking about dealer inventory levels exiting 2023. Do you expect to produce in line with dealer inventories, build? Any comments you have there?
spk12: You know, we are still... Again, with the exception of low horsepower tractors, we are still below historical levels and really, quite frankly, still below where most of our dealers would like us to be with dealer inventory. So we're going to work to catch that up. We do not plan to get back to historical levels. We'd like to keep inventory relatively lean. It's careful balancing there because you're running as fast as you can. to provide shipments and the market's going to slow down at some point. But no, we are not looking to push a lot more dealer inventory into the channel. We've got, you know, some dealer fill that we've got to do just to give them acceptable levels of inventory. But, you know, our goal and part of, you know, what we're watching for is to make sure we protect dealer inventories going into 2024. Great. Thank you.
spk16: Thank you. Our next question comes from Steven Fisher from UBS. Please go ahead.
spk10: Thanks. Good morning. Just on the Q4 order book point, just curious, Scott, why haven't you opened up the order books yet, and what will you need to see to fully open them up for Q4?
spk12: Steven, it really refers to, and again, I'm not proud of the fact, just our inability to deliver orders in a timely manner. I mean, we've got a backlog, especially in our high-horsepower tractors, that is quite long. And I think we're just trying to get more confidence in our ability to deliver. Again, inflation is not rising anymore, but it's still out there. So we also are making sure we manage our costs. Derek and Stefano are really doing a nice job of of managing cost inputs in their business um but you know it's really that making sure we balance the the cost price equation and you've seen from our history we're really good at doing that but also ensure that we can deliver when we say we're going to deliver if we open up the books okay that's fair and then i guess in terms of the ag margins for 2023 can you maybe just give us any color on the puts and takes there i imagine
spk10: There were a number of inefficiencies in production in 2022 due to the strike in the supply chain. And then you have precision ag mix should be helpful, I would think, for 2023. So can you talk about some of those puts and takes and then what you're expecting for price versus cost in 2023?
spk00: Let me take this, Steve. Yes, you pretty got it. I mean, we expect... 2023 to be a play of cost more than a play of pricing. We expect still to be positive price over cost as we have been throughout 2022. But the big game will be in getting cost out of the production system and reducing cost of the production systems. And that's a combination of having a smoother supply chain, a more organized cadence, and possibly getting some improvement from our strategic sourcing program. That probably will kick in more at the end of the year rather than the beginning of the year, but that's what we're looking at. And we have some carryover pricing for 2022 still coming in. And then you mentioned as well growing sales in tech. which have generally a higher margin than the pure equipment.
spk16: Okay, thank you. Thank you. And our next question comes from David Russell from Evercore ISI. Please go ahead.
spk09: Hi, thank you. I'm just trying to square up the implied volumes. I mean, you look at the price, sorry, the revenue guide of the 8%. I mean, currency shouldn't be that much of a drag at these levels. So it looks like it's mostly just price in the revenue guide. Is that the right way to interpret it, that basically volumes are flat? And if that is the case, if you can give us a little flavor, where are volumes up versus down, just so we kind of square up any chance of overhead absorption?
spk12: Now, volumes are up slightly, modestly. I don't know, slightly, modestly define that. It's low single digits. North America is really where we see the greatest strength and where we see the biggest backlog and where we've got the most work to do. So I think that'll be the volume play to a great extent. And there's still lots of work to do to deliver in other areas of the world, but that really will be where most of the volume comes from.
spk09: And that's more of a large ag comment? I know the units are bigger and smaller. You got it. You got it.
spk12: It's high-horsepower tractors and combines in that order.
spk09: And, Adonis, the comment about, you know, more about steel than price, just so I understood what you were implying there. We still think our steel costs are up year over year more than price. It's all wrapped in a thought around do we think gross margins can expand in 2023? I just want to make sure I understand that.
spk00: I'm sorry if I wasn't clear. I was talking about cost, so price over cost in general, and cost includes raw material, but in general production costs, so all of our production costs.
spk09: So price costs are expected to be positive for the year to margin? Yes. Neutral to margin? Yes. Positive margin. So if volume's up a little bit and price costs should be net positive to margin, I assume we can infer from that gross margins are expected to expand as well as SG&A grows slower than sales growth. At least that was in the guide. Is that correct? That is exactly correct. That's what we're looking at. All right. Thank you so much, and I appreciate the detail on the delisting. Thank you.
spk16: And our next question comes from Jamie Cook from Credit Suisse. Please go ahead.
spk03: Hi. Good morning. Nice quarter. I guess just two questions. You know, Scott, you know, given the performance that you've put up, the positive financial performance you've put up, can you talk about how you're thinking about the ag cycle and, like, the implications for your 2024? financial targets, whether you think there's upside there. And then I guess my second question, just an update on Raven and where we are relative to your synergy targets. Thank you.
spk12: Okay. Well, you know, first of all, if you go back a year to Capital Markets Day, you know, we're obviously much, 2022 played out significantly better than we expected. Unfortunately, some of that driven by soft commodity prices impacted by the war in Ukraine, which we couldn't have anticipated. But overall, 22 and then as we look at 23 are both better than we had anticipated from that. But that's really market related, not our performance. Our performance is actually doing quite well. As we look at our 2024 targets, you know, we obviously feel like we're on a path to do better in some areas, but we've got work to do in some areas. So we feel like, you know, generally speaking, you know, we set ambitious targets and we're on path to hit those. But, you know, we are I don't want to be a pessimist, but I just think 24 could be a, you know, we talked about it, could be a more difficult year. The ag cycle, though, as I talked about in my prepared remarks, you know, soft commodity prices are still at relatively good levels. And it looks like, you know, that could hold. And farmer income, you know, is still at elevated levels. And their reluctance to pay taxes and, therefore, the desire to buy equipment it still makes a good setup for the ag cycle. It won't stay positive forever, but we feel like right now we're not about to call that starting to turn negative in 23. As far as Raven is concerned, I'm honestly not sure I could be more positive on how well that integration has gone. We committed to a reverse integration because we like the team and we like the culture, and our team has embraced that. We are learning from their agile, customer-focused system, and we're building on that, giving them the tools and resources. We've done a tremendous amount of hiring. And really, we talked about the new Patriot sprayer that we brought out with full Raven capability. We'll embed their tools and everything that we can going forward. But really, integrating them into our tech stack is where the real value unlock is. Huge aftermarket opportunities there, retrofit opportunities in Raven. But overall, I'm just really pleased with
spk13: how the team both the raven team and our team have done to bring value and overdrive on our synergy targets thank you we'll now move to our next question from dylan coming from morgan stanley please go ahead great good morning guys thanks for the question i just wanted to ask on some of the more idiosyncratic modern improvement opportunities you mentioned you called out the sourcing program and cbs starting to ramp in the quarter I know Adonai mentioned it would still be a bit more back half weighted, but can you just maybe earmark kind of how much more of an opportunity that could be on more of a dollar basis or margin basis? They're trying to get a sense of kind of quantifying what that tailwind could be next year.
spk12: Yeah. Well, you remember, we actually are not, our CBS and lean initiatives are not starting from nothing. And we've got a great history with WCM and pulling lean tools throughout the plant network. What we're looking to do is how do we deploy that in other areas of the business and accelerate it in the plants? And I think that's what you'll see taking shape this year. And obviously the you know, the opportunity is quite significant. But, you know, what the teams are working on now is how do we just push back the cost input using various lean tools to get back to where costs were pre-pandemic? And, you know, that's a lot of heavy lifting. But, you know, Adoni referred to it. You know, 2022 was a year of price, and 2023 is going to be a year of cost. Focus and our lean tools will be a a significant way that we get after that. But more importantly, it's a way we get after delivering value for customers. It's not about just taking cost out. We're going to use those tools to make quality better, to make delivery better, and overall help us expand margins. That's, I wouldn't say short-term, but we can do those. We did some of that work in 2022. We're accelerating the work in 2023. So a great opportunity across the business to use those tools to create value and expand margins. Strategic sourcing is a longer-in-the-tooth program. It's probably got kicked off last summer and fall. We've got a strong team working through it. But that will sow some results later this year but really start to drive notable margin expansion in 2024 and beyond. But both of those, I would say,
spk13: more near-term opportunities with our cbs initiatives more significant long-term opportunities with strategic sourcing okay that's helpful color thanks scott and then just my follow-up on the precision ag revenue target i think a donate you mentioned that you exited the year up 32 percent you know you were originally guiding at the tech dates up 11 in 2023 i know it's still a fairly recent target but just given that exit rate would you kind of consider any upside to that billion dollar target for 23 at this point
spk00: I will stick to that target for the time being. Great. Thank you.
spk16: The next question comes from Tommy Zacharia from JPMorgan. Please go ahead.
spk04: Hi, good morning. Thank you so much. So just to get some color on the volume expectation of low single-digit, is that higher for ag, call it mid-single-digit, but negative for construction, so that nets out to a low single-digit growth for the overall company? Is that how we should be thinking about it?
spk12: No, no, no. It's actually... You know, the construction business and backlog is quite good. You know, despite a difficult overall environment, you know, we had so many limitations last year in our ability to produce. That business is actually reasonably good. So both businesses will have positive volume in 2023.
spk04: Got it. That's super helpful. And then second question, what kind of incremental margin should we expect in ag and construction segments this year?
spk00: I will go to the, I mean, in line with what the kind of incremental margins that we have had over time, no big difference from that. Probably a little bit more on construction because we have, construction was more affected by some of the cost headwinds this year. But for ag, I will use, I will be pretty much in line with what we have had in the past.
spk04: Got it. Thank you so much.
spk16: And now our next question comes from Mick Dobris and Baird. Please go ahead.
spk14: Good morning. Following up on construction here, I'm wondering if you can give us maybe a little more context around the order book here and the declines that we've seen in both heavy and light equipment. Are you limiting the order book in construction similarly to what you've done with ag? And I'm also kind of curious in your own outlook for 2023 for the industry, You know, you seem arguably a little more pessimistic than some of your peers when framing 2023. So, again, a call around that would be helpful as well.
spk12: Well, I don't – I obviously was busy this week, but I didn't really digest the CAT numbers overall, but I don't remember them being overly positive on 2023. So I think we're somewhat in line with what that was on the construction side. We're really underserving our dealer network with heavy excavators, and we're working diligently to improve that. So that's a significant opportunity for us. But that's where some of the backlog reduction has been, just because we cannot deliver in that area. On the light side, we've got just really good progress with Sampirana. We'll start to bring You know, expand the markets where we can serve with that. But South America was very strong for construction last year. We don't expect that to repeat. So that market will be a little bit, from a construction side, be a little bit lighter than it was last year. But overall, again, it's going to be a positive year. Stefano and his team are doing a nice job with that business, and we like where it's going. And it's got a long-range upside here. for sure, in that business.
spk14: Okay. And then if I can try the price-cost question as well, looking on a consolidated basis, it looks like you've had positive price costs of about $180 million the past couple of quarters. And as you contemplate 2023, I'm wondering if this figure holds or if we should expect any significant variance from that.
spk00: No, directionally we expect to be positive price cost in 2023 as well. So I wouldn't take much different view of what we're seeing. I mean, absolute terms are going to be different, but I wouldn't take a much different view of what we're seeing throughout 2022. I appreciate it.
spk16: And our next question comes from Martha Brusca from Berenberg. Please go ahead.
spk02: Hi, good afternoon. Thank you for taking my question. If you don't mind, please, it would be helpful to hear your thoughts on the pricing environment in raw materials going forward from a bit different angle. So specifically, you know, given the industry in the past, some of your competitors would hand out steel discounts once the raw materials start to start to normalize a little bit, but to my understanding, it hasn't been the case in 2022, despite the already positive base effect versus the prior year. So I was just wondering whether you see anything at all that would suggest that this should change in 2023, or what's the risk of some of your competitors starting handing out still discounts to the dealer and how would you react to that? And then I have one more, please.
spk12: So we are still expecting inflation to impact our business and therefore our supply chain in 2023. To a lesser extent, than it did in 2022. So, you know, a declining rate of inflation, but still seeing inflation. So, you know, we've seen a decrease in some areas, but overall, the cost that we're paying is not coming down. So we don't intend, in fact, you know, we're still going to have to price going into 2023, again, at lower levels because of the lower increases. But we don't see a decrease in pricing in that You know, again, the quality and innovation that we're putting in our products would suggest that we don't need to go start competing on price. And I think the industry overall is likely going to take that approach.
spk02: Perfect. Thank you. And then I was just wondering with all the big tech in cutting the workforce, were you able to benefit from the opportunity to tap into the tech talent pool for your precision at hiring people?
spk12: You know, that's actually something I've been pushing the team on for quite some time. I mean, we have done significant hiring with our technical team, precision and autonomy. But, you know, many of the... the layoffs are not actually the programmers and engineers. So we don't really see that as an opportunity. And, you know, we did most of our hiring in 2020. We'll probably slow down a little bit. But, you know, to the extent that we can bring on great talent at more reasonable prices because of what others are doing. But, you know, certainly our commitment to accelerating value that our customers get from precision and autonomy is there. And, you know, we'll We are continuing to hire in 23, but no, there's not a significant opportunity for us there just because of where we're hiring and where most of those employees are located.
spk02: Very clear. Thank you.
spk16: Thank you. Now our next question comes from Nicole de Blas from Deutsche Bank. Please go ahead.
spk05: Yeah, thanks. Good morning, guys.
spk12: Morning.
spk05: Can we just start by talking a little bit about what you're seeing with respect to used equipment values, any signs of moderation at all from such high levels in 22 within ag or construction?
spk12: Used values are still hanging in there just, again, because availability. And I'm not talking about low horsepower tractors because that's a different scenario, and we've seen that market stabilize at a lower level. But at the high horsepower side and large ag, we're still not seeing large fleets anywhere in the OEM side or in the used side. So prices are staying reasonably high.
spk05: Okay, got it. Thank you. And just thinking about the quarterly cadence of earnings throughout 23 versus normal seasonality, I would kind of suspect that you would see a return to normal seasonality, but If there's anything you guys want to comment on to think about throughout the year, that would be helpful. Thanks.
spk00: No, I would say we'll go back to the normal seasonality, which sort of we have seen in 2022 as well, between production and retail sales. So I would say, yeah, going back to the normal.
spk05: Thank you. I'll pass it on.
spk16: Thank you. We'll now take our next question from Timothy Tain from Citi. Please go ahead.
spk15: Yeah, thank you. Yeah, first, Scott, it's interesting. I think these order of board comments in the release have kind of taken a life of their own. But I'm just curious, how does Derek and team – interpret that. You know, there seems to be so much noise just in terms of how the world has unfolded over the last year or so and how you and others have shifted to an allocation mode. Just really getting at the underlying significance of these order boards in light of just all the issues around timing of deliveries and meaning, you know, how significant are they? I guess the the nature of the question.
spk12: Yeah, I would, if I could call Derek up and getting on the call, I think you'd hear a much more positive tone from him than how I think you're reading it. You know, obviously there was a, you know, we're coming off, you know, an unprecedented demand. And I think we're seeing, you know, regional changes in that, but overall the net portfolios are still, you know, reasonably good. You know, the collection, what, what used to have is you'd open up a book and you'd fill it off in an hour, and we still see that in some markets. But generally speaking, it's slowing a little bit in Europe and low horsepower tractors in almost all markets. But overall, I think a lot of what we're seeing, we didn't expect it, but the Lula election in Brazil really caused a lot of pause for farmers in the region. And that has been so good for us, and we expect it to be, but it's taken, I will call it a pause, in orders there. But overall, that market, having just been there recently, is very, very strong. So I think it's just a matter of timing, and we're trying to manage that properly. But You know, I think Derek's managing the business extremely well, as you've seen by the execution. And that includes on the sales side to make sure that orders and retail orders come through. And he's not at all sounding an alarm. He's just putting the right measures in place to make sure that, you know, we deliver on a solid year in 23. Got it.
spk15: Got it. And back to your earlier comments about And, again, I think we can all, you know, the low horsepower market weakness, I think, is pretty well telegraphed and known at this point. But just, again, sticking to large ag, obviously far more significant from a bottom line perspective for C&H, just the notion that dealer, any sort of dealer stocking or restocking is likely not happening in 23. So presumably that could pose some tailwind as we, you know, 24 is a long ways off, but that's still in front of the company as a whole. Is that a fair takeaway?
spk12: I think some markets will get, you know, back to reasonable levels of inventory, but I just, I don't like, I mean, we want to be, you know, our goal, our intent is is to make sure as we manage and protect our own cash flow that we do the same for our dealers. And that takes discipline to do, and that's the discipline that we're going to have as we go through this. The end of the year was a little bit tricky for us because there was so much very good work done to complete this significant fleet inventories we had literally all over the world where we just were missing components and we needed to finish those quickly. get them built and tested out to dealers. And the team did a really nice job with that, but it happened so much at the very end of the quarter. We ended up with more inventory in some places that has retail orders. The customers are going to pick it up right away. We just didn't get it there in time for that to happen. So I think the end-of-the-year inventories aren't really telling a great story, especially in North American market where that was significant. But overall... You know, we feel like, you know, there's just a tremendous opportunity for us to, you know, keep our factories running and produce for retail customers at this point and possibly at the end of the year, you know, start to get dealer inventories, you know, back. When I say back up, I mean it's up to acceptable levels, not up to historical levels.
spk16: All righty. Thank you. Our next question comes from Michael Finnegar from Bank of America. Please go ahead.
spk11: Hey, Scott. Thanks for taking my questions. I believe you phrased it as 2022 was a year of price. 2023 is a year of cost. Just so I understand this a little bit more, if we look at 2022, can you quantify some of the costs
spk12: embedded in the model attributed to premium freight transportation just buckets that like cyclically won't that cost won't be as elevated in 2023 well you you hit a big one which we've already seen start to come down um being transportation cost you know just the cargo boxes all of that stuff we've seen that start to give way and the way our contracts are we don't always see it you know right away but Nonetheless, that's one. And overall, we're just not seeing the spike in prices. Again, inflation is there. We're dealing with it. I think the team's proven our ability to manage that. Semiconductors have also come down. So that's at a much more reasonable or, I guess, acceptable level for us. But overall, prices are going to be higher for us in 2023 than But when I talk about it, we're looking at the entire business portfolio and saying, you know, what costs have we incurred through the pandemic and then the response to the pandemic where we had to ramp up so quickly to deliver customer orders? And how do we get back to running the business very efficiently? And that's the work. When we talk about cost, it's getting after that efficiency in all aspects of the business that we might have lost a little bit of during the last couple of years.
spk11: understood. And I know, we just went through the order order board comment. But you did also make a comment earlier, I think was to Jamie cook about 2024 could be a more difficult year. Many economists actually think 2024 could could we can be seeing the global economy expanding. So I just wanted to narrow in on that a little bit. Why do you think 2024 could just become a more more challenging year as as you said,
spk12: Well, remember, we are significantly more exposed to the ag cycle than we are to global GDP. We call it an ag cycle for a reason, which means that it's not a flat line and it doesn't go in one direction forever. and you know we've had a very high market and i'm not actually not at all talking about a peak here but i'm just saying we've had a very strong market here and i'm acknowledging with other global inputs that may at some point impact ag demand you know 24 may be a year that isn't as strong as as others i mean i i think that's not a negative that's not a negative comment it's just a fact actually
spk11: All right. Understood, Scott. Just to squeeze one last in, you did see this inflection in your industrial net debt ahead of time. It was from some of the cash generation from the business in 2022. Just I know you're aggressively investing in the business. You know, how can we think about the fact that you inflected on your industrial net debt ahead of time, and how should we think about that in terms of potentially, you know, share repurchases to kind of close maybe your valuation discount to peers, how you kind of look at that? I know you're aggressively investing in R&D and CapEx, but just that lever to pull, how are you thinking of that?
spk00: So let me take this one. We set very clearly our capital location priorities. We say that we are investing more in R&D, as you pointed out. We step up our dividend. In 2022, we went back and doing share repurchases at levels that probably we hadn't done in the past. We want to continue doing share repurchases in 2023. So that's part of the mix that we have in there. And then we also want to have some availability for some sort of M&A, particularly in the tech space, if that helps a profitable growth there.
spk16: Thank you. Thank you all. And now we have time for one final question. from Goldman Sachs. Please go ahead.
spk07: Hi, thanks very much for putting my last question in. I guess I just wanted to touch on cash. Your guidance for 23 sort of sees the weaker cash conversions. I was wondering maybe you could just comment a bit more on what you're seeing there and sort of what the moving parts are. Thank you.
spk12: Yeah, again, I'll use the opportunity of answering your question just thank the team for delivering such strong cash flow in the fourth quarter, which gave us a reasonable result for the year. We're expecting another billion-dollar-plus, I think the $1.3 to $1.5 range of cash flow in 2023. But we are spending several hundred million dollars more in CapEx. Again, part of our strategy is bringing new products to market and that do allow us to have higher gross margins and gain market share. So those things don't come free, so we're going to spend more money to get that, and that's really the key driving factor of it. We'll still be disciplined with inventories and managing that, but that will be the differentiator between year-over-year cash flow generation.
spk04: Claire, thank you.
spk16: Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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