CNH Industrial

and welcome to CNH fourth quarter conference call. Please note this call is being recorded, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. I will now hand you over to your host, Mr. Jason Omerza, Vice President of Vestor Relations, to begin today's conference. Thank you.

Thank you, Ben, and good morning, everyone. We would like to welcome you to the webcast and conference call for C&H Industrial's fourth quarter and full year results for the period ending December 31st, 2023. This call is being broadcast live on our website and is copyrighted by C&H. Any other use, recording, or transmission of any portion of this broadcast without the express written consent of C&H is strictly prohibited. Hosting today's call are C&H CEO Scott Wine and CFO Adone Anchisa. They will use the material available for download from the CNH website. Please note that any forward-looking statements that we might make 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 annual report on Form 10-K, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission. 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.

Thank you, Jason, and thanks, everyone, for joining our call. Our 2023 fourth quarter and full-year results reflect this C&H team's resilience and dedication to driving customer-inspired innovation, lean operations, and sharp commercial execution. With purpose, pace, and positive changes progressing throughout the organization, the results are evident in our margin progression. Our agriculture and construction segments both achieved record EBIT margins for the year as they balanced continued price discipline with aggressive cost management. We are improving through cycle margins to be more profitable regardless of industry strength, and our ag business demonstrated that in the fourth quarter. 2023 was our second full year as a pure play agriculture and construction company, and we again achieved record revenue and net income. I'm quite proud of the way the team addressed a challenging demand environment, notably in South America, where we are benefiting from our long-term focus on customer and dealer satisfaction. Our Brazilian dealers gave us early warnings about farmers postponing purchases, allowing tighter management of dealer inventories and demonstrating our commitment to their success, not just ours. Since the demerger, we have been fully able to fund our core businesses and allocate capital more efficiently, evidenced by our increased R&D and CapEx investments. The benefits from our intensified focus on product development are already visible as we launch 72 new products in 2023. many of these fully integrated with in-house tech solutions, garnering positive feedback from dealers and customers. This helped push our sales contribution from precision tech components over $1 billion in 2023 as planned, and that is just the beginning. We have considerably more tech-enabled products coming in the quarters and years ahead. Fourth quarter, consolidated revenues were down 2%, and industrial net sales declined 5%. as South American markets remain soft and we underproduce low horsepower tractors in North America. Despite the drop in sales, we expanded industrial even margin by almost a full percentage point with adjusted net income growing 15%. Adjusted EPS for the quarter was 42 cents, up six cents from last year. As Adoni will highlight, we are beginning to see the benefits of our enhanced focus on cost. Our full year earnings results were equally impressive. Industrial net sales were only up 3% over the prior year, but EBIT rose 12%. As price realization in the first half was supplemented by the accelerating impact of our cost actions, EBIT margin grew 110 basis points to 12.4%. Our CNH business system, or CBS, is leveraging our deep and talented global team to streamline our operations and businesses. Adjusted EPS was $1.70, an increase of over $0.24 since 2022. Recall that $1.70 was our original 2024 target, so we hit that a year early. Derek Nielsen and his agriculture team continued to execute extremely well last quarter, skillfully managing costs while confronting declining demand and elevated dealer inventories. Margin expansion in such an environment is tough, and I am proud of what this team has accomplished. Stefano Pavloni and his construction team also did an excellent job. Construction margins were up 230 basis points in the quarter and 260 for the full year as they improved dealer performance, product innovation, and cost efficiency. We decreased ag dealer inventory sequentially, but remained up more than 5% year over year. Our needed increase in North American inventories of combines and high-horsepower tractors outpaced proactive reductions in South America and in low-horsepower tractor inventories in North America. We have some work to do in product-specific dealer inventory levels, particularly in Europe, so we will maintain our retail execution focus and appropriately manage shipments. I want to clearly state that retail sales for both segments were ahead of the industry in the quarter and the full year. Our dealers' 2023 retail performance was impressive, and we appreciate their efforts. SG&A expenses declined year over year in the fourth quarter. We expect this trend to continue for every quarter in 2024, driven by our restructuring program, which is well underway. We reached an important and exciting milestone in our strategic sourcing program as we began supplier selection for the first wave of components. As we look at our strategic priorities, I would like to start with customer-inspired innovation. We mentioned last quarter that CNH won the only gold medal at Agritechnic for the New Holland CR11, our next generation flagship combine. I want to quickly highlight how it exemplifies the integration of world-class technology with our great iron. This machine offers a full suite of benefits requested by our customers, providing much greater productivity and yield for the farmer. Real-time machine learning, automated predictive adjustments, intelligent fuel management, and unique sensors to understand a crop's nutrient composition are just a few of the combine's extraordinary features. The CR-11, with its counterpart, the new Case IHAF-11, will cement our standing as the world's foremost large combine manufacturer and will especially help us improve our position in North America. These beasts will be in the field around the world this year for intensive testing and demonstrations with order books opening later this year for 2025 deliveries. T&H remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability. We continue to build on our legacy of sustainability performance as evidenced by the recognitions we receive. For example, we placed in the top 5% of over 9,000 companies rated in S&P's Global Corporate Sustainability Assessment and took second place overall in the Dow Jones World Index in the machinery and electrical component category. Like our farmers around the world, C&H maintained its longstanding commitment to protecting the environment And we are excited about our customer adoption of our first-to-market innovations that enhance customer productivity while improving fuel and emission savings. Due to the continued supply disruptions in 2022, we purposefully delayed much of our $550 million cost reduction program. But with solid improvements in 2023, we remain confident of reaching that cumulative savings target this year. As a reminder, we are targeting three main drivers, reducing logistics costs, lean manufacturing operations through CBS, and supply chain savings, including our strategic sourcing program. With a solid foundation to build upon, CBS has been enthusiastically embraced around the company as we engage our employees to create more efficient processes using lean principles and Kaizen events. Strategic sourcing is ramping up and we will begin to contribute in 2024 with accelerating savings for many quarters to come. For our SD&A restructuring, a 10% to 15% reduction translates to about $160 million to $240 million of savings. We are well underway with this difficult work and expect to complete this effort in the first half of 2024. We are also zero-based budgeting our non-labor SG&A with an eye toward right-sizing some of our service agreements and expanding support operations in low-cost countries. Together, we expect these SG&A initiatives to save about $140 to $180 million in 2024, with the remainder carrying over into 2025. I will now turn the call over to Adonay to take us through the financial results.

Thank you, Scott, and good morning, good afternoon to everyone on the call. Four-quarter industrial net sales were down 5% year-over-year to $6 billion. The decline was mostly due to lower sales in agricultural equipment dealers, especially in South America. In Q4 of 2022, we're also seeing a strong growth of dealer inventories in low-horsepower tractors in North America, but those reduced significantly in the fourth quarter of 2023 as we underproduced retail by almost 40% in this product category during the second half of the year. For the full year, net sales were $22.1 billion, up 3% from 2022, mainly driven by price realization in the first half of setting the lower unit sales in the full year. Our profits increased year over year in every single quarter, despite the slowing sales. Adjusted income was $2.3 billion for the year, with an adjusted diluted EPS of $1.70, up 24 cents versus 2022. The negative impact from the Argentine Peso devaluation and the resulting loss in value from our cash holdings was about $0.04 on both the adjusted and the unadjusted EPS. Q4 industrial free cash flow was $1.6 billion. Full year free cash flow was $1.2 billion at the top of the most recent guidance range, but down versus the previous year due to a right to manage child and inventory. Industrial activities ended the year almost net debt free. In agriculture, the net sales decrease of 8% in the quarter was driven by lower industry demand, especially in South America for all product categories and for combines in North America and EMEA. Pullier net sales were up 1%, driven mainly by higher price utilization in North America, offset by the unfavorable volume and mix, mostly in South America. As we see cost reduction accelerating in our production system, we improve our gross margin in both the quarter and the full year, closing 2023 at 25.5%, up 170 basis points from 2022. Q4 EBIT, an EBIT margin also benefited from $14 million of lower SG&A expenses. The full year adjusted EBIT increase of 1.4 percentage points was driven by favorable price over cost and higher JV income, which you'll find in the FX and other category, more than offsetting the adverse volume and mix in the second half of the year. Turning to construction, net sales for Q4 were at 9% year over year, mostly due to price realization and higher volumes in North America, partially offset by lower volumes in EMEA and South America. Full-year sales were up 10% to $3.9 billion, driven by the strength of North American demand and positive price realization. Gross margins increased by 2.3 percentage points in 2023 to 15.6% from favorable price over cost. Q4 adjusted EBIT also benefited from lower SG&A expenses, resulting in a 5.8% EBIT margin. The full-year margin closed to an all-time high of 6.1%, up to 160 basis points, substantially driven by the price over product cost relationship. For financial services, net income in the fourth quarter was $130 million, a 50% increase compared to Q4 2022. The sharp improvement was mostly driven by higher receivables portfolio across regions, better margins, and lower risk costs, only partially offset by a higher effective tax rate for the segment. Retail originations in the quarter were $3.4 billion, up alpha billion compared to the same period of 2022, as we are capturing a higher percentage of our end customer equipment financing needs. The managed portfolio at the end was nearly $29 billion, up over $5 billion compared to the prior year. We have been able to raise capital efficiently and affordably throughout the year to fund our credit operations. Financial services profitability ratios have also improved year-over-year, and delinquencies remain at a very low level, even slightly higher than in 2022. This reflects the solid nature of agricultural equipment financing. Moving to our capital allocation priorities, at the 2022 Capital Market Day, we announced a $4.4 billion combined R&D and capital spending over 2022 to 2024. Almost doubly what we spent in ag and construction in the previous three years, as we were no longer required to fund the on-highway capital needs of the larger CNH industry. In the first two years of the plan, we spent $3 billion, reflecting increased activity levels and some inflation. We remain committed to invest in our business to fuel our profitable growth, and we spent around $1.4 to $1.5 billion in 2024 between R&D and CapEx. We're confident the products, technology, and services that we're bringing to the market by virtue of this spending will ensure a better financial performance for the company and, more importantly, higher productivity for our customers. Our solid cash generation and healthy balance sheet are helping us improve our investment-grade trading rating. And last November, S&P raised by one notch our rating to triple B-plus with stable outlook. In 2023, we returned about $1.2 billion to shareholders through dividends and share repurchases. As you know, in November, we launched a $1 billion share buyback program in conjunction with our move to a single listing in New York, with a target completion by March 1st. To date, we have purchased about $935 million worth of shares between Milan and New York, and so we will likely complete the current program by the end of this month. The board has authorized a new 500 million program share repurchase program that we will start at the end of this year. We also expect that the dividend distribution consistent with our dividend policies and reflective of the higher net income achieved in 2023 will be approved by our shareholder meeting. Finally, we will continue to seek opportunities to improve our product offerings and advance our tech stack through M&A, including through our CNH Ventures Army. Before turning back to Scott with a broader industry and company outlook, I would like to provide you with some details regarding our 2024 financial assumptions. Net price realization is expected to be between flat and 2%, depending on the product and on the region. On average, for all products and regions, pricing will be around 1%. Again, we expect to spend between $1.4 and $1.5 billion on combined R&D and capex in 2024, with R&D expenses about flat year-over-year at around $1 billion and capex between $400 and $500 million. Corporate expenses, or what we call unallocated and other industrial activities, are expected to be about flat year-over-year in absolute dollar terms. At the company level, the adjusted effective tax rate would be in the range of 25 to 27%, similar to 2023. The diluted share count is estimated about one and a quarter billion, factoring in the impact of our current buyback program. I will now turn it back to Scott.

Thank you, Adonay. As we mentioned last quarter, we expect agriculture retail demand to be lower in 2024. Soft commodity prices have declined, driving year-over-year U.S. net farm income down to or even possibly below the 20-year average. In aggregate, considering our key markets and product offerings, we expect industry retail demand to be down 10% to 15% in 2024. We forecast C&H's ag sales to be down between 8% and 12%. We do have pockets of elevated inventory in North America and Europe to address, which will impact first-half sales volumes and pricing. Because of our early actions to manage dealer inventory in South America in 2023, we have relatively less work to do there. We are targeting ag-ebit margins between 14% and 15% as our cost reduction programs help offset lower volume and more of our factory-fit precision products come in-house for our customers. It is important to recognize that we are building this margin resiliency while continuing to fully fund our tech journey. In construction, we expect high interest rates to soften both residential and commercial end markets in North America and Europe, partially offset by U.S. infrastructure spending. In South America, construction markets are projected to be flattish, following a market decline there in 2023. An aggregate for our markets and products We anticipate construction equipment industry retail demand to be down about 10% in 2024. CMH construction sales are therefore expected to be down in the range of 7% to 11% year-over-year. 2023 sales included dealers stocking of an atypically large number of new construction products, which will not repeat to the same level in 2024. Our EBIT margin target for construction is between 5% and 6%, again, supported by our cost savings initiatives. Blending ag and construction brings our forecast for industrial net sales down between 8% and 12% in 2024. We do not control industry demand, but we do control how we react to it. We are on a multi-year journey to improve through cycle margins, and in 2023, we proved we can expand margins with slightly lower industry demand. In 2024, we will demonstrate that we can sustain through cycle margin improvements even as the industry declines further. We introduced this model of improving profitability curves last quarter. As you can see, our aggressive cost actions push the 2024 curve above the 2023 profile. The shaded area indicates the relevant industry and margin ranges implied by the segment guidance. With these levels of sales and EBIT, we expect industrial free cash flow to be between $1.2 billion and $1.4 billion, and EPS to be between $1.50 and $1.60 in 2024. In addition to our cost actions, we are laser focused on commercial execution, working with our dealer partners to provide customers with innovative, reliable, and efficient solutions. Our order collection in North America extends into Q3, but we have less visibility in other markets, particularly South America. Rafael Miyoto, who leads that region for us, has an especially strong team and dealer network, and we are competent in our ability to outperform no matter how that market develops. We have talked extensively about the importance of advancement of our cost programs. Early on, we recognized the need for these measures and started working to implement them and improve our decremental margins. Our recent acquisitions have given us complete control of differentiating technological capabilities, which are already being integrated into our tech ecosystem. We are making progress building out our tech stack and are exploring options to accelerate this process and bring incremental benefits to our customers even faster. We look forward to highlighting more of our journey at our upcoming Investor Day to be held May 21st at the New York Stock Exchange. What you can expect there is a refresh of our financial targets and a progress update on our company strategy, not a new strategy. We are still executing the one we outlined in 2022, and our results demonstrate that it is working well for us. I will conclude by reiterating how much I appreciate the CNH team for finishing 2023 in strong fashion while positioning us to take this company to another level in 2024. That concludes our prepared remarks. Ben, will you open the line for questions, please?

Sure. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad now. And to redraw your question, please press star 2. The first question comes from the line of Mick Dobre calling from Bird. Please go ahead.

Yes. Good morning. Can you hear me okay? Good. Excellent. Congrats on a strong year, a strong finish here. I guess, Scott, my first question is related to your comments on dealer inventories. This is obviously one of the points of controversy, I guess, in this space. Can you give us a little more perspective in terms of maybe quantify the headwind that destocking would have for you in both segments and kind of how you're thinking about first half versus second half? Thank you.

Yeah, you know, we don't – I'll start with the easier one. You know, Stefano and his team on the construction side really don't have much – we were pleasantly surprised with the demand in the fourth quarter, which helped manage inventory in that segment a little bit better. You know, we probably got room in South America where we got really lean construction inventory. So, overall, I think construction is in reasonably good shape. And as I said in the prepared remarks – It's just pockets that we have in the ag side of things. You know, we're still working through low-worth power tractors. We're making progress. We have a little bit of work to do there. Europe, there's some, you know, that market slowed a little bit in some regions, and so we've got a little more work to do in large ag areas. there. But generally speaking, there's a, and again, a few pockets in North America where we'd like, I would say an aggregate, you know, it's, it's well, well below a billion dollars of work we have to do overall on, on dealer inventory. And we've got clear plans, both with retail execution and production management to make sure that we get that addressed in as quickly as we can. But it's relatively less work to do, especially in Brazil, where I said that the team did a really nice job of helping us react quickly. So as that market turns, you know, that'll be, and it's going to turn at some point, we'll be well positioned to restock there.

Understood. Then my follow-up is on how you were thinking about About the ag cycle here, you commented on the fact that farm income is down back to maybe below a 20-year average. How do you think about the magnitude and the duration of this down cycle? Is it different than what you've experienced in the past? And if so, why?

Well, I think the positives, and I repeated the press release that came out about North American farm income, but remember, farmer balance sheets are still in reasonably good shape. That's helpful. The age of equipment is quite high, which is helpful. And the advancement of technology, which just dramatically improves productivity and yield and therefore improves dramatically benefits the farmer. Those are all tailwinds offsetting it. So the other thing is you're not starting this with, you know, tremendous amount of used inventory, tremendous amount of overall, you know, so we're starting from a better place. You know, soft commodity prices are likely to be down for a couple of years, and I think we are just expecting the industry to be flattish from here for a little while. But I'm not expecting none of our projections internally suggest this is going to be another significant step down, you know, like we saw, you know, maybe 15 years ago. The setup's just very different from that.

Thanks for the call.

Thanks, Mike. The next question comes from the line of Nicole DeBlaise calling from Deutsche Bank. Please go ahead.

Yeah, thanks. Good morning, guys. Maybe just starting with the quarterly cadence, you kind of mentioned doing some more work on dealer inventories in the first half. It doesn't sound like there's a crazy amount of work to do there, but some. I mean, does that mean that if we kind of compare the way you see 2024 with a more normal seasonal build, one half could be a little bit lower than we typically see as contribution to the full year? If you could just kind of talk through that.

Yeah, we definitely expect a tougher Q1, definitely compared to last year. Q2, a lot will depend on how the demand will evolve and what level of dealer inventories we will have and what kind of demand will be there. And then definitely Q3 and Q4 should be an easy comparative with this year, with 2023. Okay, got it. Sorry, go ahead. Yeah, Q1 is typically low and probably will be lower, and then is the usual seasonality.

Okay, understood. That's helpful. Thank you. And then just going back on pricing, I know you guys gave the expectation for flat to up 2%. First, is that kind of similar in both ag and construction? And then second, what are you seeing with respect to, and what do you expect to do with respect to dealer incentives in 2024 as demand is a bit weaker than 23? Thanks.

Yeah, I would say it's similar for ag and construction. Of course, construction is a much more competitive market in terms of number of competitors and in terms of market dynamics. So we have less visibility there if you want. In terms of retail incentive, what we call retail incentive discretionary spending with the dealers for sure, support to financing will be relevant across the year. And we have, as we have announced it, we started being more generous, if you want, on dealer incentives in the Q4. and will likely continue to be at least in the first half of the year.

Thanks. I'll pass it on.

The next question comes from the line of Stephen Fisher calling from UBS. Please go ahead.

Thanks. Good morning. I know, Adonia, you just said that Q1 was likely to be tougher. I'm wondering if we could just maybe put a little more framework around that. I'm curious, you know, do you think, particularly in Latin America, I mean, this should be, you know, strong, double-digit, you know, down 20-plus percent year-over-year in the first quarter, and then just kind of gets better over the course of the year? And then I guess just more – Fundamentally, what happens, do you think, over the course of the year in Brazil? Is your forecasting assuming that farmer confidence improves such that the buying activity picks up, or is it just sort of more easier comparisons as the year goes along?

Starting from South America and from Brazil, I think we'd stop making – detailed forecast about what's happening there because we see a disconnect between the fundamentals and the behavior of the customer. And that's why we have adjusted our dealer inventories significantly in the second half of last year. We are in constant dialogue with our dealer network. We have very, very, I would say, mature conversation with them. And we are We are observing day by day what's happening on the market, but we don't have a large forecast, I mean, a large expectation for growth there. The, yeah, I mean, sale will likely be down double digit in the first quarter globally, and then we will see after that how... how the market develops.

Yeah, it's also important to note, Stephen, that our cost actions that we've been working on will gain momentum throughout the year. So we'll get benefit in Q1, but materially more benefit as we go throughout the year, just because we're getting more maturity and better execution as that comes through. So that also affects a little bit of the calendarization.

Okay, that's helpful. And then, Scott, maybe a bigger picture question for you. I mean, this year you shouldn't be wrestling with a pandemic, a supply chain crisis, a long UAW strike, a delisting. Much of your cost actions are formulated and a lot of it has been actions. I'm not trying to jinx you or anything, but it seems like this could be the first year where you can kind of choose what to focus on. And I was going to ask you what your focus is really going to be, but you did in your prepared remarks talk about your strategic priorities. So maybe the question is more around what's your confidence in execution this year and what kind of benchmarks should really we be using at this time next year to kind of gauge how that all went?

You know, I think what the last three years, and you kind of highlighted some of the crap we've dealt with, but what it's done is given me the ability to see how strong this team is and how well they execute. And, you know, as we put in, you know, some more of our lean work and CBS and, you know, the culture change, I mean, really, you know, part of the reason our decrementals are so much better is just the work that this team has done to get in better positions. I'm immensely more positive on what we can do regardless of what happens externally. You know, you are forgetting that there is a U.S. election that is going to be – you know what kind of who knows what that's going to be like but you know we put a plan together that we feel comfortable we can execute and I believe you'll just see the fundamentals of which really show up in margins, just getting better and better as we continue to work through this. So I'm immensely confident in how this team is prepared to get through, you know, a down year in, you know, top-line sales and just prove that, you know, this isn't an anomaly, but really what we're capable of, you know, throughout the cycle.

Terrific. Thank you.

Next question coming from David Russell calling from Evercore ISI. Please go ahead.

Thank you very much. I'm trying to get a sense of the cadence of the margins year over year. The full year is implied about 70 bps lower from a business segment level, including the corporate expense. So I'm just trying to understand with the first half commentary, especially the first quarter, on a year over year basis, can you give us some sense of do we take a lot more than a 70 BIP hit in the first half of the year, and then it balances out? Because I'm trying to get a bigger picture where the margins may be exiting 24. Elise, what's in your guide?

Yeah. Well, Dave, we don't have – I mean, we're not giving the detailed guidance by quarter, and quite frankly, we are reviewing our – we're doing our forecast, re-forecast of the year right now. So – I wouldn't even have it. But if you think of what it's playing into, right? We say that sales will be lower in the first quarter, and we say that we have cost programs that are incrementally getting in throughout the year, right? The impact of that is getting in throughout the year. So from that... Likely, we will have a progression throughout the year and we will have a tough Q1.

Okay.

So basically, other than that, we've got a combination of lower sales and the cost progress not getting in completely in Q1.

Okay. So the drag of 70 bps for the year, a little more than that in the first half and a little less than that in the second half is a fair generalization. And I apologize. Maybe I missed in the beginning of the call. The total savings for the year baked in from the two programs, right, the $550 million total COGS program and the 10% to 15% SG&A program, what's in for 24 in total? I heard the SG&A number. What do you have in for the COGS reduction number for the year? Around 300?

We have, yes, roughly, yes, a little bit more than that.

Okay, so basically we're saying... Of course, that will be compensated.

That will be offset by some labor cost inflation and other cost inflation, right? You won't see it in the bucket of product cost. You will see all of that. You will see the net impact.

Okay, so basically the total programs combine... about $460 million of savings. So it's sort of like a down 10 revenue, down 40% decrementals, but then we get the cost savings to get the decrementals back to about 18%, 19%. Okay, helpful. Oh, real quick, sorry. The share count to start the year, I'm having a hard time getting down to the 1-2-5-0 share count for the year.

Yeah, so as we say, I don't have the starting point in front of me, but what was... What we said is the $1,250,000 reflects the current share buyback program that we have, so basically the completion of the $1,000,000 that we announced back in November, which we plan to complete by basically the end of this month because as of Friday last week, we had about $935 million worth of shares on the existing share buyback program.

Okay. Thank you very much. I appreciate it. Thanks, David.

Next question coming from Angel Castillo, coming from Morgan Stanley. Please go ahead.

Hi, this is Grace on for Angel. Thank you for the question. I think in the last quarter you mentioned you have the order books open in the first half 2024. So could you give us some updates and more color on your order book trends and how these are filling up across the various ag and construction products?

Thank you. You know, we said on the prepared remarks that we've got, you know, orders through Q3 in North America, less so in other regions. But, you know, we're really less focused on order. I mean, we've got the demand for our cash crop products are extremely high, but we're less focused on how far out the order books. I mean, I looked at the chart yesterday. You know, it's filling up nicely. We're very comfortable with where it is. But even if an order is out there from a dealer, we're managing that dealer inventory level, ensuring that our shipments were, as you heard from our prepared remarks, most of our comments are related to retail execution. We're really striving to ensure that we support our dealers in driving retail to the end customers so they can get the benefits of these products, Much more so than we are about, you know, collecting a bunch of orders that we're not sure that they're going to need. So the demand is high. And, again, you know, I highlighted the CR-11 and what that product is going to be. And, you know, it's interesting. I literally think it will be years before we meet demand. for that product when it's launched. And we're seeing the same thing from our new Steiger four-wheel drive tractor. Just these things, these high-end, extremely productive products are just in high demand. But, you know, overall, I think our order book is in good shape. Demand for, you know, most of our core cash crop products are in good shape. And, you know, we're pleased with, you know, how that's setting up in an industry that's going to be down year over year.

Okay, thank you. I will pass it on.

The next question comes from the line of Seth Weather, calling from Wells Fargo. Please go ahead.

Thanks. Good morning. Scott, I wanted to just follow up on your comment about Europe, the European ag market, where it sounds like there's a little bit of extra inventory there. I was wondering if you could just give us a little bit more color there, whether it's by country or by product type that you'd specifically call out and whether that's, you know, crops versus dairy livestock, anything like that? Thank you.

I'd say it's overall sentiment is really driving it. And that, I mean, you look at the news and, you know, I think farmers are expressing their dissatisfaction with some of the government actions. And, you know, when they're driving and protesting, you know, they're not planting and harvesting. So, yeah. So it's just the overall sentiment is not great in Europe. And that's what we're seeing. Again, we're seeing improvements in our penetration. of our precision offerings, and I think the team's doing a really good job of executing that. You know, we're setting up new dealers in certain regions, and we're just proud of the way that they're handling, managing, you know, the brands there. But just the overall sentiment in Europe is down a little bit, and that's reflected in how we're looking at the region. And that's what's driving us to put a little more focus on dealer inventories there so we can get that to a more healthy level. You know, as we're in an environment, you know, interest rates are presumably coming down, but they're still a little bit high. So, you know, we feel like if we can help our dealers get that inventory down, so we're both in better shape. But that, no, Europe is not a crisis situation. It's just an overall sentiment is not ideal right now.

Yeah, that's helpful. Thank you. And then maybe just on the precision platform, I think you called out north of a billion dollars in revenue in 2023. Would you expect that to grow in 2024 in any sort of order of magnitude of growth that we're looking at this year?

Well, the magnitude is I'm not going to comment on because as our overall volume comes down, that's less precision offerings we're selling in those solutions. But, you know, we are, you know, switching from Trimble to in-house solutions, which is going to be a nice benefit both on the sales and margin side for the year. And, you know, overall, I think we'll be back over a billion dollars this year, just not sure how much.

Got it. Thank you, guys. Appreciate it.

The next question comes from Michael Feninger calling from Bank of America. Please go ahead.

Hey, guys, thanks for taking my questions. Scott, I wanted to ask, obviously, you guys talked about pricing this year, getting some of those inventories out, and you kind of talked about how there's likely not another big step down in this market, maybe flattish for a while. So just trying to get a sense, Scott, does that mean we could see a return to normal on the pricing front as we turn to page of 2025? And should we be thinking that price versus cost spread for you in 2025 really starts to widen as the price actions get your inventories more in line and some of the cost savings that you have with these two programs restart to build? So I'm just trying to get a sense of how we think about that as we get into 2025.

Yeah, no, that's – the way we're looking at it is, remember, and depending on the region, because, you know, obviously Brazil had, you know, much higher inflation, so they got hit with more price early. But overall, you know, the prices are up many, many – Many tens of percent, I mean, on overall. So prices have come up somewhat dramatically. But also our costs have gone up rather dramatically. So we're keeping that in line. What we started to see in the fourth quarter is us bend that cost curve down and the pricing, you know, maintains levels. We've said it's going to be moderate price next year, but we believe that we are back to a normal. You get that 2% to 3% price when products come out. It's going to be a little bit less this year just because we think managing through the dealer inventory, but we think that environment of us getting regular 2% to 3% price is really coming back, especially as we get through the back half of the year. That's what we'll just continue to see. But matched with that is just this benefit of getting aggressively after cost, which should keep that differential between price-cost in a very positive way for us for quite some time.

And that makes sense, Scott. And, you know, obviously the decrementals are more resilient than normal given these cost reduction efforts. I'm curious, Scott, maybe this will be touched on at the investor day. Like, when we finally get to the other side of this, does this mean we should be seeing better incrementals as volumes at some point do recover? Just curious how we should kind of think about that as we kind of go through this downturn in the cycle and come out the other end.

Well, that is 100% what we are striving to do. And a lot of this cost work, I mean, I'm really proud of the team and the work that they've done, but most of the benefit is years out, not here. And, you know, we get... You know, we spent a good bit of money on our tech investments, but, you know, the work that Mark Kermish and his team are doing to accelerate that penetration is just a gift that keeps giving in the future. You know, the strategic sourcing is beneficial this year, but incrementally, significantly more beneficial in the out years. So we certainly expect, and, you know, quite honestly, we need to, right? If you look at the industry leaders, our margins are notably lower, and we've got to close that gap.

Great. And Scott, just last one. Obviously, I think your industrial net debt was zero. You guys are guiding to free cash flow of 1.2 to 1.4. I'm just curious, you guys are trying to execute these two big cost reduction programs. How are you kind of thinking about the free cash flow, where your balance sheet is, and obviously where your stock's trading now? Or are you starting to lean a little bit more towards potentially some M&A as you guys are trying to accelerate some of those other initiatives on the growth side? Just curious if you could touch on that. Thanks, everyone.

I think Adonai clearly listed that out. If you go back and read the transcript about how we're prioritizing that, we're putting a lot of focus on cash flow and want to make sure that we continue to drive that as a higher percent of net income. But, you know, we are leaning in much more heavily than we have historically on the share of MIBACs. And, you know, I think that was necessary as we went through the transition last year. But, you know, really encouraged by, you know, the board's support, you know, to put out another half a billion dollars there. But it's really investing in the company to bring products and technologies to our customers that is our first priority. But when the stock's trading below intrinsic value, and we believe it is now, we're not going to hesitate to continue to buy shares. So I think seeing the support from the board for this capital allocation process, which I believe is beneficial to our customers and to our shareholders, is a positive.

We'll take the next question from Timothy Tain, calling from City. Please go ahead.

Great. Thank you. Maybe, Scott, the first one just on the outlook for high-horsepower tractor industry sales in North America down 10% to 15%. How are you – what do you have in terms of your production plans? I know – the output from Racine and Fargo had kind of been a little spotty there. So what were you thinking in terms of just, I guess, overall company dealer inventory and your production plans in that important product category?

Yeah, well, you know, we did, again, really proud of what the team in Racine did to get that production back up and, you know, getting the quality right as we came out of the strike. But, you know, really it's not overall one category of high-horsepower tractors. I think the Magnums coming out of Racine, we're probably where we want to be on dealer inventory now, so it's about driving retail demand, and I think that's where our focus will be. On the, you know, the Stigers coming out of Fargo, you know, that product, the technology, the unbelievable horsepower is really something that we'll be struggling, I think, for all of 24 and probably into 2025 to meet global demand for that product. So, you know, I think, you know, it's really... you know, innovation sells, technology sells, and, you know, that's where we're seeing it. But I think overall, North American high horsepower tractors are going to, you know, be down a little bit less than the industry, but certainly not robust.

Okay. All right. And this is a bit just kind of nitpicky, but on the grid... Don't ask. All right. I'll use a different term, a cross-bound question. The... For the ag bridge here in the fourth quarter, on call it, you know, eight-ish percent volume decline, you had the $255 million headwind. So, you know, upwards of 60%. Obviously, you know, mixed is a component in that. What do you think, and again, not, you know, to the nearest decimal place, but what's an appropriate range as we think about just kind of volume leverage through 24, presumably it's not 60%, but any help on that, just in terms of what that kind of, what we should think about if assuming mixed, or maybe mixes continue to be a headwind, and just any help on that.

Thanks. I will see much closer to the 30% than the 60% in terms of the volume impact on the volume and makes impact.

Yeah.

Understood.

All right. Thank you. The next question comes from the line of Daniel Acosta calling from Goldman Sachs. Please go ahead.

Good afternoon or good morning. Thanks for taking my question. Yes, I have two questions as well. One more sort of to understand a bit better, like your production setup at the moment in the U.S. You mentioned the election recently, and there's lots of question marks about what happened to potential tariffs and from any inputs coming from outside the U.S. How are you set up now? You're pretty much self-sufficient within the U.S., or do you import much inputs and just understanding what the implications baked in potentially for that in your margin? And then I'll ask the second one more on the bridge for 24. Yeah.

You know, as a very global company, we strive to keep production in region. We just don't do that everywhere. Some, you know, low horsepower tractors, for example, predominantly come from Asia. But we are We do, we ship, you know, some of our tractors come from Europe and some come from India. But generally speaking, most of our volume is in the region.

Okay, so no big impact from that.

My second question. And I know, don't read too much in what's said in the run-up to a U.S. election. There's a lot of stuff that is thrown out. that is not going to be followed through. And I think some of the tariff comments that have come out, you know, tariffs are ultimately a tax on U.S. consumers. So what sounds right politically in a campaign probably isn't something that they're going to do no matter what happens in the election cycle. So I just wouldn't put too much weight on that.

Okay, thank you. Just on the guidance on the margins, the 14 to 15 and the 5 to 6 in 2024, I guess given what you've said at the beginning regarding dealer inventories and that $1 billion that you still need to get through that you're probably going to underproduce this year. So is there an impact on the margin from underproduction and if sort of trying to get to what would have been the real margin if you weren't underproducing this year?

There's absolutely absorption issues when you produce less. Now, you know, again, none of this decline surprised us. We were early on identifying that we needed to take cost out, and that includes in our plants. So we adjusted production. We've gotten that down. And that's part of the reason our decrementals are as good as they are is because we've taken a lot of that cost out. So I don't know that it's – Fair to say that we would be, I mean, obviously we'd have better margins if volume was flat, but, you know, I think we did a lot of the work to offset that already.

Got it. Thank you very much.

The next question comes from the line of Kristen Owen calling from Oppenheimer. Please go ahead.

Hi. Good morning. Thank you so much for taking the question. My question is really a function of what Tim asked about your ability to continue to outperform the market. You mentioned, Scott, in your prepared remarks that that was something that happened in 2023. You talked a little bit about getting ahead on the production, just how you continue to view your outlook relative to industry in 2024. You've touched on that. I'll just ask you to expand. And while I'm here, I'll ask you my next question, which is about the streamlined senior leadership team announcement. Understand that that wasn't really so much of a cost effort, more of a focused one. So if you could expand on that decision as well. Thank you so much.

Well, you know, my core belief is this game is about product, brand, and distribution. And if you look at the portfolio and how Derek and Stefano are running their respective businesses, you know, we are seeing the benefits of improvements in each of those areas. I think, you know, we tend to focus mostly on products. We talked about the 73 new products introduced across the company last year. And with the significant increase in R&D investments, not only on the iron side, but also on tech. You know, the continued improvement and integration of advanced technologies in our products is ultimately benefits our customers, and I think that's real. But that's the product side. You know, on the brand side, remember, the Case IH and New Holland and Case Construction brands are just really, really strong, and we're trying to leverage those as best we can. I think the teams in the regions – do a really, really good job with that. And then distribution, we're trying to be good partners with managing dealer inventory, but we're also raising the expectations for dealer execution. We've got enhanced control rooms going in so they can better manage. We think overall that combination gives us the ability you know we demonstrated we can do it in 23 and we're just going to get better and better in those three categories over time which gives us the ability to continue to outperform and i get it's hard work it's a very competitive industry but i i like how we're positioned to compete now the follow-on to that is you know what we did with the organization you know we're going through a a difficult and fairly aggressive restructuring overall and as we did that we just thought it would be um important to align how we were structured at the senior team. And, you know, one of the moves that was the regions that were dual reporting to both Derek and I are now solely reporting into ag. And, you know, that's really just about execution, just allowing, you know, them to be narrowly very, very focused on driving execution in a difficult ag market. And I think we're seeing, you know, the benefits from that. So just a couple of, I would, I just believe, you know, being a smaller team, making faster, better decisions is going to be the benefit for us going forward.

I really appreciate the time. Thank you.

The next question comes from the line of Tammy Zacharia calling from J.P. Morgan. Please go ahead.

Hi. Good morning. Thank you so much for taking my question. I have one question but two parts. So the pricing outlook of 1%, I just wanted to clarify, is that net of dealer discounts or not including dealer discounts? So that's part one. And then part two, as you said... Okay. And so you said you expect 0% to 2% pricing depending on production and geography. So that means you don't expect any negative pricing in any of the regions. The reason I focus on that, we've heard some of the other OEMs talk about pricing turning negative mid to high single digit in the fourth quarter and may continue for another quarter or two in South America. So just wondering how you're thinking about your pricing expectation versus some of these comments from your competitors, especially for South America.

Yeah, Tammy, I don't want to tell you to go back and read the prepared remarks, but I will just remind you that Rafael Mioto and the team in South America very early on last year raised the warning signs for us about what was happening, and I still think it was was a poor decision by the farmers not to sell, you know, their harvest. But, you know, we got on top of dealer inventories faster, and therefore, we have less to deal with. Therefore, we have less pricing pressure. Now, as our competitors provide that, you know, we're really focused on managing share when our competitors have more inventory than we do. So, you know, we've got Again, South America is interesting for us. It's our highest net promoter scores with our customers, our highest dealer satisfaction scores, our best proliferation of technology. So we feel really good about the team we have there and the ability to offset some of the dynamics. But I think just the net-net is our dealer inventory is in a better position, and that's helping us have less impact on price.

Got it. So no negative pricing in South America is the bottom line.

I don't understand the term negative pricing.

Like pricing down?

I'm joking. No, we certainly, we're very, very focused on delivering value for our customers, and we expect to be maintaining price in that environment.

Got it. Thank you.

And the last question comes from Larry Demaria at William Blair. Please go ahead.

Hi. You get laughed, Larry. Thanks. I don't know. It seems to be a trend lately. So, Tammy asked the question and the answer, obviously, specifically to South America. And, you know, I guess when we think about, when we talk to clients, the biggest bear case is obviously somebody with a view on the cycle, which can differ. And then it's pricing going negative for the group after a number of years being very, very strong, right? But now we're going to a period where the market's softer. Pricing has been, you know, parabolically up. and used pricing is weakening, which affects the ability to trade down one, down two levels. So I think you answered it, but just, you know, in other words, I was going to ask for your commitment on, you know, no new taxes or, you know, no pricing cuts, but really your belief and ability for the market to handle that over the next year or two with used equipment pricings, you know, going negative. And I...

I was a bit joking with Tammy, but I mean, literally, the term negative pricing doesn't, we just don't talk about it. And I think the way to think about it is our cost, we're driving costs down. But inflation, lower inflation is still inflation. I mean, what drove our pricing so high was a dramatic increase in input cost. And those input costs have not gone negative and aren't giving us a bunch of room back that we can discount. If that does happen and we see massive disinflation, I will absolutely share that with our customers. But that is not what we're seeing. And, again, I don't think it's in – in anybody's interest to take that route, and we're certainly not.

Okay, fair enough. Thanks, and good luck this year.

All right. Thanks, Larry. This now concludes the call. Thank you for participating. You may now disconnect. Host, please stay connected on the line. Thank you.