Q3 2022 CNH Industrial NV Earnings Call
<unk> industrial is strictly prohibited.
Hosting today's call are <unk>, Industrial's, CEO , Scott wine and CFO , Donnie and she's a.
They will use the material available for download from the <unk> 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 20-F 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.
Thank you, Jason and thanks, everyone for joining the call. It's actually better now that I have my mic turned on.
Is not lost on me that we are hosting this call on election day in United States. Following similar activities and some appointments in other countries that impact our business.
This is relevant to the outstanding results, we will discuss this morning and that the C and H team is proving its capabilities to successfully navigate a myriad of complex challenges.
We are not immune from the external impact of geopolitical risks inflation supply chain chain constraints and economic downturns, but the strength of both the global AG markets and our team technology products and brands are nice assets to have right now.
We finished the quarter with record consolidated revenues for any third quarter in the history of our AG and construction business of $5 $9 billion up 29% at constant currency.
While we are finally seeing some modest improvement in our supply chain. It is our team's depth execution that enabled these results in the face of unrelenting inflation and volatile currencies.
We are confident in our ability to continue to minimize these disruptions maintain our momentum and deliver for customers.
Trends still indicate a strong AG cycle with sustained demand for most products, who are closely watching for any recession related shifts in purchasing behavior.
I will again stress that historically, our business performance is driven more by the AG cycle than by GDP growth or lack thereof.
In any case, we will be prepared to traverse whatever the macro environment throws at us.
Both agriculture, and construction generated positive volume and mix and pricing of 16% more than offset the steep increase in production cost.
Additionally, gross margins benefited from the operational improvements.
It was very encouraging to see our teams using cars and a streamlined sales and operations planning process and reduce expedited freight costs.
These drivers and other actions contribute to the AG segments record, 25% gross margin in the quarter.
We generated positive free cash flow, which is notable considering the seasonality has historically led to cash consumption in the third quarter.
We saw modest improvement in the supply chain compared to what we experienced in the first two quarters of the year. However, uncertainties about cost structure again forced us to restrict order windows, both to enhance our ability to deliver on time to our dealers and customers and to sustain a balanced price cost equation.
We introduced the new Trident spreader enabled with Raven autonomy in August , which I'll provide more color on in a minute with the addition of Raven to our tech stack, we're making tremendous progress marrying our great iron with great technology.
Thanks to the strength of our year to date performance and what we see for the remainder of the fourth quarter, we are improving our guidance for the full year in renewing our commitment to maintaining expenses at industry, leading levels, while investing heavily in our future.
Derek Nielsen as agriculture team delivered another impressive quarter with net sales up 32% year over year at constant currency and year over year, EBIT margins, increasing 320 basis points.
This was mainly driven by improving volume and strong price realization, which more than offset raw material and production cost headwinds.
Overall AG demand remains robust, especially in Latin America, and North America regions order books for tractors and combines are down versus last year, but that is primarily due to continued allocation of dealer orders and limited order windows.
Our strategic focus on technology leadership and customer inspired innovation was showcased in several of our third quarter agricultural product launches.
Demonstrating our integration with Raven at farm progress, we launched the case age trading $55 50, applicator with Raven autonomy the industry's first driverless spreader.
This best in class combination applicator it makes level for supervised autonomy more accessible.
Bridging the gap between traditional iron and multipurpose driver was power platforms.
<unk> Garg is doing an excellent job of ensuring that C and H and Raven teams are fully linked and development of cutting edge solutions to farmer problems.
This synergy and abled enabled raven to take the technology and experience from their omni power dry rose platform and apply it to our traditional equipment lineup.
With all elements of our tech stack working in concert, it's fundamentally simpler for our team to develop and support autonomous solutions.
New Holland redesigned its lineup of Guardian front boom sprayers to feature new technology technological and precision capabilities.
These sprayers integrate Ravens advanced precision technologies like guidance, and staring nozzle control and complete operational connectivity with new haulage trademark high horsepower and large tanks.
Our suite of technology accumulate the data and process. It through Ravens connected workflow system to increase efficiency through better equipment utilization and more acres spread per day.
On the specialty product side case, IH launched the all stock series 9000 line of sugarcane harvesters with new automated hydraulics connectivity high performance and best in class efficiency.
Having recently been down to visit with farmers and our team in Brazil.
I can say firsthand that our harvesting portfolio is second to none.
What you see here is the acceleration of our best in class precision agriculture capabilities. Both in terms of developing a new era of products and improving our ability to expand margins and capture market share.
Stefano Pallone and our construction team continued to perform at elevated level.
With sharp focus on customer inspired innovation operational excellence and dealer engagement. The team is effectively building a platform for profitable growth.
In the quarter net sales increased 20% on a constant currency basis over 2021 with pricing offsetting higher production costs.
Adjusted EBIT in the quarter was $24 million with a two 7% EBIT margin benefiting from strong sales in North America and considerable contributions contributions from San Piranha acquisition, which still constrained by but it's still constrained by supply chain disruptions.
Construction order books are open through the second quarter of 2023, and most markets with robust order coverage, especially in north and South America.
In the third quarter, we started selling <unk> mini excavators in Europe under the case and new Holland brands, and we opened a new assembly line to increase capacity for those products with this greater throughput, we will began exporting those products to other regions next year.
During last quarter's call I teased launch of the case, Minotaur compact dose or loader and that revolutionary new product has been enthusiasm, Louisiana stickley received by our dealers.
I'll now turn the call over to <unk> to take us through some of the financial results.
Thank you Scott and good morning, and good afternoon to everyone and Nicole.
Third quarter net sales of industrial activities of $5 4 billion were up more than $1 billion or 24% year over year, despite foreign currency headwinds four of around 5%.
Thank you price realization was the main driver for our top line growth, but volume and mix also accounted for around 13% increase.
For our industrial segments gross profit was $1 2 billion with a margin of 23% is 356 million year over year increase was a 260 basis points improvement.
We achieved favorable pricing, which offset a continued escalation in production cost.
Adjusted EBIT came in at $670 million at $250 million from the third quarter of 2021 with a corresponding EBIT margin of 12, 4% up 270 basis points versus third quarter of last year.
Free cash flow from industrial activities was $202 million and industrial activities net debt ended at $1 3 billion, an increase of $146 million compared to December 31, 2021.
And this is this increase in net backed over the nine months was largely related to seasonal working capital payment of dividends and share share repurchases, partially offset by segment profits.
Adjusted net income for the quarter was 557 million with adjusted diluted earnings per share of 41.
Up 7% year over year on the back of better operating performance.
Available liquidity as of September 32022 was $8 6 billion.
On slide eight we have the industrial activities adjusted EBIT progression from Q3 2021 to Q3 2022.
In both agriculture, and construction strong price realization continue to shield us from the steep increase in production cost, while our manufacturing and sales teams.
Managed to improve volumes at the same time.
SG&A and R&D expenses were higher tier to precision AG portfolio investments and cost connected to newly acquired businesses.
SG&A as a percentage of sales came in below our seven 5% target as we continue to manage costs wisely in front of increased activity levels.
Agriculture, adjusted EBIT was $666 million with a margin of 14, 8%.
Is $251 million increase a 60% improvement year over year was driven by both favorable pricing and higher volumes, partially offset by higher production costs and SG&A and of course R&D expenses.
Gross profit was up $340 million from the same quarter last year, reaching $1 1 billion for the three months to September adjusted gross margin of 25% was a quarterly record for agriculture.
Construction equipment.
<unk> EBIT was up 3 million to $24 million with a margin of two 7% consistent with last year.
<unk> agriculture, resulting construction equipment were driven by favorable volume and positive price realization, but were offset by the higher production costs and constrained unit production at some plants in North America and South America.
For our financial services business net income was $86 million down $10 million compared to the third quarter last year, mainly because of lower margins in North America increased overheads and normalized risk costs.
These headwinds were partially offset by robust volumes across our regions as well as higher recoveries on used equipment sales.
Retained originations were $2 5 billion in the quarter and $7 1 billion year to date and the managed portfolio, including the JV at the end of the period was $21 2 billion up $2 4 billion compared to September 32021 on a constant currency basis.
Delinquencies were down roughly 60 basis points year over year to one 3% of the portfolio and remain at historically low level.
Free cash flow from industrial activities was $202 million on the back of strong strong EBIT performance.
Finished good inventories buildup is typical in the third quarter that was partially offset by an initial reduction of manufacturing mentoring from the heightened levels at the end of the previous quarter.
We still have a substantial amount of semi finished products I mean, the supply chain constraints and again manufacturing inventory is down on a sequential quarter basis.
Yeah.
Total gross debt was $20 9 billion at September 30, and invest activities net debt position was $1 3 billion.
And welcome to my remarks, I will review, our capital allocation priorities, where we continue to invest in our business and our capex and R&D expenditures keep increasing year over year as forecast.
The largest increase in R&D is on digital technologies and we expect this to continue.
As part of the board approved a $300 million share repurchase program. The company bought back shares for 76 million in the third quarter and continue doing so in the month of October .
Now I will turn it back to Scott.
Thank you Donna.
The demand environment remains healthy and we are working diligently to fulfill customer commitments, while soft commodity prices declined in the third quarter. They remain above pre pandemic and year end 2021 levels.
As commodity prices drop in input costs increased farm productivity and yield become ever more important creating a compelling case for our array of precision technology that improves farmer efficiency and profitability.
In North America, we sustained demand for high horsepower tractors, while industry wide OEM supply in dealer inventories remain low and we expect that to continue.
In construction demand trends were mixed as we expect the residential and commercial market to decline, while the housing market adjust to rising interest rates. However, public construction should fill in many of those gaps is spending from the U S infrastructure Bill ramps up.
For our full year guidance, we're raising our industrial net sales range as demand remains strong and price realizations favorable despite lower U S dollar conversion of international sales.
We are improving our SG&A guidance to under seven 5% of sales and are confirming our combined R&D and capex guidance for the year.
Our free cash flow guidance is unchanged as we are confident in our ability to improve deliveries to customers and reduce inventories that have escalated due to supply chain constraints.
We are absolutely not reinstating long term EPS guidance, but with only two months left we can now say that we expect full year adjusted EPS for 2022 to be between $1 43, and $1 45.
Despite pessimistic economic outlooks in many of the countries and regions, where we do business with.
<unk> solid demand next year inflation.
We will continue to be a factor in 2023, but we should benefit from high soft grain prices and the outlook for farmer and dealer profitability remains healthy.
We expect to again contend with supply chain disruptions, but see them progressively improving and we think channel inventories will stay tight for most of the year.
As mentioned, we have recently opened our order books into Q3 of 2023 in several regions. So are gaining visibility into next year's strong demand.
We will continue to invest in our future both by expanding and augmenting our precision AG portfolio and boldly, creating the next generation of agriculture and construction products.
We will maintain a watchful eye for signs of recession, and we'll be prepared to adjust our operations as needed.
We recently held our first supplier conventions to externally launch our strategic sourcing program.
We met with nearly 800 existing and potential suppliers from 37 countries outlining our new approach to build a stronger and more resilient supply chain that will help us and our suppliers deliver the best total value for the world's farmers and builders.
As most everyone is aware in may the United Auto workers Union initiated a strike at our Racine and Burlington facilities.
Our goal has always been to get our employees back to work with a contract that is fair and sustainable and we have been working diligently, but so far unsuccessfully to make that happen.
We continue to seek resolution, while executing our contingency plans to remain operational and work toward meeting customer commitments.
All costs associated with strike in future wage hikes are factored into our guidance.
We announced today that we are voluntary transitioning to U S periodic reporting disclosures, which means that we will start filing 10-K's 10-Q's with the Securities and Exchange Commission.
After completing the spinoff.
Of the on highway business into the <unk> group earlier this year. The company has refocused as in agriculture, and construction equipment leader with a highly significant U S presence.
Reporting according to the standards for U S. Public companies is more consistent with the company's profile and Investor base.
This change is another step on the journey to be a more straightforward corporate structure and enhanced shareholder value.
On December 7th we will be hosting a tech day in Arizona to showcase our impressive array of technology offerings.
We have made great strides since our capital markets day in February and look forward to demonstrating our progress.
We will take our first question from Steven Fisher.
Just talk about kind of what part of the cost scenario remains the most unclear is.
Is it is it labor.
I would think your material costs, there may be somewhat more estimable at this point or is it freight and to what extent do you think this pause in order and backlog is just temporary.
Stephen There was actually two parts.
I mean, not not I'm going to answer your question, but I wanted just to clarify what I, what I tried to communicate that.
As we do see quite frequently energy prices in Europe are a big issue for us that we've got to understand not just how it affects us because we can certainly manage it but really its how it impacts our suppliers.
Currency risk.
<unk>, the math correctly, it looks like going into the fourth quarter and maybe year.
AG margins might be implied to be down a few hundred basis points do I have that correct and can you just give us some of the puts and takes that bridges from your strong quarter in margins this quarter to what's implied in the fourth quarter.
Steve We don't expect to have AG margins down compared to last year for sure in the fourth quarter.
And can we just talk a little bit more about Europe , obviously, a lot of concern about potential for demand deterioration in the region could you talk a little bit more Scott about what you guys saw in the quarter, both within AG and construction and any signs of slowdown whatsoever.
Yes, we have we said it last quarter I'll say, it again, where we see weakness is in the lower horsepower tractors. That's been a segment that was <unk>.
The latter parts of the pandemic and we kind of expected that trailer, that's where we're seeing the most weakness I just got a note. This morning about from one of my team and I was in.
San Francisco on the weekend speaking to the dealers in South America and there. This is.
Space and we are managing that very closely but the overall on an aggregate basis.
Demand remains quite strong.
We will take our next question from Martino de <unk> from <unk>. Your line is open. Please go ahead.
Thank you.
Good evening everybody.
Plus 17% and not good in Q3, if not the historical because we are very close to.
So just to understand that you have visibility up to second quarter, you had already collecting orders.
So I suppose but if.
And Bronco.
The price will be able to offset.
Roadmap inflation cost and so on.
At least for another couple of quarters, if not three in a row.
First question the second.
You did not provide any guidance for next year.
Based on the your comments.
I feel like you are confident to maintain if not improve.
Sure Manav just your operating margins.
I know there are too many moving parts, but.
Am I right in assuming such a message or.
As too bullish.
It is definitely bullish.
Again, we have built in pricing and we have had price increases.
So we expect to be able to maintain pricing levels into next year.
And then we will see how the market evolves I minutes, that's where we.
Again, we are committed and improving our gross margin and improving our margins overall.
We'll have also we're working on getting better in our production systems.
Scott mentioned in prepared remarks, our business systems, our kaizen seller willingness to get leaner and production and get past most of the issues that we've had in our production facilities due to the supply chain disruptions and that's another source of improvement for next year.
Generation in the last quarter of the year or so because it's in excess of $1 billion, but I don't know if you are willing to narrow the range or what else.
Yes.
Still a struggling.
For the low horsepower tractors. So obviously, we're not limiting orders there because that's.
The dealers are improving their dealer inventory so they don't need even if we opened up the order books, there wouldn't be a lot of massive orders when there's a slowdown in demand, but in high horsepower tractors I cannot speculate what they would be all I can give you is the sentiment that I get when I talk to our dealers and actually often to our own <unk>.
<unk> about the desire to increase output.
Certainly as I mentioned in the prepared remarks and in both the Americas North America Latin America demand for high horsepower tractors is incredibly strong and inventories are tight.
And we think that situation is going to persist through most of 2023.
And that's that.
Very helpful. Scott and then if I can ask another quick one.
Seems like price cost was positive for the AG segment in the third quarter by.
Construction seem that probably wasn't positive.
Positive yet so any any visibility into when do you think that segment will become price cost level.
Construction was was price cost positive in the quarter.
<unk> are experiencing more of an impact with only four plants operating they are having a bit more of an impact of some of the labor issues that we've experienced in that that caused them and some pressure in the quarter.
Got it okay perfect. Thank you so much and congrats on an excellent quarter.
Thank you.
We will take our next question from Kristen Owen from Oppenheimer. Your line is open. Please go ahead.
Hi, Good morning, Thank you for taking the question.
Wanted to come back to some of your comments around the new Raven introduction.
Not to get too far ahead of the Tech day, but can you elaborate on what kind of those new offerings, where and then to the extent that you're willing to comment.
The international expansion of that business is tracking.
We talked about the spread or that we introduced that.
At our at farm progress, but really I mean don't forget obviously, we're incredibly pleased to have Raven as part of the family, but we've been working with them a long time, so they have been enhancing our ability.
To make our sprayer technologies and capabilities significantly better for some time, but now that they are an integrated part of it we're just able to take that.
Extensive product technology reach that they have and spread it across the platform one of the things we talked about autonomy and where they are.
Overtime the X.
The expansion into Europe is going reasonably well, but we are.
I would say the supply chain challenges are probably impacting rave and a little bit more than the rest of our business.
We're helping them, but certainly they would have greater sales in Europe , if we werent supply chain constrained given the access they have they now have to our distribution.
That's really helpful.
And then.
Yes, some of the moderated outlook for industry volume for the full year, particularly in North in North America, and Europe tractor.
Liked a lot about some of the order book trends, but I am wondering how much you're seeing that moderation pushed volume into 2023 versus.
Versus how much of that is really just a function of that truncated R&R Buck.
While we are showing now we're talking about industry volume. So that's an overall industry issue I think Scott talked extensively about the lower smaller tractors in North America.
But largest powered factor you expect we still have very strong demand with respect to lifestyle demand.
Europe .
<unk> is a.
Continental Europe is affected by some reduction in demand in Ukraine as you can imagine.
But combined demand remains remains very strong for the year.
So I would say was with the exception of the lowest powered tractor in North America, we still see strong demand overall.
In the most important markets for us.
Great. Thank you.
We will take our next question from Michael Feniger from Bank of America. Your line is open. Please go ahead.
Yes. Thank you guys for taking my question.
In the slide deck, you list priorities, including the transition of our filing of Form 10-K and 10-Q.
It wasn't in the.
The slide deck in Q2, just curious how we should thinking about that as you guys are evolving and just.
What should we think about with the pros and cons around the dual listing with with Milan, Youre clearly operating well Youre lagging your peers are trading at a big discount I'm, just curious how management's kind of viewing that dual listing and if theres a board meeting a review that needs to.
Occur just curious you kind of flesh out.
That dynamic.
Well, let me take the reporting question first so we are starting this quarter in reporting on the Das Forbes.
I think there is a request we got from from from many investors and analysts to be more comparable with some of our north American peers at clearly after the spinoff of the vehicle.
We are and we need to be more comparable and compared with empathy.
In particular, the <unk>, but also the construction appears to at least in automated so that's.
Therefore to get into into that direction of getting.
The format, the timing and even the disclosures that are that our peers.
Hi.
Yes.
Ben I don't know if fairly vocal the last several quarters that the dual listing is something that we've been evaluating and discussing with the board. We had a board meeting last week, we had a good review of the topic and I would just as I said in their prepared remarks I think this tran.
Transition.
Two SEC filing as part of that a step in the right direction and we're just we're evaluating if it's the right way to do it and what's the most efficient way for us to do it and those are the two topics that we're evaluating.
I think that as we learn more and we make.
A decision on the matter will certainly be forthcoming with it.
I appreciate that Scott and you guys are going to generate 1 billion of free cash flow UV close to net debt free in 12 months or so.
How do you balance with where the stock trades relative to your to your peers right now that discount with your other capital allocation priorities, how should we kind of think of how you view that relative to the other priorities that youre looking at with with with your cash flow. Thank you.
Tony walk through capital allocation priorities and I think we've been pretty consistent you know the first dollar we're going to spend is to drive future profitable growth for the company. We are investing a lot in capex and R&D will continue to do that and ultimately.
Driving margin expansion and end market share through those investments is really the top priority.
As it relates to that.
As I've said, we're not going to go on a big acquisition for three but you know.
And we've said and we've demonstrated when you know when we're trading below.
Our intrinsic value, we think buying our own stock is a good investment where we've leaned into that.
We like to be a good dividend player and we like to maintain our debt ratings. So we try to balance all of those and I think you know you can you can you can bet that we will continue to be diligent in how we do that but the most important thing you said it in your remarks, we do generate our business model allows us to generate.
A lot of cash flow and gives us a choice on how we allocate it.
Thank you.
We will take our next question from David Raso from Evercore ISI. Your line is open. Please go ahead.
Hi, Thank you for the time can you just clarify I think you said EPS for the year of $1 44 midpoint for.
For the year to date are you doing the all in number I mean, the $1 six year to date of $1 12, because the implication on the fourth quarter.
It's either 32 or 38 cents and either one the margin seemed down a lot sequentially, but especially if it's 32. So can you just clarify that dollars 44, what are you using for year to date EPS is a one O six.
The adjusted EPS, Dave So as the 111 I believe yes.
I don't want to relevant.
So 32 cents in the fourth quarter with revenue up.
I'm just trying to send me do you have like revenues up.
$243 million and it looks like you're trying to imply.
The margins for the fourth quarter, it's something like eight 5%.
Or said another way revenues up 250 ish sequentially, but earnings down EBIT almost 200.
And just trying to think through price costs from here.
Accurate.
No.
<unk> is.
Is done is done is there something about the <unk>.
Margins in the fourth quarter.
<unk> reasonably higher than the margins, we had last year in the fourth quarter.
So there is something in the math.
Probably as important but there is so we're talking about adjusted EPS.
Of course, there is there is there is also you've seen the tax rate higher this quarter.
So the tax rate to effect next quarter as well.
Okay.
We can help you through the details with you offline.
The reason I'm asking is the price cost I assume from here and correct me if I'm wrong.
The pricing I mean AG was up over 17% that may be pricing on a year over year basis is starting to peak, but trying to think through the cost do you see is as we think about going into the quarters for 2003.
Is there a quarter, where you see your costs year over year, starting up to be let's.
Let's say less than they were the year ago quarter I'm, just trying to get a sense of this price cost was pretty constructive right. It was about a 420 bps for the whole company on our margin improvement year over year do you see that price cost spread getting stronger in the next couple of quarters, regardless of pricing gains slow a little bit versus the third quarter I'm just trying to get that.
Price cost assumption as we roll.
Ivo local so are the cost itself alone we have incredible increasing cost us in cost over the last few quarters right coming from raw material coming from.
Transportation coming from production and we are still fighting with all of these problems.
We try and we fold and we manage to get pricing and to get sales at this pricing as well.
If we look only at the fourth quarter, we still expect credit costs to be higher than what it was last year.
And we still expect.
Price to price to continue pricing, we have embedded pricing in there, but it is not a walk in the park.
But we do expect you know obviously inflation.
Inflation despite.
Any of the central banks around the world trying to bring it under control it's not yet.
Under control, so, but we do see logistics cost, perhaps coming down a little bit, but I do want to give a shout out to Derek Nielsen and what his team is doing is really looking at.
Our cost structure compared to pre pandemic levels and what it's going to take you know as we've added a lot of cost to be able to manage through the pandemic. How do we get those costs out and it's a really good thought process to go almost re baseline and the work that they're doing driving lean driving aggressive.
Oversight to make sure that we're ripping cost out of our own owned factories and owned supply chains, not just waiting on supply chain cost to come down.
No I appreciate I'm, just trying to get a sense of that relationship useful you're implying about the fourth quarter or at least sort of raises an eyebrow about do we just get the biggest price cost benefit already I'm, just trying to make sure we understand that.
And then real quick the order books for AG large AG when do you expect to expand the order book window.
That's it for me.
Next year.
Okay.
Once again, ladies and gentlemen, please press star one to ask a question.
We will take our next question from Nicholas Green from Bernstein. Your line is open. Please go ahead.
Hi, Good morning, Thanks, Hey, Nick Green from Bernstein. Thanks for taking my question can I returned to the net working capital inflow in Q4. Please.
You mentioned the DNA that you think is quite likely its not.
Something you're expecting is effectively part of the guidance can you talk us through risk factors.
To you being able to collect that amount of working capital I'm trying to understand how much of that is within your control.
Would you perhaps like to identify any items that may prevent your ability to monetize this inventory in Q4.
First of all thank you.
I'd say the main risk factor is not being able to complete.
Some of the Red flags and agreement on what we call fleet that is still in our plans and depends on avail.
Availability of parts availability of semiconductor and in some cases availability of labor as well.
But I don't mean generic I mean, specifically.
Sounds like you're comfortable with all of those items.
Because you're comfortable giving the guidance so.
Are you are you.
<unk> I guess because of your existing order book, maybe you can see the visibility of what youre going to be delivering.
Are you fairly comfortable that you will be able to monetize that amount of working capital.
It really has nothing at all to do with order books that has everything with her to do with our plants being able to get the parts from suppliers complete the units and get them shipped.
Within the quarter and that the.
Got it literally if you could see the spreadsheet that we have to manage this process. It would blow your mind, but its very well because we put it in our guidance we have that much confidence in our team to be able to execute it but it's work to do.
Yeah.
Okay.
I'm still not clear how much if it comes through when you give us full year results.
If you Havent does not made up.
Amount.
<unk> incoming it'll.
It'll be blamed on certain factors that we could have talked about today, so, but it sounds like youre considering them.
Let me be clear what we're talking about is fleet inventory when we talk about fleet inventory. These are combines tractors.
Wheel loaders everything in our portfolio that we run our factories to continue to meet customer demand, but we can't complete the unit because theres missing component those missing components. We've got a line of sight. When we expect those suppliers to come in and therefore, when we complete those and ship those that's what's embedded in our guidance.
Okay, that's very clear thank you.
Then second question on the construction margin. So in the past. This division did suffer operating deleverage each time volumes went down it has had a number of occasions of negative margin in the past as you mentioned just suffering some of the consequences of the strike at the moment, but.
But looking forward, we would expect probably activity levels to drop as well.
Given construction activity. So can you talk us through.
What steps Youre, taking to ensure the cost base of the construction division is correctly sized from slow down so that we can hopefully avoid operating deleverage this time around.
Yes.
Got it I said, it and I will repeat it the work that Stefano Pamplona and his team are doing to set a platform for future profitable growth in this business is impressive.
The growth.
The growth that they're seeing in the North American market and especially in South America right now is impressive and they recognize we do the modeling and it's nice to see Theyre looking at what happens when this really strong growth model slows down and they are trying to build the system. So that we stay positive.
Even in those down markets now Fortunately.
We've got a little bit of time, but theyre investing in the portfolio. The product lineup is improving the technology insertion into those is improving and we're running our plants more more efficiently. They are allocating shifting production, where it makes sense.
You've done a lot of cleaning up over the last few years and I think we'll benefit from that going forward.
So does that suggest for the lower margin this quarter.
Well due to a large extent to.
To the end.
Industrial action being taken.
You're able to give us into the margin.
Sorry, I haven't been there.
Yeah well.
Part of what we're doing is looking where it makes sense. So we did make the decision in the quarter to transition some products to other plants and that impacted our ability to deliver.
So obviously it was a was down a bit.
Because of our decision to transition production during the quarter, but no no no. We don't obviously, we're not satisfied.
With the current margins, but we see a very clear path to improvement over the next several quarters.
Okay. Thank you I'll turn it over.
Yeah.
There are no further question on the line.
Thank you everyone for joining today's call you may now disconnect.
Okay.
[music].