Q4 2022 Deere & Co Earnings Call
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<unk> and events I will now turn the call over to Rachel Bock.
Good morning, John .
John Deere finished the year with strong fourth quarter, thanks to a 40% increase in net sales.
So.
For the quarter included an 18, 5% margin for the equipment operations across our businesses performance was driven by continued strong demand higher production rates and progress on reducing our inventory of partially completed machine.
Looking ahead AG fundamentals remain positive continuing to drive healthy demand as evidenced by our order books full into the third quarter of fiscal year 2023.
The construction and forestry markets also continued to benefit from solid demand.
Contributing to the division's notable performance in the quarter.
Similarly order books are extended into the second half of 'twenty, three providing visibility and confidence in the new fiscal year.
Slide three shows the results for fiscal year 2022.
Net sales and revenues were up 19% to <unk> $52 6 billion, while net sales for the equipment operations were up 21% to $47 9 billion.
Net income attributable to <unk> company was $7 1 billion or $23 28 per diluted share.
Next fourth quarter results are on slide four.
Net sales and revenues were up 37% to $15 5 billion, while net sales for the equipment operations were up 40% to $14 4 billion.
Net income attributable to Deere <unk> company was $2 2 billion or $7 44 per diluted share.
Let's take a closer look at fourth quarter results by segment, beginning with our production in precision AG business on slide five.
Net sales of 743, 4 billion or up markedly at 59% compared to the fourth quarter last year.
This was primarily due to higher production rates, both year over year and sequentially.
Additionally, we made progress on clearing partially completed machines from inventory.
Both contributed to higher shipment volumes for the quarter.
Price realization in the quarter was positive by about 19 points, whereas currency translation was negative by about three points.
Operating profit was $1 74 billion, resulting in a 23, 4% operating margin for the segment.
The year over year increase in operating profit.
It was primarily due to higher shipment volumes and price realization, partially offset by higher production costs and higher <unk> and R&D spend.
Operating profit for the quarter was negatively impacted by higher reserves on the remaining assets in Russia affecting the quarter's margin by about one point.
The production cost for mostly elevated material and freight.
Overhead spend was also higher for the period as factories continue to experience some production inefficiencies due to supply challenges and clearing our partially completed machine and inventory.
Despite these headwinds our factories were able to maintain higher rates of production and reduce the number of partially completed machines and inventory, allowing us to deliver more equipment to our dealers and customers.
Moving to smaller and turf on slide six.
Net sales were up 26%.
Totaling 354 4 billion in the fourth quarter due to higher shipment volumes and price realization, which more than offset negative currency translation.
Price realization in the quarter was positive by nearly 13 points, while currency translation was negative by over six points.
For the quarter operating profit was higher year over year at $506 million, resulting in a 14, 3% operating margin.
The increased profit was primarily due to price realization and improved shipment volumes and mix.
These were partially offset by higher production costs.
Higher R&D and <unk> expenses and unfavorable currency impacts.
Please turn to slide seven for the fiscal year, 2023 AG and turf industry outlook.
We expect large AG equipment industry sales in U S and Canada to be up 5% to 10%, reflecting resilient demand that continues to be higher than the industry's ability to supply bolstered by the need to replace aging fleets.
Our order books now extend into the third quarter and dealers remain on allocation for 'twenty three.
For small AG and turf industry demand is estimated to be flat to down 5%.
The dairy and livestock segment remained steady however.
However, demand for our products more correlated to the general economy, such as compact utility tractors and turf equipment is softening.
Shifting to Europe , the industry is forecast to be flat to up 5%.
Farm fundamentals in the region are generally stable since small green prices continued to outpace input inflation.
Meanwhile, supply constraints in 2022 are extending equipment replacement into 2023.
In South America, we expect industry sales of tractors and combines to be flat to up 5% moderated by supply chain constraints.
The region remains one of the stronger end markets, especially in Brazil, where they are forecasting record production and strong profitability for the year.
Industry sales in Asia are projected to be down moderately as India, the world's largest tractor market by unit stabilizes after record highs in 2021.
Turning now to our segment forecast on slide eight.
We anticipate production in precision AG net sales to be up between 15% and 20% in fiscal year 'twenty three.
The forecast assumes approximately 11 points of positive price realization and one point of negative currency translation.
The segment's operating margin, our full year forecast of between 22 and 23%.
Slide nine shows our forecast for the smaller inter segment.
We expect fiscal year 'twenty, three net sales to be flat to up 5%.
This guidance includes about seven points.
Positive price realization.
Partially offset by two points of unfavorable currency impact.
After accounting for the effects of price and FX. The guide implies a slight volume decrease due to softening in certain product segments.
The segment's operating margin is projected to be between 14, five and 15, 5%.
Turning to construction and forestry on slide 10.
Price realization.
And higher shipment volumes, both contributed to a 20% increase in net sales for the quarter to $3 $3 73 billion.
Price realization in the quarter was positive by nearly 13 points.
This was partially offset by almost five points of negative currency translation.
Operating profit increased to $414 million.
Resulting in a 12% operating margin.
Favorable price realization and higher shipment volumes more than offset higher production costs during the quarter.
Segment quarterly results were also negatively impacted by one five points of margin due to higher reserves on the remaining assets in Russia.
Now I will cover our 2023 construction and forestry industry outlook on slide 11.
Industry sales of both Earth, moving and compact construction equipment in North America are expected to be flat to up 5%.
And most markets overall are expected to remain steady as oil and gas U S infrastructure spend and capex programs from the independent rental companies offset moderation in the residential sector.
Global Forestry markets are expected to be flat a stronger European demand continues to be limited by the industry's ability to produce and demand in North America begins to subdue.
Global Road building markets are also expected to be flat.
Demand remains strongest in the Americas, while Europe is softening in Asia remains sluggish.
Our CNS segment outlook is on slide 12.
2023, net sales are forecasted to be up around 10%.
Our net sales guidance for the year includes about eight points of positive price realization and just over one point of negative currency translation.
The segment's operating margin is projected to be 15, five to 16, 5%.
Fiscal year 'twenty, two operating margin would have been 14, 5% excluding special items such as the one time gain from the Remeasurement of the deer Hitachi assets.
Let's transition to our financial services operations on slide 13.
Worldwide financial services net income attributable to Deere <unk> company was slightly higher in the fourth quarter year over year, mainly due to income earned on our higher average portfolio, partially offset by less favorable financing spreads.
The provision for credit loss increased reflecting economic uncertainty in Russia.
Financial risk services received an intercompany benefit from the equipment operations, which guarantees investments in certain international markets, including Russia.
For fiscal year 2023, the net income forecast is $900 million.
Results are expected to be slightly higher year over year, primarily due to income earned on higher average portfolio.
The portfolio has continued to grow in line with growth in the equipment operations.
Overall financial services is expected to continue to deliver steady results.
Credit loss provisions lease return rates and past dues all remain in good shape, reflecting sound balance sheets for our customers.
Slide 14 outlines our guidance for net income our effective tax rate and operating cash flow.
For fiscal year 'twenty three our full year net income forecast is a range of eight to eight 5 billion.
We expect favorable price realization and higher volumes to more than offset increased spend.
Next our guidance incorporates an effective tax rate between 23 and 25%.
And lastly, cash flow from equipment operations is projected to be between nine and $9 5 billion.
Before we transition to Q&A, John I'd like to thank you for joining US today do you have anything you'd like to add yes. Thanks, Rachel first I want to recognize all of our dedicated employees dealers and suppliers fiscal year 2022 was another unprecedented year in several ways we start.
The year on a work stoppage at some of our largest U S factories, but we resolved that with our groundbreaking industry, leading new contract then supply enlist logistics hurdles created disruption and constrained our production worldwide at times deliveries were delayed.
Good as demand simply outstripped, what the industry could supply.
Our operations folks worked tirelessly to get equipment shipped to our dealers and customers. The team overcame disruptions from parts shortages and delays to the clearing of partially completed machines to meet our customers' needs in the last half of the year.
And particularly here in the fourth quarter, we executed to our plans so a substantial lift in production and outpaced the industry production and retail sales. This resulted in our highest revenue and margin quarter for the year. It proves what we have.
Known all along that we've got the best factory teams in the industry and I'm extremely proud of their efforts and resilience as.
As I look ahead to fiscal year 2023 and beyond.
I truly believe our best years are still ahead of us.
In the near term order books across our businesses, our full into the third quarter and it's important to note that not only do the order books continue to fill when we open them, but the velocity of orders has remained strong we opened north American combine <unk>.
In August like our crop care ERP it was on an allocations, but it filled in two months.
That's noteworthy because we normally have the ERP open for five to six months.
And since our order books are still on allocation for retail.
<unk>, we have yet to begin replenishing dealer inventory.
And as we continue to make progress on our smart industrial strategy and leap ambitions I'm, even more confident in our ability to unlock immense value for our customers. When you integrate the industry's best equipment with cutting edge technology, and a world class dealer channel.
It's powerful.
And it's exciting we already have solutions in fields and on work sites and we are bringing more solutions to the market that will make our customers a lot more productive a lot more profitable and help them do the jobs. They do in a much more environmentally sustainable way.
Great. Thanks, John .
Now we know there are some likely some common topics of interest so let's dig into those before opening the line for Q&A.
First I'd like to take some time to look more closely at the macro environment and some of the fundamentals for each of our segments.
Let's start with production in precision AG.
We're forecasting the industry to be up 5% to 10%.
There's a lot going on there in terms of what is driving that growth can you unpack a little for us.
Sure. There's a few things going on I'd like to I'd like to point out Rachel stocks to use ratios for key grains still remain very very low while exports from the black Sea region are expected to be down about 40%. So it's going to take a couple of growing seasons to ease the tight supply and this should help support commodity prices in the interim.
And while crop prices may have come down a little bit since the summer they remain at levels, where our customers still have healthy profits. Despite some of the higher input costs. They are facing finally, the industry has not been able to meet demand due to supply chain constraints and demand continues to outpace supply and we see that and how quickly our order books.
Fill up and historically low dealer inventory of both new and used equipment. It was also evident in the fleet age, which is well above average alright, so fundamentals remained solid.
But weather geopolitical tensions and broader economic conditions may be weighing on our customers' minds.
Yes, that's absolutely true Rachel and we recognize that but our order books really serve as the best indicator, though not only are they extending into the third quarter of 2023, but the velocity in which they feel remains really encouraging for us you'll recall that our order books are still on an allocation basis. So when those.
Order ship, they generally retail right away and almost all of those machines have a customer's name on them when they go down the production line.
Remember that our dealer inventories still need to be replenished four wheel drive inventory to sales ratios are at 10%, while 220, plus horsepower tractors were up 12% and those numbers might even be a little bit overstated, because our dealers are working through all of those fourth quarter shipments right now and theres still delivering them to customers.
Also of note our guidance does assume that we build to retail demand. So any dealer inventory replenishment will likely be pushed to 2024. Additionally, I would like to point out that the 2023, North America large AG volumes will be 20% to 25% lower.
Then the five year average volume from the 2010 to 2014 replacement cycle. This is clear if you look at the AAM data our revenues are higher because we've increased our value per machine for our customers through precision AG solutions, but volumes are still rather modest when compared to the entire replacement period of five years.
Five years of 2010 to 2014.
Yes, Brian I have a few things to add here.
This last year I've been out meeting with dealers on a regular basis and I often hear them telling me that.
Theyre not able to quote every customer who wants to place an order because we're still constrained by the supply base and on and on an allocation basis. So clearly more demand there is more demand for our equipment and this replacement cycle will have an extended duration I am confident we will produce more.
More large AG equipment in 2023 than we did in 2022 and not just more equipment, but more value per machine. Our production system approach has us laser focused on the customer and unlocking more value for them. This will increase the value per machine.
Even more.
Alright, let's move on now to small AG <unk> turf.
This division has the most diverse end markets at any of our segments. Josh can you elaborate more on how we're viewing those different markets.
Sure, they're definitely different macro drivers when you breakdown the segment a bit further.
Begin with with small egg supply of meat and dairy products has remained tight which has helped prices remain elevated and as a result, livestock and dairy margins remain above historical averages. Additionally dealer inventory to sales ratios for mid sized tractors are below levels below normal levels. As demand has continued to outstrip supply. So this is part of S. E. T has remained stable.
<unk> resilient a good proof point here is that the order book for mid sized tractors built in Mannheim, Germany is about 70% for taking us well into the third quarter of fiscal 'twenty three.
On the other hand turf and utility equipment as well as compact utility tractors are more closely correlated to the general economy and somewhat specifically to housing. So we've seen some softening there channel inventory remains low.
Especially for turf buffering, our shipments to some extent, but we're monitoring inventory closely so that we can react if demand pulls back from work, we don't intend to let inventory climb to pre pandemic levels here.
Alright Thats helpful. Thanks, Josh let's.
Let's shift now to CNS. The last few years of demand were largely driven by housing. So how is that segment responding to higher interest rates and lower housing starts Brent can you talk to your that you bet. Rachel So on one hand, we have seen some softening in housing while non res building projects have continued to test continued to decline a little bit on the other.
Hand oil and gas Capex has been very steady with rig count is projected to be up next year and U S. Infrastructure is beginning to show some promise going into 2023, which is especially important for <unk>. In addition to that both dealer owned rental channel and the independent players have significant re fleeting programs going into <unk>.
2023, so all in all we're seeing a shift in the composition of demand drivers for that business less housing, but more than offset by rental infrastructure and oil and gas Brian .
Brian I would like to add that CNS dealer inventory as with other parts of our business is historically low and needs to be replenished, but we're currently focusing on retail demand and our order books are close to 70% full.
All good insight into the various industries and market dynamics and it's all factored into our net sales guidance for the full year.
To recap common themes across our businesses our order books are strong but still on allocation.
We're focused on meeting pent up retail demand and we still need to replenish channel inventory, possibly late 2023, but more likely into 2024.
Frank can you talk about what all this means for our 23 production schedule.
Sure. So this past year, we did not have our normal seasonality and we had to work we had to work stoppage at the beginning of the first quarter and we had experienced the worst supply chain issues as we tried to ramp up more during the second quarter. So we played catch up later in the year, resulting in a significantly more back half weighted 2022 in fact, we ended up.
Producing more in each successive quarter throughout the year with the fourth quarter being the high point, we achieved our highest highest daily production rates in the fourth quarter and we plan to keep those higher daily rates going into the first quarter of 2023, now well while line rates remain at those higher levels levels there will.
B some key differences in sequential revenue, though.
First there are about 15% less production days in the first quarter due to the holiday season, So expect revenue for small AG and turf in CNS to drop by about 15% sequentially in the first quarter of 2023, when compared to the fourth quarter of 2022.
Our PPA factories, we will have another 5% to 10% fewer production days due to some model year changeovers maintenance training and supplier recovery. So in total production of precision AG.
Production time will decrease by 20% to 25% in the first quarter compared to the fourth quarter of 2022 now also keep in mind that PPA benefited from clearing about $400 million of partially completed machines from inventory in the fourth quarter, so that benefit won't repeat in the first quarter.
We likely won't get back to a similar level of <unk> revenue.
Until the second quarter of 2023.
Yes. This is John Brian and I want to reiterate something you said.
While sequentially, the first quarter compared to the fourth quarter will be lower however year over year production will be higher in the first quarter, we aren't starting the euro behind so we will have more production in the first half of 2023 than we did in the first.
Half of 2022.
That's helpful.
Let's switch gears now to the supply chain, we've taken steps to try to mitigate risk, but the supply base remains fragile.
We do see pockets, improving but at a slow pace and certainly not to pre pandemic levels that we would consider to be a healthier supply chain.
So our guide does not assume significant improvement or deterioration in 2023.
Josh can you elaborate on our production costs included in the forecast.
As it relates to production cost in 'twenty three there are a few puts and takes certain raw materials like hot rolled coil steel are easing as you can see in some of the different indices.
So we expect the need for premium freight to subside next year on the.
The other hand labor and energy costs will increase that is not only impacting us directly but also our suppliers. So we continue to see increased costs for purchase components as well.
Additionally, as you mentioned, we're seeing pockets of improvement in supply chain, but it remains fragile. So we're not assuming that our operations return to normal levels of productivity and efficiency in our forecast with a different ups and downs. Our guide assumes a net increase in production cost in 2023, but we fully expect this to be offset by price realization and anticipate the full year.
<unk> been price production cost positive.
Thank you for that.
And before we open the line for other questions. Josh can you talk briefly about the use of cash priorities and capital allocation in 2023.
Simply put they remain unchanged, we're happy with our liquidity position to maintain our single a credit rating and fund our business. Our guide considers an increase in R&D and Capex as we continue to progress on strategic projects building upon the tech stack and unlock and unlocking more value for our customers next the dividend we increased it to 8%.
In fiscal year, 'twenty, two and it's worth noting that over the last two years, we've increased nearly 50%.
Finally share repurchase.
We purchased over $1 billion of shares in the fourth quarter for a total of $3 6 billion for fiscal year 'twenty, two and we have an opportunity to continue that trajectory heading into fiscal 'twenty three.
All in all we're in a great position to grow our business execute on our leap ambitions and continued to return cash to shareholders.
Thanks, Josh.
Let's see what other questions are investors have.
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Our first question comes from Tim Thein of Citigroup. Your line is open.
Great. Thank you Hey, good morning, maybe just circling back Josh on your comments there as to the full year the expectations for price to be in excess of production costs.
Obviously, a lot going on from a year over year standpoint.
Just given how are you.
The comps.
Will all play out.
There arent any more.
Help that you can give in terms of.
Does that would you expect that spread to to grow as we as we move through the year and us.
The margin benefit is more back half weighted.
Or or maybe not.
Costs are.
I'm trying to get maybe just any any more kind of more on a quarterly basis any more help you can give on that thank you.
Hey, Tim. This is this is Brent thanks for the question.
As we look out to next year, we probably see a little bit of a different quarterly cadence than what you experienced in 2022.
If I do a look back on this last year, we saw our most challenging price cost quarters in the first half of the year in fact that compare got better as we got through each of the quarters with the fourth quarter.
Being the most positive from a price.
Relative to production cost perspective, as we look out to 2023, I think youll see a very different cadence there we intend to be price cost positive on a much more even basis throughout all of the quarters Youll, probably see the strongest price performance for us really earlier in the year just as the compares are most favorable.
And then in the back half of the year some of those those.
Those price compares get a little harder to production cost compares to maybe get a little bit easier in the back half of the year. So I would expect for next year, just more even cadence throughout the course of the year as we compare price to overall production cost.
Tim one other thing I mentioned this earlier in the prepared comments, but we have not forecast a return to normal productivity and efficiency in our factories. So as it relates to the overhead inefficiencies. We saw in 'twenty two to extent, we see more stability in supply chain and the ability to operate.
More and more in line with our plans through the year there could be some benefit there but at this point, we haven't pulled that into the forecast we need to we need to see that stability first. Thank you go ahead and jump to your next question.
Thank you. Our next question comes from Seth Weber of Wells Fargo Securities. Your line is open.
Hey, guys, good morning, and happy Thanksgiving.
Josh I think you mentioned, there's 400 million.
Inventory that you've cleared in the fourth quarter can you just frame for us what what's still to come.
As first quarter or like an equivalent amount and do you expect that to be.
Largely.
Largely done by call. It the first half or just how should we be thinking about this.
Inventory thats kind of sit around waiting for parts or materials.
Hey, good morning, good morning, SaaS and happy Thanksgiving to you as well.
We've made a lot of progress on on the partially completed machines, we've had an inventory since the second quarter, that's really where we saw that figure peak.
We took down about a third of that over the course of the first quarter and then and then we took another $400 million down in the fourth quarter I would say the level of partially completed inventory within the system right now is running at a much more normalized level I mean, theres always some some level of of partially completed machines kind of within our work.
<unk> capital system. So it's much more normalized right now so the benefit that you saw in the fourth quarter is not going to repeat in the first quarter are really.
At any other time I think in 2023, assuming we don't build more inventory or partially completed machine. So.
I would say by and large the tailwind from that has largely been been completed in the fourth quarter.
This is Josh maybe importantly, too our intent in our factories as to not.
Partially completed machines and build and have to take things offline and bring them back because of the inefficiencies and disruption that drives. So the intent is to run much more linearly with our plans and not create as much of this.
Rework that has to happen because it does drive a lot of.
Disruption in the factory. Thank you.
Thank you. Our next question comes from Jamie Cook of Credit Suisse. Your line is open hi, good morning, nice quarter and happy Thanksgiving.
I guess my question was there at you know you talked about the order book the fall through the third quarter was there any difference by geography within large AG and sort of when do you expect to open the order book up again, so that that you will have visibility through.
The visibility through the full year and then my second question sorry, just on the production in large AG given what you said about production in the first half I'm trying to think about the second half of the year does that imply just.
With your sales forecast by the fourth quarter sales could be down a little marginally just based on my back of the envelope math.
Trying to understand production cadence.
Hey, good morning, Jami, Thanks for the question.
I'll start on the order book.
As we noted we're running about 70% pool for next year. It varies a little bit by product line things like combines were effectively sold out for the entire year.
In North America. The tractor order book is I think two thirds full if I moved to Europe at 70% full for Mannheim, 65% pool for combines.
So pretty similar I think across those two geographies, Brazil is the one that we manage a little bit differently than the other two.
We run that at about a three month window, just sort of given we have a little more flexibility with respect to pricing that market tends to be a little dynamic with both FX and inflation can can change quarter to quarter. So.
We're holding that that order book and a little bit tighter than North America, and Europe , and we've been executing that strategy for two years, we've been really successful there I think managing price a little more dynamically.
In that region.
I think going forward you expect us for the remaining order book, that's left in North America, and Europe to manage it on a rolling six month.
Six month window in front of us so as we get to the first quarter, we should have pretty good visibility on the rest of the year with just a few swaps few slots left available.
As it relates to sort of the production cadence in the year.
As we noted first quarter, we'll have just less production days, but we'll continue with those higher line rates that'll that'll put.
Quite a bit of production in the second quarter to give us a much better start to the first half of the year in 'twenty three as we had than we had in 'twenty two as John noted earlier.
Probably just maybe a little less than 50 percentage of the production will happen in the first half.
So I think when you when you look first half second half youre not going to see as big a differential.
And the splits when you compare back to 2022.
Thank you.
Thanks for the question Jami.
Thank you. Our next question comes from Stephen Volkmann of Jefferies. Your line is open.
Hi, good morning, everybody. Thank you.
My question is on how we should think about increasing interest rates, both with respect to kind of the impact on your finance company, but also what youre seeing relative to kind of how customers are reacting to higher financing rates as well. Thanks.
Hey, Steve Good morning.
Well I'll start with the question on the customer first and we can talk about the John Deere financial I think the impact to the customer maybe varies a little bit depending on what customer segment, we're talking about historically the customer segment most sensitive to interest rates.
As the customer segment for more of our consumer facing products. So think compact utility tractors and turf products tend to be a little more reliant on low interest rate financing I think what youll see as we progress through 2023, you may see a little more discounter incentive spend.
From the equipment operations on things like rate buy downs.
But thats, where we see the most sensitivity historically when we look at large AG.
Interest cost overall are a relatively small portion of their P&L, that's not to say, there's no sensitivity there, but it tends to be a just a little less sensitive than maybe other customer segments that we have and I think the good news for 2023 is that customer balance sheets are really in incredible shape right now over the course of 2022, we actually saw.
Lower penetration rates at John Deere financial because customers were using more cash.
To finance the acquisition so.
That's that's just speaks to not necessarily their sensitivity to interest rates, but more on just the strong balance sheet.
Our position that the Rand going into.
Going into 2023 from a John Deere financial perspective, we run a match funded book there so.
As our cost of borrowing goes up that'll take the forum in higher cost to our customers. We tend to manage that book in a way. So that you don't see a lot of.
Spread degradation.
Degradation.
Because we manage those interest rates pretty closely in that match funded book, So I wouldn't say youll see a big impact to profitability are there youll see higher interest income and higher interest expense going into 2023. Thanks.
Thanks for the question Steve.
Thank you. Our next question comes from Stanley Elliott of Stifel. Your line is open.
Good morning, everyone.
Thanks for the question happy Thanksgiving.
Can you talk a little bit about the road construction business in North America, Obviously, we've got a lot of money is coming down the pipe, but with IHA. A do you think that the road building business gets frontloaded on that should it be continuous over this period of time, when you think about kind of like a five year plus horizon.
Okay.
Hey, good morning, good morning Stanley.
Yes.
<unk>.
We are definitely seeing higher levels of demand in North America for Virgin. So if we kind of go across the different geographies <unk> operating in right now by far and away the strongest or in North America, followed by South America, Europe , starting to ease a little bit and to your point I mean, we're really just now starting to see the benefit from from infrastructure going in.
'twenty three so.
I think that probably grows for <unk> over the course of the year and continues to strengthen that market Importantly, North America right. Now is really strong mix for Virgin. If you think about our manufacturing footprint, which is primarily German based so the FX rates actually really favorable for a strong north American market, yes.
Yes, maybe to add to that Brent we just completed the bomber show and we had really really strong bomber order activity. It was actually higher versus 2019, so the demand is strong and customer.
Customers are buying new equipment, and new technologies in order to serve their customers.
Maybe just one other thing to add to that.
As we entered 2022, we had the strongest margin performance for <unk> that we've seen since we've owned that business. So we continue to be pleased with the progress of the acquisition and the synergies that we've integrated in over time.
Thanks Stanley.
Okay.
Thank you. Our next question comes from Tami Zakaria of Jpmorgan. Your line is open.
Hi, Good morning, Thank you for taking my question.
So given their wisdom.
One of them.
This year.
Taking those out.
What kind of core incremental margin.
We're expecting an hfcs segment.
In 2023.
Yes, absolutely good morning, Tammy, we can we can talk through that.
We did have a few special items in the year.
On the construction side, the onetime gain on the debt.
Dear Hitachi deal as well as some Russia impairments when we look at Incrementals for next year, a couple of things to keep in mind.
It's really a still a very dynamic operating environment that we're in we are still seeing some production costs running higher right labor energy a lot of our purchase components are all going to be higher some of that is getting offset by decreases in raw materials and freight.
But all in all we could see.
Mid <unk>.
Production cost increased by by by mid single digits next year, we're also going to see a little more higher higher <unk> and R&D.
And in the year as well now we're getting the price too to offset that and enough to put us back in line with historical Incrementals at Deere. So I think even once you adjust for some of those onetime items.
Youll see incremental margins sort of commensurate with what we've done traditionally or maybe even just to just a tad higher.
Yes, Jamie it's John if you want to get one thing to add there is I think important to us.
Probably a bit above historically, what we've done the incremental side when you take out some of the onetime items, but were also investing pretty heavily in executing on this future of where we're headed and you're thinking about the leap ambitions and some of the business model transformation that we're that we're working through that are going to as we deliver that create more value for customers.
<unk>.
<unk> cyclicality.
And create a more resilient business. So there is embedded in here is investment in strategic projects.
To deliver on that thanks.
Awesome. Thank you.
Thank you. Our next question comes from Matt Alcott of Cowen Your line is open.
Good morning. Thank you for taking my question Brendan I think John you mentioned that a little less than 50% of production will come in the first half given the fact that you guys have more of a tailwind for pricing in the first half and more of a tailwind from the subside and costs in the second half does ultimately the earth.
Earnings cadence basically just followed the production guidance for the year.
Hey, Matt Good morning, Yes, with respect to the earnings cadence I think that's probably a fair assessment that youll see.
Youll see earnings cadence sort of follow that that production.
Ramp that that you just outlined there in sort of the.
Puts and takes between higher price in the first half of the year lower production costs in the back half of the year. So.
I think those sort of net out a little bit and really you can just I think factor in some of those traditional incrementals.
As you apply them to the varying production rates throughout the course of the year.
Yes, Matt as Josh maybe one thing to point out it's been a while since we've had a year that followed a typical trend for seasonality and I think this.
This year 23, probably the returns a bit more to that where you see higher levels of of both sales and margin in <unk>, which is much more traditional to what we've done in the past. Thank you, maybe just to add to brand and Josh as comments.
We're much very much focused on getting off to a strong start in 2023 and getting our machines delivered to our customers really the bottom line I think for you all to take away is we won't be as back end loaded in 'twenty three as we were in 2022, and we're doing everything to keep up the just the.
Standing production progress that you saw in.
In the fourth quarter, and we believe we'll be able to continue with that that.
That execution into the into the first and second quarter of 2023. Thank you.
Thank you. Our next question comes from Jerry Revich of Goldman Sachs. Your line is open.
Yes, hi, good morning, and happy Thanksgiving everyone.
I'm wondering if we could just talk about precision AG.
You just update us on Blue River, we're talking to folks that are seeing pricing.
Mid to high single digit dollars per acre range for the subscription and I'm wondering if you can comment that's representative of the pricing points and I believe you folks planned on full rate production.
There are two of commercial availability I'm wondering is that still the plan for 2024 at this point. Thanks.
Yeah, Hey, good morning, Gerry and happy Thanksgiving to you as well, maybe just a couple of high level comments on precision and we can we can dive into it.
<unk> and CN spray after that but.
Overall, we're seeing kind of higher take rates for a lot of our existing technologies that have been in the market for the last couple of years I would say anywhere from 5% to 10% higher take rates in 2023, So we're super encouraged by that.
Technologies like exact emerge an exact apply continue to do well continue to penetrate the market further.
Also notably some of the newer technologies that we've had like exaggerate or the CHF 950, <unk> also made really good inroads as we start filling out the order book for next year, I think for exact rate or almost double the take rate almost a 20% going into next year now.
As you noted we're also very focused on some of these next gen technologies like <unk> like autonomy and those two technologies carry with them more recurring revenue opportunity than we've had in the past. So we've been super encouraged by putting this out with customers who have done it on a limited basis.
But these are paying customers and they are adapting to the new business model and that's part of the learnings that we've had over the course of the summer and then in the fall when we were running.
Economists paid acres over the fall the vast majority of our customers have really accepted the model and we're really encouraged by that we're going to get a little bit smarter and tighten that up as we go into 2023, which will be.
Our second year of a limited production release there.
Yes, Brent just to add to that I think are important the important comment that underscores why this is happening and why we're seeing these strong take rates is there.
The current environment underscores the need for precision.
Challenges of our customers are definitely more acute than they've ever ever been and the need for our customers to do more with less is greater than it's been in the past, especially when you consider all the rising input costs.
Not just labor scarcity scarcity, but lack of skilled labor. So precision AG is the best solution to help them solve these very very difficult problems. We're more confident today in our opportunity to create value for our customers.
Through our identified $150 billion of Iam, and we're going to continue to prioritize our investments towards the technologies and solutions that unlock that value and Josh indicated earlier on.
This year, we're spending more than we ever have in the past to create those new products, new solutions and thats going to have a big benefit in future years.
Great point, John maybe one thing I'd add there is we've also made a change to our dealer paper performance. So we're including precision AG execution in that pay for performance and that's a really important step as we think about <unk>.
To drive the outcomes that we wanted to deliver and really a shift from adoption to utilization to make sure we're delivering on that and we're and we're showing.
And demonstrating the incremental addressable unlock that we can create which we think is differentiated.
Dear Thanks, Gerry will go ahead go to the next question.
Thank you. The next question comes from Nicole to place at Deutsche Bank. Your line is open.
Thanks, Good morning, guys.
Hey, good morning, Nicole.
Just maybe asking a quick one on pricing with the price guidance that you guys have that has embedded is that all price carryover or are you embedding another annual increase as for like a return to normal in 2023, and how has the customer response been to pricing. Thank you.
So with respect to price youre picking up a little bit of both I mean, there's definitely some carryover from from 2022.
Particularly we had a lot more.
How a higher pricing in the back half of 'twenty.
Of 2022, so youre going to see those compares be a little bit higher in the first half of 2023, but there were additional.
Our list price increases for the 2023.
Her book, So it's going to be a combination of both I think with respect to the elasticity of demand we haven't seen.
A drop off in demand yet as we noted.
We've had to put ceilings in on all of our order books, which so right now demand just continues to outstrip supply and as John noted earlier in his comments the velocity of those orders hasnt slowed at all as we pace through the fourth quarter. Thanks Nicole.
Thank you. Our next question comes from make debris.
Baird Your line is open.
Hey, Thanks, and good morning, everyone I want to go back to the discussion on precision AG if we can.
And I am sort of curious here.
Economy product suite.
How has your thinking evolved in terms of the way you're commercializing.
This portion of the business and the.
The progress that you've made towards bringing this to actually become mainstream.
<unk> product is that a 2024 time frame 2025, and I'm curious for the customers that are buying <unk> tractors now do they have the option to get this feature.
Yeah.
As a mass product. Thank you.
Hey, good morning, Mig great Great question on autonomy. So so right now.
Our autonomy is being rolled out on a limited basis. So it's not available to every single customer 2023 will be another year, where we'll have a limited commercialized.
Our rollout of autonomy.
What's changing a little bit with our mindset around position really two things.
One this is the type of technology that we think lends itself really well to a per acre type of monetization model.
Is different than our historical point of sale model for most of our products and solutions.
We're getting an opportunity to roll that out with customers and what we're learning is how customers consume our solutions differs among the customer base I think they've actually really enjoyed the variable cost aspect.
Because what we're seeing is customers use autonomy a bit of a hybrid.
Roll our hybrid model they are driving their tractor some they're putting on autonomy mode overnight to get the job done while they sleep.
So that allows them to really pay just for the part of the product that they use I think the other thing thats really important with the rollout of autonomy is and this is a little bit different than what <unk> seen in the past.
We will roll out this technology really.
Retrofit first or field kit first.
As opposed to most of our technologies have gone factory installed first so I think youre going to see a little bit of a shift in some of these next generation technologies. Both in terms of the business model that we apply to it giving us some opportunities for recurring revenue, but also.
More of an emphasis on field kit opportunity to retrofit opportunities at.
At the onset of some of these technologies.
Yes, Brian just to add to that a couple of things I think are important first of all our experience with customers. This fall really reinforced our view on the very real challenges our customers are facing with respect to labor.
Labor availability and the value of hitting that agronomic window. So.
With limited skilled labor.
Down side effect to it is not hitting the agronomic window, and then having impact on yield so having the machine running when it needs to run was a very critical to our customers also as you mentioned the customer acceptance of the per acre model was really really good and one evidence of that is every single customer.
<unk> that use this product in this fall have signed up to use it in the spring so.
Really really important last thing I want to leave you with is when you think of autonomy I want you to start thinking about autonomy and automation and this is just one major productivity unlock an entire production system and if you remember as part of our leap ambitions, we're committing to have a total.
Autonomy and automation solution for corn and soy in the U S. We want to unlock all of this value for our customers and what we've been doing here. The last the last couple of years is proving out this is technically possible and I am really excited about it.
Thanks for taking for the question.
Thank you. Our next question comes from Larry de Maria of William Blair. Your line is open.
Thanks, Good morning, and.
Nice start Josh.
Staying on that topic, a little bit you continue to obviously push price and value per machine, but it's getting harder to pencil out for the midsized farmers and forcing more scale needed in the industry.
Hopefully I'm wondering if we're getting towards the upper limits of what the growers can handle and we will accept in terms of price maybe do you think they need a break maybe into 'twenty, four and or perhaps with some moving us closer towards towards the broader per acre model beyond just your autonomy quicker.
Hey, Larry it's Josh Thanks for the question.
The.
The opportunity we have in front of US here is and John Hey, Bryan just mentioned this is retrofit and the ability to go back across the installed base and upgrade and improve productivity and technology.
Without requiring a completely new machine, so I think that that is.
Differentiated solution than we've had in the past and also allows for relative value based on whether it's size of farm, particularly if you are paying on more of a per use per acre basis. So we think thats a significant component to unlocking that value for our customers and allows allows the technology.
To cover more acres.
As we as we go through the field. So thanks, Larry we're going to go ahead and go to our next question.
Thank you. Our next question comes from John Joyner of BMO capital markets. Your line is open.
Alright, great. Thank you all very much feels like eating dessert.
With your results here so.
And this should be quite good and just following up on that Mig and I'll and Larry's question.
When you think about the.
Model.
Does this ultimately tell me kind of take it we'll leave it decision pork producers such that if you want to get autonomy. If you wanted to have seen spray then you have to have the subscription otherwise you don't get it.
Yes, I think I think the John Thanks for your question I think the opportunity to do retrofit.
<unk> gives you some optionality to whether or not you want to leverage it I think what we're seeing from customers, having it and having the opportunity or the optionality to engage.
Is really important and we've seen this whether it's with.
It seems very autonomy there are different trade offs.
Customers will make whether it's timing, whereas field conditions, whether it's labor availability suddenly, creating optionality is really really critical.
And really providing an opportunity for more scale scale use of these technologies across greater acreage than farm sizes.
Josh I think it's also important to talk about what our goal here is with each one of these technologies our goal is to develop technologies.
That are targeted at the greatest problems that our customers have with the end or the outcome being by using John Deere technology, you as the customer will be more profitable because we will minimize your inputs youre going to be more productive.
Because of the case of autonomy, we might take somebody out of the cab or other technologies and youre going to do the jobs you do in a more environmentally sustainable way.
That's really good for our business. It's good for our business long term, regardless of where we are in any given cycle customers are going to buy these technologies to improve their profitability.
Thanks, I think we have time for one more question.
Thank you. The next question comes from David Raso of Evercore ISI. Your line is open hi. Thank you very much I was curious about the comment you made about the inability to raise your dealer inventory through 'twenty. Three obviously, it's very encouraging for your build schedule for 24.
Or can you give us a sense of what percent below normal do you see your dealer inventory exiting 'twenty three.
Yes. Thanks.
For the question, David with respect to dealer inventory and I'll talk kind of both new and used here I know your question is more around new.
For high horsepower equipment.
Four wheel drives are at 10% inventory to sales.
High horsepower, two wheel drive tractors, or 12% historically that would be 25% to 30% ratios there.
Combines our especially low although that's a bit seasonal those are always though it's always in the year pretty low at post harvest, but that gives you an idea of sort of the magnitude of the increase we need to see.
And the channel going forward in to 2024. So thanks for the question David I appreciate it.
And with that we'll wrap up the call. We appreciate everyone's time and hope you all have a great Thanksgiving.
Yes.
Thank you. This does conclude today's conference you may disconnect at this time, thank you and have a good day.