Q1 2023 Deere & Co Earnings Call
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Earnings and events I will now turn the call over to Rachel Bock.
Thanks, Brent and good morning.
John Deere completed the first quarter with solid execution and financial results for the quarter.
Included 20% margin for the equipment operations.
Well, it's still far from normal levels.
You were supply disruptions enabled our factories to operate.
Production.
Strong AG remain our order fill and allocation our full well into the fourth quarter and in some cases full through the balance of the year.
Likewise, the construction and Forestry division continues to benefit from healthy demand with order books pull into the quarter and orders still on an allocation basis.
Slide three shows the results for the quarter.
Net sales and revenues were up 32% to $12 65, 2 billion, while net sales for the equipment operations were up 34% to 11, four O 2 billion.
Net income attributable to Deere <unk> company was $1 nine down $5 9 billion or $6 55.
Sure.
Taking a closer look at the individual segments, beginning with our production in precision AG business on slide four.
Net sales of $5 $198 billion were up 55% compared to the first quarter last year and up versus our own forecast, primarily due to higher shipment volumes and price realization.
Price was positive by about 22 points, we expect price realization to be the highest early in the fiscal year due in part to model year 'twenty, one machine produced and shipped in the first quarter of 2022, effectively including two model year, when compared to the first quarter of 'twenty three.
Currency translation was negative by roughly one point.
Operating profit was $2 8 billion, resulting in a 23, 2% operating margin for this segment compared to an eight 8% margin for the same period last year.
The year over year increase was primarily due to favorable price realization and improved shipment volume and mix.
These were partially offset by higher production costs and increased R&D and <unk>.
Prior year results were negatively impacted by lower production from the delayed ratification of our labor agreement as well as by the contract ratification bonus.
Moving to small AG and turf on slide five.
Net sales were up 14%.
<unk> 3.001 billion in the first quarter as a result of price realization and higher shipment volumes, partially offset by negative effects of currency translation.
Price realization was positive by just over 11 points, while currency translation was negative by nearly four points.
Operating profit was up year over year at $447 million, resulting in a 14, 9% operating margin.
The increased profit was primarily due to price realization and higher shipment volumes.
We offset by higher production costs R&D and FCB.
Slide six shows our industry outlook for the AG and turf markets globally.
We expect industry sales of large AG equipment in U S and Canada to be up approximately 5% to 10%, reflecting another year.
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Then the dynamics of strong AG fundamentals.
Advanced fleet age and low field inventory all remain.
We expect demand to exceed the industry's ability to produce for yet another year.
For smiling and turf, we estimate industry sales in the U S and Canada to be down around 5%.
Within the segment order books for products linked to AG production systems remain resilient.
While demand for consumer oriented products, such as compact tractors under 40 horsepower has softened considerably since last year.
Moving on to Europe , the industry is forecasted to be flat to up 5%.
Fundamentals continue to be solid, but moderating from recent highs and net farm cash income remains healthy.
In South America industry sales of tractors and combines to be flat to up 5%.
Following a very strong year in fiscal year 'twenty two.
Farmer profitability remains high as our customers benefit from robust commodity prices record production and favorable currency environment.
And while the backdrop, the Marc Jacobs favorable demand for low horsepower.
Often a bit over the first quarter.
Industry sales in Asia are forecast to be down moderately.
Now our segment forecast beginning on slide seven.
For production in precision AG.
<unk> are forecast to be up around 20% for the full year.
Forecast assumes about 14 points of positive price realization for the full year and minimal currency impact.
As noted earlier, we expect to achieve higher price realization in the first half of the year and then see it moderate a bit in the latter half.
The segment's operating margin.
Is now between 23 five to four 5%.
Slide eight shows our forecast for the smaller <unk> segment.
We expect net sales to be flat to up 5%.
This guidance includes eight points of positive price realization and less than half a point of currency headwind.
The segment's operating margin is projected between 14, five and 15, 5%.
Yeah.
Turning to construction and forestry on slide nine.
Net sales for the quarter were $3 3 billion up 26%, primarily due to higher shipment volumes and price realization.
Both were better than our own forecast for the quarter.
Price realization was positive by over 13 points, while currency translation was negative by about three points.
Operating profit of $625 million was higher year over year, resulting in a 19, 5% operating margin due to price realization and higher shipment volumes, partially offset by higher production costs.
CNS had several miscellaneous items that were positive to the first quarter results the.
The impact of these positive items was approximately one five points of margin and we do not expect them to repeat.
Prior year results include the impact of the lower production in the first quarter due to the delayed ratification of our labor agreement as well as the contract ratification bonus.
Let's turn to our 2023 construction and forestry industries on slide 10.
Industry sales of earthmoving and construction equipment in North America are both projected to be flat to up 5%.
End markets for earthmoving and compact equipment to remain strong.
But housing has softened infrastructure.
When gas.
And robust capex programs from the independent rental companies have continued to support him.
Retail sales have remained robust and dealer inventory is well below historic levels.
Global Road building markets are forecast to be flat.
North America remains the strongest market compensating for softness in Europe , as well as in parts of Asia.
And forestry, we estimate the industry will be flat a softening in the U S. Canada is offset with strength in Europe .
Moving to the CNS segment outlook on slide 11, Deere's construction <unk> Forestry 2023, net sales are forecasted to be up between 10% and 15%.
Our net sales guidance for the year considers around nine points of positive price realization.
Operating margin is expected to be in the range of 17% to 18%.
Shifting to our financial services operations on slide 12.
Worldwide financial services net income attributable to Deere <unk> company in the first quarter was $185 million.
The decrease in net income was mainly due to less favorable financing spreads.
For fiscal year 2023, our outlook is now $820 million as the less favorable financing spreads.
<unk> expenses and lower gains on operating lease dispositions are expected to more than offset the benefits from a higher average portfolio balance.
The less favorable financing spreads in both the first quarter results and outlook are a function of the velocity of interest rate increases and the lag in price changes.
Credit quality remains favorable with very low write offs as a percentage of the portfolio.
Slide 13 outlines our guidance for net income our effective tax rate and operating cash flow.
For fiscal 'twenty, three we are raising our outlook for net income to be H b.
Be between $8 75, and nine 5 billion, reflecting the strong results of the first quarter and continued optimism for the remainder of the year.
Next our guidance incorporates an effective tax rate between 23 and 25%.
Lastly, cash flow from the equipment operations is now projected to be in the range of nine five to $9 75 billion.
Yeah.
That concludes our formal comments now I would like to spend a little time going deeper on a few things specific to this quarter.
Let's start with farmer fundamentals.
The USDA recently updated as farm income forecast.
U S. Net cash farm income is forecast to be down in 2023, compared to 2022, but still well above long term averages and at levels supportive of continued replacement demand.
Importantly, crop cash receipts are predicted to be down only 3%.
At very healthy levels for row crop producers.
And while expenses are expected to be up some key inputs like fertilizer have moderated since peaking in 2022.
All in the 2023 income forecasts are solid and will continue to support equipment demand.
This may be specific to the U S. But the message is similar across our various world markets right.
That's right and I would add that global stocks to use remain very tight keeping grain prices elevated even if they are down a bit from the highs of last summer. So the story here is one of slightly lower net income, but still quite profitable, which is true in most AG markets globally.
As noted earlier profitability in Europe remained solid while green prices have come off peak levels input costs have also declined keeping margins at supportive levels there.
The relative profitability varies a bit by region with central Europe , varying a bit better than western Europe , but overall still solid across the region.
And in Brazil, higher production and favorable FX has kept profitability solid making the region one of the strongest from a fundamentals perspective.
The political transition in rising interest rate environment could result in some softening for smaller equipment. The large AG equipment demand is holding steady.
This is Josh one thing I would like to add here is that when we meet with dealers, we hear a consistent message from them to they are positive on the outlook and customer demand, we even get feedback they could quote more customers if they weren't on allocation. So we feel good that the demand is out there.
Our dealers are also optimistic about the level of <unk> adoption and demand for precision AG solutions as customers look to reduce expensive inputs, which improve profitability and sustainability and this is not just a north American theme, but across the globe I was with our dealers from Latin America earlier in the quarter and the appetite for increased technology from our customers is very strong and our dealers are.
Investing heavily to deliver on the value proposition.
That's good perspective on the industry outlooks and the dealer feedback with that in mind. Our order books are generally fall into the fourth quarter as we look across the global large AG business.
Most orders are retail so they have a specific name associated with them and we anticipate it will be yet another year, where large AG equipment demand outstrip supply, but if we look more closely at our small AG and turf division the stories.
Can you step through that Brent.
Sure if we dissect the segment around two thirds of our sales are linked to products tied to AG production systems, like dairy and livestock hay and forage and high value crops.
The remainder is tied more to consumer oriented products. So.
So hay and forage and livestock margins remain above recent historical averages. Additionally dealer inventory to sales ratio for mid sized tractors are below normal levels. So this part of the small AG and turf has remained steady.
A good proof point here is that the order book for our mid sized tractors built in Mannheim, Germany is filled well into the fourth quarter of fiscal year 2023 on the other hand turf and utility equipment is more closely correlated with the general economy, specifically household so we've seen softening there, particularly in compact utility tractors. This is one place.
Where we've seen industry inventories build.
And to round out the conversation on order books construction and Forestry is also fall into the fourth quarter given levels of demand, we do not anticipate any rebuilding.
Any any rebuilding of channel inventory in fiscal year 2023.
Let's stay on that topic of inventory building and going back to your comment Brian on turf and utility equipment industry inventories is that increase in channel inventory purely related to the softening in demand or is any of that seasonal for turf and utility equipment.
A mix of both we are heading into the prime spring selling season for turf and utility equipment.
So we normally have some inventory build at this time of the year that will sell off as we go through the spring, but we're monitoring channel inventory closely. So we can react quickly. If there is further softening in demand.
That channel channel inventory for our other segments.
Yes for large AG, our dealers remain on allocation as we've mentioned the vast majority of orders are marked for retail and have a customer name associated with them. So we don't expect to see restocking of dealer inventory this year.
Youll see some channel inventory build seasonally a bit as we ramp up production ahead of you season, but we don't predict much change in dealer inventory year over year by our fiscal year end.
We we expect any restocking to be more of a 2024 story.
And as I noted, it's the same for our North America construction and forestry business dealer inventory is at historic lows.
Based on retail demand and our production levels, we don't anticipate much increase in dealer inventory again, we would expect any build there to occur in 2020 for maybe a couple of things to add here.
As mentioned our dealer inventories remain below historic levels and outpaces supply. We've noted a few times that our order books are still on allocation basis and this continues because while supply challenges have eased the supply chain is still fragile, it's getting better, but we continue to experience higher than normal supply disruptions. We are working with our supply chain and doing our best to try to ensure delivery.
To our customers.
Since new equipment inventories remain tight our dealers are seeing the benefit in used equipment use are turning their used equipment very quickly at a historically fast pace demonstrating resilient demand for used as a result used equipment inventories are at low levels and used equipment prices continued to be strong. This is a positive for customers as it reduces their.
Trade differentials this is especially true for both large AG and construction and forestry.
Thanks, Josh let's.
Let's shift to pricing production and precision AG in particular benefited from high price realization here in the first quarter. This isn't a normal comparison, though Josh can you break that down for us.
You're right, it's not a normal year over year compare it's really comparing two years' worth of price increases last year. During the first quarter. We were still shipping a fair number of model year 'twenty, one machine were behind on deliveries due to the work stoppage at some of our largest U S. Factories. So for example, a lot of tractors, we shipped during the first quarter of 2022 were actually model year 'twenty, one machines that model.
'twenty one pricing during the remainder of fiscal 'twenty, two we experienced significant material inflation, but we also successfully increased line rates to catch up on shipments. So we shipped most of the model year 'twenty two tractors during fiscal 'twenty two so.
So now here in the first quarter of 'twenty three nearly all of the tractor shipments where model year 'twenty three so when one looks at the first quarter year over year price comparison, Theres really model year 'twenty three versus model year, 'twenty, one or two years for the price.
We do believe the price comparisons will moderate in the back half of the year.
Our full year forecast contemplates production cost increasing year over year due to the impact of labor energy prices and purchased components that we do expect the increases to be at a much lesser extent than we experienced in 'twenty. Two we expect to benefit from improvements in commodity prices decreased use of premium freight and increased productivity as our.
<unk> run more smoothly.
Looking forward, though as inflationary pressures subside, we expect a reversion to our historical averages for price increases.
That's helpful. Thanks, Josh and also a good segue to talk about the rest of the year compared to the first quarter and with strong first quarter. However in the first quarter, we had fewer production days for the holidays and some plant maintenance model your switch overs and so on so.
So as we look to the second quarter, we'll have more production days.
CNS as I mentioned earlier had some miscellaneous positive items in the first quarter that won't repeat as we progressed through the year.
Brent can you talk through how people should be thinking about our rest of the year forecast.
Absolutely for PPA in CNS, we're confident in the rest of the year demand and it's likely that our seasonality for the remainder of the year will look more like our historical cadence with the second and third quarters expected to be the highest in revenue for PPA for example.
The supply chain needs to continue to improve enabling higher production rates part delinquencies and delays have abated, but have not returned to pre pandemic levels or anything we'd consider indicative of a healthy supply chain.
Our guidance contemplates that we can procure the material we need to continue production at current daily rates.
So with respect to topline guidance, we do not see significant demand risk for the rest of the year, but we do need the supply base to continue to execute.
When it comes to production cost there are a few variables to consider as Josh mentioned, while raw material prices and the need for premium freight have eased.
We continue to see inflation on purchased components labor and energy So some puts and takes there.
If the supply chain continues to improve we could see some additional productivity gains in our operations.
Hey, this is Josh one I want to point out that when it comes to costs, we're not just waiting for things to get better we're working with our suppliers to improve on time deliveries and manage through inflationary pressures. We continue to look for opportunities to source differently. When it makes sense and we're looking at our own processes as well to continue to improve efficiency and cost. We can control. So cost is top of mind.
And a key focus area.
One last special topic, we recently published our two sustainability.
It can be found on <unk> dot com slash sustainability and I encourage people to take a look at it Josh.
Josh any highlights you'd like to point out.
Yes, a few things here to highlight we made progress on our leaf ambitions, including engaged highly engaged sustainably engaged acres engaged acres gives us a foundational understanding of customer utilization of <unk> technology, and we continue to enable our customers to use data to do more with less unlocking economic value, while also improving environmental outcomes.
Formed partnerships to accelerate this value unlock for customers. One example is the demonstration farm with Iowa State University, where over several years, we'll be able to test various sustainable farm management strategies and farming practice, we will be able to collect data that mirrors, our customers' applications and decision making to deliver better solutions.
We introduced the exact shot feature on planters at CES 2023. This is a great example of a solution that enables our customers to do more with less and Leverages, our tech stack pulling nozzle technology from sprayers onto exact emerge planter to deliver starter fertilizer on the seed and only on the seed when planting.
We also introduced a prototype of our first fully electric excavator at CES is a deere designed excavator with a crazy battery.
It shows our focus on electrification in response to customer pool for quieter and safer solutions, while executing jobs in a lower emission manner is an example of the team making progress on reducing scope through greenhouse gas emissions.
Have validated science based targets.
With our focus on creating value for customers and being organized around their production system. The solution shown at CES underpinned the message of real purpose real technology with a real impact and all we do.
I also want to highlight the significant progress we made in terms of our operational sustainability goals for example, scope one and two greenhouse gas emissions, we had a goal.
15% reduction between 2017 and 2022 as we closed out 2020, we almost doubled that achieving a reduction of nearly 29% during that timeframe. So it's not just our products, but our operations, having a positive impact too.
That's good stuff and.
And before we open the line for other questions Josh in your final comments.
Sure. It was a good first quarter strong results and started the year fundamentals and demand across our solid across most parts of our business. The supply chain is showing early signs of improvement but remains fragile. So the teams are managing through it.
We're proud of the team of employees suppliers and dealers as we continue to work together to deliver our products and solutions to our customers.
It was also very exciting at CES to reveal new solutions that will unlock value for our customers not just economic value, but sustainable as well you can read about it and the progress in the 2022 sustainability report, but to see it at CES and our strategy in action reinforces our belief that we have tremendous purpose and the ability to deliver real value for all of those.
Good deal.
Thank you now let's open the line for questions from our investors.
Now we are ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure in consideration of others and our hope to allow more of you to participate in the call. Please limit yourself to one question. If you have additional questions. We ask that you rejoin the queue.
Yeah.
Thank you so much if you would like to ask a question at this time. Please press star one on your phone be sure. Your line is omitted and record your name at the pool.
Ask a question. Please press star one our first question today comes from Seth Weber with Wells Fargo Securities Go ahead. Please your line is open.
Oh, Hey, guys good morning.
I wanted to just.
Ask your question on the cost side just to clarify what your what your message is on the input costs and freight costs and things like that or are you, suggesting that cost you're going to continue to be up year over year.
Through 2023 or is there some point during this year when we should start to see.
Cost benefit.
On a year over year basis.
Does that slip I guess from.
Whether it's input costs or freight or what have you. Thank you.
With respect to production costs, SaaS theres quite a bit to unpack there I mean, I think first and foremost our factories were running a lot better in the first quarter really better than the first quarter than at any other point in.
Over the course of 2022, so we were able to hit line rates that we were expecting to hit as well as completing the machines and the sequence that we intended to complete them on with respect to production costs. They are still going to run higher on a year over year basis for the full year, but at a diminishing rate when compared to the production cost increases that we saw in 2020.
Two.
If I.
Dissect the components of production costs, there's a few puts and takes there raw materials were slightly favorable in the first quarter, but that will get more favorable as we progressed through the year freight was already favorable in the first quarter as well and we do believe that will continue rest of the year, where we are still seeing inflation impacting the production costs.
One item for us is really in purchase components and those tend to inflate on a lagging basis. If you think about the inflation that are tier three tier two suppliers are experiencing it takes a while for that to bubble up into our production costs. So the inflation they have with respect to labor and raw mats are really hitting us.
On a lagging basis, that's what's driving some of the higher production cost year over year. I'd also note that labor and energy youre going to be higher on a year over year basis also taking production costs on an absolute basis.
While up year over year now that said, we are actively working with our suppliers to sort of get back any sort of inflation that's linked to raw material.
So you'll see us very much focused on costs for the rest of the year.
Thanks, Jeff as Jeff maybe one one AD there is last year as we saw this we had because of the way our price programs work in our early order programs.
Set price and then we saw inflation come through so while we were we were priced production cost positive in 'twenty. Two it was just slightly positive.
<unk> 23, we would expect that to be much more positive as we catch up a bit on the pricing side and start to see some of the increases come in so that will be more positive in 'twenty three than it was in 'twenty two.
Thank you guys.
Our next question comes from John Cummings with Morgan Stanley Go ahead. Please your line is open.
Hey, good morning, Thanks for the question.
Ask a longer term one I think some of the concern out there in the market. It's just that we haven't seen the AG cycle. This long right over the last decade, but if you look at your own revenue growth profile right in the 90 days in early 2000, and there have been power. It seems as if the company is seeing.
Seven eight years of conductive consecutive revenue growth.
If you had to describe the current backdrop right demand outstripping supply et cetera would you say that we're operating in a market environment similar to those years versus the more commodity driven cycle.
Cycles that we've seen over the last decade or so.
Yeah.
Yes, good morning Dillon. Thanks for the question with respect to this particular cycle I think there is a lot of variables at play first of all first off we've had a really strong start to the year and our guidance would indicate we're going to have a very strong rest of year as well we'd note that backdrop right now is very supportive.
Fundamentals are really strong and we had a record year in 2022, but as we look at 2023, it's going to be a.
Sure.
A slight decline, but still it is very very positive level crop cash receipts are down 3% farmer net income is down 16%, but both of those figures would be higher than the peak of any prior cycle. So right now I think our farmers are in really good really good shape I think.
Another thing to contemplate with respect to this particular cycle is the way that it really unfolded.
Has been at a slower pace than what the market would typically facilitate we saw demand inflect in early 2021, but the industry was suffering from significant supply constraints over that year 'twenty two and in 'twenty three.
We are still shorting demand on some level in 'twenty three much of that or some of that will certainly pushed into subsequent years. So this cycle is difficult to compare to prior cycles because of some of these artificial and external constraints that are placed on the business now with respect to to 2024, certainly too early to make a call there.
There's a lot of variables between now and then we have to plant. The 2022 23 crop we want to see ever AG inputs normalize things like fertilizer seed and chemicals.
Have been somewhat volatile in their pricing over the last couple of or last year or so and we've got a number of swing exporters I would say when you contemplate areas like the Black Sea region as well as Argentina, So a lot of variables need to play out.
And we'll start to collect our first data point on next year really this summer when we.
<unk> run our crop care early order program, we'll collect some additional data points in the fall with our combine early order program that said, how we intend to exit 'twenty three we think we'll exit at a really healthy rate.
Fleet age will still be advanced and inventories, both new and used are going to continue to be tight.
Yes, maybe one thing I would add and this gets back to our strategy and I think how we are a fundamentally different company in terms of what we're delivering to customers. How we're integrating technology to derive value for customers really irrespective of where end markets or the ability to take cost out and to increase.
Activity in profitability for customers. So we're.
We're very very focused on our ability to dampen cyclicality over time be less reliance on sheer unit volume as we drive better economics for customers and better per unit economics for Deere. So we feel really good about the opportunity to drive growth.
And our ability to create value for customers. Thanks, Joan will go to our next question if you set it.
Our next question will come from John Joyner with BMO capital markets Go ahead. Please your line is open.
Great.
So thank you very much.
Josh you discuss.
This a bit and I know my question here comes up a lot. So I do apologize in advance but.
How do you think about pricing power I guess when the currently robust up cycle eventually moderate or are prices now, possibly set at a what could be structurally higher level.
Hey, John with respect to price I think there is a lot to contemplate there.
The pricing actions that we've taken have been commensurate with the level of production cost that we and the industry have experienced.
Josh Josh noted this earlier if you look at our 2022 margins for production of precision AG, They were actually down year over year, when compared to 'twenty, one even on 33% higher revenue.
So we've absorbed a lot of production costs and if I had to take price measures to it to account for that.
What we've seen so far is no sign of demand destruction.
Our customers have been really profitable over the last last few years and the good news is we are seeing signs of moderation in our production cost increases.
And our from our perspective that does point to I would say a reversion to the mean in terms of normal price increases year over year.
As we start to stabilize with respect to higher production costs.
Yeah, maybe John one add I would I would throw in there is when we look at the impact of equipment on the P&L for customer is still a relatively small percentage and I think important and that is a relatively small percentage and we're actively focused on other parts of the P&L, how do we take cost out and how do we improve yield and I think that's really important.
My previous comment on being able to do that is beneficial regardless of where end markets are or commodity markets are so that focus the ability to do that over time, we think is differentiated but as Brent mentioned, we do think as inflationary pressures abate, we will see we will see prices come back into closer to what we've seen in the past.
Thanks, Sean.
Our next question comes from with.
Citigroup go ahead. Please your line is open.
Yes. Thanks.
Good morning, Yes, so just thinking about.
Gross margins for the rest of the year.
Relative to the.
30% in the first quarter, the full year guidance only.
And it's just a marginal improvement.
Youll have you should have volumes.
Quite a bit higher kind of quarterly run rate.
From the first quarter so.
What are there any I know you talked about there's a lot of interplay between price and cost, but normally just from kind of a seasonal perspective, we do see more of an improvement there.
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Mix benefits that.
They played through in PPA.
That helped the first quarter that it won't for the rest of the year or are there.
Any other high level thoughts you have on that just as we think about again gross margins for the balance of the year. Thank you.
Yeah.
Tim Thanks for the question with respect to gross margins.
We would expect to see rest of year somewhat in line with what you saw in the first quarter as Josh noted.
We will have and put up the strongest price realization number in Q1 that will moderate a little bit as we go through the year.
What offsets that though as our cost compares get more favorable.
So I think the dynamic between moderating.
Moderate moderating price combined with better cost compares will sort of work to offset each other and keep our gross gross margins roughly in line with what you saw in the first quarter.
Yes, Tim I think that's fair from a gross margin perspective, and if you think about just profitability overall, our operating margins we.
We do have higher R&D year over year were investing at.
Record level of R&D, and I think that.
Really speaks to our confidence and optimism and the value that we can create.
Clearly not in the gross margin, but as you think about operating margins, we do see that higher year over year, and probably higher rest of year than compared to two <unk>. So thanks, Tim We'll go ahead and go to our next question.
Our next question comes from Stephen Volkmann with Jefferies. Go ahead. Please your line is open.
Great excuse me good morning, guys.
I wanted to think about margins kind of big picture here in.
And maybe this is Josh question I don't know, but at the end of the day. It feels like you guys are sort of achieved your targets earlier than you expected.
I Wonder if there is an opportunity to sort of bump those higher over time or whether you think those are still the right range to think about and more specifically how much volatility maybe on the decremental side, if and when we actually sort of in this cycle.
Hey, good morning, Steve with respect to our stated goal of 20% margins through cycle margins by.
2013, maybe a couple of things to unpack there first goal is to get to a structural through cycle.
<unk>.
Achievement at that point, and we would say we're not quite there yet I understand that our guidance would imply 20% for this year and we certainly have progressed beyond our original goal of 15%, but there is still a little bit further to go on the journey part part of this year's performance is based on the robust demand environment that we're in I think the <unk>.
Other thing I would point out there is keep in mind that there is an entirely other element to that goal around the reduction of the standard deviation around margins.
And we're just now beginning to make progress on our recurring revenue goal by.
By getting the right tech stack out in the market. So I think that part of the journey, we still have.
Much further way to go we're getting started I think we're off to a good start but it's really you need to consider both our goal to get to sort of through cycle margins of 20%. But then also minimize the volatility around that 20% is part of the Gulf suite as well.
Thanks, Steve Thank you.
<unk>.
Yeah.
Our next question comes from David Raso with Evercore ISI go ahead. Please your line is open.
Hi, Thank you I'm trying to think about 'twenty for the order books are not open yet right. So.
Some time to think about that and how we're going to price as well for 24. So it looks like the rest of the year Youre, implying pricing is up about 99, the rest of the year, So maybe a cadence.
$13 14, 10, and then by the fourth quarter.
Fill up 67%.
So I'm just trying to think about.
Initially I know, it's early but how are you thinking about pricing for 2004 as it sits today and is that roughly the right way to think about the exit on pricing for the year and that kind of up 6% to 7% in the fourth quarter.
Yeah.
Hey, David with respect to price.
I think your math is probably fair in terms of seeing that price realization number moderate a little bit as we go through the year compared to last year in 2023 week, we won't see as much mid year price increase.
<unk>.
A lot of the impact that we're seeing early in the part of 2023 is based on sort of mid year price actions that we took last year.
So I think as we migrate from fiscal year 'twenty, three and 24, it will be a little bit more than kind of a clean break in terms of.
Pricing and will be mostly dependent on what we do for new list prices in 'twenty four.
The calculus, there is really going to be based on what we're seeing in production costs. We've seen some some positive tailwind beginning in first quarter of this year and we would expect some of that to get better as we go through the year, but we're going to have to take a wait and see approach until we get a little bit closer to early order programs.
Before we maybe have a fully formed view on where pricing might be in 'twenty four.
David is there any color at all.
Thank you.
Yeah.
Our next question comes from Michael Feniger with Bank of America Go ahead. Please your line is open.
Yes. Thanks for taking my my question is there any way to frame these pricing gains.
Being able to look at how much is coming from the inflationary side and how much the higher rates from tools and features and are you seeing pricing just across the industry and players remain disciplined as we kind of roll through this year as inflation eases and we refer more to that normal environment. Thank you.
Hey, Mike. Thanks for the question with respect to pricing I think the historical trend we'd point to.
Normal environment of 2% to 3% pricing.
Just on inflation and roughly maybe 3% to 4% based on additional features now when we quote price realization in our press release, we're only quoting inflationary prices right.
We don't quote. The addition to average selling prices that come from those new features and precision AG that would typically fall in the next bar on our waterfall charts.
And I think on a go forward basis, the 3% to 4% is largely in line, what we would expect to continue going forward.
With respect to industry discipline, we'll play a wait and see approach how that how that.
It plays out over the course of this year.
It will be largely dependent on the inventory levels that we see.
In large AG North American large AG, specifically right now those continue to be pretty tight and as long as those remain tight theres not a lot of incentive to but for the industry itself to be on discipline on price, but again, we'll wait and see how that plays out as we progressed through the year. Thanks, Mike.
Our next question comes from Jamie Cook with Credit Suisse. Go ahead. Please your line is open.
Hi, Good morning, I guess, just two questions back to CNS I know you outlined a one five points due to certain miscellaneous positive items. If you could just explain.
Explain a little more what exactly that was and.
Obviously, the margins were strong in the quarter is there anything structural going on there that we should get more optimistic about how we think about construction margins over the longer term. Thank you.
So with respect to the drivers of the CFB I think Theres a couple of things to unpack there first operationally that division executed very well in.
In the quarter and the order book remains really strong demands really really held up in that division for US I would say that <unk> was exceptional and their performance in the first quarter and of course, we got a little extra price there.
Jamie you noted there were a couple of miscellaneous items those are around.
Some FX hedging gains that we took primarily in the quarter.
What I would tell you is that the construction and Forestry Division is one where we have been working to improve structural performance for the last couple of years, you've seen that with the <unk> acquisition, we made five years ago as well as the decision we made last year.
Purchase out.
JV partner and the Deer, Hitachi relationship I think those are things that will continue to deliver structural performance as we move forward.
And it's.
A division, we're really excited about the growth opportunities and.
One thing to add Jamie those two things that I mentioned are critical and then on top of that has been really really thoughtful on how we leveraged technology into into both Earth moving.
In road building as well as <unk>.
As with most industries. There is there are significantly more challenging so the ability to automate jobs and bring technology to make jobs safer and easier to do is really really important so youll see us leverage technology, there you'd be thoughtful and surgical in how we pull things over from from PPA section precision AG for example, and we.
That will that is another structural component as we go forward. Thanks, Jamie.
Our next question comes from Mig <unk> with Baird go ahead. Please your line is open.
Thank you good morning wanted to ask the backlog question if I may.
So you came into the year with a little better than $14 billion worth of backlog in your <unk>.
<unk> segments.
Sorry, I'm curious in your in your planning assumptions for 2023 do you expect to start working down some of this backlog.
And.
I guess there is two things here are you structurally running now with higher levels of backlog or is this something that can actually start to see come down this year and what are sort of the implications here for production in 2024, given how strong your backlog was to begin with.
With respect to our backlog I think theres, a couple of things to discuss there.
The level of the backlog.
Has grown relative to history. So some of that is just coming from increased valuation of our of the price point of our machines right. So if you compare on an absolute basis, that's certainly going to look higher.
Certainly the last couple of years order books have have run further than an iPad.
During prior years and I think that reflects the environment that we're in where demand is far exceeding supply certainly if we get back to a more normalized supply supply and demand environment.
That could moderate a little bit, but with respect to 2024 its still remains.
It's still a little early I think to have a perspective in terms of how far those order books are going to run.
Head of the year.
What I would tell you, though is based on where we're at right now we expect to have.
Little field inventory by the end of the year and many of our dealers are fully expecting that some products are going to remain on allocation in 2024. So again, that's where we that's what we see today, but again, we'll let the season play out we'll let this crop play out before we have a fully formed view on what that backlog looks like for next year.
Hey, Megan Josh maybe a couple of things to add.
Some of this too is impacted by the supply chain and what is the status of the supply chain and the ability to get material to produce.
Which impacts how far out were ordered.
I think the.
That's really really critical I think the other components.
Is thinking about.
Where we have from a field inventory perspective, where dealers at this year, we have by and large been serving retail customers. So we have not been building stock from a demand for dealer inventories. So I think that's an important.
<unk> that dealers would like to have a little more inventory that's not just going to retail as we look forward in 'twenty four.
Nick.
Our next question will come from Tami Zakaria with Jpmorgan go ahead. Please.
Open.
Hi, good morning, Thanks for taking my questions and simplistic, Florida.
So going back to the dealer inventory levels and you said you don't expect much restocking this year.
Can you comment.
Dealer inventory currently spans a number of months looks after then combines in let's say North America, Europe and South America.
I'm trying to gauge what the volume benefit to you could be in 2020 for restocking finally happen.
Hey, Tammy I would say overall inventory remains below historic averages.
And there's probably there's a few pockets where it's built in I'll call those out, but North America large AG again, we don't see any any big builds this year.
We compare where we are today versus.
Historical averages if I look at 220, plus horsepower tractors, we're sitting at about 14% inventory to sales ratios typically that's going to be in the mid twenty's to maybe even low <unk> at this point in the year.
Affordable drives and combines our I think youre at a similar point there.
So I think theres definitely some restocking that that will serve as a tailwind in subsequent years, there <unk> really a similar narrative.
We're sitting between 15% and 20% inventory to sales ratios.
And typically that's going to run in the mid <unk>, maybe even low <unk> depending on.
What our expectation is of the market. So there is a little bit of restocking tailwind I think thats more of a 'twenty four event.
Assuming that the supply chain continues to get better and demand hold.
Where we have seen a few areas of inventory build as we called out earlier, it's purely on the small.
Compact utility tractors, so the under 40 horsepower, where you've seen our inventory get to about a 50% inventory to sales ratio in the industry and even higher maybe about 10 points higher.
And then the other the other pockets that have built a little bit have been really in.
Brazil, CE and Brazil small AG in Brazil has been a market where you just kind of it's really a tale of two markets there.
Inventory I think is right in line with where we want it to be for large AG. It's built a little bit on the small cell small AG side, and what youre seeing there as those producers have a little more sensitivity to higher interest rates.
And I think as a result, that's really cool the market a bit here in the first quarter, we will see how that trends were watching it really closely for those.
<unk> five series six series tractors that we sell on the Brazilian market, but otherwise I would say inventory there is more normalized.
Thanks, Tammy got it that's great.
Helpful can I ask a quick follow up.
So I'm sorry, if I missed it can you quantify by how much your second quarter production rates would be up sequentially and year over year.
Certainly so for North America large AG are large factories like Waterloo and Harvester works, we've talked about the first quarter, having about 25% less production days than than what we would've had in the fourth quarter. So sequentially. It was significantly less production days.
Now as we look forward to the second quarter second quarter will have I would say on average number of production days. So more similar to what we had in the fourth quarter of 2022, its roughly between 60 and 65 production days for that quarter.
Hey, Jamie maybe one thing to add as we think about it broadly across all of our businesses season.
Seasonality as Brent mentioned, returning to look much more similar to what it has in the past, but I would note.
<unk> are probably much more similar from a topline and margin point of view than they historically have been so I think we would see a little bit flatter.
Sales and margin between <unk> compared to <unk> versus historical thanks, Jamie We'll go to our next question.
Our next question comes from Jerry Revich with Goldman Sachs. Go ahead. Please your line is open.
Yes, hi, good morning, everyone.
I'm wondering if you could just give us an update on precision AG.
We'll out I don't know aftermarket basis.
We stand in terms of product offerings.
Aftermarket.
And any variations in take rates versus.
What we discussed last quarter on the early order programs.
As the book is built on the new equipment side. Thanks.
Hey, Jerry.
<unk> precision take rates I would say, there's not a lot new to report this quarter from last quarter, if you recall.
At the end of the fourth quarter, we had already completed all of our early order programs for both crop care in combines.
So we are running a little bit ahead of schedule and what our normal order book cadence would typically show.
So as a result, we haven't taken a lot of a lot of new orders over the last quarter for the <unk>.
Those products if they are pretty much sold out for the entire year, we did fill out an extra month or extra quarter of tractor orders.
But maybe just to reiterate some of the things that we talked about last quarter take.
Take rates for our marquee.
Precision AG technologies, all moved up.
Notably things like exact emerge an exact apply.
Saw higher take rates and then some of our more recent precision AG product offerings like exact rate or the sugarcane Harvester CH 950 also improved remarkably I think for now we're very focused on this next generation of products like autonomy like CN spray and then Gary you also brought up.
Retrofit.
This is also another part of the tech stack that we're investing in significantly right right now and I think still early days, there, but really excited about some of the things that youll see hit the market over the next couple of years.
Gerry one thing Youll hear from US too I think it's a shift to thinking about utilization.
<unk> further engagement with our dealers and our teams recently met with our dealers, we have an annual precision AG meeting and Theres a lot of excitement and investment happening in this space to enable our customers to get more out of the solutions that we deliver and better outcomes.
And as noted you may recall in the past you've talked about we're including in our dealer incentive plans.
<unk> engagement. So that's a component of their plan, so thats new for 'twenty, three but underlines the importance of what we're doing there and the dealers commitment. So thanks Jerry.
Thanks.
Our next question will come from Christian <unk> with Oppenheimer go ahead. Please.
Alright. Thank you for the question Brent you started to talk about this a little bit in a question about the inventory levels, but I'm wondering if you can give a little bit more commentary on what youre seeing across South America.
Some on the ground for near term activity levels, but really I would love to focus on the longer term. What your view is on your relative positioning in the region. Thank you.
Yes, I think thanks Kristen for the question, maybe maybe a couple of I'll make a couple of near term comments and then we'd love to talk about the longer term there I mean for 2023.
As a market that's going to see record production for corn, and soy and near record production for cotton and sugar profitability will be outstanding. This year. So really good near term fundamentals are guide up flat to up 5% after a really big 2022. So.
We're really excited about the fundamentals there right now also in the near term and I'll point decided it a little bit of a tale of two markets ripe for large AG.
<unk> is performing at a higher level than small AG again smaller more sensitivity to things like interest rates.
But Brazil continues to be the strongest market for us in <unk>.
South America now longer term it is a market we are incredibly excited about.
There's probably no other market in the world that has the scale that Brazil has and the need for technology. There is so significant.
Not just this next generation technology that we're talking about there's a lot of tools that we have today that haven't been fully deployed in Brazil connectivity is maybe one of the biggest barriers.
We're working really hard to solve that.
And when we do solve that we think there is a significant unlock just utilizing today's technology much less when we get to a point, where we've got things like autonomy and CN spray deployed in Brazil. So.
Youll continue to see that as a market, we're going to invest heavily in in a market that really plays to our strength, particularly as we've seen just a continuation of this migration from lower horsepower equipment to higher horsepower more precise equipment I think it really plays to <unk> strength longer term there.
Hey, Kristen.
Yes, Brent mentioned, the appetite and the adoption of technology. There in particular, Brazil is happening faster than anywhere else in the world I think importantly, we've already gone on a significant journey with our dealers over really over the past two decades in terms of building dealers of scale with the ability to support service.
Sophisticate farmers piloted the technology and they are very excited about it.
The other important piece too is we've talked about in the past.
Target of having margins.
South America be North American like and we've really done that over the last year. We've seen we've seen the margin performance significantly improved to now where it's north American like.
If not a bit better so we feel really good about the progress in the future there in an area of continued focus I.
I think we have time for one last caller.
Absolutely. Our next question comes from Mike Slutzky with D. A Davidson go ahead. Please your line is open.
Yes, hi, good morning, and thanks for taking my question.
You touched on this in passing earlier branch I think but you.
You had mentioned advanced fleet age of the driver of the production of precision AG.
If you meet your overall stated financial goals for 2023 do you think farmers will have caught up on todays the end of the year.
The older than they probably should be going into 2024, maybe.
I can answer that question in a similar one on construction and forestry, but that also be delays going into 2024.
Hey, Mike Thanks for the question.
It will depend a little bit on what product line, we're talking about for large AG.
If we meet our production goals. This year tractors will sort of maintained their age we won't they won't age out further but they really wont get younger we pointed that out this out before in the past our production levels in 2023 are still 2025% below prior replacement cycles. So.
As a result, we'll likely just maintain large tractor.
Age in 2023 will make a little bit of progress on combines pulling down the age a bit but I'd note that the.
Ending point for this year is still above sort of the average fleet age over a longer period of time.
For construction.
It depends on the end market, we're talking about to some degree.
That age is normalizing in some pockets, but we also have I would say the rental channel is really re fleeting right now.
This is because they obviously had lower capex budgets in 2020, 'twenty, one and then in 2022, they werent able to gate, maybe as much allocation as they wanted given our earlier in the year that market was so strong so.
I think there's probably a longer way to go when we think about rental fleet age.
And that may be a multiyear journey there. Thanks for the question Mike.
Thank you.
And that's our final question for today, we thank everybody for joining us and look forward to.
Reporting in three months from now thanks all.
That will conclude today's conference and we thank you for participating you may disconnect at this time.
Yes.
Yes.
Okay.
Sure.