Q4 2022 CNH Industrial NV Earnings Call
We finished 2022 with solid results as fourth quarter revenues were up over 27% driving full year consolidated revenues up 21% <unk>.
Deliveries and product mix improved in both agriculture and construction.
Our strength was broad based with double digit year over year price realization coming from all regions.
We expanded profit margins in both agriculture and construction despite significant input cost increases.
The industry faced many other headwinds during the year, including a choppy supply chain elevated freight costs and ongoing inflation.
Late in the year. These issues began to modestly improve and we anticipate that will continue into 2023.
The <unk> team's creativity hard work and strong execution resulted in company records for both adjusted net income of $2 billion for the year and adjusted earnings per share at $1 46 up.
Up 14% over 2021.
We also generated $2 billion in free cash flow from industrial activities in the fourth quarter and $1 6 billion for the full year as we over delivered on our plans to complete and ship our accumulation of partially built units.
This benefited our dealers and put us in a net cash position well ahead of our plan.
Last year, we launched two potent margin improvement initiatives, the strategic sourcing program and the <unk> business system, which we refer to as Cvs.
Continuous improvement is hard, especially in pursuit of breakthrough results, but our team has embraced this lean mindset and is poised to deliver value across the business.
Looking ahead, we remain focused on executing our strategy, including significant investments in our tech stack and product development.
Derek Nielsen and his team continue to drive exceptional performance delivering a strong fourth quarter with full year net sales for the AG business up 22%.
This growth was largely propelled by robust industry demand and significant year over year price realization, especially in north and South America.
We saw improved product mix, including precision AG revenues up 32%, which benefited from both an increase take rate for factory fit precision options and incremental Raven sales.
AG profitability remained healthy with Q4 gross margins up 280 basis points and adjusted EBIT margin up 310 points admittedly against an easy comp.
Margins were down sequentially versus our record third quarter performance impacted by regional mix in the nonstandard work required to finished units.
Overall I am extremely pleased with the AG team's performance and results.
For 2022 AG adjusted EBIT was nearly $2 5 billion, marking our highest profit in more than a decade.
We are executing on our customer centric strategy and customers have responded with continued demand for our high end products at prices offsetting increased escalated.
Production costs.
They are also recognized us with improved net promoter scores, 5% higher than in 2021.
Eric and his team are ensuring that customers at the center of all we do driving the right behaviors and results.
Stefano pump alone and his construction team executed quite well in the fourth quarter with strong momentum from the San Purion M.
Integration manufacturing improvements and enhanced customer focus we expect even better progress in 2023 and beyond.
2022, net sales were up 16% for both the full year and the fourth quarter with noteworthy growth in Europe and South America.
Organic growth accounted for about two thirds of the increase and the remainder with the remainder attributed to San Piranha.
Their excavator portfolio and technology innovations have enhanced our ability to meet customer needs and their euro commack platforms provide an outstanding foundation for electrification.
Construction adjusted EBIT for the quarter was $34 million at a three 5% margin.
Full year, adjusted EBIT was up 38% to $124 million and we are encouraged by the ongoing progress in construction. The team is well positioned to deliver on their strategic initiatives support their dealers and customers and gain market share.
This past December we held an engaging tech data showcase our extensive suite of precision AG technology.
Attendees met our deep team of experts in automation autonomy and connected platforms to better understand the cutting edge products, we are developing.
Through a series of live demo stations the team exhibited the real world applications of our ground breaking smart iron.
The products and technology that we demonstrated tech day that you see here on this page and those we will be releasing over the next few years.
Our commitment to being a leader in precision agriculture.
We reiterate our expectation to deliver over $1 billion of precision AG sales in 2023.
I also want to highlight two recent investments made through our CNI industrial ventures arm.
Stout industrial technology is a U S based startup focused on AI powered smart agriculture implements.
Earth optics has proprietary sensor technology that precisely measures soil health and structure.
By taking minority Stakes in these and similar companies through our ventures portfolio <unk> staying on the cutting edge of emerging technology to develop solutions that provide real advantages for customers.
<unk> remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability.
We have a strong history of sustainability performance as evidenced by our recognitions and our innovative products, including the new Holland methane tractor and electric mini excavator pictured here.
In 2022, we pledged to set science based targets that will enhance our operations scope, one and two emissions goals and establish first time de carbonization goals related to our products, which we will announce later this year.
With that I will turn it over to Danny to take take you through our financial results.
Thank you Scott and good morning, good afternoon to everyone on the call.
Fourth quarter net sales from industrial activities of nearly $6 4 billion were up over 27% net of adverse FX impacts.
Full year net sales of industrial activities of $21 5 billion were up 21% or about 24% at constant currency.
Continued price adjustments were significant drivers for our topline growth in the quarter as volume and mix also accounted for around 15% sales increase from Q4 2021.
For our industrial segment's fourth quarter gross margin was 21, 7% and 22, 2% for the full year.
The year over year margin improvement of one five points is mainly due to strong and profitable profitable growth in South America, and disciplined price realization globally, which more than offset rising product costs production costs.
Q4, adjusted EBIT came in at $680 million up $302 million from 2021.
With a corresponding EBIT margin of 10, 7% at 310 basis points improvement versus prior year.
Adjusted EBIT of industrial activities was $2 4 billion with a margin of 11, 3% up 140 basis points from 2021.
Free cash flow from industrial activities was $1 6 billion in 2022, which turn at our initial industrial activities net debt into net cash position of $362 million at the end of the year.
Discuss in his introductory slide.
Adjusted net income for the quarter was $486 million up $61 million compared to prior year.
This resulted in adjusted earnings per share of <unk> 36.
<unk> year over year and full year adjusted EPS was $1 46 sites.
Adjusted net income for the quarter was affected by a higher tax rate due to discrete items booked in Q4.
A full year adjusted effective tax rate was about 28%, mainly due to jurisdictional mix of pre tax profit.
With higher rates coming from South America.
And we will likely see.
See the tax rate applied to lower in 2020.
Yeah.
Available liquidity as of December 31 was <unk> 6 billion and at the AD wondering on meeting the board of <unk> Doctor is planning to recommend an annual cash dividend of 36.
Sure totaling a little over $500 million and distributions to shareholders.
In the fourth quarter strong volumes and double digit price realization continue to shield us from the steep increase in production costs R&D.
R&D and SG&A expenses were higher tier two technology investments inflation and newly acquired businesses.
Energy costs increases year over year, but still accounted for about half a percentage point of our total production costs worldwide.
Agricultural adjusted EBIT increased by $287 million to reach seven $701 million with a margin of 13, 1%.
More than 300 basis points from the same quarter in 2021.
The higher profits were driven by higher volumes and profit and favorable pricing.
Which offset higher product costs, SG&A and R&D expenses.
Gross profit was up 394 million compared to Q4 2021.
<unk>, one 2 billion with a margin of 13, 1%.
For the full year gross profit was up eight $989 million or up 140 basis points from 2021.
Largely driven by strong price realization coming from all regions and better product mix, including margin reach technology related sales growing by about 32%.
Construction equipment adjusted EBITDA for Q4 increased by $14 million compared to Q4, 2021, reaching $34 million with a margin of three 5%.
These results were driven by favorable volume and positive price realization.
Production cost, including site related costs were an outsized headwind for the business.
Gross profit across the year was up $82 million compared to the full year 2021.
Mainly due to higher volumes and stronger pricing.
For our financial services business net income in the fourth quarter was $75 million down $50 million compared to 2021.
Factors include the high risk costs provisions linked to the termination of the construction business in China increased labor costs and compressed margin in North America slightly mitigated by robust volumes across all regions as well as higher recovery on used equipment.
Retained originations were $2 9 billion in the quarter, reaching $10 billion for the year up to $100 million from 2021.
The managed portfolio at the end of 2022 was $23 8 billion up.
<unk> 4 billion on a constant currency basis.
Delinquencies remain at a low level up 10 basis points year over year to one 3%.
Increase from December 2021 is explained by the in sourcing of the revolving credit account portfolio that was purchased in October 2022, <unk> Industrial Capital America acquired the receivables previously held by CD on a price on a private label program that will now be run and booked by our company.
Free cash flow from industrial activities in the quarter was over $2 billion on the back of a $1 $5 billion change in working capital.
Driven in large part by the reduction in manufacturing inventory as we mentioned before.
At the end of the year. The total gross debt for industrial activity was 5 billion with a net cash position of $362 million.
So within the first year of the spinoff, we were able to improve our net financial position by $1 5 billion on the back of the cash generated by the operations.
This takes to our capital allocation priorities and we have target spending $4 4 billion in combined R&D and Capex over the 2022 2024 planned period almost doubling what we are.
<unk>.
We're spending in the previous three years.
In 2022, we spent the first one 3 billion of that and we remain committed to investing in our business to fuel profitable growth.
We are confident the products and services, we will bring to the market with this spending will ensure higher financial performance in the near future and more importantly, IR efficiencies to our customers.
Cash generations helps us maintaining our investment grade rating, which has been reaffirm or improve by all the rating agencies after the spinoff.
We returned nearly $600 million to shareholders in 2022 through dividends and share repurchases.
And as mentioned earlier, we proposed the proposed 200 to two.
2023 dividend itself will total a bowl.
$500 million and we plan continuing our share buyback program.
We have the liquidity to fund inorganic growth and Youre seeing as used adventures armed for minority investments when opportunities arise.
We remain commitment to our capital allocation strategy and focus on maximizing value for our shareholders.
This concludes my prepared remarks, and I will now turn it turn it back to Scott.
Thank you Donna.
Overall demand continues to outstrip the industry's ability to supply at least in the near term, which despite record sales has actually dampened industry levels.
Soft commodity prices are trending down, but they are still generally above pre 2022 levels and fortunately for farmers fertilizer and other input costs are dropping as well.
In North America elevated farm incomes are sustaining demand for high horsepower tractors and combines while small tractor demand has slowed from the lofty levels seen over the past two years.
We see the European AG industry flattening as the macro environment starts to impact equipment demand there.
South America and Brazil in particular is a very good market for us the business conditions in Brazil are influx following the presidential election, but we believe that the fundamentals are still positive for agriculture in the region. We also see good long term opportunities in APAC, but this year will likely be slightly down.
And construction global demand is trending lower and we expect residential and commercial markets in North America, and Europe to decline in 2023 due to rising interest rates.
However, public construction spending at least partially fill in those gaps in the United States and Europe , and South America construction markets will be down in reaction to the overall macro environment.
We expect net sales of industrial activities to increase 6% to 10% with confidence and the stickiness of our 2022 price increases we expect to build on our margin gains by taking more cost out of our system.
We are committed to growing market share and we have the products brands and dealer network to do just that.
Returning to full production in our North American plants will also help.
Our SG&A as a percentage of sales remains one of the lowest in the industry and despite inflationary pressures, we will severely limit SG&A growth.
Free cash flow will be between one three and $1 5 billion, a little lower than last year as we have earmarked $1 6 billion for R&D and Capex up.
Up about $300 million from 2022.
Even accounting for the increased R&D costs, our EBIT is projected to grow slightly faster than our top line.
We are becoming a simpler leaner company every day and expect to modestly improve our industrial margins throughout the year.
Earlier today, we announced that our board of directors has determined that our shareholders will be best served by a single listing in the United States.
The majority of our trading in <unk> industrial stock has been shifting to the New York stock exchange since the spinoff of Iveco group, revealing that <unk>, new business profile and Investor base better fit with a single New York stock exchange listing.
Concentrating trading in one market will allow for increased liquidity of our stock improve investor focus further simplify the companys profile enable broader index inclusion and attract more passive investors.
The current Italian regulations only permit the delisting of stocks when they are or will be listed on another EU exchange by.
By definition, the New York stock exchange does not qualify.
<unk> industrial has an open dialogue with Borsa Italiana, Euronext, and we told them of our intention to leave the European listing.
The harmonization and modernization of the Italian financial system, which is underway is expected to include the New York stock exchange as an acceptable exchange.
This is our preferred path for a smooth delisting from Euronext, Milan, but not the only option. If this becomes an timely.
Okay.
We are targeting sold trading on the NYSE by the end of 2023, but that could shift into 2024, depending on the timing of the regulation change.
Rest assured we will delist as soon as it is legally possible.
At this point, we do not intend to change our incorporation in the Netherlands, where our tax domicile in the U K as part of the single listing. Therefore, we do not expect any material tax where trading consequences for our shareholders.
Our board of directors and management team are grateful Euronext, Milan for being our listing venue for the past 10 years and excited about the company's full return to the NYSE.
I want to stress that this does not change the company's long standing commitment to Italy in the Italian market.
<unk> employs over 5000 people in Italy made a significant investment with <unk> acquisition in late 2021.
Opened its fifth plant in the country in 2022.
We also have three R&D centers in Italy, developing products that are sold around the world.
While the delisting and is another step in our corporate simplification.
Real value creation come from the business we're.
We are now taking orders into Q4 in some markets and overall demand remains strong.
But the uncertain macro environment, especially towards the end of 2023 requires vigilance as we strive to support our customers dealers suppliers and employees.
We expect to escalate combined Capex and R&D investment as we launch exciting new products and build out the tech stack. We have already introduced some rabid enabled products and we will unveil more in 2023, but the real payoff for these higher margin precision solutions kicks in in 2024.
We are happy to have finally secured a contract with the UAW in North America. The agreement. We reached is fair for our employees and sustainable for the company employees return to work. This week and we expect it to affected plants to ramp up to full production in the coming months.
While the pace of investment inflation is slowing it is still inflation and we expect it to have an impact on our manufacturing energy SG&A and R&D cost in 2023.
On a more positive note, we are seeing modest supply chain improvements.
Our primary margin improvement initiatives strategic sourcing and CBS will start to yield results in 2023.
I want to close by emphasizing again, how proud I am of the team for what they have accomplished and ensure you that we are ready to do even more in 2023.
That concludes our prepared remarks, and I'll now turn the recall over to Sergei to open the line for questions.
Thank you, Sir ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad.
If you find that your question has already been answered you may remove yourself from the queue by pressing star two.
Make sure the mute function on your phone is switched off sell obviously to reach our equipment.
Thank you.
First question comes from Kristen Owen from Oppenheimer. Please go ahead.
Hi, Good morning, Thank you for the question and Scott.
Scott you talked about some of that.
Industry demand outlook for 2023, and I was wondering if you could comment more on some of the order book trends that were outlined in the press release.
I recall last quarter, you talked about some of the year over year declines being driven more by your intention on decision to keep order book's relatively short.
How far are you open now and maybe just say more about how you view demand versus order levels for 2023.
Yes.
Talked about the macro environment is.
It's choppy a little bit you see that in everything you read but our order books really are not open.
Haven't opened up Q4 in any markets yet.
Still are allocating so a lot of what's happening in the order book is our choice to allocate markets I mean, it's I'm not proud of the fact that we have not delivered on a timely manner.
In much of 2022.
The one market, where we've been very clear is down is low horsepower tractors. So we are seeing softness there and I mentioned I referred to.
The political situation in Brazil, it's really provide us.
Just taken farmers I think are just taking a pause we think the fundamentals in that market are incredibly strong the world needs that agriculture production and they need equipment in order to do that but.
We're just watching that very closely but overall Europe .
<unk>.
A little bit.
Slightly down, but we feel good about our ability to execute and keep that market relatively flat to the way. It was in 2022. So overall I think the demand environment is better than I would've expected to be at this point and.
<unk> really got them read running our factories as fast as we can as much as we can through the year.
Just being careful as we look at the fourth quarter. The fourth quarter is where we are being cautious at this point, we don't have orders for that yet, but where we have.
Talked about it I think we could open that up and probably book it very quickly.
Okay.
And then just as a follow up to that question, just how youre thinking about dealer inventory levels exiting 2023, do you expect to produce in line with dealer inventories build any comments you have there.
We are still.
Again with the exception of low horsepower tractors, we're still below historical levels and really quite frankly still below where most of our dealers would like us to be with dealer inventory. So we're going to work to catch that up.
We do not plan to get back to historical levels, we'd like to keep inventory relatively lean it's careful balancing there because you are running as fast as you can.
To provide shipments in the market is going to slow down at some point, but no. We are not looking to push a lot more dealer inventory into the channel. We've got some dealer fill that we've got to do just to give them acceptable levels of inventory, but.
Our goal and part of what we're watching for is to make sure we protect dealer inventories going into 2024.
Okay. Thank you.
Thank you. Our next question comes from Steven Fisher from UBS. Please go ahead.
Thanks. Good morning, just on the Q4 order book point, just curious Scott why haven't you opened up the order books, yet and what will you need to see to fully open them up for Q4.
Steven It really refers to.
And again I'm not proud of the fact that just our inability to deliver.
In a timely manner I mean, we've got a backlog, especially on our high horsepower tractors that is quite long.
And I think we're just trying to get more confidence in our ability to deliver.
Again inflation is it's.
It's not rising anymore, but it's still out there. So we also are making sure we manage our cost to you Derek and Stefano are really doing a nice job.
Of of managing cost inputs and their business.
But it's really that making sure we balance.
The cost price equation and you have seen from our history, we're really good at doing that.
But also ensure that we can deliver when we say we're going to deliver if we open up the books.
Okay. That's fair and then I guess in terms of the AG margins for 2023 can you maybe just give us any color on the puts and takes there I imagine.
There were a number of inefficiencies in production in 2022 due to the strike and the supply chain.
Then you have precision AG mix should be helpful. I would think for 2023.
So can you talk about some of those puts and takes and then what youre expecting for price versus cost in 2023.
Let me take this statement yet.
If you've already got it.
We expect.
2020 to be a play of cost.
More than a play of pricing.
We expect still to be positive price over cost.
As we have been 12 2022, but the big game will be in getting cost out of the production system and reducing cost also the production systems and that's a combination of having as most of our supply chain.
Or more.
Organized cadence.
And.
Possibly getting some improvement in.
From a strategic sourcing program that probably will kick in more at the end of the year rather than at the beginning of the year.
But that's what we're looking at and we have some.
Carryover pricing from 2022 Steel company and then you mentioned as well.
Growing sales in tech.
Which.
Generally a higher margin.
Then the pure equivalent.
Okay. Thank you.
Thank you and our next question comes from David Raso from Evercore ISI. Please go ahead.
Hi, Thank you just trying to square up the implied volumes I mean, you look at the price sorry, the revenue guide of the 8%.
Currency shouldn't be.
That much of a drag at these levels. So it looks like it's mostly just price in the revenue guide is that the right way to interpret it that basically volumes are flat and if that is the case. If you can give us a little flavor where volumes up versus down just so we kind of square up any chance of overhead absorption.
Volumes are up slightly.
Modest Lee I don't know if slightly modestly define that.
It's.
Low single digits.
North America is really where we see the greatest strengths and where we see the biggest backlog and where we've got the most work to do so I think that will be the the volume play.
To a great extent and the rest of Theres still lots.
Lots of work to do to deliver in <unk>.
Other areas of the world, but that really will be where most of the volume comes from.
And that's more of a large AG comment.
The units are bigger and so you've got it you got it.
It's high horsepower tractors and combines.
In that order or neither.
And it's only the comment about.
Still more about steel than price I'm, just so I understand what youre, implying there we still think our steel costs are up year over year more than price. It's all wrapped in a thought around so we think gross margins can expand in 'twenty three I just want to make sure I understand that.
That margin comment I am sorry, if I, if I wasn't clear I was talking about cost sop price over cost.
In general and cost includes.
Raw material by degenerative production cost so all of our production cost.
So essentially.
Essentially has to be positive for the year to margin neutral the margin part.
<unk> module, so if volumes up a little bit in price cost should be net positive to margin.
I assume we can infer from that gross margins are expected to expand as well as SG&A slower than sales growth with at least that was in the guide.
Is that correct that is exactly that is exactly correct looking at.
Alright. Thank you so much and I appreciate the detail on the delisting. Thank you.
And our next question comes from Jamie Cook from Credit Suisse. Please go ahead.
Hi, good morning nice quarter.
Yes, just two questions.
Scott.
Given the performance that you put out.
The positive financial performance, you've put up can you talk about how youre thinking about the AG cycle and the implications for your 2024 financial targets, whether you think theres upside there and then I guess my second question, just an update on Raven and where we are relative to your synergy targets. Thank you.
Okay, well first of all if you go back a year to capital markets day.
We're obviously much of 2022 played out significantly better than we expected.
Unfortunately, some of that driven by soft commodity prices impacted by the war in Ukraine, which we couldnt have anticipated, but overall.
22, and then as we look at 'twenty three are both better than we had anticipated from that but that's that's really market related and not our our performance is actually doing quite well.
As we look at our 2024 targets.
We obviously feel like we're on a path to do better in some areas, but we've got work to do in some areas. So we feel like generally speaking.
We set ambitious targets and we're on path to hit those but we are.
I don't want to be a pessimist, but I just think 24 could be a we talked about it could be a more difficult year. The AG cycle, though as I talked about in my prepared remarks soft commodity prices are still at relatively good levels and it looks like that could could hold and farmer income.
<unk> at elevated levels in there, but they're reluctant to pay taxes and therefore, the desire to buy equipment is still makes a good setup for the AG cycle. It won't stay positive forever, but we feel like right now we're not about to call that starting to turn negative in 2003.
As far as Raven concern.
I'm honestly not sure I could be more positive on how well that integration has gone we committed to a reverse integration because we like the team and we like the culture.
And our team has embraced that we are we are learning from their agile customer focused system and we're building on that giving them the tools and resources, we've done a tremendous amount of money.
And really it's we've talked about the new Patriot sprayer that we brought out with full Raven capability will embed their tools and everything that we can going forward, but really integrating them into our tech stack is where the real value unlock is huge aftermarket opportunities there retrofit opportunities in.
But overall I'm, just really pleased with how the team both the Raven team and our team has done to bring value and overdrive on our synergy targets.
Thank you, we'll now move to our next question from Dylan coming from Morgan Stanley . Please go ahead.
Great. Good morning, guys. Thanks for the question I just wanted to ask on some of the more idiosyncratic margin improvement opportunities. You mentioned you called out the sourcing program and CBS starting to ramp in the quarter.
Don had mentioned it was there'll be a bit more back half weighted but can you just give me earmark kind of how much more of it and how.
How much more of an opportunity that could be on more of a dollar basis on a margin basis. So I'm just trying to get a sense of kind of quantifying what the tailwind could be next year.
Yeah, well, we actually are not.
Our CBS and lean initiatives are not starting from nothing and we've got a great history with WCS and pulling labor lean tools throughout the plant network.
We're looking to do is how do we deploy that in other areas of the business and accelerated in the plants and I think thats what youll see.
<unk> shape this year end.
Obviously the.
That's the opportunity is quite significant but what the teams are working on now is how do we just pushed back the cost input using various lean tools to get back to where cost were pre pandemic.
A lot of heavy lifting but don't have referred to it 2022 was your price in 2023 is going to be a year of cost focus and our lean tools will be.
A significant way that we get after that but more importantly, it's the way we get after delivering value for customers. It's not about just taking cost out we're going to use those tools to make quality better to make delivery better than overall help us expand margins.
That's I wouldn't say short term, but we can do those that we did that some of that work in 'twenty. Two we're accelerating the work in 2023, so a great opportunity across the business to use those tools to.
To create value and expand margins strategic sourcing is a longer.
Longer in the tooth program, it's probably got kicked off last summer and fall.
We've got a.
A strong team working through it.
But that that will so some results later this year, but really start to drive.
Notable margin expansion in 2004.
And beyond but both of those I would say more near term opportunities with our CBS initiatives more significant long term opportunities with strategic sourcing.
Okay. That's helpful color. Thanks, Scott and then just a follow up on the precision AG revenue target I think.
Now you mentioned that you exited the year of 32% you were originally guiding at the tech data up 11% in 2023 I know, it's still a fairly recent targeted but just given that exit rate would you kind of consider any upside to that $1 billion target for 'twenty three at this point.
I will stick to that target for the timing.
Great. Thank you.
The next question comes from Tom is that Korea from Jpmorgan. Please go ahead.
Hi, good morning. Thank you so much so just to get some color on the volume expectation of low single digit.
Is that a higher floor and call it mid single digits, but negative for construction to that nets out to a low single digit growth for the overall company is that.
Is that how we should be thinking about it.
No no no it's actually.
The construction business and backlog is quite good despite.
Difficult overall environment, we had so many limitations last year and our ability to produce that that business is actually reasonably good. So both businesses will have positive volume in 2023.
Got it that's super helpful and then second.
Second question, what kind of incremental margin should we expect in AG and construction segment.
Yes.
I will go through the.
In line with what the kind of incremental margins that we have had over time.
No big difference from that.
Probably a little bit more on construction because we have.
Section was more affected by some of the cost headwinds this year.
But for <unk> I will use.
It will be pretty much in line with what we have added in the past.
Got it thank you so much.
And our next question comes from Mig <unk> from Baird. Please go ahead.
Good morning.
Following up on construction here.
I'm wondering if you can give us maybe a little more context around that.
The order book here and the declines that we've seen in both heavy and light equipment.
Are you limiting the order book in construction.
Similarly, what are you spending with AG and.
And I'm also kind of curious in your own outlook for 2023 for the industry.
<unk> seen arguably a little more pessimistic than some of your peers.
Framing 2023, so again color on that would be helpful as well.
Well I.
I don't I didn't obviously was busy this week, but I didn't really digest the cat.
Numbers overall, but I don't remember them being overly positive on 2023.
I think we're somewhat in line with that was on the construction side.
Yeah.
We're really.
Under serving our dealer network with heavy excavators, and we're working diligently to improve that so.
That's significant.
Opportunity for us, but that's where.
Some of the backlog reduction has been just because we cannot deliver in that area on the light side.
We've got.
Just really good progress with San Piranha.
We will start to bring.
Expand the markets, where we can serve.
With that but South America was very strong for construction last year, we don't expect that to repeat.
So that that market will be a little bit from a construction side be a little bit lighter than it was last year, but overall again, it's going to be a positive year Stefano and his team are doing a nice job with that business and we like where it's going and it's got a long.
Our long range upside for sure in that business.
Okay, and then if I can try to price cost question as well.
Looking at on a consolidated basis. It looks like you had positive price cost of about $180 million. The past couple of quarters and as you contemplate 2023 I'm wondering is.
This figure holds or.
We should expect any significant variance from that.
So directionally, we expect to be positive price cost in <unk>.
In 2023 as well.
So I wouldn't I wouldn't.
Take much different view.
What we're seeing I mean in absolute terms.
But I wouldn't take a much different view of what we have seen throughout 2022.
I appreciate it.
And our next question comes from Marta <unk> from <unk>. Please go ahead.
Hi, Good afternoon. Thank you for taking my question actually the ninth piece it would be helpful. This area and the pricing environment.
Glen.
Different angles specifically.
Given the industry.
In the past.
Looking at our competitors.
S discount.
<unk> two.
Two.
Never mind.
Thanks, but.
<unk> hasn't been the case in 2022.
And despite.
Poverty.
Okay.
So I was just wondering whether you see anything at all that would suggest that.
In 2023 yellow, what's the risk.
So looking at competitors.
Give me a second.
Discounts for the build out and how would you react to that and then I had one lumpy.
So we are.
Still expecting inflation to impact our business and therefore, our supply chain in 2023 to a lesser extent than it did in 2022 so a.
Declining rate of inflation, but still seeing inflation so.
We've seen a decrease in some areas, but overall the cost that we're paying is not coming down so we don't.
Intend and in fact, we're still going to have to price going into 2023 again at lower levels because of the lower increases, but we don't see a decrease in pricing in that.
Again the.
The quality and innovation that we're putting in our products would suggest that we don't need to go start competing on price and I think the industry overall.
Is likely going to take that approach.
Thank you and then.
Just wondering what are the big Tech.
Putting the workforce.
April could benefit from the opportunity to tap into the talent pool.
For your precision.
Hi, Eric.
Okay.
Yeah.
That's actually something I have been pushing the team on for quite some time as we have done significant hiring.
With our technical team precision and autonomy.
But.
Many of the.
The layoffs are not actually the programmers and engineers. So we don't really see that as an opportunity and we did most of our hiring in 'twenty that will probably slow down a little bit but to the extent that we can bring on great talent that.
More reasonable prices because of what others doing but certainly.
Our commitment to accelerating value that our customers get from precision and autonomy is there.
We are continuing to hire in 'twenty three so but no there is not a.
Significant.
Opportunity for US there just because of where we're hiring and where those most of those employees are located.
Thank you.
Thank you.
And our next question comes from Nicole <unk> from Deutsche Bank. Please go ahead.
Yeah. Thanks, good morning, guys.
Good morning.
And can we just start by talking a little bit about what youre seeing with respect to used equipment values any signs of moderation at all from such high levels in 'twenty, two within AG or construction.
Used values are still hanging in there just again because availability.
Im not talking about low horsepower tractors, because thats a different scenario and we've seen that market stabilize that at a lower level, but at the high horsepower side.
In large AG, we're still not seeing.
Large fleets anywhere in the OEM side or in the use side so prices are staying.
Reasonably high.
Okay got it thank you and just thinking about the quarterly cadence of earnings <unk> 23 versus normal seasonality I would kind of stack that you would see a return to normal seasonality, but if theres anything you guys want to comment on to think about throughout the year that would be helpful. Thanks.
No I would say, we will go back to the normal seasonality.
Which sort of we have seen in 2022 as well.
Between.
Production in.
And retail sales.
So.
I will say, yes going back to the normal.
Thank you I'll pass it on.
Thank you, we'll now take our next question from Timothy Thein from Citi. Please go ahead.
Yeah.
Yes. Thank you.
Yes, first Scott Interestingly.
These order order a board comments.
In our releases have kind of taken a life of their own but I'm just curious how does Derek and team.
Interpret that.
Theres so much seems to be so much noise just in terms of how.
The World has unfolded over the last year, or so and how you and others have shifted to an allocation mode.
Really getting at the underlying significant.
These order margin in light of.
Just all of it.
Issues around timing of deliveries and meaning.
How significant are they.
I guess then.
The nature of that question.
Yes, I would.
If you if I could call Derek up and getting on the call I think you hear a much more positive tone from him and then how I think youre reading it.
Obviously.
It was.
We're coming off an unprecedented demand and I think we're seeing regional changes in that but overall the net portfolios are still reasonably good the collection, what what used to have as you would open up the book and you would Philadelphia in an hour and we still see that in some markets but.
Generally speaking, it's slowing a little bit in in Europe , and low horsepower tractors.
In almost all markets, but overall I mean, I think a lot of what we're seeing.
We didn't expect it but.
Lula election in Brazil, really caused a lot of pause for farmers in the region and that had been has has been so good for us and we expect it to be but it's taken I would call. It a pause.
In in orders, there, but overall that that market.
Having just been there recently is very very.
Strong so I think it's just a matter of timing and where we're trying to manage that appropriately, but I think Derek.
Managing the business extremely well as you've seen by the execution.
And that includes on the sales side to make sure.
The orders in retail orders come through and he is not at all.
Rounding and alarm. He is just putting the right measures in place to make sure that we deliver on a on a solid year in 'twenty three.
Got it got it and.
And back to your earlier comments about just dealer and again.
We can also.
<unk>.
The low horsepower.
Market weakness I think is pretty well telegraphed and known at this point, but again sticking to.
In large AG.
Far more significant from a bottom line perspective, <unk> just the notion that.
Dealer any sort of dealer stocking or restocking is likely not happening in 2003.
So presumably that could pose some tailwind as we.
24, and a long ways off but that's still in front of the company as a whole is that a fair takeaway.
I think some markets will get back to reasonable levels of inventory, but I, just I don't like I mean, we want to be.
Our goal our intent.
Is to make sure as we manage and protect our own cash flow that we do the same for our dealers and that takes discipline to do and that's the discipline that we're going to have as we go through this.
The end of the year was a little bit.
Tricky for us because there was so much very good work done to.
To complete this significant fleet inventories, we had literally all over the world, where we just were missing components and we needed to finish those.
Get them built and tested out.
To dealers and the team did a really nice job with that but it happened so much at the very end of the quarter we ended up.
With with more inventory in some places that has retail orders the customers are going to pick it up right away. We just didn't get it there in time for that to happen. So I think the end of the year inventories arent really telling a great story, especially in North American market, where that was was significant but overall.
We feel like there is a.
Just a tremendous opportunity for us too.
Keep our factories running and produce for retail customers at this point and possibly at the end of the year start to get dealer inventories back when I say back up I mean, its up to acceptable levels not up to historical levels.
Alright, thank you.
Our next question comes from Michael Feniger from Bank of America. Please go ahead.
Hey, Scott Thanks for taking my questions I believe you phrased. It at 2022 was a year of price 2023 is a year of cost just so I understand this a little bit more if we look at 2022 can you quantify some of the costs embedded in the model attributed to.
Premium freight transportation, just buckets that like cyclically.
That cost will be as elevated in 2023.
Well you hit a big one, which we've already seen start to come down.
Being transportation cost just.
<unk>.
Cargo boxes, all of that stuff, we've seen that start to give way and the way our contracts are we don't always see it right away but.
Nonetheless that is.
That's one and overall, we're just not seeing the spike in prices were again inflation, there, where we're dealing with it I think the team's proven our ability to manage that semiconductors have also come down so.
So that set up at a much more reasonable or I guess acceptable.
Level for us, but overall prices are going to be higher for us in 2023, but when I talk about it but we're looking at the entire business portfolio and saying what cost have we incurred through the pandemic and then a response to the pandemic, we had to ramp up so quickly to deliver customer orders and how do.
We get back to running the business.
Efficiently and that's the work when I talked we talked about cost it's getting after that efficiency in all aspects of the business.
We might have lost a little bit of during the last couple of years.
Understood and I know, we just went through the order order board comment, but you did also make a comment earlier.
Jamie clinical about.
2024 could be a more difficult year.
Many economists actually think 2024 could could we be seeing the global economy, expanding so I just wanted to narrow in on that a little bit why do you think 2024 could just become a more more challenging years as you said.
But remember we are significantly more exposed to the AG cycle than we are to global GDP. So.
And I.
We call it an AG cycle for a reason, which means that it's not a flat line and it doesn't go in one direction forever.
And we've had a very high market than I am not actually not at all talking about a peak here, but I'm, just saying we had a very strong market here and I am acknowledging with other global inputs that may at some point impact the AG demand 24 may be a year that isn't as strong as.
As others.
I mean, I think that's not a negative its not a negative comment is just the fact actually.
Alright understood Scott and just just to squeeze one last in like you did see this inflection in your industrial net debt.
At a time.
From some of the cash generation from the business in 2022, just I know you are aggressively investing in the business.
Can we think about the fact that you can't you inflicted on your industrial net debt ahead of time and how should we think about that in terms of potentially share repurchases to kind of close maybe youre valuation discount to peers. How you kind of look at that I know you're aggressively investing in R&D and capex, but just that lever to pull and how you think.
<unk> of that.
Okay.
So let me take this one.
We set very clear capital allocation priorities, we say that we are investing more in R&D as you pointed out.
We step up our dividend in 2022, we went back and delay in share repurchases.
At levels that probably we hadn't done in the past.
We want to continue doing share repurchases.
In 2020.
So that's that spot of.
The mix that we have in there and then we also have.
Some availability for some sort of M&A.
In particular in the tech space.
If that.
It helps our profitable growth there.
Thank you.
Thank you all and now we have time for one final question Nancy.
Goldman Sachs. Please go ahead.
Hi, Thanks, very much for taking my last question.
I just wanted to touch on cash Youll guidance for 'twenty, three sort of sees weaker cash conversion I was just wondering maybe you could just comment a bit more on what youre seeing there and sort of what the moving parts.
Keith.
Yeah again I'll use the opportunity answering your question just to thank the team for delivering such strong cash flow in the fourth quarter, which gave us a reasonable as a result for the year.
We're expecting a another $1 billion plus I think the one three to one five range.
Cash flow in 2023, but we are spending several hundred million dollars more in Capex again part of our strategy is bringing new products to market.
That do allow us to have higher profit higher gross margins and gain market share. So those things don't come free so we're going to spend more money to get that and that's the really the key driving factor of it will still be disciplined with inventories and managing that but that will be the differentiator between year over year.
Cash flow generation.
Yes. Thank you.
Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Yeah.