Q1 2023 CNH Industrial NV Earnings Call
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Hello, and welcome to the CNA Industrial My name is Caroline and I'll be your coordinator for today's event.
Please note this call is being recorded and for the duration of the call. Your line will be on listen only mode.
However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions.
If you require assistance at any point, Please press star zero and you will be connected to an operator.
I will now hand over the call to your host Jason <unk>, Vice President of Investor Relations to begin today's conference. Thank you.
Thank you Caroline good morning, and good afternoon to everyone. We would like to welcome you to the webcast and conference call for C. N H Industrial's first quarter results for the period ending March 31 2023.
This call is being broadcast live on our website and is copyrighted by C. N H industrial any other use recording or transmission of any portion of this broadcast without the express written consent of <unk> industrial is strictly prohibited.
Hosting todays call are C N H industrial's, CEO , Scott wine and CFO , Don N cheese them. They will use the material available for download from the C N H industrial website.
Please note that any forward looking statements that we might be making during today's call are subject to the risks and uncertainties mentioned in the safe Harbor statement included in the presentation material.
Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent annual report on Form 10-K, as well as other periodic reports and filings with the U S Securities and Exchange Commission and the equivalent reports and filings with authorities in the Netherlands and Italy.
The company presentation include certain non-GAAP financial measures additional information, including reconciliations to the most directly comparable U S. GAAP financial measures is included in the presentation material.
I will now turn the call over to Scott.
Thank you, Jason and thanks, everyone for joining our call.
With record first quarter margins in both agriculture, and construction, we had a solid start to the year.
Robust demand for large agricultural equipment continues, especially in North America and construction, we benefited from better capacity utilization and higher volumes in North America and Europe .
Growth in both businesses reflects our progress and I'm increasingly encouraged by the resilience of our end markets.
Our lean manufacturing and strategic sourcing programs are introducing simpler more efficient processes across the company.
The teams are doing a lot of foundational work right now and we will accelerate these results along the way as we implement these multiyear margin improvement plans.
We are successfully employing a variety of approaches to develop our tech stack and the benefits to our customers and business will be significant.
Addition to our R&D and capital expenditures were also also announced three key acquisitions bolstering our strong precision agriculture and alternative fuel portfolios.
Yeah.
With increased volumes and continued price realization in both agriculture and construction revenues were up 15% in the quarter.
Industrial EBIT was up 29% with a margin of 11, 6% up 130 basis points over the first quarter of 2022.
And also up sequentially from Q4, the supply chain improvements a lot or manufacturing teams to be less encumbered by fleet inventory completion.
And as it should all of this translates into a higher bottom line results visible in our solid year over year EPS increase.
Yeah.
Derek Nielsen's AG team is laser focused on delivering for customers reflected in net sales of agriculture, rising 16% with gross across growth across all regions.
Ongoing industry demand, especially in North America row crop market strong year over year pricing and a favorable mix all contributed to the higher sales.
Rebounding retail sales in Brazil led to decreased dealer inventories for our brands from the end of 'twenty 'twenty. Two so we are well positioned to compete and win in that market.
Healthy construction demand is leading us to increase production on certain products and Stefano Pablo and his team continue to align our portfolio with customer needs.
At Con Expo, we previewed innovative new products like the L. 100, many track loader, which was developed in conjunction with our February Ana.
Team and cases E series wheeled excavators.
Focusing on premium capabilities and operator experience, we continue to break new ground for our customers.
With interest rates rising and banking challenges increasing it is imperative that we have a healthy captive finance to serve our dealers and end customers.
I don't and it's financial services team have decades of accumulated experience is leading this business.
Many of them even successfully fought through the 2008 financial crisis. It is reassuring to have a sound and conservatively manage finance business, where the portfolio has continued to grow even as interest rates temporarily pressured margins.
Okay.
And for a Great example of winning the right way and February San each industrial received the highest score in our industry from the 20th twenty-three S&P global sustainability sustainability yearbook, which puts us in the top 1% of all companies and industries.
Okay.
Our company strategy is centered around five key pillars customer inspired innovation technology leadership brand and dealer strength operational excellence and sustainability stewardship.
And operational excellence, we are firm, we reaffirm our annual savings target of 550 millions by 2024 year end when compared to our 2021 baseline.
Sabra buttons team is driving our strategic sourcing initiative and by the third quarter of this year. They will have visited embedded about 450 vendors around the world to ensure we select the best suppliers for our needs.
This program will transform our supply chain to sustainably improve quality delivery and cost in 2024 and beyond.
We are ramping up our C N H I business system, where C. B S rolled out rollout across the company.
To date, we have trained over 2000 employees on how to apply lean principles at their locations and more trained each week and we are increasing the pace of kaizen events by the end of the first quarter, we had already surpassed 60% of our events held last year.
I also want to highlight accomplishes accomplishments in two other pillars today.
C. N H is committed to building technology that continuously improves productivity and field experiences for farmers and builders, we constantly break new ground with the goal of marrying great iron and great technology.
Last year, we revealed our high horsepower medium heavy duty tractor platform, which combines best in class technology with premium comfort.
The T seven and Optum tractors are leveraged across new Holland encase, eight respectively sharing common componentry, while retaining brand specific features.
We designed this tractor to provide a full suite of benefits requested by farmers in its first full year in the market. It is receiving excellent quality ratings, leading to low warranty cost and we are gaining market share in this important segment. This.
This customer inspired design approach is a win win because delighted buyers made improved gross margins that drive a high return on investment.
We are continuously working to become a technology leader spurred by significant investments our goal is to accelerate adoption of ever better precision solutions, thereby bringing additional value to farmers and builders.
From 'twenty to 'twenty two to 'twenty 'twenty four we're committed to nearly doubling our R&D and capex investments versus the prior three years.
Building out our tech stack and launching new tech enabled products.
Some of the latter will arrive in 'twenty three 'twenty four but from 2025 on the pace will dramatically increase since our acquisition of Raven. We have hired over 500 Tech engineers, who are developing the next generation precision solutions that will seamlessly integrate with our great iron.
We also recently announced two acquisitions that will further propel our technology innovation and a third that advances our alternative fuel solutions.
First we purchased augment whose technology on our tractors and sprayers increases yield boost sustainability and reduces application time effort and input cost augment it will operate within Raven.
Secondly, we announced our agreement to purchase Hemisphere, a global leader in high performance satellite positioning technology hemispheres capabilities will allow us to rapidly develop automated and autonomous solutions for both agriculture and construction, we expect to close in the third quarter.
For more than two decades, we've been it's a four of alternative propulsion exploring innovative offerings that support farmers and advance our strategic priorities during.
During the quarter, we took a controlling stake in Benjamin whose methane capture capabilities are paving a path towards a carbon negative future on farms further cementing our sustainability stewardship with a platform that is poised to deliver value and growth.
We are making judicious and promising strategic investments to grow and innovate our brands. Our team is demonstrating how we can provide value in any economic environment and we remain focused on executing our growth strategy.
I'll now turn the call over to donate to take us through the financial results. Thank you Scott and good morning, Good afternoon, everyone on the call.
First quarter net sales of industrial activities of $4 billion were up roughly $600 million or 17% at constant currency year over year.
This was mainly driven by favorable price realization and higher sales volumes.
Adjusted net income for the quarter was $475 million with adjusted earning per shares or 35 cents up seven cents on the back of ongoing strong operating performance.
Free cash flow from industrial activities was negative 673 million about a $390 million improvement versus the first quarter of 'twenty to 'twenty two.
One is a normal seasonal buildup of finished inventory and preparation for the spring selling season.
Okay Gotcha net sales were up 60% to $3 $9 billion supported by favorable price realization higher volume and favorable mix.
Gross margin was a record 26.2%, mainly due to higher volume and pricing across all regions offsetting higher manufacturing costs and poultry cost.
Yeah.
Agriculture, or adjusted EBIT increased by $144 million or <unk> 33 per cent to reach $517 million with a margin of 14, 5%.
Mostly driven by the gross margin improvement.
We're still seeing high carryover price and close to inflation when comparing year over year and that will continue into Q2.
That's also true for our SG&A and R&D expenses, which like our manufacturing cost I've seen that have been heavily impacted by inflationary pressure from the second half of last year.
Yeah.
Got it over pricing was fade into the second half, but that is also what our proactive efforts to contain costs and especially SG&A would be more evident.
We have solid plans to increase the full year margins versus 'twenty with Ito and reduce volatility over time.
Yeah.
Construction sales were up 6% driven by favorable price realization as well as positive volume and mix in North America and in Europe .
These more than offset the close of operations in China, and Russia, and lower wholesales in South America, what Ddos what the stocking.
Gross margin was 15, 9% up 260 basis points, mainly due to higher volume improved fixed cost absorption and favorable price.
Yeah.
This was partially upset by higher robot theater that manufacturing cost.
Construction adjusted EBIT was $44 million with a margin of five 2%.
820 basis point increase from last year.
We did have one month of strike at the Burlington plant at the quarter and with the workforce back from February production is ramping up to full capacity there.
The same 2023 quarterly dynamics and I apply to construction as well.
For our financial services business net income was $78 million down $4 million compared to the first quarter of last year we.
We saw favorable volumes in all regions, but this was more than offset by margin compression in North America.
Risk cost and increased labor cost.
While rapid rate increases contributed to the margin pressure.
<unk> managed through a tight asset liability duration matching.
We have a limited impact on our result, and that is mainly linked to the lungs retail delivery delays in 'twenty to 'twenty two.
Which created a lag from when a customer financing post contracted when it was founded.
The technology Nations, where $2.2 billion in the quarter, the managed portfolio, including JV at the end of the beta was $24 $5 billion.
The receivable balance greater than 30 days past due as a percentage of receivables was one 4%, but I gotta contract goes back from customers remaining goes financial health.
As we look at our capital allocation priorities, Scott already touched on our organic and inorganic growth investments.
I want to mention that in April our financial service business issued $600 million in bonds.
Any show eight under the $70 million ABS transactions to continue funding our growing your receivables portfolio.
A fact that off at actual service business, he's able to raise capital in these times is a testament so that sounds good I wouldn't do that.
In Saudi the market presence of this part of our business.
It's part of the board approved share repurchase program the company executed over $70 million buyback in Q1, and this program is continuing in the second quarter.
On my third well my third annual dividend was distributed to our shareholders well over the half a billion dollars.
I'll now provide a brief update on the listing from Borsa Italiana, Milan, we have had constructive dialogue with exchange management and we are now confident that the listing process would be completed by the end of 2023.
I understand you that investors with a European mandate may be required to divest their shares when did the leasing happens. The board is prepared to do a special buyback program to offset the impact if needed as a balance sheet and our cash generation allow for it.
Yeah.
We remain confident that the opportunities for passive investment in CNA stock will increase as a result of the expected inclusions in the U S indexes.
Overall, we have had a very positive feedback from shareholders regarding the further simplification of our profile with a single listing in New York.
This concludes my prepared remarks, and I will turn it back to Scott.
Thank you Donna.
Most of our 2023 estimates for industry unit performance are consistent with our last earnings call. We have slightly increased our projections for combines in North America, but marginally lowered construction estimates in South America and APAC.
Our order backlog remained solid well above 2019 levers levels in agriculture, and construction order books are full through the third quarter.
Model year 'twenty 'twenty four list price updates will be announced later this month and we will be open opening the Q4 order books shortly thereafter in most markets.
Just on feedback from our dealers, we expect for Q4 order slots to fill rapidly.
Our dealers remain on allocation for products, where demand is outstripping our ability to produce especially our large agricultural equipment with precision technology.
Dealer inventories for high horsepower tractors and combines remained at historically low levels on the other hand with persistent small AG demand softness.
We are lowering production of the relevant equipment to keep dealer inventories near optimal levels.
We saw an uptick in dealer inventories for light construction equipment due to high shipments in the month of March but the inventory to sales ratio for these products remains quite low.
As demand for row crop products is strong pricing levels are proving durable order backlog remains solid and dealer feedback is positive we are raising and narrowing the range of our full year net sales guidance to up 8% to up 11% compared to our prior forecast about 6% to 10%.
We are reaffirming our previous 2023 guidance for the remainder of our metrics.
With the progress we have shown so far.
And at today's sustained volume levels. It is evident that we may approach or even meet our sales margin and earnings per share targets from capital markets day, a year early.
What we ship what you should retain is that we were working to make seen H, a highly profitable and cash generating business regardless of industry conditions.
It is too early to call volumes for 2024, but the drivers in most regions remains strong.
I want to conclude with a few thoughts on 2023 priorities and outlook.
As we look at the overall business conditions for 2023 we feel optimistic about our positioning in the industry and are encouraged by an improving supply chain and resilient AG and construction markets.
Commodity prices are softening with wheat, bean and corn prices depressed versus this time last year, but many farm input costs are down in farm incomes remain elevated.
We see continued strength of our markets, our growers in Brazil, and in North America corn belt.
Yeah.
Regardless of the macro backdrop, we are continuing to invest in R&D technology to build and enhance our precision enabled products custom.
Customer engagement and retention will sustainably improve as we feel the automated solutions, enabling near seamless workflow and increased yield and productivity.
The Raven integration continues to go well and we look forward to building on that momentum with our new acquisitions.
Results from our margin improvement programs will play an important role in our journey to deliver escalating value to shareholders, our investments and progress are making us better for our customers strengthening my conviction that our future is bright.
That concludes our prepared remarks, Caroline will now open the line for questions.
Sure. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad you will take the first question from Daniela Costa from Goldman Sachs. Your line is open now. Please go ahead.
Hi, good morning, Thanks for taking my question.
Just have two questions if possible on the first one instead of surrounding the current.
Given all the current credit situation, if you could give some color on how much I'll sneak one that you're selling your currently financing versus third parties and whether you plan to say call. It maybe more off of that rate.
Related to what maybe is not yet financed by you or for some reasons that that's sort of out of coal and what could that mean and the second question. Just on your comments on the journey, we are making towards precision AG can you maybe elaborate on that journey and turns off the or inorganic journey, where or why do you think.
In terms of like the the ideal product set that you.
Have you got to where you wanted 10 now it's more about growing it organically there you're still missing certain parts that you would like to just strengthen and in which are those thank you.
I don't know, let me take the first one so in terms of retail Finance Inc.
Depending on the region sudden and business about between 25 and 45% of what is retail is fine by us.
This is actually in a highly competitive market. There are other players there for dancing, we may with if theres some lower liquidity in the market, we may see an uptick or not a lot of penetration, but we don't see this as an issue.
Yeah, and as it relates to the Tech stack you know obviously as you've heard me say before I mean I feel good about.
The actual precision technology at all odd autonomy automation, that's currently on our products and what Raven does it rapidly accelerate celebrates.
Our ability to go faster and do more you know our autonomy is as good as anyone in the industry.
But really enhancing the precision suite and our products.
Off-board onboard all of those things you know what the team is doing now making tremendous progress.
To make that whole system work better and easier for our customers you know, where it's a journey and any word we've got a ways to go there, but when we add competencies like augment and hemisphere. It just allows us to go much much faster than you know the history of rave and you know that.
These bolt on acquisitions, along their journey as well so it's not cause but I do think we have the capability. We've added over 500 engineers to the Raven team. We have the internal capability to do is everything we need to do now there might be opportunities for small acquisitions to enable us to.
Yet faster yet again.
But you know I feel good about where mark and parag are and their teams are and ensuring that we can deliver value for customers along the way as we get this tech stack build out complete.
Thank you.
Thank you we will take the next question from Michael Feniger from Bank of America. Your line is open now. Please go ahead.
Yeah. Thank you for taking my question Scott could you talk about.
The cost savings I know, there's the first wave and second wave when do we think you'll see this run rate savings you talked about you're already kind of in line a target for your sales margin and EPS, but it doesn't feel like you've actually gone through with some of these savings initiatives that got pushed out. So can you kind of give us an update of where we are.
<unk> and <unk>.
That story right now.
Yet you actually donate helped me make it easy to answer that question. Because you know we did recommit. This morning to the $550 million that'll be next year and most of that actually comes in 2024, obviously the significant inflation that we experienced last year and then this year the beginning of this year.
Made some of that hard but.
The work that we're doing you know I talked about the progress of the strategic sourcing teams, making you know Scott Moran at our C. B S team are doing tremendous work in the plants, you know Derek and his team.
Our are driving you know better solutions, making the products that we design easier to assemble and source parts for it. So it is a holistic approach to cost and I think you know the fact that you know will get many hundreds of millions in 'twenty 'twenty four to get to.
That 550 million gives you you know a little bit of insight into what's to come but you know certainly you know a lot of this stuff as we see our supply chain improve you know our lean programs improve our strategic sourcing improve our designs improve our really gives us a lot of confidence that our the record margins we delivered.
This quarter I'm, you know can be beat in the years ahead.
And Scott just to follow up on that I mean, obviously nobody has a crystal ball because it seems debate on what 2024, it looks like but what there's a line of sight you have on your cost savings do you think it could expand our margin in a backdrop where units are maybe flattish to even slightly down next year.
Yes.
Okay. Thank you.
Okay.
Thank you we'll take the next question from Jamie Cook from Credit Suisse. Your line is open now. Please go ahead.
Hi, good morning, and congratulations.
On a nice quarter I guess, just my first question could you just give a little color more color on what you're seeing in Brazil, I think last quarter, you were a little more cautious it sounds like maybe there's some weakness on the on the the.
The smaller horsepower side that large horsepower seems to be okay. So that that would be my first question and then I have a follow up after that.
Yeah, well you know the situation in Brazil are just the timing of our earnings call last last quarter you all affected how we looked at that and you know there was a lot of for lack of a better term constipation, you know with the government transition.
And you know we were the our dealers there were incredibly cautious.
Literally a week after the earnings call. We started to see things turned around we'd already made the decision to to lower production. So it allowed us to reduce dealer inventory in Brazil, and we feel you know very very good about where we're positioned now with leaner inventories other than anyone else in the industry and a great product lineup and more.
We are really really solid team in Brazil to manage that market. So we think Brazil is going to be a decent market this year not not us.
Not gonna grow as much as it did last year, but still a very very good market for us.
And I guess just my follow up question based on what you guys said about the cost savings kicking in in 'twenty 'twenty, four and where your margins are today and related to that last question Scott not to put words in your mouth, but it seems like we need to update them you know the street favorably on a positive basis.
Increased share your targets that you laid out at the capital markets Day, you know at some point just given what you said in the previous question and so one confirm that obviously you don't have to tell us what that is today, but my second question is on.
Does the optimism just relate to two that can cause that farm equipment side and sort of where are you in that process within construction equipment as they all act or a nurse, whereas construction relative to what you would've thought relative to your capital market targets. Thanks.
Yeah, well you know we did put a comment in our prepared remarks about how we expect it to get to some of those.
'twenty 'twenty four targets and we knew it was just a matter of time before that question. So thanks for giving US a way out of the way early.
You know, we do feel good the markets remember, what we had anticipated at the time of capital markets day, and it went over like a lead balloon was that markets would be relatively flat in 2024 are what we've seen is the markets are just been better for us and you know as.
You can see we're taking advantage of that.
And now as you know as we sit here the positive momentum that we've had looks like it's going to continue from a market perspective again not at the same levels, but you know still there. The overall fundamentals are good.
As we talked about.
As my mother and my last question.
You know, we're putting just tremendous energy and how to make the margin expansion opportunity as we serve our customers better how do we deliver better margins along the way and you know I think with that backdrop, you know the the updated guidance will be reasonably good, but we would expect that to happen about a year from now.
We're not we haven't put a date out there yet, but you know we want to get into 2024 have a better understanding of what that can be and I think we'd update our our long term guidance sometime in the first half of 'twenty 'twenty four.
Okay, and then just the follow up ads versus construction do you Wanna comment there do you feel better on AG versus construction or is it sort of equal.
You know, it's it's sort of equal obviously I think you know the the.
The AG cycle kind of exempt us a little bit from from economics, and construction doesn't have that same exemption, but you know what we're seeing with really really good innovation. This temporary honor acquisitions, helping but you know what I the optimism I saw from our team and our deal.
At Con Expo you know it gives me confidence that our construction business is going to going to do well for the remainder of this year and is positioned well to do well after that but again, a little bit more susceptible to the overall economic woes, if if the economy tips over than egg.
Okay, great. Thank you so much I'll get back in queue.
Thank you we will take the next question is from Steven Fisher from UBS. Your line is open now. Please go ahead.
Hi, Thanks, Good morning, just curious how you're thinking about margins later in the year. It sounds like the price is going to moderate but your costs will also moderate.
Lots of different mix puts and takes there. So curious how do you see that.
Netting out.
Relative to Q1, I guess I'm, mostly thinking about the AG side, but curious on construction of well of course.
Well stay of what would have liability over the year quarter over quarter as we always have but we are confident that year over year for the full year, we can increase our margins as we have planned to do.
So.
Of course pricing as we have as we have anticipated, we'll will start to fade in terms of year over year comparison, but so will cost.
And we are putting all of this costs initial cost reduction initiatives, including in SG&A.
That will come.
Come to fruition in the second part of the year.
So could we still see some higher margin.
Later in the year relative to the first quarter and an egg.
We called yes.
Okay and then for.
For the full year, we expect margins to be better than they were last year.
Sure yes, okay.
Then on inventories at how aligned would you say C and H and see any dealers are on the desired level inventory for.
Thinking about for the next year.
Dealers have been clamoring for more inventory does that still hold and how much of a desire or do you have to build normal levels to meet their higher levels of demand.
Well I got to be really careful I answer this because I've got a few dealers that will call me immediately after the call. If I say, we're not committed to giving them the products they need so and in many markets, especially cash crop around the world.
They just need more inventory, it's it's too low.
Oh I've, what I've told our dealers as we do not want to get back to the you know 2019 2018 levels, you know where they're slightly over what they would like to have we want to keep dealers relatively lean where we're not perfect at that I mean, if you look at our.
You know, where we're lowering production of the lower horsepower AG equipment, because you know we we didn't slow down soon enough, so where we're going to correct that very very quickly, but overall I you know or many of our cash crop markets are still too low on inventory and we're ramping up production to try to meet those.
You know other parts of the market really low horsepower and in some parts of Europe , we're trying to make sure that we pulled back so we get their inventories in better position, but I I personally and we as a company do not want to get to historical levels. We thought it was probably a little bit too high and we'd like to keep.
The DSO, a little bit a little bit lower.
Perfect. Thank you.
Yeah.
Thank you we'll take the next question from line Tommy's aircraft from JP Morgan. Your line is open. Please go ahead.
Hi, good morning, and thanks, so much for taking my questions. So my first question is can you give us some color on our market share trends for large AG by region for this quarter or maybe over the last 12 months. If that's a better gauge of the trend where you saw the most schemes where you saw some relative weakness.
Yes.
Yeah, you know, we said it all of last year, and it's really true now as well market shares based on who can who can build it in the large AG in cash crop segment, and you know I I hate to say it but you know we're still ramping up production of our high horsepower tractors and that's not helping us.
Combined performance is exceptionally good we have industry, leading products and that are that gives us an opportunity to gain share in most markets Hum.
I think we're.
In Europe , it's spotty for US there are some markets, where we're doing better than others, but I think overall, we're probably down a little bit market share and you know looking forward to turning that around in the second half, but you know generally speaking I think our our overall opportunity for market share is going to improve quarter over quarter year over year.
<unk> as we are we get a return on the investments we're making.
Got it that's very helpful. Thank you and then my second question is can you help us understand the the bridge to the revenue guidance raise how much of that is Laura FX headwind versus our higher organic sales growth outlook for the rest of the it seems like it's mostly driven by <unk>.
Effects, but just curious how that how you thought about it.
Okay.
Compared to the first quarter that was gonna be yeah, FX is gonna be better and volumes are in pricing, but will be a little bit lower than what we had in the first quarter from what we'd see.
Got it thank you.
Yeah.
Thank you we will take the next question from Larry Demaria from Yeah.
Please go ahead.
Hi, Thanks, good morning, everybody.
Scott you mentioned, a new list prices coming up in a month, obviously opening up 24 outboards marker.
Moccasins healthy low commodity prices have been volatile, especially on a forward curve I was curious how you're thinking first on that list pricing, maybe even in general terms or as a breather year or we can continue to push pricing into next year.
And also with the commodity curve you know what are you hearing what are you seeing in terms of any incremental cautiousness or is it still sort of all systems go from from what you're hearing in the field.
Yeah, you know.
I think with pricing what we're seeing.
After a couple of years of unprecedented price increases we are expecting a we haven't finalized it yet so I can't say, but pricing is going to normalize and you know what what does normalize mean two 3% based on you know features but generally speaking we expect.
You know 24 pricing and maybe the next couple of years to be in that normal range.
And I like your it was a little bit swaps. So I didn't catch the second part of your question if you could repeat that.
Well I was just talking about the forward curve and commodities, obviously lower right I'm just curious about how you were you know.
Seeing and what you're hearing in the field from dealers or any incremental cautiousness creeping up or is it all systems go still at this point.
You know the general.
Feedback that I'm getting is I.
It's it's all systems go with.
A slight decline.
To call it I mean.
Incentive to produce a report came out yesterday, so farmer sentiments are improving the overall setup for for soft commodities is relatively good you know overall.
If.
You know the dollar movement also has and inverse relationship with commodity prices. So.
You know generally speaking I think you know, we expect and it's part of the help we're getting commodity prices are going to moderate.
At a level that we think is above historical norms, which helps farm income and then ultimately helps us Oh, we have to my math.
Manage that as well because we were expecting you know as you've seen steel comes down it's come down tremendously you know, we're seeing shipping rates come down dramatically. So are we we kind of need to play both sides of it keep the soft commodities relatively high in the rest of the commodities that affect our input cost relatively low and right now that seems to be working for us.
Okay. Thank you and good luck.
Yeah.
Thank you we will take the next question from landmark Atlas from Baird. Your line is open now. Please go ahead.
Hi, everybody and my question is on the mortgage.
So there are some folks that are hopefully answered so I would like to just ask if you could please comment on the decline.
100 and of course, the horse power tractors is that driven by the day 89.
I mean I'm going to pass it now.
That comes from his agenda that I'm not connecting them in situations, that's under 100 and policies that could keep growth, particularly if you would.
Also the under 40 horsepower taxes et cetera.
Yeah. Thank you.
Yeah.
Yeah. The the decline in the the low horsepower market is is really eye, it's related to the very high sales that happened during the pandemic and post.
Early years after the pandemic. So I think it's just a somewhat of a return to normal in that market, but what unfortunately, what happens is when not just us the industry got caught a little bit surprised on how quickly it turned south.
Dealer inventories are little bit higher so what you're saying is higher promotion rates, there and all of us.
So working through that that situation.
But I was thinking.
Yeah.
Thank you we'll take the next question from David Raso from Evercore ISI. Your line is open now. Please go ahead.
Hi, Thank you one question on pricing and one on the commentary around 24.
First just indulge me for a second if your pulp pricing out of AD revenues for this quarter and last quarter.
It suggests the revenues were down sequentially and a 22%.
But then the pricing gains fell 55% sequentially and.
In that same kind of math going back a few quarters. The relationship has been positive right, meaning pricing gains up sequentially or better sequentially than than what was happening on revenues ex pricing.
Was there a certain mix issue in the first quarter why would the pricing of slowed that much relative to what we've been saying and relative to the let's call. It volume ex price sequentially down what was something unique in the mix.
Hum.
Well the Meinie makes component. So you know the first quarter is a is a is a smaller quarter in terms of sales.
We have.
Also relatively its lowest sales in South America in the first quarter and we talk about it and that's mainly because of the stocking of the network.
That we have been doing.
But.
We're pretty happy about how the price it play out in the first quarter, it actually and that if you compare it I mean, if you think we started growing pricing in the second part of <unk> 2021 and that's you'll say do we have sequentially.
Price increase quarter over quarter and we we also have been very clear that we don't expect this to continue at this pace forever, but we need to have our cost reductions are in the industry in the system and the supply chain before we stopped increasing.
Yeah.
Yeah, no I appreciate that but I think by capturing volume ex revenue ex price, we're sort of just looking at it sequentially.
Why such a large or a sequential slowdown in price than in let's call. It volume.
The GAAP is GAAP some positive for for multiple quarters.
And.
Obviously, the costs are coming down, but it's just it's a very unique gap there down 22 price.
Revenue ex price and down 55 on price.
Let's look at what we forecast at the price cost relationship right and that has actually been better in the first quarter than it was in the fourth quarter.
So I agree with that yeah. It was just that much like what does it come down in price slows as much.
No I get it but that's I mean, that's that's what's relevant for US is the fact that price cost.
Is continued to be positive and has actually sequentially better for the fourth.
For the fourth quarter.
As you say, that's mainly mix component.
Quarter over quarter and again, the first quarter is that relatively small quarter. So antibody incidents there probably is a sort of amplify it.
No that's fair and on the 24 comments encouraging your comments about margins for 'twenty for sort of not requiring a growth for you know volume can you give us a little better understanding of when you I'm not trying to ask for 24 guide on incremental margins, but when you think of a smoother supply chain.
Obviously, you know no no labor issues assumed when you think of the cost improvement.
We did give you volume up I'm, just curious how you're thinking about incremental margins relative to what we've seen of late the kind of more you know low twenties. How would you think about a 24. If you did have a little volume helped and then secondly on 24 any any order books extending into 'twenty four right now that can at least.
Give us a little early color. Thank you.
You know well is let's to tackle the margin before I don't answer your second question I'll tell you about.
The the margins.
The situation you know.
It was it's been up.
Really a brutal.
Two years with supply chain, a debacle in the supply chain, some labor issues affecting our ability to produce and because we were fighting those we were not able to get as much traction with our margin improvement opportunities as we expected. So what we're seeing now as those teams are starting to really really.
Get those projects underway.
And you know they don't they don't hit immediately so we're going to see the ramp throughout the year, which is why we guided the better margins are.
For the year, but as it gets into 'twenty for you know what we see is an opportunity really for you know with strategic sourcing is gonna be better our lean programs are going to be better or you know product portfolio is going to be better than you know don't forget we do get a margin boost from our tech stack improvements and you know that stuff is a is it.
That's going to keep on giving for awhile. So I don't think it's going to take.
Yeah, we.
26.2% gross margin for AG is pretty darn good.
I'm sure, there's there's room for us to make it better but from an industry perspective its reasonably good.
And what we're committing to is is that's not as good as we can do and we see an opportunity for improvement so and construction as well I think construction is going to continue to surprise you with their ability to drive margin expansion and you know combined together you know that's a pretty good story for us.
And the order book commentary or is that a.
No answer that as no answer for twenty-four [laughter] alright, I appreciate it thank you.
Yeah.
Thank you we'll take the next question from line.
Make Gilbert from right. The line is open now please go ahead.
Thank you good morning.
Scott.
Wanted to get you to talk a little bit about augment on hemisphere cures.
Curious, how you're looking to integrate this product in your equipment and kind of what the.
But the goal is here how these folks are going to be working with with the Raven team and maybe you can update us a little bit on the progress that you're making internally.
From a tech stack perspective, considering that you've changed your relationship with Trimble. So I'm curious your engineering folks what are they doing to sort of address that in the near term and how you're thinking about the next call. It 18 to 24 months on that.
Your first of all where we're thrilled to welcome the augment the team to the portfolio you know they what they give us. This is C N Act.
Technology at a much more value oriented plays than what other people in the industry offer I've actually been in the field and seen the product work in it. It's it's really really encouraging. So you know in farmers can get into the augment to program and get you don't see in spray.
Opportunities that are much much lower cost than anything else available in the industry and that is encouraging. Its why you know why we made the initial investment when we were a minority partner and why we ultimately.
We brought them to acquire.
Yeah, we're we're still with Ravens capability doing a lot more work to advance our CNS bracey enact capabilities, but we're just better with augment and yeah. They will fold into the Raven team and you know John pretty high and the team there will really advance what they can do for us from an art.
Imation and in autonomy perspective that gets better with augment our with hemisphere.
You know we've had you know a really really strong relationship with Trimble and novatel over the years. So we know you know that there are other solutions out there but.
What it doesn't when you have to buy it from a partner you don't have the ability to innovate and integrate as fast as you would like and so you know what what hemisphere gives us is a really really good team with a strong manufacturing base, which has surprised us a little bit.
But you know the opportunity just to go faster and you know as I talk to dealers and customers. You know their request is that we go faster and this this opportunity with our with both of these businesses are just allows us to do that.
But that said the work that well.
With the benefit that we're getting from Raven and then you know the the team there have helped us bring on an additional 500 engineers just gives us so much more software capability now you know.
I I I hope I'm clear that we're nowhere near delivering for customers, what we will do and what we expect to give in that that's coming and it's going to be incremental benefits through this year and into next year, but you know as I said in the prepared remarks, it's really 25, where the where we feel like we get to a true extremely great.
Technology and products for our customers, but we're encouraged where we are on the path and and how we're progressing there.
And as it relates to Trimble.
You know that was.
You know they they they made the decision to exit the relationship and you know Robyn I are good friends and we're managing through that so that both of US can have a positive future going forward, you know really with rave and we have the ability to take over that work and it really not Miss a beat for our customers and that's what we're striving to do.
<unk>.
Got it.
Follow up is on construction.
I'm curious to get an update from you on where what are you seeing in terms of orders, especially on the on the heavy construction side.
Backlog, maybe and one of the things that kind of puzzles me a bit.
Your commentary seems to be positive in the press release and slides, but if I'm looking at your slide 16 at your outlook for both light and heavy construction.
It's basically down across product across geography, so I'm trying to square relatively positive commentary with the industry outlook that you've provided there. Thank you.
Yeah, well part of it there's two things that are.
With that are helping out some construction you know first of all dealer inventories are low and secondly, we've introduced a tremendous amount of new products and you know I I'm sorry.
And in my early remarks, you know, we're very careful about managing dealer inventory, but we also need to get these new products out there to our dealer network and that's allowing us to put you know.
And so they know that that's from a kind of an input internal perspective, if you look at a market perspective.
Housing is actually a little more resilient than I expected, which doesn't make sense to me from an economic perspective, but nonetheless housing is a little bit better than we thought.
And you know I don't like the program, but the inflation reduction act as is actually putting money into infrastructure that is going to bleed out and help us and others over time. So I think that's giving us a little bit more encouragement from a construction side than we might otherwise have.
So you're saying your outlook is too Conservative then.
On to slide I, very specifically didn't say that I'm, just saying overall.
You know it is us.
We're not on an island, saying this it's not going to be a great year for construction, but you know we're going to do a little bit better because of those are opportunities that I spoke of.
Okay. Thank you.
Thank you, let's take the next question from 19 O T T trap Citi. Your line is open now. Please go ahead.
Yeah. Thanks. Good morning, just the first is a clarification or donate on that.
<unk> comment earlier about the revenue guide.
Guidance change you mentioned FX have you seen was it was it positive but did you say that.
That was offset by lower volumes and pricing no no no no I would say I'd.
I'd say that relative to Q1.
The growth in driven by volume and price.
Needs to be a little bit lower relative to the Q1 growth.
Yeah.
I got I think last year volume price and FX.
Okay as you okay.
You were clear on that earlier, okay, I just want to make sure I heard that and then.
On the.
Scott you mentioned, they've academic market share comment.
Thinking from a high horsepower tractor standpoint, what where are you on the.
In terms of the progress of getting ramped back up in Racine, and and how does that play into.
Assuming you're not back to 100% as the year progresses does that provide a.
More of a mixed tailwind for you as you.
Presumably oh put there I'm guessing is increasing as we go through the year, but maybe just to comment on that now.
How meaningful that could be.
Yeah, you know I I, probably won't comment on how meaningful it could be but I will tell you. We had our board meeting earlier this week in Racine, So I got a chance to be on the floor and see the work that they're doing you know, where we're ramping up but by no means where we need we want to be or where our customers need us to be there.
There is a tremendous backlog globally for our high horsepower tractors and you know the teams the teams working really really hard I was encouraged.
I'm encouraged by what I saw but there there's a lot of work to do there and I'm you know I'm I'm confident that you know week after week month. After month, we're going to continue to produce more for the Racine plant and you know that'll obviously be a benefit to our customers and into our financials as well you know the.
The high horsepower market cash crop market continues to be a very strong and I think our ability to continue to produce for that.
Well will be helpful for us.
Got it thanks a lot.
Thank you we'll take the next question from 90 I'm coming from Morgan Stanley . Your line is open. Please go ahead.
Great. Good morning. Thanks for the question I wanted to see if you could put a finer point on some of the comments around the lean initiatives and the sourcing savings again you know.
So we get to a point call. It middle of next year, where supply chains are lot better price causes isn't as big of an issue where do you see as the greatest relative opportunity in between the two segments in terms of how impactful this savings opportunities the lean initiatives.
Yeah, well, obviously just by a size perspective cause AG is going to get much more of the benefit but you know Stefano and his team have already done a lot of lean work in Wichita, We're seeing actually the margins they delivered in the first quarter and I think you'll.
See as the year plays out shows a little bit of the benefit that we can get.
As we drive lean throughout the system, but you know obviously, a because of the size and nature of of AG, we get more savings there.
You know what.
We're gonna get you know meaningful and consistent savings from from lean throughout but I think a bigger nut comes from the strategic sourcing.
And you know obviously.
I don't get Lucky very often but that strategic sourcing is a little bit it doesn't happen right away its not a M.
An immediate negotiation so we're actually gonna be doing the negotiations later this year and I think as we do that you know we're gonna be entering and it's this is a multi wave program. So we're in the first wave of what's likely to be four or five.
But that first wave of negotiations is going to come when you know overall inflation is better commodity is gonna be or our.
Supply chain commodities are going to be down. So I think we'll be in a good position to get you know meaningful savings as we work through that so we're encouraged by both the lean and sourcing initiatives are what they mean in 'twenty, three but really really what they mean in 'twenty four and beyond.
Thank you we will take our final question from line Kristen Owen from Oppenheimer. Your line is open now. Please go ahead.
Great. Thank you for fitting me in I'll I'll be brief here. One is it's just a clarification again on that to see margins and obviously, a very strong pricing, but do I understand correctly. There was still a fair amount of strike drag there and just any any commentary that you have around that.
Regional exits and any impact that that may have had on margins in the segment.
Yeah. The the Burlington plant is also like Racine is ramping up they the construction team did take advantage to get some some alternative sourcing done. So that also help from a margin perspective, but I think you know both that will benefit the year, the exits of China and Russia.
You know, obviously not not helpful to us, but we've got those in the rearview mirror and I really didn't hurt us much from a margin perspective in the quarter, but you know again, you know Stefano and his team have really done a lot of work with the portfolio.
And you know we're encouraged what what we'd be able to talk about next quarter. When we had the call.
Okay. That's helpful. I think I was I was maybe assuming that perhaps those exits at least from China might be accretive to margins not not necessarily dilutive before before you respond to that just went out at my second question and in the interest of time and it's not a topic that we talk about very.
Often I feel like on these calls, but can you just give us an update on aftermarket and parts what percentage of revenue is that today, how much of that is Raven and just how to think about the aftermarket business specifically now that youre integrating more of these new acquisitions. Thank you very much.
A whole lot there so let's go see if I can see how good my memory is you first of all China was the reason we exited because we weren't very good and so the margin it wasn't a big enough business to impact our margins negatively before or possibly going forward. So that that's kind of a.
A wash the aftermarket business is really really good for us our team does a really really nice job.
Of managing that.
We finally got our inventories up a little bit so we can serve our customers.
Better their overall, it's about 18 or 20% of our business and you know Raven was an aftermarket business. So they're really really good at it and you know as we ramp up our capability with our tech stack you know a significant portion of that is in an aftermarket I know obviously, what we're most excited about.
It is the integrated solutions that we can put in with the production, but there's a very very notable opportunity for growth share gains and margin expansion with the aftermarket from Raven and what we built out there.
I think you've covered it. Thank you very much alright. Thank you.
Thank you no further questions. So I'll hand, it back over to your host to today's country.
Okay.
Thank you everyone for joining today and have a great day.
Thank you for joining today's conference you may now disconnect.
[music].
Hum.
Okay.