Hello and welcome to the CNH 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'll 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'll be connected to an operator. I will now hand over the call to your host, Jason Omerza, 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 CNH Industrial's first quarter results for the period ending March 31st, 2023. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use, recording, or transmission of any portion of this broadcast without the express written consent of CNH Industrial is strictly prohibited. Hosting today's call are CNH Industrial's CEO, Scott Wine, and CFO, Oddone Incisa. They will use the material available for download from the CNH 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 US Securities and Exchange Commission and the equivalent reports and filings with authorities in the Netherlands and Italy. The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable US 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. In construction, we benefited from better capacity utilization and higher volumes in North America and Europe. The margin growth in both businesses reflects our progress, and I am 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 multi-year 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.
In addition to our R&D and capital expenditures, we also announced three key acquisitions bolstering our strong precision agriculture and alternative fuel portfolios. 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 as supply chain improvements allowed our manufacturing teams to be less encumbered by fleet inventory completion. As it should, all of this translates into higher bottom line results visible in our solid year-over-year EPS increase. Derek Neilson's ag team is laser focused on delivering for customers, reflected in net sales of agriculture rising 16% with 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 2022. We are well-positioned to compete and win in that market. Healthy construction demand is leading us to increase production on certain products as Stefano Pampalone and his team continue to align our portfolio with customer needs. At CONEXPO, we previewed innovative new products like the TL100 mini track loader, which was developed in conjunction with our Sampierana team and CASE's E-Series wheeled excavator. By 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.
Oddone and his financial services team have decades of accumulated experiences leading this business. Many of them even successfully fought through the 2008 financial crisis. It is reassuring to have a sound and conservatively managed finance business where the portfolios continue to grow even as interest rates temporarily pressure margins. For a great example of winning the right way, in February, CNH Industrial received the highest score in our industry from the 2023 S&P Global Sustainability Yearbook, which puts us in the top 1% of all companies and industries. Our company strategy is centered around five key pillars: customer-inspired innovation, technology leadership, brand and dealer strength, operational excellence, and sustainability stewardship. In operational excellence, we reaffirm our annual savings target of $550 million by 2024 year-end when compared to our 2021 baseline.
Tom Verbaeten's team is driving our strategic sourcing initiative. By the third quarter of this year, they will have visited and vetted about 450 vendors around the world to ensure we select the best suppliers for our needs. This program will transform our supply chains to sustainably improve quality, delivery, and cost in 2024 and beyond. We are ramping up our CNH Industrial Business System, where CBS roll out across the company. To date, we have trained over 2,000 employees on how to apply lean principles at their locations. More are trained each week. We are increasing the pace of Kaizen events. By the end of the first quarter, we have already surpassed 60% of our events held last year. I also wanna highlight accomplishments in two other pillars today.
CNH 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 T7 and Optum tractors are leveraged across New Holland and Case IH, 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 costs, and we are gaining market share in this important segment. This customer-inspired design approach is a win-win because delighted buyers mean 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 2022 to 2024, we are 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 2023 and 2024. 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 Augmenta, whose technology on our tractors and sprayers increases yield, boosts sustainability, and reduces application time, effort, and input cost. Augmenta will operate within Raven.
Secondly, we announced our agreement to purchase Hemisphere, a global leader in high-performance satellite positioning technology. Hemisphere's 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 have been at the fore of alternative propulsion, exploring innovative offerings that support farmers and advance our strategic priorities. During the quarter, we took a controlling stake in Bennamann, 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 will now turn the call over to Oddone to take us through the financial results.
Thank you, Scott, good morning, good afternoon to everyone on the call. First quarter net sales of industrial activities of $4.8 billion were up roughly $600 million or 17% of the custom 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 diluted earnings per shares of $0.35, up $0.07 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 2022. Quarter one has a normal seasonal buildup of finished inventory in preparation for the spring selling season.
Agriculture 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 purchasing costs. Agriculture's adjusted EBIT increased by $144 million or 33% to reach $570 million with a margin of 14.5%, mostly driven by the gross margin improvement. We are still seeing high carryover price and cost inflation when comparing year-over-year. That will continue into Q2. That's also true for our SG&A and R&D expenses, which like our manufacturing costs, have been heavily impacted by inflationary pressure from the second half of last year.
Carryover pricing will fade in the second half, but that is also when our proactive efforts to contain costs, and especially SG&A, will be more evident. We have solid plans to increase the full-year margins versus 2022 and reduce volatility over time. Construction net 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, where dealers were destocking. Gross margin was 15.9%, up 160 basis points, mainly due to higher volume, improved fixed cost absorption, and favorable price. This was partially offset by higher raw material manufacturing cost.
Construction adjusted EBIT was $44 million with a margin of 5.2%, a 120 basis point increase from last year. We did have one month of strike at the Burlington plant in the quarter. With the workforce back from February, production is ramping up to full capacity there. The same 2023 quarterly dynamics in Ag apply to construction as well. For our financial service business, net income was $78 million, down $4 million compared to the first quarter of last year. We saw favorable volumes in all regions. This was more than offset by margin compression in North America, higher risk costs, and increased labor cost. While rapid rate increases contributed to the margin pressure, they are managed through a tight asset to liability duration matching.
We have a limited impact on our result. That is mainly linked to the long retail delivery delays in 2022, which created a lag from when a customer financing was contracted to when it was funded. Retail originations were $2.2 billion in the quarter. The managed portfolio, including JVs at the end of the period, was $24.5 billion. The receivable balance greater than 30 days past due as a percentage of receivables was 1.4% as our agriculture and construction customers remain in good 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, initial at $870 million ABS transaction to continue funding our growing receivable portfolio. The fact that our financial service business is able to raise capital in these times is a testament to the sound credit worthiness and solid market presence of this part of our business. As 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 May third, our annual dividend was distributed to our shareholders, worth over a half a billion dollars. I'll now provide a brief update on our delisting from Borsa Italiana, Milan.
We have had constructive dialogue with the exchange management, and we are now confident that the delisting process will be completed by the end of 2023. Understanding that investors with a European mandate may be required to divest their shares when the delisting happens, the board is prepared to do a special buyback program to offset the impact if needed as our balance sheet and our cash generation allow for it. We remain confident that opportunities for passive investment in CNH stock will increase as a result of our 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, Oddone. 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, marginally lowered construction estimates in South America and APAC. Our order backlog remains solid, well above 2019 levels, and agriculture and construction order books are full through the third quarter. Model year 2024 list price updates will be announced later this month, and we will be opening the Q4 order books shortly thereafter in most markets. Based on feedback from our dealers, we expect the Q4 order slots to fill rapidly. Our dealers remain on allocation for products where demand is outstripping our ability to produce, especially our large agriculture equipment with precision technology. Dealer inventories for high horsepower tractors and combines remain at historically low levels.
With persistent small ag's 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. 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 of up 6%-10%. We are reaffirming our pre-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 you should retain is that we are working to make CNH a highly profitable and cash-generating business regardless of industry conditions. It is too early to call volumes for 2024. The drivers in most regions remain 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 and farm incomes remain elevated. We see continued strength of our markets, our growers in Brazil and in North America corn belt. Regardless of the macro backdrop, we are continuing to invest in R&D technology to build and enhance our precision-enabled products. Customer engagement and retention will sustainably improve as we feel 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. We will take the first question from line, Daniela Costa from Goldman Sachs. The line is open now. Please go ahead.
Hi. Good morning. Thanks for taking my question. just have two questions, if possible. The first one sort of surrounding the current, given all the current credit situation, if you could give some color on how much of the equipment that you're selling you're currently financing versus third parties, and whether you plan to take on maybe more of that risk related to what maybe is not yet financed by you or for some reasons that's sort of out of scope and what could that mean? The second question, just on your comments on the journey you're making towards precision ag. Can you maybe elaborate on that journey in terms of your inorganic journey? Where do you think you are at the moment in terms of like the ideal product set that...
Have you got to where you want and now it's more about growing it organically? Do you still miss certain parts that you would like to strengthen and which are those? Thank you.
Hi, Daniela. Let me take the first one. In terms of retail financing, depending on regions and business, about between 25% and 45% of what is retail is financed by us. This is actually in highly competitive markets. There are other players that are financing. We may, if there's some lower liquidity in the market, we may see an uptick of our penetration, but we don't see this as an issue.
Yeah. As it relates to the tech stack, you know, obviously as you've heard me say before, I mean, I feel good about, you know, the actual precision technology and automation that's currently on our products. What Raven does, it rapidly accelerates our ability to go faster and do more. You know, our autonomy is good as anyone in the industry. Really enhancing the precision suite in our products, off board, on board, all of those things. You know, what the team is doing now, making tremendous progress, you know, to make that whole system, you know, work better and easier for our customers. You know, it's a journey and we're, we've got a ways to go there.
When we add competencies like, Augmenta, and Hemisphere, it just allows us to go much, much faster. You know, the history of Raven, you know, they added these bolt-on acquisitions, along their journey as well. It's not 'cause... I do think, we have the capability. We've added over 500 engineers to the Raven team. We have the internal capability to do everything we need to do now. There might be opportunities for small, acquisitions to enable us to go yet faster yet again. You know, I feel good about where Mark and Parag are and their teams are in, 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 line, Michael Feniger from Bank of America. The 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. Can you kind of give us an update of where we are in that story right now?
Yeah. You actually, Oddone 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. The work that we're doing, you know, I talked about the progress the strategic sourcing team's making. You know, Scott Moran and our CBS team are doing tremendous work in the plants. You know, Derek and his team are driving, you know, better solutions, making the products that we design easier to assemble and source parts for. It is a holistic approach to cost.
I think, you know, the fact that, you know, we'll get many hundreds of millions in 2024 to get to that $550 million gives you know, a little bit of insight into what's to come. You know, certainly, you know, a lot of this stuff, as we see supply chains improve, you know, our lean programs improve, our strategic sourcing improve, our designs improve, really gives us a lot of confidence that the record margins we delivered this quarter, you know, can be beat in the years ahead.
Scott, just to follow up on that, I mean, obviously nobody has a crystal ball. There's a huge debate on what 2024 looks like. With the line of sight you have on your cost savings, do you think you could expand ag margin in a backdrop where units are maybe flattish to even slightly down next year?
Yes. Okay, thank you.
Thank you. We will take the next question from line Jamie Cook from Credit Suisse. The line is open now. Please go ahead.
Hi. Good morning and congratulations, you know, on a nice quarter. I guess just my first question, could you just give a little color, you know, more color on, you know, 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 smaller horsepower side, but large horsepower seems to be okay. That would be my first question. I'll have a follow-up after that.
Yeah. Well, you know, the situation in Brazil, just the timing of our earnings call last quarter, you know, affected how we looked at that. You know, there was a lot of, for lack of a better term, constipation, you know, with the government transition. You know, we were, our dealers there were incredibly cautious. You know, literally a week after the earnings call, we started to see things turned around. We'd already made the decision to lower production, so it allowed us to reduce dealer inventory in Brazil. We feel, you know, very, very good about where we're positioned now with leaner inventories than anyone else in the industry, and a great product lineup and more importantly, a really, really solid team in Brazil to manage that market.
you know, we think Brazil is gonna be a decent market this year. Not gonna grow as much as it did last year, but still a very good market for us.
I guess just my follow-up question, based on what you guys said about the cost savings kicking in in 2024 and where your margins are today, and related to the last question, Scott, not to put words in your mouth, but it seems like we need to update, you know, the street, favorably on a positive base. You know, you know, increase 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. One, confirm that. Obviously you don't have to tell us what that is today. My second question is, does the optimism just relate to the farm equipment side, and sort of where are you in that process within construction equipment?
Is it all ag driven or where's construction relative to what you would have thought relative to your capital market targets? Thanks.
Yeah. Well, you know, we did put a comment in our prepared remarks about how, you know, we expected to get to some of those 2024 targets, and we knew it was just a matter of time before that question, so thanks for getting us 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, you know, relatively flat in 2024. What we've seen is the markets have just been better for us. You know, as you, as you can see, we're taking advantage of that.
You know, and now as, you know, as we sit here, the positive momentum that we've had looks like it's gonna continue from a market perspective, and again, not at the same levels, but, you know, still the overall fundamentals are good. As we talked about, as my last question, you know, we're putting just tremendous energy in how to make the margin and expansion opportunity as we serve our customers better, how do we deliver, you know, better margins along the way? You know, I think with that backdrop, you know, the updated guidance will be reasonably good, but we would expect that to happen about a year from now.
We haven't put a date out there yet. You know, we wanna get into 2024, have a better understanding of what that's gonna be. I think we'd update our long-term guidance sometime in the first half of 2024.
Okay. Just the follow-up, ag versus construction. Do you want to comment there? Do you feel better on ag versus construction or is it sort of equal?
You know, it's sort of equal. Obviously, I think, you know, the ag cycle kind of exempts us a little bit from economics and construction doesn't have that same exemption. You know, what we're seeing with really, really good innovation, the Sampierana acquisition's helping. You know, what the optimism I saw from our team and our dealers at CONEXPO, you know, gives me confidence that our construction business is gonna do well for the remainder of this year and is positioned well to do well after that. Again, a little bit more susceptible to the overall economic woes if the economy tips over than ag.
Okay, great. Thank you so much. I'll get back in queue.
Thank you. We will take the next question from line Steven Fisher from UBS. The line is open now. Please go ahead.
Thanks. Good morning. Just curious how you're thinking about margins later in the year. It sounds like the price is gonna moderate, but your costs will also moderate. Lots of different mix puts and takes there. 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 as well, of course.
Steve, we will have variability 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 plan to do. Of course, pricing, as we have anticipated, will start to fade in terms of year-over-year comparison, but so will cost. We are putting all this cost reduction initiatives, including in SG&A, that will come to fruition in the second part of the year.
Could we still see some higher margin later in the year relative to the first quarter in ag?
We could, yes.
Okay.
again
Um-
For the full year, we expect margins to be better than they were last year.
Sure. Yes. Okay. On inventories, how aligned would you say CNH and CNH dealers are on the desired level of inventory, for, you know, they're thinking about for the next year, and I think dealers have been clamoring for more inventory. Does that still hold? How much of a desire do you have to build normal levels to meet, you know, their higher levels of demand?
I gotta be really careful I answer this because I've got a few dealers that'll call me immediately after if I say we're not committed to giving them the products they need. In many markets, especially cash crop around the world, they just need more inventory. It's, it's too low. What I've told our dealers is 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, we wanna keep dealers relatively lean. We're, we're not perfect at that. I mean, as you look at our, you know, we're lowering production of the lower horsepower ag equipment because, you know, we didn't slow down soon enough. We're, we're gonna correct that very, very quickly.
Overall, I, you know, our 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. In some parts of Europe, you know, we're trying to make sure that we pull back so we get their inventories in better position. I personally, and we as a company, do not wanna 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 lower.
Perfect. Thank you.
Thank you. We will take the next question from line, Tami Zakaria from JP Morgan. The line is open now. Please go ahead.
Hi. Good morning, thanks so much for taking my questions. My first question is, can you give us some color on 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 gains, where you saw some relative weakness?
Yeah. You know, we said it all of last year, and it's really true now as well. Market share is based on who can build it in the large ag and cash crop segment. You know, I hate to say it, but, you know, we're still ramping up production of high horsepower tractors, and that's not helping us. You know, our combine performance is exceptionally good. We have, you know, industry-leading products and that gives us an opportunity to gain share in most markets. You know, I think Europe is spotty for us. There's some markets where we're doing better than others. I think overall, we're probably down a little bit in market share and, you know, looking forward to turning that around in the second half.
You know, generally speaking, I think our overall opportunity for market share is going to improve quarter-over-quarter, year-over-year as we get a return on the investment we're making.
Got it. That's very helpful. Thank you. Then my second question is, can you help us understand the bridge to the revenue guidance raise? How much of that is lower FX headwind, versus higher organic sales growth outlook for the rest of the year? It seems like it's mostly driven by FX, but just curious how you thought about it.
Compared to the first quarter, there's gonna be, yeah, FX is gonna be better, and volumes, and price impact will be a little bit lower than what we had in the first quarter from what we see.
Got it. Thank you.
Yeah.
Thank you. We will take the next question from line, Larry De Maria from William Blair. The line is open now. Please go ahead.
Thanks, and good morning, everybody. Scott, you mentioned new list prices coming up in a month, obviously opening up 2024 order boards. Market seems healthy, though commodity prices have been volatile, especially in the forward curve. Just curious how you're thinking, first on list pricing, maybe even in general terms. Is this a breather year or we can continue to push pricing into next year? Also, with that 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 what you're hearing in the field? Thanks.
Yeah. You know, I think with pricing, what we're seeing, after a couple of years of, you know, unprecedented price increases, you know, we are expecting, we haven't finalized it yet, so I can't say, but pricing's gonna normalize. You know, what does normalize mean? 2%, 3% based on, you know, features. Generally speaking, we expect, you know, 2024 pricing and maybe the next couple of years to be in that normal range. I, it was a little bit slough, 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 in commodity is obviously lower, right? Just curious about how you're, you know, seeing and what you're hearing in the field from dealers. Is there any incremental cautiousness creeping up? Or is it all systems sort of go still at this point?
You know, the general feedback that I'm getting is it's all systems go. Slight, you know, decline. I mean, sent to the produce report came out yesterday. Farmer sentiment's improving. You know, the overall setup for soft commodities is relatively good. You know, overall, you know, if, you know, the dollar movement also has an inverse relationship with commodity prices. You know, generally speaking, I think, you know, we expect, and it's part of the help we're getting. Commodity prices are gonna moderate at a level that we think is above historical norms, which helps farm income and ultimately helps us. We have to manage that as well because we're expecting, you know, as you've seen, steel comes down, has come down tremendously.
You know, we're seeing shipping rates come down, dramatically. We kind of need to play both sides of it, keep the soft commodities relatively high and the rest of commodities that affect our input costs relatively low. Right now, that seems to be working for us.
Okay. Thank you, and good luck.
Thank you. We will take the next question from line. Marta Bruska from Berenberg. The line is open now. Please go ahead.
Hi. Good morning, everybody. My questions on the margins were already asked several times and was very helpfully answered. I would like to just ask if you could please comment on the decline in the under 140 horsepower tractors. Is that driven by the dairy market, with milk margins coming under pressure now? Rather that comes from the general macroeconomic situation as under 140 is a relatively broad category, which you would include also the under 40 horsepower tractors that are declining perhaps strongly. Thank you.
The decline in the low horsepower market is really. It's related to the very high sales that happened during the pandemic and post, you know, early years after the pandemic. I think it's just a somewhat of a return to normal in that market. You know, unfortunately, what happens is when not just us, the industry got caught a little bit surprised on how quickly it turned south. You know, dealer inventory is a little bit higher. What you're seeing is higher promotion rates there and all of us, you know, working through that situation.
All right. Thank you.
Thank you. We will take the next question from line. David Raso from Evercore ISI. The line is open now. Please go ahead.
Hi. Thank you. One question on pricing and one on the commentary around 2024. First, just indulge me for a second. If you pull pricing out of ag revenues for this quarter and last quarter, it suggests the revenues were down sequentially in ag 22%, but then the pricing gains fell 55% sequentially. That same kind of math going back a few quarters, the relationship's been positive, right? Meaning pricing gains up sequentially or better sequentially than what was happening on revenues ex pricing. Was something unique in the mix?
Well, the many mix components, you know, the first quarter is a smaller quarter in terms of sales. We have also relatively lower sales in South America in the first quarter, and we talk about it, and it's mainly because of the stocking of the network that we have been doing. We're pretty happy about how the prices play out in the first quarter, actually. If you compare it. I mean, if you think we started growing pricing in the second part of 2021, and as you say, we have sequentially price increase quarter-over-quarter.
We also have been very clear that we don't expect this to continue at this pace forever, we need to have cost reductions in the industry, in the system, in the supply chain before we stop increasing pricing.
Yeah. No, I appreciate that. I think by capturing volume ex or revenue ex price, we're sort of just looking at it sequentially. Why such a larger sequential slowdown in price than in, let's call it volume? You know, just, it's just the gap's been positive for multiple quarters. You know.
Yeah.
Obviously, the costs are coming down, but it's just, it's a very unique gap there, down 22 price.
Well-
Revenue ex price and down 55 on price.
Let's look at what we focus at the price cost relationship, right? That has actually been better in the first quarter than it was in the fourth quarter.
Yeah. No, I agree with that. Yeah. I was just getting a sense of how much costs.
That would take.
Have to come down if price slows this much. That's sort of.
No, I get it. That's, I mean, that's what's relevant for us is the fact that price cost is continued to be positive and is actually sequentially better compared to the fourth quarter. As you say, there's many mixed components, quarter-over-quarter. Again, the first quarter is a relatively small quarter, so any variances there probably is sort of amplified.
No, that's fair. On the 2024 comments, encouraging your comments about margins for 2024, sort of, you know, not requiring growth for, you know, volume. Can you give us a little better understanding? I'm not trying to ask for 2024 guide on incremental margins, but when you think of a smoother supply chain, obviously, you know, no labor issues assumed. When you think of the cost improvement, if 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 20s%. How would you think about a 2024 if you did have a little volume help? Secondly, on 2024, any order books extending into 2024 right now that you can at least give us a little early color? Thank you.
You know, well, let's tackle the margin. Before I don't answer your second question, I'll tell you about the margin situation. You know, it's been a really a brutal two years with supply chain, a debacle in the supply chain, some labor issues affecting our ability to produce. Because we were fighting those, we were not able to get as much traction with our margin improvement opportunities as we expected. What we're seeing now is those teams are starting to really get those projects underway. You know, they don't, they don't hit immediately, so we're gonna see the ramp throughout the year, which is why we guided better margins for the year.
As it gets into 2024, you know, what we see is an opportunity really for, you know, with strategic sourcing is gonna be better, our lean programs are gonna be better, our, you know, product portfolio is gonna be better. Don't forget we do get a margin boost from our tech stack improvements. You know, that stuff is a, is a gift that's gonna keep on giving for a while. I don't think it's gonna take. You know, 26.2% gross margin for ag is pretty darn good. You know, I'm sure there's room for us to make it better, but from an industry perspective, it's reasonably good. What we're committing to is that's not as good as we can do and we see an opportunity for improvement, so.
Construction as well. I think construction is gonna continue to surprise you with their ability to drive margin expansion. You know, combined together, you know, that's a pretty good story for us.
Any order book commentary or is that a no answer?
That's a no answer.
For 2024. All right. I appreciate it. Thank you.
Thank you. We will take the next question from line Mircea Dobre from Baird. The line is open now. Please go ahead.
Thank you. Good morning. Scott, I wanted to get you to talk a little bit about Augmenta and Hemisphere. Curious how you're looking to integrate this product in your equipment and kind of what the goal is here, how these folks are gonna be working with the Raven team. Maybe you can update us a little bit on the progress that you're making internally from a tech to stack perspective, considering that you've changed your relationship with Trimble. I'm curious, your engineering folks, what are they doing to sort of address that in the near term, and how are you thinking about the next call of 18-24 months on that?
Yeah. You know, first of all, we're thrilled to welcome the Augmenta team to the portfolio. You know, what they give us is See & Act technology at a much more value-oriented place than what other people in the industry offer. You know, I've actually, you know, been in the field and seen the product work, and it's really encouraging. You know, and farmers can get into the Augmenta program, and get, you know, See & Spray opportunities at a much lower cost than anything else available in the industry. And that is encouraging, and it's why, you know, why we made the initial investment, when we were a minority partner and why we ultimately brought them to acquire.
Now, we're still, with Raven's capability, doing a lot more work to advance our See & Spray, See & Act capabilities. I mean, we're just better with Augmenta. You know, they will fold into the Raven team, and, you know, John Preheim and the team there will, you know, really advance what they can do for us from an automation and an autonomy perspective that gets better with Augmenta. With Hemisphere, you know, we've had, you know, a really strong relationship with Trimble and NovAtel over the years. We know, you know, that there are other solutions out there, 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.
You know, what Hemisphere gives us is a really, really good team with a strong manufacturing base, which has surprised us a little bit. You know, the opportunity just to go faster. You know, as I talk to dealers and customers, you know, their request is that we go faster. This opportunity with both of these businesses just allows us to do that. That said, the benefit that we're getting from Raven and then, you know, the team there have helped us bring on an additional 500 engineers just gives us so much more software capability. You know, I hope I'm clear that we're nowhere near delivering for customers what we will and what we expect to give, and that's coming.
It's gonna be incremental benefits through this year and into next year. You know, as I said in the prepared remarks, it's really 25 where we feel like we get to true, extremely great technology and products for our customers. We're encouraged where we are on the path and how we're progressing there. As it relates to Trimble, you know, that was, you know, they made the decision to exit the relationship. You know, Rob and 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 Raven, we have the ability to take over that work and really not miss a beat for our customers, and that's what we're striving to do.
Got it. My follow-up is on construction. I'm curious to get an update from you on what you're seeing in terms of orders, especially on the heavy construction side, backlog maybe. And one of the things that kind of puzzles me a bit is, you know, 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 geographies. I'm trying to square relatively positive commentary with the industry outlook that you've provided there. Thank you.
Well, there's two things that are helping us in construction. You know, first of all, dealer inventories are low, and secondly, we've introduced a tremendous amount of new products. You know, I'm as I mentioned in my earlier remarks, we're very careful about managing dealer inventory. We also need to get these new products out there to our dealer network, and that's allowing us to put, you know... Now, 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. You know, nonetheless, housing's a little bit better than we thought.
You know, I don't like the program, but the Inflation Reduction Act is actually putting money into infrastructure that is gonna bleed out and help us and others over time. I think that's giving us a little bit more encouragement from a construction side than we might otherwise have.
You're saying your outlook is too conservative then on this slide?
I very specifically didn't say that. I'm just saying overall, you know, as us... I mean, we're not on an island saying this. It's not gonna be a great year for construction. You know, we're gonna do a little bit better because of those opportunities that I spoke of.
Okay. Thank you.
Thank you. We will take the next question from line, Timothy Thein from Citi. The line is open now. Please go ahead.
Yeah, thanks. Good morning. Just the first is a clarification. Oddone, on the comment earlier about the revenue guidance change, you mentioned FX obviously was a positive. Did you say that was offset by lower volumes in pricing?
No, no, no. I said... Sorry.
Okay.
I said that relative to Q1, the growth in driven by volume and price needs to be a little bit lower relative to the Q1 growth.
Got it. Got it.
Relative to last year, volume, price and effects-
Right. Okay.
are positive.
Okay. You've, you were clear on that earlier. Okay. I just wanna make sure I heard that. Scott, you mentioned, back to the market share comment, in thinking from a high horsepower tractor standpoint, where are you on the in terms of the progress of getting ramped back up in Racine? How does that play into assuming you're not at back to 100%, as the year progresses, does that provide a more of a mixed tailwind for you as you, as you presumably, output there, I'm guessing is increasing as we go through the year, but maybe just to comment on that and how meaningful that could be.
Yeah. You know what? I probably won't comment on how meaningful it could be. I will tell you, we had our board meeting earlier this week in Racine. I got a chance to be on the floor and see the work that they're doing. You know, we're ramping up, by our no means where we want to be or where our customers need us to be. There is a tremendous backlog globally for our high horsepower tractors and, you know, the team's working really, really hard. I was encouraged by what I saw, there's a lot of work to do there. You know, I'm confident that, you know, week after week, month after month, we're gonna continue to produce more for the Racine plant.
You know, that'll obviously be a benefit to our customers and to our financials as well. You know, the high horsepower market, cash crop market continues to be very strong, and I think our ability to continue to produce for that will be helpful for us.
Got it. Thanks a lot.
Thank you. We will take the next question from line Dillon Cumming from Morgan Stanley. The line is open now. Please go ahead.
Great. Good morning. Thanks for the question. 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, say we get to a point, call it middle of next year, where supply chain is a lot better, price cost isn't as big of an issue. Where do you see the greatest relative opportunity between the two segments in terms of how impactful the savings opportunities, the lean initiatives?
Yeah. Well, obviously, just by a size perspective, 'cause ag is gonna get much more of the benefit. 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, I think you'll, you know, see as the year plays out, shows a little bit of the benefit that we can get as we drive lean throughout the system. You know, obviously, because of the size and nature of ag, we get more savings there. You know, we're gonna get, you know, meaningful and consistent savings from lean throughout. 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. It's not an immediate negotiation. We're actually gonna be doing the negotiations later this year. I think, as we do that, you know, we're gonna be entering and this is a multi-wave program, so we're in the first wave, what's likely to be four or five. That first wave of the negotiations is gonna come when, you know, overall inflation's better, supply chain commodities are gonna be down. I think we'll be in a good position to get, you know, meaningful savings as we work through that. We're encouraged by both the lean and sourcing initiatives, what they mean in 2023, but really what they mean in 2024 and beyond.
Thank you. We will take our final question from line, Kristen Owen from Oppenheimer. The line is open now. Please go ahead.
Great. Thank you for fitting me in. I'll be brief here. One is just a clarification again on the CE margins. Obviously a very strong pricing, but do I understand correctly, there was still a fair amount of strike drag there and just any commentary that you have around the regional exits and the impact that that may have had on margins in the segment?
Yeah, the Burlington plant is also, like Racine, is ramping up. You know, the construction team did take advantage to get some alternative sourcing done, so that also helped from a margin perspective. I think, you know, both that will benefit the year. The exits of China and Russia, you know, obviously not helpful to us, but we've got those in the rear view mirror and really didn't hurt us much from a margin perspective in the quarter. You know, again, you know, Stefano and his team have really done a lot of work with the portfolio. You know, we're encouraged what we'll be able to talk about next quarter when we have the call.
Okay. That's helpful. I think I was maybe assuming that perhaps those exits, at least from China, might be accretive to margins, not necessarily dilutive. Before you respond to that, just wanna fit my second question in the interest of time. 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 % of revenue is that today? How much of that is Raven? Just how to think about the aftermarket business specifically now that you're integrating more of these new acquisitions. Thank you very much.
There's a whole lot there, so let's go see if I can see how good my memory is. Yeah, first of all, China was the reason we exited 'cause we weren't very good. And so It wasn't a big enough business to impact our margins negatively before or positively going forward, so that's kind of a wash. Aftermarket business is really, really good for us. Our team does a really, really nice job of managing that. You know, we finally got our inventories up a little bit so we can serve our customers better there. 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.
You know, as we ramp up our capability, with our tech stack, you know, a significant portion of that is in aftermarket. Obviously, what we're most excited about is the integrated solutions that we can put in with the production, but there's a very notable opportunity for growth share gains and margin expansion with the aftermarket from Raven and what we build out there.
I think you covered it. Thank you very much.
All right. Thank you.
Thank you. There's no further questions. I'll hand it back over to your host to conclude today's conference.
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