CNH Industrial N.V. Q4 FY2022 Earnings Call

Good day, and welcome to today's CNH Conference Call and Webcast. At this time, I'll hand the call over to Jason Omerza. Please go ahead.

Thank you, Serge. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's Fourth Quarter and Full-Year Results for the period ending December 31, 2022. 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 expressed 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 the factors that could cause actual results to differ materially is contained in the company's most recent Form 20-F and EU annual report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission, and the equivalent authorities in the Netherlands and Italy. The company presentation includes 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. We finished 2022 with solid results as fourth quarter revenues were up over 27%, driving full-year consolidated revenues up 21%. Deliveries and product mix improved in both Agriculture and Construction. Our strength was broad-based, with double-digit year-over-year price realization coming from all regions. We expanded profit margins in both Agriculture and Construction despite significant input cost increases. The industry faced many other headwinds during the year, including a choppy supply chain, elevated freight costs, and ongoing inflation. Late in the year, these issues began to modestly improve. And we anticipate that will continue into 2023. The CNH team's creativity, hard work, and strong execution resulted in company records for both adjusted net income, up $2 billion for the year, and adjusted earnings per share, at $1.46, up 14% over 2021. We also generated $2 billion in free cash flow from industrial activities in the fourth quarter and $1.6 billion for the full year as we over-delivered on our plans to complete and ship our accumulation of partially built units. This benefited our dealers and put us in a net cash position well ahead of our plan. Last year, we launched two potent margin improvement initiatives, the Strategic Sourcing Program, and the CNHI Business System, which we refer to as CBS. Continuous improvement is hard, especially in pursuit of breakthrough results. But our team has embraced this lean mindset, and is poised to deliver value across the business. Looking ahead, we remain focused on executing our strategy, including significant investments in our tech stack and product development. Derek Neilson and his team continue to drive exceptional performance, delivering a strong fourth quarter, with full-year net sales for the Agriculture business up 22%. This growth was largely propelled by robust industry demand and significant year-over-year price realization, especially in North and South America. We saw improved product mix, including Precision Ag revenues up 32%, which benefited from both an increased take rate for factory-fit precision options and incremental rate in sales. Agriculture profitability remained healthy, with Q4 gross margins up 280 basis points, and adjusted EBIT margin up 310 basis points, admittedly against an easy comp. Margins were down sequentially versus our record third quarter performance, impacted by regional mix and the non-standard work required to finish units. Overall, I'm extremely pleased with the Agriculture team's performance and results. For 2022, Agriculture adjusted EBIT was nearly $2.5 billion, marking our highest profit in more than a decade. We are executing on our customer-centric strategy and customers have responded with continued demand for our high-end products at prices offsetting increased escalated production cost. They have also recognized us with improved net promoter scores, 5% higher than in 2021. Derek and his team are ensuring that the customer is at the center of all we do, driving the right behaviors and results. Stefano Pampalone and his Construction team executed quite well in the fourth quarter with strong momentum from Sampierana integration, manufacturing improvements, and enhanced customer focus; we expect even better progress in 2023, and beyond. 2022 net sales were up 16% for both the full year and the fourth quarter, with noteworthy growth in Europe and South America. Organic growth accounted for about two-thirds of the increase, with the remainder attributed to Sampierana. Their excavator portfolio and technology innovations have enhanced our ability to meet customer needs, and their Eurocomach platforms provide an outstanding foundation for electrification. Construction adjusted EBIT for the quarter was $34 million at a 3.5% margin. Full-year adjusted EBIT was up 38%, to $124 million. And we are encouraged by the ongoing progress in Construction. The team is well-positioned to deliver on their strategic initiatives, support their dealers and customers, and gain market share. This past December, we held an engaging Tech Day to showcase our extensive suite of precision Agriculture technology. Attendees met our deep team of experts in automation, autonomy, and connected platforms to better understand the cutting edge products we are developing. Through a series of live demo stations, the team exhibited the real-world applications of our groundbreaking Smart Iron. The products and technology that we demonstrated at Tech Day that you see here on this page and those we will be releasing over the next few years, prove our commitment to being a leader in precision agriculture. We reiterate our expectation to deliver over $1 billion of Precision Ag sales in 2023. I also want to highlight two recent investments made through our CNH Industrial Ventures arm. Stout Industrial Technology is a U.S.-based startup focused on AI-powered smart agriculture implements. EarthOptics has proprietary sensor technology that precisely measures soil health and structure. By taking minority stakes in these and similar companies through our Ventures portfolio, CNH is staying on the cutting edge of emerging technology to develop solutions to provide real advantages for customers. CNH remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability. We have a strong history of sustainability performance as evidenced by our recognitions and our innovative products, including the New Holland methane tractor and electric mini excavator pictured here. In 2022, we pledged to set science-based targets that will enhance our operation's Scope 1 and 2 emissions goals, and establish first-time decarbonization goals related to our products, which we'll announce later this year. With that, I will turn it over to Oddone to take you through our financial results. Oddone?

Yes, thank you, Scott, and good morning, good afternoon to everyone on the call. So, fourth quarter net sales from Industrial Activities, of nearly $6.4 billion, were up over 27% net of adverse FX impacts. Full-year net sales of Industrial Activities, of $21.5 billion, were up 21% or over 24% at constant currency. Continued price adjustments were significant drivers for the top-line growth in the quarter, and volume and mix also accounted for around 15% sales increase from Q4 2021. Our Industrial segment's fourth quarter gross margin was 21.7%, and 22.2% for the full year. The year-over-year margin improvement of 1.5 percentage points is mainly due to strong and profitable growth in South America, and disciplined price realization globally, which more than offset rising production costs. Q4 adjusted EBIT came in at $680 million, up $302 million from 2021, with a corresponding EBIT margin of 10.7%, a 310 basis point improvement versus prior year. Full-year adjusted EBIT of Industrial Activities was $2.4 billion with a margin of 11.3%, up 140 basis points from 2021. Free cash flow from Industrial Activities was $1.6 billion in 2022, which turned our initial Industrial Activities net debt into a net cash position of $362 million at the end of the year, as Scott discussed in his introductory slide. Adjusted net income for the quarter was $486 million, up $61 million compared to prior year. This resulted in adjusted earnings per share of $0.36, up $0.05 year-over-year, and full-year adjusted EPS was $1.46. Adjusted net income for the quarter was affected by a higher tax rate due to discrete items booked in Q4. The full-year adjusted effective tax rate was about 28% mainly due to the jurisdictional mix of pre-tax profit with higher rates coming from South America. And we will likely see the tax rate a point or two lower in 2023. Available liquidity, as of December 31, was $10.6 billion. And at the Annual General Meeting, the Board of CNH Industrial is planning to recommend an annual cash dividend of $0.36 per common share, totaling a little over $500 million in distribution to shareholders. In the fourth quarter, strong volumes and double-digit price realization continued to shield us from the steep increase in production costs. R&D and our SG&A expenses were higher because of technology investments, inflation, and newly acquired businesses. Energy costs increased year-over-year but still accounted for about half a percent of our total costs worldwide. Agriculture adjusted EBIT increased by $287 million, to reach $701 million with a margin of 13.1%, up more than 300 basis points from the same quarter in 2021. The higher profits were driven by higher volumes and favorable pricing, which offset higher product cost, SG&A, and R&D expenses. Gross profit was up $394 million compared to Q4 2021, exceeding $1.2 billion with a margin of 13.1%. For the full year, gross profit was up $989 million or up 140 basis points from 2021 largely driven by strong price realization coming from all regions and better product mix, including margin-rich technology-related sales growing by about 32%. Construction Equipment adjusted EBIT for Q4 increased by $14 million compared to Q4 2021, reaching $34 million with a margin of 3.5%. These results were driven by favorable volume and positive price realization. But product cost, including site-related costs, were an outsized headwind for the business. Gross profit across the year was up $82 million compared to full-year 2021, mainly due to higher volumes and stronger pricing. For our financial services business, net income in the fourth quarter was $75 million, down $50 million compared to 2021. Factors include higher risk cost, provisions linked to the termination of the construction business in China, increased labor cost, and compressed margin in North America slightly mitigated by robust volumes across the region as well as high recovery on those agreements. Retail originations were $2.9 billion in the quarter reaching $10 billion for the year, up $100 million from 2021. The managed portfolio at the end of 2022 was $23.8 billion, up $4 billion on a constant currency basis. Delinquencies remained at a low level, up 10 basis points year-over-year to 1.3%. Increase from December 2021 is explained by the in-sourcing of the resolving credit account portfolio that was purchased in October 2022. CNH Industrial Capital America acquired receivables previously held by a third party on a private label program that will now be run and booked by our company. Free cash flow from industrial activities in the quarter was over $2 billion on the back of $1.5 billion change in working capital driven in large part by the reduction in manufacturing inventory as we mentioned before. At the end of the year, the total gross debt for industrial activity was $5 billion with a net cash position of $362 million. So, within the first year of the spin-off, we were able to improve our net financial position by $1.5 billion on the back of the cash generated by the operations. This takes us to our capital allocation priorities. And we have target spending $4.4 billion in combined R&D and CapEx over the 2022 - 2024 plan period, almost doubling what we were spending in the previous three years. In 2022, we spent the first $1.3 billion of that. And we remain committed to invest in our business to fuel profitable growth. We are confident the products and services we will bring to the market with the spending will ensure higher financial performance in the near future, and more importantly, higher efficiencies to our customers. Strong cash generation helps us maintain our investment grade rating which has been re-affirmed or improved by all the rating agencies after the spin-off. We returned nearly $600 million to shareholders in 2022 through dividend and share repurchases. And as mentioned earlier, the proposed 2023 dividend will total above $500 million. And we plan to continue our share buyback program. We have the liquidity to fund organic growth and you are seeing us use the Ventures arm for minority investments when opportunity arises. We remain committed to our capital allocation strategy and focus on maximizing value for our shareholders. This concludes my prepared remarks. And I will now turn it back to Scott.

Thank you, Oddone. Overall, demand continues to outstrip the industry's ability to supply at least in the near term, which despite record sales has actually dampened industry backlogs. Spot commodity prices are trending down. But they are still generally above pre-2022 levels. And fortunately for farmers, fertilizers and other input costs are dropping as well. In North America, elevated farm incomes are sustaining demand for high horsepower tractors and combines, while small tractor demand has slowed from the lofty level seen over the past two years. We see the European Agriculture industry flattening as the macro-environment starts to impact equipment demand there. South America and Brazil in particular is a very good market for us. The business conditions in Brazil were affected following a presidential election. But we believe that the fundamentals are still positive for agriculture in the region. We also see good long-term opportunities in APAC, but this year will likely be slightly down. In construction, global demand is trending lower. And we expect residential and commercial markets in North America and Europe to decline in 2023 due to rising interest rates. However, public construction spending at least partially fills in those gaps in the United States. In Europe and South America, construction markets will be down in reaction to the overall macro-environment. We expect net sales of industrial activities to increase 6% to 10%. With confidence in the stickiness of our 2022 price increases, we expect to build on our margin gains by taking more cost out of our system. We are committed to growing market share. And we have the products, brands, and dealer network to do just that. Returning to full production in our North American plants will also help. Our SG&A as a percentage of sales remains one of the lowest in the industry. And despite inflationary pressures, we will severely limit SG&A growth. Free cash flow will be between $1.3 billion and $1.5 billion, a little lower than last year as we have earmarked $1.6 billion for R&D and CapEx, up about $300 million from 2022. Even accounting for the increased R&D cost, our EBIT is projected to grow slightly faster than our top line. We are becoming a simpler, leaner company every day, and expect to modestly improve our industrial margins throughout the year. Earlier today, we announced that our Board of Directors has determined that our shareholders would be best served by a single listing in the United States. The majority of our trading in CNH Industrial stock has been shifting to the New York Stock Exchange since the spin-off of Iveco Group, revealing that CNH's new business profile and investor base better fit with the single New York Stock Exchange listing. Concentrating trading in one market will allow for increased liquidity of our stock, improve investor focus, further simplify the company's profile, enable broader index inclusion, and attract more passive investors. The current Italian regulations only permit the delisting of stocks when they are or will be listed on another EU exchange. By definition, the NYSE does not qualify. CNH Industrial has an open dialog with Borsa Italiana and Euronext. And we told them of our intention to leave the European listing. The harmonization and modernization of the Italian financial system, which is underway, is expected to include the New York Stock Exchange as an acceptable exchange. This is our preferred path for a smooth delisting from Euronext Milan. But not the only option if this becomes untimely. We are targeting sole trading on NYSE by the end of 2023. But that could shift into 2024 depending on the timing of the regulation change. Rest assured, we will delist as soon as it is legally possible. At this point, we do not intend to change our incorporation in the Netherlands or our tax domicile in the U.K. as part of the single listing. Therefore, we do not expect any material tax or trading consequences for our shareholders. Our Board of Directors and management team are grateful to Euronext Milan for being our listing venue for the past 10 years, and excited about the company's full return to the NYSE. I want to stress that this does not change the company's longstanding commitment to Italy and the Italian market. CNH employs over 5,000 people in Italy, made a significant investment with the Sampierana acquisition in late 2021, and opened its fifth plant in the country in 2022. We also have three R&D centers in Italy developing products that are sold around the world. While the delisting is another step in corporate simplification, real value creation comes from the business. We are now taking orders into Q4 in some markets. And overall demand remained strong. But the uncertain macro-environment, especially toward the end of 2023, requires vigilance as we strive to support our customers, dealers, suppliers, and employees. We expect to escalate combine CapEx and R&D investment as we launch exciting new products and build out the tech stack. We have already introduced some Raven-enabled products, and we will unveil more in 2023. But the real payoff for these higher margin precision solutions kicks in 2024. We are happy to have finally secured a contract with UAW North America. The agreement we reached is fair for our employees and sustainable for the company. Employees returned to work this week. And we expect the two affected plants to ramp up to full production in the coming months. While the pace of inflation is slowing, it is still inflation. And we expect it to have an impact on our manufacturing, energy, SG&A, and R&D cost in 2023. On a more positive note, we are seeing modest supply chain improvements. Our primary margin improvement initiative, strategic sourcing, and CBS will start to yield results in 2023. I want to close by emphasizing again how proud I am of the team for what they have accomplished, and ensure you that we are ready to do even more in 2023. That concludes our prepared remarks. And I will now turn the call over to Serge to open the line for questions.

Thank you, sir. Operator instructions: at this time we will open the lines for questions. Our first question comes from Kristen Owen from Oppenheimer. Please go ahead.

Hi, good morning. Thank you for the question. Scott, you talked about some of the industry demand outlook for 2023. I was wondering if you could comment more on some of the order book trends that were outlined in the press release? If I recall, last quarter, you talked about some of the year-over-year declines being driven more by your intentional decision to keep order books relatively short. How far are you open now, and maybe just say more about how you view demand versus order levels for 2023?

Yes. As we talked about, the macro environment is a little choppy, and you see that in everything you read. But our order books really are not open. We haven't opened up Q4 in any markets yet, and we still are allocating. So, a lot of what's happening in the order book is our choice to allocate across markets. I'm not proud of the fact, but we did not deliver in a timely manner in much of 2022. The one market where we've been very clear is down is low horsepower tractors. So, we are seeing softness there. And I mentioned the political situation in Brazil; it really provided a pause — farmers are just taking a pause. We think the fundamentals in that market are incredibly strong; the world needs that agricultural production and they need equipment in order to do that. But we're just watching that very closely. Overall, Europe is slightly down, but we feel good about our ability to execute and keep that market relatively flat compared to 2022. So, overall, I think the demand environment is better than I would have expected to be at this point. We're running our factories as fast as we can and as much as we can through the year, and just being careful as we look at the fourth quarter. The fourth quarter is where we are being cautious at this point. We don't have orders for that yet, but where we have talked about it, I think we could open that up and probably book it very quickly.

Okay, that's helpful. And then just as a follow-up to that question, just how you're thinking about dealer inventory levels exiting 2023 — do you expect to produce in line with dealer inventories and builds? Just any comments you have there?

We are still — again with the exception of the low horsepower tractors — below historical levels, and quite frankly, still below where most of our dealers would like us to be with our inventory. So, we're going to work to catch that up. We do not plan to get back to historical levels. We'd like to keep inventory relatively lean. It's a careful balancing act, because you're running as fast as you can to provide shipments, and the market is going to slow down at some point. But no, we are not looking to push a lot more dealer inventory into the channel. We've got some dealer builds that we've got to do just to give them acceptable levels of inventory. But our goal and part of what we're watching for is to make sure we protect dealer inventories going into 2024.

Great, thank you.

Thank you. Our next question comes from Steven Fisher from UBS. Please go ahead.

So, thanks. Good morning. Just on the Q4 order book point, just curious, Scott, why haven't you opened up the order books yet? And what will you need to see to fully open them up for Q4?

Steven, it really refers to, and again I'm not proud of the fact, just our inability to deliver in a timely manner. I mean, we've got the backlog, especially in our high horsepower tractors, that is quite long. And I think we're just trying to get more confidence in our ability to deliver. Again, inflation is not rising anymore, but it's still out there. So, we also are making sure we manage our cost. Derek and Stefano are really doing a nice job of managing cost inputs in their businesses, but it's really about making sure we balance the cost-price equation, and you've seen from our history, we're really good at doing that. Also, ensure that we can deliver when we say we're going to deliver if we open up the books.

Okay, that's fair. And then, I guess, in terms of the Agriculture margins for 2023, can you maybe just give us any color on the puts and takes there? I imagine there were a number of inefficiencies in production in 2022 due to the strike and the supply chain, and then you have Precision Ag mix which should be helpful for 2023. So, can you talk about some of those puts and takes, and then what you're expecting for price versus cost in 2023?

Let me take this, Steve. Yes, you pretty much got it. We expect 2023 to be a play of cost more than a play of pricing. We expect raw materials such as steel to be positive price over cost, as we have been throughout 2022. But the big game will be in getting cost out of the production system and reducing cost across the production systems. And that's a combination of having a smoother supply chain, a more organized cadence, and possibly getting some improvement from our Strategic Sourcing Program. That probably will kick in more at the end of the year rather than in the beginning of the year. But that's what we're looking at. And we have some carryover pricing from 2022 still coming in. And then you mentioned as well growing sales in tech, which generally have higher margin than pure equipment.

Okay, thank you.

Thank you. And our next question comes from David Raso from Evercore ISI. Please go ahead.

Hi, thank you. I'm just trying to square up the implied volumes. When you look at the revenue guide of 6% to 10%, I mean currency shouldn't be that much of a drag at these levels. So, it looks like it's mostly just price in the revenue guide. Is that the right way to interpret it, that basically volumes are flat? And if that is the case, can you give a little flavor where volumes are up versus down so we can square up any chance of overhead absorption?

Volumes are up slightly — modestly — low single digits. North America is really where we see the greatest strength, and where we see the biggest backlog and where we've got the most work to do. So, I think that'll be the volume play there, to a great extent. And there is still lots of work to do to deliver in other areas of the world, but that really will be where most of the volume comes from.

And that's more of a large Agriculture comment, I know the units are bigger —

No, you've got it. It's high horsepower tractors and combines, and in that order.

And Oddone, the comment about steel — more about steel than price — so I understood what you were implying there. Do we still think our steel costs are up year-over-year more than price? And it's all wrapped in a thought around do we think gross margins can expand in '23? I just want to make sure I understand that margin comment.

I'm sorry if I wasn't clear. I was talking about cost, so price over cost in general. And cost includes raw material, but in general, cost — so all of our production cost.

But so, price minus cost expected to be positive for the year to margin?

Yes.

So, if volume is up a little bit and price-cost should be net positive to margin, I assume we can infer from that gross margins are expected to expand?

Yes.

As well as SG&A growing slower than sales growth which was in the guide. Is that correct?

That is exactly correct.

Yes, what we're looking at.

All right, thank you so much. And I appreciate the detail on delisting. Thank you.

And our next question comes from Jamie Cook from Credit Suisse. Please go ahead.

Hi, good morning. Nice quarter. I guess just two questions. Scott, given the performance that you've put up — the positive financial performance — can you talk about how you're thinking about the Agriculture cycle, and the implications for your 2024 financial target, whether you think there's upside there? And then, I guess, my second question, just an update on Raven and where we are relative to your synergy targets? Thank you.

Okay. First of all, if you go back a year to Capital Markets Day, we're obviously much — 2022 played out significantly better than we expected. And unfortunately some of that was driven by factors we couldn't have anticipated. But overall, 2022, and as we look at 2023, are both better than we had anticipated then. But that's really market related, not purely our performance — our performance is actually doing quite well. As we look at our 2024 targets, we obviously feel like we're on a path to do better in some areas, but we've got work to do in others. So, we feel like, generally speaking, we set ambitious targets, and we're on path to hit those. But I don't want to be overly optimistic; '24 could be a more difficult year. The Agriculture cycle, as I talked about in my prepared remarks, shows soft commodity prices are still at relatively good levels, and it looks like that could hold. Farm income is still at elevated levels. That supports demand for equipment. It won't stay positive forever, but right now, we're not about to call that it will turn negative in '23. As far as Raven, I honestly could not be more positive on how well that integration has gone. We committed to a reverse integration because we like the team and their culture. Our team has embraced that. We are learning from their agile customer-focused system, and we're building on that, giving them the tools and resources. We've done a tremendous amount of hiring. It's — we brought a new Patriot sprayer with full Raven capability. We'll embed their tools in everything that we can going forward. Integrating them into our tech stack is where the real value unlock is. There are huge aftermarket opportunities, retrofit opportunities with Raven. Overall, I'm really pleased with how the Raven team and our team have done to bring value and overdeliver on our synergy targets.

Thank you. We'll now move to our next question from Dillon Cumming from Morgan Stanley. Please go ahead.

Great. Good morning. Thanks for the question. Just wanted to ask on some of the more productive margin improvement opportunities you mentioned. You called out the sourcing program and CBS starting to ramp in the quarter. I know Oddone mentioned it would still be a bit more back-half-weighted. But could you earmark how much more of an opportunity that could be on a dollar basis or a margin basis, just to get a sense of quantifying what the tail end could be next year?

Yes. Remember, our CBS and lean initiatives are not starting from nothing. We've got a great history with World Class Manufacturing and pulling lean tools throughout the plant network. What we're looking to do is deploy that in other areas of the business and accelerate it in the plants. I think that's what you'll see taking shape this year. The opportunity is significant, but the teams are working on how we push back the cost input using various lean tools to get back to where costs were pre-pandemic. That's a lot of heavy lifting. Oddone referred to it: 2022 was the year of price, and 2023 is going to be a year of cost focus. Our lean tools will be a significant way we get after that. More importantly, it's a way we deliver value for customers — it's not just about taking cost out; we're going to use those tools to make quality better, to make delivery better, and overall help expand margins. We did some of that work in '22; we're accelerating in 2023, so a great opportunity across the business. Strategic sourcing is a longer-term program. It got kicked off last summer and fall. We've got a strong team working through it. That will show some results later this year, but really start to drive notable margin expansion in '24 and beyond. Both are opportunities: CBS gives near-term upside, strategic sourcing more significant long-term upside.

Okay, that's helpful color. Thanks, Scott. And then just with my follow-up on the Precision Ag revenue target, Oddone, you mentioned that you exited the year up 32% and you were originally guiding at Tech Day for 11% in 2023. Given that exit rate, would you consider any upside to that $1 billion target for '23 at this point?

I will stick to that target for the time being.

The next question comes from Tami Zakaria from JPMorgan. Please go ahead.

Hi, good morning. Thank you. So, just to get some color on the volume expectation of low single-digit, is that higher for Agriculture, call it mid single-digit, but negative for Construction, so that nets out to low single-digit growth for the overall company? Is that how we should be thinking about it?

No, actually the Construction business backlog is quite good. Despite a difficult overall environment, we had many limitations last year in our ability to produce, so that business is actually reasonably good. So, both businesses will have positive volume in 2023.

Got it, that's super-helpful. And then second question, what kind of incremental margin should we expect in Agriculture and Construction segments this year?

I would say in line with the incremental margins we've had over time, and no big difference from that. Probably a little bit more on Construction because Construction was more affected by some of the cost headwinds this year, but for Agriculture, it will be pretty much in line with what we have had in the past.

Got it. Thank you so much.

And our next question comes from Mig Dobre from Baird. Please go ahead.

Good morning. Following up on Construction here, can you give a little more context around the order book and the declines we've seen in both heavy and light equipment? Are you limiting the order book in Construction similarly to what you've done with Agriculture? And in your outlook for 2023 for the industry, are you seeing anything more pessimistic than some of your peers when framing 2023? Any color would be helpful as well.

I didn't digest Caterpillar's numbers this week, but I don't remember them being overly positive on 2023. So, I think we're somewhat in line on the Construction side. We're really underserving our dealer network with heavy excavators, and we're working diligently to improve that. That's a significant opportunity for us. On the light side, we've made good progress with Sampierana, and it will help expand the markets we can serve. South America was very strong for Construction last year; we don't expect that to repeat, so that market will be a little lighter than last year. But overall, it's going to be a positive year. Stefano and his team are doing a nice job and we like where it's going. It has long-range upside.

Okay. And then on the price-cost question on a consolidated basis, it looks like you've had positive price-cost of about $180 million the past couple of quarters. As you contemplate 2023, should that figure hold or should we expect significant variance?

Directionally, we expect to be positive price-cost in 2023 as well. The absolute amounts will differ, but I wouldn't change much from the view of what we saw throughout 2022.

Great, appreciate it.

And our next question comes from Marta Bruska from Berenberg. Please go ahead.

Hi, good afternoon. Thank you for taking my question. It would be helpful to hear your thoughts on the pricing environment. Specifically, in the past some competitors handed out steel discounts when raw material normalized. To my understanding that wasn't the case in 2022. At present, prices are already positive. Do you see anything that would suggest that will change in 2023 or the risk of competitors handing out steel discounts to dealers, and how would you react to that? And I had one more question after this.

We are still expecting inflation to impact our business and our supply chain in 2023 to a lesser extent than in 2022 — a declining rate of inflation, but still inflation. We've seen decreases in some areas, but overall the costs we're paying are not coming down broadly. So, we don't intend to decrease pricing. The quality and innovation we're putting into our products suggest we don't need to compete on price. I think the industry overall is likely to take that approach.

Perfect. Thank you. And with the big tech layoffs, were you able to benefit from hiring into the tech talent pool for your Precision Ag, i.e., hiring from that pool?

That's something I've been pushing the team on for quite some time. We've done significant hiring in our technical teams for Precision and Autonomy. But many of the layoffs elsewhere are not actually of the programmers and engineers we target. So, we don't see a large opportunity there. We did most of our hiring in 2022 and will probably slow down a bit. To the extent we can bring on great talent at more reasonable prices, we will. Our commitment to accelerating customer value from Precision and Autonomy continues and we will keep hiring in 2023, but there's not a significant opportunity beyond what we've already done.

Very clear, thank you.

Now our next question comes from Nicole Deblase from Deutsche Bank. Please go ahead.

Yes, thanks. Good morning. Can we just start by talking a little bit about what you're seeing with respect to used equipment values, any signs of moderation at all from such high levels in 2022 within Agriculture or Construction?

Used values are still holding in large part because of availability. I'm not talking about low horsepower tractors because that's a different scenario where that market stabilized at a lower level. But at the high horsepower side and large Agriculture equipment, we're still not seeing large supplies of used equipment. So, prices are staying reasonably high.

Okay, got it. And thinking about the quarterly cadence of earnings throughout 2023 versus normal seasonality, should we expect a return to normal seasonality?

I would say we will go back to normal seasonality, which is similar to what we saw in 2022 between production and retail sales. So yes, returning to normal seasonality.

Thank you. I'll pass it on.

We will now take our next question from Timothy Thein from Citi. Please go ahead.

Yes, thank you. Scott, it's interesting these order book comments in the release have taken a life of their own. How does Derek and the team interpret that? There's so much noise in how the world has unfolded over the last year, and how you and others have shifted to an allocation mode. How significant are these order books in light of the timing of deliveries — how should we think about their underlying significance?

If Derek were on the call, you'd hear a much more positive tone from him than perhaps how you're reading it. We came off unprecedented demand and there are regional changes, but overall the portfolios are still reasonably good. Where we had to open the book and allocate, you see that. The Lula election in Brazil caused a pause for some farmers, but overall that market is very strong. It's a matter of timing and we're managing that, and Derek is managing the business extremely well, including on the sales side to make sure orders and retail orders come through. He's not sounding an alarm; he's putting the right measures in place to ensure we deliver a solid year in 2023.

Got it. And on the dealer stocking or restocking point, especially given low horsepower market weakness, but sticking to large Agriculture which is more significant to CNH, the notion that dealer stocking isn't likely happening in 2023 — could that pose some tailwind as we get into 2024? Is that a fair takeaway?

Some markets will get back to reasonable inventory levels, but we want to be disciplined and protect both our cash flow and our dealers' cash flow. The end of the year was tricky because we completed many partially built units and needed to finish and ship them, which resulted in more inventory in some places that had retail orders but were not delivered in time. So, end-of-year inventories aren't fully indicative, especially in North America. Our goal is to have dealer inventories at acceptable levels, not to return to historical high levels.

All righty, thank you.

Our next question comes from Michael Feniger from Bank of America. Please go ahead.

Hey, Scott. Thanks for taking my questions. I believe you phrased that 2022 was the year of price and 2023 is the year of cost. If you look at 2022, can you quantify some of the costs — premium freight, transportation — that cyclically won't be as elevated in 2023?

You hit a big one: transportation. We've already seen transportation costs start to come down — cargo boxes and ocean freight. We don't always see immediate effects because of contractual terms, but that's improving. Semiconductors have also improved. Overall, the costs are at more reasonable levels compared to the spikes during the pandemic, but prices will still be higher in 2023 versus pre-pandemic. When I talk about cost focus, I mean improving efficiency across the business where we may have lost some cadence during the past couple of years.

Understood. And you mentioned 2024 could be more difficult. Many economists see global growth in 2024. Why do you think 2024 could be a more challenging year?

We are more exposed to the Agriculture cycle than global GDP. The Agriculture cycle moves — it's not a flat line. We've had a very strong market recently. '24 might not be as strong — that's not a negative, it's just the cyclical nature of the industry.

Understood. Lastly, you inflected to a net cash position ahead of plan from cash generation in 2022. With aggressive investing going forward, how should we think about potential share repurchases to help close valuation gaps relative to peers? What's the lever set?

Let me take that. We set clear capital allocation priorities: invest more in R&D, step up dividends, and we returned capital through share repurchases in 2022. We plan to continue share repurchases in 2023. We also want to keep availability for potential M&A, particularly in the tech space if it supports profitable growth. So, it's a mix of investing for growth and returning capital when appropriate.

Thank you.

And now we have time for one final question from an analyst at Goldman Sachs. Please go ahead.

Hi, thanks very much for taking my last question. Your guidance for 2023 sees weaker cash conversion. Could you comment more on what you're seeing there and what the moving parts are?

Yes. Thanks, and thank the team for delivering such strong cash flow in the fourth quarter, which helped our 2022 performance. We expect another $1.3 billion to $1.5 billion range of free cash flow in 2023, but we are spending several hundred million dollars more in CapEx. Part of our strategy is bringing new products to market that allow higher gross margins and market share gains. Those investments don't come free. That's the key driver of the year-over-year cash flow change. We'll remain disciplined with inventories and working capital management, but the increased investment in product and technology is the main factor reducing cash conversion versus 2022.

Fair, thank you.

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.