CNH Industrial N.V. Q1 FY2023 Earnings Call

Hello and welcome to CNH Industrial. My name is Caroline and I will be your coordinator for today’s event. Please note this call is being recorded and for the duration of the call your line will be on listen-only mode. However, you will have the opportunity to ask questions at the end of the call. 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 31, 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 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 annual report on Form 10-K, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission, and the equivalent reports and filings with authorities in the Netherlands and Italy. The Company presentation 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. With a 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’m increasingly encouraged by the resilience of our end markets. Our lean manufacturing and strategic sourcing programs are introducing simpler, more efficient processes across the company. The teams are doing a lot of foundational work right now and we will accelerate these results along the way as we implement these multiyear margin improvement plans. We are successfully employing a variety of approaches to develop our tech stack and the benefits to our customers and business will be significant. 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. And as it should, all of this translates into higher bottom-line results, visible in our solid year-over-year EPS increase. Derek Nielsen’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 the 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, so we are well positioned to compete and win in that market. Healthy construction demand is leading us to increase production on certain products, and Stefano Pampalone and his team continue to align our portfolio with customer needs. At ConExpo we previewed innovative new products like the L100 mini track loader, which was developed in conjunction with our SAP Ariana 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 customers. Oddone and his financial services team have decades of accumulated experience leading this business. Many of them even successfully worked 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 in our 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. Ombre Biden’s team is driving our Strategic Sourcing Initiative and 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 chain to sustainably improve quality, delivery and cost in 2024 and beyond. We are ramping up our CNHI business system, or CBS, rollout across the company. To date we have trained over 2,000 employees on how to apply lean principles at their locations and more are trained each week, and we are increasing the pace of Kaizen events. I also want to 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 cost and we are gaining market share in this important segment. This customer-inspired design approach is a win-win because delighted buyers may improve gross margins and 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, but from 2025 on the pace will dramatically increase. Since our acquisition of Raven we have hired over 500 tech engineers who are developing the next generation precision solutions that will seamlessly integrate with our grade 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 toward 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% in the customer 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 share 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 is a normal season to build up finished inventory in preparation for the spring selling season. Agriculture net sales were up 16% 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 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, and that will continue into Q2. That is also true for our SG&A and other expenses which, like our manufacturing cost, 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, would be more evident. We have solid plans to increase full-year margins versus 2022 by reducing 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 closure of operations in China and Russia and lower wholesalers in South America where dealers were de-stocking. 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 and 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 and 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 services business, net income was $78 million, down $4 million compared to the first quarter of last year. We saw favorable volumes in all regions but this was more than offset by margin compression in North America, higher risk cost and increased labor cost. While rapid rate increases contributed to the margin pressure, they are managed through a site asset-to-liability ratio metric. We have a limited impact on our result, and that is mainly linked to the long retail delivery delays in 2022, which created the 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 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 services business issued $600 million in bonds and an initial $870 million ABS transaction to continue funding our growing receivables portfolio. The fact that our financial services business is able to raise capital in these times is a testament to the sound creditworthiness and steady 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 3 our annual dividend was distributed to our shareholders worth over $0.5 billion. I will 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 cash generation allow for it. We remain confident that opportunities for passive investments in CNH stock will increase as a result of our respected inclusions in the U.S. indices. Overall, we have had 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, but 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 queue for 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 agricultural equipment with precision technology. Dealer inventories for high horsepower tractors and combines remain at historically low levels. On the other hand, with persistent small Ag demand softness, we are lowering production of the relevant equipment to keep dealer inventories near optimal levels. We saw an uptick in dealer inventories for light construction equipment due to high shipments in the month of March, but the inventory-to-sales ratio for these products remains quite low. As demand for row crop products is strong, pricing levels are proving durable, order backlog remains solid and dealer feedback is positive. We are raising and narrowing the range of our full-year net sales guidance to about up 8% to up 11%, compared to our prior forecast of about up 6% to up 10%. We are reaffirming our previous 2023 guidance for the remainder of our metrics. With the progress we have shown so far and at today’s sustained volume levels, it is evident that we may approach or even meet our sales, margin and earnings per share targets from our 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, but 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 in our markets, our growers in Brazil and in North America cornville. Regardless of the macro backdrop, we are continuing to invest in R&D and technology to build and enhance our precision-enabled products. Customer engagement and retention will sustainably improve as we field 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. Karolina will now open the line for questions.

Sure, thank you. We will take the first question from the line of Daniela Costa from Goldman Sachs. Your line is open now, please go ahead.

Hi, good morning, thanks for taking my question. I just have two questions, if possible. The first one surrounding the current credit situation: if you could give some color on how much of the equipment that you are selling you are currently financing versus third parties, and whether you plan to take on maybe more of that risk related to what may not yet be financed by you or for some reasons is out of scope, and what could that mean? And the second question, just on your comments on the journey you are making towards precision Ag: can you elaborate on that journey in terms of your inorganic strategy? Where do you think you are at the moment in terms of the ideal product set — have you gotten to where you want, and is it now more about growing organically, or do you still miss certain parts that you would like to strengthen and which are those? Thank you.

Daniela, let me take the first one. So in terms of retail financing, depending on the region and business, about between 25% and 45% of retail is financed by us. This is actually in a highly competitive market; there are other players providing financing. We may, if there is some lower liquidity in the market, see an uptick in our penetration. But we don’t see this as an issue.

Yes, and as it relates to the tech stack, obviously, as you have heard me say before, I feel good about the actual precision technology and automation that is currently on our products. What Raven does is rapidly accelerate our ability to go faster and do more. Our autonomy is as good as anyone in the industry, but Raven enhances the precision suite in our products — off-board, on-board, all of those things. The team is making tremendous progress to make that whole system work better and easier for our customers. It is a journey, and we have got a ways to go. But when we add competencies like Augmenta and Hemisphere, it allows us to go much, much faster. The history of Raven shows they added bolt-on acquisitions along their journey as well. So it is not that we need large acquisitions because we do have the capability — we have added over 500 engineers to the Raven team and 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 faster again, but I feel good about where Mark, Parag and their teams are in ensuring that we can deliver value for customers as we get this tech stack buildout complete.

Thank you.

We will take the next question from the line of Michael Feniger from Bank of America. Your line is open now, please go ahead.

Yes, thank you for taking my question. Scott, could you talk about the cost savings? I know there is a first wave and second wave. When do we think we will see this run-rate savings? You talked about already being kind of in line a target for your sales margin and EPS, but it doesn’t feel like you have actually gone through with some of these savings initiatives that got pushed out, so can you give us an update of where we are in that story right now?

Yes. Oddone made it easy to answer that question because we did recommit this morning to the $550 million target that will be achieved next year. Most of that actually comes in 2024. The significant inflation that we experienced last year and at the beginning of this year made some of that hard, but the work that we are doing — the strategic sourcing teams, Scott Moran and our CBS team — are doing tremendous work in the plants. Derek and his team are driving better solutions, making the products we design easier to assemble and source parts for. So it is a holistic approach to cost and the fact that we will get many hundreds of millions in 2024 to get to that $550 million gives you a little insight into what is to come. A lot of this will show as supply chains improve, our lean programs improve, strategic sourcing improves, and our designs improve. We have a lot of confidence that the record margins we delivered this quarter can be sustained and can grow in the years ahead.

And Scott, just to follow-up on that: nobody has a crystal ball, there's a debate on what 2024 looks like. But with the line of sight you have on your cost savings, do you think you could expand and add margin in a backdrop where units are maybe flat or slightly down next year?

Yes.

We will take the next question from the line of Jamie Cook from Credit Suisse. The line is open now, please go ahead.

Hi, good morning and congratulations on a nice quarter. I guess just my first question: can you give more color on what you are seeing in Brazil? I think last quarter you were a little more cautious. It sounds like maybe there is some weakness on the smaller horsepower side, but large horsepower seems to be okay. That is my first question and then I have a follow-up.

Well, the situation in Brazil: the timing of our earnings call last quarter affected how we looked at that and there was a lot of, for lack of a better term, caution with the government transition and our dealers there were incredibly cautious. Literally a week after the earnings call, we started to see things turn around. We had already made the decision to lower production, which allowed us to reduce dealer inventory in Brazil, and we feel very, very good about where we are positioned now, with leaner inventories than many others in the industry, a great product lineup, and, more importantly, a really solid team in Brazil to manage that market. We think Brazil is going to be a decent market this year; it is not going to grow as much as it did last year, but it will still be a very good market for us.

And as a follow-up based on what you said about the cost savings kicking in 2024 and where your margins are today, it seems like you might update the street favorably at some point, given what you said. Can you confirm maybe that could happen? And does the optimism just relate to the farm equipment side or is construction in a similar position relative to your Capital Markets Day targets?

We did put a comment in our prepared remarks about how 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 it out early. We do feel good. The markets — remember what we anticipated at the time of Capital Markets Day — was that markets would be relatively flat in 2024. What we have seen is that markets have been better for us. As you can see, we are taking advantage of that and now the positive momentum looks like it is going to continue from a market perspective, not at the same elevated levels, but the overall fundamentals are good. We are putting tremendous energy into how to make margin expansion opportunities work as we serve our customers better. With that backdrop, an updated long-term view will be reasonably positive, but we expect to update our long-term guidance about a year from now; likely in the first half of 2024 once we have better visibility.

Okay and just on Ag versus construction, do you feel better on Ag versus construction or is it roughly equal?

It is somewhat equal. The Ag cycle exempts us a little from macroeconomic pressures, and construction does not have that same exemption. But the innovation we have brought and acquisitions are helping construction. The optimism I saw from our team and our dealers at ConExpo gives me confidence that our construction business will do well for the remainder of this year and is positioned well beyond that, although it is a bit more susceptible to overall economic weakness than Ag.

We will take the next question from the line of Steven Fisher from UBS. Your line is open now, please go ahead.

Hi thanks, good morning. Just curious how you are thinking about margins later in the year. It sounds like price is going to moderate but your costs will also moderate; lots of different mix puts and takes. How do you see that netting out relative to Q1? I’m mostly thinking about the Ag side but curious on construction as well.

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. Pricing will start to fade in year-over-year comparisons, but costs will also moderate and we have 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. And again, for the full year, we expect margins to be better than they were last year.

And then on inventories, how aligned would you say CNH and CNH dealers are on the desired level of inventory for the next year? Dealers have been clamoring for more inventory. Does that still hold and how much of a desire do you have to build normal levels to meet their higher levels of demand?

I have to be careful answering this because dealers will call me if I say we won't give them products they need. In many markets, especially cash crop regions, dealer inventories are too low and they need more inventory. What I have told our dealers is we do not want to get back to the 2018-2019 levels where inventories were slightly higher than optimal. We want to keep dealers relatively lean. If you look at our actions, we lowered production of lower-horsepower Ag equipment because we didn’t slow down soon enough earlier, and we corrected that quickly. Overall, many of our cash crop markets are still too low on inventory, and we are ramping up production to meet demand. In other parts, such as low horsepower in parts of Europe, we are pulling back to get inventories to a better position. We do not intend to return to historical high inventory levels.

Perfect. Thank you.

We will take the next question from the line of Tami Zakaria from J.P. Morgan. Your line is open now, please go ahead.

Hi, good morning, thanks so much for taking our 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 is a better gauge of the trend — where you saw the most gains and where you saw some relative weakness?

We said it all of last year and it remains true: market share in large Ag and cash crop segments is based on who can build the equipment. We are still ramping up production of high-horsepower tractors, which is affecting share. Our combine performance is exceptionally good and we have industry-leading products that give us opportunities to gain share in most markets. Europe is spotty for us — some markets are better than others. Overall, we are probably down a little in market share, but we are looking to turn that around in the second half. Our opportunity for share gain should improve quarter-over-quarter and year-over-year as we return on investments.

Got it, that is really helpful. My second question: can you help us understand the bridge to the revenue guidance? How much of that is FX versus higher organic sales growth outlook for the rest of the year? It seems mostly driven by FX but curious how you thought about it?

Compared to the first quarter, FX effects will be better and volumes and pricing will be a little lower than what we had in the first quarter.

Got it. Thank you.

We will take the next question from the line of Larry De Maria from William Blair. The line is open now, please go ahead.

Hi, thanks and good morning everybody. Scott, you mentioned new list prices coming up this month, obviously opening up 2024 onward. The market seems healthy though commodity prices have been volatile. Curious how you’re thinking about list pricing — is this a breather year or can you continue to push pricing into next year? And regarding the commodity curve, what are you hearing from dealers — is there any incremental cautiousness or is it still all systems go?

On pricing, after a couple years of unprecedented price increases, we expect pricing to normalize. We haven’t finalized details yet, but normalization would be in the range of 2% to 3% depending on features. Regarding commodities, farmer sentiment is improving and the overall setup for soft commodities is relatively good. The dollar movement has an inverse relationship to commodity prices. We expect commodity prices to moderate to a level above historical norms, which helps farm income and ultimately helps us. At the same time, input costs that affect our manufacturing such as steel and shipping have come down significantly, so we need to play both sides. Right now the conditions are working in our favor.

Okay, thank you and good luck.

We will take the next question from the line of Marta Bruska from Berenberg. The line is open now, please go ahead.

Hi, good morning everybody. My question is on the decline in the under-140 horsepower tractors: is that driven by the dairy market coming under pressure now, or is it more general macroeconomic weakness? Under 140 is a relatively broad category; could you please comment on what is driving that decline?

The decline in the low-horsepower market is related to the very high sales that happened during the pandemic and shortly after. It is essentially a return to a more normalized level in that market. The industry was surprised by how quickly demand moderated, so dealer inventories ended up a bit higher in that segment. That has led to higher promotion rates there and everyone in the industry is working through that situation.

We will take the next question from the line of 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, if you pull pricing out of Ag revenues for this quarter and last quarter, it suggests the revenues were down sequentially in Ag on a price-excluded basis, and pricing gains fell sequentially. Was there a certain mix issue in the first quarter? Why would pricing slow that much relative to what we have been seeing and relative to volume? The gap seems unique. Second, on 2024 commentary about margins not requiring volume: can you give a sense for incremental margins if volumes are healthy? And any order books extending into 2024 right now — any early color?

There are many mix components. The first quarter is a smaller quarter in terms of sales and we had relatively slower sales in South America in the first quarter. We discussed this and it is mainly because of the stocking of the network. We are happy with how prices played out in the first quarter. You should remember we started growing pricing in the second part of 2021 and have had sequential price increases quarter-over-quarter since. We don’t expect that pace to continue forever; we need cost reductions in the industry and supply chain before increasing pricing further. Also, price-cost relationships are what we focus on, and that relationship was actually better in Q1 than in Q4.

I appreciate that. But on the sequential slowdown in price versus volume, the gap is large — price down 55% sequentially while revenue ex-price down 22% — any more color?

Again, many mix components amplify quarter-to-quarter variance in a small quarter. The relevant metric for us is the price-cost relationship, which remained positive and improved sequentially versus Q4.

And on 2024 comments: encouraging comments about margins for 2024 not requiring volume. When you think about smoother supply chains and cost improvement, how would you think about a 2024 margin level if volumes were healthy? Also, any order book commentary extending into 2024?

It has been a brutal two years with supply chain issues and some labor problems affecting our ability to produce. Because we were fighting those, we were not able to get as much traction on margin improvement projects as we expected. Now those teams are getting projects underway. The ramp will continue through the year, which is why we are confident about better margins for the year and into 2024. Strategic sourcing will be better, lean programs will be better, product portfolio will be better, and our tech stack improvements provide additional margin uplift. I don’t want to provide a specific 2024 margin number here, but we see clear opportunity for improvement in both Ag and construction, and together that forms a good story for margin expansion. On order books, I’ll pass on that for now.

Any order book commentary or is that a no answer?

That is a no answer.

We will take the next question from the line of Mircea Dobre from Baird. The line is open now, please go ahead.

Hi, thank you, good morning. Scott, I wanted to get you to talk a little bit about Augmenta and Hemisphere. How are you looking to integrate these products into your equipment, and how will these teams work with the Raven team? Also, update us on your tech stack progress, considering that you changed your relationship with Trimble. What are your engineering folks doing to address that in the near term and how are you thinking about the next 18 to 24 months?

We are thrilled to welcome the Augmenta team to the portfolio. Augmenta offers see-and-act technology at a more value-oriented price point than many industry offerings. I have been in the field and seen the product work and it is encouraging. Farmers can get see-and-spray opportunities at a much lower cost with Augmenta. We initially invested when we were a minority partner and decided to acquire because of that potential. Augmenta will fold into the Raven team and John Preheim and his team will advance the see-and-act capabilities for automation and autonomy. With Hemisphere, we had strong relationships with partners like Trimble and NovAtel, but when you buy from a partner you don’t always have the ability to innovate and integrate as fast as you would like. Hemisphere gives us an experienced team and manufacturing capability to go faster. Dealers and customers want us to move faster, and these acquisitions allow that. Raven’s capability and the additional 500 engineers we added give us significant software capability. We are far from delivering everything we plan to for customers, but we are on a clear path with incremental benefits this year and next. The big step change really appears around 2025 when we expect more substantial product rollouts. Regarding Trimble, they made the decision to exit the relationship; we are managing through that. With Raven, we can take over the work and not miss a beat for customers.

Got it. My follow-up is on construction: curious what you are seeing in orders, especially heavy construction backlog. One puzzling point is your commentary seems positive, but Slide 16 in the outlook shows declines across product and geography for light and heavy construction. How do you square that?

Two things are helping us in construction. First, dealer inventories are low, and second, we have introduced a lot of new products. We have been careful managing dealer inventories but also need to get new products out to dealers, which creates demand. From a market perspective, housing has been a little more resilient than expected, and infrastructure-related legislation is starting to move money that will flow into projects and help demand over time. So while our slide may look conservative, these dynamics give us additional confidence that construction will do a bit better than one might otherwise expect.

So you are saying the outlook is too conservative on that slide?

I didn’t say that specifically. I’m saying that there are some constructive factors that give us additional encouragement, but it isn’t a full-on robust year for construction.

We will take the next question from the line of Timothy Thein from Citi. The line is open now, please go ahead.

Thanks, good morning. Just a clarification: Oddone, on the comment earlier about the revenue guidance change, you mentioned FX was a positive. But did you say that was offset by lower volumes and pricing?

No. Relative to Q1, the growth is driven by volume and price but it will be a little lower relative to the Q1 growth. Last year growth was driven by volume, price and FX.

And Scott, on the market share comment and high-horsepower tractors: where are you in ramping back up and how does that play through the year? As you increase output, does that provide a mixed tailwind since you are not yet at full capacity?

I won’t quantify the impact, but I can tell you we had our board meeting earlier this week in Racine and I was on the floor seeing the work. We are ramping up, but we are not yet where we need to be or where our customers need us to be. There is a significant backlog globally for our high-horsepower tractors and the team is working very hard. I was encouraged by what I saw and I am confident that week-after-week and month-after-month we will continue to produce more at Racine. The high-horsepower cash crop market remains very strong and our ability to produce more will be beneficial both to customers and financially.

Got it, thanks a lot.

We will take the next question from the line of Dillon Cumming from Morgan Stanley. The line is open now, please go ahead.

Hey, good morning, thanks for the question. Where do you see the greatest relative opportunity between the two segments — agriculture and construction — in terms of how impactful the savings opportunities from lean initiatives and strategic sourcing will be? If supply chains improve by mid-next year, which segment benefits more?

By size perspective, Ag will receive more of the benefit. Stefano and his team have done a lot of lean work in Wichita and we are already seeing margin benefits in the first quarter. Lean will deliver consistent savings across the company, but a bigger opportunity comes from strategic sourcing. Strategic sourcing doesn't happen immediately; it is a negotiation process and we will do a wave of negotiations later this year when inflation and commodity costs are lower. We expect meaningful savings from those sourcing efforts. So we are encouraged by both lean and sourcing initiatives, which will have impact in 2023 but even larger impact in 2024 and beyond.

We will take our final question from the line of Kristen Owen from Oppenheimer. The line is open now, please go ahead.

Great, thank you for fitting me in. Two brief items: one, clarification on CE margins — obviously very strong pricing. Was there still a fair amount of strike drag there and any commentary around the regional exits and the impact that may have had on margins in the segment? And two, an update on aftermarket and parts: what percentage of revenue is that today, how much of that is Raven, and how should we think about the aftermarket business now that you are integrating new acquisitions?

The Burlington plant had a strike and is ramping back up; that had an impact, but Stefano’s team took advantage to secure alternative sourcing which helped margins in the quarter and will benefit the year. The exits from China and Russia were not helpful but are largely in the rearview mirror and did not significantly hurt margins in the quarter. Regarding aftermarket and parts, the team manages that business very well, and we have gotten inventories up to serve customers better. Aftermarket is roughly 18% to 20% of our business and Raven historically was an aftermarket-related business, so they are very good at it. As we ramp our tech stack, a significant portion of the growth opportunity is in aftermarket, and integrated solutions with precision technology will drive growth, share gains and margin expansion for aftermarket through Raven and what we build.

I think you covered it. Thank you very much.

There are no further questions, so I will hand it back over to your host to conclude today’s conference.

Thank you, everyone, for joining us today and have a great day.

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