CNH Industrial N.V. Q2 FY2023 Earnings Call

Hello, and welcome to the CNH Industrial Second Quarter Earnings Conference Call. I would now like to hand the call over to Jason Omerza, Head of Investor Relations. Please go ahead.

Thank you, Kevin. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's Second Quarter Results for the period ending June 30, 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 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 reconciliation 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. In the second quarter, we delivered a solid set of results with record margins in both agriculture and construction. The impact of our CNH Business System is accelerating and we recorded our highest ever level of price over cost both in dollar and percentage terms. Profitability was particularly strong in the second quarter with results exceeding our 2024 margin targets. Our ability to deliver record margins with moderate revenue growth is indicative of the earnings power we are building. In June, our EMEA team delivered record retail sales providing helpful momentum as we enter the second half. We also achieved our highest production of North American high horsepower tractors since 2015, but are still aggressively working to reduce backlog and restock our dealers in this fundamental product category. Across the business strong execution and focus on serving customers drove our success. Our Lean Manufacturing programs are developing more efficient processes across the company. These initiatives are rooted in expanding productivity, improving quality and eliminating waste and have become a tenet of our culture. "Make it simple" is one of my favorite cultural beliefs and it is helping us streamline our business, and you can see the early results in our earnings strength. Consolidated revenue for the company was $6.6 billion, up 8% over last year's second quarter. Industrial net sales were up 6% year-over-year reflecting a 19% increase in construction sales and improved shipments of high horsepower tractors in North America. Agriculture saw less robust sales growth in Q2, but we still see solid overall ag fundamentals. Our lighter ag sales in the second quarter were primarily driven by two factors: first, while our team in South America delivered strong retail share performance in the quarter and year-to-date, much like earlier in the year the demand environment in the second quarter was shaky. With short-term demand in Brazil slightly lower than expected we reduced shipments to maintain lean dealer inventories; second, shipments of our new Patriot sprayer were delayed due to production ramp-up issues and quality considerations. We will get those products to our customers in the second half. In North America first half combined demand was exceptionally strong. We are proactively working with our dealers to spur retail sales of both new and used combines in the coming quarters to mitigate potential inventory growth. We remain confident in our full year sales guidance even with targeted production cuts. Industrial EBIT was up 26% on strong price over cost as we finished the quarter with an EBIT margin of almost 14%. Earnings per share was $0.52 for the quarter and $0.87 for the first half marking our best ever start to the year. Derek Nielson and his agriculture team set new quarterly records for gross and EBIT margins. This is not just a record second quarter but a record for any quarter. Their impressive execution across products, brands and distribution coupled with the determined elimination of waste from our production processes enable us to better serve our dealers and customers. Our Construction segment also recorded record results in the second quarter, for the first time generating net sales over $1 billion. Stefano Pampalone and his team introduced a plethora of new products at ConExpo and they are increasing manufacturing throughput to improve customer delivery. We continue to see solid benefits from our Sampierana acquisition. We started taking orders in North America for model year 2024 products in June, and production slots for 2023 are full for most products in most markets. High horsepower tractor production is now fully booked and assigned to retail customers throughout 2023, and global demand for this segment remains high. We are taking orders into 2024 now, and we see order backlog and pricing normalizing above pre-pandemic levels. Our customers are increasingly asking for our suite of precision technologies. Precision Components net sales contribution increased 21% year-over-year in the second quarter, with a steady growth of factory-fit elements. We continue to accelerate development and delivery of improved technical solutions for our customers. We launched the New Holland Straddle Tractor specifically designed for narrow vineyards that require stream maneuverability and compact dimensions. These new tractors will bolster our commanding presence in the orchard and vineyard segments when they ship later this year. We also published our 2022 sustainability report during the quarter. The multiple initiatives illustrated provide proof of our commitment to world-class environmental stewardship for our company, our communities and our end-customers. The construction team is making impressive progress in their pursuit of profitable growth. Our 2024 construction EBIT margin target of 5.5% to 6.5% was a significant stretch from our previous low baseline, but we surpassed that at 6.8% in the second quarter and we will likely be in that target range for the full year. Sampierana is proving to be the right investment for us. It gives us both mini excavator IP and enhanced electrification capabilities that we are already integrating into other products. We recently opened a new assembly facility in Central Italy, expanding our production capacity for many excavators and the new many track loaders both of which we will soon export to North America. Construction continued to benefit from strength in the North American market, especially for Light Equipment. We are leaning into the customer synergies we have with our ag distribution network to create incremental construction sales opportunities with our New Holland brand. All this, plus much more value we're working to unlock to take margins still higher in years to come, demonstrates why our construction business is an important part of our portfolio. Our company strategy is centered around five key pillars: customer-inspired innovation, technology leadership, brand and dealer strength, operational excellence and sustainability stewardship. Today, I want to focus on our advances in operational excellence, especially our CNH Business System or CBS which is a key contributor to our $550 million plus cost reduction target by 2024. CBS is a set of tools and an aspiration to leverage lean to constantly improve the way we run our business and serve our customers, and a commitment to using Kaizen to engage our employees and drive sustainable improvements. Whenever I travel to our plants around the world, I see consistent use of our daily management system to prioritize and solve systemic issues. Our leadership team uses strategy deployment to ensure rigorous execution of our most important priorities to achieve breakthrough results. The overriding goals of CBS are margin expansion through operational excellence and revenue growth through constantly improving execution and innovation. What does this mean in practical terms? As an example for revenue growth, we are accelerating our time to market by eliminating waste and rework in our new product development processes. For margins, we are improving our module design concepts and Friedrich Eichler, our new Chief Technology Officer, brings a wealth of experience to help drive that effort. Across our manufacturing plants we are empowering our teams to refine processes to improve throughput and quality. I would like to highlight a recent example at our Contagem plant in Brazil, where the team held a Kaizen to improve their production throughput. They addressed logistics bottlenecks and implemented a standard inspection checklist, making the process significantly more efficient. The result was a 58% decrease in fleet inventory buildup, a 14% increase in the daily line rate and a total annual cost benefit of $2.3 million. This is only one example of the many Kaizens we're doing across the company at more than twice the rate of 2022 and we are starting to see the impact in our results. As CBS continues to expand our results will as well. I will now turn the call over to Oddone to take us through the financial results.

Thank you, Scott and good morning good afternoon to everyone on the call. Second quarter net sales of industrial activities of almost $6 billion were up 7% year-over-year at constant currency. This was mainly driven by favorable mix and pricing in both equipment businesses and by higher shipments in construction. Adjusted net income for the quarter was $711 million with adjusted diluted earnings per share of $0.52, up $0.09 on the back of the ongoing strong operating performance. The effective tax rate was 24% in the quarter and the full year tax rate will likely be in the 25% to 26% range. Free cash flow from industrial activities in the quarter was nearly equal to last year, up $386 million while the first half cash absorption is about $370 million lower than last year. Looking at the segments. Agricultural sales were $4.9 billion up 5% at constant currencies supported by strong pricing, improved factory deliveries for large equipment and favorable mix. Net sales were up in all regions except South America whose contribution to global agricultural sales is down to 18% from 20% last year. Gross margin was a record 27%, we are continuing our trajectory of very favorable price over cost as we push now more on cost efficiencies and some of last year's inflationary headwinds go away. Although we still experienced unfavorable product costs from higher purchasing economics in EMEA and South America, we have lower freight costs and multiple improvements in our operations as a result of our CBS efforts. High carryover pricing and cost inflation are persisting, but we will see both moderate as the year progresses with the price-cost relationship remaining positive. Net prices will revert to the historical level and there is no intention of lowering list prices. This applies to construction as well. Increases in SG&A are largely driven by labor cost inflation and R&D spend was higher as we invest in the future of our products. Adjusted EBIT in agriculture increased by $158 million to reach $821 million with a margin of 16.8% up 280 basis points mostly driven by the gross margin improvement. Since Scott already spent some time covering our main achievements in the construction business I will focus on the financial KPIs for the last quarter. At over $1 billion construction net sales were up 20% at constant currency, driven by better volume and mix in North America and APAC offsetting lower sales in South America. Gross margin was 16%, up 220 basis points, mainly due to higher volumes and pricing. Adjusted EBIT was $72 million, up 47% year-over-year with a margin of 6.8%. For our Financial Services businesses net income was $94 million substantially flat compared to the second quarter of 2022. We experienced favorable volumes in all regions, but this was offset by margin compression, higher risk costs, and increased labor costs. We also had a lower tax rate compared to last year. Retail originations were $2.8 billion in the quarter. The management portfolio including JVs at the end of the period was $2.6 billion. The receivable balance greater than 30 days past due as a percentage of receivables was 1.8%, largely driven by delinquencies in Brazil where a large concentration of payments is due every May and creates a seasonal spike at the end of the second quarter. We are confident that our collection efforts will bring the past dues back to lower levels in the coming quarters. Our capital allocation priorities continue to be investing in our business, maintaining a healthy balance sheet and credit ratings and returning money to our shareholders. We completed $98 million of share repurchases during the quarter which is the highest level ever in one quarter and we are continuing to buy back shares in the third quarter under our existing $300 million repurchase program started last year. We have already announced that we intend to have an additional share buyback program in connection with the delisting from the Milan exchange. To that end we continue to be confident that the regulatory changes needed for a simple delisting with consolidation will be in a time frame allowing us to be single listed by the end of 2023. More specific details on the Milan delisting and the related stock buyback program will be shared as soon as possible. Now, we'll now turn it back to Scott.

Thank you, Oddone. For our 2023 industry outlook, most of our estimates remain unchanged, but we have slightly lowered our projections in South America for combines and heavy construction. We also expect heavy construction equipment in APAC to be slightly worse than originally expected. On the other hand, we project slightly better full year industry demand for light construction equipment in both North and South America and for heavy equipment in Europe. We are reaffirming our previous guidance levels. We are catching up on our order backlog and staying vigilant to ensure that we keep a tight balance on dealer inventory. It naturally varies seasonally, but we are committed to taking the necessary actions to keep our dealers positioned for success this year and every year to come. Where we land in the net sales guidance range will largely depend on retail sales levels, which is why retail sales execution is a primary focus in the second half. As previously announced, we have cut factory production on low horsepower tractors which will be down about 20% in the second half. We will of course continue to build as many high horsepower tractors as possible in North America. We are also reaffirming our SG&A guidance of up 5% or less. Admittedly, we saw a higher increase in the first half, but cost of the last two quarters will be in line with or below the cost of the 2022 second half. Last quarter, we said that in 2023, we may approach or even meet our 2024 EPS targets from Capital Markets Day of $1.70 per share. With a strong first half behind us, we now have more data to suggest that we will meet or exceed that target in 2023. As we move into the back half of the year, we are encouraged by our results in Agriculture and Construction segments. We are well positioned to build off this momentum, as we continue to optimize our business. Our new product offerings and tech stack are consistently improving and continuously expanding their contribution to profitable growth. These developments take time however, so our short-term growth is more reliant upon market share performance and dealer inventory management. We held firm in market share in the first half and expect to gain in the rest of the year and we are confident that we are controlling dealer inventory and stressing retail execution as well as anyone in the industry. We will increase the pace of CBS strategic sourcing and SG&A cost reduction programs which will accelerate into 2024 and beyond. In closing, I would like to thank our entire CNH team for their dedication, hard work and inspiration. That concludes our prepared remarks and I'll open the line for questions.

The operator provided instructions on how to ask questions. The first question today comes from Nicole DeBlase of Deutsche Bank.

Yeah. Thanks. Good morning, guys. Maybe just starting with what happened with the North America sprayer production in the quarter. Can we just get a little bit more detail on why the delays started in production and whether or not you think you can kind of make up for that in the second half?

Sure, Nicole. I'm really proud of Vilmar Fistarol who took over the North American business this year. We did a transition from the old sprayer to the new Patriot sprayer which we were really excited about for the features and benefits that it brings. Model year changeovers are often challenging; we've had a much higher turnover in our Benson factory than we would normally have had and the transition did not go as well as expected. Rather than take risk on shipping products to our dealers that didn't meet our quality standards, we halted production, ensured that we had everything right — they are now shipping. We'll get them all out in the second half, but this was a prudent effort by Vilmar and his team to ensure that we're delivering the highest quality. When you introduce a really good new product like that you want to make sure that that's what's delivered to our customers, not something that falls short of their standards. I'm really pleased that those are already starting to be delivered and we'll fulfill that in the third and fourth quarter.

Okay. Understood. Thanks, Scott. And then maybe just secondly on what's going on in South America. Are you guys now happy with your current dealer inventory levels there, or would you say there's more to go with respect to inventory curtailment?

No. Certainly nothing more we need to do on inventory curtailment there. We really feel like — remember the fundamentals in Brazil are still quite strong. It's still a strong ag economy. Farmer income was pressured a little bit because of the dollar weakening and some softer commodity prices. But overall the fundamentals for the market are quite solid and we are very well-positioned. We still have company inventory because we didn't ship it to our dealers. So it's not like we are at any risk of losing market share. We had really good market share there in the quarter, gained share in combines, held our own in tractors. And we feel like we're very capable of performing better in the second half as we've already leaned out our inventories going into the second half.

Thanks Scott. I’ll pass it on.

Our next question comes from Mig Dobre of Baird.

Yes. Good morning, everyone. Thanks for taking the question. I guess, I'm looking for a little more color if I may on how you see demand in large ag playing out. Any insight into how farmers are thinking into 2024 as well would be helpful? Thank you.

Mig, what we're seeing in cash crop really globally is still continued positive demand signals. As we said in our prepared remarks, we're going to make as many high horsepower tractors as we possibly can. The second half is always better for us in combines. There is what we've heard from dealers: the used inventory not of our products, but competitive products on combines specifically has gone up at a much higher level than it has been previously. So we are being careful to make sure we're dialing in the retail programs, not only for new but for used products as well with our dealers. Oddone's financial services business is really capable of and smart about how we do those things. There's been a little bit of caution not to overstock — our dealer inventories are in good shape for our combines across markets. But I think people are just anticipating what can happen as used inventory starts to grow, and we're proactively getting after that. So really the North American market for large ag still is very positive for us and we don't see signs of that slowing down.

Understood. As you mentioned financial services, pretty sizable increase in the managed portfolio. So I guess I'm curious as to how you see that progressing going forward. Also revenue as a percentage of the managed portfolio has remained fairly steady despite interest rate increases. I guess the way I'm interpreting that is you're essentially trying to offer good financing deals for your end customers. Is that a proper interpretation? Are you essentially using services as a tool?

Look the growth of the portfolio is a mix of nominal growth, because we have higher prices of the equipment, and also some increase in penetration. So we are financing more of the equipment to end customers. But also, of course, we had some growth in dealer inventories over the last 12 months. So we have volume growth in there as well. We've had interest rates increase all over the world. As we all know, we tend to match our funding with our receivables. So we are increasing the cost for customers of financing, but we're probably not doing so at the full pace, and we have had some margin compression in particular last year when we were delaying some of the deliveries by six to nine months of tractors and combines. We have been generally honoring the conditions that we had agreed with the customers when they ordered the tractor. We will revert to normal pricing and we target a margin of around 2% on assets in Financial Services and I'm confident we're going to get back there.

Okay. Thank you.

Our next question comes from Steven Fisher of UBS.

Thanks. Good morning. Can you just give us a sense for how the pricing was in ag by region? I'm just trying to figure out if the volumes were down in every one of your regions. I know you talked about the sprayers in North America and the South American dynamics. But I'm just wondering how broadly volumes were down and in which categories and why?

So in terms of units, we were marginally down globally. We were up on high-horsepower tractors in North America, up in combines in North America in terms of shipments. In nominal sales, so dollar sales, we were down only in South America compared to the second quarter of last year.

Okay. And Europe — were volumes flat in Europe?

Volumes were flat but there was a lot of pricing in Europe. So unit volumes were flattish but pricing drove sales up in Europe.

But just a reminder, in Europe we had our best June retail performance. So the team did a really nice job of creating opportunities for a better second half and we're pleased about that momentum.

Okay. And then, with such good margins this quarter in ag but volumes down, how should we expect operating leverage to look as you actually get volumes growing again more broadly? To what extent is there even more margin upside when you get that positive leverage and more cost benefits?

The second quarter is typically the quarter with the best margin in the year. That wasn't the case last year where we had a stronger third quarter. We think we're going to revert to the normal seasonality this year. So I expect the third quarter to be sequentially lower than the second quarter in terms of margin but in line with or higher than last year. It's mainly a mix and a sales story. Third quarter typically we have European plants down and we sell less in Europe. So, it's mainly a regional mix effect.

Okay. Thank you very much.

Our next question comes from Kristen Owen of Oppenheimer.

Hi. Good morning. Thank you for the question. A lot of puts and takes on the production commentary, so I was wondering if you can sort of consolidate that for us and help us understand what the production cadence looks like across say high horsepower, low horsepower, combine and construction for the remainder of the year. And then if you could put that in context of some of the retail execution that you mentioned, how should we think about mix of retail versus wholesale going into the channel? Thank you.

Yes. For North America, our combine plants in Grand Island and New Holland really ran full for the first half of the year and I suspect they will continue to do so. They've been improving production and quality at the same time which is encouraging. They also supply our Fargo plant, so that's given them an opportunity there. So we'll continue to run basically our North American plants at capacity for the remainder of the year. Brazil, obviously, we've taken a little bit of a slowdown to match demand there. Across all of our regions, Derek Nielson and his team have good retail execution plans in the second half of the year. With the products that we have introduced, we're very confident in our share positions. So, we think we'll be able to take advantage of both markets being still solid and better share performance. We're encouraged about where we stand heading into the second half.

Okay. And just to clarify the mix of retail versus wholesale. You mentioned focus on retail but as we're looking at the order book, has that trended back to normal? Just any color on that?

The order book is actually — we just started taking orders in June. For cash crop, we're kind of booked out and we'll start taking orders for 2024 here shortly. We've got six to nine months across the board. So we feel good about how we are standing from an order perspective. But even when there's an order in place, dealers need retail demand to have spot for a new one. So that's where we're putting a lot of our energy right now. I think the team is dialed in on that and we feel good about the performance we had in June, and the ability to continue that throughout the rest of the year.

Okay. Thank you very much.

Our next question comes from David Raso of Evercore ISI.

Thank you very much. First question is on margins. In the first half of the year your margins were up 170 basis points. But in the first half your sales were up around 9.5% but your SG&A was up 16%. In the back half of the year you're assuming revenue growth the same around 9.5%, but SG&A down 4%. Given that notable swing from SG&A up 16% in the first half to now down 4% in the second half, can you help us understand a little bit on the operating margins here? Should we expect a similar margin improvement as we saw in the first half? I know the comps get a little harder but I'm trying to understand this a little more.

It's a question of comps. Our SG&A grew a lot last year and the second half of last year was much higher than the first half. So the comps are easier in the second half, getting to that level of SG&A is not going to be easy for sure. I mean we are looking at different angles of it. But we set this target and we've got to get there in the second half. For margin, as I said, we expect the second quarter margins to be the highest in the year but we expect EBIT margin to be at the level, if not higher, in the third quarter which was a very good quarter and then likely higher in the fourth quarter.

Is it fair to say the margin for ag is also supposed to reach the 2024 targets this year?

Yes.

All right. That's helpful. And then on the pricing cadence, can you help us a little bit — you made a comment I believe, we do not expect a lower price for 2024, understand — I mean it could be incentives, lower financing; we're not talking list price. The way you're approaching the 2024 order books when they open up soon, should we expect price increases? Because price does seem like it's coming down maybe a little faster than people thought. Obviously, you're getting cost outs and price-cost has been very strong. But just to get a sense of demand, how do you feel about pricing? Can you give us a little more color?

We think on a 2% to 3% pricing increase, which is a mix of list price and discount management, is reasonable.

Remember, we were very aggressive price leaders in many quarters over the last period. Admittedly, prices moved up from a very high level. We're certainly not thinking about continuing aggressive increases, but we recognize dealers are not willing to accept continued double-digit price increases. Getting back to normalized price is a good thing for everyone.

All right. Appreciate it. Thank you.

And our next question comes from Tami Zakaria of JPMorgan.

Hi, good morning, thank you so much. I was wondering could you share some color on how much of the volume decline in ag was due to the delay in sprayer manufacturing versus the weakness in South America you saw?

It was probably two-thirds South America and one-third sprayer production, give or take a little bit.

Got it. That's very helpful. And then can you update us on the over $550 million operational excellence savings. Do you still expect one-third realized this year and two-thirds next year?

No. I think we might have miscommunicated on that. We still expect more of that to happen in 2024. I think it would be more like 20% this year. We're really encouraged by the CBS activities and pushing back on logistics costs that have crept in and some of the other costs. The ramp-up of both CBS activities, our SG&A takeout and our strategic sourcing starts to really hit the road. So most of that hits in 2024.

Got it. Thank you so much. That's very helpful.

Our next question comes from Gabriele Gambarova of Banca Akros.

Yes. Thank you for taking my questions. The first one is on your relative performance in terms of revenues. Over the last couple of quarters you outperformed your competitors. I was wondering if this has to do with your choices in terms of production basically, and if this trend is going to possibly revert in the second half of the year? And the second one deals with your 2023 free cash flow guidance. Is it possible to understand what is your implied assumption in terms of working capital delta change? Thank you.

For the first question on our revenue cadence versus competitors, look at the second half guidance. Because we've kept inventories lean we still have the opportunity to ship to demand or in some cases replenish dealer inventory. Those competitors that are having a sequential decrease probably have too high dealer inventory and can't ship as much. I think that explains how we got where we are.

On the working capital, we were very lean on finished goods inventories at the end of last year. So we're being a little bit more prudent at the end of this year. Of course, we're taking working capital out of the plants as we are becoming more efficient there, but we have some prudence on the overall balance of where we're going to be with inventories at the end of the year also depending on where we want to be with available stocks today.

Okay. Thank you very much.

Our next question is from Jamie Cook of Credit Suisse.

Hi. Good morning. Nice quarter. Two questions. One — can you talk to your approach to the order book for 2024: whether you'll open it by region, whether you'll open and close it and manage it throughout the year, specifically within the Farm Equipment segment? And second, on the $550 million in 2024, can you remind me — I think that assumes sort of a flattish market. If we have volumes, could we have above-average incrementals in 2024 if volumes do occur and you're assuming you get the majority of the $550 million? Thank you.

To answer your second question first: yes we can absolutely have upside to that number if we get volume upside. The incrementals we had in the second quarter demonstrate what we can do. We'll have a little bit less price but also a lot less cost. The mix of how we get there could be different, but certainly the opportunity to overdeliver on the $550 million if volume is higher is there. As for order books for 2024, we've gotten to the point where we'd like to maintain some discipline and have strong visibility. So we won't open up the entire year at one point. We'll probably do the first half of the year and then go into the second half because we'll have model year 2025 pricing to consider. It won't be wide open as we go into it. With cash crop and the innovative products we're bringing we feel good about order demand.

Thank you.

Our next question comes from Daniela Costa of Goldman Sachs.

Hi. Good afternoon. Thanks for taking my question. On capital allocation, could you elaborate on how you're thinking about buybacks going forward once the current program finishes? What are the priorities between buybacks versus M&A? I'll ask one at a time.

Daniela, we set up a buyback program in July last year for $300 million. We are executing on that and are coming close to the end of it. In connection with the delisting from Milan and single listing in New York, we expect some reallocation of investor demand. We discussed with the Board last quarter and are prepared to have a specific program that will be announced in connection with the delisting, and that program will be considerable in size. We are keeping balance sheet capacity available for that.

Great. My next question was on timing of the delisting; last time you said slightly before end of year — is that still on track?

Right. We believe we are on track to complete this by the end of the year.

Okay. Thank you. And a final one on delinquencies — delinquencies started to creep up. Do you think this is related to demand or interest rates or is it a normalization?

It's mainly linked to the Brazilian portfolio. We don't see any increase in the other portfolios. We had some small increase in India, but it's a very small portfolio. In Brazil we have a concentration of payments in the month of May and we typically have higher past dues at the end of the second quarter, which typically reduce as the quarters move on. We are confident we'll get back to lower levels over the next couple of quarters. On the North American and European portfolios we don't see creeping delinquencies.

Got it. Thank you very much.

The next question today comes from Michael Feniger of Bank of America.

Hey, guys. Thanks for taking my questions. Scott, can we just frame: you kept the 2023 sales guide but you highlighted the sprayer issue in Brazil. Can you frame how much of an impact that's having on the full year guide?

Zero impact on the full year guide. The sprayer issue was a short-term issue addressed for the right reasons. We're already shipping those sprayers and we'll get the full allotment out to customers in the third quarter and some into the fourth quarter. We took our medicine in Brazil in the quarter, so we don't expect to repeat that. Dealer inventory management is really about driving retail performance. Rafael and the team there are doing a nice job on market share. With leaner inventories and better share we should get improved performance in the second half.

Great. And Scott, regarding the dealer inventories chart across equipment categories, when we get to the fourth quarter how do you expect dealer inventories to look year-over-year across those categories?

We are anticipating that we are near peak levels in some categories. Remember, on some of cash crop we're still behind, so we'll decrease low horsepower inventory and will increase some high-horsepower inventory. But on balance, we're trying to keep inventories lean. We've seen the benefits of that: better customer attachment rates, better pricing, lower dealer flooring costs. Part of what we have included in our guidance is continued healthy management or improved management of dealer inventory.

And just a follow-up: next year is production in line with retail sales? That's how you're thinking about 2024?

That's where we'd like to be. It's hard to tell, but that is an efficient way to run the business and how we would like to run it. Obviously, with long lead times it's complicated, but it's our aspiration to be closer aligned between production and retail demand.

The next question comes from Larry De Maria of William Blair.

Thanks. Good morning, everybody. First question: are you taking any sprayer orders for next year yet, and are there any programs out there? Related to that, with the Smart Spray collaboration, when is the commercial launch for green-on-green targeted spraying? I think some competitors are out next year with that?

We are taking orders into the first quarter and partly the second quarter for sprayers. We have not disclosed a firm launch schedule for the green-on-green Smart Spray integration yet; partly because we want to be sure of integration timing. Raven are experts at sprayer technology and had a relationship with Bosch before us. I feel confident we will not be delayed unduly, but we don't have a scheduled launch to disclose yet. We recognize the competitive need to get that to market quickly.

Okay. Thank you. And you refreshed your tractor lineup and faced strike-related disruption earlier. Can you talk a bit about share and whether you think you can regain some of that share given the interruption — is this a multiyear event or can you regain share relatively quickly?

We're already seeing our ability to get some share back. We feel really good about customer stickiness. We were at an egregiously low level earlier and we've gained in the month of June about 500 basis points. We believe we've got the opportunity to continue to advance from those low levels back to a healthier share. We'll continue to invest in the category; it's incredibly important for us both on the iron side and the technology side. You'll see us continue to lead and the team is doing well with the Magnum product to get more units out to customers.

Okay. Thank you. Good luck.

The next question is from Marta Bruska of Berenberg.

Hi, good morning. Could you provide more color on Europe? Some peers have been negative for the region this year; your SG&A shows still positive or flattish volume development year-to-date. Is that due to product mix? With the broader market in Europe normalizing this year, could a potential upcycle next year benefit you? Or do you expect continued moderate performance for several years?

Marta, Europe is a mixed picture as always — many countries and different zones and we also include Middle East and Africa in our Europe reporting. We also have Ukraine which is disrupted. Southern Europe was most difficult this year — Spain, Italy and some of France — whereas Northern Europe was stronger. We feel we've done good work with our dealers in the second quarter and are encouraged by the month of June results. We are stimulating retail and expect to improve our situation significantly.

Thank you. And moving to Financial Services and volatile regions like Brazil, can you do anything with lease term adjustments to protect farmers and stimulate demand?

In Financial Services we act with our dealers on wholesale financing and with customers on retail financing. Brazil retail financing is influenced by government subsidies which are becoming smaller and get consumed quickly in the year. We are extremely competitive and offer very fast service to our customers and dealers. We help customers access subsidies when available. We see ourselves as a service function to support dealer and brand sales.

Thank you very much.

As there are no further questions at this time that does conclude the CNH Industrial Second Quarter Earnings Conference Call. We thank you all for your participation and you may now disconnect.