CNH Industrial N.V. (CNH) Q4 2023 Earnings Report, Transcript and Summary

Hello, and welcome to CNH Fourth Quarter Conference Call. Please note, this call is being recorded. [Operator Instructions]. I will now hand you over to your host, Mr. Jason Omerza, Vice President of Investor Relations, to begin today's conference. Thank you.

Thank you, Ben, and good morning, 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, 2023. This call is being broadcast live on our website and is copyrighted by CNH. Any other use recording or transmission of any portion of this broadcast without the express written consent of CNH is strictly prohibited. Hosting today's call are CNH CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH website. Please note that any forward-looking statements that we might make 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. 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. Our 2023 Fourth quarter and full year results reflect the CNH team's resilience and dedication to driving customer-inspired innovation lean operations and sharp commercial execution. With purpose, pace and positive changes progressing throughout the organization, the results are evident in our margin progression. Our Agriculture and Construction segments both achieved record EBIT margins for the year as they balance continued price discipline with aggressive cost management. We are improving through-cycle margins to be more profitable regardless of industry strength and our ag business demonstrated that in the fourth quarter. 2023 was our second full year as a pure-play agriculture and construction company, and we again achieved record revenue and net income. I'm quite proud of the way the team addressed a challenging demand environment, notably in South America, where we are benefiting from our long-term focus on customer and dealer satisfaction. Our Brazilian dealers gave us early warnings about farmers postponing purchases, allowing tighter management of dealer inventories and demonstrating our commitment to their success, not just ours. Since the demerger, we have been fully able to fund our core businesses and allocate capital more efficiently, evidenced by our increased R&D and CapEx investments. The benefits from our intensified focus on product development are already visible as we launch 72 new products in 2023. Many of these fully integrated with in-house tech solutions garnering positive feedback from dealers and customers. This helped push our sales contribution from precision tech components over $1 billion in 2023 as planned, and that is just the beginning. We have considerably more tech-enabled products coming in the quarters and years ahead. Fourth quarter consolidated revenues were down 2% and industrial net sales declined 5% as South American markets remain soft, and we underproduced low-horsepower tractors in North America. Despite the drop in sales, we expanded industrial EBIT margin by almost a full percentage point, with adjusted net income growing 15%. Adjusted EPS for the quarter was $0.42, up $0.06 from last year. As Oddone will highlight, we are beginning to see the benefits of our enhanced focus on costs. Our full year earnings results were equally impressive. Industrial net sales were only up 3% over the prior year, but EBIT rose 12% as price realization in the first half was supplemented by the accelerating impact of our cost actions, EBIT margin grew 110 basis points to 12.4%. Our CNH Business System, or CBS, is leveraging our deep and talented global team to streamline our operations and businesses. Adjusted EPS was $1.70, an increase of over $0.24 since 2022. Recall that $1.70 was our original 2024 target, so we hit that a year early. Derek Neilson and his agriculture team continued to execute extremely well last quarter, skillfully managing costs while confronting declining demand and elevated dealer inventories. Margin expansion in such an environment is tough, and I'm proud of what this team has accomplished. Stefano Pampalone and its construction team also did an excellent job. Construction margins were up 230 basis points in the quarter and 260 for the full year as they improve dealer performance, product innovation and cost efficiency. We decreased ag dealer inventory sequentially but remained up more than 5% year-over-year. Our needed increase in North American inventories of combines and high horsepower tractors outpaced proactive reductions in South America and in low horsepower tractor inventories in North America. We have some work to do in product-specific dealer inventory levels, particularly in Europe, so we will maintain our retail execution focus and appropriately manage shipments. I want to clearly state that retail sales for both segments were ahead of the industry in the quarter and the full year. Our dealer's 2023 retail performance was impressive, and we appreciate their efforts. SG&A expenses declined year-over-year in the fourth quarter. We expect this trend to continue for every quarter in 2024, driven by our restructuring program, which is well underway. We reached an important and exciting milestone in our strategic sourcing program as we begin supplier selection for the first wave of components. As we look at our strategic priorities, I would like to start with customer-inspired innovation. We mentioned last quarter that CNH won the only gold metal at Agritechnica for the New Holland CR11, our next-generation flagship combines. I want to quickly highlight how it exemplifies the integration of world-class technology with our great iron. This machine offers a full suite of benefits requested by our customers, providing much greater productivity and yield for the farmer. Real-time machine learning, automated predictive adjustments, intelligent fuel management and unique sensors to understand the crop's nutrient composition, are just a few of the combined extraordinary features. The CR11, with its counterpart, the new Case IH AF11 will cement our standing as the world's foremost large combine manufacturer and will especially help us improve our position in North America. These beasts will be in the field around the world this year for intensive testing and demonstrations with order books opening later this year for 2025 deliveries. CNH remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability. We continue to build on our legacy of sustainability performance as evidenced by the recognitions we receive. For example, replacing the top 5% of over 9,000 companies rated in S&P's Global Corporate Sustainability Assessment and took second place overall in the Dow Jones World Index in the machinery and electric component category. Like our farmers around the world, CNH maintained its long-standing commitment to protecting the environment and we are excited about our customer adoption of our first-to-market innovations that enhance customer productivity while improving fuel and emission savings. Due to the continued supply disruptions in 2022, we purposely delayed much of our $550 million cost reduction program. But with solid improvements in 2023, we remain confident of reaching that cumulative savings target this year. As a reminder, we are targeting three main drivers: reducing logistics costs, lean manufacturing operations through CBS and supply chain savings, including our strategic sourcing program. With a solid foundation to build upon, CBS has been enthusiastically embraced around the company as we engage our employees to create more efficient processes using lean principles and Kaizen events. Strategic sourcing is ramping up, and we will begin to contribute in 2024 with accelerating savings for many quarters to come. For our SG&A restructuring, a 10% to 15% reduction translates to about $160 million to $240 million of savings. We are well underway with this difficult work and expect to complete this effort in the first half of 2024. We are also zero-based budgeting our non-labor SG&A with an eye toward rightsizing some of our service agreements and expanding support operations in low-cost countries. Together, we expect these SG&A initiatives to save about $140 million to $180 million in 2024 with the remainder carried over into 2025. 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. Fourth quarter industrial net sales were down 5% year-over-year to $6 billion. The decline was mostly due to lower sales in agriculture equipment dealers, especially in South America. In Q4 of 2022, we have also seen a strong growth of dealer inventories in low horsepower tractors in North America, but those reduced significantly in the fourth quarter of 2023 as we underproduce retail by almost 40% in this product category during the second half of the year. For the full year, net sales were $2.1 billion, up 3% from 2022, mainly driven by price realization in the first half offsetting the lower unit sales in the full year. Our profits increased year-over-year in every single quarter despite a slow in sales. Adjusted net income was $2.3 billion for the year with an adjusted diluted EPS of $1.70, up $0.24 versus 2022. The negative impact from the Argentine peso devaluation and the resulting loss in value from our cash holdings was about $0.04 of both the adjusted and the unadjusted EPS. Q4 industrial free cash flow was $1.6 million. Full year free cash flow was $1.2 billion at the top of the most recent guidance range but down versus the previous year due to our effort to manage channel inventory. Industrial activities ended the year almost net debt-free. In agriculture, the net sales decrease of 8% in the quarter was driven by lower industry demand, especially in South America for all product categories and for combines in North America and EMEA. Full year net sales were up 1%, driven mainly by higher price utilization in North America, offset by the unfavorable volume and mix, mostly in South America. As we see cost reduction accelerating in our production system, we improved our gross margin in both the quarter and the full year, closing 2023 at 25.5%, up 170 basis points from 2022. Q4 EBIT and EBIT margin also benefited from [$14 million] of lower SG&A expenses. The full year adjusted EBIT increase of 1.4 percentage points was driven by favorable price over cost and higher JV income, which you'll find in the FX and other category, more than offsetting the adverse volume and mix in the second half of the year. Turning to construction. Net sales for Q4 were up 9% year-over-year, mostly due to price realization and higher volumes in North America, partially offset by lower volumes in EMEA and South America. Full year sales were up 10% to $3.9 billion, driven by the strength of North America demand and positive price realization. Gross margins increased by 2.3 percentage points in 2023 to 15.6% from favorable price over cost. Q4 adjusted EBIT also benefited from lower SG&A expenses, resulting in a 5.8% EBIT margin. The full year margin close to an all-time high of 6.1%, up to 160 basis points, substantially driven by the price of our product cost relationship. For Financial Services, net income in the fourth quarter was [$113 million], a 50% increase compared to Q4 2022. The sharp improvement was mostly driven by higher receivables portfolio across regions, better margins and lower risk costs, only partially offset by a higher effective tax rate for the segment. Retail originations in the quarter were $3.4 billion, up $0.5 billion compared to the same period of 2022 as we are capturing a higher percentage of our end customer equipment financing needs. The managed portfolio at year-end was nearly $29 billion, up over $5 billion compared to the prior year. We have been able to raise capital efficiently and affordably throughout the year to fund our credit operations. Financial Services profitability ratios have also improved year-over-year, and delinquencies remain at a very low level, even slightly higher than in 2022. This reflects the solid nature of agriculture equipment financing. Moving to our capital allocation priorities. At the 2022 Capital Market Day, we announced a $4.4 billion combined R&D and CapEx spending over '22 to 2024. Almost double what we spent in ag construction in the previous three years, as we were no longer required to fund the on-highway capital needs of the larger CNH industrial. In the first two years of the plan, we spent $3 billion, reflecting increased activity levels and some inflation. We remain committed to invest in our business to fuel our profitable growth and we'll spend around $1.4 billion to $1.5 billion in 2024 between R&D and CapEx. We are confident the products, technology and services that we're bringing to the market by virtue of the spending will ensure a better financial performance for the company and more importantly, higher productivity for our customers. Our solid cash generation and healthy balance sheet are helping us improve our investment-grade credit rating. And last November, as S&P raised by one notch our rating to BBB+ with stable outlook. In 2023, we returned about $1.2 billion to shareholders through dividends and share repurchases. As you know, in November, we launched a $1 billion share buyback program in conjunction with our move to a single listing in New York with a target completion by March 1. To date, we have purchased about $935 million worth of shares between Milan and New York. And so we will likely complete the current program by the end of this month. The Board has authorized a new $500 million program share repurchase program that we will start at the end of this year. We also expect that the dividend distribution, consistent with our dividend policies and reflective of the higher net income achieved in 2023 will be approved by our shareholder meeting. Finally, we will continue to seek opportunities to improve our product offerings and advance our tax to M&A, including through our CNH [indiscernible]. Before turning back to Scott with a broader industry and company outlook, I would like to provide you with some details regarding our 2024 financial assumptions. Net price realization is expected to be between flat and 2% depending on the product and in the region. On average, for all products and regions, pricing will be around 1%. Again, we expect to spend between $1.4 billion and $1.5 billion on combined R&D and CapEx in 2024, with R&D expenses about flat year-over-year at around $1 billion and CapEx between $400 million and $500 million. Corporate expenses or what we call unallocated and other industrial activities are expected to be about flat year-over-year in absolute dollar terms. At the company level, the adjusted effective tax rate would be in the range of 25% to 27%, similar to 2023. The diluted share count is estimated t about $1.25 billion, factoring in the impact of our current buyback program. I will now turn it back to Scott.

Thank you, Oddone. As we mentioned last quarter, we expect agriculture retail demand to be lower in 2024. So commodity prices have declined, driving year-over-year U.S. net farm income down to or even possibly below the 20-year average. In aggregate, considering our key markets and product offerings, we expect industry retail demand to be down 10% to 15% in 2024. We forecast CNH's ag sales to be down between 8% and 12%. We do have pockets of elevated inventory in North America and Europe to address, which will impact first half sales volumes and pricing. Because of our early actions to manage dealer inventory in South America in 2023, we have relatively less work to do there. We are targeting ag EBIT margins between 14% and 15%. And as our cost reduction programs help offset lower volume and more of our factory fit precision products come in-house for our customers. It is important to recognize that we are building this margin resiliency while continuing to fully fund our tech journey. In construction, we expect high interest rates to soften both residential and commercial end markets in North America and Europe, partially offset by U.S. infrastructure spending. In South America, construction markets are projected to be flattish, following a marked decline there in 2023. In aggregate for our markets and products, we anticipate construction equipment industry retail demand to be down about 10% in 2024. CNH construction sales were, therefore, expected to be down in the range of 7% to 11% year-over-year. 2023 sales included dealer stocking of an atypically large number of new construction products which will not repeat to the same level in 2024. Our EBIT margin target for construction is between 5% and 6%, again, supported by our cost savings initiatives. Blending ag and construction brings our forecast for industrial net sales down between 8% and 12% in 2024. We do not control industry demand, but we do control how we react to it. We are on a multiyear journey to improve through-cycle margins. And in 2023, we proved we can expand margins with slightly lower industry demand. In 2024, we will demonstrate that we can sustain through cycle margin improvements even as the industry declines further. We introduced this model of improving profitability curves last quarter. As you can see, our aggressive cost actions pushed the 2024 curve above the 2023 profile. The shaded area indicates the relevant industry and margin ranges implied by the segment guidance. With these levels of sales and EBIT, we expect industrial free cash flow to be between $1.2 billion and $1.4 billion and EPS to be between $1.50 and $1.60 in 2024. In addition to our cost actions, we are laser-focused on commercial execution, working with our dealer partners to provide customers with innovative, reliable and efficient solution. Our order collection in North America extends into Q3, but we have less visibility in other markets, particularly South America. Rafael Miotto, who leads that region for us has an especially strong team in dealer network and we are confident in our ability to outperform no matter how that market develops. We have talked extensively about the importance of advancement of our cost programs. Early on, we recognized the need for these measures and started working to implement them and improve our decremental margins. Our recent acquisitions have given us complete control of differentiating technological capabilities, which are already being integrated into our tech ecosystem. We are making progress building out our tech stack and are exploring options to accelerate this process and bring incremental benefits to our customers even faster. We look forward to highlighting more of our journey at our upcoming Investor Day to be held on May 21 at the New York Stock Exchange. What you can expect there is a refresh of our financial targets and a progress update on our company strategy, not a new strategy. We are still executing the one we outlined in 2022, and our results demonstrate that it is working well for us. I will conclude by reiterating how much I appreciate the CNH team for finishing 2023 in strong fashion while positioning us to take this company to another level in 2024. That concludes our prepared remarks. Ben, will you open the line for questions, please?

[Operator Instructions] The first question comes from the line of Mig Dobre calling from Baird.

I guess, Scott, my first question related to your comments on dealer inventories, this is obviously one of the points of controversy, I guess, in the space. And can you give us a little more perspective in terms of maybe quantify the headwind that destocking would happen you in both segments? And kind of how you're thinking about first half versus second half?

Yes. We don't -- I'll start with the easier one. Stefano and his team on the construction side really don't have much -- we were pleasantly surprised with the demand in the fourth quarter, which helped manage inventory in that segment a little bit better. We probably got room in South America where we've got really lean construction inventory. So overall, I think construction is in reasonably good shape. And as I said in the prepared remarks, it's just pockets that we have in the ag side of things. We're still working through low-horsepower tractors. We're making progress, we have a little bit of work to do there. Europe, there's some -- that market slowed a little bit in some regions as we've got a little more work to do in large ag there. But generally speaking, there's -- and again, a few pockets in North America where we'd like. I would say in aggregate, it's well below $1 billion of work we have to do overall on dealer inventory. And we've got clear plans, both with retail execution and production management to make sure that we get that addressed as quickly as we can. But it's relatively less work to do, especially in Brazil, where I said that the team did a really nice job of helping us react quickly. So as that market turns, that will be -- and it's got to turn at some point. We'll be well positioned to restock there.

My follow-up is on how you’re thinking about the ag cycle here. You commented on the fact that farm income is down back to maybe below a 20-year average. How do you think about the magnitude and the duration of this down cycle? Is it different than what you’ve experienced in the past? And if so, why? A –Scott Wine: Well, I think the positives and – I repeated the press release that came out about North American farm income. But remember, farmer balance sheets are still in reasonably good shape, that’s helpful. The age of equipment is still in – is quite high, which is helpful. And the advancement of technology, which just dramatically improves productivity and yield and therefore, dramatically benefits the pharma. Those are all tailwinds offsetting it. So the other thing is you’re not starting this with tremendous amount of used inventory, tremendous amount of overall. So we’re starting from a better place. Soft commodity prices are likely to be down for a couple of years, and I think we are just expecting the industry be flattish from here for a little while. But I’m not expecting none of our projections internally suggest this is going to be another significant step down like we saw maybe 15 years ago. The setup is very different from that.

The next question comes from the line of Nicole DeBlase calling from Deutsche Bank.

Maybe just starting with the quarterly cadence. You kind of mentioned doing some more work on dealer inventories in the first half. It doesn't sound like there's like a crazy amount of work to do there, but some. I mean does that mean that if we kind of compare the way you see 2024 with a more normal seasonal build, one half could be a little bit lower than we typically see as a contribution to the full year? If you could just kind of talk through that.

Yes. We definitely expect a buffer of Q1 definitely compared to last year. Q2 a lot will depend on how the demand will evolve and what level of dealer inventories we will have and what kind of demand will be there. And then definitely, Q3 and Q4 should be an easy comparative with this year with 2023. Yes, Q1 is low and probably will be -- it's typically low and probably will be lower and then is the usual seasonality.

And then just going back on pricing, I know you guys gave the expectation for flat to up 2%. First, is that kind of similar in both ag and construction? And then second, what are you seeing with respect – and what do you expect to do with respect to dealer incentives in 2024 as demand is a bit weaker than ‘23? A –Oddone Incisa: Yes. I would say it’s similar for ag and construction. Of course, construction is a much more competitive market in terms of number of competitors and in terms of market dynamics. So we have less visibility there if you want. In terms of what we call retail incentive discussion spending with the dealers for sure. Support the financing will be relevant across the year. And as we have announced, we started being more generous, if you want, on dealer incentives in the Q4 and will likely will continue to be at least in the first half of the year.

The next question comes from the line of Steven Fisher calling from UBS.

I know Oddone you just said that Q1 was likely to be tougher. I'm wondering if we could just maybe put a little more framework around that. I'm curious, do you think, particularly in Latin America, I mean, it should be strong double digit down 20-plus percent year-over-year in the first quarter and then just kind of gets better over the course of the year? And then I guess just more fundamentally, what happens, do you think over the course of the year in Brazil? Is your forecasting, assuming that farmer confidence improves such that the buying activity picks up? Or is it just sort of more easier comparisons as the year goes along?

Starting from South America and from Brazil, I think we stopped making detailed forecast about what's happening there because we see a disconnect between the fundamentals and the behavior of the customer. And that's why we have adjusted our dealer inventories significantly in the second half of last year. We are in constant dialogue with our dealer network. We have a very, very, I would say, mature conversation with them. And we are observing day by day what's happening on the market. But we don't have a large expectation for growth there. The -- yes, I mean, sales will likely be down double digit in the first quarter globally, and then we will see after that, how the market evolves.

Yes. It's also important to know, Steven, that our cost actions that we've been working on will gain momentum throughout the year. So we'll get benefit in Q1, but materially more benefit as we go throughout the year just because we're getting more maturity and better execution as that comes through. So that also affects a little bit of the calendarization.

And then Scott, maybe a bigger picture question for you. I mean this year, you shouldn't be wrestling with a pandemic, the supply chain crisis along UAW strike, a delisting of your cost actions are formulated and a lot of actions I'm not trying to jinx you or anything, but it seems like this could be the first year where you can kind of choose what to focus on. And I was going to ask you what your focus is really going to be, but you did in your prepared remarks talk about our strategic priority. So maybe the question is more around what's your confidence in execution this year? And what kind of benchmarks should really we'd be using at this time next year to kind of gauge how that all went?

I think what the last three years, and you kind of highlighted some of the crap we've dealt with, but what it's done is given me the ability to see how strong this team is and how well they execute. And as we put in some more of our lean work and CBS and the culture change -- I mean, really part of the reason our decramentals are so much better is just the work that this team has done to get in better positions. So I'm immensely more positive on what we can do regardless of what happens externally. You are forgetting that there is a U.S. election it's going to be -- who knows what that's going to be like. But we put a plan together that we feel comfortable we can execute. And I believe you'll just see the fundamentals which really show up in margins, just getting better and better as we continue to work through this. So I'm immensely confident in how this team is prepared to get through a down year in top line sales and just prove that this isn't an anomaly but really what we're capable of throughout the cycle.

The next question coming from David Raso calling from Evercore ISI.

I'm trying to get a sense of the cadence of the margins year-over-year. The full year is implied about 70 bps lower from a business segment level, including the corporate expense. So I'm just trying to understand what the first half commentary, especially the first quarter. On a year-over-year basis, can you give us some sense of do we take a lot more than a 70 bps hit in the first half of the year and then it balances out? Because I'm trying to get a bigger picture where the margins may be exiting '24. At least what's in your guide?

Yes. We don't have -- I mean, we're not giving the detailed guidance by quarter. And quite frankly, we are doing our forecast -- reforecast of the year right now. So I wouldn't even have it. But if you think of what is playing into, right? It's -- we say that sales will be lower in the first quarter, and we say that we have cost programs that are incrementally getting in throughout the year, right? The impact of them is getting it throughout the year. So from that likely will have a progression throughout the year, and we will have a tough Q1.

Okay. So basically --

We got a combination of lower sales and the cost problems not getting in completely in Q1.

Okay. So the drag of 70 bps for the year, a little more than that in the first half and a little less than that in the second half is a fair generalization. And I apologize, maybe I missed it in the beginning of the call. The total savings for the year baked in from the two programs, right, the $550 million total COGS program in the 10% to 15% SG&A. What's in for '24 in total? I heard the SG&A number. What do you have in for the COGS reduction number for the year? Around 300?

We have -- Yes, roughly. Yes, a little bit more than that. Of course, that will be compensated. That will be offset by some labor cost inflation and other cost inflation, right? You won't say in the bucket of product cost, you will see all of that. You will see the net impact.

So basically, the total programs combined about $460 million of savings. So it’s sort of like a down 10% revenue, down 40% decrementals, but then we get the cost savings to get the decrementals back to about 18%, 19%. Real quick, the share count to start the year. I’m having a hard time getting down to the 1250 share count for the full year? A –Oddone Incisa: So as we said, I mean I don’t have the starting point in front of me, but what we said is the $1.250 billion reflects the current share buyback program that we have. So basically, the completion of the $1 billion that we announced back in November, which we plan to complete by basically at the end of this month because we – as of Friday last week, we had both about $935 million worth of shares on the existing share buyback program.

The next question coming from Angel Castillo calling from Morgan Stanley. Q – Unidentified Analyst: This is [Grace] on for Angela. I think in the last quarter, you mentioned you have the order books opening in the first half 2024. So could you give us some updates and more color on your order book trends and how these are filling up across the various ag and construction products?

Yes. we said on the prepared remarks that we've got orders through Q3 in North America, less so in other regions. But we're really less focused on order -- I mean we've got -- the demand for our cash products are extremely high, but we're less focused on how far out the order book. I mean I looked at the chart yesterday, it's filling up nicely. We're very comfortable with where it is. But it's -- even if an order is out there from a dealer, we're managing that dealer inventory level, ensuring that our shipments were -- as you heard from our prepared remarks, most of our comments are related to the retail execution. We're really striving to ensure that we support our dealers in driving retail to the end customers so they can get the benefits of these products much more so than we are about collecting a bunch of orders that we're not sure that they're going to need. So the demand is high. And again, I highlighted the CR11 and what that product is going to be. And it's interesting, I literally think it will be years before we meet demand for that product when it's launching. And we're seeing the same thing from our new Steyr stagger 4-wheel drive tractors. Just these things, these high-end extremely productive products or just in high demand. But overall, I think our order book is in good shape. Demand for most of our core cash crop products are in good shape, and we're pleased with how that's setting up in an industry that's going to be down year-over-year.

The next question comes from the line of Seth Weber calling from Wells Fargo. Q – Unidentified Analyst: Scott, I wanted to just follow up on your comment about European ag market, where it sounds like there's a little bit of extra inventory there. I was wondering if you could just give us a little bit more color there, whether it's by country or by product type that you specifically call out and whether that's crops versus dairy livestock, anything like that?

I'd say it's overall sentiment is really driving it. And that -- I mean you look at the news and I think farmers are expressing their dissatisfaction with some of the government actions. And when they're driving and protesting, they're not planting and harvesting. So it's just -- the overall sentiment is not great in Europe. And that's what we're seeing. Again, we're seeing improvements in our penetration of our precision offerings, and I think the team is doing a really good job of executing that. We're setting up new dealers in certain regions, and we're just proud of the way they're handling managing the brands there, but just the overall sentiment in Europe is down a little bit, and that's reflected in how we're looking at the region. And that's what's driving us to put a little more focus on dealer inventories there so we can get that to a more healthy level as we were in an environment, interest rates are presumably coming down, but they're still a little bit high. So we feel like if we can help our dealers get that inventory down, we're both in better shape. But that -- Europe, it's not a crisis situation. It's just an overall sentiment is not ideal right now. Q –Unidentified Analyst: And then maybe just on the Precision platform. I think you called out north of $1 billion in revenue in 2023. Would you expect that to grow in 2024? And any sort of order of magnitude of growth that we’re looking at this year? A –Scott Wine: Well, the magnitude is – I’m not going to comment on because as our overall volume comes down, it’s – that’s less precision offerings we’re selling in those solutions. But we are switching from [Tremble] to in-house solutions, which is going to be a nice benefit both on the sales and margin side. For the year. And overall, I think we’ll be back over $1 billion this year. Just not sure how much.

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

Scott, I wanted to ask, obviously, you guys talked about pricing this year, getting some of those inventories out. And you kind of talked about how there's likely not another big step down in this market, maybe flattish for a while. So just trying to get a sense, Scott, does that mean we could see a return to normal on the pricing front as we turn the page to 2025? And should we be thinking that price versus cost spread for you in 2025 really starts to widen as the price actions get your inventories more in line and some of the cost savings that you have in these two programs, we start to build. So I'm just trying to get a sense of how we think about that as we get to 2025.

Yes. No, that's -- the way we're looking at it is, remember, and depending on the region because, obviously, Brazil had much higher inflation, so they got hit with more price early. But overall, we -- the prices are up many, many tens of percent, I mean on -- overall, so prices have come up somewhat dramatically. But also, our costs have gone up rather dramatically. So we're keeping that in line. What we started to see in the fourth quarter is us bend that cost curve down and the pricing maintains level. We've said it's going to be moderate price next year, but we believe that we are back to a normal. You get that 2% to 3% price when products come out. It's going to be a little bit less this year just because we think managing through the dealer inventory. But we think that environment of us getting regular 2% to 3% price is really coming back especially as we get through the back half of the year is that's what we'll just continue to see. But matched with that is just this benefit of getting aggressively after costs, which should keep that differential between price cost in a very positive way for us for quite some time.

And obviously, the decrementals are more resilient than normal given these cost reduction efforts I'm curious, Scott, maybe this will be touched on at the Investor Day. Like when we finally get to the other side of this, does this mean we should be seeing better incrementals as volumes at some point do you recover? Just curious how we should kind of think about that as we kind of go through this downturn in the cycle and come out the other end?

Well, that is 100% what we are striving to do. And a lot of this cost work I mean, I'm really proud of the team and the work that they've done, but most of the benefit is years out, not here. And we get -- we spent a good bit of money on our tech investments, but the work that Marc Kermisch and his team are doing to accelerate that penetration is just a gift that keeps getting in the future. The strategic sourcing is beneficial this year, but incrementally, significantly more beneficial in the out years. So we certainly expect -- and quite honestly, we need to, right? If you look at the industry leaders, our margins are notably lower and we've got to close that gap.

And Scott, just last one. Obviously, I think your industrial net debt was zero because the guidance of free cash flow of [$1.2 billion to $1.4 billion]. I’m just curious, you guys are trying to execute these two big cost reduction programs. How are you kind of thinking about the free cash flow, where your balance sheet is? And obviously, where stock is trading now? Or are you starting to lean a little bit more towards potentially some M&A as you guys are trying to accelerate some of those other initiatives on the growth side? Just curious if you could touch on that.

Yes. No, I think Oddone clearly listed that out if you go back and read the transcript about how we’re prioritizing that. We’re putting a lot of focus on cash flow and want to make sure that we continue to drive that as a higher percent of net income. But we are leaning in much more heavily than we have historically on the share buybacks. And I think that was necessary as we went through the transition last year, but really encouraged by the Board’s support to put out another $0.5 million there. But it’s really investing in the company to bring products and technologies to our customers. That is our first priority. But when the stock is trading below intrinsic value, and we believe it is now, we’re not going to hesitate to continue to buy shares. So I think that seeing that – the support from the Board for this capital allocation process, which I believe is beneficial to our customers and to our shareholders is a positive.

We'll take the next question from Timothy Thein calling from Citi.

Maybe, Scott, the first one just on the outlook for high horsepower tractor industry sales in North America down 10% to 15%. How are you -- what do you have in terms of your production plans? I know the output from Racing and Fargo has kind of been a little spotty there. So what are you thinking in terms of just, I guess, overall company dealer inventory and your production plans in that important product category?

Yes. We did -- and again, really proud of what the team in Racing did to get that production back up and getting the quality right as we came out of the strength. But really, it's not overall one category of high horsepower tractors. I think the Magnums coming out of Racing, we're probably where we want to be on dealer inventory now. So it's about driving retail demand, and I think that's where our focus will be. On the staggers coming out at Fargo, that product, the technology, the unbelievable horsepower is really something that will be struggling, I think, for all of '24 and probably into 2025 to meet global demand for that product. So I think it's really innovation sells, technology sells, and that's where we're seeing it. But I think overall, North American high horsepower tractors are going to be down a little bit less than the industry, but certainly not robust.

And then this is a bit just kind of nitpicky. But on the bridge.

Then don't ask.

All right. I’ll use the different – a profound question. For the ag EBIT bridge here in the fourth quarter on, call it, 8-ish percent volume decline, you had the $255 million headwind. So upward to 60%. Obviously, mix is a component in that. What do you think – and again, not to the nearest decimal place, but what’s an appropriate range as we think about just kind of volume leverage through ‘24, I presumably stopped 60%. But any help on that just in terms of what that kind of what we should think about if assuming mix or maybe mix has continued to be a headwind and just any help on that. A –Oddone Incisa: I will say much closer to the 30% than the 60% in terms of the volume impact. On the volume and mix impact.

The next question comes from the line of Daniela Costa calling from Goldman Sachs.

I have two questions as well. One more -- sort of to understand a bit better like your production set up at the moment in the U.S., you mentioned the election recently and there's lots of question marks about what happened to potential tariffs from any inputs coming from outside the U.S. How are you set up now, you're pretty much self-sufficient within the U.S.? Or do you import much inputs and just understanding what the implications baked in potentially for that in your margin? And then I'll ask the second one more on the bridge for '24.

Yes. You know as a very global company, we strive to keep production in region. We just don't do that everywhere. Low horsepower tractors, for example, predominantly come from Asia. But we are -- we do -- we ship -- some of our tractors come from Europe and some come from India. But generally speaking, most of our volume is in region.

Okay. So no big impact from that.

And please just -- and I know -- don't read too much in what's said in the run-up to a U.S. election. There's a lot of stuff that is thrown out that is not going to be followed through. And I think some of the tariff thing comments that have come out, the tariffs are ultimately a tax on U.S. consumers. So what sounds right politically and a campaign probably isn't something that they're going to do no matter what happens in the election cycle. So that -- I just wouldn't put too much weight on that.

Just on the guidance on the margins, the 14% to 15% and the 5% to 6% in 2024. I guess given what you’ve said at the beginning regarding dealer inventories and that $1 billion that you still needed to get through that you’re probably going to underproduce this year. So is there an impact on the margin from underproduction? And is sort of trying to get to what would have been the real margin if you weren’t underproducing this year?

There’s absolutely absorption issues when you produce last. Now again, we were not – none of this decline surprised us. We were early on identifying that we needed to take cost out, and that includes in our plants. So we adjusted production, we’ve gotten that down. And that’s part of the reason our decrementals are as good as they are, is because we’ve taken a lot of that cost out. So I don’t know that it’s fair to say that we would be – I mean, it’s obviously, we have better margins if volume was flat, but I think we did a lot of the work to offset that already.

The next question comes from the line of Kristen Owen calling from Oppenheimer.

My question was really a function of what Tim asked about your ability to continue to outperform the market. You mentioned, Scott, in your prepared remarks that, that was something that happened in 2023. You talked a little bit about getting ahead on the production, just how you continue to view your outlook relative to industry in 2024. You’ve touched on that; I’ll just ask you to expand. And while I’m here, I’ll ask you my next question, which is about the streamlined senior leadership team announcement. I understand that, that wasn’t really so much of a cost effort, more of a focused one. So if you could expand on that decision as well.

My core belief is this game is about product brand and distribution. And if you look at the portfolio and how Derek and Stefano are running their respective businesses, we are seeing the benefits of improvements in each of those areas. We tend to focus mostly on products. We talked about the 73 new products introduced across the company last year. And with the significant increase in R&D investments, not only on the iron side but also on tech, the continued improvement and integration of advanced technologies and our products ultimately benefits our customers, and I think that’s real. But that’s the product side. On the brand side, remember, the Case IH and New Holland and case construction brands are just really, really strong. And we’re trying to leverage those as best we can. I think the teams and the regions do a really, really good job with that. And then distribution, we’re trying to be good partners with managing dealer inventory, but we’re also raising the expectations for dealer execution. We’ve got enhanced control rooms going in, so they can better manage. We think overall, that combination gives us the ability. We demonstrated that we can do it in ‘23 and we’re just going to get better and better in those three categories over time, which gives us the ability to continue to outperform. And again it’s hard work, it’s a very competitive industry, but I like how we’re positioned to compete. Now the follow-on to that is what we did with the organization. We’re going through a difficult and fairly aggressive restructuring overall. And as we did that, we just thought it would be important to align how we were structured with the senior team. And one of the moves that was the regions that we’re dual reporting to both Derek and I are now solely reporting into ag. And that’s really just about execution, just allowing them to be narrowly very, very focused on driving execution in a difficult ag market. And I think we’re seeing the benefits from that. So just a couple of – I would – I just believe being a smaller team, making faster, better decisions is going to be the benefit for us going forward.

The next question comes from the line of Tami Zakaria calling from JP Morgan.

I have one question, but two parts. So the pricing outlook of 1%. I just wanted to clarify, is that net of dealer discounts or not including dealer discount? So that's part one. And then part two.

Yes, it is. Next.

Okay. And so you said you expect 0% to 2% pricing depending on production and geography. So that means you don't expect any negative pricing in any of the regions. The reason I focus on that, we've heard some of the other OEMs talk about pricing turning negative mid- to high single digit in the fourth quarter and may continue for another quarter or two in South America. So just wondering how you're thinking about your pricing expectation versus some of these comments from your competitors, especially for South America?

Yes. Tami, I don't want to tell you to go back and read the prepared remarks. But I will just remind you that Rafael Miotto and the team in South America, very early on last year, raise the warning signs for us about what was happening. And I still think it was with a poor decision by the farmers not to sell their harvest. But we got on top of dealer inventories faster, and therefore, we have less to deal with. Therefore, we have less pricing pressure. Now as our competitors bribed at, we're really focused on managing share when our competitors have more inventory than we do. So we'll -- we've got I mean, again, South America is interesting for us. It's our highest Net Promoter Scores with our customers, our highest dealer satisfaction scores our best proliferation of technology. So we feel really good about the team we have there and the ability to offset some of the dynamics. But I think just the net-net is our dealer inventory is in a better position, and that's helping us have less impact on price.

Got it. So no negative pricing in South America is the bottom line?

I don't understand the term negative pricing.

Like pricing down less than zero --

I'm joking. No, we certainly -- we're very, very focused on delivering value for our customers, and we expect to be maintaining price in that environment.

And the last question comes from Larry De Maria at William Blair.

So Tami asked the question, you answered obviously, specifically to South America. And I guess when we think about – we talk to clients, the biggest [indiscernible] case is obviously somebody we view on the cycle, which can differ. And then as pricing going negative from the group after a number of years being very, very strong, right? But now we’re going to a period where the market softer pricing has been parabolically up and used pricing is weakening, which impacts the ability to trade down one, down two levels. So I think you answered it, but just – in other words, I was going to add for your commitment on no new taxes or no pricing cuts, but you really – your belief and the ability for the market to handle that over the next year or two with used equipment pricing going negative.

I was a bit joking with Tami. But I mean literally, the term negative pricing doesn’t – we just don’t talk about it. And I think the way to think about it is our cost, we’re driving cost down, but inflation – lower inflation is still inflation. I mean what drove our pricing so high was a dramatic increase in input cost. And those input costs have not gone negative and aren’t giving us a bunch of room back that we can discount. If that does happen, and we see massive disinflation, I will absolutely share that with our customers. But that is not what we’re seeing. And again, I don’t think it’s in anybody’s interest to go – to take that route, and we’re certainly not.

This now concludes the call. Thank you for participating. You may now disconnect.