CNH Industrial N.V. (CNH) Earnings Call Transcript & Summary

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

Thank you, Serge. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's fourth quarter and full year results for the period ending December 31, 2022. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use, recording or transmission of any portion of this broadcast without the express written consent of CNH Industrial is strictly prohibited. Hosting today's call are CNH Industrial's CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH Industrial website. Please note that any forward-looking statements that we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20-F and EU Annual report as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent authorities in the Netherlands and Italy. The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable U.S. GAAP financial measures is included in the presentation material. I will now turn the call over to Scott.

Thank you, Jason, and thanks, everyone, for joining our call. We finished 2022 with solid results as fourth quarter revenues were up over 27%, driving full year consolidated revenues up 21%. We Deliveries and product mix improved in both agriculture and construction. Our strength was broad-based with double-digit year-over-year price realization coming from all regions. We expanded profit margins in both agriculture and construction despite significant input cost increases. The industry faced many other headwinds during the year, including a choppy supply chain, elevated freight costs and ongoing inflation. Late in the year, these issues began to modestly improve, and we anticipate that will continue into 2023. The CNH team's creativity, hard work and strong execution resulted in company records for both adjusted net income of $2 billion for the year and adjusted earnings per share at $1.46, up 14% over 2021. We also generated $2 billion in free cash flow from industrial activities in the fourth quarter and $1.6 billion for the full year, as we over delivered on our plans to complete and ship our accumulation of partially built units. This benefited our dealers and put us in a net cash position well ahead of our plan. Last year, we launched 2 potent margin improvement initiatives, the strategic sourcing program and the CNHI business system, which we refer to as CBS. Continuous improvement is hard, especially in pursuit of breakthrough results but our team has embraced this lean mindset and is poised to deliver value across the business. Looking ahead, we remain focused on executing our strategy, including significant investments in our tech stack and product development. Derek Nielsen and his team continue to drive exceptional performance, delivering a strong fourth quarter with full year net sales for the ag business up 22%. This growth was largely propelled by robust industry demand and significant year-over-year price realization, especially in North and South America. We saw improved product mix, including precision ag revenues up 32%, and which benefited from both an increased take rate for factory fit precision options and incremental Raven sales. Ag profitability remained healthy, with Q4 gross margins up 280 basis points and adjusted EBIT margin up 310 points admittedly against an easy comp. Margins were down sequentially versus our record third quarter performance impacted by regional mix and the nonstandard work required to finish units. Overall, I'm extremely pleased with the ag team's performance and results. For 2022, ag adjusted EBIT was nearly $2.5 billion, marking our highest profit in more than a decade. We are executing on our customer-centric strategy and customers have responded with continued demand for our high-end products at prices offsetting increased escalated production cost. They have also recognized us with improved net promoter scores, 5% higher than in 2021. Derek and his team are ensuring that customers at the center of all we do, driving the right behaviors and results. Stefano Pampalone and his construction team executed quite well in the fourth quarter with strong momentum from Sampierana integration, manufacturing improvements and enhanced customer focus, we expect even better progress in 2023 and beyond. 2022 net sales were up 16% for both the full year and the fourth quarter with noteworthy growth in Europe and South America. Organic growth accounted for about 2/3 of the increase in the remainder with the remainder attributed to Sampierana. Their excavator portfolio and technology innovations have enhanced our ability to meet customer needs and their Eurocomach platforms provide an outstanding foundation for electrification. Construction adjusted EBIT for the quarter was $34 million at a 3.5% margin. Full year adjusted EBIT was up 38% to $124 million and we are encouraged by the ongoing progress in construction. The team is well positioned to deliver on their strategic initiatives, support their dealers and customers and gain market share. This past December, we held an engaging tech data to showcase our extensive suite of precision ag technology. Attendees met our deep team of experts in automation, autonomy and connected platforms to better understand the cutting-edge products we are developing. Through a series of live demo stations, the team exhibited the real-world applications of our groundbreaking smart iron. The products and technology that we demonstrated Tech Day that you see here on this page and those we will be releasing over the next few years, prove our commitment to being a leader in precision agriculture. We reiterate our expectation to deliver over $1 billion of precision ag sales in 2023. I also want to highlight 2 recent investments made through our CNH Industrial Ventures arm. Stout Industrial Technology is a U.S.-based startup focused on AI-powered smart agriculture implements. EarthOptics has proprietary sensor technology that precisely measures soil health and structure. By taking minority stakes in these and similar companies through our ventures portfolio, CNH is staying on the cutting edge of emerging technology to develop solutions that provide real advantages for customers. CNH remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability. We have a strong history of sustainability performance as evidenced by our recognitions and our innovative products, including the New Holland methane tractor and electric mini excavator pictured here. In 2022, we pledged to set science-based targets that will enhance our operations, Scope 1 and 2 emissions goals and establish first-time decarbonization goals related to our products, which we will announce later this year. With that, I will turn it over to Oddone to take you through our financial results. Oddone?

Yes. Thank you, Scott, and good morning, good afternoon to everyone on the call. So fourth quarter net sales from industrial activities of nearly $6.4 billion were up over 27% net of adverse FX impacts. Full year net sales of industrial activities of $21.5 billion were up 21% or over 24% at constant currency. Continued price adjustments were significant drivers for our top line growth in the quarter, but volume and mix also accounted for around 15% sales increase from Q4 2021. For our Industrial segments, fourth quarter gross margin was 21.7% and 22.2% for the full year. The year-over-year margin improvement of 1.5 points is mainly due to strong and profitable growth in South America and disciplined price realization globally, which more than offset rising cost -- production costs. Q4 adjusted EBIT came in at $680 million, up $302 million from 2021, with a corresponding EBIT margin of 10.7%, a 310 basis points improvement versus prior year. Full year adjusted EBIT of Industrial Activities was $2.4 billion with a margin of 11.3%, up 140 basis points from 2021. Free cash flow from Industrial Activities was $1.6 billion in 2022, which turned at our initial industrial activities net debt into a net cash position of $362 million at the end of the year, as Scott discussed in his introductory slide. Adjusted net income for the quarter was $486 million, up $61 million compared to prior year. This resulted in adjusted earnings per share of $0.36, up $0.05 year-over-year and full year adjusted EPS was $1.46. Adjusted net income for the quarter was affected by a higher tax rate due to discrete items booked in Q4. The full year adjusted effective tax rate was about 28%, mainly due to the jurisdictional mix of pretax profits with higher rates coming from South America, and we will likely see the tax rate upper end to lower in 2023. Available liquidity as of December 31 was $10.6 billion. And at the Annual General Meeting, the Board of CNH Industrial is planning to recommend an annual cash dividend of $0.36 per common share, totaling a little over $500 million in distribution to shareholders. In the fourth quarter, strong volumes in double-digit price realization continued to shield us from the steep increase in production costs. R&D and SG&A expenses were higher tied to technology investments, inflation and newly acquired businesses. Energy costs increased year-over-year but still accounted for about 0.5 percentage point of our total production costs worldwide. Agricultural adjusted EBIT increased by $287 million to reach $701 million with a margin of 13.1%, up more than 300 basis points from the same quarter in 2021. The higher profits were driven by higher volumes and favorable pricing, which offset higher product costs, SG&A and R&D expenses. Gross profit was up $394 million compared to Q4 2021, exceeding $1.2 billion with a margin of 13.1% (sic) [ 23.1% ]. For the full year, gross profit was up $989 million or up 140 basis points from 2021, largely driven by strong price realization coming from all regions and better product mix, including margin-rich, technology-related sales growing by about 32%. Construction Equipment adjusted EBIT for Q4 increased by $14 million compared to Q4 2021, reaching $34 million with a margin of 3.5%. These results were driven by favorable volume and positive price sterilization but production costs, including strike-related costs were an outsized headwind for the business. Gross profit across the year was up $82 million compared to the full year 2021 mainly due to higher volumes and stronger pricing. For our financial service business, net income in the fourth quarter was $75 million, down $50 million compared to 2021. Factors include high-risk cost provisions linked to the termination of the construction business in China, increased labor costs and compressed margin in North America, slightly mitigated by robust volumes across all regions as well as higher recovery on used equipment. Retail originations were $2.9 billion in the quarter, reaching $10 billion for the year, up to $100 million from 2021. The managed portfolio at the end of 2022 was $23.8 billion, up $4 billion on a constant currency basis. Delinquencies remain at a low level, up 10 basis points year-over-year to 1.3%. The increase from December 2021 is explained by the in-sourcing of the revolving credit account portfolio that was purchased in October 2022. CNH Industrial Capital America acquired the receivables previously held by Citi on a private label program that will now be run and booked by our company. Free cash flow from Industrial Activities in the quarter was over $2 billion on the back of a $1.5 billion change in working capital, driven in large part by the reduction of manufacturing inventory, as we mentioned before. At the end of the year, the total gross debt for industrial activity was $5 billion with a net cash position of $362 million. So within the first year of the spinoff, we were able to improve our net financial position by $1.5 billion on the back of the cash generated by the operations. This takes to our capital allocation priorities. And we have targeted spending $4.4 billion in combined R&D and CapEx over the 2022-2024 plan period, almost doubling what we were spending in the previous 3 years. In 2022, we spent the first $1.3 billion of that, and we remain committed to investing in our business to fuel profitable growth. We are confident the products and services we will bring to the market with this spending would ensure higher financial performance in the near future and more importantly, higher efficiencies to our customers. Strong cash generation helps us maintaining our investment-grade rating, which has been reaffirmed or improved by all the rating agencies after the spin-off. We returned nearly $600 million to shareholders in 2022 through dividends and share repurchases. And as mentioned earlier, we proposed -- the proposed 2023 dividend itself will total above $500 million, and we plan continuing our share buyback program. We have the liquidity to fund inorganic growth and you are seeing us use the ventures arm for minority investments when opportunity arises. We remain commitment to our capital allocation strategy and focus on maximizing value for our shareholders. This concludes my prepared remarks, and I will now turn it back to Scott.

Thank you, Oddone. Overall, demand continues to outstrip the industry's ability to supply at least in the near term, which despite record sales has actually dampened the industry levels. Soft commodity prices are trending down, but they are still generally above pre-2022 levels. And fortunately, for farmers, fertilizer and other input costs are dropping as well. In North America, elevated farm incomes are sustaining demand for high horsepower tractors and combines, while small tractor demand has slowed from the lofty levels seen over the past 2 years. We see the European ag industry flattening as the macro environment starts to impact equipment demand there. South America and Brazil, in particular, is a very good market for us. The business conditions in Brazil are in flux following the presidential election, but we believe that the fundamentals are still positive for agriculture in the region. We also see good long-term opportunities in APAC, but this year will likely be slightly down. In construction, global demand is trending lower, and we expect residential and commercial markets in North America and Europe to decline in 2023 due to rising interest rates. However, public construction spending, at least partially fill in those gaps in the United States. In Europe and South America, construction markets will be down in reaction to the overall macro environment. We expect net sales of industrial activities to increase 6% to 10%, with confidence in the stickiness of our 2022 price increases, we expect to build on our margin gains by taking more cost out of our system. We are committed to growing market share, and we have the products, brands and dealer network to do just that. Returning to full production in our North American plants will also help. Our SG&A as a percentage of sales remains one of the lowest in the industry. And despite inflationary pressures, we will severely limit SG&A growth. Free cash flow will be between $1.3 billion and $1.5 billion, a little lower than last year as we have earmarked $1.6 billion for R&D and CapEx, up about $300 million from 2022. Even accounting for the increased R&D costs, our EBIT is projected to grow slightly faster than our top line. We are becoming a simpler, leaner company every day and expect to modestly improve our industrial margins throughout the year. Earlier today, we announced that our Board of Directors has determined that our shareholders will be best served by a single listing in the United States. The majority of our trading in CNH Industrial stock has been shifting to the New York Stock Exchange since the spin-off of Iveco Group, revealing that CNH's new business profile and investor base better fit with the single New York Stock Exchange listing. Concentrating trading in one market will allow for increased liquidity of our stock improve investor focus, further simplify the company's profile, enable broader index inclusion and attract more passive investors. The current Italian regulations only permit the delisting of stocks when they are or will be listed on another EU exchange. By definition, the New York Stock Exchange does not qualifying. CNH Industrial has an open dialogue with Borsa Italiana and Euronext, and we told them of our intention to leave the European listing. The harmonization and modernization of the Italian financial system, which is underway is expected to include the New York Stock Exchange as an acceptable exchange. This is our preferred path for a smooth delisting from Euronext Milan, but not the only option if this becomes untimely. We are targeting sole trading on the NYSE by the end of 2023, but that could shift into 2024, depending on the timing of the regulation change. Rest assured, we will delist as soon as it is legally possible. At this point, we do not intend to change our incorporation in the Netherlands or our tax domicile in the U.K. as part of the single listing. Therefore, we do not expect any material tax or trading consequences for our shareholders. Our Board of Directors and management team are grateful to Euronext Milan for being our listing venue for the past 10 years and excited about the company's full return to the NYSE. I want to stress that this does not change the company's long-standing commitment to Italy and the Italian market. CNH employees over 5,000 people in Italy made a significant investment with Sampierana acquisition in late 2021. And opened its fifth plant in the country in 2022. We also have 3 R&D centers in Italy developing products that are sold around the world. While the delisting is another step in our corporate simplification, real value creation come from the business. We are now taking orders into Q4 in some markets and overall demand remained strong. But the uncertain macro environment, especially towards the end of 2023 requires vigilance as we strive to support our customers, dealers, suppliers and employees. We expect to escalate combined CapEx and R&D investment as we launch exciting new products and build out the tech stack. We have already introduced some Raven enabled products and will unveil more in 2023. And but the real payoff for these higher-margin precision solutions kicks in, in 2024. We are happy to have finally secured a contract with UAW in North America. The agreement we reached is fair for our employees and sustainable for the company. Employees returned to work this week, and we expect the 2 affected plants to ramp up to full production in the coming months. While the pace of inflation is slowing, it is still inflation, and we expect it to have an impact on our manufacturing, energy, SG&A and R&D costs in 2023. On a more positive note, we are seeing modest supply chain improvements. Our primary margin improvement initiatives, strategic sourcing and CBS will start to yield results in 2023. I want to close by emphasizing again how proud I am of the team for what they have accomplished and ensure you that we are ready to do even more in 2023. That concludes our prepared remarks, and I will now turn the call over to Serge to open the line for questions.

[Operator Instructions] Our first question comes from Kristen Owen from Oppenheimer.

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

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

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

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

Our next question comes from Steven Fisher from UBS.

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

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

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

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

And our next question comes from David Raso from Evercore ISI.

I'm just trying to square up the implied volumes. I mean, you look at the price -- sorry, the revenue guide of the 8%. I mean, currency shouldn't be that much of a drag at these levels. So. It looks like it's mostly just price in the revenue guide. Is that the right way to interpret it that basically volumes are flat? And if that is the case, if you can give us a little flavor where volume is up versus down, just so we kind of square up any chance of overhead absorption?

No. Volumes are up slightly modestly, I don't know, slightly modestly define that, but it's low single digits. North America is really where we see the greatest strength and where we see the biggest backlog and where we've got the most work to do. So I think that will be the volume play to a great extent. And the rest of -- there's still lots of work to do to deliver in other areas of the world. But that really will be where most of the volume comes from.

And that's more of a large ag comment, I know the units are bigger and so...

You got it. It's high horsepower tractors and combines in that order.

And then on the comment about still more about steel than price. I just want to understand what you're implying there. We still think our steel costs are up year-over-year more than price. It's all wrapped in our thought around do we think gross margins can expand in '23? I just want to make sure I understand that slight growth margin comment.

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

So price cost is expected to be positive for the year to margins neutral to margin, positive margin.

Yeah, positive margin.

So if volume is up a little bit and price cost should be net positive to margin. I assume we can defer from that, gross margins are expected to expand as well as SG&A grow slower than sales growth with at least that was in the guide. Is that correct?

That is exactly correct.

What we're looking at.

And our next question comes from Jamie Cook from Credit Suisse.

Nice quarter. I guess just 2 questions. Scott, given the performance that you've put up -- the positive financial performance you've put up, can you talk about how you're thinking about the ag cycle and like the implications for your 2024 financial targets, whether you think there's upside there. And then I guess my second question, just an update on Raven and where we are relative to your synergy targets.

Well, first of all, if you go back a year at a Capital Markets Day, we're obviously much -- 2022 played out significantly better than we expected. Unfortunately, some of that driven by soft commodity prices impacted by the war in Ukraine, which we couldn't have anticipated. But overall, '22 and then as we look at '23 are both better than we had anticipated from that. But that's really market related, not our performance. Our performance is actually doing quite well. As we look at our 2024 targets, we obviously feel like we're on a path to do better in some areas, but we've got work to do in some areas. So we feel like, generally speaking, we set ambitious targets, and we're on path to hit those. But we are -- I don't want to be a pessimist, but I just think '24 could be a -- we talked about it could be a more difficult year. The ag cycle, though, as I talked about in my prepared remarks, soft commodity prices are still at relatively good levels. And it looks like that could hold and farmer income is still at elevated levels and their reluctance to pay taxes, and therefore, they desire to buy equipment still makes a good setup for the ag cycle. It won't stay positive forever, but we feel like right now, we're not about to call that starting to turn negative in '23. As far as Raven concerned, I'm honestly not sure I could be more positive on how well that integration has gone. We committed to a reverse integration because we like the team, and we like the culture. And our team has embraced that. We are -- we are learning from their agile customer-focused system, and we're building on that giving them the tools and resources. We've done a tremendous amount of hiring. And really, it's -- we talked about the new Patriot sprayer that we brought out with full Raven capability. We'll embed their tools and everything that we can going forward. But really integrating them into our tech stack is where the real value unlock is, huge aftermarket opportunities there, retrofit opportunities in Raven, but overall, I'm really pleased with how the team -- both the Raven team and our team have done to bring value and overdrive on our synergy targets.

We'll now move to our next question from Dillon Cumming from Morgan Stanley.

Just wanted to ask on some of the more producing credit margin improvement opportunities you mentioned. You called out the sourcing program and CBS starting to ramp in the quarter. I know as Oddone mentioned it was still be a bit more back half weighted, but can you just maybe earmark kind of how much more -- how much more of an opportunity that can be on more of a dollar basis or on a margin basis, just trying to get a sense of -- kind of quantifying what that tailwind could be next year?

Yes. Well, remember, we actually are not -- our CBS and lean initiatives are not starting from nothing. We've got a great history with WCM and polling lean tools throughout the plant network. What we're looking to do is how do we deploy that in other areas of the business and accelerate it in the plants. And I think that's what you'll see taking shape this year. And obviously, that's -- the opportunity is quite significant. But what the teams are working on now is how do we just push back the cost input using various lean tools to get back to where costs were pre-pandemic. And that's a lot of heavy lifting. But Oddone referred to it. 2022 as a year of price and 2023 is going to be a year of cost. Focus in our lean tools will be a significant way that we get after that. But more importantly, it's a way we get after delivering value for customers. It's not about just taking cost out. We're going to use those tools to make quality better, to make delivery better and overall help us expand margins. The -- that's -- I wouldn't say short term, but we can do those that we did that, some of that work in '22. We're accelerating the work in 2023. So a great opportunity across the business to use those tools to create value and expand margins. Strategic sourcing is a longer in the [indiscernible] program. It's probably -- it got kicked off last summer and fall. We've got a strong team working through it. But that will show some results later this year, but really start to drive notable margin expansion in '24 and beyond. But both of those, I would say, more near-term opportunities with our CBS initiatives, more significant long-term opportunities with strategic sourcing.

Okay. That's helpful color. And then just a follow-up on the precision ag revenue target. I think Oddone, you mentioned that you exited the year up 32%. That you were originally guiding at the Tech Day, it's up 11% in 2023. And I know it's still a fairly recent target. But just given that exit rate, would you kind of consider any upside to that $1 billion target for '23 at this point?

I will stick to that target for the time being.

The next question comes from Tami Zakaria from JPMorgan.