CNH Industrial NV (CNHI) 2023 Q1 法說會逐字稿

Hello, and welcome to the CNH Industrial. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. And for the duration of the call, your line will be on listen only. However, you'll have the opportunity to ask questions at the end of the call. (Operator Instructions) I will now hand over the call to your host, Jason Omerza, Vice President of Investor Relations, to begin today's conference. Thank you.

Thank you, Caroline. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's first quarter results for the period ending March 31, 2023. This call is being broadcast live on our website and is copyrighted by CNH Industrial. Any other use, recording or transmission of any portion of this broadcast without the express written consent of CNH Industrial is strictly prohibited.

Hosting today's call are CNH Industrial's CEO, Scott Wine; and CFO, Oddone Rocchetta. 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 reconciliations to the most directly comparable U.S. GAAP financial measures is included in the presentation material.

I will now turn the call over to Scott.

Thank you, Jason, and thanks, everyone, for joining our call. With record first quarter margins in both agriculture and construction, we had a solid start to the year. Robust demand for large agricultural equipment continues, especially in North America. In construction, we benefited from better capacity utilization and higher volumes in North America and Europe. The margin growth in both businesses reflects our progress, and I'm increasingly encouraged by the resilience of our end markets.

Our lean manufacturing and strategic sourcing programs are introducing simpler, more efficient processes across the company. The teams are doing a lot of foundational work right now, and we will accelerate these results along the way as we implement these multiyear margin improvement plans. We are successfully employing a variety of approaches to develop our tech stack and the benefits to our customers and business will be significant. In addition to our R&D and capital expenditures, we also announced 3 key acquisitions bolstering our strong precision agriculture and alternative fuel portfolios.

With increased volumes and continued price realization in both agriculture and construction, revenues were up 15% in the quarter. Industrial EBIT was up 29% with a margin of 11.6%, up 130 basis points over the first quarter of 2022 and also up sequentially from Q4 as supply chain improvements allowed our manufacturing teams to be less encumbered by fleet inventory completion. And as it should, all of this translates into higher bottom line results, visible in our solid year-over-year EPS increase.

Derek Nielsen's ag team is laser-focused on delivering for customers, reflected in net sales of agriculture rising 16% with growth across all regions. Ongoing industry demand, especially in North America row crop market, strong year-over-year pricing and a favorable mix all contributed to the higher sales. Rebounding retail sales in Brazil led to decreased dealer inventories for our brands from the end of 2022, so we are well positioned to compete and win in that market. Healthy construction demand is leading us to increase production on certain products as Stefano Pampalone and his team continue to align our portfolio with customer needs.

At CONEXPO, we previewed innovative new products like the 100 mini track loader, which was developed in conjunction with our Sampierana team and Cass E-Series wheeled excavator. By focusing on premium capabilities and operator experience, we continue to break new ground for our customers. With interest rates rising and banking challenges increasing, it is imperative that we have a healthy captive finance to serve our dealers and end customers. A done and his financial services team have decades of accumulated experiences leading this business, many of them even successfully fought through the 2008 financial crisis.

It is reassuring to have a sound and conservatively managed finance business where the portfolios continue to grow even as interest rates temporarily pressure margins. And for a great example of winning the right way, in February, CNH Industrial received the highest score in our industry from the 2023 S&P Global Sustainability Yearbook, which puts us in the top 1% of all companies and industries.

Our company strategy is centered around 5 key pillars; customer-inspired innovation, technology leadership, brand and dealer strength, operational excellence and sustainability stewardship. In operational excellence, we reaffirm our annual savings target of $550 million by 2024 year-end when compared to our 2021 baseline. Cover Batten's team is driving our strategic sourcing initiative. And by the third quarter of this year, they will have visited and vetted about 450 vendors around the world to ensure we select the best suppliers for our needs. This program will transform our supply chain to sustainably improve quality, delivery and cost in 2024 and beyond. We are ramping up our CNHI business system where CVS roll out across the company.

To date, we have trained over 2,000 employees on how to apply lean principles at their locations and more are trained each week. And we are increasing the pace of Kaizen events. By the end of the first quarter, we have already surpassed 60% of our events held last year. I also want to highlight accomplishments in 2 other pillars today. CNH is committed to building technology that continuously improves productivity and field experiences for farmers and builders. We constantly break new ground with the goal of marrying great iron and great technology.

Last year, we revealed our high horsepower, medium heavy-duty tractor platform, which combines best-in-class technology with premium comfort. The T7 and Optum tractors are leveraged across New Holland and Case IH, respectively, sharing common componentry while retaining brand-specific features. We designed this tractor to provide a full suite of benefits requested by farmers.

In its first full year in the market, it is receiving excellent quality ratings, leading to low warranty cost, and we are gaining market share in this important segment. This customer inspired design approach is a win-win because delighted buyers may improve gross margins that drive a high return on investment. We are continuously working to become a technology leader, spurred by significant investments.

Our goal is to accelerate adoption of ever better precision solutions, thereby bringing additional value to farmers and builders. From 2022 to 2024, we are committed to nearly doubling our R&D and CapEx investments versus the prior 3 years, building out our tech stack and launching new tech-enabled products. Some of the latter will arrive in '23 and '24, but from 2025 on, the pace will dramatically increase. Since our acquisition of Raven, we have hired over 500 tech engineers who are developing the next-generation precision solutions that will seamlessly integrate with our great iron.

We also recently announced 2 acquisitions that will further propel our technology innovation and a third that advances our alternative fuel solutions. First, we purchased Augmenta whose technology on our tractors and sprayers increases yield, boost sustainability and reduces application time, effort and input cost. Augmenta will operate within Raven.

Secondly, we announced our agreement to purchase Hemisphere, a global leader in high-performance satellite positioning technology. Hemisphere's capabilities will allow us to rapidly develop automated and autonomous solutions for both agriculture and construction. We expect to close in the third quarter. For more than 2 decades, we have been at the fore of alternative propulsion, exploring innovative offerings that support farmers and advance our strategic priorities.

During the quarter, we took a controlling stake in Bennamann, whose methane capture capabilities are paving a path toward a carbon-negative future on farms, further cementing our sustainability stewardship with a platform that is poised to deliver value and growth. We are making judicious and promising strategic investments to grow and innovate our brands. Our team is demonstrating how we can provide value in any economic environment, and we remain focused on executing our growth strategy.

I will now turn the call over to Oddone to take us through the financial results.

Thank you, Scott, and good morning, good afternoon to everyone on the call. First quarter net sales of data activities of $4.8 billion were up roughly $600 million or 17% at constant currency year-over-year. This was mainly driven by favorable price realization and higher sales volumes. Adjusted net income for the quarter was $475 million, with adjusted diluted earnings per share of $0.35, up $0.07 on the back of ongoing strong operating performance.

Free cash flow from Industrial Activities was negative $673 million, about a $390 million improvement versus the first quarter of 2022. Quarter 1 has a normal seasonal buildup of finished inventory in preparation for the spring selling season. Agriculture net sales were up 60% to $3.9 billion, supported by favorable price realization, higher volume and favorable mix. Gross margin was a record 26.2%, mainly due to higher volume and pricing across all regions, offsetting higher manufacturing costs and purchasing costs.

Agriculture's adjusted EBIT increased by $144 million or 33% to reach $570 million with a margin of 14.5%, mostly driven by the gross margin improvement. We are still seeing high carryover price and cost inflation when comparing year-over-year, and that will continue into Q2. That's also true for our SG&A and IDA expenses, which, like our manufacturing costs have been heavily impacted by inflationary pressure from the second half of last year.

Carryover pricing will fade in the second half, but that is also when our proactive efforts to contain costs and especially SG&A would be more evident. We have solid plans to increase the full year margins versus 2022 and reduce volatility over time. Construction net sales were up 6%, driven by favorable price realization as well as positive volume and mix in North America and in Europe. These more than offset the close of operations in China and Russia and lower wholesales in South America where dealers were destocking.

Gross margin was 15.9%, up 160 basis points, mainly due to higher volume, improved fixed cost absorption and favorable price. This was partially offset by higher raw material and manufacturing costs. Construction adjusted EBIT was $44 million with a margin of 5.2%, a 120 basis point increase from last year. We did have 1 month of strike at the Burlington plant in the quarter and with the workforce back from February, production is ramping up to full capacity there. The same 2023 quarterly dynamics in ag applied to construction as well.

For our financial service business, net income was $78 million, down $4 million compared to the first quarter of last year. We saw favorable volumes in all regions, but this was more than offset by margin compression in North America, higher risk costs and increased labor cost. While rapid rate increases contributed to the margin pressure, they are managed through a tight asset liability duration magic.

We have a limited impact on our results, and that is mainly linked to the long retail delivery delays in 2022, which created a lag from when a customer financial was contracted to when it was funded. Retail originations were $2.2 billion in the quarter. The managed portfolio, including JVs at the end of the period was $24.5 billion. The receivable balance greater than 30 days past due as a percentage of receivables was 1.4% as agriculture and construction customers remain in good financial health. As we look at our capital allocation priorities, Scott already touched on organic and inorganic growth investments.

I want to mention that in April, our financial service business issued $600 million in bonds, initial $870 million ABS transaction to continue funding our growing receivable portfolio. The fact that our financial service business is able to raise capital in these times is a testament to the sound credit worthiness and solid market presence of this part of our business.

As part of the Board approved a repurchase program, the company executed over $70 million buyback in Q1, and this program is continuing in the second quarter. On my third, our annual dividend was distributed to our shareholders worth over $0.5 billion. I'll now provide a brief update on our delisting from Borsa Italiana and Milan. We have had constructive dialogue with the Exchange management, and we are now confident that the delisting process will be completed by the end of 2023. Understanding that investors with a European mandate may be required to divest their shares when delisting happens, the Board is prepared to do a special buyback program to offset the impact, if needed, as our balance sheet and our cash generation allow for it.

We remain confident of the opportunities for passive investments in CNH stock will increase as a result of our -- the expected inclusions in the U.S. indices. Overall, we have had a very positive feedback from shareholders regarding the further simplification of our profile with a single listing in New York.

This concludes my prepared remarks, and I will turn it back to Scott.

Thank you, done. Most of our 2023 estimates for industry unit performance are consistent with our last earnings call. We have slightly increased our projections for combines in North America but marginally lowered construction estimates in South America and APAC. Our order backlog remains solid, well above 2019 levels, and agriculture and construction order books are full through the third quarter.

Model year 2024 list price updates will be announced later this month, and we will be opening the Q4 order books shortly thereafter in most markets. Based on feedback from our dealers, we expect the Q4 order slots to fill rapidly. Our dealers remain on allocation for products where demand is outstripping our ability to produce, especially our large agriculture equipment with precision technology. Dealer inventories for high horsepower tractors and combines remain at historically low levels.

On the other hand, with persistent small ag demand softness, we are lowering production of the relevant equipment to keep dealer inventories near optimal levels. We saw an uptick in dealer inventories for light construction equipment due to high shipments in the month of March, but the inventory to sales ratio for these products remains quite low. As demand for row crop products is strong, pricing levels are proving durable, order backlog remains solid and dealer feedback is positive, we are raising and narrowing the range of our full year net sales guidance to up 8% to up 11% compared to our prior forecast of up 6% to 10%. We are reaffirming our previous 2023 guidance for the remainder of our metrics.

With the progress we have shown so far and at today's sustained volume levels, it is evident that we may approach or even meet our sales, margin and earnings per share targets from Capital Markets Day a year early. What we -- what you should retain is that we are working to make CNH a highly profitable and cash-generating business regardless of industry conditions. It is too early to call volumes for 2024, but the drivers in most regions remain strong.

I want to conclude with a few thoughts on 2023 priorities and outlook. As we look at the overall business conditions for 2023, we feel optimistic about our positioning in the industry and are encouraged by an improving supply chain and resilient ag and construction markets. Commodity prices are softening with wheat, bean and corn prices depressed versus this time last year, but many farm input costs are down and farm incomes remain elevated. We see continued strength of our markets, our growers in Brazil and in North America Corn belt. Regardless of the macro backdrop, we are continuing to invest in R&D technology to build and enhance our precision-enabled products.

Customer engagement and retention will sustainably improve as we field automated solutions, enabling near seamless workflow and increased yield and productivity. The Raven integration continues to go well, and we look forward to building on that momentum with our new acquisitions. Results from our margin improvement programs will play an important role in our journey to deliver escalating value to shareholders. Our investments and progress are making us better for our customers, strengthening my conviction that our future is bright.

That concludes our prepared remarks. Caroline will now open the line for questions.

(Operator Instructions) We will take the first question from Daniela Costa from Goldman Sachs.

Just have 2 questions, if possible. The first one sort of surrounding the current -- given all the current credit situation. If you could give some color on how much of the equipment that you're selling, you're currently financing versus third parties and whether you plan to take on maybe more of the risk related to what maybe is not yet financed by you or for some reasons that sort of out of scope? And what could that mean? And the second question, just on your comments on the journey you're making towards precision ag. Can you maybe elaborate on that journey in terms of the inorganic journey? Where are -- where do you think you at the moment in terms of like the ideal product set that, have you got to where you want and now it's more about growing it organically? Do you still miss certain parts that you would like to strengthen and which are those?

Daniela, let me take the first one. So in terms of retail financing, depending on regions and business about between 25% and 45% of what is retail is financed by us. This is actually in a highly competitive market. There are other players they're financing. We may with -- if there's some lower liquidity in the market, we may see an uptick of our penetration, but we don't see this as an issue.

Yes. And as it relates to the tech stack, obviously, as you've heard me say before, I mean, I feel good about the actual precision technology and automation that's currently on our products. And what Raven does, it rapidly accelerates our ability to go faster and do more. Our autonomy is as good as anyone in the industry, but really enhancing the precision suite in our products, offboard on board, all of those things. What the team is doing now, making tremendous progress to make that whole system work better and easier for our customers. It's a journey, and we're -- we've got a ways to go there.

But when we add competencies like Augmenta and Hemisphere, it just allows us to go much, much faster. And the history of Raven, they added these bolt-on acquisitions along their journey as well. So it's not because -- but I do think we have the capability. We've added over 500 engineers to the Raven team. We have the internal capability to do everything we need to do now. There might be opportunities for small acquisitions to enable us to go faster yet again. But I feel good about where Mark and Parag are and their teams are in ensuring that we can deliver value for customers along the way as we get this tech stack build-out complete.

We will take the next question from Michael Feniger from Bank of America.

Scott, could you talk about the cost savings? I know there's the first wave and second wave. When do we think you'll see this run rate savings? You talked about you're already kind of in line of target for your sales margin and EPS, but it doesn't feel like you've actually gone through with some of these savings initiatives that got pushed out. So can you kind of give us an update of where we are in that story right now?

Yes. You actually -- don't help me make it easy to answer that question because we did recommit this morning to the $550 million that will be next year, and most of that actually comes in 2024. Obviously, the significant inflation that we experienced last year and then this year, the beginning of this year, you made some of that hard. But -- the work that we're doing, I talked about the progress the strategic sourcing team is making. Scott Moran and our CBS team are doing tremendous work in the plants. So Derek and his team are driving better solutions, making the products that we design, easier to assemble and source parts for. So it is a holistic approach to cost. And I think the fact that we'll get many hundreds of millions in 2024 to get to that $550 million gives you a little bit of insight into what's to come. But certainly, a lot of this stuff as we see supply chains improve, our lean programs improve our strategic sourcing improve, our designs improve really gives us a lot of confidence that the record margins we delivered this quarter can be beat in the years ahead.

And Scott, just to follow up on that. I mean, obviously, nobody has a crystal ball. There's a huge debate on what 2024 looks like. But with the line of sight you have on your cost savings, do you think you could expand ad margins in a backdrop where units are maybe flattish to even slightly down next year?

Yes.

We will take the next question from Jamie Cook from Credit Suisse.

Congratulations on a nice quarter. I guess just my first question, could you just give a little color -- more color on what you're seeing in Brazil. I think last quarter, you were a little more cautious. It sounds like maybe there's some weakness on the smaller horsepower side but large horsepower seems to be okay. So that would be my first question. And then I'll have a follow-up after that.

Well, the situation in Brazil, just the timing of our earnings call last quarter affected how we looked at that and there was a lot of, for lack of a better term, constipation with the government transition. And we were -- our dealers there were incredibly cautious literally a week after the earnings call, we started to see things turned around. We'd already made the decision to lower production. So it allowed us to reduce dealer inventory in Brazil. And we feel very, very good about where we're positioned now with leaner inventories than anyone else in the industry and a great product lineup and more importantly, a really, really solid team in Brazil to manage that market. So we think Brazil is going to be a decent market this year, not going to grow as much as it did last year, but still a very, very good market for us.

And then I guess just my follow-up question based on what you guys said about the cost savings kicking in, in 2024 and where your margins are today. And related to the last question, Scott, not to put words in your mouth, but it seems like we need to update the Street favorably on a positive basis, increase your targets that you laid out at the Capital Markets Day at some point, just given what you said in the previous question. And so one, confirm that. Obviously, you don't have to tell us what that is today. But my second question is, does the optimism just relate to the farm equipment side and sort of where are you in that process within construction equipment? Is it all ag-driven or where is construction relative to what you would have thought relative to your capital market targets?

Yes. Well, we did put a comment in our prepared remarks about how we expected to get to some of those 2 targets, and we knew it was just a matter of time before that question. So thanks for getting us out of the way early. We do feel good. The markets -- remember, what we had anticipated at the time of Capital Markets Day, and it went over like a lead balloon was that markets would be relatively flat in 2024. What we've seen is the markets have just been better for us. And as you can see, we're taking advantage of that. And now as we sit here, the positive momentum that we've had looks like it's going to continue from a market perspective, and again, not at the same levels, but still the overall fundamentals are good.

As we talked about my last question. We're putting just tremendous energy and how to make the margin expansion opportunity as we serve our customers better, how do we deliver better margins along the way. And I think with that backdrop, the updated guidance will be reasonably good, but we would expect that to happen about a year from now. We're not -- we haven't put a date out there yet, but we want to get into 2024, have a better understanding of what that can be. And I think we'd update our long-term guidance sometime in the first half of 2024.

Okay. And then just a follow-up, ag versus construction? Do you want to comment there? Do you feel better on ag versus construction? Or is it sort of equal?

It's sort of equal. Obviously, I think the ag cycle kind of exempts us a little bit from economics and construction doesn't have that same exemption. But what we're seeing with really, really good innovation, the Sampierana acquisition is helping. But what I -- the optimism I saw from our team and our dealers at CONEXPO gives me confidence that our construction business is going to do well for the remainder of this year and is positioned well to do well after that. But again, a little bit more susceptible to the overall economic roles if the economy tips over than ag.

We will take the next question from Steven Fisher from UBS.

Just curious how you're thinking about margins later in the year. It sounds like the price is going to moderate, but your costs will also moderate lots of different mix puts and takes there. So curious how do you see that netting out relative to Q1. I guess I'm mostly thinking about the ag side, but curious on construction of well, of course.

Well, Steve, we will have variability over the year, quarter-over-quarter, as we always have, but we are confident that year-over-year, for the full year, we can increase our margins as we plan to do. So of course, pricing, as we have anticipated will start of fade in terms of year-over-year comparison, but so will cost -- and we are putting all these costs -- initiated cost reduction initiatives, including in SG&A that will come to fruition in the second part of the year.

So could we still see some higher margins later in the year relative to the first quarter in ag?

We could, yes. And again, for the full year, we expect margins to be better than they were last year.

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

Well, I got to be really careful as I answer this because I've got a few dealers that will call me immediately after the call if I say we're not committed to giving them the products they need. So in many markets, especially cash crop around the world, they just need more inventory. It's too low. And I've -- what I've told our dealers is we do not want to get back to the 2019, 2018 levels, where they're slightly over what they would like to have. We want to keep dealers relatively lean. We're not perfect at that. I mean, as you look at our -- we're lowering production of the lower horsepower ag equipment because we didn't slow down soon enough. So we're going to correct that very, very quickly.

But overall, our -- many of our cash crop markets are still too low on inventory, and we're ramping up production to try to meet those other parts of the market, really low horsepower and in some parts of Europe, we're trying to make sure that we pull back so we get their inventories in a better position. But I personally and we as a company do not want to get to historical levels. We thought it was probably a little bit too high, and we'd like to keep the DSO a little bit lower.

We will take the next question from Tami Zakaria from JPMorgan.

So my first question is, can you give us some color on market share trends for large ag by region for this quarter or maybe over the last 12 months, if that's a better gate of the trend, where you saw the most gains where you saw some relative weakness?

Yes. We said it all of last year, and it's really true now as well. Market share is based on who can build it in the large ag and cash crop segment. I hate to say it, but we're still ramping up production of high horsepower tractors, and that's not helping us. Our combined performance is exceptionally good. We have industry-leading products, and that gives us an opportunity to gain share in most markets. I think we're -- in Europe is spotty for us. There are some markets where we're doing better than others. I think overall, we're probably down a little bit in market share and looking forward to turning that around in the second half. But generally speaking, I think our overall opportunity for market share is going to improve quarter-over-quarter, year-over-year as we get a return on the investments we're making.

Got it. That's very helpful. And then my second question is, can you help us understand the bridge to the revenue guidance raise? How much of that is lower FX headwind versus higher organic sales growth outlook for the rest of the year? It seems like it's mostly driven by FX, but just curious how you thought about it.

Compared to the first quarter, there's going to be -- yes, FX is going to be better and volumes and price impact will be a little bit lower than what we had in the first quarter from what we see.

We will take the next question from Larry De Maria from William.

Scott, you mentioned new lift prices coming up at a month, obviously, opening up 24 order boards. Market seems healthy, though commodity prices have been volatile, especially in the forward curve. Just curious how you're thinking first on list pricing, maybe even in general terms, is this a breather year or we can continue to push pricing into next year? And also with that commodity curve, what do you hear and what are you seeing in terms of any incremental caution? Or is it still sort of all systems go from what your hardens field?

Yes. I think with pricing, what we're seeing after a couple of years of unprecedented price increases, we are expecting -- we haven't finalized it yet, so I can't say, but pricing is going to normalize. And what does normalized mean 2%, 3% based on features. But generally speaking, we expect '24 pricing and maybe the next couple of years to be in that normal range. And you -- it was a little bit soft, so I didn't catch the second part of your question. If you could repeat that?

I was just talking about the forward curve in commodity is obviously lower, right? I'm just curious about how you're seeing and what you're hearing in the field from dealers. Is there any incremental cautiousness creeping up? Or is it all systems sort of go still at this point?

The general feedback that I'm getting is, it's all systems go with a slight -- I mean, senate produce report came out yesterday, some farmer sentiments improving, the overall setup for soft commodities is relatively good. Overall, if the dollar movement also has an inverse relationship with commodity prices. So generally speaking, I think we expect, and it's part of the help we're getting -- commodity prices are going to moderate at a level that we think is above historical norms, which helps farm income and ultimately helps us. We have to manage that as well because we are expecting, as you've seen, steels come down tremendously. We're seeing shipping rates come down dramatically. So we kind of need to play both sides of it and keep the soft commodities relatively high and the commodities that affect our input cost relatively low. And right now, that seems to be working for us.

We will take the next question from Marta Bruska from Berenberg.

My question is on the margin, but asked several times and was very helpful answer. So I would like to just ask if you could please comment on the decline in the under 140 horsepower tractors. Is that driven by the dairy with milk margins coming under personnel or rather that comes from the general macroeconomic situation as under 140 at broad category, which would include also the under 40 horsepower tractors that are declining to a strong year.

Yes. The decline in the low horsepower market is really -- it's related to the very high sales that happened during the pandemic and post early years after the pandemic. So, I think it's just somewhat of a return to normal in that market. But unfortunately, what happens is when, not just us, the industry got caught a little bit surprised on how quickly it turns out dealer inventory is a little bit higher. So what you're seeing is higher promotion rates there and all of us working through that situation.

We will take the next question from David Raso from Evercore ISI.

One question on pricing and one on the commentary around 24. First, just indulge me for a second. If you pull pricing out of ag revenues for this quarter and last quarter, it suggests the revenues were down sequentially in a 22%, but then the pricing gains fell 55% sequentially. And that same kind of math going back a few quarters. The relationship has been positive, right, meaning pricing gains up sequentially or better sequentially than what was happening on revenues ex pricing. Was there a certain mix issue in the first quarter? Why would the pricing have slowed that much relative to what we've been seeing and relative to the, let's call it, volume ex price sequentially down? Was something unique in the mix?

Well, the many mixed components, the first quarter is a smaller quarter in terms of sales. We have also relatively slower sales in South America in the first quarter, and we talk about it, and it's mainly because of the stocking of the network that we have been doing. But we're pretty happy about how the price play out in the first quarter actually. And if you compare it -- I mean if you think we started growing pricing in the second part of 2021. And as you said, we have sequentially price increase quarter-over-quarter. And we also have been very clear that we don't expect this to continue at this pace forever, but we need to have cost reductions in the industry, in the system and the supply chain before we stop increasing pricing.

No, I appreciate that, but I think by capturing volume ex -- revenue ex price, we're sort of just looking at it sequentially, why such a larger sequential slowdown in price than in, let's call it, volume. It's just the gap is the gaps in positive for multiple quarters. And obviously, the costs are coming down, but it's just a very unique gap there, down 22 price revenue ex price and down 55% on price.

Let's look at what we focus at, the price cost relationship, right? And that has actually been better in the first quarter than it was in the fourth quarter.

I agree with that (inaudible) come down in price flows as much as.

No, I get it. But that's -- I mean, that's what's relevant for us is the fact that price cost is -- continue to be positive and is actually sequentially better to the -- compared to the fourth quarter. Then as you say, there's many mix components quarter-over-quarter. And again, the first quarter is a relatively small quarter. So any variances there probably is a sort of amplify.

No, that's fair. And on the 24 comments, encouraging your comments about margins for '24 sort of not requiring growth for volume. Can you give us a little better understanding of when you -- I'm not trying to ask for '24 guide on incremental margins. But when you think of a smoother supply chain, obviously, no labor issues assumed, when you think of the cost improvement, if we did give you volume up, I'm just curious how you're thinking about incremental margins relative to what we've seen of late, the kind of more low 20s. How would you think about a 24%, if you did have a little volume help? And then secondly, on 24, any order books extending into '24 right now that you can at least give us a little early color?

Well, let's tackle the margin before I don't answer your second question. I'll tell you about the margins. situation. It was -- it's been really a brutal 2 years with supply chain, a debacle in the supply chain, some labor issues affecting our ability to produce. And because we were fighting those, we were not able to get as much traction with our margin improvement opportunities as we expected. So what we're seeing now is those teams are starting to really, really get those projects underway. And they don't hit immediately. So we're going to see the ramp throughout the year, which is why we guided better margins for the year.

But as it gets into '24, what we see is an opportunity really for, with strategic sourcing is going to be better. Our lean programs are going to be better. Our product portfolio is going to be better. And don't forget, we do get a margin boost from our tech stack improvements, and that stuff is a gift that's going to keep on giving for a while. So I don't think it's going to take -- 26.2% gross margin for ag is pretty darn good. I'm sure there's room for us to make it better. But from an industry perspective, it's reasonably good. And what we're committing to is that's not as good as we can do, and we see an opportunity for improvement. So -- and construction as well. I think construction is going to continue to surprise you with their ability to drive margin expansion. And combined together, that's a pretty good story for us.

In the order book commentary? Or is that a no answer?

That's a no answer.

We will take the next question from Mircea Dobre from Baird.

This is -- Scott, I wanted to get you to talk a little bit about Augmenta and Hemisphere. Curious how you're looking to integrate this product in your equipment and kind of what the goal is here, how these folks are going to be working with the Raven team. And maybe you can update us a little bit on the progress that you're making internally from a text to stack perspective, considering that you've changed your relationship with Trimble. So I'm curious, your engineering folks, what are they doing to sort of address that in the near term? And how you're thinking about the next, call it, 18 to 24 months on that?

First of all, we're thrilled to welcome the Augmented team to the portfolio. They -- what they give us is see and act technology at a much more value-oriented place than what other people in the industry offer. I've actually been in the field and seen the product work, and it's really, really encouraging. So, farmers can get into the augmented program and get sand spray opportunities at a much, much lower cost than anything else available in the industry. And that is encouraging. It's why we made the initial investment when we were a minority partner and why we ultimately brought them to acquire. Now we're still with Raven's capability doing a lot more work to advance our (inaudible) Act capabilities. But we're just better with Augmenta. And they will fold into the Raven team and John Preheim, the team there will really advance what they can do for us from an automation and an autonomy perspective that gets better with Augmenta.

With Hemisphere, we've had a really, really strong relationship with Trimble and Novatel over the years. So we know that there are other solutions out there. But what it doesn't -- when you have to buy it from a partner, you don't have the ability to innovate and integrate as fast as you would like. And so what Hemisphere gives us is a really, really good team with a strong manufacturing base, which has surprised us a little bit. But the opportunity just to go faster. And as I talk to dealers and customers, their request is that we go faster. And this opportunity with both of these businesses just allows us to do that. But that said, the work that -- the benefit that we're getting from Raven and then the team there have helped us bring on an additional 500 engineers just gives us so much more software capability.

Now, I hope I'm clear that we're nowhere near delivering for customers what we will and what we expect to give, and that's coming, and it's going to be incremental benefits through this year and into next year. But as I said in the prepared remarks, it's really 25 where we feel like we get to true extremely great technology and products for our customers. But we're encouraged where we are on the path and how we're progressing there. And as it relates to Trimble, that was -- they made the decision to exit the relationship. And Rob and I are good friends, and we're managing through that. So both of us can have a positive future going forward. Really, with Raven, we have the ability to take over that work and really not miss a beat for our customers, and that's what we're striving to do.

Got it. My follow-up is on construction. I'm curious to get an update from you on what you're seeing in terms of orders, especially on the heavy construction side backlog maybe. And one of the things that kind of puzzles me a bit is your commentary seems to be positive in the press release and slides. But if I'm looking at your Slide 16 on your outlook for both light and heavy construction, it's basically down across products, across geographies. So I'm trying to square a relatively positive commentary with the industry outlook that you provided there.

Yes. Well, part of -- there's 2 things that are with -- that are helping us in construction. First of all, dealer inventories are low. And secondly, we've introduced a tremendous amount of new products. And as I mentioned in my earlier remarks, we're very careful about managing dealer inventory, but we also need to get these new products out there to our dealer network, and that's allowing us to put in something -- now that's from a kind of an input -- internal perspective. If you look at a market perspective, housing is actually a little more resilient than I expected, which doesn't make sense to me from an economic perspective. But nonetheless, housing is a little bit better than we thought. And I don't like the program, but the inflation Reduction Act is actually putting money into infrastructure that is going to bleed out and help us and others over time. So I think that's giving us a little bit more encouragement from a construction side than we might otherwise have.

So you're saying your outlook is too conservative then on this slide?

I very specifically didn't say that. I'm just saying, overall, is us -- I mean we're not on an island saying this. It's not going to be a great year for construction, but we're going to do a little bit better because of those opportunities that I spoke of.

We will take the next question from Tim Thein from Citi.

Just the first is a clarification. Oddone, on the comment earlier about the revenue guidance change, you mentioned FX, obviously, was a positive. But did you say that was offset by lower volumes and pricing...

No, no, no, no. I said --. Sorry. I'd say that relative to Q1 the growth driven by volume and price needs to be a little bit lower relative to the Q1 growth. Last year, volume, price and FX...

Right. Okay, you were clear on that earlier. Okay. I just want to make sure I heard that. And then on the -- Scott, you mentioned back to the market share comment, thinking from a high horsepower tractor standpoint, where are you on the -- in terms of the progress of getting ramped back up in Racine, and how does that play into -- assuming you're not back to 100%, as the year progresses, does that provide a more of a mix tailwind for you as you presumably output there. I'm guessing is increasing as we go through the year, but maybe just a comment on that and how meaningful that could be?

Yes. I probably won't comment on how meaningful it could be. But I will tell you, we had our Board meeting earlier this week in Racine. So I got a chance to be on the floor and see the work that they're doing. We're ramping up, but by no means where we need -- we want to be or where our customers need us to be, there is a tremendous backlog globally for our high horsepower tractors. And the team is working really, really hard. I was encouraged by what I saw, but there's a lot of work to do there. And I'm confident that week after week, month after month, we're going to continue to produce more for the racing plant, and that will obviously be a benefit to our customers and to our financials as well. The high horsepower market -- cash crop market continues to be very strong. And I think our ability to continue to produce for that will be helpful for us.

We will take the next question from Dillon Cumming from Morgan Stanley.

I wanted to see if you could put a finer point on some of the comments around the lean initiatives and the sourcing savings. Again, so we get to a point, call it, middle of next year where supply chain is a lot better price costs in an issue. Where do you see the greatest relative opportunity between the 2 segments in terms of how impactful the savings opportunities, the lean initiatives...

Yes. Well, obviously, just by a size perspective, ag is going to get much more of the benefit. But Stefano and his team have already done a lot of lean work in Wichita. We're seeing actually the margins they delivered in the first quarter. And I think you'll see as the year plays out, shows a little bit of the benefit that we can get as we drive lean throughout the system. But obviously, because of the size and nature of ag, we get more savings there. We're going to get meaningful and consistent savings from lean throughout. But I think a bigger nut comes from the strategic sourcing.

And obviously, I don't get lucky very often, but that strategic sourcing is a little bit -- it doesn't happen right away. It's not an immediate negotiation. So we're actually going to be doing the negotiations later this year. And I think as we do that, we're going to be entering, and it's -- this is a multi-wave program. So we're in the first wave of what's likely to be 4 or 5. But that first wave of negotiations is going to come when overall inflation is better, commodity is going to be supply chain commodities are going to be down. So I think we'll be in a good position to get meaningful savings as we work through that. So we're encouraged by both the lean and sourcing initiatives, what they mean in '23, but really, really what they mean in '24 and beyond.

We will take our final question from Kristen Owen from Oppenheimer.

I'll be brief here. One is just a clarification again on the CE margins. Obviously, a very strong pricing. But do I understand correctly, there was still a fair amount of strike drag there. And just any commentary that you have around the regional exits and the impact that, that may have had on margins in the segment?

Yes, the Burlington plant is also like Racine is ramping up. The construction team did take advantage to get some alternative sourcing done. So that also helped from a margin perspective. But I think both that will benefit the year. The exits of China and Russia, obviously, not helpful to us, but we've got those in the rearview mirror and really didn't hurt us much from a margin perspective in the quarter. But again, Stefano and his team have really done a lot of work with the portfolio, and we're encouraged what we'll be able to talk about next quarter when we have the call.

Okay. That's helpful. I think I was maybe assuming that perhaps those exits, at least from China might be accretive to margins, not necessarily dilutive. Before you respond to that, just I want to fit my second question in the interest of time. It's not a topic that we talk about very often, I feel like on these calls, but can you just give us an update on aftermarket and parts? What percentage of revenue is that today? How much of that is Raven? And just how to think about the aftermarket business, specifically now that you're integrating more of these new acquisitions?

There's a whole lot there. So let's go see if I can see how good my memory is. First of all, China was -- the reason we exited because we weren't very good. And so the margin -- it wasn't a big enough business to impact our margins negatively before or positively going forward. So that's kind of wash. Aftermarket business is really, really good for us. Our team does a really, really nice job of managing that. We finally got our inventories up a little bit, so we can serve our customers better there. Overall, it's about 18% or 20% of our business.

And Raven was an aftermarket business. So they're really, really good at it. And as we ramp up our capability with our tech stack, a significant portion of that is in aftermarket. And obviously, what we're most excited about is the integrated solutions that we can put in with the production, but there's a very, very notable opportunity for growth, share gains and margin expansion with the aftermarket from Raven and what we build out there.

There's no further questions. So I'll hand it back over to your host to conclude today's conference.

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

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