Obviously, it’s the beginning of the year. We’ll — we’ve indicated where there will be some puts and takes. But obviously, performance this year has been exceptional. Our aim is to continue to drive to that level of performance. That’s what we’re focused on. And I think that’s what the organization is focused on as well.
Operator: And your next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.
Nicole DeBlase: Yeah. Thanks, good morning, guys.
Jim Umpleby: Good morning, Nicole.
Nicole DeBlase: Just a few on parts. So if you could elaborate on the parts decline that you saw in resource. Any color on the magnitude of parts growth that you might expect for ’24? And then how would you characterize parts inventory levels in the dealer network right now? Thank you.
Jim Umpleby: Yeah. So as we talked about, I mentioned part of the decline in part sales in Resource Industries was relating to dealer buying patents. We don’t include — obviously, we’re talking about dealer inventory, that’s machines and engines. It’s not actually parts. And what we did see as availability improved as we went through 2023, we did see dealers reduce their inventory a little bit. It’s probably more at normalized levels now. Obviously, they’ll continue to monitor it. They make their independent decisions. And as we always remind you, it’s very complex, with over 150 dealers globally and a large number of parts that they order, but they obviously try and optimize their network. Next year, we do expect a benefit from services revenue growth.
Obviously, if we are to achieve our target, we would hope for a little bit of an acceleration versus what we saw in 2023. Obviously, that does depend a little bit on what happens with the dealers and buying patents. And on resources, given the amount of truck utilization, we do expect services revenues to improve as we go through 2024 based on the need for rebuilds, particularly of the large mining trucks. So that’s where we are on services.
Operator: And your next question comes from Mig Dobre with Baird. Your line is open.
Mig Dobre: Yes. Thank you. Thank you for the question. Going back to construction, I’m curious to get your thoughts in terms of how you think about margin here. And it sounds like you’re guiding Q1 flat margin year-over-year, which would be tremendous given the comp there. Are margins sustainable at this level? Is there any insight you can give us as to how you see the year progressing beyond Q1?
Andrew Bonfield: Yeah, there’s going to be a couple of things, Mig, which are going to happen as we go through 2024. The one that’s a little bit hard to predict at the moment is any potential mix impact. As we said, when we were going through 2023, we biased our production towards machines with the highest levels of OPACC. That’s what customers wanted as well. So met customer demand, particularly those products. We expect a more normal mix product. That may have some impact on margins as we go through the year. Obviously, it’s a little bit difficult to predict to that at this stage, given that we’re at the beginning of the year, but that potentially is the one. We will continue to invest in the business. We are continuing to drive services and services growth.
As you know, that’s a possible upside potential, particularly in construction, where we have the largest opportunity. So those are the sort of big things or big buckets I would look at as we think through 2024. And both of those, one will be slightly negative and the other one possibly will be slightly more positive. So those are the sort of puts and takes at the moment.
Operator: And your next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Jerry Revich: Yes. Hi, good morning, everyone.
Jim Umpleby: Good morning, Jerry.
Andrew Bonfield: Good morning, Jerry.
Jerry Revich: Jim, Andrew, I’m wondering if you could just say more about the increase to the free cash flow guidance, a bigger increase there than on the margin framework. And we’re a couple of years away, where you folks in 2020 were below the $5 billion number. So can you just talk about what’s playing out better than you folks expected to drive the much stronger outlook for free cash flow conversion? And obviously, we’re seeing a little performance here as well, but I’m wondering if you could just expand on the comments on the confidence through the cycle?
Jim Umpleby: Well, Jerry, you recall when we launched our strategy in 2017, we really focused very heavily on OPACC, operating profit after capital charge. And we’re really challenging our teams to work to ensure that we get a return for every dollar of capital that we invest. And we’ve also worked hard to reduce our structural costs. And again, with OPACC as our measure, that obviously helps us produce more cash. Again, we demonstrated the ability to produce higher free cash flows. If I remember the numbers correctly, between 2019 and 2022, we produced $5 billion to $6 billion of free cash flow. And then in 2020, we had a 22% decline in our top line. And even that year, even during the COVID year, when our top line dropped more than 20%, we still produced $3 billion of free cash flow. So again, we have the whole organization based on OPACC, and that’s working all those levers every single day, and that helps us drive increased free cash flow.
Andrew Bonfield: And that is part of the reason why we’ve upped the bottom end of the range because we are now more confident that, that OPACC will flow through to the bottom line. Obviously, with margins, the issue you have there is in a period of time where revenues decline, margins become an impact of a function of what happens from a gross margin perspective. Actually on free cash flow, we can generate more free cash flow by actually using up some of our working capital and bringing that back through. And that’s one of the things we expect as well and if that happens.
Jim Umpleby: I’m really glad you asked the question. I think, honestly, that’s one thing that maybe is underappreciated about our performance, it’s just our ability to produce cash and the way we really transformed the business over the last few years to produce higher free cash flows more consistently.
Operator: And your next question comes from Angel Castillo with Morgan Stanley. Your line is open.
Angel Castillo: Hi, good morning, and thanks for taking my question. Just wanted to maybe continue on that note. I wanted to understand a little bit maybe the reasoning or the thought process around not lowering the kind of low end of your operating profit margin range. You talked about the gross margin and you mentioned this in the prior response, but gross margin dynamic, maybe on volumes potentially also leading to a little bit more challenged, lower end of the range. So maybe what gives you confidence in keeping that rather than lowering that as well? And how do you kind of think about a wider range overall through the cycle rather than kind of a step higher?
Andrew Bonfield: Yeah. So I mean, one of the things you will have seen over the last couple of years is the improvement in gross margins. That obviously — effectively with the progressive margin range, what happens obviously is, the leverage is what benefits us as we go through, which gives us more confidence now that there’s more opportunity from a leverage perspective to drive the top end of the range. But that obviously means on a declining volume basis, there’s more pressure. So that really was the reason why we kept the bottom end of the range as it was. Interestingly, if you go back to the previous ranges, this is within — the top end of the range now is virtually within a very, very marginal difference to the old margin target ranges that we had before.
Operator: And your next question comes from Chad Dillard with Bernstein. Your line is open.
Chad Dillard: Hi, good morning, guys.
Jim Umpleby: Good morning, Chad.
Andrew Bonfield: Good morning, Chad.
Chad Dillard: So on the — on price cost, so I think in your full year guide, you talked about price modestly exceeding manufacturing costs for the full year. But then also, you talk about, I guess, some carryover benefit in the first part. So just trying to understand the cadence on that. And just to confirm, do you expect price cost to be positive for each quarter through the balance of the year?
Andrew Bonfield: Yeah. So I think what we guided to is that we expect price to exceed manufacturing costs for the full year. We expect price to be positive in the first half of the year, more positive in the first half of the year because of carryover pricing. Obviously, there will be some other factors that go through there. Geographic mix, for example, was positive this year. That may not be as positive as we go through the second part of the year. So those are the sort of mix things that can happen. At this stage, we’re not giving you a prediction — a firm prediction. We know what we think overall for the full year, but most of that price benefit will come through in the first half.
Operator: And your next question comes from Steve Volkmann with Jefferies. Your line is open.
