CNH Industrial N.V. (NYSE:CNHI) Q4 2023 Earnings Call Transcript

CNH Industrial N.V. (NYSE:CNHI) Q4 2023 Earnings Call Transcript February 14, 2024

CNH Industrial N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Jason Omerza: Thank you, Ben, and good morning, everyone. We would like to welcome you to the webcast and conference call for CNH Industrial’s fourth quarter and full year results for the period ending December 31, 2023. This call is being broadcast live on our website and is copyrighted by CNH. Any other use recording or transmission of any portion of this broadcast without the express written consent of CNH is strictly prohibited. Hosting today’s call are CNH CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH website. Please note that any forward-looking statements that we might make during today’s call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material.

Additional information pertaining to factors that could cause actual results to differ materially is contained in the company’s most recent annual report on Form 10-K as well as other periodic reports and filings with the U.S. Securities and Exchange Commission. The company presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable U.S. GAAP financial measures is included in the presentation material. I will now turn the call over to Scott.

Scott Wine : Thank you, Jason, and thanks, everyone, for joining our call. Our 2023 Fourth quarter and full year results reflect the CNH team’s resilience and dedication to driving customer-inspired innovation lean operations and sharp commercial execution. With purpose, pace and positive changes progressing throughout the organization, the results are evident in our margin progression. Our Agriculture and Construction segments both achieved record EBIT margins for the year as they balance continued price discipline with aggressive cost management. We are improving through-cycle margins to be more profitable regardless of industry strength and our ag business demonstrated that in the fourth quarter. 2023 was our second full year as a pure-play agriculture and construction company, and we again achieved record revenue and net income.

I’m quite proud of the way the team addressed a challenging demand environment, notably in South America, where we are benefiting from our long-term focus on customer and dealer satisfaction. Our Brazilian dealers gave us early warnings about farmers postponing purchases, allowing tighter management of dealer inventories and demonstrating our commitment to their success, not just ours. Since the demerger, we have been fully able to fund our core businesses and allocate capital more efficiently, evidenced by our increased R&D and CapEx investments. The benefits from our intensified focus on product development are already visible as we launch 72 new products in 2023. Many of these fully integrated with in-house tech solutions garnering positive feedback from dealers and customers.

This helped push our sales contribution from precision tech components over $1 billion in 2023 as planned, and that is just the beginning. We have considerably more tech-enabled products coming in the quarters and years ahead. Fourth quarter consolidated revenues were down 2% and industrial net sales declined 5% as South American markets remain soft, and we underproduced low-horsepower tractors in North America. Despite the drop in sales, we expanded industrial EBIT margin by almost a full percentage point, with adjusted net income growing 15%. Adjusted EPS for the quarter was $0.42, up $0.06 from last year. As Oddone will highlight, we are beginning to see the benefits of our enhanced focus on costs. Our full year earnings results were equally impressive.

Industrial net sales were only up 3% over the prior year, but EBIT rose 12% as price realization in the first half was supplemented by the accelerating impact of our cost actions, EBIT margin grew 110 basis points to 12.4%. Our CNH Business System, or CBS, is leveraging our deep and talented global team to streamline our operations and businesses. Adjusted EPS was $1.70, an increase of over $0.24 since 2022. Recall that $1.70 was our original 2024 target, so we hit that a year early. Derek Neilson and his agriculture team continued to execute extremely well last quarter, skillfully managing costs while confronting declining demand and elevated dealer inventories. Margin expansion in such an environment is tough, and I’m proud of what this team has accomplished.

Stefano Pampalone and its construction team also did an excellent job. Construction margins were up 230 basis points in the quarter and 260 for the full year as they improve dealer performance, product innovation and cost efficiency. We decreased ag dealer inventory sequentially but remained up more than 5% year-over-year. Our needed increase in North American inventories of combines and high horsepower tractors outpaced proactive reductions in South America and in low horsepower tractor inventories in North America. We have some work to do in product-specific dealer inventory levels, particularly in Europe, so we will maintain our retail execution focus and appropriately manage shipments. I want to clearly state that retail sales for both segments were ahead of the industry in the quarter and the full year.

Our dealer’s 2023 retail performance was impressive, and we appreciate their efforts. SG&A expenses declined year-over-year in the fourth quarter. We expect this trend to continue for every quarter in 2024, driven by our restructuring program, which is well underway. We reached an important and exciting milestone in our strategic sourcing program as we begin supplier selection for the first wave of components. As we look at our strategic priorities, I would like to start with customer-inspired innovation. We mentioned last quarter that CNH won the only gold metal at Agritechnica for the New Holland CR11, our next-generation flagship combines. I want to quickly highlight how it exemplifies the integration of world-class technology with our great iron.

This machine offers a full suite of benefits requested by our customers, providing much greater productivity and yield for the farmer. Real-time machine learning, automated predictive adjustments, intelligent fuel management and unique sensors to understand the crop’s nutrient composition, are just a few of the combined extraordinary features. The CR11, with its counterpart, the new Case IH AF11 will cement our standing as the world’s foremost large combine manufacturer and will especially help us improve our position in North America. These beasts will be in the field around the world this year for intensive testing and demonstrations with order books opening later this year for 2025 deliveries. CNH remains committed to adding value and creating profitable growth for its customers and shareholders through sustainability.

We continue to build on our legacy of sustainability performance as evidenced by the recognitions we receive. For example, replacing the top 5% of over 9,000 companies rated in S&P’s Global Corporate Sustainability Assessment and took second place overall in the Dow Jones World Index in the machinery and electric component category. Like our farmers around the world, CNH maintained its long-standing commitment to protecting the environment and we are excited about our customer adoption of our first-to-market innovations that enhance customer productivity while improving fuel and emission savings. Due to the continued supply disruptions in 2022, we purposely delayed much of our $550 million cost reduction program. But with solid improvements in 2023, we remain confident of reaching that cumulative savings target this year.

As a reminder, we are targeting three main drivers: reducing logistics costs, lean manufacturing operations through CBS and supply chain savings, including our strategic sourcing program. With a solid foundation to build upon, CBS has been enthusiastically embraced around the company as we engage our employees to create more efficient processes using lean principles and Kaizen events. Strategic sourcing is ramping up, and we will begin to contribute in 2024 with accelerating savings for many quarters to come. For our SG&A restructuring, a 10% to 15% reduction translates to about $160 million to $240 million of savings. We are well underway with this difficult work and expect to complete this effort in the first half of 2024. We are also zero-based budgeting our non-labor SG&A with an eye toward rightsizing some of our service agreements and expanding support operations in low-cost countries.

Together, we expect these SG&A initiatives to save about $140 million to $180 million in 2024 with the remainder carried over into 2025. I will now turn the call over to Oddone to take us through the financial results.

Oddone Incisa : Thank you, Scott, and good morning, good afternoon to everyone on the call. Fourth quarter industrial net sales were down 5% year-over-year to $6 billion. The decline was mostly due to lower sales in agriculture equipment dealers, especially in South America. In Q4 of 2022, we have also seen a strong growth of dealer inventories in low horsepower tractors in North America, but those reduced significantly in the fourth quarter of 2023 as we underproduce retail by almost 40% in this product category during the second half of the year. For the full year, net sales were $2.1 billion, up 3% from 2022, mainly driven by price realization in the first half offsetting the lower unit sales in the full year. Our profits increased year-over-year in every single quarter despite a slow in sales.

Adjusted net income was $2.3 billion for the year with an adjusted diluted EPS of $1.70, up $0.24 versus 2022. The negative impact from the Argentine peso devaluation and the resulting loss in value from our cash holdings was about $0.04 of both the adjusted and the unadjusted EPS. Q4 industrial free cash flow was $1.6 million. Full year free cash flow was $1.2 billion at the top of the most recent guidance range but down versus the previous year due to our effort to manage channel inventory. Industrial activities ended the year almost net debt-free. In agriculture, the net sales decrease of 8% in the quarter was driven by lower industry demand, especially in South America for all product categories and for combines in North America and EMEA.

Full year net sales were up 1%, driven mainly by higher price utilization in North America, offset by the unfavorable volume and mix, mostly in South America. As we see cost reduction accelerating in our production system, we improved our gross margin in both the quarter and the full year, closing 2023 at 25.5%, up 170 basis points from 2022. Q4 EBIT and EBIT margin also benefited from [$14 million] of lower SG&A expenses. The full year adjusted EBIT increase of 1.4 percentage points was driven by favorable price over cost and higher JV income, which you’ll find in the FX and other category, more than offsetting the adverse volume and mix in the second half of the year. Turning to construction. Net sales for Q4 were up 9% year-over-year, mostly due to price realization and higher volumes in North America, partially offset by lower volumes in EMEA and South America.

Full year sales were up 10% to $3.9 billion, driven by the strength of North America demand and positive price realization. Gross margins increased by 2.3 percentage points in 2023 to 15.6% from favorable price over cost. Q4 adjusted EBIT also benefited from lower SG&A expenses, resulting in a 5.8% EBIT margin. The full year margin close to an all-time high of 6.1%, up to 160 basis points, substantially driven by the price of our product cost relationship. For Financial Services, net income in the fourth quarter was [$113 million], a 50% increase compared to Q4 2022. The sharp improvement was mostly driven by higher receivables portfolio across regions, better margins and lower risk costs, only partially offset by a higher effective tax rate for the segment.

Retail originations in the quarter were $3.4 billion, up $0.5 billion compared to the same period of 2022 as we are capturing a higher percentage of our end customer equipment financing needs. The managed portfolio at year-end was nearly $29 billion, up over $5 billion compared to the prior year. We have been able to raise capital efficiently and affordably throughout the year to fund our credit operations. Financial Services profitability ratios have also improved year-over-year, and delinquencies remain at a very low level, even slightly higher than in 2022. This reflects the solid nature of agriculture equipment financing. Moving to our capital allocation priorities. At the 2022 Capital Market Day, we announced a $4.4 billion combined R&D and CapEx spending over ’22 to 2024.

Almost double what we spent in ag construction in the previous three years, as we were no longer required to fund the on-highway capital needs of the larger CNH industrial. In the first two years of the plan, we spent $3 billion, reflecting increased activity levels and some inflation. We remain committed to invest in our business to fuel our profitable growth and we’ll spend around $1.4 billion to $1.5 billion in 2024 between R&D and CapEx. We are confident the products, technology and services that we’re bringing to the market by virtue of the spending will ensure a better financial performance for the company and more importantly, higher productivity for our customers. Our solid cash generation and healthy balance sheet are helping us improve our investment-grade credit rating.

And last November, as S&P raised by one notch our rating to BBB+ with stable outlook. In 2023, we returned about $1.2 billion to shareholders through dividends and share repurchases. As you know, in November, we launched a $1 billion share buyback program in conjunction with our move to a single listing in New York with a target completion by March 1. To date, we have purchased about $935 million worth of shares between Milan and New York. And so we will likely complete the current program by the end of this month. The Board has authorized a new $500 million program share repurchase program that we will start at the end of this year. We also expect that the dividend distribution, consistent with our dividend policies and reflective of the higher net income achieved in 2023 will be approved by our shareholder meeting.

Finally, we will continue to seek opportunities to improve our product offerings and advance our tax to M&A, including through our CNH [indiscernible]. Before turning back to Scott with a broader industry and company outlook, I would like to provide you with some details regarding our 2024 financial assumptions. Net price realization is expected to be between flat and 2% depending on the product and in the region. On average, for all products and regions, pricing will be around 1%. Again, we expect to spend between $1.4 billion and $1.5 billion on combined R&D and CapEx in 2024, with R&D expenses about flat year-over-year at around $1 billion and CapEx between $400 million and $500 million. Corporate expenses or what we call unallocated and other industrial activities are expected to be about flat year-over-year in absolute dollar terms.

At the company level, the adjusted effective tax rate would be in the range of 25% to 27%, similar to 2023. The diluted share count is estimated t about $1.25 billion, factoring in the impact of our current buyback program. I will now turn it back to Scott.

Scott Wine : Thank you, Oddone. As we mentioned last quarter, we expect agriculture retail demand to be lower in 2024. So commodity prices have declined, driving year-over-year U.S. net farm income down to or even possibly below the 20-year average. In aggregate, considering our key markets and product offerings, we expect industry retail demand to be down 10% to 15% in 2024. We forecast CNH’s ag sales to be down between 8% and 12%. We do have pockets of elevated inventory in North America and Europe to address, which will impact first half sales volumes and pricing. Because of our early actions to manage dealer inventory in South America in 2023, we have relatively less work to do there. We are targeting ag EBIT margins between 14% and 15%.

And as our cost reduction programs help offset lower volume and more of our factory fit precision products come in-house for our customers. It is important to recognize that we are building this margin resiliency while continuing to fully fund our tech journey. In construction, we expect high interest rates to soften both residential and commercial end markets in North America and Europe, partially offset by U.S. infrastructure spending. In South America, construction markets are projected to be flattish, following a marked decline there in 2023. In aggregate for our markets and products, we anticipate construction equipment industry retail demand to be down about 10% in 2024. CNH construction sales were, therefore, expected to be down in the range of 7% to 11% year-over-year.

2023 sales included dealer stocking of an atypically large number of new construction products which will not repeat to the same level in 2024. Our EBIT margin target for construction is between 5% and 6%, again, supported by our cost savings initiatives. Blending ag and construction brings our forecast for industrial net sales down between 8% and 12% in 2024. We do not control industry demand, but we do control how we react to it. We are on a multiyear journey to improve through-cycle margins. And in 2023, we proved we can expand margins with slightly lower industry demand. In 2024, we will demonstrate that we can sustain through cycle margin improvements even as the industry declines further. We introduced this model of improving profitability curves last quarter.

As you can see, our aggressive cost actions pushed the 2024 curve above the 2023 profile. The shaded area indicates the relevant industry and margin ranges implied by the segment guidance. With these levels of sales and EBIT, we expect industrial free cash flow to be between $1.2 billion and $1.4 billion and EPS to be between $1.50 and $1.60 in 2024. In addition to our cost actions, we are laser-focused on commercial execution, working with our dealer partners to provide customers with innovative, reliable and efficient solution. Our order collection in North America extends into Q3, but we have less visibility in other markets, particularly South America. Rafael Miotto, who leads that region for us has an especially strong team in dealer network and we are confident in our ability to outperform no matter how that market develops.

We have talked extensively about the importance of advancement of our cost programs. Early on, we recognized the need for these measures and started working to implement them and improve our decremental margins. Our recent acquisitions have given us complete control of differentiating technological capabilities, which are already being integrated into our tech ecosystem. We are making progress building out our tech stack and are exploring options to accelerate this process and bring incremental benefits to our customers even faster. We look forward to highlighting more of our journey at our upcoming Investor Day to be held on May 21 at the New York Stock Exchange. What you can expect there is a refresh of our financial targets and a progress update on our company strategy, not a new strategy.

We are still executing the one we outlined in 2022, and our results demonstrate that it is working well for us. I will conclude by reiterating how much I appreciate the CNH team for finishing 2023 in strong fashion while positioning us to take this company to another level in 2024. That concludes our prepared remarks. Ben, will you open the line for questions, please?

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Q&A Session

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

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

Scott Wine: Yes. We don’t — I’ll start with the easier one. Stefano and his team on the construction side really don’t have much — we were pleasantly surprised with the demand in the fourth quarter, which helped manage inventory in that segment a little bit better. We probably got room in South America where we’ve got really lean construction inventory. So overall, I think construction is in reasonably good shape. And as I said in the prepared remarks, it’s just pockets that we have in the ag side of things. We’re still working through low-horsepower tractors. We’re making progress, we have a little bit of work to do there. Europe, there’s some — that market slowed a little bit in some regions as we’ve got a little more work to do in large ag there.

But generally speaking, there’s — and again, a few pockets in North America where we’d like. I would say in aggregate, it’s well below $1 billion of work we have to do overall on dealer inventory. And we’ve got clear plans, both with retail execution and production management to make sure that we get that addressed as quickly as we can. But it’s relatively less work to do, especially in Brazil, where I said that the team did a really nice job of helping us react quickly. So as that market turns, that will be — and it’s got to turn at some point. We’ll be well positioned to restock there.

Mig Dobre: My follow-up is on how you’re thinking about the ag cycle here. You commented on the fact that farm income is down back to maybe below a 20-year average. How do you think about the magnitude and the duration of this down cycle? Is it different than what you’ve experienced in the past? And if so, why?

A –Scott Wine: Well, I think the positives and – I repeated the press release that came out about North American farm income. But remember, farmer balance sheets are still in reasonably good shape, that’s helpful. The age of equipment is still in – is quite high, which is helpful. And the advancement of technology, which just dramatically improves productivity and yield and therefore, dramatically benefits the pharma. Those are all tailwinds offsetting it. So the other thing is you’re not starting this with tremendous amount of used inventory, tremendous amount of overall. So we’re starting from a better place. Soft commodity prices are likely to be down for a couple of years, and I think we are just expecting the industry be flattish from here for a little while. But I’m not expecting none of our projections internally suggest this is going to be another significant step down like we saw maybe 15 years ago. The setup is very different from that.

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

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

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

Nicole DeBlase: And then just going back on pricing, I know you guys gave the expectation for flat to up 2%. First, is that kind of similar in both ag and construction? And then second, what are you seeing with respect – and what do you expect to do with respect to dealer incentives in 2024 as demand is a bit weaker than ‘23?

A –Oddone Incisa: Yes. I would say it’s similar for ag and construction. Of course, construction is a much more competitive market in terms of number of competitors and in terms of market dynamics. So we have less visibility there if you want. In terms of what we call retail incentive discussion spending with the dealers for sure. Support the financing will be relevant across the year. And as we have announced, we started being more generous, if you want, on dealer incentives in the Q4 and will likely will continue to be at least in the first half of the year.

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

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

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

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

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

Scott Wine: I think what the last three years, and you kind of highlighted some of the crap we’ve dealt with, but what it’s done is given me the ability to see how strong this team is and how well they execute. And as we put in some more of our lean work and CBS and the culture change — I mean, really part of the reason our decramentals are so much better is just the work that this team has done to get in better positions. So I’m immensely more positive on what we can do regardless of what happens externally. You are forgetting that there is a U.S. election it’s going to be — who knows what that’s going to be like. But we put a plan together that we feel comfortable we can execute. And I believe you’ll just see the fundamentals which really show up in margins, just getting better and better as we continue to work through this.

So I’m immensely confident in how this team is prepared to get through a down year in top line sales and just prove that this isn’t an anomaly but really what we’re capable of throughout the cycle.

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

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

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

David Raso: Okay. So basically —

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