CNH Industrial’s construction equipment division reported its most profitable first quarter in over a decade.
The manufacturer of construction and agricultural machinery reported a net sales increase of 23% to $803 million in its construction division in the first quarter of 2022. The company’s portfolio of construction equipment is sold under three brands: Case Construction Equipment, New Holland Construction, and most recently, Eurocomach, part of the portfolio acquired with Sampierana.
Chief Executive Officer Scott Wine said the construction division delivered $32 million in earnings before interest and taxes at a 4% margin. He said the company is seeing high demand for construction equipment in all its regions, and estimates for 2022 are largely unchanged, except in South America where CNH is anticipating some upside to demand in an election year. In North America, demand from customers ahead of projects related to the U.S. infrastructure bill could be a potential upside.
“Our improving construction equipment performance is fundamentally sound with a strong focus on product quality and design and expanding our market reach,” Wine said. In conjunction with that progress, he said, order books continue to build up year over year for both light and heavy equipment across all regions. CNH is practically sold out for 2022 production slot in North America.
The acquisition of Sampierana has brought in a competitive range of compact excavators built through a cost-effective supply chain, helping strengthening CNH’s presence in Europe, the company says.
“Our construction business in Europe specifically has had a rough decade or so,” Wine said. “With Sampierana coming on, we are going to see construction growth and actually profitability for the first time in a long time in Europe.”
With Case Construction Equipment’s celebration of its 180th anniversary, he is confident there is a profitable future ahead for it and the New Holland Construction brand.
A look back
“In our first quarter as a pure play agricultural and construction equipment business, the CNH Industrial team delivered a solid performance that demonstrates the potential of a focused, customer-centric company,” Wine said. “With redoubled commitment to customer-inspired innovation, diligent operational execution, and improved product quality spurring margin expansion, we delivered net sales of nearly $4.2 billion, a 13.4% increase from 2021.”
He said order books remained exceptionally strong, up almost 40% in agriculture and 80% in construction, as demand remained healthy in Q1.
"I think there is anxiety amongst most retail customers to be able to put their hands on iron when it does hit the dealership," Wine said.
More money than normal was spent on expedited freight, and production schedules are continually being adjusted to accommodate parts shortages. Unfinished machines in factories and in transit inventory were above plan at the end of the quarter, according to the CEO.
“We did not plan for positive cash flow in the first quarter, and as critical supply chain disruptions constrained our ability to ship finished goods, we ended the quarter with a cash outflow of $1.1 billion,” Wine said.
The adjusted net income for Q1 2022 of $352 million excludes, among other items, $71 million related to asset write downs, financial receivable allowances and valuation allowances on deferred tax assets resulting from the suspension of operations in Russia.
“We have suspended operations in Russia and are offering financial and housing assistance for our employees based in Ukraine,” Wine said, adding that CNH is supporting its Ukrainian dealers and have been able to redirect shipments minimizing the war's financial impact on its business.
“Judging from conversations and other insights, our customers and dealers are managing fairly well in this difficult environment as increased soft commodity prices help balance farm income, which has been hurt by rising input costs,” Wine said.
Although supply chain challenges are expected to continue in 2022, he said production and retail sales are expected to increase in Q2 and beyond.
“While we no longer expect meaningful supply improvements in the second half and other external risks will likely endure, we remain confident in our execution and expect our ag and construction end markets to have more incremental resiliency than the general economy,” Wine said, noting that the overall outlook for 2022 remains unchanged.
From a labor standpoint, Wine did reference the ongoing strike under way at CNH’s plants in Burlington, Iowa and Racine, Wisconsin. He noted that it is two of 38 plants, making it well below 10% of CNH’s global production, and they are continuing to operate. Forecasts for Q2 of 2022 and beyond are not contingent upon the negotiations although they have factored in higher labor costs.
“We knew there was labor risk, we planned for those contingencies, and we'll continue to work as quickly as we can towards a negotiated settlement that's beneficial of all parties,” Wine said. "The very nature and purpose of a strike is to disrupt our business and create concern amongst our customers. Despite that intent, CNH is committed to reaching an agreement with United Auto Workers."
Even with a number of risks at hand, CNH is maintaining its course for 2022 with projected net sales for the year forecast to grow 10% to 14%. Wine noted that free cash flow for industrial activities is expected to exceed $1 billion, and research and development and capital expenditures will be approximately $1.4 billion combined spend for the year.
Wine acknowledges that the plan may be volatile depending on the cadence of supply shipments and ongoing war in Ukraine. Further, from a broader economic perspective, he is less optimistic, citing inflation, rising interest rates and the shutdowns in China.
“We will not be surprised if there’s a global economic slowdown in 2023,” Wine said. “Nonetheless, as our current outlook indicates, we think that global food demand and associated productivity needs will support our industry better than others. While supply pressures persist, we will maintain our focus on managing them and minimizing any associated inventory buildup.”
The intention is to maintain a sustainable market share improvement over the plan period with understanding that the current economic and geopolitical environment will really dictate availability.
“I'm not reading much into what's happening right now because it's literally who has products from dealerships and gets that out,” Wine said. “Our team is doing a really good job with supply chain, but certainly, in some of our product lines, we're not as good as we could or should be. While we did gain market share in some regions and some product lines, it really is strictly around availability right now, and I don't think that's a sustainable way for us to look at it.”
The CEO said there will be investments in new products and the precision ag tech offering that will be more long-term contributors to the market and meeting company goals.