CNH Industrial NV
MIL:CNHI
Earnings Call Analysis
Q3-2023 Analysis
CNH Industrial NV
The third quarter report opens acknowledging the company's disappointment in their performance, especially in South America, which weighed on the overall earnings power of CNH. However, the company's initiatives toward operational efficiency, supply chain improvements, and productive CNH business systems softened the impact by delivering record third quarter EBIT margins in their Agriculture and Construction segments.
In the interest of efficiency and cost savings, CNH has embarked on a restructuring program anticipated to reduce salaried workforce costs by 5% by year-end, streamlining the corporate structure post-Iveco spinoff and removing approximately 20% of managerial positions. This reorganization aims to cut overall labor and SG&A expenses by 10%-15%. Furthermore, the company announced its decision to delist from the Milan exchange.
Revenue growth of 2% to $6 billion for the third quarter was driven mainly by higher construction volumes and increased financial services income, compensating for lower agricultural sales. Adjusted EBIT margin remained steady at 12.3%, and net income reached $570 million, with a marginal EPS increase to $0.42. The company's EBIT margin expansion across industrial segments indicates an improved longer-term margin performance, despite weakened markets in Brazil and Europe.
The company faced weaker demand in European and South American markets, leading to a strategic cut in estimates for South America across all business lines and slight adjustments in Asia Pacific and North American markets. CNH is revising its financial projections to a net sales growth of 3% to 6% for the year and a free cash flow prediction of $1 billion to $1.2 billion despite demand and industry challenges.
The company observed a decrease in free cash flow, yet maintained confidence in achieving targeted cash flow in the fourth quarter. Management holds a belief that the 70% cash conversion rate stays aligned with the company's business structure and will be a target for the present year despite volume fluctuations.
CNH's consistent elevated R&D levels are yielding fruit through technological innovation and refinement of their offerings, with an expectation of a moderate reduction in R&D spending to address product gaps and make pivotal upgrades. The board also supports a strategic $1 billion share buyback thanks to a large expected flowback from the delisting process, demonstrating the company's robust capital allocation strategy and forward-thinking approach towards deploying its resources.
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Hello, and welcome to the CNH Industrial Third Quarter Conference Call. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Jason Omerza, Vice President of Investor Relations, to begin today's conference.
Thank you, Francois. Good morning and good afternoon to everyone. We would like to welcome you to the webcast and conference call for CNH Industrial's third quarter results for the period ending September 30, 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's CEO, Scott Wine; and CFO, Oddone Rocchetta. 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 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. Our third quarter results were disappointing, but they also reflect the earnings power of CNH, as we dealt with the challenging market environment in South America. The sustained strength of our North American row crop and construction equipment demand, continues to be helpful offset to slowing demand in Brazil and Continental Europe. Better efficiency with operational improvements, supply chain, normalization and productivity gains from our many CNH business system initiatives helped drive record third quarter EBIT margins in both Agriculture and Construction. Our tech evolution is accelerating the development of innovative, customer-driven solutions. With key acquisitions, strategic investments and a deep and talented team, we are largely in possession of the in-house capabilities to build out our tech stack and fulfill customers' precision needs. I am pleased to welcome the employees of Hemisphere, who joined the CNH family in early October. We are redoubling our efforts on cost savings and working capital efficiency. Concurrent with the spinoff of Iveco in 2022, we streamlined our corporate structure and eliminated about 20% of the managerial positions. After almost 2 years of operating is an ag and construction pure play, we understand how to further optimize in support of our customers and dealers. Today, we are initiating an immediate restructuring program to achieve a 5% reduction in salaried workforce costs to be substantially completed by year-end. This will be coupled with a comprehensive rightsizing of the company's cost structure to be implemented early next year. We expect these 2 initiatives to deliver a run rate reduction of 10% to 15% of total labor and non-labor SG&A expenses. Additionally, we've announced today that we have formally applied to delist from Milan exchange, which Oddone will discuss in more detail. Company revenues for the third quarter were up 2% to $6 billion, driven by higher volumes in construction and higher interest revenues in financial services, offsetting lower Agriculture sales. Positive price realization contributed 2% to 3% of the top line in both Industrial segments. Industrial net sales were down 1% as lower ag shipments offset 6% sales growth in Construction. Adjusted EBIT margin, including corporate costs, was 12.3%, essentially flat compared to last year. Net income came in at $570 million and EPS was up $0.01 to $0.42. South American markets, primarily Brazil, were weaker than expected in the quarter. With industry-wide retail deliveries down 16% year-over-year in tractors, 46% in combines and 27% in Construction equipment. I was with our team in Brazil last month, speaking with dealers and farmers who are reluctant to engage with a steep year-over-year declines in soft commodity prices. We are working closely with our dealers to maximize their retail sales, while also responding prudently with production and wholesale shipment cuts. Very purposely, we did not sequentially increase dealer inventories in Brazil. It's worth noting, that we are also comping record harvest and results in the region last year. We remain bullish on the long-term growth prospects for South American market, which is an increasingly important part of the global ag economy and our strongest market position. We are pleased with the EBIT margin expansion for both of our industrial segments and will show later in our presentation how this is indicative of improved through-the-cycle margin performance. Derek Neilson and his team are executing well and remain focused on driving benefits for our dealers and customers. Through an expanding product lineup, innovative technology solutions, improving product quality and productivity gains, they are expanding margins and maintaining our market share. I look forward to being in Hanover next week with our team, as we showcase our Case IH, New Holland and Steyr brands at Agritechnica.
Collectively, we have won 5 innovation awards for the show, including the shows only gold medal for New Holland's Twin Rotor combine harvester concept. Our Construction segment had a record-breaking quarter, driven by new product launches and solid retail sales growth in North America. Revenue was up 6% year-over-year with notable expansion of gross profit margins. North American demand for our equipment has been strong on the back of public infrastructure spending, and Stefano Pampalone and his team are doing an impressive job moving the business forward and delivering significant value to customers. Dealer inventories have been normalizing for most products in most markets as supply availability recoveries. We are judiciously balancing wholesale shipments with retail improvement to improve inventory levels by year-end. Our company strategy remains centered with 5 key pillars: customer-inspired innovation, technology leadership, brand and dealer strength, operational excellence and sustained stewardship. Today, we will focus on advances in technology leadership. Over the past quarter, we bolstered our precision technology offerings with 3 key product innovations. All these solutions automate guidance and steering, enhance operator efficiency and are first available as aftermarket solutions. We commercially launched our Raven AutoCart solution with hands-on demo at Farm Progress in August. Early orders indicate strong demand for this solution that automatically syncs a grain cart to a combine, thereby eliminating operator strain, decreasing spillage and enabling -- operational by less skilled workers. By optimizing the harvest process, Raven Cart Automation maximizes yield and farmer profits. Raven DirecSteer provides precision automated electric steering, which is backwards compatible across a wide range of brands, including other OEMs equipment. DirecSteer outperforms other similar steering mechanisms, and for Case IH and New Holland tractors, replaces third-party technology with a superior in-house solution. We additionally previewed guidance and positioning kits that enable customers to replicate the factory-fit displays and features from newer CNH machines on their existing fleet. These internally developed automated driving advancement boost customers' productivity and profitability. We are reducing our reliance on third-party solutions and optimizing our products to meet customer needs. The innovative technology we are developing and launching, reinforces my confidence in our strategy to transition to in-house solutions. We started this effort nearly 4 years ago, accelerated it with the Raven acquisition and have been aggressively pursuing the strategy ever since. Recent developments in our industry will not change the course we set out years ago. In fact, we think they validate our direction. You can see from the graph, that our tech stack hit an inflection point in 2023, with the integration of Raven and the contribution of some of our recent acquisitions. This activity allowed us to bypass years of organic development in key areas such as autonomy, vision and guidance. Which we further expedited by rapidly scaling our own tech talent. This steep increase in this ownership curve is no accident, and it is the manifestation of our strategy to take control of our tech offerings. Earlier this year, we announced the acquisition of Hemisphere and are excited to have finally closed the purchase in October. This is another highly strategic acquisition for us. Not only does Hemisphere have the most accurate position in heading technology in the business, but they also design and manufacture their complete positioning engine all the way down to the chipset. This acquisition allows CNH to create a seamless system to deliver optimal customer performance and experience. With Hemisphere, we own the foundation for positioning and guidance, that powers all aspects of automation and autonomy. This vertical integration facilitates faster development times and gives us full control over future performance and cost. Hemisphere adds to our comprehensive portfolio of high-tech companies that are expediting the advancement of full autonomy, throughout our product offerings. In conjunction with Raven's expertise in autonomous technology and augment as unique sensing solutions, Hemisphere's capabilities significantly advanced our ability to improve customer productivity. We'll 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. Third quarter net sales of industrial activities of $5.3 billion, were down about 3% at constant currency year-over-year. This was mainly due to lower industry demand in the Agricultural segment, especially in South America, partially compensated by carryover price realizations in both segments. As demand slowed, we produce around 20% fewer low horsepower tractors in Q3 2023 globally, compared to a year ago. While on our high horsepower tractors, production was up 13% and on combines, was up 8%. With only South America plants down double digits for the 3 categories. Construction machine production schedules were up 20% globally, except for South America, where we reduced assemblies in view of the slowing demand. Low EBIT margin in both segments were up year-over-year. Industrial EBIT margin for CNH was slightly down in the quarter. Our unallocated costs were higher in 2023, due to inflationary impacts on support expenses and nonrecurring favorable items in 2022. Adjusted net income for the quarter was $570 million, with adjusted diluted earnings per share of $0.42, up $0.01 versus last year. Free cash flow from Industrial Activities was an outflow of $127 million, consistent with the seasonality of working capital in the third quarter. The September year-to-date figure of $440 million outflow is $39 million better than the $453 million outflow from the first 9 months of 2022. Agricultural net sales were down 4% in constant currency this quarter, driven in large part by pullbacks in demands in South America. We have reacted with lower production and lower deliveries to our dealers. Gross margin was 25.6%, a 60 basis point improvement compared to last year, as price realization continues to more than compensate for the long tail of inflation in our material cost. SG&A cost was also slightly lower in Q3, than last year and sequentially lower than in the second quarter of this year. In the end, Agriculture's adjusted EBIT increased by $6 million to $672 million with higher [indiscernible] income in Turkey, here included in FX and other categories, offsetting higher R&D investments. All in all, despite the lower sales level, the higher gross margin carried to the bottom line with an EBIT margin of 50 basis points higher than last year's record Q3 EBIT margin. Turning to Construction. Net sales were up 4% at constant currency, driven by demand in North America, mainly for heavy equipment. Demand was weaker in Europe and South America, a bit mounting economic uncertainties. Gross margin improved to about 16%, over 300 basis points higher year-over-year. In the quarter, we started shipping new models for the U.S. market, and therefore, we have increased their inventories. Construction EBIT margin came in at 6.3%, with a year-over-year improvement largely driven by favorable pricing with some help from lower SG&A. For our Financial Services business, net income was flat year-over-year at $86 million. Credit portfolios grew in all regions, generating higher interest revenues, partially offset by higher risk cost and margin compression because of the steep increase in interest rates in the last few quarters. Retail originations were $3 billion, up about $600 million compared to 2022. As more customers are using the captive company to finance their equipment investments, which highlights the strategic importance of running a healthy and nimble financial services operation. The managed portfolio for the third quarter was nearly $27 million, up $5.6 billion compared to the prior year. Delinquencies on book, which saw a seasonal spike last quarter, were down sequentially to 1.6%, while still higher year-over-year, this low level of delinquencies reflects the strong nature of Agriculture equipment financing. As announced earlier today, we have filed our application with Borsa Italiana to delist CNH Industrial shares from Euronext Milan. We have just been notified that the application has been accepted, and so we can confirm now that as of January 2, 2024, our shares will be listed only on the New York Stock Exchange. We have obtained a single listing within the time frame, we have consistently communicated, without needing a corporate organization. And we did it in a smooth, albeit long process. The single listing represents a significant milestone for our business as it will increase liquidity for our stock and streamline financial reporting. CNH was added to the Russell 1000 in June and to the S&P Total Market Index in September, and we look forward to further shareholder participation by a new class of investors. We also think that our global nature will continue to be attractive to shareholders around the globe. In conjunction with the listing announcement, we also announced that today that the Board of Directors has approved a new share buyback program of up to $1 billion, of which approximately EUR 400 million will be deployed in Milan, before the listing. The remaining amount will be purchased in New York. This concludes my part, and I'll turn it back to Scott.
Thank you, Oddone. For our 2023 industry outlook, we have lowered our estimates for South America in all businesses and product categories, given the weakened demand there. The pronounced decline in combines is especially unhelpful given our market-leading presence. We also expect slightly lower demand in Asia Pacific. We have further lowered expectations for small tractors in North America, while increasing them for large tractors as demand for cash crop equipment remains strong. We also project slightly better demand for heavy equipment -- heavy construction equipment in North America and for light construction equipment in EMEA. Last quarter, I said our full year net sales would be contingent upon retail demand, as we are moderating production in wholesales accordingly. With the South American market weaker than we foresaw, we are updating our financial guidance. We now see projected net sales growth of 3% to 6% versus 2022 and free cash flow of $1 billion to $1.2 billion. We reaffirm our SG&A to be up no more than 5% compared to 2022 at constant currency and our combined R&D and CapEx spending of about $1.6 billion. Q4 net pricing will be about flat year-over-year as we will need to increase some incentive programs to address pockets of excess dealer inventory. Volumes in Q4 will be down year-over-year and where we fall in the range, again, depends on retail demand. I also previously noted that this year will likely be able to achieve some of the 2024 EBIT margin and EPS targets from our 2022 Capital Markets Day. Despite this lower sales outlook, that statement holds true, and we still expect to get our adjusted EPS target of around $1.70. We are confident that our margin expansion efforts will allow us to better sustain profitability through the industry cycle. As shown on this chart, you see here, it is created from a 10-year average composite industry, based on our mix of agriculture and construction, with industry volumes and margins on the horizontal and vertical axes, respectively. In 2021, when our estimated composite industry was about 110% of the 10-year average, we achieved about 10% EBIT margin. Our business was operating along the gray curve. At our 2022 Capital Markets Day, we set out an ambition to achieve 12% to 13% EBIT margin by 2024, if we stayed at the 110% of the 10-year average. That's represented on the graph by the blue curve. When we talk about margin expansion, we are talking about shifting from the gray curve to the blue curve. Our margins vary with the industry demand, but every point of that blue Capital Markets Day curve is higher margin than the 2021 great curve. Higher profitability at any point in the cycle. In 2022, we shifted up to the black curve and achieved 11.3% margin, through industry growth and our own operational improvements. In 2023, we are shifting up to the red curve with better margins than 2022, even though we expect the composite industry level to be lower than 2022. We are not prepared to say precisely where 2024 will land from an industry standpoint, but we are confident that we will shift up to the blue curve, as a result of our operational and cost improvements. Looking forward, our margin improvement programs will continue delivering measurable results and protecting profitability in any market environment. We are on track our $550 million operational efficiency targets through CBS and Strategic Sourcing, and around 30% of that will be realized in 2023, with the remainder in 2024. Couple that with the SG&A cost improvements supported by our restructuring plan, and we will be well positioned to move up that blue margin curve that I introduced on the previous slide. As mentioned, South America is an increasingly important part of the global ag economy and the fundamentals there still support long-term growth. Our strong brands and regional presence, especially in Brazil, give us a solid foundation for success in this vital market. Disciplined dealer inventory management is crucial, as we close 2023 and will remain important for us next year. We are actively leveraging the synergies between our recent acquisition, Raven's capabilities and our organic proficiencies. We will continue to accelerate development of our Precision tech stack, taking more control of the factory fit and aftermarket solutions we offer. As we look to 2024, mix signals abound. On one hand, soft commodity prices are likely depressed farm incomes, while interest rates remain high. And order backlogs and dealer inventories are normalizing. On the other hand, fleet ages are still elevated, and there is high demand for newer equipment with the latest Precision technologies. We are gaining some early visibility into 2024 with order books opened through the first half in major markets and in many cases, we are already filling Q2 order slots. It is too early to call 2024 industry demand, but we do expect it to be lower than 2023. We look forward to finishing the year strong and completing our journey to become a single listed company. That concludes our prepared remarks. We'll now open the lines for questions.
[Operator Instructions] Our first question comes from the line of Steven Fisher from UBS.
You mentioned that there's going to be some incentives to help move some inventory in Q4. You also mentioned you have the order books opened in the first half of 2024. Just curious to what extent do we know at this point about whether those incentives are going to be extending into those 2024, first half orders? Or is that sort of a different set of kind of pricing card?
No. That's a great question, Steven. Let's definitely not confuse the two. The Q4 discussion around getting flat pricing was related to actions to drive retail performance. So we're talking about incentives for retail performance, not to incentivize people to take orders from us. That's actually lowering list prices, which we're not -- we've been very clear that we're not planning to do. It's really about just -- it's driving retail. That's what we're trying to do.
Okay. That's very helpful. And I guess just a bigger picture question. I guess I'm curious for how you see what's different in '24 versus '23 that's actually now taking volumes down? I mean it's not terribly surprising given what we've seen in the commodity prices, but farm income is going to be down in '23 also, and there's a fadeout of bonus depreciation this year, but still '23 shows some growth. So is it just though the magnitude of the decline that's kind of cross a threshold, where it makes a difference? Or is it used values? Or is it interest rates or there's like a tale of time that just has to play out for this demand decline to play out?
Yes. Well, we still strongly believe in the sound fundamentals of the Agriculture industry for the long term. I mean -- and especially in Brazil, where we're seeing weakness now, I mean, the fundamentals couldn't be better. But the setup for 2024 is certainly not ideal. Higher interest rates are certainly weighing on. When I talk to farmers, they are just considering, do I want to take that new product on. If they are financing it, it's a good bit more expensive now. So that is a consideration for them. Specifically in Brazil, they're just really worried about the soft commodity prices, and they're waiting for those to come back. And I think if we see a rebound for whatever reason in soft commodity prices, I think it really gives a boost, especially to Brazil but for most markets, we're just not anticipating that in 2024. So we're being prudent with dealer inventories, and we'll certainly be able to take advantage, if the market turns out to be better, but our initial outlook, and I think it's triangulated by what we're seeing by most everybody else prognosticating is, it's going to be slightly less than this year.
The next question comes from the line of Nicole DeBlase from Deutsche Bank.
Maybe just for starting with the restructuring, the $200 million, that you guys are talking about taking, what is the expectable annual savings related to that program? And is that separate from what you've already guided for, for '24 and '25 -- or sorry, '23 and '24? Or is this completely incremental?
In terms of restructuring, that's incremental. And that's also incremental to the general COGS cost reduction of $550 million that we are working on and that we started delivering this year. In terms of spending, a chunk of it will be this year. Because we are taking immediate actions on head count right now, as we speak. And the remainder will be in the first part of next year.
Okay. That's helpful. And then shifting to dealer inventories. Can you guys talk a little bit about how you see current dealer inventories just around the world? And if you still think that you can kind of produce in line with retail demand, as we move into '24.
Yes. We've seen over the last couple of years just wild swings. We went from racing to catch up and struggling to catch up with dealer inventories. And then certainly in the low horsepower tractors, as we've talked about for quarters now, that slowed down rather quickly. We've got what I call pockets of inventory that are too high and pockets that are too low. I'd say net-net, it's -- I would call it like a mid-single-digit percent high that we'd like to get rid of. So it's really not dramatic. So I believe if we can get retail up and again, that is our focus, working with our dealers to drive retail, we'll be able to keep wholesale shipments in line.
The next question comes from the line of Michael Feniger from Bank of America.
I know that you guys kept the EPS where it is, but you cut the free cash flow. Free cash flow was down year-over-year in the quarter. It looks like there was a negative use from cash from ops for financial services net of eliminations. Can you just talk about your conviction on hitting the free cash flow in the fourth quarter? Just trying to understand the moving pieces with that cut? Is it just the cuts in net sales, and as we look to next year, is $1 billion of free cash flow still kind of the base case we kind of think about for next year? Just love to get any sense on that.
Yes, you got it. Reduction in free cash flow is mainly linked to the reduction in sales and some of the slowdowns in production we have. And basically, we probably would have some level of higher company inventory, compensated by lower dealer inventory, right. Which are not part of our cash -- of our working capital. The -- in terms of next year, I mean it's early to talk about next year, but we think that our 70% cash conversion rate is still consistent with the overall structure of our business, over time. So we would target that range of cash generation for the year.
And just if I could add, I understand you're saying volumes potentially are likely down next year. There's -- these cost savings numbers that we're looking at, plus the restructuring. Just can ag margins hold flat if volumes are down 5%, 10%? Is that kind of the range we should be bracketing? Are we kind of looking at down 10% to 20%? And in that case, obviously, absorption becomes a bigger headwind. Just curious if we kind of talk about these moving pieces with volumes likely down next year, but these big cost saving numbers coming in, in next year?
No, I really like to give a shout out to Derek Neilson and the work that he and his team are doing on this very topic. I think if, just to respond to your question, if it's down 10%, yes, we can hold margins flat. If it's down 20%, we got a -- that's a heavier lift, but I wouldn't want to bet against the team to find a way to get there. But no, it's -- the team has really been focused on driving margin performance, and we're seeing the benefits of that now.
The next question comes from the line of David Raso from Evercore ISI.
A little more over a longer term and then more of a shorter term. Sort of to the point you just made, when you were considering this incremental cost reduction program, right, the 10% to 15% of SG&A, what magnitude of revenue decline were you assuming just -- there had to be some relationship to how you saw your revenue next year to the tough decision to take this kind of cost out on the SG&A. And in the same vein of some of those hard decisions. Were you thinking of those cuts in relationship to a traditional kind of 2-year downturn that we see in ag? I know we've seen some longer ones, but maybe this one could be a little shorter. I'm just trying to get a sense of this incremental decision, how you thought about next year and really even more importantly, is this trying to enter a couple of year downturn and that was the magnitude of the cuts? And then the shorter-term question, just -- and I appreciate all that you're doing to offset some of the weakness in the market. But in the fourth quarter, your revenue growth sequentially is sort of -- it's a normal 15% to 20%. In fact, it's 21% implied. Why such the strong incremental revenue 3Q to 4Q, if we're trying to prepare a bit for a weaker '24?
All right. I'll take the first one and let Oddone take the second one. First of all, we don't take any action or activity, as it relates to our head count or employees lightly. We really -- it's not something we ever want to do because we invest a lot in our team, and that's just -- it's a difficult action to take. But it's not a reaction to the market. It really is when we did the spin-off from Iveco, we took a shot at getting organized and understanding how we be. We've just learned a lot about, where we are as a company and how we can be more efficient. We do a lot of employee surveys, and we get a lot of feedback that despite, a focus on being agile and customer focused, it's still difficult to do sometimes. So this is really about not a level of decrease in volume next year, but it's just recognizing that the market is not going to grow, like we've seen over the past several years, and we need to think about, what's the proper structure to deal with that is effectively and as efficiently as we can to create a better working environment for our employees and better for our customers. So that's what we're striving to do, and we see a good opportunity to do that, and we think the timing is right.
And Dave...
Generation of the cycle. Sorry, Oddone, go ahead.
If you think you're going to bait me into a comment on the cycle, try again.
Well, no, I'm just trying to be thoughtful around those are hard decisions to make, and we knew the SG&A staying below 5% was it was getting hard, right? I mean, you're implying the fourth quarter SG&A, is going to be flat despite revenues up 20%, right? So we needed to take some action, and I appreciate those are not easy decisions. But when you were putting pen to paper. I was just trying to think about it's never easy to let people go. Obviously, not always easy to hire people nowadays, find good people. Just trying to think about, yes, we're just going to approach this as a typical downturns to -- yes, we've seen 3 and tougher -- 3 years and tougher eras. But I was just trying to get a sense of how you're really approaching this from a real structural view of the cycle. So I'm trying to bait you just -- those are tough decisions made at...
No, no, no. it was putting the through-the-cycle margin chart together was actually helpful for us. And especially if you look at it in the middle of the chart, which reflects 100% of the market, and we're still talking about playing above that middle ground line. So it's not like we're -- the fundamentals in ag are just too good for a major downturn. It's just -- we've seen a lot of demand. We've seen dealer inventories normalize and we think it's going to be a little bit slower next year, but we don't -- if you compare it to past downturns in the market, we fully just don't see that coming right now.
That's helpful. No, I appreciate the discussion.
And Dave, on your second question about the growth in the fourth quarter, yes, you noticed -- I mean the growth that we have sequentially fourth quarter to third quarter is pretty typical. In our rate [indiscernible] sales and is predicated on higher retail sales in the fourth quarter. Which are also typical for our business and for the way our dealers and our farmers operate.
But I guess that was the decision. Do we get the typical sequential revenue growth, which is what you're exactly correct. That's the normal third or fourth quarter, but the decision was to get that revenue, we're willing to clear out a bit with pricing? Which is fine. It just -- that was the decision, right? Without that incentive, we probably wouldn't get the sequential revenue. But at least it clears out some inventory going into '24, which I appreciate.
Next question comes from the line of Timothy Thein from Citi.
Apologies in advance on the voice issue here. But in context with the pricing for ag that you've talked about. Can you kind of just give us a sense in terms of your expectations and what you're seeing on the cost side in ag and just maybe a little bit longer purview into '24 in terms of, again, just kind of the trend lines and what you can see through contract negotiations and the like as to into that relationship and again more on the cost side? And then I guess, the second question, and I'll just ask them at once, Scott, is just -- on the -- obviously, you don't do presales for every product, but what you have seen in terms of presales and where you're taking orders into '24. Is that -- can you just give us a sense in terms of how much that's informing you about the volume outlook into '24, i.e., just some kind of sense in terms of what you have seen in terms of that order uptake.
Yes. As we've said throughout the year, we've seen a moderating cost. And if you look at our EBIT margins, as we're getting carryover pricing, but not significant pricing going forward, we're seeing that cost curve been down to a level. I mean, moderating inflation is still inflation, and we're seeing that, but we're also seeing really good work by our team, specifically on logistics lanes and other costs. Our strategic sourcing, actually, we have our first review tomorrow, and we'll continue to get through that. And we still see the double-digit savings, that we talked about in that -- those categories, we still see that coming to fruition. But that's a longer-term benefit. But it really is the lean activities that we're driving through CBS, the focus on logistics improvement, we're able to push back on cost. And I said earlier in the year, that it was going to be the year of cost not price like last year, and the team is really delivering on that. And I think you're going to see that cost benefit show up for us for the next several quarters to come. We're not giving guidance on '24, but I did say in the prepared remarks that we have started to take orders in some markets for some products into 2024. And it seems very reasonable now. There is a bifurcation. I mean the cash crop market in North America still seems to have nice legs to it. South America is -- it's weak, and it's going to be weak, I think, until farmers decide to sell. When I mean sell, sell the crops that they harvested, and we're prepared for that. But overall, there's nothing that significantly positive or significantly negative, as we read out what we're seeing in the order books.
Our next question comes from the line of Tami Zakaria from JPMorgan.
So given your goal to bring factory fit and aftermarket precision ag solutions in-house, to over 90%, it seems by 2026, which seems quite impressive. So from -- from an R&D perspective, should we expect R&D spend to remain at 2023 level, even if there is a downturn for the next couple of years?
We have been at an elevated R&D level for several years now. And I think what you're seeing is the fruition of those investments. We are obviously looking -- we're not going to stay at that level forever. And we're looking at every single project about where we can. I think we'll probably be flattish in that area. But we've also got some product gaps that we're leaning in to fill, and we've got some upgrades that we're looking to make, and we're not going to slow those down because it's so important to our future. But I don't think it's going to go -- over the last several years, you've seen it go higher from here, and I think it won't go higher from here. It will go lower from here, but moderately.
Got it. That's very helpful. And one quick modeling question. It seems like corporate expenses ticked up in the third quarter sequentially a bit despite revenues coming in a lot lower. Anything in particular driving that?
I mean, I think there are 2 things here. One, sequentially as slightly lower than in the second quarter, and we expect sequentially then to be down in the third quarter -- on the fourth quarter, sorry. What you probably noticed is that there's a big gap to the number of last year. But last year, we had some nonrecurrent positive items that we didn't have. We didn't repeat this year. So that's the big gap, that you may have noticed in comparison with last year. In terms of running costs, we are in the range between the $60 million and $70 million per quarter. And of course, those will be also cost that will be subject to the review that we're looking at partially immediately...
[Operator Instructions] Our next question comes from the line of Daniela Costa from Goldman Sachs.
I have 2 things left. First, I wanted to ask you, you mentioned in the release in the disclosures that you had a material issue with internal controls over financial reporting. It sounds like it is sourced, but I was wondering if you could give us some clarity of what it is and if it's really all part of past now? And then the second thing, just obviously, we've seen sort of throughout the quarter, the announcement between Trimble and one of our competitors, and you used to have some sort of relationship with Trimble. Can you tell us at what sort of -- which impact should we see if any or if you're now in terms of Raven product completely independent and all sorts of -- that would be great.
So let me take the first one, Daniela. You may have noticed we had an auditor rotation at the beginning of this year. And auditor rotations are mandatory under European framework. And so we started working with a new auditor and in conjunction with them. We had a different way of looking at the, I would say, the service access that we give to some of our employees, mainly in ICT to the -- to the system, so the system of record, in particular, the different SAP instances that we have. We realized that with this different way of looking at things, the number and the scope of some of these [ axis ] is out of what is typical nowadays even considering the fact that we are a large multinational corporation. So what we're doing is we are acting very swiftly and looking at ways of -- well, first of all, of making sure that we have all the controls, but also of bringing or normalizing this situation, let's say. And we're working on that and we should have a solution in a timely manner.
You don't expect any impact on business or anything?
Absolutely, no, no, no. There's no impact and is stated on the documents on the reps that you will see, when we issue our quarterly report, that this has no impact on the financial statements. Of course, the risk that we see is that having this extended access to the system, a fraud could be perpetrated and could not be immediately seen. But again, it requires some -- a lot of skills, and it's not something that has happened or that is something that has been identified.
Yes. And the second question as it relates to the acquisition during the quarter about Trimble and AGCO. It doesn't really affect us at all in the short term or the long term. We've got -- we still today, buy a lot of stuff from Trimble. They've been a great supplier and partner for a long time. They announced that they were going to go direct in the aftermarket earlier. So we've known since we acquired Raven, that we would have a lot of the ability to do this stuff in-house. And as we showed on the chart, we believe that is going to continue. But, we still serve our customers well with a lot of products from Precision Planting and we'll continue to do that. Raven continues to be a supplier to AGCO and that will likely continue. So really, there's we compete in the market, but we also sell to each other, and we don't see that necessarily changing. What is changing is just the execution of our long-term strategy to have the capabilities in-house to give our customers best-in-class solutions with our internal products, and that's why we're in technology. That's what we're doing.
The next question comes from the line of Kristen Owen from Oppenheimer.
I wanted to come back to the conversation around pricing. And Scott, I think in the prepared remarks, you mentioned price is about 3% in the quarter, flat for 4Q. If we were to abstract from that, what's happening in Brazil, Latin America writ large, how is the book pricing trending? And how much of those incentives are really in that Latin American region?
No, I would say incentives are across the board, not focus on the Latin American region, frankly. And those -- I mean, the large -- a good part of those are financial incentives. So retail financing support and also the cost of holding floor plan inventory, when we deliver to our dealers. So -- but that's mainly -- that's I would say across the board is our global effort to sustain retail sales in the fourth quarter. And support for dealers getting there.
So then my follow-up question relates to the Milan delisting and the announcement this morning for the $1 billion buyback, all of which will be executed or the majority of which you've said will be executed by March 1. Just wondering if you can talk to the appetite for further buybacks beyond that? I mean you've discussed the 70% conversion rate and free cash flow. This still generating a lot of cash. And given the headwind -- or excuse me, tailwinds to margin next year, just how to think about the buyback opportunity once this transaction closes.
Yes. I have to almost laugh when you -- we just announced a $1 billion buyback, and you're already asking for the next one. It sounds like a hedge fund question. But no, the reality is, we have a lot of places to deploy capital. There are times -- and I think now is right one of them we're trading below intrinsic value, and there's a large flowback expected with the delisting that we want to lean in. And we think it's the right time, and the Board was very supportive of that. As it goes out over time, I think it is just part of our capital allocation strategy. We're committed to keeping our ratings intact. We're improving them. We're committed to providing all of the R&D funding that we can. We'll buy if we have acquisitions that can improve the customer experience or help us grow profitably faster, we'll do that. And sometimes we'll lean in more with share buybacks. And if you look over history, I would expect with a single listing in the New York Stock Exchange, we'll probably buy more than we have historically done. But I don't think you should look at the $1 billion and think there's going to be another $1 billion coming right after that. I mean we're going to be -- it's just part of our capital allocation strategy. And right now, it's a rather important one.
There are no further questions, and this concludes the conference call. Thanks for joining today. You may now disconnect your lines.