CNH Industrial NV
MIL:CNHI
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CNH Industrial NV
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Good day, and welcome to CNH conference call. Today's call is being recorded. At this time, I will now turn the call over to Jason Omerza. Please go ahead, sir.
Thank you, Alan. 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, 2022. This call is copyrighted by CNH Industrial and any other use, recording, or transmission of any portion of this broadcast without the expressed written consent of CNH Industrial is strictly prohibited. Hosting today's call are CNH Industrial's CEO, Scott Wine; and CFO, Oddone Incisa. They will use the material available for download from the CNH Industrial website.
Please note that any forward-looking statements that we might be making during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent report 20-F and EU Annual report, as well as other periodic reports and filings with the U.S. Securities and Exchange Commission and the equivalent 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 the call. It's actually better now that I have my mic turned on. It is not lost on me that we are hosting this call on election day in the United States, following similar activities and some appointments in other countries that impact our business. This is relevant to the outstanding results we will discuss this morning and that the CNH team is proving its capabilities to successfully navigate a myriad of complex challenges. We are not immune from the external impact of geopolitical risks, inflation, supply chain constraints and economic downturns, but the strength of both the global Ag markets and our team, technology, products and brands are nice assets to have right now.
We finished the quarter with record consolidated revenues for any third quarter in the history of our Ag and Construction business of $5.9 billion, up 29% at constant currency. While we are finally seeing some modest improvement in our supply chain, it is our team's depth execution that enables these results in the face of unrelenting inflation and volatile currencies. We are confident in our ability to continue to minimize these disruptions, maintain our momentum and deliver for our customers.
Trends still indicate a strong Ag cycle with sustained demand for most products. We are closely watching for any recession-related shifts in purchasing behavior. I will again stress that historically our business performance is driven more by the Ag cycle than by GDP growth or like thereof. In any case, we will be prepared to traverse whatever the macro environment throws at us. Both agriculture and construction generated positive volume and mix and pricing of 16% more than offset the steep increase in production cost. Additionally, gross margins benefited from the operational improvements. It was very encouraging to see our teams using [ Kaizen ] to streamline the sales and operations planning process and reduce expedited freight cost. These drivers and other actions contribute to the Ag segment's record 25% gross margin in the quarter.
We generated positive free cash flow, which is notable considering the seasonality, has historically led to cash consumption in the third quarter. We saw modest improvement in the supply chain compared to what we experienced in the first 2 quarters of the year. However, uncertainties about cost structure again forced us to restrict order windows, both to enhance our ability to deliver on time to our dealers and customers and to sustain a balanced price cost equation.
We introduced the new Trident spreader enabled with Raven Autonomy in August, which I will provide more color on in a minute. With the addition of Raven to our tech stack, we are making tremendous progress marrying our great iron with great technology. Thanks to the strength of our year-to-date performance and what we see for the remainder of the fourth quarter, we are improving our guidance for the full year and renewing our commitment to maintaining expenses at industry-leading levels while investing heavily in our future.
Derek Neilson and his agriculture team delivered another impressive quarter with net sales up 32% year-over-year at constant currency and year-over-year EBIT margins increasing 320 basis points. This was mainly driven by improving volume and strong price realization, which more than offset raw material and production cost headwinds. Overall, Ag demand remains robust, especially in Latin America and North America regions. Order books for tractors and combines are down versus last year, but that is primarily due to continued allocation of dealer orders and limited order windows.
Our strategic focus on technology leadership and customer-inspired innovation was showcased in several of our third quarter agricultural product launches. Demonstrating our integration with Raven at Farm Progress, we launched the Case IH Trident 5550 applicator with Raven autonomy, the industry's first driverless spreader. This best-in-class combination applicator makes Level 4 supervisor autonomy more accessible, bridging the gap between traditional iron and multipurpose driverless power platforms. Parag Gar is doing an excellent job of ensuring that CNH and Raven teams are fully linked in development of cutting-edge solutions to farmer problems. This synergy enabled Raven to take the technology and experience from their omnipower driverless platform and apply it to our traditional equipment lineup. With all elements of our tech stack working in concert, it's fundamentally simpler for our team to develop and support autonomous solutions.
New Holland redesigned its lineup of Guardian front boom sprayers to feature new technological and precision capabilities. These sprayers integrate Raven's advanced precision technologies like guidance and steering, nozzle control and complete operational connectivity with New Holland's trademark high horsepower and large tanks. Our suite of technology accumulates the data and process it through Raven's connected workflow system to increase efficiency through better equipment utilization and more acre spread per day.
On the specialty products side, Case IH launched the Austoft Series 9000 line of sugarcane harvesters with new automated hydraulics, connectivity, high performance and best-in-class efficiency. Having recently been down to visit with farmers and our team in Brazil, I can say firsthand that our harvesting portfolio is second to none.
What you see here is the acceleration of our best-in-class precision agriculture capabilities, both in terms of developing a new era of products and improving our ability to expand margins and capture market share. Stefano Pampalone and our construction team continue to perform at elevated level. With sharp focus on customer-inspired innovation, operational excellence and dealer engagement, the team is effectively building a platform for profitable growth.
In the quarter, net sales increased 20% on a constant currency basis over 2021, with pricing offsetting higher production costs. Adjusted EBIT in the quarter was $24 million with a 2.7% EBIT margin, benefiting from strong sales in North America and considerable contributions from Sampierana acquisition, which still constrained by -- but it's still constrained by supply chain disruptions. Construction order books are open through the second quarter of 2023 in most markets with robust order coverage, especially in North and South America.
In the third quarter, we started selling Sampierana mini excavators in Europe under the Case and New Holland brands, and we opened a new assembly line to increase capacity for those products. With this greater throughput, we will begin exporting those products to other regions next year. During last quarter's call, I teased the launch of the Case Minotaur compact dozer loader and that revolutionary new product has been enthusiastically received by our dealers.
I will now turn the call over to Oddone to take us through some of the financial results.
Thank you, Scott, and good morning and good afternoon to everyone in the call. Third quarter net sales of industrial activities of $5.4 billion were up more than $1 billion or 24% year-over-year despite foreign currency headwinds of around 5%. Effective price realization was the main driver for our top line growth, but volume and mix also accounted for around 13% increase.
For our Industrial segment, gross profit was $1.2 billion with a margin of 23%. This $356 million year-over-year increase was a 260 basis points improvement, largely achieved for favorable pricing, which offset a continued escalation in production cost. Adjusted EBIT came in at $670 million, up $250 million from the third quarter of 2021, with a corresponding EBIT margin of 12.4%, up 270 basis points versus third quarter of last year.
Free cash flow from industrial activities was $202 million, and industrial activities net debt ended at $1.3 billion, an increase of $146 million compared to December 31, 2021. And this increase in net debt over the 9 months was largely related to seasonal working capital, payment of dividends and share repurchases, partially offset by segment profits. Adjusted net income for the quarter was $557 million with adjusted diluted earnings per share of $0.41, up $0.07 year-over-year on the back of better operating performance. Available liquidity as of September 30, 2022, was $8.6 billion.
On Slide 8, we have the industrial activities adjusted EBIT progression from Q3 2021 to Q3 2022. In both Agriculture & Construction, strong price realization continued to shield us from the steep increase in production cost, while our manufacturing and sales teams managed to improve volumes at the same time.
SG&A and R&D expenses were higher, tied to Precision Act portfolio, investments and costs connected to newly acquired businesses. SG&A as a percentage of sales came in below our 7.5% target as we continue to manage costs wisely in front of increased activity levels. Agricultural's adjusted EBIT was $666 million with a margin of 14.8%. This $251 million increase, a 60% improvement year-over-year was driven by both favorable pricing and higher volumes, partially offset by higher production costs and SG&A, and of course, R&D expenses.
Gross profit was up $340 million from the same quarter last year, reaching $1.1 billion for the 3 months to September. The adjusted gross margin of 25% was a quarterly record for agriculture. Construction equipment adjusted EBIT was up $3 million to $24 million with a margin of 2.7%, consistent with last year. Like in agriculture, result in construction equipment were driven by favorable volume and positive price realization, but were offset by the higher production cost and constrained unit production at some plants in North America and South America.
For our Financial Service business, net income was $86 million, down $10 million compared to the third quarter last year, mainly because of lower margins in North America, increased overheads and normalized risk cost. These headwinds were partially offset by robust volumes across all regions as well as higher recoveries on used equipment sales.
Retail originations were $2.5 billion in the quarter and $7.1 billion year-to-date. And the managed portfolio including JVs at the end of the period was $21.2 billion, up $2.4 billion compared to September 30, 2021 on a constant currency basis. Delinquencies were down roughly 6 basis points year-over-year to 1.3% of the portfolio and remain at historically low level.
Free cash flow from industrial activities was $202 million on the back of strong EBIT performance. Finished good inventories buildup is typical on the third quarter but was partially offset by the initial reduction of manufacturing vendoring from the heightened levels at the end of the previous quarter. We still have a substantial amount of semifinished products amid the supply chain constraint, but again, manufacturing inventory is down on a sequential quarter basis. Total gross debt was $20.9 billion at September 30, and industrial activities net debt position was $1.3 billion.
To conclude my remarks, I will review our capital allocation priorities where we continue to invest in our business and our CapEx and R&D expenditures keep increasing year-over-year as forecast. The largest increase in R&D is on digital technologies and we expect this to continue. As part of the Board approved $300 million share repurchase program, the company bought back shares for $76 million in the third quarter and continued doing so in the month of October.
Now I will turn it back to Scott.
Thank you, Oddone. The demand environment remains healthy and we are working diligently to fulfill customer commitments. While soft commodity prices declined in the third quarter, they remained above pre-pandemic and year-end 2021 levels. As commodity prices drop and input cost increase, farm productivity and yield become ever more important, creating a compelling case for our array of precision technology that improves farmer efficiency and profitability.
In North America, we sustained demand for high horsepower tractors, while industry-wide OEM supply and dealer inventories remain low, and we expect that to continue. Demand in South America continues to be impressively strong. In construction, demand trends are mixed as we expect the residential and commercial market to decline while the housing market adjusts to rising interest rates. However, public construction should fill in many of those gaps as spending from the U.S. infrastructure bill ramps up.
For our full year guidance, we are raising our industrial net sales range as demand remains strong and price realization is favorable despite lower U.S. dollar conversion of international sales. We are improving our SG&A guidance to under 7.5% of sales and are confirming our combined R&D and CapEx guidance for the year. Our free cash flow guidance is unchanged as we are confident in our ability to improve deliveries to customers and reduce inventories that have escalated due to supply chain constraints.
We are absolutely not reinstating long-term EPS guidance. But with only 2 months left, we can now say that we expect full year adjusted EPS for 2022 to be between $1.43 and $1.45. Despite pessimistic economic outlooks in many of the countries and regions where we do business, we anticipate solid demand next year. Inflation will continue to be a factor in 2023, but we should benefit from high soft grain prices and the outlook for farmer and dealer profitability remains healthy. We expect to again contend with supply chain disruptions, but see them progressively improving, and we think channel inventories will stay tight for most of the year. As mentioned, we have recently opened our order books into Q3 of 2023 in several regions, so are gaining visibility into next year's strong demand.
We will continue to invest in our future, both by expanding and augmenting our precision Ag portfolio and boldly creating the next generation of agriculture and construction products. We will maintain a watchful eye for signs of recession and will be prepared to adjust our operations as needed.
We recently held our first supplier conventions to externally launch our strategic sourcing program. We met with nearly 800 existing and potential suppliers from 37 countries, outlining our new approach to build a stronger and more resilient supply chain that will help us and our suppliers deliver the best total value for the world's farmers and builders. As most everyone is aware, in May, the United Auto Workers Union initiated a strike at our Racine and Burlington facilities. Our goal has always been to get our employees back to work with a contract that is fair and sustainable. And we have been working diligently, but so far unsuccessfully to make that happen. We continue to seek resolution while executing our contingency plans to remain operational and work toward meeting customer commitments. All costs associated with strike and future wage hikes are factored into our guidance.
We announced today that we are voluntary transitioning to U.S. periodic reporting disclosures, which means we will start filing 10-Ks and 10-Qs with the Securities and Exchange Commission. After completing the spinoff of the on-highway business into the IVECO Group earlier this year, the company has refocused as an agriculture and construction equipment leader with a highly significant U.S. presence. Reporting according to the standards for U.S. public companies is more consistent with the company's profile and investor base. This change is another step on the journey to be a more straightforward corporate structure and enhanced shareholder value.
On December 7th, we will be hosting a Tech Day in Arizona to showcase our impressive array of technology offerings and display what the future holds. We have made great strides since our Capital Markets Day in February and look forward to demonstrating our progress.
That concludes our prepared remarks, and we will now open the line for questions. Alan, please go ahead.
[Operator Instructions] We'll take our first question from Steven Fisher from UBS.
So you mentioned the Ag order book is down year-over-year. It sounds like you're restricting orders because the cost scenario is unclear. Can you just talk about kind of what part of the cost scenario remains the most uncleared? Is it labor? And I would think your material costs are maybe somewhat more estimable at this point, or is it freight? And to what extent do you think this pause in order and backlog is just temporary?
Steve n, there was actually 2 parts to -- I mean, not -- I'm going to answer your question, but I want to just clarify what I tried to communicate. There's 2 issues impacting the order backlog right now. One is, of course, what you just attributed to is us trying to maintain a price cost balance. But the other one, and it's important is, we're still allocating many of our orders. And if I'm having conversations with dealers, it's more about allocation and that's what's really happening to our ability to increase the backlog. So it's both the order book and us continuing to allocate orders, we do that.
What we're seeing in the supply chain is certainly -- and I said it is some improvement sequentially, and we expect that to continue. But as we do see quite frequently, energy prices in Europe are a big issue for us that we've got to understand not just how it affects us because we can certainly manage it. But really it's how it impacts our suppliers. Obviously, currency risk, we've proven our ability to manage it, but we just want to make sure we have all of an understanding of these elements as they're coming in and make sure that we're protected and our customers are protected.
Okay. That's helpful. And then maybe just thinking about the fourth quarter here, if I'm working the math correctly, it looks like going into the fourth quarter maybe your Ag margins might be implied to be down a few hundred basis points. Do I have that correct? And can you just give us some of the puts and takes that bridges from your strong quarter in margins this quarter to what's implied in the fourth quarter?
Steve, we don't expect to have Ag margins down compared to last year for sure in the fourth quarter.
Or sequentially.
They may be marginally sequentially down depending on the mix of products that we will have -- but I wouldn't speculate too much on how the margin will evolve in the fourth quarter. I think it's very important to show -- to remark that it constantly increasing margins that we have had and that is part of our plan and what we presented back in February for getting to higher margin levels by 2024, and we are delivering on that.
We'll take our next question from Nicole DeBlase from Deutsche Bank.
Can we just talk a little bit more about Europe? Obviously, a lot of concern about potential for demand deterioration in the region. Could you talk a little bit more, Scott, about what you guys saw in the quarter, both within Ag and construction? And any signs of slowdown whatsoever?
Yes. We have -- we said it last quarter, and I'll say it again. Where we see weakness is in the lower horsepower tractors. That's been a segment that was extremely strong through the latter parts of the pandemic and we kind of expect that to fill up. That's where we're seeing the most weakness. I just got a note this morning about -- from one of my team and I was in San Francisco on the weekend speaking to the dealers from South America. And there, this is dealer sentiment and the desire for more products heading into '23 is extremely high. So I think for high horsepower tractors and the cash crop business, we still see very strong demand and no signs of slowing down. Obviously, there's pockets in Europe where we are a little bit weaker. That's more of the hay and forage space. And we are managing that very closely. But overall on an aggregate basis, demand remains quite strong.
Got it. And then just a follow-up on pricing, still really strong for you guys. I guess, what is the expectation for carryover pricing into 2023? And I suspect that price/cost should be a positive from a margin perspective again next year. Is that correct?
Again, we have been delivering on price costs over the last few quarters. We expect to at least pair cost increase with pricing in the fourth quarter, and we will maintain pricing dividends into 2023.
We'll take our next question from Martino De Ambroggi from Equita.
The first is on prices, again, sorry, plus 17% in Ag in Q3, if it's not the historical peak we are very close to. So just to understand that you have visibility up to second quarter, you are already collecting orders. So I suppose, but tell me if I'm wrong that price will be able to offset raw mat inflation cost and so on at least for another couple of quarters, if not 3 in a row. First question.
The second, I know you do not provide any guidance for next year. But based on the -- your comments, I feel that you are confident to maintain, if not improve your margins -- your operating margins next year. I know there are too many moving parts, but am I right in assuming such a message or is too bullish?
It is definitely bullish, Martino. But we -- again, we have built in pricing and we have had price increases. So we expect to be able to maintain pricing levels into next year. And -- but then we will see how the market evolves. I mean, it's we're not -- we are facing -- we are competing on a market. We have dealers we're working with, and there's a constant price negotiation there. So we will -- again, we are committed in improving our gross margin and improving our margins overall. We will have also -- we're working on getting better in our production systems. Scott mentioned in the prepared remarks, our business systems, our kaizens and our willingness to get leaner in production and get past most of the issues that we've had in our production facilities to the supply chain disruptions. And that's another source of improvement for next year.
Okay. And another question is on net working capital, just to have a flavor of what could be the cash generation in the last quarter of the year, so because it's in excess of $1 billion, but I don't know if you are willing to narrow the [ reinsure ] or what else?
Yes. So we are guiding to or committing to be in excess of $1 billion for the year. We are still negative over the 3 quarters, so we need to do more than $1 billion in the fourth quarter. We think most of it will come from working capital improvement and most of it will come from inventory depletion. And that's mainly manufacturing inventories where we have still staffing our production systems that needs to be completed and needs to be sold in the fourth quarter.
And compared to the last call, you see relevant improvement in supply chain or is still struggling as it was in the previous quarter?
It's absolutely improving. We said in the pressed remarks the third quarter was better than the first and second quarter, and we expect that trend of improvement to continue going into '23.
We'll take our next question from Tami Zakaria from JPMorgan.
So my first question is going back to your order trends. I know you mentioned you are intentionally limiting orders and Ag is down 10% year-over-year. But can you give some color on small versus large Ag? Are you limiting orders for both? And let's see if you didn't limit orders, what would have been actual orders of like?
Well, we did talk about demand slowing for the low horsepower tractors. So obviously, we're not limiting orders there because that's -- the dealers are improving their dealer inventory so they don't need -- even if we open up the order books, there wouldn't be a lot of massive orders when there's a slowdown in demand. But in high horsepower tractors I cannot speculate what they would be. All I can give you is the sentiment that I get when I talk to our dealers and actually often to our own team about the desire to increase output. Certainly, as I mentioned in the prepared remarks, in both the Americas, in North America, Latin America, demand for high horsepower tractors is incredibly strong and inventories are tight. And we think that situation is going to persist through most of 2023.
Understood. That's very helpful, Scott. And then if I can ask another quick one. It seems like price cost was positive for the Ag segment in the third quarter, but construction seems like probably wasn't price/cost positive yet. So any visibility into when you think that segment will become price/cost positive?
Construction was price/cost positive in the quarter. They just are experiencing more of an impact with only 4 plants operating. They're having a bit more of an impact of some of the labor issues that we've experienced, and that caused them some pressure in the quarter.
Congrats on an excellent quarter.
Thank you.
We'll take our next question from Kristen Owen from Oppenheimer.
I wanted to come back to some of your comments around the new Raven introduction. Not to get too far ahead of the Tech Day, but can you elaborate on what some of those new offerings were? And then to the extent that you're willing to comment how the international expansion of that business is tracking?
We talked about the spreader that we introduced at, at Farm Progress. But really, I mean don't forget, obviously, we're incredibly pleased to have Raven as part of the family. But we've been working with them a long time. So they have been enhancing our ability to make our sprayer technologies and capabilities significantly better for some time. But now that they're an integrated part of it, we're just able to take that extensive product technology reach that they have and spread it across the platform. One of the things we talked about is autonomy. And where they are -- the work that they had done with autonomy really elevated our game, and I wouldn't quite describe it as plug and play, but we really got an efficient way to bridge that across into our product categories.
And we're excited to talk about that and many other things with Raven over time. The -- the expansion into Europe is going reasonably well, but we are -- I would say the supply chain challenges are probably impacting Raven a little bit more than the rest of our business. We're helping them. But certainly they would have greater sales in Europe if we weren't supply chain constrained given the access they have -- they now have to our distribution.
That's really helpful. And then I noticed some of the moderated outlook for industry volume for the full year, particularly in North America and Europe tractor. You've talked a lot about some of the order book trends. But I'm wondering how much you're seeing that moderation push volume into 2023 versus how much of that is really just a function of that truncated order book?
Well, we are showing -- we are talking about industry volumes. So that's an overall industry issue. I think Scott talked extensively about the lower power tractor in North America, but largest power tractor we expect to -- we still have very strong demand. We expect to have strong demand. Europe is -- Continental Europe is affected by some reduction in demand in Ukraine, as you can imagine, but combined demand remains very strong for the year. So I would say with the exception of the lowest power tractor in North America, we still see strong demand overall in the most important markets for us.
We'll take our next question from Michael Feniger from Bank of America.
In the slide deck, you list priorities, including the transition of the filing of Form 10-K and 10-Q that wasn't in the slide deck in Q2. Just curious how we should think about that as you guys are evolving? And just what should we think about with the pros and cons around the dual listing with Milan. You're clearly operating well. You're lagging your peers. You're trading at a big discount. I'm just curious how management is kind of viewing that dual listing? And if there's a board meeting or a view that needs to occur? Just curious if you can kind of flesh out that dynamic.
Well, let me take the reporting question first. So we are starting this quarter in reporting under the U.S. Forbes. I think this is a request we got from many investors and analysts to be more comparable with some of our North American peers. Clearly, after the spin-off of the vehicle, we are and we need to be more comparable and compared with, in particular, the Ag peers, but also the construction peers that are listed in North America. So that's an effort to get into that direction of getting the format, the timing and even the disclosures that our peers have.
Yes. And we've been, I don't know, fairly vocal the last several quarters that the dual listing is something that we've been evaluating and discussing with the Board. We had a Board meeting last week. We had a good review of the topic. And I would just -- as I said in the prepared remarks, I think this transition to SEC filing is part of that step in the right direction. And we're just -- we're evaluating if it's the right way to do it and what's the most efficient way for us to do it. And those are the 2 topics that we're evaluating. And I think that as we learn more and we make a decision on the matter, we'll certainly be forthcoming with it.
Appreciate that, Scott. And you guys are going to generate $1 billion of free cash flow, you'd be close to net debt free in 12 months or so. How do you balance with where the stock trades relative to your peers right now that discount with your other capital allocation priorities? How should we kind of think of how you view that relative to the other priorities that you're looking at with your cash flow?
I mean, it only walk through capital allocation priorities, and I think we've been pretty consistent. The first dollar we're going to spend is to drive future profitable growth for the company. We are investing a lot in CapEx and R&D. We'll continue to do that and ultimately driving margin expansion and market share through those investments is really the top priority. As it relates to -- as I've said, we're not going to go on a big acquisition spree, but -- and we've said and we've demonstrated, when we're trading below our intrinsic value, we think buying our own stock is a good investment, and we've leaned into that. We like to be a good dividend player and we like to maintain our debt rating. So we try to balance all of those. And I think you can bet that we'll continue to be diligent in how we do that. But the most important thing, you said it in your remarks, we do generate -- our business model allows us to generate a lot of cash flow, it gives us a choice on how we allocate it.
We'll take our next question from David Raso from Evercore ISI.
Can you just clarify? I think you said EPS for the year $1.44 midpoint. For the year-to-date, are you doing the all-in number, I mean the $1.06 year-to-date or the $1.12 because the implication on the fourth quarter is either $0.32 or $0.38 and either one of the margin seemed down a lot sequentially, but especially if it's $0.32. So can you just clarify that $1.44 -- what are you using for year-to-date EPS? Is it $106...
Yes. That's the adjusted EPS, Dave. So is the [ 111 ] I believe.
So $0.32 in the fourth quarter with revenue up, I'm just trying to understand, you have like revenues up $243 million, and it looks like you're trying to imply the margins for the fourth quarter, it's something like 8.5%. Or said another way, revenue is up $250-ish sequentially, but earnings down, EBIT almost [ $200 million ]. I'm just trying to think through price/cost from here, is that accurate?
No, it's not. Is not, is not margin in the fourth quarter reasonably higher than the margins we had last year in the fourth quarter. So there's something in the math that probably isn't working. But there's -- so we're talking about adjusted EPS. Of course, there's also -- you've seen the tax rate higher this quarter. So I expect the tax rate to affect next quarter as well. We can walk you through the details offline.
The reason I'm asking is the price/cost, I assume from here, and correct me if I'm wrong. The pricing, I mean, Ag was up over 17%, that maybe pricing on a year-over-year basis is starting to peak, but trying to think through the cost. Do you see as we think about going into the quarters for '23, is there a quarter where you see your cost year-over-year starting to be, let's say, less than they were the year ago quarter? I'm just trying to get a sense of this price cost was pretty constructive, right? It was about 420 bps for the whole company on a margin improvement year-over-year. Do you see that price/cost spread getting stronger over the next couple of quarters regardless of pricing gains slow a little bit versus the third quarter? I'm just trying to get that price/cost assumption as we roll into '23.
I will look also at the cost itself alone, right? We have incredible increase in cost over the last few quarters, right, coming from raw material, coming from transportation, coming from production. And we are still fighting with all of these problems. We try and withhold and we managed to get pricing and to get sales at this pricing as well. If we look only at the fourth quarter, we still expect product cost to be higher than what it was last year. And we still expect price to price to continue pricing. We have embedded pricing in there, but it's not a walk in the park.
Yes. But we do expect, obviously, the inflation despite many of the central banks around them, the world trying to bring it under control, it's not yet under control. So -- but we do see logistics costs perhaps coming down a little bit. But I do want to give a shout out to Derek Nielson and what his team is doing is really looking at our cost structure compared to pre-pandemic levels and what it's going to take is we've added a lot of cost to be able to manage through the pandemic, how do we get those costs out. And it's a really good thought process to go almost rebaseline and the work that they're doing, driving lean, driving aggressive oversight to make sure that we're ripping cost out of our own factories and own supply chains, not just waiting on supply chain costs to come down.
No, I appreciate it. I'm just trying to get a sense of that relationship because what you're implying about the fourth quarter, at least sort of raises an eyebrow about did we just get the biggest price cost benefit already? I'm just trying to make sure we understand that. And then real quick, the order books for Ag, large Ag, when do you expect to expand the order book window.
Next year.
[Operator Instructions] We will take our next question from Nicholas Green from Bernstein.
Nick Green from Bernstein. Can I return to the net working capital in the flow at Q4, please? You mentioned Oddone that you think it's quite likely it's not a -- it's something you're expecting. It's effectively part of the guidance. Can you talk us through risk factors to you being able to collect that amount of working capital? I'm trying to understand how much of that's within your control? Would you perhaps like to identify any items that may prevent your ability to monetize this inventory in Q4? That's the first one.
I'd say the main risk factor is not being able to complete some of the red flag equipment or what we call fleet, that is still in our plans and depends on availability of parts, availability of semiconductor in some cases, availability of labor as well.
But I don't mean generically. I mean, specifically, it sounds like you're comfortable with all of those items because you're comfortable giving the guidance. So are you expecting, I guess, because of your existing order book, maybe you can see the visibility of what you're going to be delivering. Are you fairly comfortable that you will be able to monetize that amount of working capital?
It really has nothing at all to do with order books. It has everything with to do with our plants being able to get the parts from suppliers, complete the units and get them shipped within the quarter. And that we've got literally -- if you could see the spreadsheet that we have to manage this process, it would blow your mind. But it's very well because we put it in our guidance, we have that much confidence in our team to be able to execute it, but it's work to do.
Okay. I think I'm still not clear how much if we come to when you give us full year results, if you haven't had or not made that amount of inventory incoming, it will be blamed on certain factors that we could have talked about today. So -- but it sounds like you are considering them.
Let me be clear. What we're talking about is fleet inventory. When we talk about fleet inventory, these are combines, tractors, wheel loaders, everything in our portfolio that we run our factories to continue to meet customer demand, but we can't complete the unit because there's a missing component. Those missing components, we've got a line of sight when we expect those suppliers to come in. And therefore when we complete those and ship those, that's what's embedded in our guidance.
Okay. That's very clear. And then second question on the construction margin. So in the past this division did suffer operating deleverage each time volumes went down. It's had a number of occasions of negative margin in the past. As you mentioned, you're suffering some of the consequences of the strike at the moment. But looking forward, we would expect probably activity levels to drop as well given construction activities. So can you talk us through what steps you're taking to ensure the cost base of the construction division is correctly sized for a slowdown so that we can hopefully avoid operating deleverage this time around.
Yes. Well, I got -- I said it and I will repeat it. The work that Stefano Pampalone and his team are doing to set a platform for future profitable growth in this business is impressive. It's -- the growth, the growth that they're seeing in the North American market and especially in South America right now is impressive. And they recognize -- we do the modeling, and it's nice to see. They're looking at what happens when this really strong growth model slows down and they're trying to build the system so that we stay positive even in those down markets. Now fortunately we've got a little bit of time, but they're investing in the portfolio. The product lineup is improving. The technology insertion in those is improving. And we're running our plants more efficiently. They're allocating, shifting production where it makes sense. They've done a lot of cleaning up over the last few years, and I think we'll benefit from that going forward.
So does that suggest that the lower margin this quarter was due to a large extent to the industrial action being taken? Are you able to give us a hint of the margin if the strike haven't been there?
Yes. Well, part of what we're doing is looking where it makes sense. So we did make the decision in the quarter to transition some products to other plants and that impacted our ability to deliver. So obviously, it was down a bit because of our decision to transition production during the quarter. But no, no, no, we don't -- obviously, we're not satisfied with the current margins, but we see a very clear path to improvement over the next several quarters.
There are no further questions on the line. Thank you, everyone, for joining today's call. You may now disconnect.