Deere & Company (NYSE:DE) Q3 2023 Earnings Call Transcript

Deere & Company (NYSE:DE) Q3 2023 Earnings Call Transcript August 18, 2023

Deere & Company beats earnings expectations. Reported EPS is $10.2, expectations were $8.14.

Operator: Good morning, and welcome to Deere & Company’s Third Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and answer session of today’s conference. I would now like to turn the call over to Mr. Brent Norwood, Director of Investor Relations. Thank you, sir. You may begin.

Brent Norwood: Hello. Also on the call today are Josh Jepsen, Chief Financial Officer, and Josh Rohleder, Manager of Investor Communications. Today, we’ll take a closer look at Deere’s third quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2023. After that, we’ll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at johndeere.com/earnings. First, a reminder. This call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company. Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.

Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking statements concerning the company’s plans and projections for the future that are subject to uncertainties, risks, changes, and circumstances and other factors that are difficult to predict. Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8-K, risk factors in the annual Form 10-K, as updated by reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP.

Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at johndeere.com/earnings under Quarterly Earnings & Events. I will now turn the call over to Josh Rohleder.

Josh Rohleder: Good morning, and thank you all for joining. John Deere finished the third quarter with another strong performance, resulting in 22.6% margin for equipment operations. Performance exceeded expectations as a result of sustained demand for both farm and construction equipment, as well as sound operational execution across all business units. Ag fundamentals continue to remain healthy, with a full order book and positive customer sentiment supporting a strong finish to fiscal year 2023. Meanwhile, Construction & Forestry remain sold-out for the remainder of the fiscal year with robust shipments driven by strong retail demand and rental re-fleeting. Slide 3 begins with results for the third quarter. Net sales and revenues were up 12% to $15.801 billion, while net sales for the equipment operations were up 10% to $14.284 billion.

Net income attributable to Deere & Company was $2.978 billion or $10.20 per diluted share. Third quarter net income results included a $243 million tax benefit and $47 million of associated interest income stemming from a favorable tax ruling on Brazilian VAT tax subsidies. Turning now to Slide 4, let’s begin our segment review with the Production & Precision Ag business. Net sales of $6.806 billion were up 12% compared to the third quarter last year, primarily due to price realization. Price realization for the quarter was positive by just under 12 points. Currency translation was also positive by approximately 1 point. Operating profit was $1.782 billion, resulting in a 26.2% operating margin for the quarter. The year-over-year increase was driven by favorable price realization, improved shipment volumes and favorable sales mix, which was partially offset by higher production costs, increased SA&G and R&D spending, and unfavorable currency exchange.

Shifting to Small Ag & Turf on Slide 5. Net sales were up 3%, totaling $3.739 billion in the third quarter. The increase was a result of price realization, which was partially offset by lower shipment volumes. Price realization was positive by slightly over 9 points. Currency was also positive by slightly under 0.5 point. Operating profit improved year-over-year to $732 million, resulting in 19.6% operating margin. The year-over-year increase was primarily due to price realization and was partially offset by higher production costs, lower shipment volumes, and increased SA&G and R&D spending. Slide 6 shows our industry outlook for ag and turf markets globally. In the U.S. and Canada, we expect industry sales of large ag equipment to be up approximately 10% during the fiscal year, reflecting a continuation of strong demand.

Ag fundamentals remain solid, with farm net income expected to be near historical highs even if down from last year’s record levels. Drier weather conditions over the summer put some downward pressure on yields, tightening ending grain stock estimates and further supporting commodity prices. Solid order visibility provides a high level of confidence as we move into the fourth quarter. Within Small Ag & Turf, we estimate industry sales in the U.S. and Canada to be down between 5% and 10%, as strength for midsized equipment continues to be offset by weaker consumer-oriented products, which have been pulled down in part by high interest rates. Midsized tractors in the 100 to 180 horsepower range are sold out for the remainder of the year, while production cuts in the sub 40 horsepower compact tractor range have helped bring inventory levels down from April highs.

Hay and forage continues to see significant year-over-year increases as production shortages in 2022 fully abate. Turning to Europe, the industry is forecasted to be flat to up 5% for fiscal year 2023. Our visibility for the rest of 2023 remains excellent, as order books are largely pre-sold at this point in the year. In South America, we expect industry sales of tractors and combines to be flat to down 5%, following a record year of equipment in 2022. Positive sentiment around record grain production in 2023 was somewhat offset by political uncertainty and a delayed government sponsored financing plan. The market remains stable and order books now provide visibility through the remainder of 2023. Industry sales in Asia are forecasted to be down moderately, as volumes in India remain subdued when compared to record levels in 2021.

Moving now to segment forecasts on Slide 7. For Production & Precision Ag, net sales continue to be forecasted up around 20% for the fiscal year. The forecast assumes roughly 15 points of positive price realization for the full year and minimal currency impact. Segment operating margin for the year remains between 25% and 26%, reflecting strong execution globally. Slide 8 gives our forecast for the Small Ag & Turf segment. Net sales are expected to remain up around 5% in fiscal year 2023. Guidance includes about 9 points of positive price realization and approximately 1 point of currency headwind. The segment’s projected operating margin is now between 17% and 18%, reflecting stronger-than-expected operational efficiency, notably in Europe.

Now switching to Construction & Forestry on Slide 9. Net sales for the quarter were $3.739 billion, up 14%, primarily due to price realization and higher shipment volumes. Price realization was positive by nearly 10 points and currency translation was also positive by approximately 0.5 point. Operating profits increased year-over-year to $716 million, resulting in a 19.1% operating margin due to price realization and improved shipment volumes. These were partially offset by increased SA&G and R&D expenses, higher production costs and unfavorable currency impact. Slide 10 shows our 2023 industry outlook for Construction & Forestry. Industry sales of earthmoving and compact construction equipment in North America are both projected to remain flat to up 5%.

Demand for earthmoving and compact construction equipment remains robust, driven primarily by the early stages of infrastructure spending and rental re-fleeting. The industry has also benefited from some stabilization in housing, as well as reshoring efforts in the manufacturing sector, which are helping to offset weaknesses in office and commercial real estate. In forestry, we estimate the global industry will be flat to down 5%, with growth in Europe offset by softening markets in the U.S. and Canada. Global roadbuilding markets are forecasted to be flat to up 5%. Strong performance in North America and emerging markets in South America and India are supporting strong fundamentals across Europe. Continuing on with the C&F segment outlook on Slide 11.

Deere’s Construction & Forestry 2023 net sales are now forecasted up between 15% and 20%, with results likely to converge towards the middle of that range. Our net sales guidance for the year contains about 11 points of positive price realization. Operating margin is now expected to be between 18.5% to 19.5%. Next, we’ll transition to our financial services operations on Slide 12. Worldwide Financial Services net income attributable to Deere & Company in the third quarter was $216 million. The 3% year-over-year increase was due to income earned on a higher average portfolio, partially offset by less favorable financing spreads. For fiscal year 2023, our outlook remains at $630 million, reflecting less favorable financing spreads, the second quarter correction of the accounting treatment for financing incentives, a higher provision for credit losses, increased SA&G expenses, and lower gains on operating-lease dispositions.

These were partially offset by benefits from a higher average portfolio balance. Finally, Slide 13 outlines our guidance for net income, effective tax rate and operating cash flow. For fiscal year ’23, we are raising our outlook for net income by $0.5 billion to be between $9.75 billion and $10 billion, reflecting another quarter of strong results and continued optimism for the remainder of the year. Next, our guidance incorporates an updated effective tax rate between 21% and 23%, which reflects the impact of a favorable tax ruling in Brazil, as mentioned earlier. Lastly, cash flow from equipment operations is now projected to be in the range of $10.5 billion to $11 billion. This concludes our formal remarks. We will now turn to a few specific topics relevant to the quarter before opening the line for Q&A.

Let’s begin with Deere’s performance this quarter, Brent. We had another really strong quarter, with operational results coming in just ahead of our own expectations. Net sales for equipment operations were up 10% year-over-year, while operating margins came in at 22.6% for the quarter. Can you break down what went well for us this quarter?

Brent Norwood: Thanks, Josh. First, our factories ran really well in the third quarter. We saw continued progress from our supply base, enabling our operations to hit production schedules almost exactly as planned. This precise execution from our factories is evident in our top-line quarterly cadence, which will show a return to normal seasonality in 2023 when compared to 2022. And a return to normal seasonality is incredibly important to us because it means that we are delivering on our customer commitments to get the machines in season. Importantly, this is a real testament to our factory teams. And the real story, as you alluded to, is around margins, right? All three divisions saw lower-than-expected production cost inflation as our operational teams continued to deliver on cost reduction activities, having eliminated many of the inflationary and disruption driven costs over the last couple of years.

This was especially notable for Construction & Forestry, which delivered record year-to-date margin performance. In addition to exceptional near-term execution, Construction & Forestry is also benefiting from executing on our business strategy as shown by our successful integration of Wirtgen, the dissolution of our Deere-Hitachi joint venture, and the strategic portfolio actions that have helped us focus the business. As it relates to the quarter, these results underpin our commitment to operational excellence. With supply chains continuing to improve, we have been able to reduce delinquencies and improve resiliency in our supply base. In premium freight alone, we’ve been able to reduce costs by nearly 50% this year when compared to last year.

From a production standpoint, we’ve seen material cost inflation come down meaningfully throughout the year. We expect this trend to continue throughout the rest of the year. And when you successfully execute on all of these different initiatives simultaneously, you get factories that fundamentally run better. Across the board, we’re seeing smoother operations, leaner in process inventories and better ability to meet our delivery commitments, which ultimately lead to a better customer experience.

Josh Rohleder: That’s great. Thanks, Brent. With operations running much more smoothly, maybe we can flip to the other side of the equation. There’s been a large amount of focus on industry fundamentals, both from a construction and an ag perspective. I’d like to start with construction equipment. We’ve seen record amounts of government funding announced in the past few years. Alongside the IIJA and CHIPS Act, the IRA has already announced more than $130 billion worth of clean energy projects. How are construction fundamentals faring today?

Brent Norwood: Yes, that’s great context, Josh. Earthmoving industry fundamentals remain quite strong, driven by construction job growth across most sectors and, in particular, large infrastructure project spending. Coupled with continued rental industry re-fleeting, demand is expected to remain steady throughout the remainder of the year. And while we see nice tailwinds from mega project spendings tied to government funds, most of these projects will primarily benefit 2024 and potentially even 2025, supporting an elongated cycle for construction equipment sales. In the near term, the residential housing market, while down from the highs in 2021, has stabilized despite elevated interest rates. For non-res demand, reshoring trends are driving manufacturing projects, while sectors linked to office space and apartment building construction remain quite sluggish.

Ultimately, this demand backdrop translates to a strong six month rolling order book extending into the second quarter of 2024. And finally, while we have had some success increasing inventory from historic lows, inventory to sales ratios still remain well below target levels.

Josh Rohleder: Okay. That’s perfect. So, near-term construction fundamentals remain resilient and the business appears to be very well positioned on the construction side heading into 2024. Focusing now on ag fundamentals, farmers are expected to have another strong year relative to historicals. WASDE just released its latest forecast last week, showing crop yields down and stocks tightening. How should we be thinking about farmer fundamentals, Brent?

Brent Norwood: Grain prices have definitely seen a large amount of volatility this year, but equipment demand has remained strong, particularly for large ag. While down year-over-year, crop prices are forecasted to be the third highest in over a decade. And in North America, farmers are projected to have another year of healthy net income. Additionally, farm inputs have trended back down to pre-COVID levels, providing a benefit to next year’s farm margins. And finally, as grain production remains subject to ever-volatile weather patterns and adverse geopolitical events, expect stocks to use to remain tighter for a bit longer. So, in summary, ag fundamentals are still supportive in the North American market. Farmers will continue to see relatively healthy economics, supported by downward trending input cost and continued constraint on grain supplies globally.

Josh Rohleder: Thanks, Brent. That’s great color on the U.S. and Canada. If we look outside North America, how will we see these fundamentals impacting Brazil?

Brent Norwood: Yes, Brazil has been a real dynamic market this year. Earlier in the year, we saw some of the political uncertainty and the delayed government-sponsored financing plans weigh on sentiment. While profitability has been very good, some farmers generated lower-than-expected income due to lower grain prices combined with a strengthening Brazilian currency relative to the U.S. dollar. As such, we saw the industry forecast come in a bit. And as a result, we trimmed our equipment production some in the back half of 2023. At this point, the order book extends through the fiscal year and our pre-sold position is robust, eclipsing 90% for combines.

Josh Jepsen: Hey, Brent, this is Josh Jepsen. Just to add to that, Brazil still experienced record production this year. We’re seeing continued acreage expansion and a supportive government-sponsored financing program is now in place. So, long term, Brazil remains a key market for us, that we’ll continue to invest in for the future as we accelerate precision technologies in the region.

Josh Rohleder: Thanks, Josh. Now switching back to the North American market. With order books full through the end of the year, how are new field inventory levels shaping up as we exit 2023 and begin planning for ’24?

Brent Norwood: That’s a great question, Josh. Starting from the top, all of our North America large ag production is sold out for this year. We expect ending year-over-year changes in new field inventory to be modest. In-season inventory increases have largely corresponded to our quarterly production schedules, which will come down in the fourth quarter. Combine inventory, for example, saw its highest level in the second quarter and is currently down from its peak. We will see that figure step down further in connection with seasonal retail activity ahead of harvest. And while high horsepower tractor inventory remains sequentially flattish in the third quarter, we’ll see that drop off at the end of the fourth quarter, which is typically the highest retail quarter for tractors. Keep in mind that combines and high horsepower tractors are 95%-plus retail sold to customers already.

Josh Rohleder: Perfect. So, we will expect to see inventories wind down further throughout the fourth quarter. Now what about used inventories? We’ve seen those rise pretty significantly year-over-year from their historic lows last year.

Brent Norwood: We have. But the key phrase here is historic lows last year. When you are starting with a historically small existing inventory base, like we had in 2022, even modest changes in units will reflect large percentage increases. That said, our dealers have been watching used inventories very closely and have been managing them proactively. Large ag equipment has roughly four to five owners over its useful life in North America. So for every combine or tractor we sell, a dealer will typically facilitate three to four additional transactions as used equipment works its way down the trade ladder. Now when you put it in the context of my previous comments around new inventory, it would make sense that we saw inventory levels rise during the middle part of the calendar year.

However, if we look at used combines, for example, we saw a 10% decrease in used inventory since May. Also, August tends to be an important month for used inventory. So we’ll watch closely how that trends. Importantly, used gear inventory for both combines and tractors remains about 20% lower than the seven-year average on a unit basis.

Josh Jepsen: This is Josh. Maybe one thing to highlight. Just I think the important takeaway here is that by year-end, we expect both new and used inventory levels to be below historic levels on a unit basis. So really position us well as we exit ’23 into ’24.

Josh Rohleder: Perfect. But how are we doing from an EOP perspective in North America?

Brent Norwood: At this point, we’ve kicked off, and in some cases, closed our early order programs for a few product lines. I want to caveat here that it is still early. And while we don’t have a fully formed view, the early order programs are giving us some early data points. We launched our sprayer EOP back in May, and the program ended July 31. We have sold out all of our model year ’24 production slots with unit sales up double digits when compared to model year ’23 sprayers. The 2024 year-over-year increase reflects improved supply conditions, which had disproportionately limited sprayer production in 2023. Phase 2 of planters opened in mid-July and has just under two weeks left to go in the program. Orders are relatively flat compared to the same point in time as the program last year and down 5% relative to the end of last year’s EOP.

However, we won’t have the final read on this year’s early order program until the end of August. Importantly, we are seeing favorable mix towards our larger planters and higher take rates on technology. Our combine early order program just opened at the beginning of this month and has gotten off to a nice start, but it remains too early to extrapolate any data points for 2024 as the program will continue through the end of November. Likewise, our tractor order book has just opened this week for 2Q ’24, and we have not had — we don’t have any data points to share at this time. I would note, however, that the order book is currently full through the calendar year ’24.

Josh Rohleder: Thanks for the color on North America, Brent. Clearly, too early to tell here, but it sounds like preliminary data is supportive. To round out our discussion, can we focus on Europe and discuss how things are shaping up there for next year?

Brent Norwood: Yes, absolutely. And actually, Josh, I just want to amend my prior statement, tractors are sold out through calendar year ’23, not ’24. In Europe, however, order books are stretching into the second quarter of 2024, providing decent visibility, but with some early order programs having just kicked off, it remains too early to form a view on 2024 outlook. Expect markets in Europe to remain dynamic with outlooks varying a bit between Western Europe versus Central and Eastern markets. Western markets are seeing arable cash margins — are seeing arable cash flow stabilize at supportive levels, while declining input cost will help buttress financials going into next year. Meanwhile, dairy margins may see some pressure in 2024.

On the other hand, markets with close proximity to Ukraine will contend with lower commodity prices as reduced port access means grains are flowing over neighboring borders, pressuring local prices. All in, expect Europe to remain a dynamic market going into 2024, and we’ll have a more informed view as we get closer to the start of our fiscal year.

Josh Jepsen: And one point I’d add to highlight in Europe is our dealer network. We continue to see higher levels of sales flowing through dealers of scale. This has driven better market share, higher rates of precision ag adoption and overall stronger businesses for our dealers and Deere.

Josh Rohleder: Perfect. That’s great insight. I now have one last question for you, Josh. Given the high level of cash flow this year, we’ve had an opportunity to execute on all elements of our capital allocation priorities. Can you walk through some of the decisions we’ve made this year with respect to funding further investments in our business, both organic and inorganic, while at the same time returning higher levels of capital back to investors?

Josh Jepsen: Yeah, great question, Josh. This is, first and foremost, a direct reflection of the strong performance this year, which is projected to yield between $10.5 billion and $11 billion in operating cash flow for the equipment operations. We’re very proud of what we’ve been able to accomplish this year and are encouraged by our ability to both invest aggressively in the business, while at the same time returning a significant amount of earnings to our shareholders. During the year, we’ve increased R&D 15%. We pulled ahead some CapEx projects into 2023 and has still managed to simultaneously deliver over $5.5 billion to shareholders year-to-date through dividends and share repurchases. It further reinforces our excitement for the future and the opportunities we see ahead as we execute on the strategy, unlocking value for customers.

Josh Rohleder: Thanks, Josh. And before we open up the line for questions, do you have any final thoughts you’d like to share?

Josh Jepsen: Yes. Thanks. As previously noted, the team is executing at a high level in 2023, which is evident in our results. We’re actively working to reduce some of the inflationary and disruption costs experienced over the past couple of years, and we expect to see that benefit continue. Over the last decade, we’ve been on a journey to deliver more value per unit. This is clearly visible today through our higher revenues on lower new units, making us less dependent on new unit sales to drive increased levels of performance. As we continue to execute our strategy, this trend should accelerate even faster over the coming years. By utilizing our production systems approach and leveraging the tech stack, we can help our customers do their jobs more profitably and sustainably. That is our purpose, and we are more excited about it each day.

Josh Rohleder: Thanks, Josh. Now, let’s open up the line for questions from our investors.

Brent Norwood: Now, we’re ready to begin the Q&A portion of the call.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Jerry Revich with Goldman Sachs. Sir, your line is open.

Jerry Revich: Yes, hi. Good morning, everyone. Josh, I’m wondering if we could just continue the discussion you just touched on in terms of higher value per unit. So, in the past, you folks have been able to outgrow ASPs by 3% to 4% per year beyond price. Do you have a finer point that you can share on what that might look like in ’24? And if you could just touch on precision ag take rates and how they’re tracking as part of that conversation as well, if you don’t mind?

Josh Jepsen: Yes. Thanks, Jerry. I appreciate the question. I think we’re seeing that continued trend of 3, 4 points on top of the inflationary price as it relates to technology and the appetite we’re seeing to continue to drive technology into the machines. As we look forward, and start to drive the business model shift, that may change a little bit as we see and build a little more recurring revenue. But I think all in, we’re continuing to see the benefits on the unit economics through what we’re doing in technology and the value that we can create for customers.

Brent Norwood: Yes, Jerry, as it relates to take rates on technology, obviously, we just finished up our sprayer early order program and are near complete on planters. Those are two product lines that have a high degree of technology embedded in those solutions. And for some of those mainstay technology innovations like ExactEmerge and ExactApply, we continue to see those take rates increase mid-single digits year-over-year. I mean both of those are really approaching high levels. I think ExactEmerge is around 60% for 2024. ExactApply is a little over 70%. So great progress on those. Other products like Combine Advisor have almost just become standard. I think we’re at almost 100% take rate there, and the same is true for our premium and automation activation suite for our tractors, which is almost a near 100% take rates.

So, these things are really driving that higher average selling price that Josh talked about. And as we begin to launch some of those next-generation technologies, I think we’ve got opportunity to supplement the higher average selling prices with some recurring revenues as we get into ’25, ’26 and beyond.

Josh Jepsen: Yes, Jerry, maybe one last thing I’d add, too, that bodes well in terms of the direction we’re headed is we’re seeing growth in engaged acres and we’re seeing growth in highly engaged acres. So the interaction we’re seeing, the value that we can create with our digital tools and having that all in one place in the John Deere Operations Center for our customers is continuing to drive value and we’re seeing that continue to aid in our business. Thanks, Jerry.

Jerry Revich: Thank you.

Operator: Thank you. Our next question is from Jamie Cook with Credit Suisse. Your line is now open.

Jamie Cook: Hi. Good morning. Congrats on a nice quarter. I guess my first question, as it relates to — it sounds like supply chain is getting better, which probably bodes well for 2024. So, as you’re thinking about supply chain getting better and you’re looking at your — what you’re seeing so far in terms of the early order program, can you talk to your approach with inventory next year, both for Deere and both at the dealer level whether you think you would overproduce retail demand [to achieve some] (ph) more normalized inventory levels? I guess that’s my first question. And then my second question, Josh, again, just on the margin performance of the company, can you talk to where you are with regards to reducing the volatility of your margins? Since that there was a downturn coming, how resilient your orders would be? How is it detrimental towards some of the internal initiatives? Thank you.

Brent Norwood: Hey, good morning, Jamie. Thanks for the question. I’ll start with some comments on supply chain and what that means for our inventory position next year, and Josh can comment on the margin progress. But I think you’ve been able to see from our results that our factories ran really well in the third quarter. We’ve got a robust cost agenda still to come in next year, but we’re really pleased that the progress we’ve made on reducing production cost inflation, particularly in the third quarter. If you look at our production cost inflation numbers in Q3, I mean, they came in about half what we had originally anticipated. So that was really good work by our factory teams and our supply management teams. And I think what you’re seeing is we’re driving a lot of progress in terms of getting delinquencies down to almost pre-COVID levels.

We’re driving freight costs down. We’re still seeing a little bit of pressure on some of the purchase components, and labor and energy are up, but things are trending in the right direction. And I think we’ve got a really robust agenda for next year around further cost reduction in the supply base, further resiliency in the supply base and then just designing out cost for future programs next year. All of that is going to help us manage inventory. As we noted, for large ag inventory, we’ve been sort of below historic levels and below target levels. Now, we’ll end the year relatively low as we sort of work through sort of the fourth quarter retail sales that we would anticipate to happen. That said, our starting position or sort of our default position, if you will, beginning any fiscal year is always to produce in line with retail sales, and then we’ll leave ourselves some optionality to build as we get through the selling season.

So, we have a fully formed view on next year after all of our early order programs are done and after we’ve made some progress on our tractor order book, we’ll leave ourselves a little optionality to determine what’s the right level of inventory. And obviously, our dealers will help with that input as well. But again, right now, our default position is to produce in line, but given the exit position that we’ll have, which will be really attractive from an inventory perspective, we’ll leave ourselves some optionality for next year.

Josh Jepsen: Yes, Jamie, if you think about reducing volatility, I think there’s some near-term things that we’re working on. Brent mentioned what we’re doing as it relates to cost management, continuing to take some of the cost that we’ve seen through inflation and disruption out of the system, that’s an important one. Continuing to drive technology into our machines, driving, as I just mentioned, more value per unit from an economics perspective will be beneficial. There’s a lot of work, great work going on in terms of lifecycle solutions and how we take care of our customers through the life of our products from first owner down to the fourth and fifth owner. And that activity will help dampen some cyclicality as well. And I think the last one is maybe a little bit longer term is we are building the infrastructure to drive solutions as a service for our business in terms of how we shift business model on some of our new technologies.