Q1 2021 Deere & Co Earnings Call

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Okay.

[music].

Good morning, and welcome to Deere and company first 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. Josh Jepsen director of Investor Relations. Thank you you may begin.

Thank you and good morning.

Okay.

Also on the call today are Ryan Campbell, our Chief Financial Officer, and Brent Norwood manager Investor Communications today, we'll take a closer look at <unk> first quarter earnings then spend some time talking about our markets and our current outlook for fiscal 'twenty. One after that we'll respond to your questions. Please note that slides are available to complement the call. This morning and can be accessed on our website at John Deere Dot com.

Slash earnings first a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere <unk> 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 comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent form 8-K, and periodic reports filed with the Securities and Exchange Commission.

This call May include non May include financial measures that are not in conformance with accounting principles generally accepted in the United States of America or GAAP. Additionally, information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website at John Deere Dotcom slashed earnings under quarterly earnings and events I'll now turn the call over to Brent.

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John Deere demonstrated strong execution in the first quarter, resulting in a 17% margin for the equipment operations AG fundamentals improved significantly throughout the first quarter and the improved sentiment is reflected in the most recent status of our order books and early order programs.

While markets for our construction and Forestry Division also.

<unk> in the first quarter, leading to improved levels of profitability at our heightened outlook for the rest of the year.

Slide three shows the results for the first quarter net sales and revenue were up 19% to $9 1 billion, while net sales for the equipment operations were up 23% to just over $8 billion.

Net income attributable to Deere <unk> company was one to two 4 billion or $3 87 per diluted share.

During the first quarter of 2021, the company recorded impairments totaling $50 million pre tax to certain long lived assets. These.

These impairments were more than offset by a favorable indirect.

So in force ruling in Brazil of $58 million pretax.

In comparison to last year the quarter also benefited from minimal employee separation costs, which represented $127 million pretax in the first quarter of 2020.

Before transitioning to review of our business divisions I'd like to highlight a few changes to our segment.

Tax rate as shown on slide four.

As you probably already noticed in our press release the company implemented a new segment reporting structure beginning in fiscal year 2021 to align with the most to <unk>.

With the recent implementation of the new strategy and operating model, which was announced last summer.

As.

<unk> report the Companys agriculture, and turf operation was bifurcated into two new segments. The production and precision agriculture segment is responsible for developing and delivering global equipment and technology solutions for production scale growers of large grains small grains cotton and sugar.

Main products include large.

And certain mid sized tractors.

Combines cotton pickers, sugarcane, harvesters seeding and application equipment.

The small agriculture, the small agriculture and turf segment is responsible for developing and delivering market driven products to support mid sized and small growers as well as turf customers.

The operations.

<unk> are principally organized to support production systems for dairy and livestock high value crops, and turf and utility turf and utility operators.

Primary products include certain mid sized and small tractors as well as hay and forage equipment riding a commercial lawn equipment golf course equipment and utility vehicles.

Bill reporting changes for the construction and forestry and financial services segments. As a result, the company will now report across these four segments.

Now, let's turn to a review of our production in precision AG business starting on slide five.

Net sales of 3.069 billion were up 22%.

There were no to the first quarter last year, primarily due to higher shipment volumes and price realization, partially offset by the unfavorable effect of currency translation.

Rice realization in the quarter was positive by nearly eight points, while currency translation was negative by one point.

Operating profit was 643 million.

Resulting in a 21% operating margin for the division compared to an eight 7% margin for the same period last year.

The year over year increase was driven by positive price realization higher shipment volumes and sales mix and a $53 million favorable indirect tax ruling in Brazil.

These items were partially.

Partially offset by unfavorable effects of foreign foreign currency exchange.

Excluding the impact of onetime items, such as the favorable tax ruling first quarter margins were 19 were around 19, 5%.

Also when comparing to last year keep in mind that the results in the prior period included employee separations.

<unk> costs of $42 million.

With respect to price realization the above average results for the quarter were primarily driven by a few different factors, while north American list prices were up slightly above average the primary drivers of price came from significant mid year price adjustments made in 2020.

<unk> for select foreign markets to offset unfavorable currency movements. Additionally.

Additionally, certain U S and Canada products also had mid year adjustments in 2020 as a result of product launches such as the new aydar in may of last year.

Lastly, the current low inventory levels across the industry have led to lower overall incentive.

Spending thus boosting net price realization.

We do anticipate net price realization to moderate closer to normal level levels towards the second half of the year.

Shifting focus to small AG and turf on slide six.

Net sales were up 27% totaling $2 515 billion in the first quarter.

The increase was driven primarily by higher shipment volumes price realization and the favorable effects of currency translation.

Price realization in the quarter was positive by nearly six points, while currency translation was positive by two points.

For the quarter operating profit was $469 million.

Sing and an 18, 6% operating margin for the division compared to a seven 9% margin for the same period last year.

The year over year increase was due to higher shipment volumes positive sales mix and price realization while results for the prior period were affected by voluntary employee separation expenses of about 36.

Result.

Slide seven shows our industry outlooks for AG and turf markets globally.

In the U S and Canada, we expect industry sales of large AG equipment to be up between 15, and 20% for the year, reflecting improved fundamentals in the AG sector.

Our outlook is guided in part by the results of our earlier.

6 million programs in tractor order book.

Our crop care early order program, which ended in October.

Finished with unit orders up double digits compared to the prior year.

In addition, we completed our combine early order program in January with results also up double digits and outpacing the results.

Of our crop care program.

Furthermore, our large tractor order book now extends into the fourth quarter and has an increased production schedule relative to last year.

Meanwhile, we expect industry sales of small AG and turf equipment in the U S and Canada to be up about 5%.

<unk> forecasted production.

<unk> will be higher than the industry, reflecting our plans to increase inventory levels in small AG, which ended the year at historic lows.

Moving onto Europe, the industry outlook is forecast to be up about 5% as higher commodity prices strengthened business conditions and the arable segment offsetting some weakness in dairy and livestock.

Importantly, our tractor order book in Mannheim now extends into the fourth quarter, providing good visibility through much of fiscal year 'twenty one.

Furthermore, we've seen continued progress executing our regional strategy focused on large and precision AG.

In South America, we expect an industry sales sales increase of about.

Per cent the confluence of higher commodity prices strong production and a favorable currency environment have boosted profitability of farmers driving equipment demand for the year.

<unk> limited government financing programs private debt is more widely available this year supporting continued strength in equipment demand.

Industry sales in Asia are forecast to be down slightly though key markets for deere are performing slightly better.

Moving on to our segment forecast on slide eight.

For production and precision AG net sales are forecast to be between $15, five and $16 5 billion in fiscal year 'twenty one.

10, a forecast includes a currency tailwind of about a point and expectations of just under six points of positive price realization for the full year.

For the segments operating margin our full year forecast is range between $19, five and 25% with solid performance across the various geographical regions.

Slide nine shows our forecast for the small AG and turf segment.

Net sales in fiscal year 'twenty, one are forecast to be between 10, five and $11 5 billion.

The guidance includes expectations for two points of positive price realization and a favorable currency impact of about three points.

The segment's operating margin is forecast.

Cost to range between 14, five and 15, 5%.

Now, let's focus on construction and forestry on slide 10.

For the quarter net sales of $2 467 billion were up 21%, primarily due to higher shipment volumes price realization and the favorable.

Effects of currency translation.

Additionally, <unk> ended its practice of reporting on a one month lag, resulting in four months of her connectivity in the quarter.

The quarter's results were boosted by three points of positive price realization and a currency tailwind of one of about one point.

Operating profit moved higher year.

Over year to $268 million due to higher shipment volumes and sales mix and price realization.

The increase in profit was partially offset by higher production costs and impairments of long lived assets related to an asphalt plant factory in Germany.

Also keep in mind that last year's results included voluntary employee separation costs.

$24 million.

Let's turn to our 2021 construction and forestry industry outlook on slide 11.

North American construction equipment industry sales.

While sales of compact construction equipment are expected to be up about 10%.

And.

Cost of about for Earth, moving and compact equipment have benefited primarily from the strength in the housing market as well as a modest recovery from trough conditions in the oil and gas sector.

Furthermore, current demand levels reflect the benefit the benefit from the industry's collective response managing inventory levels tightly during the early days of.

Mark It's Mike.

In forestry, we now expect the industry to be up between 5% to 10% as a recovery in lumber demand, particularly in North America is leading to increased production throughout the year.

Moving to the CNS segment outlook on slide 12.

Deere's construction and forestry 2000.

Penn to anyone net sales are now forecast to be between 10, five and $11 billion.

Our net sales guidance for the year includes expectations of two points of positive price realization and a currency tailwind of about two points.

We expect the segment's operating margin to be range between 10, five and 11, 5%.

Isn't toward the year benefiting from price volume and non reoccurring expenses from 2020.

Let's move now to our financial services operations on Slide 13.

Worldwide financial services net income attributable to Deere <unk> company in the first quarter was 204 million benefiting.

Percentage favorable financing spreads lower losses on operating leases and a lower provision for credit losses.

For fiscal year 2021, the net income forecast is now $730 million.

The provision for credit losses, the provision for credit loss forecast for 2021 is 23.

Fitting for points when compared to the average portfolio managed.

Slide 14 outlines our guidance for net income our effective tax rate and operating cash flow.

For fiscal year 'twenty, one our full year outlook for net income is now forecast to be between $4 $6 billion to $5 billion the guidance.

Base rates and effective tax rate projected to be between 24% to 26%.

Lastly, cash flow from the.

Cash flow from the equipment operations is expected to be in a range of $4 $6 billion to $5 billion and contemplates a $700 million voluntary contribution to our <unk> plan.

And I will now turn the call over to Ryan Campbell for closing comments.

Jim.

Before we respond to your questions I'd like to offer a few thoughts on our fiscal year 'twenty, one outlook as well as address some of the key themes covered and our latest sustainability report published earlier this month.

With respect to our outlook, we've seen underlying fundamentals.

Continued to improve since the last quarter.

Commodity prices and improved market access boosted sentiment and AG markets and are reflected in the results of our early order programs and order books.

In addition, we've seen further strength in demand for compact utility tractors and turf equipment as consumers.

Furthermore, those businesses are also benefiting from our channel partners desire to boost inventory levels from historic lows.

Meanwhile, our C&I business has benefited from a very strong housing market a modest recovery in the oil and gas sector and the industry's proactive inventory management.

While we are encouraged by some of the end market tailwind. It is also important to point out some key risks dynamics in our supply base remained tight globally.

While trends pre COVID-19 rates are improving many areas are still impacted by high levels of absenteeism and are also facing growing constraints for some electronic components to.

To date.

And largely successful keeping our production rates on schedule. However, we acknowledged the situation is very fluid and will remain so for the foreseeable future.

Furthermore, prices for key raw materials, such as steel have risen significantly over the last quarter, while freight and logistics costs have also experienced upward pressure.

Our current forecast contemplates the impact of rising input costs and includes an additional $500 million related to material and freight.

Despite these challenges we are encouraged by the strength in our end markets as well as the execution of our employees have delivered so far this year, our first quarter results demonstrated the highest net income and equipment.

Operations margins in the history of the company.

While we are still in the early phases of executing our new operating model. We are encouraged by the progress made so far importantly, we are seeing the benefits of our new agile structure, allowing us to make decisions quickly and operate more efficiently.

I'd like to close with some perspective.

Perspective on our recent efforts driving sustainability R.

Our vision is that John Deere customers will lead their industry by becoming the world's most profitable and sustainable businesses.

We believe we are uniquely positioned to deliver this for our customers. Our continued technology advancements allow our customers to make every seat every drop and every hour counts.

This makes our operations more sustainable and have less impact on the environment, while also saving them time and money.

Earlier this month, we released our 2020 sustainability report in.

In it we highlighted how our precision technologies are already making our customers more sustainable and productive.

Using technologies like auto track section control exactly.

Exact apply exact emerge true set and combine advisor, our corn and soybean customers use less fuel save time apply less herbicides and fertilizers and emit less greenhouse gases throughout their production cycles.

John Deere customer farming 6500 acres in the Midwest can lower their greenhouse gas.

Emissions on an annual basis by the equivalent of nearly 1 million passenger vehicle miles driven just by incorporating these technologies into their operations at the same time. These six technologies are improving the economics of our customers' businesses less inputs translates into lower costs.

In addition to reducing inputs our approach.

So translates into higher yields taken together this suite of technologies available today can conservatively delivered savings of $40 per acre to our customers. These outcomes scaled across our platform of global engaged acres provides an opportunity. Unlike any other for us to impact the sustainability and productivity of our customers operation.

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On the Earth, moving and road building side of the business. We are also making progress in delivering our customers the tools to operate in a more sustainable manner. For example, our grade control technology deliver significant time and material savings through automating control of the edge of the bulldozer. This ultimately translates into cost savings for our customers through reduced.

<unk> us reduced fuel usage and reduced asphalt costs. These same reductions translate into lower greenhouse gases emitted and less natural resources utilized on each job.

A road building business is leading the industry in both efficiency and sustainability and repaying technology with its cold recycler called recycling reusing the existing.

Labor costs have a roadway significantly minimizing the cost and environmental impact of repayment.

While the traditional process of repaying involves milling up the old payment hauling the old materials away and hauling new materials to the Worksite. The Bergen code Recycler enables the old asphalt from the existing roadway to be mixed with additives onsite to be reused.

Materials technology can increase the life of the roadway, while utilizing 90% less material and reducing greenhouse gas emissions by the equivalent of 12 million passenger miles driven per job.

These are just a few examples of technologies that are already making an impact on sustainability and what we're most excited about is that despite the multi decade decade investment we've already.

We are still just getting started on this journey as we look to our future technology Road map, we will enable our customers to do more with even less as well as adapt to the dynamic future dynamic nature of weather patterns consumer trends in the global regulatory environment.

In addition to our industry, leading equipment and technology stack.

<unk> made one of the most collaborative data platforms in the industry and we're exploring ways that data can help our customers participate in new markets and programs that reward our customers for incorporating sustainable practices into their operations.

Our tools will allow customers to demonstrate the impact of their sustainable outcomes, enabling them to tap into new markets for revenue.

We are financing.

The key will be giving growers the ability to seamlessly document the appropriate data and provide them with digital tools to confidently evaluate agronomic and business tradeoffs.

As we look ahead, our biggest opportunity lies in delivering solutions that make our customers more productive and sustainable but we also remain committed.

To running our own operations in a sustainable and socially responsible manner in that regard, we continue making progress towards our 2022 sustainability goals.

We have steadily reduced the greenhouse gas emissions from our own facilities and we have leverage important partnerships to convert a significant portion of our electricity footprint to renewable sources.

We are improving our water practices around the world exploring new and innovative ways for recycling waste at our facilities and through our new strategic focus on our aftermarket business will continue to grow and expand our portfolio of remanufactured products.

And we can only deliver on this opportunity if we have a diverse and highly engaged workforce employee safety.

It always has been of the highest important to us and throughout 2020, we took action to ensure that our employees were protected and have the proper tools to do their jobs effectively and safely. We also launched new strategic initiatives that are focused on leading and lagging lagging indicators that are designed to enable continuous measurement of safety performance and drive continuous improvement.

He is and we know that diverse teams working together result in better ideas and better solutions. Therefore, we are committed to improving diversity at our company to do this we are partnering with key universities and professional organizations in order to recruit diverse talent and we are providing employees the opportunity to connect with others that have common experiences through our employee resource groups moving.

Forward, we will continue to attract retain and develop employees with the diverse backgrounds and experiences as it will be critical to delivering sustainable outcomes for all of our stakeholders.

Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedures in consideration of others.

Others, and our hope to allow.

And if you have additional questions I will ask that you rejoin the queue Carolyn.

Thank you we will now begin the question and answer session, if you'd like to ask a question or make a comment. Please press star one and record your name and you May press star two to withdraw.

Moving to request our first question or comment comes from Brett Linzey from vertical research partners. Your line is open.

Hey, good morning, everybody was hoping you might be able to put a finer point on the better margin expectations for the production and precision AG business in any way you can bucket that between whats.

Draw that related to a larger mix of large ad <unk>.

Precision AG pull through and then cost and productivity any way to unbundle that.

Thanks Brent.

I would say I mean, when you think about the what we've seen from production precision AG.

When you think about mix yes.

As title.

Essentially large AG and Youre in Youre seeing the continued integration of precision AG and that so I think that's one of the things that as we separated these and we think about how we're how we're segmenting. It is we're seeing a much probably cleaner view of pure.

What.

It's what is precision AG and production AG. So the integration of machinery and technology I think is as it relates to the performance I mean, certainly we saw volume pick up.

Price as Brent noted was a significant driver in the quarter.

And that was on a number of different variables, but we saw.

What is its of above average just normal price increases pretty significant.

Adjustments, we've made over the last year in overseas markets as it related to currency and some new products that came in middle of the year. So we're seeing that impact and then.

As noted the the benefit of low.

Inventory and.

Strong demand driving lower incentive spending so.

But as I think about it I think those would be the biggest drivers, particularly in the quarter.

As it relates to things like R&D.

We're timing wise, we're probably skewed a little bit to the later part of the year, that's just timing on programs.

And probably worth noting when you think about that that performance ex the Brazil tax item.

Production precision AG did about 19, 5%.

And.

We'll continue to see as a percentage of sales higher R&D in that segment compared to the rest of the business.

Thanks, Brett we'll go ahead and go to our next question.

Thank you. Our next question or comment comes from Jamie Cook from Credit Suisse. Your line is open.

Hi, good morning, and congrats on a nice quarter.

Back on the.

Production in precision AG business.

Is there any way you can help us understand.

I mean, obviously, the 6% price is a pretty meaningful price increase for this segment I'm just trying to understand how you're approaching pricing with precision AG. This cycle relative to different prior cycles, how much more of that benefit should be benefiting the margins for this segment over time and I guess, just as a follow up your order books.

Books look pretty good across large AG I'm, just wondering how much more opportunity there is to take our production.

You know assuming markets continue to be favorable.

Thanks, Jamie.

It relates to the order book side.

We've made adjustments clearly compared to a quarter ago, we've seen sales move up.

As a result.

And we've done things we've added production we've added some shifts in some of our large facilities places like.

Waterloo for example, and in some of our facilities in.

In South America as well so we have made those adjustments.

The real challenge and Ryan mentioned this is.

On the supply side, there are components and parts that continue to be tight from from a from a supply point of view. So we're managing those really tightly supply management group is working really hard with suppliers day to day some components are.

Our week to week in terms of what we're seeing.

<unk> from an availability point of view so some of those are tight so to the extent we continue to see demand, we'll try to work two to react to that to the upside but acknowledge it.

A tight environment as it relates to some key components.

Relative to price and I think what we're seeing on the price side certainly we.

From BC, we're seeing strong price this year about six points for the year for production precision AG.

What is happening there when you think about not just price, but what's happening with price and mix is we're continuing to see average selling prices.

Our large AG machinery growing and thats through the continued integration.

<unk>.

Of technology and solutions into that business, so that pattern and trend has continued.

As we continue to be able to deliver.

Outcomes, and we talked a little bit about it from both a sustainability and economic point of view.

That is driving real value to customers and we're seeing that.

<unk> as it relates to adoption and continuing to see the trends across most of our large AG machinery in terms of adoption of the latest tools.

Hey, Jamie it's Ryan I think what Youre, what youre seeing there and what we've talked about is.

As we've built this precision infrastructure with the.

Equipment guidance.

Biotics the John Deere Operations Center now we're stacking on applications that have more of a software content on them that are focused specifically on the jobs our customers are doing.

And as that continues to adopt and our customers continue to adopt that you get a higher software mix and our margin profile.

Tell them is another factor.

Josh as point on average selling prices going up that's true, but also those selling prices include a richer mix of software.

Thank you. We'll go ahead and go to our next question.

Thank you our next question or comment comes from Jerry Revich from Goldman Sachs. Your line is open.

Yes, hi, good morning, everyone.

Hi, Jerry.

On that mix comment Ryan you just mentioned I think in the past you folks have spoken about.

Delivering three point tailwind to essentially the average selling price from rising features and it looks like.

Just on the adoption rates.

So you may add technology.

So shared it feels like Thats accelerating closer to maybe 5% this.

This year I'm wondering if you could just comment.

Specifically and then can you touch on as we think about cycle over cycle margin performance for production and precision AG.

How much of a tailwind are you folks thinking about it in your long term margin targets from the adoption rates on software and precision AG that you outlined.

Jerry I'll start there as it relates to kind of the incremental benefit we see I think that that couple of points.

Points of range is still it's still very very fair in terms of what we've been experiencing.

The opportunities as we go forward to to continue to see that or to see that move I think are there as you think about increasing seen more sensing and acting in the field. So you think about things like Steve spray.

Two three talked a lot about but we see opportunities to go beyond that beyond herbicides into things like fungicides pesticides other fertilizers and into other jobs. Other machine force planting for example.

And as we've talked about in the past.

We were also as we continue down the automation journey, we're getting.

We have to closer to full autonomy. So I say all of those things to point out as we do those things those create more opportunity.

Two to drive.

Revenue as well as a more more recurring base of revenue that we can add value job to job pass the pass.

As it relates to kind of where.

Closer at cycle Wise, and what does this mean for production precision AG margins.

Today, what we'd say is we're just above call it 105%.

Mid cycle for production in precision AG.

Middle of the range margins around 20%, so context wise and we compare that back to.

2013.

When we were at from a large AG perspective, well well above peak.

With roughly 16% margins at that time, so we are doing.

Higher margins on lower sales.

And I think feel really good about the opportunity and the other things I mentioned earlier in terms of what drives.

<unk> opportunities for us those continue to be strong tailwind with lots of runway.

Thanks, Gerry will go ahead and go to our next question.

Thank you. Our next question or comment comes from Ann Duignan from Jpmorgan. Your line is open.

Yes, hi, good morning, maybe still on the large.

AG sector.

Yes.

Or do you plan on managing the cycle. This time versus the last cycle I mean last cycle we saw.

Farmers start to roll equipment annually, we saw multiple unit discount programs and eventually dealers ended up with excess he used.

Equipment sales.

Sales increases are great, but how.

How are you going to manage the cycle differently. This time around or is there anything you can do so we don't end up in the same as we did that at the bottom left the last cycle.

Thanks, Dan I think when we think about the cycle.

We're certain.

Coming into this where we're seeing demand inflect here over call. It the last three or four months coming into in a position of very low new inventories very low used inventories. So that dynamic has certainly helped in terms of the starting point and the tightness we're seeing in overall.

Inventory levels I think.

The lessons learned from the past cycle certainly play into that how do we make sure we're in.

Polling.

Additional customers in pulling ahead demand potentially that would've occurred later on.

And I think as we look at 2021 right now with demand.

<unk> that we're seeing our order books large tractors for example or into the fourth quarter.

And with the early order programs they account for nearly the entire full year production. So I think we've got really good visibility.

I think that this is a good indicator of the replacement demand that.

We are expecting and have thought we would see over the last couple of years coming coming to fruition here, but I think we are definitely working very closely with the dealers in terms of how do we manage the.

The cycle, but acknowledged right now we're early early days in terms of seeing some of this demand pick up.

And as Ryan maybe add to that I think it's the total industry, including ourselves having the discipline to make sure that.

Are those new customers, we're providing new product for them, but also those customers that historically have purchased used and used makes more sense for them to really be discipline to continue to provide them.

We have been high quality used equipment. So we maintain that trade cycle and trade ladder throughout throughout this upturn that we have.

Okay.

Yes, I think one other piece.

It helps us there and we're very early is in performance upgrades and the ability to upgrade existing machine fleets.

He'll provide the ability to take take a used machine it could be a generation or two old and outfit that with with updated equipment, which in some cases may alleviate some of the pressure on new.

Because you can get a significant amount of productivity at at a little bit less of a total investment.

Switching costs towards the customer.

Thanks, Ann we will go ahead and go to our next question.

Thank you. Our next question or comment is from Stephen Volkmann from Jefferies <unk> Company. Your line is open.

Alright, good morning, everybody I appreciate the breakout of the small and the production.

<unk> equipment.

Investments.

Or what your view is going forward relative to any difference in incremental margins, we should be thinking about in those two segments.

Some of the large stuff is bigger, but just anything you want to kind of give us on that would be great.

Thanks, Steve Yeah, as it relates to incremental margins historically.

We've talked about in the past the AG and turf being 30 to 35.

Kind of depending on how our mix fell I think what we what we say now is the production precision AG side pushes.

At the high end of that range.

And small I can turf probably towards the lower end of that range I think generally.

<unk> be a good a good rule I think.

This year, particularly small AG <unk> turf you were seeing a pretty strong benefit of what was as you look at small tractors in particular really significant.

Significant underproduction last year.

Retail and we intend to.

Bill a little bit of inventory this year, so youre seeing.

A little bit of.

Swing there so that that swing from under producing over producing definitely benefits the margin profile as well.

Thanks, Steve We'll go ahead and jump to our next question.

Thank you. Our next question or comment is from Tim Thein from Citigroup. Your line is open.

Alright.

Thank you good morning, Josh.

And Ryan.

Question is on the dividend and how Youre thinking.

About.

Your view of mid cycle earnings for the company, obviously, where we're moving into a much higher margin level.

Really laid out.

And just tying back to your point earlier about large AG being called.

Call it right around your view of normalized level, so just kind of tying it altogether.

It kind of three ish dollar annualized dividend run rate, how youre thinking about that relative to your kind of 25% to 30.

35% payout.

Payout target. Thank you.

Hey, Tim It's Ryan and.

As we've said and you pointed out.

We keep our dividend in a 25% to 35% mid cycle earnings ratio.

And with the structural improvements that we have.

We're probably below that range.

With with the current dividend and so it's something that we're certainly thinking about and with overall liquidity situation of the company.

That's something we're going to take a look at for sure this year.

Thanks, Tim.

Okay.

We'll go ahead and go to our next question.

Thank you. Our next question comes from Ross Gilardi from Bank of America. Your line is open.

Thanks, Good morning, guys.

Hey, Ross.

You explained that you think youre at a 105% of mid cycle for large AG can you remind us where you expect to be.

Relative to mid cycle for you or.

Other segments through the end of this year based on your guidance and when.

When should we expect you guys to recast your mid cycle margin targets and just along with that how does the 20% at mid cycle that youre seeing for large bag in fiscal 'twenty one compared.

There to your initial estimate when you put out the 15% target to begin with.

Ross Yeah, when we think about a percent of mid cycle, so actually the production precision AG.

And and small I can turf are pretty much in the same range kind of read between call. It one five and $1 10.

Mid cycle.

The the CF business is right around mid cycle as well like pretty nearly dead on theres, a little bit of mix impact.

Impact in there where compact construction equipment is much higher.

And we're obviously coming kind of off of off of the bottom after 2020 from a construction equipment perspective so.

There's there are some <unk>.

Variation amongst the segments there in CNS, but overall about mid cycle.

I think when you think about kind of our mid cycle margins certainly we've talked a lot about the 15% continuing to focus on executing and I'd say in 'twenty one.

Very strong.

First quarter, and I'd say lots of focus on delivering the the.

The guide that we have this year and the performance that we feel confident in but I think.

Post that I think is when we start to think about what's what's next for the company.

And just on that.

First of all how the 20% at mid cycle.

Jack compares to your initial estimate.

Yes, I think what we're seeing.

From that business and what we've seen in the first quarter kind of X X items about 19, a half I think.

Bill.

Strong performance for US I think we're seeing some benefits.

Things like strong pricing.

And obviously, the volume rebounding and operational leverage coming through.

As is solid and I think aligned with where we were we would hope it would be you know knowing that we feel like we've got opportunity as we go forward.

That business sees.

The majority of.

And our material and freight that Ryan mentioned that weighs on the full year there as well.

Hey, Ross Thanks, Ryan.

It's fair to say, we're probably a little bit ahead of where we thought we would be.

But we're heads down and focused on delivering this from a sustainable perspective, and then in 2022 will take a step back and reflect on what's appropriate.

The headwind going forward.

Thanks, Pat Thanks Ross.

Go to next question.

Thank you. Our next question comes from Rob Wertheimer from Melius Research. Your line is open.

Thank you and good morning.

So the new segments, I think helped clarify a lot and align pretty well with what you are hearing that.

And for me of the small AG was particularly impressive I wonder since we just talk less about it you know versus all of the things we've talked about on large AG can you just talk about what the workflows are that have been driving the margin that you saw in the quarter and then maybe just reiterate what gets worse from here for the rest of the year given the outlook. Thanks.

Yes.

When you think about small small I can turf and youre right I mean, it tends to be a little bit lesser story, what we've seen here is really.

Point is some of the actions we've taken from executing the new strategy I think we're seeing the benefits and smelling enter a number of the exits or closures that we did.

Yes, Robert.

<unk> 'twenty.

Our benefit is there those were mostly in the small AG and turf part of the business. So that focus is definitely helping I think we're seeing really strong execution.

Yeah.

Under producing to slightly over producing on small tractors helps.

The the pricing point of view is solid as well I mean, when you think about small tractors and turf.

Those are those are going to be pushing much higher than call. It that kind of between 105, 110% of mid cycle. So there's there's benefit there.

Well also embedded in that is you know a large portion of smoking turf is.

Which has tended to be more stable market. So we see a little bit less less volatility there and we've seen some strength in that market, which are which have been beneficial as well.

Rob I think taken taken.

<unk> taken the two businesses apart I think Josh alluded to we focus.

In Europe on the small AG <unk> turf side with some of our fixed and exit strategies.

And then focusing on markets, where our value proposition makes sense, given the industry and market dynamics I think when you do those things and think about capitalizing that business is a little bit different focus on the R&D portfolio a little bit differently.

Results.

It shows that you can have great a great business in the small side and both of them are equally important for us to drive our strategy going forward and I'm.

I'm, sorry, Rob I forgot about your other portion of your question kind of whats what are there headwinds in the remainder of the year end.

Not dissimilar I would say all of our businesses have material freight headwinds.

$500 million of.

Material and freight costs that Ryan mentioned is all really kind of two or three or four Q.

I think it's so theres a portion of that is impacting small AG and turf price.

We don't expect to be as strong as we move through the year, 2% for the full year compared to a strong a strong.

First quarter there.

In the other the others, maybe two things I'd mentioned R&D. There. Similarly has a little bit back end weighted so you see that be based on timing of programs impact the rest of year and there's there are some inefficiencies related to overheads with the combination of Covid and supply challenges that we've got.

They're embedded in the forecast as well.

Thanks, Rob We'll go ahead and go to our next question.

Thank you. Our next question comes from Steven Fisher from UBS. Your line is open.

Thanks, Good morning, guys.

So the supply chain challenges while going.

Through an upturn now kind of remind me of what you experienced in 2017 and in 2018 than it was.

A bit of a struggle back then but it seems like you're better prepared to handle it. This time is that a fair assess.

Assessment.

Or is it may be just a stronger.

Longer up cycle now than it was back then and that enables you to kind of cover the $500 million of increases that youre seeing and just kind of.

Gauging your confidence that.

We've kind of got the supply chain challenges.

Your control to really capture the benefit of a strong.

Strong upside here.

This cycle plays out.

Steve when we look at the supply base I mean, I think that our team has learned a significant amount as we went through what you described and that 2017 18 timeframe.

We went through tariffs with China in the early.

First first round of Covid and we saw some of those impacts. So I think the team has done a really good job and gotten much deeper in terms of understanding supplier by supplier, what our constraints, what our capacities and what are what are the challenges.

So that certainly helped I think up to this point, we've been able to mitigate disruptions.

But you know in some.

The cases I think I think there is we are week to week in terms of how things are operating in there are there are challenges. So I think we're continuing to work closely they're trying to execute.

On on.

The forecast and meet customer demand and we've got ranges in the forecast.

For for that reason knowing there are.

Certainly challenges that we're facing we will continue to pace through the remainder of the year.

Yes, Ryan I mean, we're also seeing the benefit and we went through the activity to look at kind of each position of the company and how those positions worked over the last year.

We're seeing the benefit.

From a more focused and agile organization that we that we put in place last year and finished effectively with that towards the end of last year.

Thank you. Thanks, Steve We'll go ahead and go to our next question.

Our next question or comment comes from Kristen Owen from.

Your line is open.

Hi, Good morning, Thank you for taking my question I.

I wanted to point back to slide 15 here in the deck, the $40 an acre and economic value to the customer that you've outlined and that's pretty significant when you think about the impact to net farm income across your connected acres weighted.

Do you feel like Youre.

Oppenheimer's are at this stage in terms of understanding that potential value and when you think about the backdrop of this improved commodity prices land values, how do you see adoption cycle moving forward.

Yeah. Thanks Kristen.

It's a great point I mean, I think as we look across those different technologies.

There's a varying range of adoption individually were at the highest end you'd think about something like guidance, which would be very very highly highly adopted.

And then maybe on the lower end.

Like exact emerge which is in the low 40% so varying degrees in terms of how.

How deeply engaged.

Our farmers are across all of those jobs, but we think that's the increasingly where we see the opportunity to drive that value.

And particularly when you start to think about additional opportunities.

Ryan mentioned this a little bit you know as you start to think about.

The.

Yes.

Carbon markets or differentiating crops because of the practices that are utilized.

And then our position of one executing the jobs, but to having the operation center in debt documents those and can.

To provide that information very very seamlessly and we think that creates a pretty significant opportunity for.

For our customers. So when you think about not only the technology that we have in place today those that are coming and then what.

Feels like just a burgeoning opportunity for for some additional revenue I think well positions our customers and we feel like we're in a really good spot to be able to unlock and enable that.

Thanks, Kristen we'll go ahead and go to our next question.

Thank you. Our next question is from Chad Dillard from Bernstein. Your line is open.

Hi, good morning, guys.

So I was wondering if you could give us a sense for how far along.

Derrick in Europe are adopting precision AG may.

Relative to the U S.

Thanks, John can you guys did a 100% where those two regions.

Easier to talk about it from I can engage acre perspective, I know you guys talked about 230 million engaged acres globally like how does that break down from like a regional perspective, and kind of whats. The total addressable market in terms of engaged acres you could we could get to.

Okay.

So when you think about what kind of regional performance certainly further along in North America, but but kind of as we just alluded to and Chris alluded to in the previous question. There's still a long way to go in North America, when you think about it.

Stacking all of those different technologies on the farm and what that can deliver.

So.

That's just a bit of a caveat to say there is still a big opportunity in North America, and I think we're seeing it grow the adoption grow in places like South America, Brazil in particular, we've seen pretty significant growth in engaged acres last year I think we were.

Something like 60.

Percentage.

In Latin America, so continuing to grow there and I think when you think about some of the challenges faced there double crops.

As well as the opportunity to get more efficient there.

That will continue to grow and we're seeing our dealers embrace that as well when you think about <unk>.

Got now.

We're 40.

Digital operation centers that are supporting their their customer fleets as we unlock the the challenge of connectivity.

That's a huge huge opportunity for us and we've done a couple of things over the last couple of years. Most recently on an agreement with Claro to provide access better better connectivity and bandwidth.

Now that unlock even more potential for the use of those tools Europe has historically been a lot.

Of guidance.

And I think we're starting to see some of that turn.

And shift towards more connectivity engaged acres grew their last year significantly like triple digits.

And as.

As you think about the potential impact of regulatory environments coming into Europe, first, but probably other parts of the world.

The appetite for precision agriculture, and some of our tools and when you think about spring and others will be particularly important as we go forward there so.

Two to grow feel really good about.

We think that we're in.

And I think theres, a tremendous amount of opportunity.

Thanks, John will go ahead and go to our next question.

Thank you. Our next question comes from David Raso from Evercore ISI. Your line is open hi, good.

Good morning, given the supply chain constraints amid the.

The strong farm equipment van I'm curious are you already taking tractor orders beyond fiscal 'twenty, one and are you willing to open up your early order programs for other products earlier this year than normal and.

And the other question is we don't have the baseline for the new segments within AG and turf.

The revenue.

The increase that you put into a N T. I thought it was impressive that on those incremental sales incremental margins of 44%. So it's pretty impressive but of that revenue increase just so we have a sense of the mix what changed how much of the increase was the production of precision AG versus how much was small AG and turf.

Thank you.

Yeah. So first on the on the order side I think we are.

We haven't opened anything up into 'twenty to fiscal 'twenty two at this point, so where we're pushing out into the end of the fiscal year for large tractors in particular.

So.

We haven't we haven't adjusted.

And anything at this point.

As far as timing of the early order programs, but bill you bring up a really good point in that.

By the time, we closed our crop care early order programs.

That was we were just beginning to see the inflection. So if you think about kind of the low double digit increases we saw in planters and sprayers that was that was mostly well ahead.

Kind of the inflection we saw here in the fall.

I think.

Obviously, a lot to play out but that that bodes well there, but we havent, we havent adjusted timing at this point.

As it relates to the sales increase from our former anti in the production precision AG small I can turf.

Ed a percentage increases are pretty similar so if we look at those businesses year over year. They are both up.

All that roughly 20% so pretty pretty balanced between the two in terms of the increase we saw compared to two a quarter ago.

Thank you David We'll go ahead and go to our next question.

Our next question or comment comes from Larry de Maria from William Blair. Your line is open.

Hi, Thanks, and good morning, everybody.

If we could go just go back to slide 15.

Should we be saying is agreeing on green solution can deliver a $40 return.

There's a lot of mixed fleets out there is still so this growth, but can you give us.

Really the annual cost, what's the ROI and how does it at $40 returns stack up when you're thinking when you're competing with seed and fertilizer companies in other words Green and Green solution delivered 40 Bucks at what's the ROI and how does that compare to seed and fertilizer companies.

Yes, I mean, when you think from a.

From a payback.

ROI perspective.

We think about these tools and solutions, we've traditionally been in the year to two year payback period, and I think across those that'd be fair. Some of those are going to be much shorter than.

We have seen in months compared to two years of payback. So I think as you look at those those technologies.

Dave you know there I think you'd be very fair to say.

Well under two years would be a reasonable payback period for what we're seeing there.

So I think that's that's where we're at and I think what was exciting about it is.

There's there's opportunity as we start to think about kind of what's coming next to grow that from.

We've got the economic value, but also delivering increased sustainability outcomes as well.

Thanks, Larry will go ahead and jump to your next one.

Thank you. Our next question comes from Nicole to Blaise from Deutsche Bank. Your line is open.

Yeah. Thanks, good morning, guys.

Clinical.

Can we just focus a little bit on South America I thought the comments that you gave around North America or about <unk> and how far it extends it was helpful. But there was just a bit less around what youre hearing from South America farmers and maybe how far the order book extends there.

Yeah.

Yeah, So so Latin America, and South America, Brazil.

Particular really strong.

Kind of a lot of things coming together, there that are driving really strong farm profitability in terms of production.

How it's moved those are those have all been very positive. So we saw this.

Third out through May into June.

So so strong.

Resilient strong activity there and.

And we're coming out of a period with 2020, where we ended with kind of historically low inventory. So we're pushing there to try to.

Only meet demand, but if we can we will try to build a little bit of inventory because we finished quite low so I think overall south American demand.

<unk> in particular really strong customers feeling good dealers.

Very much engaged.

And the.

I think from a you know as we step back and not just think about.

South America, but I think the performance that we've seen this year first quarter and as we look at our forecast we are benefiting from just really strong.

In Brazil, the ability from a from a global perspective.

Our business as well.

That's helpful.

Thanks, Nicole we'll go ahead and go to our next question.

Our next question or comment comes from Courtney <unk> from Morgan Stanley. Your line is open.

Hi, good morning, guys.

Can you just talk a little bit about I guess, maybe just first a clarification I had the extra amount of work again in the quarter is are we going to see any.

Thank you nice quarter here or is it to the full year and did that have any impact on that.

Margins.

Yeah.

The increase in the margin guidance and then I guess my my actual question is just on.

In the context that CNS is at mid cycle can you help kind of walk us through.

What's going to get you to the 15% margins in that segment.

James for both segments.

And.

I think you've historically talked about the working synergies being back half weighted so just trying to understand if that's flowing through sooner or if that's still going to be a 2022 story. Thanks.

Thanks, Tony I think when you think about the Virgin the extra months I mean, it was didn't really impact margins. So it was pretty much. The extra month was kind of in line with where they were running for the quarter. So.

<unk> no significant change there didn't didn't necessarily impact their overall guidance or the division's total guidance I mean I think.

When you think about a road building business I think we feel really good about what we're seeing there overall, we expect that to be up about 20%.

In this fiscal year about half of that is the extra months.

So say underlying business up about 10%.

And when we look at the core road building business, we feel like the margins that they're delivering are where we'd expect them to be so as we talked about.

I feel like that business as a mid teens business, we're executing along those lines and feel really good about how that's how that's progressing.

I think when you step back overall CNS.

Certainly we think there is an opportunity.

<unk> continues to.

Two to perform that that will pull.

Pull up margins technology opportunity for us as well in construction forestry, we're very early on and think about how do we integrate that.

<unk>.

That will drive.

Performance there as well we highlighted just an example on grade control and what that can do from a customer economic and sustainable impacts as well. So those are the types of things. We're looking at obstacle detection. There's a few things that we feel like we can.

<unk> copy paste.

Into that division to drive better performance and continuing to be very focused on operations.

Executing very very tightly and what is.

A volatile cyclical business.

With that I think we've got time for one more question.

Thank you our final question comes from.

Adam Neeleman from Cleveland Research Your line is open.

Hey, guys. Thanks for squeezing me in and congrats on the strong quarter.

I wanted to go back to the material costs.

Discussion that were having before would you be willing to break down the $500 million by segment and then.

May be perhaps the cadence I think Josh you said that it was going to start to hit in the second quarter.

Is that equally weighted throughout.

Throughout the rest of the year should we be thinking about this as more of a fourth quarter impact and then do you think you need to implement any more price increases to offset what's happening with material.

Reals and freight costs.

Thanks, Adam I mean I think.

What I can tell you on the 500, we haven't gotten too too bright lines, there but of the 500.

The majority are well more than half of that is PPA production precision AG, where we see that.

Oh and following.

Following interest would be have the smallest portion of that.

But impacting those businesses as it relates to price.

Historically, we've not taken price solely based on commodities, we try to do that and be disciplined in our approach to price and pricing for value and those sorts of things.

So at this point we haven't.

Contemplated that I mean, if we step back and look overall.

The price we're getting is is offsetting more than more than offsetting the material, but it does certainly have a drag.

On on Incrementals as we as we go through the remainder of the year and timing wise I would say it's pretty balanced.

Over the over.

Over the course of the remaining three quarters.

No.

So with that I think we'll wrap up we appreciate everyone's time.

And well look forward to catching up with everyone. Thank you.

Thank you that concludes today's conference call. Thank you for your participation you may disconnect at this time.