Q3 2021 Deere & Co Earnings Call
Year.
Meanwhile, robust fundamentals for our construction and forestry equipment continued into the third quarter, leading to improved levels of profitability and our heightened outlook for the rest of this year.
Slide three shows the results for the third quarter.
Net sales and revenue were up 29% to $11.5 billion, while net sales for the equipment operations were up 32% to $10.4 billion net income attributable to Deere <unk> company was $166.7 billion or $5.32 per diluted share.
Now, let's turn to review of our production in precision AG business starting on slide four.
Net sales of $4.2.5 billion were up 29% compared to the third quarter last year, primarily due to higher shipment volumes and price realization.
Price realization in the quarter was positive by about eight points, while currency translation was positive by about four points.
Operating profit was $906 million, resulting in a 21% operating margin for the segment compared to an 18% margin for the same period last year the.
The year over year increase was driven by higher shipment volumes and sales mix and price realization, partially offset by higher production costs.
With respect to the price realization at the above average results for the quarter were primarily driven by a few different factors.
The primary driver came from price adjustments made to offset unfavorable currency movements, which resulted in low double digit price realization for markets outside North America, North American list prices were up slightly above average and benefited from lower incentive spending.
Shifting focus to small AG and turf on slide five.
Net sales were up 32% totaling $3, one $4.7 billion in the third quarter the.
The increase was driven primarily by higher shipment volumes and price realization.
This realization in the quarter was positive by just over three points, while currency translation was positive by about three five points.
For the quarter operating profit was $582 million, resulting in an 18, 5% operating margin for this segment compared to a 14% margin for the same period last year.
The year over year increase was due to higher shipment volumes sales mix and price realization, partially offset by higher production costs.
Results for the current period were affected by a $27 million onetime game, while the prior period included $37 million of onetime losses.
Slide six 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 about 25% for the year, reflecting improved fundamentals in the AG sector. At this point, we anticipate producing in line with retail demand for the year keeping.
Inventory levels relatively tight heading into fiscal year 'twenty two.
As it relates to small AG and turf, we expect industry sales in the U S and Canada to be up about 10%.
While our shipment schedule schedules imply production roughly in line with retail demand our net sales for small AG <unk> turf products are up higher than the year over year change in retail sales as activity recovers from significant underproduction in 2020.
Moving on to Europe any industry forecast.
Is the industry is forecast to be up about between 10% to 15% as higher commodity prices strengthened business conditions, and the arable segment and dairy prices remain resilient, even as margins show some pressure from rising input costs.
At this time, we have opened our man Mannheim tractor order book through the second quarter of 2020 to filling all production slots through that time period.
In South America, we expect industry sales of tractors and combines to increase about 20%.
The combination of higher commodity prices strong production and a favorable currency environment haven't boosted profitability boosted the profitability of farmers driving orders through the remainder of the year and into the first quarter of fiscal year 2022, which is as far as we've allowed the order book to grow.
Despite limited government sponsored financing programs private financing is more widely available this year supporting continued strength in equipment demand.
Industry sales in Asia are forecast to be up significantly driven primarily by a strong recovery in the Indiana tractor market.
Moving on to our segment forecasts beginning on slide seven.
For production in precision AG net sales are forecast to be up between 25% to 30% in fiscal year 'twenty one.
Our forecast includes a currency tailwind of about two points and expectations of nearly eight points of positive price realization for the full year.
For the segments operating margin our full year forecast is range between 20, and 21% and contemplates consistently solid financial performance across the various geographical regions.
Slide eight shows our forecast for small Aegean for the small AG and turf segment.
Net sales in fiscal year 'twenty, one are forecast to be up about 25%.
The guidance includes expectations for nearly five points of positive price realization and a favorable currency impact of about three points.
The segment's operating margin is forecast to be ranged between 35%.
Before moving on to the results for our construction and Forestry Division, Jamie Heinemann, Our Chief Technology Officer will offer some thoughts around our recent acquisition of bear flag robotics Jamie.
Thanks, Brent as many of you are aware John Deere has a long history of investing in increasing levels of automation in our equipment. These.
These investments are distinctly positioned us to be a leading provider of autonomous solutions for our industry.
We're now at a stage of maturity in that journey to make additional bold investments in autonomy consistent with the tech stack <unk> strategy that I shared with you last November.
Accordingly earlier this month, we added another exciting capability to our tech stack with our acquisition of bear flag Robotics technology startup based in Silicon Valley.
Today I'd like to give you a little more perspective on how this acquisition will accelerate our autonomous capabilities and serve as an important addition to our overall investment in autonomy.
They're flagged develops autonomous solutions compatible with existing machines, which means greater tech adoption increased productivity and improved profitability for our customers that offers a set of technologies such as lidar cameras radar that complements our own initiatives and goals to provide customers with solutions that address the individual needs on the.
Farm and the job site.
The acquisition underscores our smart industrial strategy to deliver smarter machines with advanced technology.
It addresses the challenge of scaling food production with fewer available resources, especially that of skilled labor increase.
Increasingly farm labor shortages are constraining the timing of agronomic jobs or in some cases, the ability to do that job at all which has a significant impact on farming outcomes through autonomy customers can run their operation more predictably efficiently sustainably and profitably from anywhere ensuring the <unk>.
<unk> get done within optimal timing windows, which has a substantial economic impact.
It also represents an important leap forward in our retrofit capabilities across the installed base, we call those performance upgrades and will aid in the evolution of our business model for recurring revenue more important the combination of John Deere Blue River and bear flag positions autonomy as a key opportunity for differentiated value creation for our customers.
And our company.
We started working with bear flag in 2019 as part of Deere startup collaborator program set initiatives focused on enhancing work with startup companies, whose technology could add value for our customers and it's also an important point of access to some of the leading talent and innovation in our industry.
Since then <unk> has successfully feel that its autonomous solution on several farms in the United States.
As I mentioned its primary focus has been on its retrofit first strategy.
However, its technical architecture scales quickly with new implements new tractor models, enabling fast compatibility with a large universe of equipment.
This pairs nicely with <unk> comprehensive suite of products across our production systems and while it's too early to commit to a business model for <unk> products. We are encouraged by their customers early acceptance of a per acre approach dispositions autonomy of the service and we feel that may reduce the barriers to accelerate adoption of the technology.
This innovative approach and capability are a real testament to the foresight and talent of the <unk> team and I'm confident they will make a strong addition to our current expertise in automation and autonomy.
Let me wrap up by providing a brief perspective on our on our thoughts regarding technology investment over the last 20 years, we've invested in the building blocks for autonomy, starting with foundational tools like our GPS guidance known as auto track, we've increased the automation in those foundational technologies with the introduction of turn automation and auto path been our Mo.
Recent examples we have also begun automating the quality of the job being done seamless combine advisor. These are core building blocks that set the foundation for autonomy. We've also made strategic investments in companies like Blue River, which has significantly accelerated our timeline for both automation and autonomy.
<unk> robotics will add new capabilities that help us on this journey as both companies will play a vital role in delivering a full range of autonomous solutions built from a technology Foundation that was intentionally crafted over decades for this very moment.
It is important to note that the breadth and diversity of these use cases introduces significant complexity. This highlights the ongoing need to expand our tech stack through the acquisition of new technologies, while further developing our existing capabilities, which are.
Which as you know are already significant.
Looking ahead, we see an enormous opportunity to create even greater customer value through autonomy and are committed to the continued investment in technologies that address the broad array of use cases across agriculture Road building and construction at this time I'll turn the call over to John Stone to discuss our construction and Forestry Division John Thanks, Jamie.
So let's look at slide 11, and talk about construction forestry. These results for the quarter <unk> net sales of just over $3 billion were up 38%, primarily due to higher shipment volumes and price realization.
Operating profit moved higher year over year to $463 million, resulting in a 15, 4% operating margin due to higher shipment volumes and a favorable sales mix and price realization, partially offset by higher production costs.
Turning to slide 12, and take a look at our industry outlook.
North American construction equipment industry sales are forecast to be up between 35%.
Sales of compact construction equipment expected to be up 20% to 25%.
Equipment have benefited from a strong housing market.
Has slowed a bit we are beginning to.
So the positive indicators for nonresidential investment and order activity from independent rental companies remains exceptionally strong heading into the fourth quarter.
Demand for earthmoving, and compact construction equipment will exceed our production for the year, resulting in low inventory levels as we exit the fiscal year.
Moving to the CNS segment outlook on slide 13.
We expect our sales to be up around 30%, our net sales guidance for the year includes expectations of five points of positive price realization and favorable currency tailwind of about two points.
Our operating margin is expected to be between 13, and 14% for the year benefiting from price volume and nonrecurring expenses from 2020.
Moving on to slide 14, I'd like to take a few minutes and talk through our construction and forestry strategy and also address how the recent excavator announcement, you saw yesterday aligns with our overall smart industrial journey.
The first thing.
And so the fundamental need for smarter.
For safer and more sustainable.
Construction, so our customers can shape Tomorrow's world.
As a result of the strategy, we initiated last year CNS business focused on three main priorities margin improvement diff.
Differentiation with precision technology, and a new excavator strategy that will better position dear and its customers for the future.
I'll talk a little bit about each of these priorities.
In the area of margin improvement, we've made considerable progress this year and our guidance implies a line of sight to the highest operating margin in the division's history. We're committed to further improvements that will give <unk> the ability to generate 15% margins at mid cycle volumes.
To improve our current margins.
Profile, we accomplished three main objectives over the past year and a half.
First we reorganized our division around our customers' production systems to mirror the way they do business. This enables us to deliver greater customer value by helping been while performing their jobs in a more sustainable way.
Next we made significant progress optimizing our cost structure, while at the same time, maintaining pricing discipline for our products and fixing or exiting unprofitable business segments.
Finally, we adjusted our investment priorities to ensure a greater degree of focus on the products and solutions that are the most differentiated and unlock the highest value for our customers.
Notably leading the way has been the Virgin group, whose performance has substantiated our original deal thesis as a high performing business that demonstrates higher growth with less cyclicality than our legacy businesses.
We've made significant improvements in the cost structure and worldwide distribution network for the <unk> group and I expect the group to generate greater than 15% operating margin. This year inclusive of deal amortization and impairments, which is a structural improvement relative to the 10, 7% margin. We produced during our first full year of ownership.
No doubt <unk> best days are still ahead.
Moving to differentiating technology and coming over to CNS from ISG just over a year ago was really eye opening to see the size of the opportunity in front of us for differentiating technology on the job site and on the roads.
Productivity in the construction industry has lagged for years and machine automation coordination and access to data can address a sizable portion of this productivity GAAP.
Our strategy and technology stack is enabling us to move beyond historical enterprise synergies to leveraging technology like computer vision advanced control systems sensors software back end cloud and machine learning training infrastructure to innovate faster.
Let me give you a few examples on how this technology will make our products smarter safer and more sustainable.
The next generation of Deere's construction equipment will feature a higher degree of our propriety.
No individual machine is used to its full capacity and this inefficiency is coming from a lack of data.
Lack of communication and coordination between.
Machines and different steps of the production system.
Our analysis indicates cost savings in the range of 15% to 30% is possible in road rehabilitation.
And when a three mile Road rehabilitation project can cost one to $1.5 million. This is a big opportunity.
These technologies will also.
Serve to make job sites considerably safer, which is a top priority for our customers and while we use.
We use much of the same hardware and software you would encounter on a blue River sand spray machine Z is just the same but we will collect.
Different data and train our neural network.
Use different onboard software for machine control.
We feel we are uniquely positioned to help further the use of recycled and renewables.
Full building materials and for many reasons construction equipment is likely to lead the way on full electric machines, and we look forward.
As a summary of the transaction.
Highlights, which you also saw.
As noted in the press release, we have entered into definitive agreements with Hitachi construction machinery to purchase the Deere Hitachi joint venture businesses, including three factories and a license agreement for the intellectual property for continued manufacturer.
Through the source components from Hitachi.
Our existing locations for the near term.
For those of you who may not be familiar with our long standing relationship with Hitachi, Let me provide a little context Deere has produced excavators through a joint venture agreement with Hitachi for the last 30 years.
Have produced Hitachi design machines, which were distributed under both through the dealer channel in the Americas.
This joint venture has been successful and served us well over the years.
Our new strategy will allow us to leverage our own technology and designs, specifically focused on the markets that matter most to us furthering the value unlock for our customers with deere on Deere machines, while accelerating our innovation in response time to customer and dealer feedback on products.
To that end, we've been investing in our own proprietary excavator designs for well over a decade, serving markets outside of the Americas and we have plans to introduce our next generation of X excavators in the Americas, and a timeline that complements our supply agreement with Hitachi.
Finally, I would highlight we do expect this transaction to be accretive to earnings in year one.
At this point I will turn the call back over to Brent.
Let's move now to our financial services operations on Slide 17 worldwide financial services net income attributable to Deere <unk> company.
In the third quarter was $227 million benefiting from an improvement on operating lease residual values as well as income earned on a higher average portfolio, a lower provision for credit losses, and more favorable financing spreads.
For fiscal year 2021, the net income forecast is now $850 million as the segment continues to benefit from the same factors realized during the quarter.
Slide 18 outlines our guidance for net income our effective tax rate.
<unk> operating cash flow.
For fiscal year 'twenty, one our full year outlook for net income is now forecast to be between five seven and $5.9 billion.
The full year forecast reflects the impact from higher raw material prices and logistics costs, which we estimate to have added an additional $1.5 billion in expense experienced mostly in the back half of the year.
The guidance incorporates an in <unk>.
Active tax rate projected to be between 22% and 24%.
Lastly, cash flow from the.
Cash flow from the equipment operations is expected to be in a range of five $8 billion to $6 billion.
I will now turn the call over to Ryan Campbell for closing comments Brian.
Thanks, Brian.
Before we respond to your questions I'd like to offer a few thoughts on our financial results and the current demand environment.
As well as provide some commentary on the execution of our strategy.
The company continued to demonstrate strong performance in the third quarter, while challenges in the supply base persisted and in some cases became more complicated.
We owe this solid execution to the extraordinary efforts made by our workforce for getting our products to the field and to our dealer channel for best in class customer support.
At this time, we expect many of these challenges to persist through the end of this year and into next.
Our guidance reflects a continuation of these challenges, but does not contemplate a significant shutdown of operations.
Despite the challenging production environment and market demand remains robust with order activity, providing excellent visibility for our large AG production throughout much of fiscal year 'twenty two.
Results from our planter and sprayer early order programs indicate robust demand will continue well into <unk>.
So next year in fact, we were able to fill our available production slots for fiscal year 'twenty two early in the first phase of the program.
At this time, we expect production rates for our crop care products to be up strong double digits on a percentage basis.
Even more encouraging is the take rates for advanced precision features which were up significantly from last year, reaching all time highs.
Our large tractor order book in the U S extends through the second quarter of fiscal year 'twenty two.
Year Encouragingly.
Nation Activations also reached all time highs.
The demand environment, we are also.
Laser focused on executing our strategy that will unlock significant new economic headroom for our customers, while driving higher levels of sustainability in their operations.
As we reflect on what we have built to date and the possibilities we see in the future we will aggressively make investments that promote deeper customer engagement in our digital solutions.
As we speak our production systems teams are analyzing each step in our customers' processes and designing our concept concept in solutions that will increase output, while reducing the inputs required.
As these types of solutions gain traction, we see the potential for a future less dependent on sales of new equipment units each year and instead of future tied more closely to the jobs are customers do year in and year out enabled by the technology that makes it a more profitable productive and sustainable.
Over the next year, we'll talk a bit more about how this transformation will impact the company's goals and ambitions beyond our current set of goals slated for 2022.
Ultimately our next generation of goals will allow.
To unlock the total addressable market of new value creation for our customers, which we believe is significant.
Lastly, the third quarter provided a good representation of our use of cash priorities last quarter I noted that our heightened cash flow levels would enable us to invest more in our technology stack.
As well as increased cash return to shareholders and as we indicated we made investments that will support our smart industrial strategy and will deliver long term value for shareholders.
Beyond that we raised our dividend by 18% in the second quarter and in the third quarter repurchased over $700 million and shares our highest amount in six years.
In summary, despite some of the near term operational challenges, we expect to continue delivering on our financial goals, while at the same time accelerating our investments in technology and sustainability. Although still early we are convinced that our strategy will drive differentiated outcomes for our customers and all stakeholders. We look forward to updating you on our progress over the next few quarters.
<unk>.
Now we're ready to begin Q&A. The operator will instruct you on the polling procedures in consideration of others and our hope to allow more of you to participate in the call. Please limit yourself to one question. If you have additional questions. We ask that you rejoin the queue.
Ed.
That's the southern lines are now open for questions. If you would like to ask a question over the phone. Please press star one and record your name.
Withdraw your question Press Star two.
First question in the queue is from Adam Uhlman with Cleveland Research. Your line is now open.
Hey, guys. Good morning, Congrats on the strong quarter I had a question on the early order programs if it could.
Any chance you could expand the production capacity to capture more of the demand side and related to that can you just talk about what the pricing was looking like on the early order programs.
Thanks, Adam So the early order programs one of the one of the things that we see and when we look at what the demand picture there is.
It appears demand is going to be above the industry's ability to supply given the supply constraints that we're facing.
So I think thats one of the challenges that we see there as we looked at the early order program. The crop care. So planters and sprayers has that opened up and we essentially filled the full year of production in the first phase of the program. So we will not run additional additional phases there.
And when.
When you think about combined so for combines and we recently opened that up we're doing that a little bit differently. This year.
We've allowed orders to begin.
But we are taking time.
And to be able to manage price cost dynamics. There. So we can make make those adjustments.
And then from a price point of view for the PPA products for production precision AG products that we have out either under the order or that we've taken orders on just carrying of roughly 8% price increase.
For 2020 will go then go to our next question.
Next question is from Rob Wertheimer with Melius Research. Your line is now open.
Hi, good morning, everyone and thanks for the discussion on the strategy and the technology and how they are intersecting.
Jamie I don't give a pretty good overview of their flag I'm a little bit curious if you can expand on maybe why you didn't do more of this internally.
<unk> added relationship and I'm sure you are working with them in the accelerator I Wonder if you could just talk a little about internal versus external decision startup versus internal innovation and the advantages and disadvantages and I'll stop there. Thank you.
Thanks, Rob for the question.
Work internally as well I think the autonomy problem is hard and it takes a.
I think a multi.
Sensor approach in order to solid and so don't read into to the <unk> acquisition that we haven't done work internally internally as well <unk>.
Ignition that the problem is hard.
And we thought that the talent technical skills and sensing capability that they brought to the equation was part of us helping to solve the complete puzzle.
Okay.
Bob It's Ryan just maybe to add on to that the opportunity is as big some of this is a function of the speed.
To the extent that we can acquire.
That we think about a lot more focused on.
Thank you Ryan.
Thanks, Rob We'll go ahead and go to our next question.
Next question is from Stephen Volkmann with Jefferies. Your line is now open.
Hey, good morning, guys, maybe to go back to price cost I'm curious I'm on both price and cost.
In the first half of next year.
As far as you have your order books open I guess, so how should we think about the price cost dynamic.
In your backlog now.
Sure Steve.
So maybe just backing up 2021, and we are price cost positive for the full year, we do see that become more challenged in the fourth quarter.
We talked about at Brent mentioned 1 billion and a half of a material and freight costs out of this year almost 45% of that is in the fourth quarter importantly, as we as we think about going forward to next year.
And we are on the PPA side of the business, we have about eight points of price on the products that are out there right now and mentioned earlier as well as our sectors adjusting a little bit of how we are managing order.
Productivity to better.
Try to control the price cost dynamics, so that we fully intend and expect that will be price cost.
A positive in 'twenty two as well.
Thanks, Steve We'll go ahead and go to our next question.
Next.
Next question is from Jerry Revich with Goldman Sachs. Your line is now open.
Yes, hi, good morning, everyone.
Ryan I'm wondering if you could just expand on your comments regarding that.
And take rates the productivity improvements that feels like.
Plus billion dollar Tam for you folks I'm wondering if you might be willing to comment on that.
At this point and if you could just touch on the exact pay creates for exact emerge in some of the other key products. If you can.
Thanks, Jerry this is Josh I'll start and maybe just talking a little bit on the take rate side. So we as noted we saw significant steps up and planting on exact emerge as well as the exact apply on sprayers. So exact emerge is around 55%. That's about a 10 point jump from where we were a year ago.
And just above 55 on exact apply on the spare side. So we have seen those move up maybe one other thing as you think about technology adoption and we saw a pretty significant increase as well in engaged acres. So now over 290 million engaged acres. So when you think about the ability to.
Grow engagement there both through the use of technology and in the data side in terms of what that can do from a decision making perspective for our customers and the value. We can add continue to see expanding.
Yes, Jerry on Tam.
Youll hear us talk more about and start to quantify Tam over the next few quarters, but what I would say is.
Yeah.
And the Best example, that we can turn into software.
There is a benefit to us from a margin perspective.
So as we think about it there is an opportunity on inputs that are customers are using that as an opportunity.
On the solutions that will develop and.
As I indicated that opportunity is significant but more to come in more specifics to come over the next.
A couple of quarters.
Hey, Jerry this is Jeremy I'd, just add that we also think about one of those inputs as labor and tying back to the automation of autonomy story that we shared.
U S census data released last week would indicate the flight from rural to urban is continuing to accelerate and that that.
The pressure point from an AG labor perspective is only going to get worse. So we view that as part of the equation as well.
Thanks, Shari well go ahead and go to our next question.
Next question is from Steven Fisher with UBS. Your line is now open.
Thanks, Good morning.
Wonder if you could just talk a little bit more about the supply chain. I think you mentioned that some aspects have gotten a little more complex than im wondering overall to the what extent you're seeing any signs anywhere that easing and when you think you might see the kind of the peak pain points.
In that process.
We're seeing it get a little bit better.
Yeah.
As we expected a quarter ago. We noted we felt the back half of the year would be more challenging that's exactly what we saw we saw more more disruptions are different facilities at different times throughout the quarter and.
And we think that continues we don't.
It's a pretty wide variety of issues.
It's not one select issue from materials to labor.
Which makes it a little more challenging.
First from a geographic perspective so.
We'll continue to manage through the team's doing really good job of producing and being as productive as possible given the challenges dealers working really hard taking care of customers, making sure we're getting.
Those products to them, but we don't we don't see that easing up here in the near term.
Yes.
I can go to our next question.
Next question is from.
Okay.
Hi, good morning.
I guess, if you could just I was interested by the Hitachi announcement.
I'm just trying to ask.
Understand one I think your market share in excavators is about 40%. If you can help me.
Fine for you so I'm trying to understand how.
I know it will be accretive to margins and EPS, but if you could give us any more color there and then sort of new.
Geographies at this thank you.
Thanks very much for the question.
I would say.
Excavators is obviously, a very important machine form for our construction and if you look at unit volume, it's typically $35, 40% of any given market.
Our share would not be.
The numbers you said probably in the range of half that in fact, and so when we look at our other core earthmoving product lines.
We do see an opportunity.
The margin story is.
Think about a.
A 50.50 joint venture structure, where design, we jointly bid the manufacturer.
Fusion.
There is a market.
Margin sharing aspect of that relationship and obviously as we move to a more traditional supply agreement with Hitachi.
That margin sharing goes away so.
It's really a mechanical adjustment to that part of the business that will improve the margins.
And then as we're able to introduce their designs to your technology in the future. We see that really is is really important segment.
We will we will maintain our near term focus on just working through this change in the Americas and talk with you about other geographies.
Thanks, Jamie Thank you.
Go ahead go to our next question.
Next question is from David Raso with Evercore ISI Q, just trying to think about margin.
Okay.
If you pull out the fourth quarter, a year ago or I get a lot of one time costs there.
But what you are implying about the negative price cost for the fourth quarter, we kind of get back to like a core.
Or incremental of about 24, 25%.
It sounds like the first half of the.
The year next year still struggles with price cost and you're going to open the order books for the back half when you get a little more comfort with how much price do we need to get the margins.
A little bit stronger on an incremental.
And should we think about the way youre trying to manage the business is that sort of trying to get core incrementals around <unk> as we flip.
Price will reset there.
So I would not expect that we are necessarily seen those price cost dynamics.
Particularly negative.
As we go forward and then the full year of 'twenty two at this point, we would expect those to be positive from a from a price cost point of view I think maybe importantly is fourth quarter is probably not.
Good.
Read through in terms of what we would expect from a margin perspective.
In the fiscal year.
We're in the early part of 'twenty two.
Yes, David it's Ryan implied in fourth quarter as is.
Mid to high <unk> Incrementals as you indicated we had some specials last year. If you take those out here in the teens, but then if you look at some of the heavy inflation, that's sitting in the fourth quarter and adjust for that you're back to about 40% Incrementals, which is what we've been running for.
We're running with.
This year to date, certainly as we move forward as Josh indicated we'll be resetting price as we turned the calendar in a lot of them.
The range that we've been able to execute against in the past, yes and on the on the order book I think product a product that will like South America, Brazil, it's better.
But thats a shift for us.
A little more dynamic in terms of.
Thanks, David.
We'll go ahead and go to.
Your next question.
Next question is from Christopher <unk> with Us.
Hey, Thanks, good morning, and thank you.
Let me follow up on some of the team.
And net during the quarter.
You made some changes to the to the John Deere Link business model. Just wondering if you can discuss some of the thought process behind that shift.
And it's too early to commit to a single autonomy business not all but maybe give us a broader sense.
The foundation of recurring revenue that it has today and how we should think about that evolving across the portfolio. Thank you.
That business model question first.
In the technology space and autonomy in particular that the taxes are going to spend faster than the base machine.
To provide a business model that allows us and allows customers to take advantage of that latest tech.
Existing machines and <unk>.
Relatively new machines in the fleet not just brand new haul goods coming out of the factory. So that's one of the factors that we're taking into account from a business model perspective.
Just given the rates of change the disparity in change from a technology perspective on the base machine versus the tack that enables autonomy. Your first question Kristen.
Yes.
And the business model.
Got it.
That fundamentally is about just trying to reduce the friction for customers too.
To collect their data and get their data in a usable format right that's about us and trying to minimize the.
The amount of inertia that they have to overcome in order to collect that data and removed one more hurdle for a customer to take that data and put it in a useful place and to start extracting insights from it.
Thanks, Kristen we'll go ahead and go to our next question.
Next question is from Chad Dillard with Bernstein. Your line is now open.
Yes, hi, good morning, everyone.
Thanks, Ed.
Can you talk about the ability to expand.
What sort of opportunities the acquisition.
Thanks.
Workflows.
Do you think about the particular product category that light Davis.
So Jamie Thanks for the question. It's a great question I think John mentioned.
Some of the.
The transfer of technology from AG.
In the construction space, we'd see.
Similar opportunities on the economy side, it's the perception problem from a technical perspective.
It is different in the environment that we're operating in but the core technologies required to execute it from AG two construction.
Hi, Shneur to road building are remarkably similar so we see here.
That's been happening in AG into that construction and road building space as well.
Thanks, Ken.
Go to our next call.
Next question is from Mig <unk> with Baird. Your line is now open.
Good morning, Thank you.
Another question on bear flag for me as well.
Okay.
It was really geared towards retrofitting.
Shipment, but I guess I'm wondering as you're as you're looking at this technology is there a timeline that we should keep in mind in terms of your ability to integrate this technology in your machines from our new.
New model standpoint, and is there a <unk>.
Yes.
Timeline, we should keep in mind attractor experiences harvest serious players other types of equipment.
That's a great question, that's the Crystal ball question, Yes, I would tell you that the technology is maturing at a very rapid pace.
And the capabilities are improving day by day.
We fully plan on developing a fully autonomous production system all the way through.
The agricultural production systems back and leverage the technology from one machine farm to the other so for example from tractors into sprayers into combines et cetera that leveraging capability gives us the ability to move quickly once we start to introduce it into the market on the other machine farms.
Thanks, Mig low hanging over our next question.
Next question is from Ann Duignan with Jpmorgan. Your line is now open.
Yes, I'd like to focus on the Pinnacle business David.
As outlined if you could talk a little bit about <unk>.
Much you have realized gain.
Operating leases returning.
And your outlook for the client tolerating and Ian do you anticipate that used equipment prices will dissipate as mainly men becomes more available.
Or are you really just seeing a reversion to normal our most farmers never buying new equipment anyway, because the price of marine equipment.
Curious as to your outlook comment.
Used pricing as we go into 2022 and new parts become more readily available.
When we think about the operating lease book has performed very well this year I think more importantly than just the sheer gains and losses are some of the changes we made in terms of how we interact how we worked with our dealers.
<unk>.
I have the right behavior and what we've seen from a return rate perspective, as we've seen very very solid improvements.
To the levels, we havent seen for well over six seven years, so thats been particularly positive.
As you noted we've seen gains on the lease book the last few quarters, which has been positive and really.
It.
Demonstrates the underlying demand for used equipment the upward price pressure, we're seeing really across all categories of of used equipment from AG two to construction and forestry.
The current environment with inventories of used quite low.
And new inventory very low our expectation would be that that continues who wouldn't see a significant shift there.
As you look at channel inventories, whether it's small AG.
Production precision AG or construction forestry.
At near historic level low levels across all categories. So we think there is probably a multiyear recovery to rebuild those channel inventory so.
Wouldn't expect new inventory.
To put any pressure on unused at this point.
Thanks, Ann we will go ahead and jump to our next question.
Next question is from Tim Thein with Citigroup. Your line is now open.
Thanks, Good morning, Yes, Josh I, just wanted to come back make sure I was clear on the how to interpret the.
And.
The large AG business in terms of debt and eight points. So that's obviously on on some of the some of what's included there.
Some of that.
New products and you mentioned the spring ERP, but of course every promise within within the large AD group. So can you maybe help us.
You've got that component in terms of the list price increases, but then you mentioned earlier some of the volatility in FX market.
That has led you to be more dynamic in terms of pricing.
It's difficult to tell whether that repeats or now so maybe just clarify a little bit more in terms. So we don't just come only thing okay.
Points of price, that's what we heard that that may not tell the whole story in terms of pricing into 2002. Thank you.
The the production precision AG in North America, where we've got order activity going for 'twenty, two so planters sprayers combines large tractors.
Hearing about 8%.
Price so so thats.
A decently fair representation for North America and PPA.
As Brent noted overseas markets, where we have seen volatility we've been in 'twenty, one we've seen low double digits price realization and thats been.
Very favorable for us as we've tried to be a little more dynamic in responding to those changes so I would not expect that.
We've changed the process or methodology that we've used over the last year there.
Thanks, Tim.
Go ahead and go to our next question.
Next question is from Ross Gilardi with Bank of America. Your line is now open.
Yes.
Guys good morning.
Another technology question.
You guys are making a bigger commitment to autonomy.
<unk> bought about electrification and what kind of role will electrification have across your various product categories and can we expect here.
<unk>.
Perhaps announcement relatively soon and just like how you electrify maybe your smaller AG.
Compact construction equipment at least are you already in the process of doing that thanks.
Yes. Thanks for the question, yes, absolutely electrification battery electric in particular is going to play a role in.
The power and machines in the future and certainly we view that sort of starting.
At low horsepower is low power equipment first and as the technology matures and it becomes more power dense.
Moving up into the product lines over time.
Many of our products are ready for that.
The reality is that.
The technology is mature enough to start to build that into product.
Those are active products in our road map.
Perhaps one thing I would add.
To consider there too is as we think about this journey.
The ability to.
Electrified components to hybridize machines, particularly in higher horsepower will be things that happen are happening today. We've had in lineup in some cases in construction for number of years that will continue to drive more efficiency. There and then as you think about things like renewable biodiesel. There are other opportunities for alternative fuels those sorts of.
Things that can significantly pulled down emissions.
But also.
We generated from from crops that are customers grow which provide a pretty virtuous circle there.
Thank you. Thanks, Ross will go head and go to our next question.
Next question is from Joel <unk> with BMO. Your line is now open.
Hey, guys. Thanks, Don.
Hey, Joel.
Im wondering if you can talk a little bit about.
Getting paid on the construction side I think just for the industry, that's been a little bit more of a difficult <unk>.
Denver and any characterization you can give us on how far construction is behind behind precision AG just give us an idea like how much work has to be done in order to hold to get paid for that thank you.
Yes, Joe This is John stone really good question.
I think certainly construction as an industry has probably lagged what you see in terms of technology advancements in precision AG, but like we talk.
We stand to benefit a lot from moving from just these historical enterprise synergies here, you've heard <unk> talk about to being able to leverage common hardware components common based software common.
Common sensors, and just a different application and different use of those technologies then they can solve a lot of the same problems in construction.
Labor availability is tough to find for construction companies, so making machines more automated it's easier to train a new operator and get them up to speed quickly.
When you look at an average job site estimates would tell you that 30% of the cost of that job site is due to waste and rework and automation like smart grid technology that we have introduced into the market the controls to blade tip controls. The bucket allows you to do a very pre.
Nice job down to just over one inch precision on the grade get to grade right.
Fast do it right the first time and eliminate that 30% waste, we've got customer testimonials its real take rates are on.
I'd say the early part of the adoption curve and it starts to get steep.
The mid double digits.
And growing so I think theres, a great opportunity and leveraging.
Jamie's organization, leveraging technology developed for AG and we can certainly go a lot faster and at a fraction of the investment that.
That we would incur if we tried to do it all by ourselves.
Yes.
Those features like smart grid.
Obviously as John talked about its profitable for our customers. It's also profitable for us.
Thanks Joel.
Go ahead go to our next question.
Next question is from Courtney <unk> from Morgan Stanley. Your line is now open.
Hi, Good morning, guys. Thanks for the question.
Maybe first just wanted to follow up on the take rates for exact apply. Thank you. We're also rolling out in Spain. This year does that include San spray or can you give us any detail.
And how that program is unfolding.
And then my question just on <unk>.
The supply constraints that you're experiencing and obviously you increase peanuts at the $1.5 billion for the year in terms of cost is that primarily relates to freight versus.
Material costs and other than kind of restrict restricting your capacity and your order book.
For next year can you just talk to us a little bit about what you're damned the procurement side to make sure that you have.
A consistent supply chain.
During next year and I think you mentioned in your guidance does not contemplate a SEC Campbell, what youre doing to make sure that there is no significant.
Second shutdowns.
The billion and a half that we mentioned, it's about two thirds material and a third freight.
So there is combination.
Combination of things going some of the increases.
Are you is the ability to get material.
We had supply challenges, you'll see more expedited freight so needing to use air freight to get things to the factories and more just in time.
In addition to two <unk>.
In general being higher given given high levels of demand. So we're continuing to work really closely with the supply base working through what our challenges capacity constraints as we look forward.
We provided more visibility to the supply base than we historically have in order to try to work through those challenges and get out ahead of them but.
It certainly has been a challenging environment.
Very likely continues.
From a <unk> spray select point of view that is not in the exact if I take rate that I mentioned, we had limited.
Availability in this early order program, it's a relatively small number.
Excuse me Green on Brown solution.
A little bit more of a niche operation, but we did fill up the allocation of machines that we had planned for.
For for this year, so that's positive and we'll be working on Sainsbury ultimate as well as we get.
Limited production machines out later this leader in.
Calendar 'twenty two as well.
Thanks Courtney.
Go ahead and go to our next question.
Next question is from Larry de Maria with William Blair. Your line is now open.
Hey, Thanks, good morning, everybody.
As we think about looking into next year, and we think about what's going on this year is there anywhere where or how material are we under producing anywhere now because if I understand your comments, you're producing to retail demand essentially everywhere.
And you had to swing in the small AG.
So as we think about next year.
You may want to add inventory, but there should be no major swings from over or under production is that correct and just trying to understand that.
Potential production swings next year.
For production of precision AG. So all I can turf, we're producing more or less in line with retail this year.
On the construction equipment side and the compact construction equipment side, that's where we see under production this year.
More and more significantly on the compact construction side, that's a combination of very strong demand.
Some of the supply constraints, but we've also been we've been growing share.
We talked about introducing dual distribution.
AG dealers as well over the last few years, so we have seen.
Really really solid and positive results there. So thats just put more pressure on the ability to get more and more inventory out. So that's probably the place where we see the need to build.
Inventory as well as small small tractors, where both small tractors and come back construction similar similar in that they are probably in the high teens inventory to sales and typically those are in probably in the 40% range or so so to your point, probably a long multi year recovery.
Get those back up to the inventory sales levels that we think are best.
Thanks, Larry Yeah. Thanks.
Got time for one more question.
Okay. The next question is from Nicole <unk> with Deutsche Bank. Your line is now open.
Yes, Thanks, David I appreciate you squeezing me in here.
And can we just talk a little bit about your expectations for R&D and Capex.
I know that you tweak.
Tweak here your expectations for 2021 down the Titan.
Just curious.
Those two numbers need to come out next year.
I would not necessarily significant changes this year, we've been down a little bit some of that has been large projects that rolled off from an R&D point of view, so things like the Exxon combine.
A few other things that were relatively significant.
Significant so that has driven some of the decrease so we probably over time in next year and going forward, we probably expect a little more R&D as we look to accelerate some of the opportunities that we see that both Jamie and John talked about here today.
So I think from a and from a capex perspective, I would say not significant changes.
And where we're at.
Thanks Nicole.
That will wrap up the call. Thanks, everyone for the interest and we'll chat with you soon take care.
This concludes today's call. Thank you for your participation.
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