Q2 2022 Deere & Co Earnings Call
Okay.
Sure.
Yes.
Oh.
Yes.
[music].
Okay.
Yes.
Good morning, and welcome to Deere <unk> Company second quarter earnings Conference call. Your lines have been placed on listen only until the question and answer session of today's conference I would now like to turn the call over to Mr. Brent Norwood director of Investor Relations. Thank you you may begin.
Hello also on the call today are Ryan Campbell, Chief Financial Officer, Josh Jepsen, Deputy Financial Officer, Guy You Barr director of corporate Economics, and Rachel Bot manager of Investor Communications.
We'll take a closer look at Deere's second quarter earnings then spend some time talking about our markets and our current outlook for the fiscal year 2022.
After that we'll respond to your questions. Please note that slides are available to complement the call. This morning, they can be accessed on our website at 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.
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 companys. Most recent form 8-K and periodic reports.
Filed with the Securities and Exchange Commission.
This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America GAAP.
Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website at John Deere Dot Com Slash earnings under quarterly earnings and events.
I'll now turn the call over to Rachel Buck.
Thanks, Brent and good morning.
<unk> completed the second quarter with sound execution, despite being constrained by persistent supply challenges.
Financial results for the quarter included a 19, 9% margin for the equipment operations.
AG fundamentals remain solid with our order book largely fall to the balance of the year and demand starting to build for model year 'twenty three products.
Furthermore, the construction and forestry markets also continued to benefit from strong demand and price realization.
Contributing to the division's solid performance in the quarter.
Slide three shows the results for the second quarter.
Net sales and revenues were up 11% to $13 three 7 billion.
Net sales for the equipment operations were up 9% to 12 point out three 4 billion.
Net income attributable to Deere <unk> company was $2 98 billion or $6 81 per diluted share.
Taking a closer look at our production and precision AG business on slide four.
Net sales of $5, one 7 billion were up 13% compared to the second quarter last year, primarily due to price realizations and higher shipment volumes.
Price realization in the quarter was positive by about 11 points.
Operating profit was $1 7 billion.
Five 7 billion, resulting in a 20% 21% operating margin for the segment.
The year over year increase in operating profit was primarily due to price realizations and higher shipment volumes.
Partially offset by higher production costs and higher R&D spend.
The production costs were mostly elevated material and freight.
Fly challenges also contributed to production inefficiencies.
<unk> higher overheads further period.
The increased R&D spend reflects our continued focus on developing and integrating technology solutions into our equipment and unlocking value for our customers.
Operating profit for the quarter was also negatively impacted by an impairment of $46 million related to the events of Russia Ukraine.
Next to small AG and turf on slide five.
Net sales were up 5%.
Totaling $3 $5 7 billion in the second quarter as price realization more than offset negative currency translation.
Price realization in the quarter was positive by just over eight points, while currency translation was negative by about two points.
For the quarter operating profit was down year over year at $520 million, resulting in a $14 six operating margin.
The decreased profit was primarily due to higher production costs, specifically material and an unfavorable sales mix.
These items were partially offset by price realization.
To share more perspective on the current global AG and turf industry and fundamentals I'm happy to be joined today by <unk> director of corporate economics.
Thanks, Rachel turning to slide six I would first like to take a few moments to talk through some points that are influencing the global industry kudos thoughtful grains and oilseeds have declined over the past three seasons, and we expect to see significant lift production and export out of the Black Sea region.
And on the demand side, there was an increase of imports into China, and China's hog herd recovered so both supply and demand factors are leading to higher crop prices as reflected in the reason why the release. Meanwhile, <unk> are experiencing input cost inflation and availability concerns most notably with <unk>.
So row crop producers are experiencing higher input cost. Many push you have input in advance of the recent inflation and our marketing their crops at elevated prices.
As a result growers continue to experience strong profitability and cash flow, while farmers expect another year of high input costs in 2023 global <unk> prices have recently lost to deliver healthy margins profit into the next season.
With respect to farm equipment 12 consecutive years of industry wide production constraints have resulted in further aging of the fleet the higher than average fleet age coupled with low channel inventory is contributing to pent up demand and is likely to remain beyond fiscal 'twenty two with this backdrop of continued strong fundamentals.
We expect U S and Canada industry sales of large AG equipment to be up approximately 20% order books for the remaining of the current fiscal year are mostly full and we already see signs of strong demand for model year 'twenty three equipment with some order books opening in June .
So I'll ask on turf industry demand continues to be forecasted to be about flat. This year. We are seeing moderate increases from our <unk> segment, while consumer products are lower due to supply constraints and low inventory in the channel.
Rising interest rates will likely impact home sales and home improvement spending in North America, Although we expect them to remain elevated.
Shipment.
Inventories remained well below normal and are unlikely to begin recovering until 2023 now moving onto Europe . The industry is forecasted to be up roughly 5% as higher commodity prices threaten business conditions in the edible segment. We expect the industry will continue to face supply based constraints, resulting in demand outstrips.
Production for the year at this time, our order book extend through the duration of fiscal 'twenty, two and even into early fiscal 'twenty three for some product lines in.
In South America, we expect industry sales of tractors and combines to increase by approximately 10% despite low below trend crop yield due to whether our customers are very possible. This year benefiting from high commodity prices.
Our order books reflect a strong sentiment in our nearly four for most product lines.
Industry sales in Asia are forecasted to be down moderately as India, which is the world's largest truckload market by units moderates from record volume achieved in 2021, I will now turn the call back to Rachel.
Thanks <unk>.
Moving on to our segment forecast beginning on slide seven.
Production in precision AG net sales continued to be forecasted up between 25% and 30% in fiscal year 'twenty to.
The forecast assumes about 13 points of positive price realization for the full year, which will allow us to be price cost positive for the fiscal year.
Additionally, we expect roughly one point of currency headwind.
For the segments operating margin, our full year forecast remains between 'twenty, one and 22%.
Reflecting consistently solid financial performance across all geographic regions.
Slide eight shows our forecast for the small AG and turf segment.
We expect net sales in fiscal year 'twenty two to be up about 15%.
This guidance includes over eight points of positive price realization and three points of currency headwind.
The segment's operating margin is forecasted to be between $15 five and 16, 5%.
Although price cost remains positive for the year supply challenges as well as higher material and freight costs are expected to continue to put pressure on margins.
Changing to construction and forestry on slide nine for the quarter.
Net sales of $3 $34 7 billion were up 9% largely due to price realization and higher shipment volumes.
Operating profit increased year over year to $814 million, resulting in a 24% operating margin.
During the quarter, there was a onetime gain of $326 million investment re measurement from the Hitachi transaction.
Results were also impacted by a $47 million impairment related to the events in Russia and Ukraine.
Excluding those special items operating margin would have been 16%.
Higher production costs, and an unfavorable product mix or detrimental to the quarter results.
The production costs were mainly a result of higher material and freight.
Now, let's take a look at our 2020 to construction and forestry industry outlook on slide 10.
Industry sales of Earth moving equipment in North America are expected to be up approximately 10%.
While the compact construction market is forecasted to be flat to up 5%.
End markets for Earthmoving and compact equipment are expected to remain strong as U S housing market is forecasted to remain elevated.
Oil and gas activities continue to ramp ups and strong capex programs from the independent rental companies drive re fleeting efforts.
Compact construction equipment inventory levels are extremely low due to supply constraints affecting those product lines.
In <unk>, we now expect the industry to be flat to up 5%.
Global Road building markets are also expected to be flat to up 5%.
Road building demand in the Americas remained strong, while China, and Russia markets are down significantly.
The CNS segment outlook is on slide 11.
Deere's construction <unk> Forestry 2022, net sales continued to be forecasted up between 10 and 15%.
Our net sales guidance for the year includes nine points of positive price realization and two points of negative currency impact.
The segment's operating margin outlook has been revised to a range of 15 five to 16, 5%.
The update reflects the onetime gain from the Hitachi transaction.
And the impairment related to the events in Russia, and Ukraine that occurred in the second quarter of 2022.
The normal course of business continues to benefit from increases in price and volume.
Shifting over to our financial services operations on slide 12.
Worldwide financial services net income attributable to Deere <unk> company in the second quarter was $208 million.
This is a slight decrease compared to the second quarter last year, primarily due to the higher reserves for credit losses, partially offset by income earned on our higher average portfolio.
For fiscal year 'twenty, two we maintained our net income outlook at $870 million as the segment is expected to continue to benefit from income earned on our higher average portfolio balance.
Slide 13 outlines our guidance for net income our effective tax rate and operating cash flow.
For fiscal year 'twenty, two we are raising our outlook for net income to be between 7% and $7 4 billion, reflecting the one time items in the second quarter of this year.
The full year forecast is inclusive of the impact of higher raw material prices and logistics costs.
At this time, our forecasted price realization is expected to outpace both material and freight costs for the entire year.
The first two quarters are expected to be our most difficult material and freight inflationary cost compares.
While the third quarter comparison to last year should improve slightly.
As we progress into the fourth quarter, we expect those material and freight comparisons to improve even further.
We also expect shipments to be more back half weighted than we've seen historically as we work through our backlog of partially built inventory waiting for supply parts and while seasonal factories will continue to produce without the typical shutdown periods.
Moving on to tax our guidance incorporates an effective tax rate projected to be between 22 and 24%.
Lastly, cash flow from the equipment operations is now expected to be in the range of five $6 billion to $6 billion.
The decrease in the forecast reflects the increases in working capital required through the year.
At this time I would like to turn the call over to Ryan Campbell, Chief Financial Officer for comments Brian .
Before we transition to the Q&A portion.
I would like to make a few remarks on our results and the opportunities ahead of us.
Reflecting on our second quarter results as we indicated in our prior earnings call on outlook the supply chain related constraints continued through the quarter and we will not likely abate during this fiscal year.
With respect to our forecast excluding the special items in the second quarter, our operational guidance remains roughly unchanged.
I want to commend our employees dealers and suppliers for their efforts to support customers and deliver products as quickly as possible in this dynamic environment.
Given the strong fundamentals in agriculture, coupled with the underlying supply constraints, we do not see the industry being able to meet all of the demand that exists in 2022.
While difficult to quantify exactly the impact of this we expect 2023 to be another strong year of industry demand.
Strategically each day that passes gives us more confidence in our smart industrial strategy and our recently announced leap ambitions.
While we are hard at work managing our operations in this dynamic environment. We are also executing on our strategy our production.
<unk> systems teams continue to identify and execute against opportunities to drive both economic and sustainable value for our customers and their operations.
This is even more critical in an environment, where inputs are significantly increasing in cost and are hard to come by.
Thanks Ryan.
Now before we open the line for Q&A I would like to dive deeper into a few important topics for the quarter.
Let's start with our full year revenue guidance.
The top line forecast implies a second half shipment schedule that is higher than the first half.
Brent what factors led to this and how does their plan to deliver on our back half loaded year.
Yes.
Spend a few minutes talking about some of the factors.
In the first half of the year.
The first quarter. It was unusually low due to the work stoppage that we experienced so we expected the delivery schedule, what essentially would be seasonally different.
Earlier in the year.
Also had two large new product programs that we're ramping up to full production in the first half the <unk> combine and the 900 tractor.
And our production plans always reflected higher volumes of these products later in the year.
Typically.
We see we have some of our seasonal factories that take shutdowns in the second half of the year. However, this year, we will see some of our PPA production of precision AG factories, producing through much of the third and fourth quarter.
Overall, we expect to have more production days in the second half of 2022 than the previous year and we expect to grow production progressively from the second quarter through the fourth quarter, meaning we expect Q4 to be our highest revenue quarter for the year.
Additionally, supply disruptions led to inefficiencies at factories, resulting in unusually high inventory of partially completed machines.
As soon as we get parts, we will be able to complete and ship product providing confidence in the second half shipment schedule.
Our guidance does contemplate getting enough parts to fulfill the production schedule as Ryan mentioned, we are collaborating with suppliers and our factories and are working hard to make sure we get there.
This is Josh maybe one thing to add there we're seeing some of this play out in the AGM retail data as well, where you see some category is down year to date, but choppiness in the month to month retails.
Kris in certain categories is not reflective of changes in demand, but more the challenges we're seeing in getting product shipped and not just us but across the industry.
The current environment in supply.
Great. Thank you.
Next let's discuss how margins will progress throughout the year, especially in the context of price and material and freight costs can.
Can you talk a little bit more about how we should think about margins in second half versus the first half Brian how do you expect the rest of the year to unfold.
So we experienced the most difficult material and freight compares in the first half of 2022.
<unk> contracts on steel means we've seen progressively higher costs since third quarter 2021.
Other cost of ramping as well commodities, such as copper and aluminum electronics, and even things like labor and energy are increasing.
We will begin to anniversary some of these cost increases in the third and fourth quarter. So we will see easier compares relative to the previous year.
Freight remains elevated two recent COVID-19 lockdowns in China have caused delays in shipping globally compounding some of the previous logistics bottlenecks.
With the supply chain back up we're utilizing significantly more air for Airfreight solutions and we expect this to continue throughout the second half of 2022.
In addition to material and freight overhead has increased.
This has come from the Choppiness in the supply base and is particularly evident in the number of partially completed machines.
In our inventory that are missing parts required to be complete.
So while the compare gets easier, we probably won't see much moderation and material and freight costs. This year.
Fortunately price realization should get progressively better potentially making it the first the fourth quarter, the highest margin period for us which is a bit atypical.
We have managed our order books differently than we have in the past, enabling us to adapt to changes in inflation. So as noted earlier, we expect our price for the full year will more than offset increases in material and freight.
Thanks Brent.
Let's take a closer look at AG fundamentals Italia can you share more insight.
Sure, let's start with the.
Global stocks were granted all seats, which we've seen decline over the last three seasons and Thats driven by both the supply demand side now looking at the demand side, we experienced a large increase in Chinese import and that starting in probably a 2021 as China's HOKA recovered from the African swine fever, and now on the supply side the <unk>.
World experiencing significant damage to crop Tuesday, two consecutive years that was in 2021 crop year and also a 'twenty one 'twenty two crop year as well and in multiple locations in North America, South America parts of the CIA So together of strong demand and declining supply led to the higher price that we experiencing over the past two years.
Now expected lower production of crop from the Black Sea region as to the challenges that the asset quality faces the region accounts for almost about a third of global wheat export as well as a normal source of corn exports usda's forecast production and export for wheat, and corn to be almost 50% lower.
'twenty two 'twenty three crop year from the Black Sea region and in fact, the potential export loss could impact a tool crop years and as a result, right now with ending stocks among key exporters could fall below 50 million tonnes, which is the lowest level in 15 years now looking at the fertilizer prices, which have cloud in some markets are.
Chancing Scarcities of these critical input persistent bunch of ISO constrains and high price will lead the supply chain to adjust but this is likely going to take some time.
You put these factors together, while row crop producers are experiencing high input cost mainly half what she has inputs in advance of recent inflation and we're able to market their crop at the high price, which helped mitigate the the higher input costs and also a tight global supply will likely remain supportive of prices next year, which is.
Helping to sustain farmer profitability now given this backdrop of elevated commodity prices combined with two consecutive years of constrained machinery production, we have older fleet age and low channel inventory the fundamentals for agriculture machinery remain favorable.
Thanks, Scott Yeah, maybe just to punctuate all of that we're seeing strong demand as we look into model year 'twenty three orders and even begin to take orders and <unk> 23 for certain products in different geographies. So we're expecting continued demand to be a tailwind going into 'twenty three.
As a follow up to that our technology helps alleviate some of the pressure that guy you talked about on the input cost by enabling the customer to use less while still achieving yields.
That's right and traditionally in AG boost yields we've seen an approach that had to be do more with more both rising input costs. Our customers are looking at how they can do more with less and they are looking to us and the strategy that we've been talking about over the last few years using less inputs, but not losing out on yields or in some cases cases using less input.
And increasing yields. So for example, we introduced a product called exact rate last year, which applies liquid nitrogen at the time of planting. This helps our customers get more precise with fertilizer fertilizer usage, which has been a unit.
Experiencing rapid inflation this year not only can this reduce the cost but also improves our customer's nitrogen efficiencies unlocking significant environmental benefits as well as helping yield by applying nutrients when the seed needs. It most.
So not only do we see continued strong demand, but the demand for our precision AG solutions as our customers look for opportunities to do more with less.
Thanks, Josh and speaking of precision AG technology, do you announced a few acquisitions during the quarter, Brian can you share more.
Sure Richard consistent with the themes that we've previously discussed of Digitization automation autonomy lifecycle electrification and sustainability, we've executed during the quarter to expand our access to talent technology and business opportunities in these areas.
To highlight one investment Gus automation, which is a pioneer in semi autonomous spring for high value crops Gus.
Gus automation brings an in depth knowledge of HBC customers and innovative solutions that deal with some of the most pressing issues facing that segment today.
We look forward to working together on further collaboration with the Deere sales channel and in other areas that drive value for HBC customers.
I highlight this investment as this is illustrative of the new smart industrial strategy focused on production systems. Our teams worked to deeply understand customer production systems and how to deliver better outcomes, both from an economic and sustainability perspective.
Then we work to deliver a differentiated solutions.
Sometimes we'll designed to deliver that solution organically other times, we'll invest partner or require unique capabilities to accelerate that delivery.
Overall, you'll see us continue to aggressively expand our capabilities to deliver differentiated customer value and we will dive deeper into this at our tech day on May 26.
Now we are ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure 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.
Thank you Carolyn will now. Thank you we will now begin the question and answer session. If you'd like to ask a question or make a comment from the phones. Please press star one and record. Your name has prompted to withdraw that request you May press star two once again Thats star one or.
Our first question comes from Jamie Cook from Credit Suisse. Your line is open hi, good morning.
Could you just talk to obviously.
The street views the second quarter as in MS. How the quarter came in relative to your expectations and then also just on the can you just quantify the the inventory that you have that youre still waiting for parts I'm just trying to figure out how big of a deal that is and was that the entire cut just cash flow.
Yeah.
Hey, Jamie.
Yes. Thanks for the question with respect to the second quarter, there's a lot of different variables going on there.
Certainly inflation has been broader based than just deal overseeing it impact a lot of other commodities.
I think we see continued pressure.
On material cost.
That kind of led to.
Some of the margin performance in the second quarter I think in addition to that just with the.
Delays in delinquencies, we are seeing in supply chain, we're utilizing a lot of additional.
Premium freight right now so that's also having an impact on our results for the quarter.
Really the biggest challenge to though as we noted in our second quarter was the number of partially completed machines that you referenced to Jamie.
Yeah.
And in many cases that.
Those those partially completed machines will drive poor overhead absorption.
But they also give us a lot of confidence in the second half production schedule, because we do have <unk>.
<unk> that we'll be able to complete and ship and ultimately retail those parts in the second half of the year.
To give a little bit of an idea of the size of that and you can certainly look at the change in inventory that we had on the balance sheet sequentially in the second quarter from the first quarter. If you go back in history. Typically you don't see an increase in inventory in the second quarter. So that'll give you a little bit of an idea of the magnitude.
That we saw all of those partially completed machines, yes.
Yes, Jamie it's Josh just to pile on what Brent mentioned there that.
That.
It does machine sitting waiting on parts. If you look at the back half of the year increase year over year in the second half representing close to 25%. So as Brent mentioned getting those out gives us a significant jump on the.
The backend loaded sales.
Okay. Thank you very much.
Thank you. Our next question comes from Christopher Nolan from Oppenheimer. Your line is open.
Great. Thank you for taking my question.
So you talked about some of this in and some of the commentary that you made.
Obviously, a lot of noise in that retail statistics and the industry sentiment indicators that we're seeing coming out.
Given the ongoing production challenge, how how do you think investors should interpret some of those readings in the context of some.
The demand commentary that you've made.
Yeah.
Yes with respect to the retail data, we're certainly not not surprised to see it come in.
Little bit choppy this year as you know.
Certainly we're dealing with delays in delinquencies in the supply base, but I presume that.
Most of most of the industry as well.
Given the number of partially completed machines I think we'll continue to see that data come in waves and be a little bit choppy.
As we get through the rest of the year certainly with respect to market share on any given month, it's really a function of.
Who can produce what that month, and so again that will be a little bit choppy certainly.
Particularly in the first quarter, we probably outperformed our own expectations, there with respect to what we could deliver given the work stoppage.
I would say other than that we feel like we've been holding our own in.
Terms of retailing machines, we have we do have a couple of standouts, though and bright spots eight ours in particular.
<unk> line that we've had a lot of success outperforming the industry in terms of production Mannheim tractors is as well. So if you look at the first half of the year, we picked up a little bit of market share.
On the <unk> and then also in Europe for a high horsepower tractors and <unk>.
Certainly look to holding onto that lead as we produce through the back half of the year.
Yeah, Chris as it relates to demand piece, specifically, we have not seen that shift or change or cool.
As it pertains to the large AG in particular.
Anecdotally for example in Brazil, as we opened month to month.
We filled a month's production in a day when we opened it and as we start to get ready for early order programs.
<unk> strong strong activity as we as we're talking to dealers who are already working with customers. So.
We think that that demand environment continues and provides a good tailwind for 'twenty three.
Christian its Ryan maybe just add some of the customer sentiment survey is or can be driven by just the overall volatility in the environment and the input pressures and concerns that the customers may have with respect to that ultimately demand comes from the actual economics, which we see continuing to be favorable.
Yeah.
Thank you so much.
Thank you. Our next question comes from Stephen Volkmann from Jefferies. Your line is open.
Hi, good morning, everybody. So I kind of want to go back to this first half second half thing, if we could and it feels like.
Lot of what you are planning on is requires the supply chain to sort of improve going forward and get you. Those parts you need to get those parked vehicles shift so I'm curious a.
How did that play out in April because it feels like it actually may be deteriorated, a little bit, but correct me if I'm wrong and then secondarily just how much visibility do you have on that in the second half to give you that confidence in that kind of ramp that we're seeing.
Yes, Thanks, Steve for the question I think with respect to the supply the supply base.
We have seen.
Supply base that got I would say progressively worse over the course of 2021.
And then really since the fourth quarter of 'twenty, one we characterize the supply basis, just kind of persistent challenges.
Wouldn't say that it's necessarily deteriorated over the course of 2022.
Or gotten better it's just been persistently challenging throughout the first half of the year, we would expect to see that continue that same environment to continue over the second half. So our guidance does contemplate kind of a similar level of choppiness in the supply base.
As we progressed through the year, we don't necessarily see it moderating or getting better.
I think what's a little bit interesting is the some of the root causes have changed quarter from quarter, but the end result has been the same rate in the first quarter, we were primarily grappling with omicron and a high degree of absenteeism and the.
Second quarter.
We spent a lot of our time responding to recent global geopolitical events as.
As well as Lockdowns in China that are having an indirect impact on us through just the debottleneck of global.
Logistics networks so.
When we think about the rest of the year that we would we would.
Expect to see that continue a bit.
And our guidance.
It certainly contemplates that and we think the current conditions do support our second half production schedule.
And we do have confidence that we will get the parts that we need to complete those machines that are currently in inventory ultimately having those ship in retail mostly in the third quarter, maybe a little bit in the fourth quarter there.
Okay. Thanks.
Thank you. Our next question or comment comes from Tami Zakaria from Jpmorgan. Your line is open.
Hi, good morning. Thank you so much for taking my question I think you mentioned you are taking orders for two.
2023 in Europe and order books are opening next months on North America. So what's the pricing you expect to realize for these products next year. Given this year. It has been it's shaping up to be a really strong year in terms of pricing.
With respect to the order books, maybe before I, even get to fiscal year 'twenty. Three it's just important to note fiscal year 'twenty. Two is largely complete at this point for most of our product lines.
We will have our early order programs open up for crop care in early June .
Which is fairly typical for planters and sprayers, we would expect combines to begin sometime in the fall period again.
That's fairly standard for us for our Rolling odor order books will see Waterloo open up here in the next couple of weeks.
And Mannheim is actually already open up for fiscal year 2003, and we're about a quarter full for the first year for.
For the next fiscal year, there and importantly, we are putting pauses and all of these order programs. So that we do maintain a little bit.
Flexibility and pricing as we are.
Have an eye towards.
Material and freight costs are fluctuating.
Next year with respect to our crop care or early order program, where we do have prices that we are seeing.
Pricing for crop care products in the high single digits for.
For next year, So we would expect pricing to be above trend line for for those products going into next year.
Got it. Thank you so much that's super helpful.
Thank you. Our next question or comment is from John Joyner from BMO. Your line is open.
Great. Thank you for taking my question, So maybe asking Steve's question, a slightly different way.
When looking at the back half shipments how do you envision the cadence of the ramp higher or maybe where are you run rating today versus the level that you expect to get to in the fourth quarter.
Yes, Thanks, John for the question with respect to our cadence.
We do expect to see a slightly different seasonal pattern than maybe what many investors have come to expect.
From deer.
Some of this had really been in our plans all along with the work stoppage in the first quarter and the new product programs that we're launching like the X nine combine and then INR tractor.
So we will see production progressively ramp each and every quarter two three and then ultimately leading to the fourth quarter will just allow it.
Should likely be are our highest quarter with respect to production.
Part of what's boosting that as well again is just the completion of those semi completed machines that are currently.
Onto your lots in our inventory so that will also help but keep.
Keep in mind too when doing a comparison of 21 to the back half of 'twenty to most of our UAW factories were shut down for the last couple of weeks of October .
So thats going to give us.
A significantly higher number of production days in the fourth quarter of 'twenty two than what we saw into 'twenty. One. So those are some of the things that are impacting our back half of this year relative to what folks.
<unk> in the back half of 'twenty one.
Thanks, John .
Yes.
Thank you. Our next question comes from Tim Thein from Citigroup. Your line is open.
Great. Thank you and good morning.
I just wanted to circle back with comments on the.
Spring ERP and the pricing thats been communicated to dealers.
<unk> historically.
How good of a reference point.
Yes.
A lot of different products within PPA, PPA, but how good of gist.
Proxy should we think of that to the to the segment as a whole I E.
Yes.
Ladders, and sprayers relative to to large AG as a whole.
With respect to <unk>.
Our ERP programs and how that serves as a proxy for other large AG product lines.
It's a really important first data point for US first one just a demand perspective.
Typically what we see in the early order program for crop care does have some correlation to what we'll see for combines and tractors as well just from an overall demand perspective as it relates to price increases.
Again, I would say that the pricing that we see for our crop care products planters and sprayers.
<unk> generally fairly correlated to the pricing, we'd see for large tractors and combines.
North America market.
You'll see <unk>.
Different price as we look through other regions you know as you think about a market like Brazil, we have maybe the most dynamic pricing capabilities there due to the way that we manage our order fulfillment process.
Due to higher inflation, there and fluctuating FX you may see pricing in Brazil different than detached a little bit from what we do in our north American market, but.
Other than that I would say the read through from our crop care products to other north American products is generally pretty good.
Hey, Tim This Josh one other thing to add to that we will watch really closely is what are we seeing with technology uptake in that early order program and particularly when you look at planters and sprayers and given the increases in input cost and what we can deliver from a value point of view.
We would say our value proposition on a lot of those things has gotten even better with higher input costs and being able to be more precise and more accurate.
To deliver better outcomes for our customers. So as we roll those out here, we'll be watching that closely too because we think there's a tremendous amount of opportunity.
Opportunity with those features and tools.
Thank you.
Thank you. Our next question comes from Jerry Revich from Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
I'm wondering if you could just talk about for the construction and forestry business now that you've completed the excavator technology acquisition.
What's the impact on the margin profile of the business and can you update us on your.
Smart industrial strategy for CNS, specifically now that you have.
The entire <unk>.
Product suite.
Yeah, Thanks, Gary with respect to our construction and Forestry Division. This was really the first quarter that we are operating.
Post the joint venture that we've historically held with Hitachi, maybe just just a quick update on how that's going so far.
We still have a supply agreement with Hitachi and there is still an incredibly important partner to us.
As we transition.
During this time and so far that has been a really great partnership and operations have run very smoothly out of our Cartersville factory in North Carolina.
So things are going really well on that front.
Certainly.
Longer term, we would we would see this is margin accretive to us.
And the way that we've accounted for that historically has.
Put the excavator product line for us at a lower margin relative to other larger moving equipment.
And so we do see an opportunity to improve that certainly.
And.
In the short term, though it may be hard to fair it out exactly what the impact to margins just given the noise of the gain on the remeasurement, but ex that I think we'll see a little bit of margin accretion this year.
But really it's the out years, where I think that will continue to deliver for us.
Yes on the technology side, Jerry I think like in AG. This is where technology can play a huge role in driving profitability and sustainability for our customers.
Accordingly safety as well so you think about labor challenges skilled labor on the job site tool like smart grade.
Effectively automates the job that someone with.
Not a tremendous amount of experience can get in and perform a job as well as an experienced operator, reducing rework time like today when contractors have more jobs and they can do and if I can reduce rework because I'm automating parts of the production system that allows our customers to get more done so.
The smart industrial strategy and leveraging technology into into construction earthmoving.
Building is a big opportunity we're at the very early stages of this but a lot of opportunity to create value for our customers and we're going to continue to methodically work through that bringing the excavator in house is a key step to unlock more value there.
Thanks.
Thank you. Our next question or comment comes from David Raso from Evercore ISI. Your line is open hi. Thank you for the question can I first of all a clarification of something that was said earlier I think Josh you mentioned.
The machines still waiting on parts. If you look at the back half of the years year over year growth it represents close to 25%.
Do you mean, 25% year over year growth just from those machines shipping or do you mean of the needed growth in the back half of the year roughly a quarter of a 25% of it is going to come from the machines.
Waiting for a partial.
The latter.
The growth that we see in the back half a quarter of it.
As effectively represented by those machines waiting on parts. Okay. That's helpful. So it means that's the Genesis of my question. It looks like the sequential growth from say the second quarter run rate for the rest of the year I mean, it's principally in production in precision AG.
And if you look at what's needed in the second half of the year.
Basically needs to be about 23% higher.
<unk> taught you average in <unk> and <unk>, So maybe it'd be helpful. For us can we just break that down it sounds like.
The inventory part could be 10% of it.
10, or 11, let's call it using your math of that 23 sequential.
Can you help us with the two other key piece as you alluded to pricing maybe.
Maybe it's adding more dollars sequentially right.
Alright from <unk> to <unk>.
And then also the production day comment the shutdowns can you help us a little bit with what level of production day Youll have second half versus what we ran into Q.
Getting that 23% I mean, those are the three buckets right. It's partially built inventory hey, we're going to take not take the shutdowns that we usually do and then you get a little better pricing.
Yes, David Thanks for the question.
Youre absolutely right price is certainly a component of it you saw us raise our price realization forecast for production in precision AG from 10% to 13%. If you look year to date for production of precision AG I think we've averaged close to 10% in the first half of the year. So the implication on.
Over the last few quarters as well.
We will get a little bit more than that.
And so that's part of the explanation for the higher revenue year over year with respect to the shutdown periods. It really varies factory by factory.
Factories shut down for.
Couple of weeks.
Another shutdown for more or less than that so it really is dependent on what factory, we're talking about but net net.
The minimum minimization of factory shutdowns.
Plus the lack of a work stoppage that we experienced in in October .
October of 2021, all contribute to higher production days year over year that help and that help us support the build schedule that we have currently in place. Thanks David.
Thank you. Our next question or comment comes from Michael Feniger from Bank of America. Your line is open.
Hey, everyone. Thanks for taking my question Theres, a lot of commentary right now in the market with consumers quote unquote trading down obviously farmers are facing higher input costs, where there was reference to the sentiment indicators for farmers have weekend I'm curious from your vantage point have you seen any evidence of farmers.
Trading down and just certain areas are recognizing <unk> technology helps improve efficiencies your farmers, but is there any sticker shock being observed there.
Our farmers trading down in certain product categories.
To compensate for the higher input costs. Thank you.
Hey, Mike Thanks for thanks for the question.
With respect to price.
So far what we've seen in 2022 is it hasn't had much of effect on demand and as we noted we're already seeing indications of interest for 23, even though some products maybe above trend line price.
This realization already for 23.
Certainly the <unk>.
<unk> and freight inflation that we're experiencing are on <unk>.
<unk> is real and we price.
For the following year, we take that into account to make sure that we maintain our our price cost ratios.
If you think about the large AG customer too.
Machinery is still a relatively smaller portion of their P&L. The bulk of their variable cost structure really relates to seed fertilizer and chemicals. The inputs is where the bulk of their variable variable costs have always been and those variable variable costs are increasing at a much.
More significant rate than machinery costs and in many cases.
Our machinery is lessening the usage and reliance on some of these inputs. So the more inflation that we see in chemical and fertilizer costs in many cases, the more valuable our equipment has become to them.
Maybe just kind of one other point on that is.
We have seen significant appreciation in used pricing as well.
Which has really been helpful for our customers who are purchasing new equipment.
Had the impact of limiting that trade differential for them.
Which has helped us price.
You have to help us get the price we've been able to get this year and I think it will be.
Helpful. As we look towards next year as well.
Mike It's Ryan maybe just quickly.
We see our take rates for our tech that allow our customers to manage their P&L better. They continue to be very strong and we would expect them to get stronger. So if anything we see customers trading up not down.
Thank you. Our next question comes from Steven Fisher from UBS. Your line is open.
Great. Thanks, good morning.
Brent you just made a comment about used values in general I guess I am curious what you saw with used values in the quarter.
Is there any particular strengthening there and if so should that be an incremental benefit to.
The fin co and I guess related to that I saw that you raised the provision for credit losses was that just for Russia.
Or can you talk about.
Why that would be.
And how that might.
Reconcile that relate to.
Farmer income and farmer confidence thank you.
Yes with respect to used pricing.
We've seen we've seen it be pretty strong really for the last 12 to 18 months I wouldn't say we had.
Any change from that pattern in the second quarter, it's been consistently strong and consistently outpacing.
Pricing for new equipment as.
As it relates to John Deere financial.
We would say that we've really benefited from a higher average portfolio this year and very favorable credit conditions.
You will see our provision provision for credit loss tick up a little bit in the second quarter and part of that.
Due to the events in Russia, and Ukraine, and also just a really tough compare to <unk> 'twenty one where.
As the backdrop was.
Improving significantly I think we had negative provision in the second quarter. So youre just seeing that normalize out our provision is still well below the 15 year average so all in all conditions for John Deere financial remain very favorable and maybe just a quick comment on the lease book as well we continue to.
See return rates decline.
And really at this point, they're almost for large AG I would say almost approaching zero there.
And then recovery rates on that which does get returns have been increasing for the last 18 months. So.
The quality of the JDM portfolio is really good right now and.
We expect to see that continue in the interim.
Thanks, Steve.
Thank you. Our next question or comment comes from Larry de Maria from William Blair. Your line is open.
Hey, Thanks, good morning, everybody.
You made a comment earlier.
Recall that the average age was increasing which is obviously one of the reasons why we're getting trade ins because the farmers want to.
Ill.
It makes it fully younger can you talk a little bit maybe more specifically on the average age and also.
We are now and how many years would it take do you think to get back towards equilibrium kind of number.
Where farmers you're comfortable thank you.
Hey, Larry.
As it relates to the fleet age.
Yes, we have we have seen at age out.
Really since <unk>.
2013, I think we have aged out every year since then.
And really what's led to the further aging of the fleet. These last two years has really been the industry's inability to meet.
Demand in 'twenty, one into 'twenty two.
So overall, it's aged out a little bit even in 'twenty, two right, which means we haven't kind of fully hit volumes to replace.
The equipment, that's coming out of the of the fleet tractors is where we see the most aging in 'twenty two combines we actually did produce.
Just enough to bend the age of the fleet down a little bit we're still well above average there.
But at.
At least produced enough to begin that process of replacing the combined fleet.
Thanks, Larry.
Yeah.
Thank you our next question or comment comes from Chad Dillard from Bernstein. Your line is open.
Hi, good morning, guys.
I was hoping you could talk a little bit more about your industry view on small lag it looks like a test volume growth.
Flat, but we've seen AAM data.
Sales down mid to high single digits at least on a year to date basis. So can you just talk about what gives you the confidence that we'll be able to kind of see growth in the second half.
And then as it pertains to.
Dear how are you guys thinking about restocking relative to retail demand.
Yes.
Yes, with respect to our small AG and turf business.
We've seen retail data come in really choppy there and in some cases down I think there's a number of things that are impacting that any interim.
First and foremost part of that is just exceed.
Exceedingly low inventory levels are probably starting to have an impact on on retail settlements right now.
That's been particularly as you get into things.
Things like utility vehicles riding lawn equipment compact utility tractors those continued to be fairly scarce. So that is impacting I think the number of retail sentiment.
Also we are seeing a little bit of an impact from just the late spring that we have here typically early springs drive a lot of sale sales for those types of equipment. So that's certainly having an impact.
Further compounding the issue, though is our smaller I can turf business has probably been the most impacted by acute shortages.
Particularly here, referring to riding lawn equipment and utility vehicles, where constraints around small engines has been a real factor limiting volume not just for <unk>, but for the industry as a whole and so.
Okay.
As we get through the year.
We continue to see that be a governing factor ultimately on where volumes can go for small AG and turf.
Got you anything you'd add to that yes, just to kind of give some some ideas on where the market is right now when you look at the protein prices.
With beef pork and also partly all at record high and also milk demand continues to be very strong as well so that's going to help support.
After the the rising fleet costs, we're hitting the market and that market is still looking pretty steady.
Yes.
And it looks like we have one last caller.
Thank you. Our final question comes from Seth Weber from Wells Fargo Securities. Your line is open.
Hey, guys. Good morning, Thanks for taking the question I guess, just going back on the supply chain.
I assume semiconductors is problematic is there anything else you'd call out there and then just related to the semiconductors is there.
So is the assumption is the is the message that the mix.
Fortunately being hurt on the precision in the.
Tech.
Because of the semiconductor issue there or is that really weighing on mix.
And that should get better in the back half of the year as well that's the right way to think about it.
Yes.
With respect to the supply chain, we are seeing.
Issues be fairly broad based.
Our supply management team, we would describe it as whack a mole certainly chips are an issue and we'll probably continue to be an issue.
As we worked through the year I would say so far we've managed that in.
<unk> been able to keep that from having a material impact on mix or any time.
But.
As we looked at the back of the half of the year I would expect.
Not to single out any particular area of the supply base just due to the broad based nature of it I mean, we're seeing challenges with castings and wire harnesses in hydraulics and pumps and tires and it really just depends on the day.
In terms of.
What's causing challenges for us Fortunately our supply management team has really done an excellent job of working through each of these as they come up.
We've been able to solve them without any material work stoppages or any particular mix issues to call out.
Thanks, Seth Okay. Thanks, Thanks, Brent.
I believe that is our last caller.
Thanks, Alan I appreciate it.
Thank you that concludes today's conference call. Thank you for your participation you may disconnect at this time.