Q3 2023 Deere & Co Earnings Call
Speaker 1: Good morning and welcome to Dear and Company's third quarter earnings conference call. Your lines have been placed on listen only until the question and answer session of today's conference. I would now like to turn the call over to Mr. Brent Norwood, Director of Investor Relations. Thank you, sir. You may begin.
Speaker 2: Hello. Also on the call today are Josh Jepson, Chief Financial Officer, and Josh Rolliter, Manager of Investor Communications. Today we'll take a closer look at Deere's third quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2023. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning.
Speaker 2: They can be accessed on our website at johndeere.com backslash earnings.
First, a reminder, this call is being broadcast live on the internet and recorded for future transmission and use by Deere and company. Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as...
in the company's most recent form 8K risk factors in the annual form 10K as updated by reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures , is included in the release and posted on our website at johndeer.com backslash earnings under quarterly earnings and events. I will now turn the call over to Josh Rolleter. Good morning and thank you all for joining. John Deer finished the third quarter with another strong performance resulting in 22.6% margin for equipment operations. Performance exceeded expectations as a result of sustained demand for both farm and construction equipment.
as well as sound operational execution across all business units. AG fundamentals continue to remain healthy, with a full order book and positive customer sentiment supporting a strong finish to fiscal year 2023.
Meanwhile, construction and forestry remain sold out for the remainder of the fiscal year, with robust shipments driven by strong retail demand and rental refleeting.
Slide three begins with results for the third quarter.
Net sales and revenues were up 12% to $15.801 billion, while net sales for the equipment operations were up 10% to $14.284 billion.
Net income attributable to Deere & Company was $2.978 billion or $10.20 per diluted share.
Third quarter net income results include a $243 million tax benefit and a $47 million of associated interest income stemming from a favorable tax ruling on Brazilian VAT tax subsidies. Turning now to slide four, let's begin our segment review with the production and precision ag business.
Net sales of $6.806 billion were up 12% compared to the third quarter last year, primarily due to price realization.
Price realization for the quarter was positive by just under 12 points.
Currency translation was also positive by approximately one point.
Operating profit was 1.782 billion, resulting in a 26.2% operating margin for the quarter.
The year-over-year increase was driven by favorable price realization, improved shipment volumes, and favorable sales mix, which was partially offset by higher production costs, increased S.A.N.G. and R&D spending, an unfavorable currency exchange.
Shifting to small ag and turf on slide five.
Net sales were up 3%, totaling $3.739 billion in the third quarter.
The increase was a result of price realization, which was partially offset by lower shipment volumes.
Price realization was positive by slightly over 9 points.
Currency was also positive by slightly under half a point.
Operating profit improved year-over-year to $732 million, resulting in 19.6% operating margin.
The year-over-year increase was primarily due to price realization and was partially offset by higher production costs, lower shipment volumes, and increased SANG and R&D spending.
Slide six shows our industry outlook for ag and turf markets globally.
In the US and Canada, we expect industry sales of large ag equipment to be up approximately 10% during the fiscal year, reflecting a continuation of strong demand.
Ag fundamentals remain solid with farm net income expected to be near historical highs, even if down from last year's record levels.
Dryer weather conditions over the summer put some downward pressure on yields, tightening ending grain stock estimates and further supporting commodity prices.
Solid order visibility provides a high level of confidence as we move into the fourth quarter.
Within small ag and turf, we estimate industry sales in the US and Canada to be down between 5 and 10 percent, as strength for mid-sized equipment continues to be offset by weaker consumer-oriented products, which have been pulled down, in part, by high interest rates.
Midsize tractors in the 100 to 180 horsepower range are sold out for the remainder of the year, while production cuts in the sub 40 horsepower compact tractor range have helped bring inventory levels down from April highs.
Pay and forge continues to see significant year-over-year increases as production shortages in 2022 fully abate.
Turning to Europe , the industry is forecasted to be flat to up 5% for fiscal year 2023. Our visibility for the rest of 2023 remains excellent as order books are largely pre-sold at this point in the year. In South America, we expect industry sales of tractors and combines to be flat to down 5%.
following a record year of equipment in 2022. Positive sentiment around record grain production in 2023 was somewhat offset by political uncertainty in a delayed government-sponsored financing plan.
The market remains stable and order books now provide visibility through the remainder of 2023.
Industry sales in Asia are forecasted to be down moderately, as volumes in India remain subdued when compared to record levels in 2021.
Moving now to segment forecast on slide 7.
For production and precision ag, net sales continue to be forecasted up around 20% for the fiscal year.
The forecast assumes roughly 15 points of positive price realization for the full year and minimal currency impact.
Segment operating margin for the year remains between 25 and 26 percent, reflecting strong execution globally.
Slide 8 gives our forecast for the small ag and turf segment.
Net sales are expected to remain up around 5% in fiscal year 2023.
Guidance includes about nine points of positive price realization and approximately one point of currency headwind.
The segment's projected operating margin is now between 17 and 18 percent, reflecting stronger than expected operational efficiency, notably in Europe .
Now, switching to construction in forestry on slide nine.
Net sales for the quarter were 3.739 billion, of 14%, primarily due to price realization and higher shipment volumes.
Price realization was positive by nearly 10 points.
and currency translation was also positive by approximately half a point.
Operating profits increased year over year to $716 million, resulting in a 19.1% operating margin due to price realization and improved shipment volumes.
These were partially offset by increased S&G and R&D expenses, higher production costs, and unfavorable currency impacts.
Slide 10 shows our 2023 industry outlook for construction and forestry.
Industry sales of Earth moving and compact construction equipment in North America are both projected to remain flat to up 5%.
Demand for Earth moving and compact construction equipment remains robust, driven primarily by the early stages of infrastructure spending and rental refleeding.
The industry has also benefited from some stabilization and housing as well as reshoring efforts in the manufacturing sector, which are helping to offset weaknesses in office and commercial real estate.
In forestry, we estimate the global industry will be flat to down 5 percent, with growth in Europe offset by softening markets in the US and Canada.
Global road building markets are forecasted to be flat to up 5%.
Continuing on with the CNF Segment Outlook on slide 11.
Gears construction and forestry 2023 net sales are now forecasted up between 15 and 20% with results likely to converge towards the middle of that range.
Our net sales guidance for the year contains about 11 points of positive price realization. Operating margin is now expected to be between 18 and a half to 19 and a half percent.
Next, we'll transition to our financial services operations on slide 12.
Worldwide financial services net income, a tribute role to deer and company, in the third quarter was 216 million.
The 3% year-over-year increase was due to income earned on a higher average portfolio, partially offset by less favorable financing spreads.
For fiscal year 2023, our outlook remains at 630 million, reflecting less favorable financing spreads, the second quarter correction of the accounting treatment for financing incentives, a higher provision for credit losses, increased SANG expenses, and lower gains on operating lease dispositions.
These were partially offset by benefits from a higher average portfolio balance. Finally, slide 13 outlines our guidance for net income, effective tax rate, and operating cash flow.
For fiscal year 23, we are raising our outlook for net income by half a billion to be between $9.75 and $10 billion, reflecting another quarter of strong results and continued optimism for the remainder of the year.
Next.
Lastly, Casulo from Equipment Operations is now projected to be in the range of 10.5 to 11 billion. This concludes our formal remarks. We will now turn to a few specific topics relevant to the quarter before opening the line for Q&A. Let's begin with Dears Performance this quarter, Brent. We had another really strong quarter with operational results coming in just ahead of our own expectations. Net sales for Equipment Operations were up 10% year over year while operating margins came in at 22.6% for the quarter. Can you break down what went well for us this quarter?
Thanks, Josh. First, our factories ran really well in the third quarter. We saw continued progress from our supply base, enabling our operations to hit production schedules almost exactly as planned. This precise execution from our factories is evident in our top line quarterly cadence.
which will show a return to normal seasonality in 2023 when compared to 2022. And a return to normal seasonality is incredibly important to us because it means that we are delivering on our customer commitments to get them machines in season.
Importantly, this is a real testament to our factory teams. And the real story, as you alluded to, is around margins.
All three divisions saw lower than expected production cost inflation as our operational teams continue to deliver on cost reduction activities.
having eliminated many of the inflationary and disruption driven costs over the last couple of years.
This was especially notable for construction forestry, which delivered record year-to-date margin performance.
In addition to exceptional near-term execution, construction for forestry is also benefiting from executing on our business strategy as shown by our successful integration of Verton, the dissolution of our dear Hitachi joint venture, and the strategic portfolio actions that have helped us focus the business.
From a production standpoint, we've seen material cost inflation come down meaningfully throughout the year. We expect this trend to continue throughout the rest of the year. And when you successfully execute on all of these different initiatives simultaneously, you get factories that fundamentally run better. Across the board, we're seeing smoother operations, leaner in-process inventories, and better ability to meet our delivery commitments, which ultimately lead to a better customer experience. That's great. Thanks, Brent. With operations running much more smoothly, maybe we can flip to the other side of the equation. There's been a large amount of focus on industry fundamentals, both from a construction and an ag perspective.
of our production standpoint, we've seen material cost inflation come down meaningfully throughout the year. We expect this trend to continue throughout the rest of the year. And when you successfully execute on all of these different initiatives simultaneously, you get factories that fundamentally run better. Across the board, we're seeing smoother operations, leaner in-process inventories, and better ability to meet our delivery commitments which ultimately lead to a better customer experience. That's great. Thanks, Brent. With operations running much more smoothly, maybe we can flip to the other side of the equation. There's been a large amount of focus on industry fundamentals, both from a construction and an ag perspective. I'd like to start with construction equipment.
We've seen record amounts of government funding announced in the past few years. Alongside the IIJA and CHIPS Act, the IRA has already announced more than $130 billion worth of clean energy projects. How are construction fundamentals faring today? Yes, that's great context, Josh. Earth-moving industry fundamentals remain quite strong driven by construction job growth across most sectors, and in particular, large infrastructure project spending. And with continued rental industry refleeting, demand is expected to remain steady throughout the remainder of the year.
And while we see nice tailwinds from mega project spendings tied to government funds, most of these projects will primarily benefit 2024 and potentially even 2025, supporting an elongative cycle for construction equipment sales. In the near term, the residential housing market, while down from the highs in 2021, has stabilized despite elevated interest.
strong six month rolling order book extending into the second quarter of 2024.
And finally, while we have had some success increasing inventory from historic lows, inventory-to-sales ratios still remain well below target levels.
Okay, that's perfect. So near-term construction fundamentals remain resilient and the business appears to be very well positioned on the construction side heading into 2024.
focusing now on AG fundamentals.
Expect stocks to use to remain tighter for a bit longer. So in summary, ag fundamentals are still supportive in the North American market. Farmers will continue to see relatively healthy economics supported by downward trending input costs and continued constraint on grain supplies globally.
Thanks Brent. That's great color on the US and Canada. If we look outside North America, how will we see these fundamentals impacting Brazil?
Josh I'm wondering if you could just continue the discussion.
You just touched on in terms of higher value per unit. So in the past you folks have been able to outgrow.
Asps by 3% to 4% per year beyond price do you have a finer point that you can share on what that might look like.
24, and if you could just touch on precision AG.
Take rates and how they're tracking.
Part of that conversation as well if you don't mind.
Yeah. Thanks, Jerry I appreciate the question I think we're seeing that continued trend.
Three four points on top of the <unk>.
Thanks, Mary price as it relates to technology.
And the appetite, we're seeing to continue drive technology into the machines.
We look forward and start to drive the business model shift that may change a little bit as we see.
Build a little more recurring revenue, but I think all in we're continuing to see the benefits.
On the unit economics.
Through what we're doing in technology and the value that we can create for customers.
Yes, Jerry as it relates to take rates on technology. Obviously, we just finished up our sprayer early order program.
And our near complete on planters those are two product lines that have a high degree of technology embedded.
And those solutions for some of those mainstay.
Technology innovations like exact emerge an exact apply and we continue to see those take rates increase.
Mid single digits year over year, I mean, both of those are really approaching.
High levels I think exact emerge is around 60%.
For 2020 for exact supply is a little over 70%.
So great progress on those other other products like combine advisor have almost just becomes standard I think we're at almost 100% take rate there and the same is true for our premium and automation activation.
Sweet for our tractors, which is almost at near 100% take rates. So these things are really driving that higher average selling price that Josh talked about and as we begin to lap. Some of those next generation technologies I think we've got opportunity to supplement the higher average selling prices with.
Some some reoccurring revenues as we get into 'twenty $5 26 and beyond.
Maybe one last thing I'd add to that.
Bodes well in terms of the direction. We're headed as we are seeing growth in engaged acres and we're seeing growth in highly engaged acres. So the interaction we're seeing the value that we can create with our digital tools and having that all in one place.
John Deere Operation Center for our customers is continuing to drive value.
And we're seeing that continue to to aid in our business. Thanks Gerry.
Thank you.
Thank you. Our next question is from Jamie Cook with Credit Suisse. Your line is now open.
Hi, good morning, Congrats on a nice quarter.
My first question.
As it relates to your it sounds like supply chain getting better it probably bodes well for 2024.
About supply chain getting better either looking at your what Youre seeing with your foreign Kimpton early order program.
Can you talk to your approach with inventory next year, both for DRAM, both at the dealer level, whether you think you will.
Pretty good retail demand for dealers and more normalized inventory level I guess, that's my first question and then a question Josh again, just on the margin performance.
Yes.
Can you talk about where you are with regard Q.
Where do you think the volatility.
Got it.
There was a downturn coming how resilient.
How would the decremental and some of the internal initiatives. Thank you.
Hey, good morning, Jami. Thanks for the question I'll start with some comments on supply chain and what that means for our inventory position next year and Josh can comment on on the margin progress but.
I think I think <unk> been able to see from our results that our factories ran really well in the third quarter.
We've got a robust cost agenda still to come in next year, but we're really pleased that the.
The progress.
Progress, we've made on reducing production cost inflation, particularly in the third quarter to quarter. If you look at our production cost inflation numbers in Q3, I mean, they came in about half what we had originally anticipated. So that was really good work by our factory teams and our supply management teams.
And I think what Youre seeing is we're driving a lot of.
Progress in terms of getting delinquencies down to almost pre COVID-19 levels, we're driving.
Freight costs down.
We're still seeing a little bit of pressure on some of the purchase components and labor and energy are up but things are trending in the right direction and I think we've got a really robust agenda for next year around.
Further cost reduction in the supply base for the resiliency in our supply base and then just designing out cost for future programs next year all of that is going to help us manage inventory.
As we noted for large AG inventory, we've been sort of below historic levels.
And below target levels now, we will end the year relatively low as we sort of work through sort of the <unk>.
Fourth quarter retail sales that we would anticipate to happen that.
Said, our starting position our sort of our default position. If you will beginning any fiscal year is always to produce in line with retail sales.
And then we'll leave ourselves some optionality to build as we get through the selling season. So once we have a fully formed a view on next year. After all of our early order programs are done and after we've made some progress on our tractor order book.
We'll leave ourselves a little optionality to determine what's the right level of inventory and obviously, our dealers will help help with that input as well, but again right now our default position is to produce in line, but we will given the exit position that will have which will be really attractive from an inventory perspective, we'll leave ourselves some optionality for next year.
Yes, Jamie if you think about reducing volatility I think there is some near term things that we're working on Brent mentioned, what we're doing as it relates to cost management and continuing to take some of the costs that we've seen through inflation and disruption out of the system. That's an important one continuing to drive technology into our machines driving.
As I just mentioned more value per unit from an economics perspective will be beneficial.
There's a lot of great work going on in terms of lifecycle solutions and how we take care of our customers through the life of our products from first owner down to in the fourth and fifth owner and that activity will help.
Dampen some some cyclicality as well and then the last one is maybe a little bit longer term as we are building the infrastructure to drive solutions as a service.
For our business in terms of how we how we shift business model on some of our new technologies.
And that's going to help us to deliver more value to customers and importantly to more customers and more acres more quickly. So that's a focus area. Some of those were early in the journey others. We feel really good about where we are executing on and I think importantly, structurally we feel like we're performing from a profitability perspective.
At a different level and our expectation is you look at where we're performing today.
With volumes as they shift and move up or down we would move up or down that.
That line.
Based on were performing so we think this is a meaningful structural shift in profitability and one that we're going to keep working on so thanks Jamie.
Thank you.
Our next question is from Tim Thein with Citigroup, Sir Your line is open.
Alright, great. Thanks, Good morning, just on AG.
The comment on Brazil. So you can just maybe help us.
Frame that up a bit just in terms of you mentioned the some of the.
Production cuts you made.
Targeting in the second half of the.
A year, how do you think that obviously again a lot of moving parts in a volatile market, but how do you think the.
In the year from an inventory.
Perspective.
In Brazil.
As we go into 'twenty four.
Obviously dealer inventories questions. Thank you.
Yes.
Hey, Tim.
Good morning, as it relates to Brazil, as we noted in our opening comments, it's been a really dynamic year I think a lot of puts and takes at this point. The order book is full for the rest of 'twenty three.
Managing the year has been interesting we've seen record production for corn, soy and near record production for cotton and sugar really healthy profitability for customers, they're down from 22% and again.
To refer back to our opening comments, probably a little bit less than expected.
From our customers there as they had lower levels of forward selling this year and I think some difficulty marketing the sizeable crop that the crop that they had in 2023, you had a little political uncertainty and the delayed in government sponsored financing program and that was all kind of embedded in our reduced industry guide from went from flat to <unk>.
That's the downside and that really reflects for us lower production in the fourth quarter, but a great example of kind of how we intend to be proactive in managing a dynamic market in almost real time, Brazil has always operated that way. We've been we're more dynamic in terms of our order book, our pricing strategy and how we manage production there.
So the goal is with.
Some of the modest production cuts that we took in the fourth quarter is that we would end the year there with inventory really at target.
And so that we would start the year again when that default position of an intent to produce in line with retail sales for 2024.
The good news is there from a combined perspective in particular I think we're 90 over 90% retail sold so we should we should have a pretty good read on where inventories heading for the end of the year, which should well position us for next year.
Longer term, though despite maybe some of the market dynamics of this year.
<unk> is still one of our most important growth markets and it's going to be a market that we're going to continue to invest in for the long term, even while we manage.
Production in the short term.
Tim.
Our next question is from Steven Fisher with UBS. Your line is now open.
Thanks, Good morning, so the year over year step down in pricing and production of precision AG from Q2 was a bit bigger than the kind of headwind you had some tougher comparison in the year before I guess were you expecting such a big step down in pricing I mean, you didn't change your pricing forecast. So maybe it's really not any.
Surprise.
But I'm curious if the environment and what.
What youre seeing in the order activity is still supportive of a 2% to 3% pricing including incentives.
And how is the need for incentives kind of shaping up here.
Hey, Steve.
As it relates to pricing I would say that the second quarter came in almost right on the forecast for production in precision AG.
And construction and forestry small I can turf, probably fair just a shade better as they are retaining a little more price than we had in our forecast but.
All of this is largely in line with our expectations, particularly as we lap some of the mid year price increases that we took in 2002, we would expect from a percentage basis to see that price realization come in for production of precision AG I think we were 12% in the third quarter that should be high single digits in the fourth quarter.
As expected and importantly, though.
Seeing production cost inflation ratchet down at a similar pace. So when you look at the absolute delta between price and cost.
For production of precision AG for example, I think we were at $1 $4 billion positive in the first half second half should be something not dissimilar to that so we are maintaining that price cost disciplined I think throughout the entire year now as it pertains to next year.
No no change in some of the early pricing that we've put out there which has been.
And the sort of 2% to 4% range.
We are certainly managing.
Our incentive spend as well and embedded in that so.
We would expect overall realization to be within that range inclusive of what other whatever discounts you begin to get layered back into the market for 2024.
Thank you.
Our next question is from Kristen Owen with Oppenheimer Ma'am Your line is open.
Great. Thank you for taking the question wanted.
I wanted to ask about the construction margins that you lifted the target once again and really narrowing the gap with with your AG business is that what is arguably a different point in the cycle.
Just given some of the comments of normalization in pricing across the portfolio and what you talked about in the prepared remarks for 2020 for how we should think about the sustainability of that improved margin performance in the construction segment. Thank you.
Hey, good morning Kristen.
As it relates to.
Construction <unk> forestry margins I would kind of refer back to some of the comments we made.
In our opening remarks around the structural things that we've been doing in construction and forestry for really the last four to five years that have.
Really really reformed that business into a more sound and solid business that to your point has closed some of the gap between large AG over the last couple of years first.
First and foremost the most important move we made was the inclusion of a road building business.
In market that we view as high growth lower volatility and it's a very attractive market to be in.
And we acquired the number one asset in that in that business <unk> Ken.
We're really still early days executing our excavator strategy. The first important step there was the dissolution of the Hitachi joint venture, which we successfully negotiated last year and we're on our way to delivering.
A full line of Deere designed excavators, which I think is really sort of the next phase of the strategy there and how we'll see that business continue to drive further margin performance going forward.
And.
We didn't help us a lot publicly but we were very active in portfolio management over the last couple of years really focusing that portfolio on the products, where we're most differentiated and in the markets, where we really have a right to play and a right to win so.
We think all of those things are structural and continue on a go forward basis, Yeah, Kristen one thing I'd add is.
As we look forward and you think about what is there another leg in this journey for CNS.
And believe there is and it's around technology and how do we integrate technology to help do the jobs that our customers do and do them better and more efficiently and more productively and more sustainably. So we're seeing that with with.
Our first suite of automation tools things like grade control, we see more and more opportunities to leverage technology into construction into road building in particular.
We're going to create real value for customers. We think we can differentiate in the marketplace.
And as we create that value for customers in turn get paid as well. So we're excited about the future there.
And we see we see continued opportunities. Thank you.
Our next question is from Rob Wertheimer with Melius Research your line is open.
And actually I wanted to follow up on exactly Josh was just talking about where construction pricing what you've achieved to date is that largely market related or do you feel like you've had enough technology flow and sort of to support a rising price overall and maybe as a part of that question I suppose definitional. If you if you have a tech.
For that.
Volume I think.
But I assume there is just an overall price.
<unk> products deliver more value to customers. So maybe just talk about where you are in technology.
Thanks.
Yeah, Rob.
As it relates to <unk>.
I'll first start with the comment around pricing and then we can talk about technology more broadly, but as it relates to the pricing that we've achieved I mean, I think you've seen that broadly in the construction equipment markets. We worked hard to lead in price as best we can we try to be one of the most disciplined industry players as it pertains to price I think.
We are still early days in terms of getting higher average selling prices.
On account of more technology more innovation the equipment. So we are starting to see that I think on specific product lines. We can definitely see that in terms of the entire portfolio rising we're still early days there. So I think more headroom for us as we begin to integrate technology FERC is certainly going to be one of the.
One of the product lines that benefit the most from a higher average selling price as we include more technology in the coming years.
Rob I would say timeline wise do you think about this journey. We went on the large AG side in 2013 14, when we began I would say I would say we were probably similar to that timeframe. So maybe not quite a decade, but I think behind but we're in those early days are starting to drive more of that technology in.
The excavator is a good example, where we're just getting started as we design the fully integrated machine, where we're going to see.
In our minds, what we're seeing and what we're hearing from customers that are testing really tremendous tremendous technologies and usability. So we're excited about the future there and we think we're very early days. Thanks, Rob.
Perfect. Our next question is from Steve Volkmann with Jefferies. Your line is open.
Hi, Good morning, Thanks for fitting me in here I wanted to go back I think a couple of you have used the word robust cost agenda for next year a couple of times.
I'm just wondering if there's any way for us to think about sizing that is this like sort of a big deal where we could see these.
Production costs in your waterfall chart could they actually be positive next year or is this kind of continuous improvement a better way to think about that.
Hey, Steve.
It's a great question.
We've seen over the last couple of years.
Billions of dollars of cost inflation flow into our operations some of that is coming from systemic inflation.
A portion of that though is is coming from just I'll call. It COVID-19 disruption cost inefficiency costs.
Yeah.
So associated with that with our <unk>.
Deferred ratification of our UAW contract in 'twenty, two all of those things.
Cost overheads to run higher than they normally do so we're bringing a lot of those back in 2023, I think theres more room to run certainly in 2024.
I would not probably characterize it as just a normal continuous improvement program here at Deere because we do have line of sight to specific cost that we want to take out, particularly as some commodity prices have come down it's really easy to capture that in our raw material spend and we did see a tailwind in Ramat raw mats in the third quarter, but for.
A lot of our purchase components that have those raw materials embedded in their purchase price. There is an opportunity to go back and actively renegotiate. So we're very proactive there on executing the strategy.
And we do have a formalized.
Process in place to take further action in 2024.
Steve the only thing I'd add on top of that is just coming through last three years, which have been far from from from usual operating procedures in terms of pandemic supply chain disruptions et cetera is continuing to root out that disruption cost that had come in and made its way in on top of where youre seeing strong demand. So I think there is.
There's going to be work done certainly and I think ongoing getting back to a cadence that we would expect in terms of continuing to take cost out and drive efficiency in the operations. So.
We think theres more room to go here for sure. Thanks.
Thank you and our next question is from David Raso with Evercore. Your line is open.
Hi, Thank you very much the comment earlier about the construction.
The demand backdrop right. It saying you were saying the six month Rolling order book extends into the second quarter 24 can you give us a sense of that order book or your orders up year over year or is that implying growth in construction and forestry through the second quarter or is that what that comment meant.
And any help on the pricing within that order book would be would be great and then a quick question on large AG, maybe I'm misreading it but for the fourth quarter for large AG.
I know go back to normal seasonal times, the fourth quarter does have a pretty weak sequential margin, but large AG you have profit sequentially down almost as much as revenues are implied down I'm, just making sure I understand are there any unique cost or you mentioned, Brazil negative mix just something on why the profits would fall.
<unk> almost as much as the revenues are going to fall sequentially. Thank you.
Yeah, Hey, David Let me, let me start with the first the last part of that question on the.
AG side, and then I'll, let I'll, let Josh comment on construction and forestry.
If you think about the fourth quarter, we will see.
Revenues.
Flattish to maybe down a little bit in AG. The big driver there and then to your point margins will come in <unk>.
Good from where they were in the third quarter. The Big driver. There is we are seeing a return to again this normal seasonality, which does mean that we will institute normal factory shutdowns, particularly at Harvester works, which historically, we've done factory shutdowns in the month of September <unk> October .
And so I think what youre going to see is the impact of shutting that down we havent done that the last couple of years as we've been running behind on.
On delivering machines to customers late in 'twenty, one and then all the way to really through 2022. So that's really the big impact that we're going to see happen.
In the fourth quarter I think the other thing I would note specific to the fourth quarter and this would actually be true for all three divisions, we will see a heavier R&D spend in the fourth quarter, that's a timing thing or fourth quarter does tend to be a little heavy.
Most years from an R&D perspective that that is certainly going to be true this year as well.
And then the other the other thing I would add on the fourth quarter is youll see a little less Brazil mix as well in the fourth quarter. So kind of all three of those things will conspire together to bring down margins just a shade in the fourth quarter when you compare them to third quarter results.
As it relates to CNS and if you look at the order book I would say.
Comparing year over year is a little bit difficult because we were constrained last year, so probably not a good a good way to compare just total order activity, but I would say is on the order book that we have we're looking at similar production rates, 23% to 24% so not a not a significant change there.
And realistically, obviously less less disruption expected as well.
24 than we saw in 'twenty three thanks, David.
Our next question is from Tami Zakaria with Jpmorgan Ma'am your line is open.
Hi, good morning, Thank you so much.
I wanted to step away from the quarterly trend.
That battery.
I think you just take the new battery manufacturing.
You tell us a bit more on that when it will be operating at that Bob.
Yes.
One Dave what products do you expect it to see that.
Any impact on margins or a potential cost saving.
Any thoughts on this initiative.
Yes, certainly tammy thanks for the question. So this stems from the acquisition we made.
A little over a year ago with Chrysler Chrysler electric.
So this is really the next step as we continue that evolution to build.
Manufacturing capacity for batteries and charging.
Was announced here earlier this week in North Carolina.
I would say stepping back and looking at this.
This is a strategic investment in growing our production capacity.
Aimed to being the leader, particularly in off highway as off highway is evolving well.
Prioritizing development of robust charging technology. In addition to a battery battery portfolio that can support.
The long term adoption of of electrification in our products.
Yes, the timeline, we're probably.
Ah you're or so out in terms of this facility up and running we are producing them in Europe today at a relatively small scale.
But we see we see the opportunity with the technology we have.
To really drive charging here in the near term and we've developed relatively robust pipeline.
Portfolio plan for Deere products that will begin to incorporate the <unk> batteries here as we go forward, starting probably below 125 horsepower.
Then we'll continue to evolve that portfolio as we go forward and Youll see hybrid technologies and the like.
Thanks Amy.
Youre welcome Sir.
Our next question from Chad Dillard with Bernstein. Your line is open Sir.
Hi, everyone.
So I wanted to spend some time on the average age of our fleet.
Can you just talk about where we will be exiting.
And a year versus normal and call Youre talking about other filers.
A lot of different owners within the fleet like Where's the bulge in age in terms of the fleet.
And then just last question.
These higher average age structural why or why not.
Hey, good morning, Chad as it relates to the average age of the fleet.
I think what Youre seeing is the impact.
This.
Replacement cycle, really having a sort of delayed or deferred start right. If you think about when.
Demand really inflect. It it was the beginning of 2021 and you really had three factors conspiring to slow down the production really for not just for deere, but the industry at large right. We had the industry was.
Suffering from labor shortages supply chain delinquencies delays as well as significant inflation affecting production.
In the last three years demand has outpaced supply.
What that's done is it has really slowed the.
Ability for the industry to bring down the age of the fleet if I look at it at four wheel drives and 220 plus horsepower tractors those.
We continue to age out most years since really 2013, we've started to sort of flatten the curve a little bit I would say, we brought down the age significantly or even at all for either one of those and we're still probably a couple of years older than historic averages.
Combined this is one where the last this last year, we were probably.
The industry was able to make a little bit of progress, bringing down the age of that fleet a little bit we'll make further progress in 'twenty, four but will still be.
Just above kind of historic averages there so.
I think it's going to take a little more time on tractors, just given some of the challenges that we've had I think particularly for four wheel drives which you guys can see this in the AAM data, we just havent seen thats been one of the more constrained product lines from an industry perspective kind of similar to sprayers.
We're just going to take maybe a little more time to bring down the age of the fleet. If you ask kind of where is the.
The bulge so to speak in the age of the fleet I mean, it's really <unk>.
Go back to the <unk>.
Vintages of machines that were kind of 2010 to 2014, Thats still a big part of the installed base and those are the ones that are really aging out on us at a faster rate than the industry has been able to replace it in the last couple of years. So thanks. Thanks for the question Chad, Yes, maybe one thing I'd add just on top of that is I think the important piece too is we are continuing to see demand.
For technology across the trade ladder and our equipment.
Just speaking with the dealer principle, a couple weeks ago and he was talking about this very very fact that it's not just demand for latest technology by the first owner, but it's the second third fourth or fifth and I think when we think about the age of the fleet and the.
The health of those the trade letter that is a that is a big big driver because theres a desire to upgrade technology.
No matter, where the customer may be in that in that chain. So I think that's an important piece that underlies.
The age, but but the demand Chad. Thanks. Thanks for the question Fran I think we have time for one last caller.
Thank you very much. So our last question now is from Seth Weber with Wells Fargo Securities. Your line is open.
Hey, guys good morning.
I guess I wanted to ask about the small AG business.
Margin was a lot better than what we were expecting I think I heard you say something about Europe .
Wondering is that are those structural changes.
Changes that we should think about as being in place going forward and then just your comment about.
Small AG inventory kind of coming off the peak.
Do you think that we're past the past.
The challenges there and things are going to start getting better or just less bad going forward. Thanks.
Yes, hey, thanks, Thanks for the question as it relates to small AG and turf.
Certainly a structurally.
Sounder business today than if you went back to prior cycles.
As you think about.
And I'll talk a little bit more about some of the margin puts and takes there. Let me answer your question on inventory first so as it relates to inventory for small AG I know theres been a lot of focus on what I would call. The small end of small AG <unk> turf, so like the under 40 horsepower.
<unk> of compact utility tractors.
I think we've seen the industry level out even come down a little bit here recently so.
It appears that maybe we're kind of past that elevated or we're in the early stages of getting past this elevated inventory levels on the compact utility tractors side, but the bulk of the of that business is really revolves around mid sized tractors that are going into dairy and livestock operations Hay and forage opera.
<unk> or high value crops and I think.
We're probably closer to target level inventory there. So we don't see quite the.
The abundance of inventory for those categories of machines.
And so.
And we're also going to see just some seasonality impact just as it relates to the rest of the year from a margin perspective.
We'll do a factory shutdown in Mannheim, which is.
Our single source location for those six series tractors those mid series tractors that makes up a significant portion of the small AG and turf revenue and margin for that matter.
Going forward, though from a margin perspective, I think what youll see particularly on those mid sized tractors as higher levels of technology that is going to be leveraged from production of precision AG I would say if you went back to prior years, you wouldn't see a lot of technology that gets leveraged from production precision AG into small AG and turf, but youre going to see more of that as our.
<unk>, particularly in like high value crop production systems.
They are demanding solutions like autonomy and electrification and so thats going to be an opportunity to I think further buttress the margin profile that we've achieved this year and extend that into years to come.
Yes, just one last thing I would add is just see the.
The diversity of.
All I can turf so it's much broader in terms of global coverage and we're seeing performance really strong across the globe and Burns point on driving technology, we're seeing technology would be driven into utility tractors in India, leveraging telematics and bringing connectivity to the farm there. So there's a.
Lot of activity that we see that is going to both create customer value and also drive different business and so all I can turf than than you've seen in the past. Thank you.
So that concludes today's call. We appreciate everyone's time and thank you for joining us today.
This conference has concluded again. Thank you for your participation you may please disconnect at this time.