Q2 2024 Deere & Co Earnings Call

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Operator: Good morning, and welcome to Deere & Co.'s 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. Josh Beal, Director of Investor Relations. Thank you. You may begin.

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. Josh Bill Director of Investor Relations. Thank you you may begin.

Josh Beal: Hello, welcome, and thank you for joining us on today's call. Joining me on the call today are Josh Jepsen, Chief Financial Officer. Corey Reed, President, Worldwide Agricultural and Turf Division, Production and Precision Ag Americas in Australia, and Josh Rohleder, Manager of Investor Communications. Today 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 fiscal 2024. After that, we'll respond to your questions.

Speaker Change: Hello, Welcome and thank you for joining us on today's call joining me on the call today are Josh Jepsen, Chief Financial Officer, Cory Reed President worldwide, Agriculture, and Turf Division production of precision AG, Americas, and Australia, and Josh Rohleder manager of Investor Communications.

Speaker Change: Today, 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 fiscal 2024.

Speaker Change: After that we'll respond to your questions.

Josh Beal: Please note that slides are available to complement the call this morning. They can be accessed on our website at johndeer.com forward slash earnings. First, a reminder, this call is 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.

Speaker Change: Please note that slides are available to complement the call. This morning.

Speaker Change: They can be accessed on our website at <unk> dot com forwards last earnings.

First a reminder, this call is broadcast live on the Internet and recorded for future transmission and use by Deere <unk> company.

Any other use recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.

Josh Beal: Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking statements concerning the company's plans and projections for the future, which are subject to uncertainties, risks, changes in circumstances, and other factors that are difficult to predict. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8K and risk factors in the annual Form 10K, as updated by reports filed with the Securities and Exchange Commission.

Speaker Change: Participants on 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.

Speaker Change: This call includes forward looking statements concerning the company's plans and projections for the future that are subject to uncertainties risks changes in circumstances and other factors that are difficult to predict.

Speaker Change: Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent form 8-K risk factors in the annual Form 10-K as updated by reports filed with the Securities and Exchange Commission.

Josh Beal: This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, such as gap. Additional information concerning these measures, including reconciliations to comparable gap measures, is included in the release and posted on our website at johndeere.com forward slash earnings under quarterly earnings and events. I will now turn the call over to Josh Rohleder.

Speaker Change: 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.

Speaker Change: Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website at <unk> Dot Com forwards last earnings under quarterly earnings and events.

Speaker Change: I'll now turn the call over to Joshua later.

Josh Rohleder: Good morning. John Deere concluded the second quarter with solid execution. Financial results for the quarter included a 21.2% margin for the equipment operation. Trends in the end markets that we serve remain broadly unchanged from last quarter. Agriculture fundamentals continue to deteriorate, leading to more challenging market conditions in the back half of the year. However, in construction and forestry, fundamentals remain stable at levels supportive of demand across most end markets. Demand shifts coupled with proactive inventory management are reflected in our production schedules for the balance of the fiscal year, with many product lines anticipating retail demand under production to close out 2024. Notably, our projected financial performance in these dynamic market conditions demonstrates our ability to deliver better results across the business cycle. We will now begin with slide three and our results for the second quarter.

Speaker Change: Good morning, John Deere concluded the second quarter with solid execution.

Speaker Change: Financial results for the quarter included a 21, 2% margin for the equipment operations.

Trends in the end markets that we serve remained broadly unchanged from last quarter AG fundamentals continue to abate leading to more challenging market conditions in the back half of the year and construction and forestry fundamentals remained stable at levels supportive of demand across most end markets.

Manned shifts coupled with proactive inventory management are reflected in our production schedules for the balance of the fiscal year with many product lines anticipating retail demand underproduction to closeout 2024.

Speaker Change: Notably our projected financial performance and these dynamic market conditions demonstrates our ability to deliver better results across the business cycle.

Josh Rohleder: Net sales and revenues were down 12% to $15.235 billion, while net sales for the equipment operations were down 15% to $13.61 billion. Net income attributable to Deere & Co. was $2.37 billion, or $8.53 per diluted share. Digging into our individual business segments, we'll start with the production and precision ag business on slide four. Net sales of $6.581 billion were down 16% compared to the second quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive by just under two points.

Speaker Change: We now begin with slide three and our results for the second quarter.

Speaker Change: Net sales and revenues were down 12% to 15 to $3 5 billion, while net sales for the equipment operations were down 15% to 13, six 1 billion.

Speaker Change: Net income attributable to Deere <unk> company was $2 $3 7 billion or $8 53 per diluted share.

Josh Rohleder: Currency translation was roughly flat, and operating profit was $1.65 billion, resulting in a 25.1% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and higher production costs, although these were partially offset by price realization. Turning to small ag and turf, on slide 5. Net sales were down 23%, totaling $3.185 billion, in the second quarter as a result of lower shipment volumes partially offset by price realization. Christ's Realization was positive by 1.5 points.

Digging into our individual business segments, we'll start with the production and precision AG business on slide four.

Net sales of $6 $5 81 billion were down 16% compared to the second quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization.

Speaker Change: Price realization was positive by just under two points currency translation was roughly flat.

Speaker Change: Operating profit was $1 65 billion, resulting in a 25, 1% operating margin for the segment.

Speaker Change: The year over year decrease was primarily due to lower shipment volumes and higher production costs. These were partially offset by price realization.

Speaker Change: Turning to small AG and turf on slide five.

Speaker Change: Net sales were down 23% totaling three 185 billion in the second quarter as a result of lower shipment volumes, partially offset by price realization.

Speaker Change: Price realization was positive by one five points.

Speaker Change: Currency translation was roughly flat.

Josh Rohleder: Currency Translation was roughly flat. However, operating profit declined year-over-year to $571 million, resulting in a 17.9% operating margin. The decrease was primarily due to lower shipment volumes, which were partially offset by price realization. Slide six provides our industry outlook for ag and turf markets globally. Across all our major markets, we see continued softening in grower sentiment as the combined impacts of rising global stocks, lower commodity prices, and a growing supply chain. High interest rates and weather volatility weigh on customer purchase decisions.

Speaker Change: Operating profit declined year over year to $571 million, resulting in a 17, 9% operating margin.

Speaker Change: The decrease was primarily due to lower shipment volumes, which were partially offset by price realization.

Speaker Change: Slide six provides our industry outlooks for AG and turf markets globally.

Speaker Change: Across all our major markets, we see continued softening and grower sentiment as the combined impacts of rising global stocks lower commodity prices high interest rates and weather volatility weighed on customer purchase decisions.

Josh Rohleder: Amidst this backdrop and rising uncertainty, we're seeing customers exercise greater discretion in their equipment purchases, which is reflected in the changes in our industry guide this quarter. Large ag equipment industry sales in the U.S. and Canada are now expected to decline 15 percent, reflecting further demand reduction in the back half of the year, primarily in large tractors. In addition to the aforementioned factors, increases in used inventory levels, particularly late-model year machines, are having an impact on purchase decisions.

Mitch: Mitch this backdrop and rising uncertainty, we're seeing customers exercise greater discretion and their equipment purchases, which is reflected in the changes in our industry guide this quarter.

Mitch: Large AG equipment industry sales in the U S and Canada are now expected to decline, 15%, reflecting further demand reduction in the back half of the year, primarily in large tractors.

Mitch: In addition to the aforementioned factors increases and used inventory levels, particularly late model year machines are having an impact on purchase decisions. These.

Josh Rohleder: These headwinds are partially offset by fleet fundamental tailwinds, including elevated fleet age, stable farmland values, and strong farmer balance. For small ag and turf in the U.S. and Canada, industry demand estimates are now down 10%. In the quarter, we saw notable reductions in our expectations for the turf segment, particularly riding lawn equipment, where high interest rates are impacting purchase behavior following several years of strong market demand. In Europe, the industry is now forecasted to be down 15%, reflecting increasing grower uncertainty in the region.

Mitch: These headwinds are partially offset by fleet fundamental tailwind, including elevated fleet age stable farmland values and strong farmer balance sheets.

Mitch: Small AG <unk> turf in the U S and Canada industry demand estimates are now down 10%.

Mitch: In the quarter, we saw notable reductions in our expectations for the turf segment, particularly riding lawn equipment, where high interest rates are impacting purchase behavior. Following several years of strong market demand.

Mitch: In Europe, the industry is now forecasted to be down 15%, reflecting.

Mitch: Increasing grower uncertainty in the region.

Josh Rohleder: Wet conditions have raised concerns for winter crop yields, while elevated input costs are weighing on margin expectations. Nevertheless, despite the softening, arable cash flows remain at roughly 10-year averages, and dairy and livestock fundamentals are expected to improve due to stronger pricing amid lower feed costs. In South America, industry sales of tractors and combines are now expected to decline between 15 to 20%. Brazil remains the largest affected market, with additional pressure stemming from strong global yields driving down commodity prices.

Mitch: What conditions have raised concerns for winter crop yields while elevated input costs are weighing on margin expansion expectations.

Despite the softening terrible cash flows remain at roughly 10 year averages and dairy and livestock fundamentals are expected to improve due to stronger pricing amid lower feed costs.

Mitch: In South America industry sales of tractors and combines are now expected to decline between 15% to 20%.

Mitch: <unk> remains the largest affected market with additional pressure stemming from strong global yields driving down commodity prices.

Josh Rohleder: Both soy and corn margin expectations softened over the quarter. Conditions are further impacted by elevated interest rates and an expected strong recovery in Argentina's production levels following last year's drought. Industry sales in Asia continue to be forecasted down moderately. Next, our segment forecasts begin on slide seven. For production and precision ag, net sales are forecasted to be down between 20 and 25% for the full year. The forecast assumes roughly 1.5 points of positive price realization for the full year and minimal currency impact.

Mitch: Soy and cotton and corn margin expectations softened over the quarter.

Mitch: Conditions are further impacted by elevated interest rates and an expected strong recovery in Argentina production levels following last year's drought.

Industry sales in Asia continued to be forecasted down moderately.

Mitch: Next our segment forecast begin on slide seven.

Mitch: For production and precision AG net sales are forecasted to be down between 20% and 25% for the full year.

Mitch: The forecast assumes roughly one five points of positive price realization for the full year and minimal currency impact.

Josh Rohleder: For the segment's operating margin, our full-year forecast is now between 20.5% and 21.5% due to demand softening and proactive inventory management. Slide 8 shows our forecast for the small ag and turf segment. We now expect net sales to be down between 20 and 25%. The guidance includes 1.5 points of positive price realization and flat currency translation.

Mitch: The segment's operating margin our full year forecast is now between 25, and 21, 5% due to demand softening and proactive inventory management.

Mitch: Slide eight shows our forecast for the small AG and turf segment.

Mitch: We now expect net sales to be down between 20% and 25%.

Mitch: The guide includes one five points of positive price realization and flat currency translation.

Josh Rohleder: The segment's operating margin is now between 13.5% and 14.5%, in line with slowing net sales. Shifting to Construction and Forestry on slide 9, net sales for the quarter were down 7% year-over-year at $3.844 billion due to lower shipment volume. Price realization was positive by roughly half a point, while all currency translation was flat.

Mitch: The segment's operating margin is now between 13, 5% and 14, 5% in line with slowing net sales.

Mitch: Shifting to construction and forestry on slide nine.

Mitch: Net sales for the quarter were down 7% year over year at 384, 4 billion due to lower shipment volumes and.

Mitch: Price realization was positive by roughly half a point.

Mitch: While currency translation was flat.

Josh Rohleder: Operating profit of $668 million was down year-over-year, resulting in a 17.4% operating margin due primarily to lower shipment volumes and higher R&D and SA&G expenses. Slide 10 gives our 2024 Construction and Forestry Industry Outlook. Industry sales expectations for earthmoving equipment in the U.S. and Canada remain flat to down 5 percent, while compact construction equipment in the U.S. and Canada is expected to be flat. Industry fundamentals remain vastly unchanged, with stabilized demand supported by visibility into the balance of the year.

Mitch: Operating profit of $668 million was down year over year, resulting in a 17, 4% operating margin due primarily to lower shipment volumes and higher R&D and <unk> spend expenses.

Mitch: Slide 10 gives our 2020 for construction and forestry industry outlook.

Mitch: Industry sales expectations for Earth, moving equipment in the U S and Canada remained flat to down 5%.

Mitch: While complex construction equipment in the U S and Canada is expected to be flat.

Mitch: Industry fundamentals remained vastly unchanged with stabilized demand supported by visibility into the balance of the year.

Josh Rohleder: And markets continue to be healthy as U.S. government infrastructure spending increases further, investments in manufacturing persist, and single-family housing starts to improve. Tailwinds are tempered by declines in commercial real estate and softening in rental demand throughout the balance of the year. Global forestry markets are expected to be down around 10% as all global markets continue to be challenged. Global road building markets are now forecasted to be flat to down 5% as strong infrastructure spending in the U.S. is offset by continued softness in Western Europe.

Mitch: And markets continue to be healthy as U S government infrastructure spending further increases investor.

Mitch: Investments in manufacturing persist and single family housing starts improve.

Mitch: Tailwind are tempered by declines in commercial real estate and softening in rental demand throughout the balance of the year.

Mitch: Global Forestry markets are expected to be down around 10% is all global markets continue to be challenged.

Mitch: Global Road building markets are now forecasted to be flat to down 5% as strong infrastructure spending in the U S is offset by continued softness in western Europe.

Josh Rohleder: Moving to the construction and forestry segment outlook on slide 11, 2024 net sales remain forecasted to be down between five and 10%. That sales guidance for the year includes about 1.5 points of positive price realization and flat currency translation. The segment's operating margin is projected to be around 17%. Transitioning to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere & Company in the second quarter was $162 million.

Mitch: Moving to the construction and forestry segment outlook on slide 11.

Mitch: 2024, net sales remained forecasted to be down between 5% and 10% net.

Mitch: <unk> net sales guidance for the year includes about one five points of positive price realization and flat currency translation the.

Mitch: The segment's operating margin is projected to be around 17%.

Mitch: Transitioning to our financial services operations on slide 12.

Mitch: Worldwide financial services net income attributable to Deere <unk> company in the second quarter was 162 million net income was positively impacted by a higher average portfolio balance, which was partially offset by a higher provision for credit losses and less favorable financing spreads.

Josh Rohleder: Net income was positively impacted by a higher average portfolio balance, which was partially offset by a higher provision for credit losses and less favorable financing spreads. As a reminder, net income in the second quarter of 2023 was also impacted by a non-repeating one-time accounting correction. For fiscal year 2024, our outlook for net income remains at $770 million, as benefits from a higher average portfolio balance offset a higher provision for credit losses and a less favorable financing spread.

Mitch: As a reminder.

Mitch: Net income in the second quarter of 2023 was also impacted by a non repeating one time accounting correction.

Mitch: For fiscal year 2024, our outlook for net income remains at $770 million as benefits from a higher average portfolio balance offset a higher provision for credit losses, and less favorable financing spreads.

Josh Rohleder: Finally, slide 13 outlines our guidance for Deere & Company's net income, our effective tax rate, and operating cash flow for Fiscal Year 24. Our outlook for net income is now expected to be approximately $7 billion. Next, our guidance incorporates an effective tax rate between 23 and 25 percent. And lastly, cash flow from the equipment operations is now projected to be in the range of $7 to $7.25 billion. This concludes our formal comments.

Mitch: Finally, slide 13 outlines our guidance for <unk> companies net income our effective tax rate and operating cash flow.

Mitch: For fiscal year 'twenty for our outlook for net income is now expected to be approximately $7 billion.

Mitch: Next our guidance incorporates an effective tax rate between 23 and 25%.

Mitch: And lastly, cash flow from the equipment operations is now projected to be in the range of seven to seven 5 billion.

Josh Beal: We'll now shift to a few topics specific to the quarter. Let's begin with Deere's performance this quarter. We saw net sales decline roughly 15% year over year, and yet operating margin came in at just over 21%. Across all business segments, we saw better than expected performance despite a more challenging macro backdrop. Josh Beal, can you walk us through what went well for Deere? Absolutely.

Mitch: This concludes our formal comments I will now shift to a few topics specific to the quarter.

Speaker Change: Let's begin with <unk> performance this quarter.

Speaker Change: We saw a net sales decline roughly 15% year over year.

Speaker Change: Operating margin came in at just over 21%.

Bill: Across all business segments, we saw better than expected performance. Despite a more challenging macro backdrop, just bill can you walk us through what went well for Deere absolutely. Josh. This is really a story of execution discipline across the organization, we were able to outperform on the topline as demand held up slightly better than we expected in particular, we saw resilient earthmoving and <unk>.

Josh Beal: Josh, this is really a story of executional discipline across the organization. We were able to outperform on the top line as demand held up slightly better than we expected. In particular, we saw a resilient earth-moving and road-building market that exceeded our expectations despite a tough competitive environment. Turning to production costs, freight came in solidly favorable year over year. However, as you noted earlier, we are experiencing offsetting headwinds and overheads as we adjust production to moderating demand.

Bill: Building market that exceeded our expectations, despite a tough competitive environment.

Speaker Change: Turning to production costs freight came in solidly favorable year over year. However, as you noted earlier, we are experiencing offsetting headwinds in overheads as we adjust production to moderating demand.

Josh Beal: All that being said, it's worth noting that this quarter's performance, with its equipment operations margin over 21%, ranks as one of the best quarters in company history. We're encouraged by the start of the year, and we're focused on executing our plan in the remaining two quarters.

Speaker Change: All that being said its worth noting that this quarter's performance with equipment operations margin over 21% ranks as one of the best quarters in company history.

Josh Beal: Thanks, Josh. That's a great summary and a great point you bring up.

Speaker Change: We're encouraged by the start to the year and we're focused on executing our plan and the remaining two quarters.

Speaker Change: Yes, Josh that's a great summary, and great point, you bring up it's clearly been a strong execution will start for the year, but we've revised our full year guidance, what's driving the delta in the back half of the fiscal year right. The forecast change is really volume driven primarily in our AG and turf segments underlying the demand decline is a tougher backdrop in global AG, which as you mention.

Josh Beal: It's clearly been a strong executional start for the... But we've revised our full year guidance. What's driving Delta in the back half of the fiscal year?

Josh Beal: The forecast change is really volume-driven, primarily in our ag and turf segment. Underlying the demand decline is a tougher backdrop in global agriculture, which, as you mentioned in your opening comments, has continued to weigh on our customer base. Uncertainty has caused a decline in farmer sentiment, and as a result, we are seeing a softer retail environment today than we did just six months ago. Primary crop margins globally are forecasted to be down. Stocks to use are expected to be above historical averages thanks to multiple years of favorable growing conditions and record global yields. However, used inventories have risen, and persistently high interest rates are impacting PERSA's decisions.

Speaker Change: In your opening comments as continued to weigh on our customer base.

Speaker Change: Uncertainty has caused the decline in farmer sentiment and as a result, we are seeing a softer retail environment today than we did just six months ago.

Speaker Change: Primary crop margins globally are forecasted to be down stocks to use are expected to be above historical averages things to multiple years of favorable growing conditions and record global yields used inventories have risen and persistently high interest rates are impacting purchase decisions.

Josh Beal: Despite all these headwinds, we experienced strong demand in the first half of the year, albeit down from the highs of 2023, which drove solid first-half production volumes for Ag and Turf. Given the environment that I just mentioned, we do expect incremental demand decline in the back half of 2024. Notably, our production volumes will decline more than demand in the back half, as we're taking proactive steps to drive down field inventory. This is true for all of our major markets, South America, Europe, and also now for North America, large tract. We believe this approach best positions us to build retail demand in 2025.

Speaker Change: Despite all these headwinds we experienced strong demand in the first half of the year, albeit down from the highs of 2023, which drove solid first half production volumes for AG <unk> turf.

Speaker Change: Given the environment that I just mentioned, we do expect incremental demand decline in the back half of 2024.

Notably our production volumes will decline more than demand in the back half as we're taking proactive steps to drive down field inventories.

Speaker Change: True for all of our major markets South America, Europe, and also now for North America large tractors. We believe this approach best positions us to build the retail demand in 2025.

Josh Jepsen: This is Jepsen here. I have maybe a couple things to add. First, I want to commend our employees for the work they've done to drive the overall declines for the business despite the velocity of declines we're experiencing this year. We're delivering value for our customers and driving operating margins that are structurally better at this point in the cycle than ever before. However, there's always opportunity to do better, and we'll continue to take action on cost throughout the remainder of the year while still investing in our future.

Justin: This is Justin here, maybe a couple of things to add first I want to commend our employees for the work they've done to drive the overall decrementals for the business. Despite the velocity of declines we're experiencing this year, we're delivering value for our customers and driving operating margins that are structurally better at this point in the cycle than ever before however, there is always opportunity to do better and will.

Justin: We continue to take action on costs throughout the remainder of the year, while still investing in our future.

Josh Beal: Thanks for that additional color, Josh. And you make a great point about the decrementals. We're definitely being impacted by more... definitely being impacted more significantly than usual by the unfavorable mix associated with higher-margin products in regions declining more significantly. But I think the key differentiator this year is around more proactive management. Both you and Beal alluded to the rate at which we're bringing in production. Corey, I'd like to bring you into the conversation. You've been in the ag business nearly your entire career. What is different in terms of how we have managed the changing environment this cycle?

Speaker Change: Thanks for the additional color, Josh and you make.

Speaker Change: Great point about the Decrementals, we're definitely being impacted by more definitely being impacted more significantly than usual by the unfavorable mix associated with higher margin products and regions declining more significantly.

Speaker Change: But I think the key differentiator this year is around more proactive management.

Speaker Change: Both you and bill alluded to the rate at which we're bringing in production Cory I'd like to bring you into the conversation now you've been in the AG business nearly your entire career what is different in terms of how we have managed the changing environment. This cycle.

Cory J. Reed: Thanks, Josh. We are coming down from a period of high demand, and historically, we would have, as an industry, been slow to react to that change. Often, we would drive higher levels of field inventory to the detriment of the following years. Within Deere, we're managing this year differently, which is a testament to the fact that both we and our dealers have learned from the past cycle. This is probably best exemplified by our decision to underproduce large tractor retail demand in North America in the back half of the year.

Speaker Change: Yes, Thanks, Josh we are coming down for a period of high demand and historically, we would have as an industry been slow to react to that change often we would drive higher levels of field inventory to the detriment of the following years within Deere were managing this year differently, which is a testament to the fact that both we and our dealers have learned from the past cycles.

Speaker Change: This is probably best exemplified by our decision to under produce large tractor retail demand in North America in the back half of the year. We ended 2023 with really low levels of large tractor inventory, but we think it's prudent to drive those levels, even lower as we close out our 24. The key here is that by staying ahead of demand changes, we're giving ourselves the optionality.

Cory J. Reed: We ended 2023 with really low levels of large tractor inventory, but we think it's prudent to drive those levels even lower as we close out our 24th year. The key here is that by staying ahead of demand changes, we're giving ourselves the option to react most efficiently to whichever way the market moves in the next year. I think it's important to note that we're not implying that we know where 2025 demand will be.

Speaker Change: <unk> to react most efficiently to whichever way the market moves in the next year I think it's important to note that we're not implying that we know where 2025 demand will be frankly, this season's crops aren't even in the ground yet so it's still way too early to opine on that but we're focused on proactive management to ensure that we keep inventories in balance with demand.

Cory J. Reed: Frankly, this season's crops aren't even in the ground yet, so it's still way too early to comment on that. But we're focused on proactive management to ensure that we keep inventories in balance with demand. This is a key component to ensuring better structural profitability throughout the cycle for

Speaker Change: This is a key component to ensuring better structural profitability throughout the cycle for our business.

Josh Jepsen: Hey, this is Jepsen. One other thing to highlight, beyond the current environment, and where we see the long-term strategy leading us is related to technology and how we engage with our customers. We're starting to think about market share not only as the number of units sold but as the number of acres covered by Deere products and technology as a percentage of total acres farmed. In the future, we're going to continue accelerating the utilization of technology as we grow our precision upgrade, retrofit business, as well as our solution as a service offering.

Jefferson: Hey, this is Jefferson one other thing to highlight beyond the current environment.

Speaker Change: And where we see the long term strategy, leading us as it related to technology and how we engage with our customers. We're starting to think about market share not only is the number of units sold but as the number of acres covered by Deere products and technologies as a percentage of total acres farmed.

Speaker Change: And in the future, we're going to continue to accelerate and utilization of technology as we grow our precision upgrade retrofit business as well as solution as a service offerings.

Josh Jepsen: Our Engaged Acre journey helps demonstrate the progress we've made in delivering value for customers and making their jobs easier. In fact, at the end of the quarter, we now cover over 415 million engaged acres globally, and importantly, highly engaged acres. Which, as a reminder, means three production steps, and Value Creating Activities in the John Deere Operations Center are performed make up over 25% of the engaged acres amount, having grown by double digits this past quarter alone.

Speaker Change: Our engaged acre journey helps demonstrate the progress we've made in delivering value for customers and making their jobs easier to do.

Speaker Change: In fact at the end of the quarter, we now cover over 415 million engaged acres globally, and importantly, highly engaged acres.

Speaker Change: Which as a reminder, three production steps and value creating activities in the John Deere Operation Center are performed.

Speaker Change: Over 25% of the engage engaged acres amount, having grown by double digits this past quarter alone.

Josh Jepsen: While all parts of the world are seeing growth, Brazil is growing faster than North America on both engaged and highly engaged acres, which is a positive sign as we bring more technology to the market, in particular with satellite communications coming soon, and customers there see increased value given the multiple crop harvests each year, as well as the ability to improve efficiency, profitability, and sustainability in their operations.

Speaker Change: While all parts of the World, we're seeing growth, Brazil is growing faster than North America in both engaged and highly engaged acres, which is a positive sign as we bring more technology to the market in particular with satellite communications coming soon.

Speaker Change: And customers there see increased value given the multiple crop harvest each year as well as the ability to improve efficiency profitability and sustainability in their operations.

Josh Beal: Those are excellent proof points, but one thing we haven't covered yet is costs. A key benefit of proactive cycle management should theoretically be the associated cost savings. We're seeing another year of positive price cost, but can you break down what's driving that positive differential for us?

Speaker Change: Those are excellent proof points, but one thing we haven't covered yet as costs a key benefit of practice cycle management should theoretically be the associated cost savings, we're seeing another year of positive price cost, but can you break down what's driving that positive.

Speaker Change: <unk> for us.

Josh Beal: Yeah, definitely. That's a great point, Josh, and I'm happy to start. I'd begin by referencing back to what Josh Jepsen talked about earlier. Along with structural cost reductions, we continue to prioritize managing to our structure lines, which essentially means as production and sales come in, we pull levers to bring in costs. Our speed in pulling those levers and the subsequent timing of those actions hitting the bottom line is a top priority right now.

Speaker Change: Yes, definitely that's a great point, Josh and I'm happy to start I'd begin by referencing back to what Josh Jepsen talked about earlier, along with structural cost reductions where can we continue to prioritize managing to our structure lines, which essentially means is production and sales come in we pull levers to bring in costs are speed and pulling those levers and the subsequent timing of those actions hitting the bottom line is it.

Speaker Change: Top priority right now.

Josh Beal: The outcomes of these efforts show up in the production cost bar in our quarterly earnings. Given that there's a lot that goes into that cost category, it might be helpful to walk through a few of the notable components. Starting with freight and materials, we're beginning to see the benefits of our ongoing cost reduction efforts. We're encouraged by the opportunity to get back significant costs on freight and logistics as well as in our materials.

Speaker Change: Through these efforts show up in the production cost bar in our quarterly earnings bridge, given that Theres a lot that goes into that cost cut category. It might be helpful to walk through a few of the notable components.

Speaker Change: Starting with freight and material, we're beginning to see the benefits of our ongoing cost reduction efforts. We are encouraged by the opportunity to get back significant cost on freight and logistics as well as in our materials spend we're truly building strategic partnerships with our supply base as we jointly work to structure sourcing in a way that ultimately creates value for both parties.

Josh Beal: We're truly building strategic partnerships with our supply base as we jointly work to structure sourcing in a way that ultimately creates value for both parties. Coupled with our dual sourcing strategies, we've been able to enhance supply chain resiliency in tandem with cost savings, which has been crucial to optimizing returns amidst lower demand. Those cost reduction efforts are important, given we have seen some manufacturing overhead deficiencies associated with managing to lower production levels.

Speaker Change: With our dual sourcing strategies, we've been able to enhance supply chain resiliency in tandem with cost savings, which has been crucial to optimizing returns amidst slower demand.

Speaker Change: Those cost reductions reduction efforts are important given we have seen some manufacturing overhead efficiencies associated with managing to lower production levels.

Josh Beal: This reference is back to my comment on the timing of lever pulling and the timing of those actions impacting financials. We're actively taking steps to manage costs as we see demand change, essentially right-sizing the cost structure for a given production level. But in a year when we're moving down in volume, we've experienced some inefficiency as we make those adjustments. This headwind is showing up in the production cost bar as well, largely offsetting the gains that we're seeing in freight, logistics, and material spend this year.

Speaker Change: Those references back to my comment on the timing of lever pulling and the timing of those actions impacting financials.

Speaker Change: We're actively taking steps to manage cost as we say that see demand change essentially right sizing the cost structure for a given production level, but in a year when were moving down in volume, we've experienced and we've experienced some inefficiency as we make those adjustments. This headwind is showing up in the production cost bar as well largely offsetting the gains that we're seeing in freight logistics and material spend this year.

Josh Jepsen: This is Jepsen. Maybe one thing worth mentioning is that we also pull levers on assets, and that's evident when you look at our cash flow guidance change, which is down less in this guide compared to the change in net income. This is reflective of the fact we're starting to see our inventory come down following our production rate reductions in the first half of the year, creating a source of cash for the business. We're continuing to manage working capital and expect further reductions throughout the remainder of the year.

This is gypsum one thing worth mentioning is we also pull levers on assets and that's evident when you look at our cash flow guidance change, which is down less.

Speaker Change: In this guide compared to the change in net income. This is reflective of the fact, we are starting to see our inventory come down following our production rate reductions in the first half of the year, creating a source of cash for the business, we're continuing to manage working capital and expect further reductions throughout the remainder of the year.

Josh Beal: And in the spirit of inventory management, I'd like to briefly touch on new and used inventories. Josh Beal, could you give us an update on where we stand today and what to expect in the second half of the year?

Speaker Change: Perfect and in the spirit of inventory management I'd like to briefly touch on new and used inventories just built.

Speaker Change: Could you give us an update on where we stand today and what to expect in the back half of their yes, absolutely and I'll start with new equipment in North America large AG, we're seeing interesting as an inventory build as expected, albeit below industry levels and inventory to sales ratios ratio increases in line with historical norms that said given our proactive underproduction previously discussed.

Josh Beal: Yeah, absolutely. And I'll start with new equipment. In North America, large ag, we're seeing intraseason inventory build, as expected, albeit below industry levels, and inventory-to-sales ratio increases in line with historical norms. That said, given our proactive underproduction previously discussed, we expect these numbers to fall by year-end, with beginning 2025 inventory-to-sales ratios down significantly from where they stand today. Furthermore, we expect the largest decline in new inventory levels to occur during the fourth quarter, as normal year-end seasonal declines are amplified by our planned underproduction for the year.

Speaker Change: We expect these numbers to fall by year end with beginning 2025 inventory to sales ratios are down significantly from where they stand today.

Speaker Change: Anymore, we expect to see the largest decline in new inventory levels to occur during the fourth quarter as normal year end seasonal declines are amplified by our planned underproduction for the year.

Josh Beal: On the used inventory side, we've seen total used units up year over year. However, while combines are up from decade lows, they remain below the highs seen in the last downturn. Meanwhile, used high-horsepower tractors have increased in value more rapidly and are skewing more predominantly to later models, driving up the average value of the equipment. The trend that we're seeing in used high-horsepower tractors was a key factor in our decision to underproduce retail demand in North America.

Speaker Change: On the used inventory side, we've seen total used used units up year over year. While combines are up from decade lows. They remain below the highs seen in the last downturn.

Speaker Change: Meanwhile, used high horsepower tractors have increased more rapidly and are skewing more predominantly the later models driving up the average value of the equipment.

Speaker Change: The trend that we're seeing in used high horsepower tractors was a key factor in our decision to Underproduce retail demand in North America.

Cory J. Reed: Hey Josh, this is Corey. Just one thing to add here is, as you look at the industry as a whole, we've been relatively disciplined. Our large ag new inventory in North America currently represents less than half of the industry's unit inventory, and it's significantly below the industry on an inventory-to-sales-ratio basis. This is reflective of the discipline we're showing in this cycle.

Corey: This is Corey just one thing to add here is as you look at the industry as a whole we have been relatively disciplined.

Corey: Large AG new inventory in North America currently represents less than half of the industry's unit inventory at significantly below the industry on an inventory to sales ratio basis. This is reflective of the discipline, we're showing in this cycle and on the used side. Our dealers are hyper focused on used inventory managing them appropriately to ensure that they maintain a.

Cory J. Reed: And on the use side, our dealers are hyper-focused on used inventory, managing it appropriately to ensure that they maintain a healthy trade ladder for their customers. For example, this cycle, we put a strong focus on our dealer pool funds to help manage used inventory; dealers accumulate these funds based on new equipment sales and then use them to create competitive packages to help move used equipment. Our dealers prudently built up these funds over the last several years, nearly tripling their total available balance, which is now providing valuable support in the current market environment.

Corey: Healthy and the trade ladder for their customers. For example, this cycle, we put a strong focus on our dealer pool funds to help manage used inventories.

Corey: Accumulate these funds based on new equipment sales and then use them to create competitive packages to help move used equipment. Our dealers prudently buildup. These funds over the last several years nearly tripling their total available balance which is now providing valuable support in the current market environment.

Josh Beal: Thanks, Corey and Josh. That's a good reminder about entry-year seasonality swings and how those play into our larger production and inventory management. Shifting now to a region we haven't talked much about yet, I'd like to focus on Brazil. There's been quite a bit of buzz down there between the first crop harvest, an agri-show two weeks ago, and the recent devastating flooding in Rio Grande do Sul. Josh Beal, do you want to kick us off with a quick overview of the state of the business there? Yeah, happy to.

Thanks, Corey and Josh that's a good reminder, on intra year seasonality swings and how those play into our larger production and inventory management.

Speaker Change: Shifting now to a region, we haven't talked much about yet I'd like to focus on Brazil. There has been quite a bit of buzz down there between first crop harvest agro show two weeks ago and the recent devastating flooding in Rio Grande do Sul, Josh Bill do you want to kick us off with a quick overview on the state of the business Theyre happy too and definitely a dynamic market to <unk>.

Josh Beal: And definitely a dynamic market to unpack. I'd like to first start by extending our deepest sympathies to those affected by the tragic flooding you mentioned, Josh, including a significant number of our employees, customers, and suppliers. We want to wish everyone well in their recovery, and I want to emphasize that the safety and security of our employees is our first priority as we assess and respond to the impacts of the event.

Speaker Change: I'd like to first start by extending our deepest sympathies to those affected by the tragic flooding you mentioned, Josh including a significant number of our employees customers and suppliers, we want to wish everyone, well and the recovery and I want to emphasize that the safety and security of our employees is our first priority as we assess and respond to the impacts of the event.

Josh Beal: Operationally, while we do have facilities in the region, we do not anticipate any long-term impacts on the business at this time. Turning to the broader Brazilian agricultural environment, soybean farmers saw profitability decline due to adverse weather conditions and global supply surpluses. That said, we do expect some favorable offsets with a strong cotton crop this year and a better than expected corn crop, which should provide some support to farmer sentiment for the 2024 season.

Operationally, while we do have facilities in the region, we do not anticipate any long term impacts of the business at this time.

Speaker Change: Turning to the broader Brazilian AG environment soybean farmers saw profitability declined due to adverse weather conditions in global supply surpluses.

Speaker Change: That said, we do expect some favorable offsets with a strong cotton crop this year and a better than expected corn crop, which should provide some support to farmer sentiment for the 2024 season.

Josh Beal: All in all, ag equipment retail demand in the region continues to decline, driving the change in our industry guide. While production cuts came through as expected for the quarter, retail sales came in lighter than anticipated. Nevertheless, we remain committed to underproducing retail demand in the region this year as we target year-end inventory levels supportive of building in line with retail in 2025. Ultimately, we'll see more of the planned inventory reduction for the region in the back half of the year.

Speaker Change: All in AG equipment retail demand in the region continues to decline driving the change in our industry Guide.

Speaker Change: While production cuts came through as expected for the quarter retail sales came in lighter than anticipated.

Speaker Change: Nevertheless, we remain committed to under producing retail demand in the region. This year as we target year end inventory levels supportive of building in line with retail in 2025.

Speaker Change: Ultimately, we will see more of the planned inventory reduction for the region in the back half of the year.

Josh Beal: Perfect. Thanks for setting the stage, Josh. Now, Corey, I believe you were just down there for AgriShow. Could you give us an update on what you saw there and the sentiment you were hearing from dealers and customers?

Speaker Change: Perfect. Thanks for setting the stage Josh.

Corey I believe you were just down there for <unk> could you give us an update on what you saw there and the sentiment you were hearing from dealers and customers absolutely that sentiment was positive. Josh. This is not to say that we've reached an inflection point given Josh Bill's comments earlier about retail activity, but I think the biggest takeaway was the excitement that we're seeing for our latest tech offerings in fact, where te.

Cory J. Reed: Absolutely. That sentiment was positive, Josh. This is not to say that we've reached an inflection point, given Josh Beal's comments earlier about retail activity, but I think the biggest takeaway was the excitement that we're seeing for our latest tech offerings. In fact, we had pre-order interest for our Starlink connectivity solution and ended up oversubscribed by the first day of the show. We similarly sold out of our allotments for Seanspray Select and our Precision Ag Essentials bundle, which was also a great success.

Speaker Change: Preorder interest for our Starlink connectivity solution and ended up oversubscribed by the first day of the show we simply sold out of our allotments for seeing spray select in our precision AG essentials bundle that was also a great success.

Cory J. Reed: Fundamentally, we're at the forefront of bringing our full ecosystem of solutions to the Brazilian market, and our customers there are very calculated in their investment. They adopt when it makes financial sense, and given the double or sometimes even triple crop rotations they're able to achieve, the payback for much of our technology and equipment is significantly faster than in the North American market. I'll take sprayers as an example. In the U.S., a corn or soybean farmer may only spray three times annually, but in Brazil, a farmer on a soybean and cotton rotation could spray as much as 20 times a year.

Speaker Change: Fundamentally we're at the forefront of bringing our full ecosystem of solutions to the Brazilian market and our customers. There are very calculated and their investments they adopt when it makes financial sense and given the double or sometimes even triple crop rotations theyre able to achieve the payback for much of our technology and equipment is significantly faster than in the North American market.

Speaker Change: Think sprayers as an example in the U S. A corner soybean farmer may only spray three times annually, but in Brazil, a farmer on a soybean and cotton rotation could spring as much as 20 times a year. This is why we're so focused on bringing our customers the solutions and connectivity that enables them to drive more value from their operations and the great thing is that tech adoption.

Cory J. Reed: This is why we're so focused on bringing our customers the solutions and connectivity that enable them to drive more value from their operation. And the great thing is that tech adoption was only half the story at the show at AgriShow. We saw equipment order interest rebound from last year's lows, including some of our most productive product offerings, like our new 9RX tractors and X9 combines. Adding in the strong fundamentals and demand for sugarcane harvesters, we feel optimistic about the future of agriculture in Brazil.

Speaker Change: It was only half the story at the show at Agro show, we saw equipment order interest rebound from last year's lows, including some of our most productive product offerings like our new nine Rx tractors and X nine combines adding in the strong fundamentals and demand for sugarcane harvesters, we feel optimistic about the future of agriculture in Brazil.

Cory J. Reed: So while the competitive landscape continues to expand in the region, we feel confident not only in our ability to deliver additional value to our customers via our integrated solutions but also through the strong dealer network that we've worked hard to build out. These dealers are providing industry-differentiated support to our customers, helping to drive uptime and reliability required in an environment where there's no off-season.

Speaker Change: So while the competitive landscape continues to expand in the region, we feel confident not only in our ability to deliver additional value to our customers via via our integrated solutions, but also through the strong dealer network that we've worked hard to build out.

Speaker Change: These dealers are providing industry differentiated support to our customers, helping to drive uptime and reliability required in an environment, where there is no off season.

Josh Beal: Awesome. That's really great insight, Corey. Now, for the last topic, I'd like to briefly touch on construction forestry, which was relatively stable this quarter. Earth-moving end markets remain largely unchanged quarter over quarter, while road building has seen some minimal shifts in North America, albeit remaining at strong demand levels. Josh Beal, can you give us a little more color on this part of the business and what we should expect for the balance of the year?

Speaker Change: Awesome, that's really great insight core now.

Speaker Change: Now for the last topic I'd like to briefly touch on construction and forestry, which was relatively stable this quarter.

Speaker Change: End markets remain largely unchanged quarter over quarter, while road building has seen some minimal shifts in North America, albeit remaining at strong demand levels.

Speaker Change: Can you give us a little more color on this part of the business and what we should expect for the balance of the year.

Josh Beal: Definitely, Josh. The key takeaway for the quarter is what you noted. Minimal change at healthy levels of demand. As we've noted on previous calls, we expected some decline year over year, unrelated to in-market demand, as we billed less inventory this year relative to 2023. While contractor backlogs remain healthy, and utilization at sustainable levels, we've seen rental capex come in at our new and used inventory levels, currently around the long-term average. Our guide is also supported by an order book for earthmoving equipment that extends out approximately four months into the fourth quarter.

Josh: Definitely Josh the key takeaway for the quarter as what you noted minimal change at healthy levels of demand as we've noted on previous calls we expected some decline year over year unrelated to end market demand as we build less inventory this year relative to 2023.

Josh: While contractor backlogs remain healthy and utilization of stable sustainable levels, we've seen rental capex come in at our new and used inventory levels currently around long term averages.

Josh: Our guide is also supported by an order book for Earthmoving equipment that extends out approximately four months into the fourth quarter.

Josh Beal: The only other point I'd highlight is around pricing. In addition to strong demand, we're also seeing strong competition bolstered by industry inventory levels that have recovered and a shift in the competitive landscape with a stronger U.S. dollar. However, we remain committed to a disciplined approach that balances both market share and price. Overall, our earth-moving and world-bending segments continue to deliver structurally better financial performance than we've seen historically

Josh: The only other point I'd highlight is around pricing. In addition to strong demand. We're also seeing strong competition bolstered by an industry inventory levels that are recovered and a shift in the competitive landscape with the stronger U S. Dollar.

Josh: However, we remain committed to a disciplined approach that balances both market share and price.

Josh: Overall, our earthmoving enrolled biddings segments continue to deliver structurally better financial performance than we've seen historically.

Josh Jepsen: Thanks Josh, that's a great update. And before we open the line to questions, Josh Jepsen, any final comments?

Speaker Change: Thanks, Josh that's a great update.

Speaker Change: Before we open the line of questions, Josh ups and any final comments.

Certainly.

Josh Jepsen: It was a good second quarter with strong results to round out the first half of the year. Despite a dynamic global ag market and a competitive construction environment in North America, we performed at structurally higher levels across the board. Given the pullback we've seen in ag markets, we now expect to end the year moderately below mid-cycle levels. This quarter, we also returned approximately $1.5 billion in cash to shareholders via dividends and share repurchases and remain committed to returning cash to shareholders while concurrently investing in the business via value-accretive CapEx and R&D spending.

It was a good second quarter with strong results to round out the first half of the year. Despite a dynamic global AG market and competitive construction environment in North America, we performed a structurally higher levels across the business given the pullback we've seen in AG markets. We now expect to end the year moderately below mid cycle levels.

This quarter. We also returned approximately $1 $5 billion in cash to shareholders via dividends and share repurchases and remain committed to returning cash to shareholders, while concurrently investing in the business via value accretive Capex and R&D spending.

Josh Jepsen: I want to reinforce that we're not new to market cycles, and we've learned from the past, making us a more resilient and better prepared business than ever before. Our proactive management reflects this and demonstrates that we are a structurally better business today, with equipment margins forecast just above 18% despite an unfavorable mix and a rapidly shifting global environment. And as a result, we feel that we are putting ourselves in the best position possible for the future.

Speaker Change: I want to reinforce that we're not new to market cycles, and we've learned from the past, making us a more resilient and better prepared business than ever before our proactive management reflects this and demonstrates that we are structurally better business today with equipment margin forecast just above 18%, despite unfavorable mix and a rapidly shifting.

Speaker Change: Global environment.

Speaker Change: And as a result, we feel that we're putting ourselves in the best position possible for the future.

Josh Jepsen: Regardless of where we are in the cycle, we remain committed to our customers and their needs, ensuring our solutions drive real value to their business, while Deere and our dealers provide the support they need to be successful. The progress on technology adoption and utilization, as noted earlier with our engaged and highly engaged ACRE progress, provides evidence of the value in our integrated offering of equipment, technology, and digital tools. At the end of the day, we're focused on doing more so our customers can do less, and we are more excited every day about the vast amount of opportunities that lie in front of us.

Speaker Change: Regardless of where we are in the cycle, we remain committed to our customers and their needs ensuring our solutions drive real value to their business, while deere and our dealers provide the support they need to be successful.

Speaker Change: The progress on technology adoption and utilization as noted earlier with our engaged and highly engaged acre progress.

Speaker Change: As evidence of the value in our integrated offering of equipment technology and digital tools.

At the end of the day, we're focused on doing more so our customers can do list and we are more excited every day about the vast amount of opportunities that lay in front of us. Thanks, Josh now, let's open it up to questions from our investors. We're now ready to open ready to begin the Q&A portion of the call. The operator will instruct instruct you on the polling procedure in consideration of others and to allow more of you to <unk>.

Josh Beal: Thanks Josh. Now, let's open it up to questions from our investors.

Operator: We're now ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. In consideration of others and 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.

Speaker Change: Participate in the call. Please limit yourself to one question. If you have additional questions. We ask that you rejoin the queue.

Operator: Thank you. We will now begin our question and answer session. If you would like to ask a question, please press star 1. Again, that is star 1 if you would like to ask a question and star 2 to withdraw your question. Our first question comes from Jerry.

Speaker Change: Thank you we will now begin our question and answer session. If you would like to ask a question. Please press star one again that is star one if you would like to ask a question and start to to withdraw. Your question. Our first question comes from Jerry Revich with Goldman Sachs. Your line is open.

Jerry: Yes, hi. Good morning, everyone. I'm wondering if you just, hi, I'm wondering if you'd just expand on the

Jerry David Revich: Yes, hi, good morning, everyone.

Jerry David Revich: Hi, Jerry I'm wondering if you could just hi, I'm wondering if you could just to expand on that.

Jerry David Revich: Sure.

Jerry David Revich: Yes.

Operator: Hey Jerry, we lost you. You're broken up a little bit.

Speaker Change: Hey, Jerry we last year broken up a little bit Okay, I hear what youre, saying.

Operator: We can't hear what you're saying. Amanda, we might need to move back to Jerry. Jerry, if you can hear us, you're not coming through.

Amanda: Amanda we might need it to move back to Gerry Gerry if you can hear US you are not coming through.

Operator: Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Your line is open.

Speaker Change: Thank you. Our next question comes from Andrew Costello with Morgan Stanley. Your line is open.

Grace: Hi, this is Grace. I'm from ANGEL. Thanks for the question. I think your updated guidance for production and precision, I believe, implies 50% decrementals and high teens margins. So can you talk about the underlying drivers of that and what you see as, ultimately, the normalized level of probability for a segment? And as part of that, what gives you comfort that we won't see margins move lower to the low teens range? Thank you.

Speaker Change: Hi, This is grace on for Ann Joseph for the question.

Speaker Change: Thank you your updated guidance for production for <unk> I believe implies 50% Decrementals in high teens margins. So can you talk about the underlying drivers of Dod.

Speaker Change: And where you see us ultimately to a normalized level of profitability for a segment and as part of that what gives you comfort that we won't see margins lower to a low to mid teens range. Thank you.

Speaker Change: Yeah. Thanks. Thanks for the question, Yes, I mean really what we saw production of precision AG in the quarter as we described in our comments. Some further softening end markets really really around the globe and you saw that reflected our industry guides nor.

Josh Beal: of precision ag in the quarter, you know, as we described in our comments, you know, some further softening in markets really, really around the globe. And you saw that reflected in our industry guides, you know, North America, Brazil, and Europe; we saw pullbacks, you know, across all those markets. And as a result, you know, we've adjusted production accordingly. Again, as we talked on the call, our number one focus is to position ourselves to build in line with retail demand.

Speaker Change: North America, Brazil, and Europe, we saw pullbacks across all those markets.

Speaker Change: And as a result, we have adjusted production Accordingly, again as we've talked on the call. Our number one focus is a position ourselves to build in line with retail demand and so as we've seen those shifts.

Josh Beal: And so as we've seen those shifts in the end markets, we're making those adjustments, again, to keep us in line. I think the one notable change, probably from some of our prior commentary, is around North America. Really, the softening that we saw in that market was around the large, large, large tractors. Excuse me. And as we saw that pullback, we've also seen, you know, some increases in high horsepower tractor used inventory.

Speaker Change: In the end markets, we're making those adjustments again it keeps us in line I think the one notable change probably from some of our prior commentary is around North America really the softening that we saw in that market was around the large large large tractors gives me.

And as we saw that pullback. We've also seen some increases in high horsepower tractor used inventory and as a result, we've made the decision to underproduce retail.

Josh Beal: And as a result, we've made the decision to underproduce retail, demand, and large tractors this year in North America to bring down our ending inventory levels. We think that positions us best for 2025. Again, given what we're seeing in the market, and that's reflected in some of the declines that you've seen, you know, we were in the first half of the year, you know, producing at healthy levels in line with strong retail demand, we have seen some pullback, and what you're seeing in terms of, you know, decrimentals, and that change is related to that, that pullback that we've seen.

Speaker Change: Demand in large tractors this year in North America to bring down our ending inventory levels, we think that positions us best for 2025 again, given what we're seeing in the market.

That's reflected in some of the declines that you've seen we were <unk>.

Speaker Change: First half of the year producer.

Speaker Change: Producing at healthy levels.

Speaker Change: In line with strong retail demand, we have seen some pullback in what youre seeing in terms of Decrementals in that change is related to that pullback that we've seen.

Josh Jepsen: Yeah, Grace, this is Josh Jepsen. Maybe just to comment on the decrements. I think, you know, full year, I think we expect PPA to do around, you know, 44%. I think the back half is actually pretty similar to that. So not materially different.

Jeff: Yes, Chris this is Jeff shifts and maybe just two.

Speaker Change: A comment around Decrementals I think.

Speaker Change: Full year I think we expect PPA to do around 44% I think the back half is actually pretty similar to that so not materially different maybe important important.

Speaker Change: Compare exposition in terms of the structural profitability of that business is if we look back to 2020, the business was around call. It 90% of mid cycle, which is not terribly far from where we are today for production of precision AG and we did around 16% operating margin kind of adjusted for some onetime things that occurred during that time so <unk>.

Josh Jepsen: It may be important, important, just compare Jeff's position in terms of the structural profitability of that business. If we look back to 2020, the business was around call it 90% of mid cycle, which is not terribly far from where we are today for production precision ag. And we did around 16% operating margin, kind of adjusted for some one-time things that occurred during that time. So 16, you know, today the middle of our guide is 21.

Josh Jepsen: So I think that underlies the shift we're seeing from a structural profitability perspective, you know, even with, as we noted earlier, a mix that has been less than favorable for us, both from products as well as regional shifts.

Speaker Change: Today Middle of our guide is 21, so I think underlies the shift we're seeing from our structural profitability perspective, even with.

As we noted earlier.

Speaker Change: Mix that has been less than favorable for us both from products as well as regional shifts.

Josh Beal: Yep, thanks for the question, Grace.

Speaker Change: Yeah. Thanks, Thanks for the question Greg.

Operator: Thank you. Our next question comes from Meg Dobre with Baird. Your line is open.

Thank you. Our next question comes from Mig <unk> with Baird. Your line is open.

Mircea Dobre: Thanks for the question and good morning. I'm wondering if you can maybe put a finer point on it and help us understand how large this underproduction is in both PPA and SAT. What percentage of revenue or the revenue decline, if you would, is related to this underproduction? And as we're looking at your disclosure on slide 15 for dealer inventories, what should we think about that two-wheel drive tractor number exiting fiscal 24? Thank you. Yeah, thanks.

Mig <unk>: Thanks for the question and good morning, I'm wondering if you can maybe put a finer point and help us understand.

Speaker Change: How large is this under production in both PPA and what.

Speaker Change: What percentage of revenue or the revenue decline. If you would is it related to the underproduction and as we're looking at your disclosure on slide 15 for dealer inventories how should we think about that two wheel drive tractor.

Speaker Change: Number exiting fiscal 'twenty four thank you.

Mig <unk>: Yeah. Thanks, Mig I appreciate the questions, yes, looking at total underproduction for the year.

Josh Beal: For the year, you know, and starting with the large ag segment, you know, globally, maybe if you think about it, worldwide underproduction to complete good retail sales is going to be in the high single digits, you know, worldwide. North America, you know, large tractors, it's probably in that range, maybe a little bit higher. On the higher end in South America and Brazil, you know, as we bring down inventory and combines in tractors, you know, and similarly, in Region 2, or sorry, excuse me, in Europe, our Region 2, as we call it, tractors kind of in line with that guy in the midsize, combines a little bit heavier.

Mig <unk>: And starting with.

Mig <unk>: Starting with the large AG segment globally, maybe if you think about it worldwide under production to complete good retail sales is it going to be in the high single digits worldwide.

Mig <unk>: North America large tractors.

Mig <unk>: It's probably in that range, maybe a little bit higher.

Mig <unk>: On the higher end in South America in Brazil, as we bring down the inventory and combines and tractors.

Mig <unk>: And similarly.

Mig <unk>: And reason to or sorry, excuse me in Europe, our region to as we call. It <unk>.

Mig <unk>: <unk> kind of in line with that guidance and the midsized commented a little bit heavier, but again globally. If you look at production in precision AG.

Josh Beal: But again, globally, you know, if you look at production and precision agriculture, you know, it's about high single-digit underproduction. You know, as you referenced on the slide and the current levels of inventory, you know, for tractors, we're about 30%, you know, right now. I think 31 on the slide there. And that's pretty normal, you know, for this level of seasonal build, maybe a little bit higher relative to the historical average, but kind of in that range.

Mig <unk>: It's about high single digit.

Mig <unk>: Under production.

Speaker Change: You referenced.

Speaker Change: On the on the slide and the current levels of inventory.

Speaker Change: For for tractors, we're about 30% right now I think 31 on the slide there and that's pretty normal for this level of seasonal seasonal build maybe a little bit high relative to the historical average, but kind of in that range I think notably we're going to see significant reduction in that ending inventory level in the back half of the year.

Josh Beal: I think notably, we're going to see a significant reduction in that ending inventory level, you know, in the back half of the year. Last year, row crop tractors were about 15% inventory to sales. As we close out, you know, 2023. This year, it's probably going to be closer to 10. And on a unit basis, significant underproduction.

Speaker Change: <unk> last year broke out tractors were about 15%.

Inventory to sales as we closed out 2023.

Speaker Change: This year, it's probably going to be closer to 10.

Speaker Change: And on a unit basis significant underproduction.

Cory J. Reed: Yeah, Mick, this is Corey. I was gonna give you a finer point on the inventory side. You know, I mentioned that we're on a unit basis significantly below, or we're below the total in terms of the rest of the industry. On a unit basis for row crops, as an example, we're sitting at half of the industry's new inventory, but we're taking that down even further. So, as Josh mentioned, we're going to go from that range of 15 plus percent down to 10% at the end of the year.

Corey: Yes, Nick this Corey.

Corey: Give a finer point to you on the inventory side I mentioned that we're on a unit basis significantly below our below the total in terms of the rest of the industry on a on a unit basis for row crops. As an example, we're sitting at half of the industry new inventory, but we're taking that down even further so as Josh mentioned, we're going to go we're going to go from that range of <unk>.

Josh: <unk> plus percent down to 10% at the end of the year that the net effect of that obviously is lower production in the back half while maintaining good margins throughout PPA, but putting us in the best position going forward.

Cory J. Reed: The net effect of that, obviously, is lower production in the back half while maintaining good margins throughout PPA, but putting us in the best position going forward, relative to responding to retail demand in the future. So we're taking those inventories down; they'll be in the hundreds at the end of the year for row crop tractors on the new side.

Josh: Relative to responding to retail demand in the future. So we're taking those inventories down there'll be in the hundreds at the end of the year for row crop tractors on the new side.

Josh Jepsen: Yeah, and maybe one thing, lastly to add, this is Josh Jepsen. I think, compared to history, we're ensuring that we're getting inventories in the right place, being as proactive as possible, and not prolonging demand, not stretching out the potential to have higher demand a little bit longer, which is a lesson learned clearly from the past. So being able to do that more proactively, you know, we think it puts us in a better position and also impacts, I think, the duration of what we see from an overall cyclical impact.

Jeff shifts: Yes, and maybe just lastly to add this is this is Jeff shifts and I think.

Jeff shifts: Compared to historical.

Jeff shifts: We're ensuring that we're getting inventories in the right place being as proactive as possible and not prolonging demand not stretching out.

Jeff shifts: The potential.

Speaker Change: To have higher demand a little bit longer which is a lesson learned clearly from the past so being able to do that more proactively we think puts us in a better position and also impacts I think duration of what we see from from an overall cyclical impact that final point on that for <unk>.

Cory J. Reed: And a final point on that to support Josh is that actually, in the month of April, we saw the industry peak for row crop tractors, and we're proactively pulling back at the peak before the decline comes, so I think that's another indicator. Thank you. You had asked about...

Josh: Josh is that actually in the month of April we saw the industry actually peak in row crop tractors, and we're proactively pulling back at the peak before the decline come so I think that's another indicator.

Josh Beal: Mike, you asked about small ag as well; let me just make a couple of points here. I don't have it for the whole segment, but if you kind of break down some of those sub-components. Small tractors, there's been high inventory, particularly in compact utility tractors. Pretty significant underproduction there; it's double digits. On sort of the mid-tractor space, kind of in line with our comments around tractors, it's kind of a high single digit on the midsize.

Speaker Change: You had asked about small AG as well I mean, just maybe a couple of points here I don't have it for the whole segment, but if you kind of break down some of those sub components.

Speaker Change: Small tractors, I mean, theres been high inventory, particularly in compact utility tractors.

Speaker Change: Pretty significant underproduction, there it's double digits.

On sort of the mid tractor space kind of in line with.

Speaker Change: Our comments around around tractors, it's kind of a high single digit on the mid size banks.

Thanks for the question Mike.

Speaker Change: Thank you.

Operator: Thank you. Our next question comes from Kristen Owen with Oppenheimer. Your line is open.

Speaker Change: Thank you. Our next question comes from Kristen Owen with Oppenheimer. Your line is open.

Kristen E. Owen: Good morning, thank you for the question. Mine will be somewhat of a follow-up to the last, which is given the high level of underproduction in the back half of the year and those mixed implications being more toward, you know, this high value, large form factors. I'm wondering if you could talk a little bit more about those offsets, what you've done already to help protect that decrement margin, arguably that that should be significantly higher given the mix, so what actions you' Thank you.

Kristen E. Owen: Good morning. Thank you for the question and then we'll be somewhat.

Speaker Change: Follow up to the last which is given the high level of lack of production in the back half of the year and as mix implications being more toward yes. It is high value.

Speaker Change: Large form factor I'm wondering if you could talk a little bit more about those offsets what you've done already to help protect that decremental margin arguably that that should be actually significantly higher given the mix.

Speaker Change: So what actions you've taken already and how to think about the cost benefits of layering into the back half of the year, that's offsetting that underproduction. Thank you.

Josh Beal: Yeah, thanks, Chris. I'll start and jump in as well.

Yes, Thanks, Chris I'll start and jump in as well here I think.

Speaker Change: A few things I mean, certainly I think as you think about 2024.

Speaker Change: And particularly the underproduction, primarily shifted towards the back half of the year, we had some adjustments in rates and things.

Speaker Change: We've talked about that in terms of some of the overhead inefficiencies that have come into the business. As we made those changes you are seeing that in production costs.

Speaker Change: Thats a headwind there that's offsetting the tailwind that we see a material in flake and freight excuse me. So that that is having an impact on some of the changes.

Josh Beal: You know, I think, you know, a few things. I mean, certainly, you know, as you think about, you know, 2024, and particularly, you know, under production, primarily shifted towards the back half of the year, we have had some adjustments in rates and things. And we've talked about that in terms of some of the overhead inefficiencies that have come into the business as we've made those changes. And you're seeing that in production costs.

Josh Beal: You know, that's a headwind there that's offsetting, you know, the tailwinds that we see in material and freight. Excuse me. So that is having an impact on some of the changes, you know, and certainly that under production plays a part, you know, in terms of what we're seeing as far as decrements go. We're definitely taking cost steps, you know. Our focus on taking material and freight out of the business continues, and we expect that to build in the back half. That is helping, you know, offset some of the decrements as we pull down production in the latter part of the year.

Speaker Change: And certainly that that underproduction.

Speaker Change: It plays a part.

Speaker Change: In terms of what Youre seeing as far as Decrementals were definitely taking cost steps are focus on.

Taking material and freight out of the business continues and we expect that to build in the back half that is that is helping.

Speaker Change: Offset some of the Decrementals as we pull down production in the latter part of the year.

Josh Jepsen: Hey, Kristen, it's Jepsen. I would say, you know, definitely we see the bigger impact in 4Q, as you know, seasonally, you see a higher level of retail, but then also we get into seasonal shutdowns and those sorts of things. You know, as we work through the back half of the year, we're resetting production rates, and as Josh mentioned, we're also getting the cost structure aligned. So, you know, that will benefit us as we go forward.

Jeff: Hey, Chris, It's Jeff and I would say definitely we see the bigger impact in <unk>.

Jeff: Seasonally.

Jeff: See higher level of retail, but then also we get into the seasonal shutdowns and those sorts of things.

Jeff: As we work through the back half of the year resetting production rates as Josh mentioned, we're also getting the cost structure aligned so.

Jeff: That will benefit us as we go forward. So the way we're exiting 'twenty four I would say is not indicative of what we would expect 25 to look like as we step into that year, regardless of.

Josh Jepsen: So the way we're exiting 24, I would say is not indicative of what we would expect, you know, 25, to look like as we step into that year, regardless of where we see the end marks moving.

Where we see the market moving.

Cory J. Reed: Yeah, one thing I would add, I mean, one of the additional points I'd make is we're actually preparing for probably the largest new product launch going into 2025 we've ever had. So while we're pulling production down, we're also readying to launch some of the highest, most productive products we've ever had. So all new combines, all new four-wheel drive tractors, all of that's taking place and included in what we're doing to prepare in terms of the cost structure as we head into 2025 and bring the value proposition even higher for our customers going forward. Yeah, I think we should just build on that too, Corey.

Speaker Change: And one thing I would add I mean.

One of the the additional points I'd make is we're actually preparing for probably the largest new product launch going into 2025, we ever have so while we're pulling production down. We're also readying to launch some of the highest most productive products. We've ever had so all new combines only four wheel drive tractors all of that is taking place and included in what we're doing.

Speaker Change: In terms of the cost structure as we head into 'twenty, five and bring value proposition, even higher for our customers going forward.

Cory J. Reed: Yeah, I think just building on that too, Corey, excitingly, a lot of those new products are coming with great tech, you know, Harvest Setting Automation, Predictive Ground Speed Automation, Exact Shot Provision. There's a lot of great solutions coming in 25 as well.

Speaker Change: Just maybe build on that too gory excitingly a lot of those new products are coming with great Tech harvest setting automation predictive groundspeed automation exact outgrow vision there's.

Speaker Change: There's a lot of great solutions coming 25 as well.

Speaker Change: Thanks for the question Chris.

Operator: Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.

Operator: Thanks for the question, Kristen. Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open. Yeah, thanks for the questions. Good morning, guys.

Speaker Change: Thank you. Our next question comes from Nicole <unk> with Deutsche Bank. Your line is open.

Speaker Change: Thanks for the question good morning, guys.

Speaker Change: Nicole.

Nicole: Maybe just if you were willing to comment on that on what Youre seeing so far with the crop care early order program and I think that question may be quick so I'm going to ask another question I got.

Speaker Change: The decrementals were a bit high this quarter.

Speaker Change: It seems like in the guidance.

Speaker Change: Decremental margin.

Speaker Change: In the back half thank you.

Josh Beal: Yeah, you're, you're right that the answer is quick on crop care early order programs. You know, so that sprayer order programs just opened up at the beginning of the month. So we're about, you know, what, a week and a half, two weeks in now. It's early, and that tends to build, you know, throughout the course of the program. So really not enough to comment at this point, just based on the very early stages of that program.

Speaker Change: Yes, Youre right that the answer is quick on crop here early order programs.

Speaker Change: So that spray early order programs just opened up at the beginning of the months were about what we can have two weeks in now.

Speaker Change: That.

Speaker Change: It's early and that tends to build throughout the course of the program. So really not enough to comment at this point just based on the very early stages of that program.

Josh Jepsen: Hey Nicole, this is Jepsen also on EOP. I think one thing important to note is that as we get into times of uncertainty, like order activity tends to probably push a little bit later through the phases of those programs, you know, as customers, dealers, you know, exercise a little more optionality and want to have a little, a little bit firmer view of how the planting season goes and how the crop is emerging. Just another point of reference there. Yeah, I think maybe shifting Nicole to your question,

Jeff: Political is as Jeff said also on <unk> I think one thing important to note we've seen as we get into times of uncertainty I think order activity tends to probably push a little bit later through the phases of those programs as customers dealers exercise a little more optionality and want to have a little bit firmer view of how this planting season go in house crop emerging.

Speaker Change: A point of reference there yeah, I think maybe shifting Nicole to your question on CNS Decrementals for the quarter I think the one thing to point out there is we did have lower price realization than.

Josh Beal: Yeah, I think maybe I should shift, Nicole, to your question on CNF Decrementals for the quarter. I think the one thing to point out there is we did have lower price realization than originally anticipated. That was due to, you know, a discount accrual that we put on some field inventory that will affect sales for the balance of the year. So it's a little bit of a timing issue around price realization. That's why you see us keeping that full year guide, you know, at a point and a half. We don't expect that to continue. It's just really the timing of making that change. And the back half, you know, should support that full year price, you know, of a point and a half.

Speaker Change: <unk> than originally anticipated.

Speaker Change: That was due to discount accrual that we put on some field inventory that.

It will affect sales for the balance of the year. So it's a little bit of a timing around price realization and Thats why you see us keeping that full year guide at a point and a half we don't expect that to continue it's just really a timing of making that change in.

Speaker Change: In back half should support that full year price point.

Point and a half.

Speaker Change: I appreciate the question.

Operator: Thank you. Our next question comes from Hiram Nathan with Daiwa. Your line is open.

Josh Beal: I appreciate the question. Thank you. Our next question comes from Hiram Nathan with Daiwa. Your line is open. Hi, thanks for your question.

Speaker Change: Thank you. Our next question comes from Hiram Nathan with Daiwa. Your line is open.

Hiram Nathan: Hi, Thanks, Thanks for the question I just.

Hiram Nathan: Wanted to do it.

Hiram Nathan: Dig a little deeper on pricing what are you seeing.

Hiram Nathan: And that trend across across regions and segments.

Speaker Change: And just kind of let's say primarily.

Speaker Change: On what we could be seeing.

Speaker Change: Next year on the pricing side.

Josh Beal: Yeah, I mean, a bit early to talk about, you know, 2025 pricing, but I think, you know, as we talk about 2024 and where it stands, and then kind of do a walk around the world here, you know, again, and in large agriculture, we're talking about a point and a half price realization for the year. As we kind of step through the different regions, you know, North America, we would say normal price realization is in the range of two to 3%. We're actually in that range. In fact, on the higher end of that, if not a little bit better there.

Speaker Change: Yes.

Speaker Change: A bit early to talk about.

Speaker Change: 2025 pricing, but I think as we talk 2024, and where it stands and kind of do a walk around the world here.

Speaker Change: And.

Speaker Change: In large AG, we're talking about a point and a half price realization for the year.

Speaker Change: Yes, as we kind of stepped through the different regions North America, we would say normal price realization is in the range of 2% to 3% roughly in that range and in fact on the top end of that if not a little bit better. There. So we've seen some strong pricing and expect that to continue through the course of the year.

Josh Beal: So we've seen some strong pricing and expect that to continue through the course of the year. You know, South America, you know, we've talked, you know, Brazil specifically, with the inventory that we built in 2023, we will have some negative prices there this year, kind of in the mid single digits. Candidly, as that sort of plays out through the course of the year, which was higher on the front end, it starts to mitigate on the back end.

Speaker Change: South America, we've talked in Brazil, specifically now with the inventory that we built in 2023, we will have some negative price there this year kind of in the mid single digits.

Speaker Change: Candidly is that sort of plays out through the course of the year was higher on the front end it starts to mitigate on the backend and then Europe.

Speaker Change: Very very similar to <unk>.

Josh Beal: And then Europe, you know, very, very similar to North America, we're seeing pricing in kind of a normalized range of two to 3%. And we expect that to really, you know, to continue through the course of the year. Small ag and turf, very similar comments. I think construction and forestry, again, we've seen, you know, certainly a more competitive environment there. We talked about the discounts that we had accrued this year.

North America, we're seeing pricing in kind of that normalized range of 2% to 3%.

Speaker Change: And we expect that to really continue through through the course of the year small I can tell you very similar comments I think construction and forestry again, we've seen.

Speaker Change: Certainly more competitive environment, there, we talked about the discounts that we accrued this year, but again.

We're managing that.

Speaker Change: Balance in that dynamic and then feel good about the point and half price realization that we're going to maintain through the course of the year.

Josh Beal: But again, you know, we're managing that balance and that dynamic and then feel good about the point and a half price realization that we're going to maintain, you know, through the course of the year. Thanks for the question.

Speaker Change: Okay. Thanks for the question.

Speaker Change: Okay.

Operator: Thank you. Our next question comes from Rob Wertheimer with Melius. Your line is open.

Speaker Change: Thank you. Our next question comes from Rob Wertheimer with Melius. Your line is open.

Rob Wertheimer: Yeah, hi, thanks. My question is kind of a big picture one on PP&A in North America and just how you think about the trade down cycle. Your machines have gotten bigger, more capable, more productive, and more expensive in some ways. And I'm curious if you see this as an unknown, whether, you know, they'll all find homes and second and third owners, or whether you guys know the market better than anybody in the chain of buyers, or whether you see enough of the, you know, the moderate-sized farms and second buyers to kind of absorb the equipment, just how you think about that playing Thank you.

Rob Wertheimer: Yeah, Hi, Thanks. My question is kind of a big picture one on <unk>.

Rob Wertheimer: In North America, and just how you think about the trade down cycle your machines.

Speaker Change: Bigger more capable more productive more expensive in some ways and I'm curious if you see this as an unknown whether the oil find homes in the second and third owners or whether you guys know the market better than anybody in the chain of buyer or whether you see enough of the moderate sized part of the second buyers to kind of absorb the equipment just how you think about.

Speaker Change: That playing into the overall cycle. Thank you.

Cory J. Reed: Yeah, Rob, this is Corey. I'll maybe take a first stab.

Speaker Change: Yes, Rob this Corey I'll, maybe take a first stab.

Corey: I'll use tractors as an example, one thing we watch very closely is used inventory on row crop tractors, we've seen.

Speaker Change: Model used above 300 horsepower grow and we've watched that closely but if I can give you. The example, if you went back to the previous peak 14000 unit industry back in 2014 has been about 14000 units and only 30% of that industry would have been above 300 horsepower. If you fast forward today to 2024 were about 13000 units.

Cory J. Reed: Look, I'll use tractors as an example. You know, one thing we watch very closely is used inventory on row crop tractors. We've seen late models used above 300 horsepower grow, and we've watched it closely. But if I can give you an example, if you went back to the previous peak 14,000-unit industry back in 2014, it would have been about 14,000 units, but only 30% of that industry would have been above 300 horsepower.

Speaker Change: Above 220, and 70% of that is above 300, and that's being driven off of the structural improvement of our customers are making for how they plant predominantly so you think about the adoption of exact emerge we're seeing exact emerge continue to drive forward. We're in the mid eighties headed towards 90 plus percent electric drives on planners high speed that drives power.

Speaker Change: Acquirements the absorption of that at the top end of the market, we see those tractors being required throughout the market as all customers take on the ability to plant better take this year and less than 50% of the crop already planted there's no better time. If you think about timeliness, then there'll be able to plant fast in an environment, where you have a short window. So I think we're set really well.

Cory J. Reed: If you fast forward today to 2024, we're about 13,000 units above 220, and 70% of that is above 300. And that's being driven off of the structural improvement that our customers are making for how they plant predominantly. So you think about the adoption of exact emerge, we're seeing exact emerge continue to drive forward, we're in the mid 80s headed toward 90 plus percent electric drives on planters high speed, that drives power requirements, the absorption of that at the top end of the market, we see those tractors being required throughout the market as all customers take on the ability to plant better take this year, got less than 50% of the crop already planted, there's no better time, you know, if you think about timeliness, then to be able to plant fast in an environment where you have a shortened window.

Speaker Change: Obviously, the timing of year over year trade cycle as interest rates has people pause in an environment like we're in but if you look at the age of the fleet and you look at where we're headed we feel really confident that our solutions are set up to move through the market combine that with performance upgrades in precision upgrades together with what we're doing with precision AG essentials, and we'll be able to take more.

Cory J. Reed: So I think we're set really well. Obviously, the timing of year over year trade cycles and interest rates has people pause in an environment like we're in. But if you look at the age of the fleet, and you look at where we're headed, we feel really confident that our solutions are set up to move through the market. Combine that with performance upgrades and precision upgrades together with what we're doing with precision ag essentials, and we'll be able to take most of the value we're creating out through the fleet to each of those customers. So we feel pretty good about that.

Speaker Change: Are the value, we're creating out through the fleet into each of those customers. So we feel pretty good about that.

Josh Jepsen: Yeah, Rob, the one thing I would add is that the other piece that gives us confidence as well is no matter where the customer is on that ladder, whether the first owner or the fifth, there's a strong desire to keep upgrading technology, become more productive, more efficient, and be able to do those jobs in tighter timeframes. As Cora mentioned, planting is, you know, a very tight timeframe.

Rob Wertheimer: Yes, Rob the one thing I would add is I think the piece that gives us gives us confidence as well as no matter, where the customer is in that net ladder, where they're the first owner or the fifth there is a strong desire to keep upgrading technology become more productive more efficient.

Cord: And be able to execute those jobs and tighter timeframe as cord mentioned planting.

Cord: Very tight timeframe, so that demand across I think continues to drive and we're seeing this precision AG essentials is a really good example, where we're connecting machines I think two thirds or more of the machines that we've been we've been putting those on have not had technology before so we are bringing customers that haven't been using things like.

Josh Jepsen: So that demand across, I think, continues to drive, and we're seeing this Precision Ag Essentials is a really good example where we're connecting machines that you know, I think, two-thirds or more of the machines that we've been putting those on have not had technology before. So we're bringing customers that haven't been using things like guidance or other tools into the fold into the system. So I think that that is what is important.

Josh Jepsen: And the other part is that dealers work really hard. They know their customers really well, they know their AORs well, and they're working around how do they best spec those machines and how do they best get them into the right hands. Thanks, Rob.

Cord: Guidance, our other tools into into the fold into the system. So I think that that is that is important and the other part as dealers work really hard they know their customers really well they know their AOR as well and they are working around how do they best spec those machines, how they best get them into the right hands.

Speaker Change: Thanks, Rob.

Cord: Yes.

Cory J. Reed: Thank you. Our last question comes from Jerry Revich with Goldman Sachs. Your line is open.

Thank you our last question comes from Jerry Revich with Goldman Sachs. Your line is open.

Operator: Yes, I apologize for the sound issue earlier. I want to ask, you know, you folks are hyper focused on used inventories just normally based on the actions that you've taken, you know, rising use of school funds, the roughly $2 billion D stock. What's your level of confidence that late-model inventories will stop moving up from here? I appreciate that it's more of an art than a science, but I would love to hear how you're modeling and thinking about it versus additional potential levers.

Jerry David Revich: Yes, Hi, I apologize for the sound issue earlier I wanted to ask you.

You folks are hyper focused on used inventories just normally based on the actions that you've taken rising use of pool funds, the roughly $2 billion.

Jerry David Revich: Destock, what's your level of confidence that late model inventories will stop moving up from here I appreciate that it's more of an art for the sides, but love to hear how your model again thinking about it versus additional potential levers.

Jerry David Revich: Thanks for the question, Jerry. Glad you made it back.

Speaker Change: Yes. Thanks for the question Gerry glad you made it back I mean, I'll start and Corie, Josh feel free to jump in.

Speaker Change: It starts with our proactive management on the new inventory side as well I think.

Speaker Change: Our decision to under produce.

Josh Beal: I'll start, and Corey, Josh, feel free to jump in. I think it starts with our proactive management on the new inventory side as well. I think our decision to underproduce Waterloo row crop tractors in North America, you know, in 2024, and to bring those inventories to sales levels down as low as we're bringing them and significantly below, you know, where we ended last year, is really that opportunity, as Corey talked. We feel pulled for the equipment. There's value there.

Speaker Change: Why do we row crop tractors in North America in 2024 and to bring those inventory to sales levels down as low as we're bringing them and was significantly below.

Speaker Change: Where we ended last year.

Speaker Change: It's really that opportunity is Corey talked we feel pull for the equipment.

Speaker Change: There's value there.

Speaker Change: Given where current environment. It is given where rates are it has slowed down.

Speaker Change: You know that equivalent moving through the pipeline and we don't want to build on that we don't want to.

Speaker Change: Exacerbate that situation and so we feel like it's prudent to bring the the new inventory down to allow that focus on a lot of that time to work the use through but again as we just talked theres definitely pull both for the value that that brings and we certainly see it in even this year the planting and the.

Josh Beal: But, you know, given where the current environment is, given where rates are, it has slowed down, you know, that equipment moving through the pipeline, and we don't want to build on that. We don't want to, you know, exacerbating that situation. And so we feel like it's prudent, you know, to bring the new inventory down, to allow that focus and allow that time to work, work the use through. But again, as we just talked, you know, there's definitely pull for the value that it brings.

Josh Beal: And we certainly see it even this year, you know, with planting, you know, in the US with the delayed spring and the wetness. I mean, the value to be able to get in, you know, quickly, you know, with high-speed planning is as important as ever. And that pull for that higher, more productive equipment, you know, is definitely there. I don't Corey, anything you add? No, I use

Speaker Change: The us with the delayed spring and what the witness I mean, the value they can be able to get in quickly with high speed planning is as important as ever in that pool for the higher more productive equipment is definitely there.

Cory J. Reed: No, I used the planting example earlier, but I think it also applies in spraying, and it applies in harvesting. In the end, those windows get tighter, and the ability to cover more ground more quickly at all levels and all customers, I think, helps us drive confidence. Together with the fleet age, it drives confidence that we will consume that product. And we've got tools in place to be able to do it.

Speaker Change: As.

Speaker Change: I use the planning example earlier, but I think it also applies in spring and it applies in harvesting in the end those windows get tighter and the ability to both cover more ground more quickly at all levels and all customers I think it helps us drive confidence together with the fleet age drives confidence that we will consume that product in and we've got tools in place to be able to do it.

Obviously, it slows down when markets are uncertain in crops in the ground, but if you look at the fleet age and you look at the technologies that are coming in you look at how customers are adopting those technologies trend wise over time, we look at profitability coming down, but it's still solidly profitable in the business, we know that it pays to adopt these technologies and we expect those those used unit.

Cory J. Reed: Obviously, it slows down when markets are uncertain and crops aren't in the ground. But if you look at the fleet age, and you look at the technologies that are coming, and you look at how customers are adopting those technologies over time, we see profitability coming down, but it's still solidly profitable in the business. We know that it pays to adopt these technologies, and we expect those used units to move into the market.

Speaker Change: To move into the market.

Josh Beal: Thanks for the question, Jerry. I appreciate all the questions today.

Speaker Change: Thanks for the question Gerry.

Josh Beal: I think we're at the end of the list. That's all the time we have. We appreciate everyone's time. Thanks for joining us. We'll talk soon. Have a great day.

Operator: That concludes today's conference. Thank you for participating. You may disconnect at this time.

Speaker Change: Another question is today I think we're at the end of the last year. That's all the time, we have we appreciate Owen's time, thanks for joining us and we will talk soon have a great day.

Speaker Change: That concludes today's conference. Thank you for participating you may disconnect at this time.