Q3 2024 Deere & Co Earnings Call
Good morning and welcome to the Deere and Company third quarter earnings conference call. Your lines have been placed on a listen only mode 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.
Speaker Change: Hello, welcome, and thank you for joining us on today's call. Joining me on the call today are John May, Chief Executive Officer, Josh Jepsen, Chief Financial Officer, Luke Gackstetter, Senior Vice President, Ag and Turf Sales and Marketing for Americas in Australia, and Josh Rohleder, Manager of Investor Communications.
Speaker Change: Today, we'll take a closer look at Deere's third quarter earnings and spend some time talking about our markets and our current outlook for fiscal 2024. After that, we'll respond to your questions.
Speaker Change: Please note that slides are available to complement the call this morning. They can be accessed on our website at johndeere.com forward slash earnings.
Speaker Change: First, a reminder, this call is broadcast live on the Internet and recorded for future transmission and use by Deering Company.
Speaker Change: Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of DEER is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
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 8K, Risk Factors in the Annual Form 10K, as updated by reports filed with the Securities and Exchange Commission.
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. Gap.
Speaker Change: 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.
Speaker Change: I will now turn the call over to Josh Rohleder.
Josh Rohleder: Good morning and thank you for joining. John Deere completed the third quarter with disciplined performance amid a tough macro backdrop.
Josh Rohleder: Financial results for the quarter included an 18.5% margin for the equipment operations.
Speaker Change: Ag fundamentals remain muted, and market demand in construction and forestry has tempered alongside continued price competition, resulting in another quarter of overall challenging market conditions.
Speaker Change: Despite tougher markets in both ag and construction, we continued to execute to our plan, focusing on proactive inventory and cost management. Notably for the quarter, we adjusted rest of year production schedules and our earth moving product lines to target lower year-end field inventory levels.
Speaker Change: As a result, order books across all segments are effectively full for the remainder of the fiscal year as we position our business to respond to changes in retail demand.
Speaker Change: These actions, along with a continued focus on cost control, are essential to keeping our business healthy as we continue to invest in future growth.
Speaker Change: We now begin with slide three and our results for the third quarter.
Speaker Change: Net sales and revenues were down 17% to $13.152 billion, while net sales for the equipment operations were down 20% to $11.387 billion.
Speaker Change: That income attributable to Deere and Company was $1.734 billion, or $6.29 per diluted share.
Speaker Change: Double-clicking into our individual business segments, we'll start with production and precision ag on slide four. Net sales of 5.099 billion were down 25 percent compared to the third quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization.
Speaker Change: Price realization was positive by slightly more than two and a half points.
Speaker Change: Currency translation was negative by a little more than one point.
Speaker Change: Operating profit was $1.162 billion, with a 22.8% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and employee separation program expenses. These were partially offset by price realization and lower warranty expenses.
Speaker Change: Next, we'll turn to Smollag and Tuerck on slide 5.
Speaker Change: That sales were down 18% year-over-year, totaling $3.053 billion in the third quarter because of lower shipment volumes partially offset by price realization.
Speaker Change: Price realization was positive, by more than one and a half points. Currency translation was negative, by just under half a point.
Speaker Change: Operating profit declined year-over-year to $496 million, leading to a 16.2% operating margin. The decrease was primarily due to lower shipment volumes and higher warranty expenses, which were partially offset by price realization.
Speaker Change: Slide 6 gives our 2024 Industry Outlook for Ag and Turf Markets Globally.
Speaker Change: Across all major markets, we continue to see muted demand resulting from a challenging macro environment. Global stocks of grains continue to rebuild with excellent growing conditions leading to better-than-expected production and lower commodity prices.
Speaker Change: High interest rates and geopolitical uncertainty further weigh on customers' purchase decisions, resulting in reduced demand across all end markets.
Speaker Change: In the U.S. and Canada, we continue to expect large ag equipment industry sales to be down approximately 15% during the quarter.
Speaker Change: Demand continues to be pressured by declining farm margins and elevated used inventory levels in late model year machines, which is partially offset by an elevated fleet age, rising farmland values and stable farm balance sheets.
Speaker Change: Within small ag and turf in the U.S. and Canada, industry demand estimates remain down approximately 10 percent. Further declines in the turf and compact utility tractor segments, which are more sensitive to interest rates, are partially offset by improving dairy and livestock fundamentals.
Speaker Change: Returning to Europe, the industry is forecasted to be down approximately 15%, reflecting yield headwinds and weekend margins.
Speaker Change: Volatile weather patterns continue to drive commodity price and arable cash flow uncertainty, which is enhanced by slightly elevated input costs. However, dairy and livestock fundamentals remain healthy, providing moderate stability to the segment.
Speaker Change: In South America, we expect industry sales of tractors and combines to decline between 15 and 20 percent. Commodity price softening and elevated interest rates continue to pressure grower profitability, especially in Brazil, our largest market in the region.
Speaker Change: Fundamentals are further pressured by better-than-expected production in Brazil despite regional weather challenges and a slower-than-forecasted recovery in Argentina.
Speaker Change: Industry sales in Asia are forecasted down moderately.
Speaker Change: Moving on to our segment forecast beginning on slide 7.
Speaker Change: Production and Precision Ag, our net sales forecast remains down between 20 and 25 percent for the full year. The forecast now assumes roughly two points of positive price realization and flat currency translation for the full year.
Speaker Change: For the segment's operating margin, our full-year forecast remains between 20.5% and 21.5% despite muted demand.
Speaker Change: Slide 8 covers our forecast for the small ag and terp segment.
Speaker Change: We expect net sales to remain down between 20 and 25 percent. The guide now includes two points of positive price realization and flat currency translation.
Speaker Change: The segment's operating margin continues to be forecasted between 13.5 and 14.5 percent, in line with slowing net sales.
Speaker Change: Shifting now to construction and forestry on slide 9, net sales for the quarter were down 13% year over year to $3.235 billion due to lower shipment volumes. Price realization was negative by one point. Currency translation was also negative by more than half a point.
Speaker Change: Operating profit of $448 million was down year over year, resulting in a 13.8% operating margin, due primarily to lower shipment volumes, unfavorable sales mix, and negative price realization.
Speaker Change: Slide 10 provides an update to our 2024 Construction and Forestry Industry Outlook.
Speaker Change: Industry sales for earthmoving equipment in the U.S. and Canada is now expected to be down 5 to 10 percent, while compact construction equipment in the U.S. and Canada is now expected to be flat to down 5 percent.
Speaker Change: Demand for earth-moving and compact construction equipment is down from robust levels in 2023 and increasingly competitive as rental refleeting decelerates and used inventory levels rise.
Speaker Change: While U.S. government infrastructure spending remains supportive and manufacturing investments continue to increase, we are witnessing a sequential slowdown in single-family housing starts amid interest rate uncertainty.
Speaker Change: This is compounded by continued declines in multifamily housing starts and persistent weakness in the commercial real estate sector.
Speaker Change: Global forestry markets are projected to remain down around 10% as all global markets continue to be challenged.
Speaker Change: The global world building market forecast remains flat to down 5, as strong infrastructure spending in the U.S. is offset by continued softness in Western Europe .
Speaker Change: Moving on to the construction and forestry segment outlook on slide 11. 2024 net sales estimates are now expected to be down between 10 and 15 percent as moderating demand is coupled with planned underproduction.
Speaker Change: That sales guidance for the year now includes about half a point of positive price realization in flat currency translation.
Speaker Change: The segment's operating margin is now projected to be around 15 percent, reflecting a tougher competitive environment, decelerating demand, and underproduction of construction equipment.
Speaker Change: Transitioning to our financial service operations on slide 12.
Speaker Change: Worldwide financial services net income attributable to Deere & Co. in the third quarter was $153 million.
Speaker Change: That income was lower due to a higher provision for credit losses and less favorable financing spreads, which were partially offset by a higher average portfolio and favorable discrete tax items.
Speaker Change: For fiscal year 2024, our outlook for net income is now at $720 million, as benefits from a higher average portfolio balance are expected to be more than offset by a higher provision for credit losses and less favorable financing spreads.
Speaker Change: Subsequent to the quarter, we announced an agreement with Banco Bradesco to invest and become 50% owners in our Brazilian financing subsidiary, Banco Jandir.
Speaker Change: This strategic decision reduces incremental financing risks while allowing for continued investment and growth in the Brazilian market.
Speaker Change: The transition is expected to close in the second fiscal quarter of 2025.
Speaker Change: In our quarterly results, we classified Banco John Deere as a business held for sale, which resulted in the net impact of a pre-tax and after-tax loss of $15 million, accounted for in S, A, and G, within the financial services segment.
Speaker Change: Next, slide 13 outlines our guidance for Deere and Company's net income, our effective tax rate, and operating cash flow.
Speaker Change: For fiscal year 24, we maintain our outlook for net income at approximately $7 billion.
Speaker Change: Next, our guidance continues to incorporate 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 six to six and a half billion dollars.
Speaker Change: And finally, on slide 14, I'd like to hand it over to John May to say a few words.
John May: Thank you, Josh. The third quarter was another solid quarter, thanks to the efforts of the entire John Deere team, in partnership with our outstanding dealer network and supply base.
John May: As mentioned in the opening comments, our customers across nearly all business segments are facing headwinds, including softer commodity prices and elevated interest rates.
John May: Against this backdrop, I'm extremely proud of our team's unwavering commitment to and execution of our key priorities.
John May: They have navigated the business cycle through proactive inventory management and disciplined cost control while continually striving to deliver value to our customers.
John May: Effective cycle management begins with ensuring that inventory levels are appropriately aligned to end market demand.
John May: Throughout 2024, we've prudently and proactively adjusted production schedules in our large ag business at a faster pace than ever before in order to reduce field inventory in our end markets.
John May: This quarter, we made a similar adjustment for many of our earth-moving product lines in North America in response to signs of moderating demand.
John May: We will also continue to focus on reducing used inventory levels, particularly in North American large ag, for the remainder of the year. As we approach the start of fiscal 2025,
John May: The lean levels of field inventory resulting from these actions will best position our operations in both segments to respond effectively to changes in market demand.
John May: Proactively Managing Our Production Schedules
Speaker Change: also facilitates
Speaker Change: Discipline cost control. In this lower volume environment, we've made challenging decisions that impact both our factories and our offices to ensure that our cost structure aligns with current market demand.
Speaker Change: And while these actions have been hard, and certainly not something we take lightly,
Speaker Change: They help us maintain our competitiveness throughout the business cycle, allowing us to continue investing in the products and solutions that empower our customers to address their unique challenges.
Speaker Change: That is our ultimate purpose.
Speaker Change: Delivering value for our customers.
Speaker Change: In the near term, this means continuing to build and ship the highest level quality and most productive equipment to our customers.
John Deere: I want to extend my heartfelt gratitude to all of our John Deere team members who have maintained this commitment at the highest level throughout 2024, despite necessary adjustments we've had to make in our operations.
John Deere: None of this happens without a high performing team that shows up to deliver for our customers every single day.
John Deere: In the medium and long term, our ability to deliver value for our customers is rooted in GEAR's unique position to help them do more with less.
John Deere: by developing precision solutions that leverage our extensive product portfolio, our vertically integrated tech stack, and unparalleled service and support.
John Deere: Looking ahead, we are optimistic about the opportunities before us. Our machines are delivering ever greater cost savings and promoting sustainable operations for our customers.
John Deere: We see significant potential to leverage our existing technologies across various production systems.
John Deere: enabling us to scale innovation and enhance value delivery across our customer base.
John Deere: Ultimately, this results in a continually expanding offering of solutions that drive improved outcomes for our customers, dealers, and Deere alike.
John Deere: Thank you, John. This concludes our formal comments. We'll now shift to discussions on a few topics specific to the quarter.
Speaker Change: Starting off with Deere's performance in the third quarter, net sales declined approximately 20% year over year.
Speaker Change: But we still saw our operating margin come in at over 18%.
Speaker Change: Clearly, a challenging macro environment, but we've managed to hold margins.
Josh Beal: Josh Beal, can you kick us off with what happened this quarter? Absolutely. Thanks, Josh. As you mentioned, our strong margin performance is encouraging given the difficult market backdrop, particularly as we pull the inventory management levers that John noted.
Speaker Change: In both ag segments, we saw declines in net sales as end-user demand continued to soften.
Speaker Change: However, by keeping inventories in check, we've been able to maintain solid price realization.
Speaker Change: In addition, our strategic partnerships with our supply base are helping drive down material and freight costs, which are offsetting overhead efficiencies as we bring down production rates at our factories.
Speaker Change: In construction, we saw a downshift in demand and an uptick in used inventories as rental refleeting cooled and home starts slowed amid interest rate uncertainty, all while a competitive market environment drove increased incentive spending.
Speaker Change: This put pressure on both volumes and price in the quarter, and as a result, we adjusted our North American construction equipment production schedule for the rest of the year to lower our ending field inventories and better position us for 2025.
Speaker Change: With roughly two months of order visibility in this segment, we are confident in our ability to execute our plan.
Josh: Great recap, Josh. And on your note about the challenging quarter and decline in demand.
Speaker Change: Farm fundamentals are clearly top of mind right now with corn, soy, and wheat prices all down more than 15% year over year.
Speaker Change: which brings down farm margins as well.
Speaker Change: Can you walk us through what we're seeing and what this means for both farmers and equipment demand? Sure. It's definitely a tough, different and tougher environment today than it was a year ago. Take North America as an example, you know, on the one hand, farmers are experiencing one of their best crops in years, thanks to excellent weather conditions.
Speaker Change: But then on the other hand, the high levels of production resulting from these strong expected yields are causing crop prices to decline, as you mentioned.
Speaker Change: Although input costs are projected to be down this year, it's not enough to offset the lower commodity prices.
Speaker Change: Projected year-over-year declines in farm net incomes, which ultimately puts pressure on equipment demand.
Speaker Change: Brazil is experiencing a similar situation in North America, with ag commodity prices softening due to replenished global supplies, another year of near-record yields, and expansion of soybean acreage.
Speaker Change: Muted profitability for Brazilian customers is magnified by persistently high interest rates in the region, leading to further pullbacks in equipment sales.
Speaker Change: In Europe, farm investments continue to soften as weather uncertainty pressures crop yield estimates.
Speaker Change: And while lignin conditions remain tight, input costs have remained elevated in the region, leading to depressed margins and weaker farmer sentiment.
Speaker Change: However, steady prices and reduced input costs in the dairy and livestock segment are providing some moderating tailwinds for what is otherwise a challenging equipment demand environment in the region.
Jepsen: This is Jepsen. One important note regarding fleet fundamentals is that in North America, we continue to see an elevated fleet age, which enables replacement purchases.
Jepsen: Additionally, strong balance sheets are providing support in a downturn driven by farmland values that are up nearly 5% year-over-year. So while it's definitely a challenging market for customers, there are some supportive factors to account for.
Jepsen: Yeah, this is John . I'd like to share an additional thought. Last week, I was in Brazil speaking with some of our customers in the region about the near and long-term prospects for agriculture in the country.
Speaker Change: The near term, while the market has experienced a decline, it appears to be more stable now than it was just a few months ago, which is encouraging for 2025. Looking ahead, there is a strong sense of optimism regarding the region's prospects.
Speaker Change: with significant opportunities still on the horizon. One customer mentioned that his business has structurally improved over the years.
Speaker Change: He is eager to continue investing in solutions and technologies that enhance productivity and profitability.
DEER: DEER is committed to supporting this need through ongoing investments in the region as we continue to introduce new product and technologies specifically designed in Brazil for Brazil.
Speaker Change: Perfect. Thank you all for that great color.
Speaker Change: Now, with that context on Ag Fundamentals, I'd like to move on to our early order programs in North America to better understand how this is translating into equipment sales for model year 25. Luke, our EOPs typically account for roughly 90% of our production for seasonal products each year.
Luke: Can you walk us through what's transpired so far as we begin to get some insights into next year?
Luke: Absolutely, Josh. It's probably best to start with what's changed in our process year over year.
Luke: Historically, our early order programs would leverage multiple phases to help shape demand and fill our production schedule.
Luke: Under this approach, generally speaking, the earlier an order is placed in the program, the greater the discount for the customer.
Luke: During the last few years of constrained supply, this all changed and we leveraged more of an allocation approach in attempt to meet our dealer and customer needs in a time of high demand.
Luke: I've given the return to more moderated demand.
Luke: We have returned to our traditional approach of multiple phases with tiered discounts for products like planters, air seeders, sprayers, and compacts.
Luke: Planners and sprayers opened earlier this summer and are currently in their second or third phase, while combines just opened last week, with list price increases across all EOPs currently in the 2-3% range.
Luke: Tractors, as a reminder, are on a rolling order book with roughly four months of visibility.
Luke: providing confidence in our production plans as we close out the fiscal year.
Luke: Now, as we shift and talk about progress on our early order programs.
Luke: Coming off last year's near peak demand levels, the model year 25 sprayer EOP is currently down double digits.
Luke: That said, orders are tracking slightly above pre-2022 EOP volumes.
Luke: Planner sales are also down double digits and down relatively more than sprayers on a year-over-year basis.
Luke: It's worth noting that, historically, we have seen greater variability with implement sales throughout the ag cycle when compared to self-propelled product lines.
Luke: And given North American planters were another product well above mid cycle volumes in 2024, it is not unexpected to see a larger reduction with planters relative to sprayers this year.
Luke: Additionally, history would tell us that in times of uncertainty, we typically see more activity at the end of the EOP phases compared to the beginning as customers time their purchases to better align delivery with their seasonal needs.
Luke: A current high interest rate environment further extends this trend as both customers and dealers look to minimize carrying costs and be as efficient as possible with their assets.
Luke: While planner and sprayer EOP orders are down for model year 25, tech adoption continues to accelerate as customers adopt precision solutions to help increase profitability amidst a tougher macro environment.
Luke: Across our more established solutions we have seen average adoption rates well above 80% with exact supply in particular up nearly 10 points.
Speaker Change: Jepsen, Stanley Elliott, John May, John May, John May,
Speaker Change: For our newest and most advanced offerings like Exact Shot and See & Spray, we are seeing healthy adoption rates during the first year.
Speaker Change: And in particular, our Sea & Spray technology has achieved high single-digit take rates in its first full year of commercial availability.
Speaker Change: At a pace commensurate with historical precedence.
Speaker Change: One thing to highlight, beyond just the take rates for our latest solutions, is the feedback we're receiving from both customers and dealers on the efficacy of the technology.
Speaker Change: We continually hear that seeing price savings are meeting or exceeding expectations and that the ROI pencils out.
Speaker Change: That said, seed and spray does require significant shifts in the way our customers manage their crop care programs. Everything from what chemicals they buy, to how much they buy, to how often they are tendering their equipment in the field must change, which is a significant investment on the part of the customer.
Speaker Change: We understand this, which is why we are more committed than ever to dealer engagement and customer success, ensuring we provide the solutions, support, and most importantly, the outcomes that our customers need to succeed.
Luke: Thanks for the additional detail, Josh. And Luke, if I could come back to you once more. We've covered ag fundamentals, which in turn has resulted in early indications on our planner and sprayer EOP sales.
Luke: How does this relate to inventory levels? Can you give us an update on how we're progressing in our inventory management plan? Yeah, you bet. And just as a reminder, our decision to underproduce is rooted in our learnings from the last cycle.
Speaker Change: Given that, we began taking action last year, and again this year, to drive inventories lower.
Speaker Change: And while this has caused some short-term pain, it is the right plan to manage the cycle and better sets us up for whichever way the market moves next year.
Speaker Change: And so with that, I would start by highlighting our situation in Brazil.
Speaker Change: This market has remained challenged, as you noted earlier.
Speaker Change: However, we significantly underproduced the market, and despite the industry demand declining more than anticipated, we've still seen inventory decline so far this year and fully anticipate that this trend will accelerate throughout the remainder of the year.
Speaker Change: Relative to the North American large segment, we are beginning to see the impacts of our proactive inventory management decisions with absolute units of new inventory declining double digits over the past quarter, outpacing the industry.
Speaker Change: We expect further reductions to occur during the fourth quarter, which is in line with historical trends.
Speaker Change: While we expect our inventory to sales ratios, which remain below industry levels, to end the year at roughly the same level as last year, this reflects a material decrease in the absolute number of years.
Speaker Change: In fact, to put this into perspective, on an absolute basis, we are forecasting to end the year with less than one row crop tractor per dealer load.
Speaker Change: If I might jump in and quickly add some color to Luke's comment on rest of the year reductions in North America, the underproduction of large tractors we highlighted last quarter will be a significant driver of the implied margin decline in our fourth quarter.
Speaker Change: For example, our guide contemplates planned shutdowns of our 8-series tractor production line in Waterloo, Iowa for about 50% of the total production days in the quarter, which will have a material impact on our decremental margins.
Speaker Change: It's important to note here that these are shutdown days rather than line rate shifts, as we work to implement our planned underproduction for fiscal 2024 as efficiently as possible while remaining agile enough to respond to any future demand changes next year.
Speaker Change: That's a great point to highlight, Josh. In fact, we're taking that approach at other factories around the world. For example, our six series tractors in Mannheim, Germany, are also planning a similar shutdown for roughly a third of their fourth quarter production days.
Speaker Change: which will have an impact on small ag margins as well.
Speaker Change: But to shift back to inventory levels, Luke, can you walk us through the use side? Certainly.
Luke: On the used inventory side, we've seen total units increase across all product lines year-over-year.
Luke: While combines did peak near 10-year averages last quarter, we have since seen volumes retreat as dealers work through normal intra-season swings.
Luke: As we look to finish out the year and into 2025, one of our primary focused areas is huge equipment.
Luke: For that end, last week we hosted our dealer CEOs and key leaders at various locations across North America.
Luke: Our message to our dealers is clear.
Luke: Production and used inventories was our number one priority right now, and we were further committed to helping them drive down used inventories.
Luke: Furthermore, we rolled out additional programs and tactics to support them.
Luke: The best example would be our increase in pool funds, which as a reminder, are dollars dealers earn from new sales that can be applied as incentives to used equipment.
Luke: We expect this and other additional tactics to help them sell through late-model, high-horsepower tractors and combines.
Luke: to best position us for next year.
Luke: Overall, as I reflect on the meetings with our dealers.
Luke: I came away with a strong sense of optimism on three important points.
Luke: Number one, incredibly strong alignment and focus between Deere and our dealers on managing used inventory differently from previous cycles.
Luke: Two, our strategy of high-quality iron combined with world-class technology supported by the best dealers in the industry is a winning strategy that is delivering incremental value to our customers.
Luke: And I heard a number of examples of this last week.
Luke: and three.
Luke: Despite headwinds in the industry, there is still strong support for deer and dealers to continue to transform in areas that add significant customer value.
Luke: Examples of this include even higher levels of tech utilization, along with greater investment in the tech stack and lifecycle solutions.
Luke: Yeah, this is John. I'd like to add one additional point to share. I recently spoke with one of our largest dealers in the U.S.
Speaker Change: who said he does not expect this downturn to be as prolonged as the last cycle.
Speaker Change: He noted that the proactive steps we are taking to manage inventory are reinforcing that sentiment. As Luke mentioned, Deere and our dealer network are working together to navigate this cycle differently.
Luke: We are taking action more quickly and making more aggressive decisions to ensure that inventory levels remain balanced as markets soften.
Luke: And our dealers are working closely with each customer to better rationalize equipment replacement schedules this time.
Luke: We fundamentally believe that these actions will lead to more favorable cycle dynamics than in previous downturns.
Luke: Thanks Luke and John. That's a great summary on both the current state of the industry as well as the proactive measures we're taking to manage it.
Josh Beal: Turning now to construction and forestry, we previously mentioned some increased volatility this quarter. Josh Beal, can you further break down what's happened and what that means for the final quarter of the year? Yeah, definitely, Josh. This is really a story of two businesses, earth moving and road building.
Josh Beal: While our road building business continues to experience more stable volumes, we've seen some hesitation in earthmoving equipment purchases.
Speaker Change: Project demand for our Earthmoving customers has remained relatively unchanged, however those same customers are seeing increased competition on their job bids, as well as higher financing costs and overall higher equipment carrying costs following recent years of high inflation.
Speaker Change: That means that while still profitable, many customers are experiencing lower profitability compared to just a year ago.
Speaker Change: And as a result, we are seeing some slowdown in order velocity, which is reflected in our guidance update.
Speaker Change: Additionally, rental capex spending has diminished with investments in construction equipment at multi-year lows following years of robust refleeting.
Speaker Change: Recall that Deere, along with the industry, has been rebuilding our field inventory levels over the past several years.
Speaker Change: With the recent softening that we've seen, we are taking steps, similar to those in our ag business, to underproduce retail demand in both our construction and compact construction equipment segments through the remainder of the year to best position ourselves for 2025.
Speaker Change: From a pricing perspective, we continue to see robust competition in the market.
Speaker Change: This, coupled with rising inventory levels, has required the deployment of additional incentives into the market, resulting in net pricing declines this past quarter.
Josh Jepsen: Great. Thanks, Josh. And now for our final question. This quarter included a few special items. Josh Jepsen, can you walk us through those as well as the overall state of the business before we open up the line to investors?
Josh Jepsen: Yeah, absolutely, Josh. I'd like to start by echoing John's appreciation to our entire John Deere team for their adaptability and resilience to the changes in demand and their continued commitment to delivering for our customers.
Speaker Change: This quarter, we made difficult decisions to structure the business to align with current market conditions.
Speaker Change: This involved a mid-single-digit reduction in our global salaried workforce.
Speaker Change: Resulting in one-time expense of approximately $150 million for the business.
Speaker Change: 125 million of which was booked in the third quarter while delivering roughly 230 million in run rate savings. The net impact for 2024 is expected to be an expense of about $25 million.
Speaker Change: Given the velocity of the market pullback we've seen this year, this has also created volatility in our working capital.
Speaker Change: As a result, we've seen a downward revision to our Operating Cash Flow Guide.
Speaker Change: However, it's important to note that there are cost management actions, whether that be our supply management teams that are driving down production costs, or focus on reducing inbound and outbound freight, or engineering teams working diligently to design out costs from new equipment and retrofit solutions, are yielding savings in 2024 on material and freight.
Speaker Change: which gives us confidence in our ability to deliver on our net income guide of approximately $7 billion this fiscal year.
Speaker Change: And these cost management actions are an example of the many things our team is doing every day to drive a structurally better business that has capital available to invest in value-enhancing products, solutions, and support to help make our customers more productive, profitable, and sustainable each and every day.
Speaker Change: And as we do that, all stakeholders of John Deere will benefit.
Speaker Change: Thanks Josh. Now let's open it up to questions from our investors.
Speaker Change: Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure.
Speaker Change: In consideration of others, and to allow more of you to participate in the call, please limit yourself to one question.
Speaker Change: If you have additional questions, we ask that you rejoin the queue.
Speaker Change: To ask a question, please press star 1. To withdraw your question, you may press star 2. Our first question comes from Jamie Cook from Truist Securities. Please go ahead.
Jamie Cook: Hi, good morning. Um, I guess just my first question or my one question. I'll get back in queue the I was surprised you guys were able to raise your price
Speaker Change: Assumptions for 2024 in Precision and Production Ag to 2% from 1.5% just given the fundamentals. So can you talk to
Speaker Change: What the factors were behind that, any color on pricing per region, and does that include discounting? And just receptivity to the price increases you announced for 2025. Thanks.
Speaker Change: Hey, thanks, Jamie. Good. Thanks for the question. Yeah, I mean, as you think about pricing for the year, you know, and we've talked, you know, we, we, we tend to think about normalized pricing is in that range of 2 to 3%.
Speaker Change: And we've really seen that all year in both our North American market and in our European markets. As you know, as we've talked before,
Speaker Change: You know, in Brazil, you know, we had been talking about negative price, you know, this year in 2024, with the high inventories that we had to enter the year, you know, notably in the quarter.
Speaker Change: We had actually a flat-ish price realization, actually slightly positive in Brazil. So we've seen that turn a little bit. It harkens back to some of the stabilization that John mentioned in the market.
Speaker Change: Additionally, in the back half of the year, we had planned some incentives as we were facing used inventory levels. We didn't have to deploy as many of those in the quarter, and we're seeing favorable price there as well. As you talk about early order programs for 2025 and the price there, I think Luke gave some color on how that's building over the course of the year, I think at a very normal rate to what we've seen historically in time to build, so that pricing seems appropriate. Thank you. Thank you. Thank you.
Josh Jepsen: Hey Jamie, it's Josh Jepsen. One thing I would add a little bit to your question is, are incentives included in that number? And they are, you know, so when we talk about incremental pool funds that Luke mentioned to help move used in the full year, that's in. So that, you know, that raise in the net price from a point and a half to two for production precision ag.
Speaker Change: embeds what we're doing from an incentive perspective. So I think, you know, continuing to be, you know, disciplined in how we manage that, but also mindful of how we best position inventory, both new and used as we as we roll into 225. But thank you.
Speaker Change: Thank you.
Speaker Change: Next we'll go to the line of Angel Castillo from Morgan Stanley. Please go ahead.
Angel Castillo: Hi, thanks for taking my question and congrats on this hot quarter.
Angel Castillo: Just wanted to dig in a little bit more into the construction segment. You talked about implementing an underproduction strategy similar to what you've been doing in ag.
Speaker Change: Can you talk about the magnitude of that? How much you're planning to underproduce? And you noted, I think, rising inventories. So as we think about, you know, how long this can kind of...
Speaker Change: Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: Continuing into fiscal 1Q or 2Q and just kind of what the magnitude is that you think you need to work through in terms of underproduction and just how that maybe relates to your ability to get price in the next few quarters.
Speaker Change: Thanks. Yeah, thanks for the question, Angel. Yeah, you know, maybe starting on the field inventories.
Speaker Change: You know, we, as you recall, you know, we have been building inventories over the past year or so. But this year, you know, construction equipment pretty much producing in line with demand, we feel like we got field inventories at a level, you know, that's very normal, you know, within our inventory band. As we mentioned, you know, we did see some softening over the past quarter, you know, we had a couple months of
Speaker Change: Unknown Executive, Tim Thein, Joshua Rohleder, Aaron Wetzel, Tim Thein, Joshua Rohleder,
Speaker Change: for the industry and a little bit of softening in order of velocity and given that.
Speaker Change: You know, we made the decision to proactively bring down inventory levels to the lower end of those bands, again, sitting at pretty normal levels now on construction equipment. And so what that'll amount to is about mid single under mid single digit under production in construction equipment.
Speaker Change: for this year. On compact construction, we were still building some inventory this year. We'll underproduce a little bit in the fourth quarter there, but net for compact is still pretty much production in line. In fact, building inventories this year net on compact construction.
Speaker Change: Yeah, Angel, I would say, I think as you contemplate inventory levels and where we're planning, you know, as we look to execute this under production,
Speaker Change: and see our retail plans come through in 4Q. We think that positions us really well for the year to come, and we would not expect to see dramatic changes there, but the goal would be to build it in line with retail as we step forward.
Angel Castillo: Thank you.
Speaker Change: Next we'll go to the line of Tammy Zakaria from J.P. Morgan. Please go ahead.
Tammy Zakaria: Hey, good morning. Thank you so much.
Tammy Zakaria: So I wanted to build on the pricing conversation. I think you mentioned two to three percent pricing in the EOP order books for seasonal ag products. Could you share any comments on what you're seeing on the construction side? Are there any orders in the books for next fiscal? And if so,
Speaker Change: Can you comment on what kind of pricing you're seeing for that segment?
Speaker Change: Hey, we wouldn't have a guide yet for 25 on pricing. I think, you know, definitely in the construction market, we talked about increased levels of price competition, you know, we're seeing that we did, we did lower our full year guide, you know, down to a half a point, or for 2024, you know, given some of the increased, increased pressure, and then that would imply, you know, for Q4, you know, flattish pricing for the segment. And so, you know, we're definitely balancing, you know, price, price with share as we navigate, you know, the competition in the market. But again, for the full year, we're expecting to see about a half point of price.
Speaker Change: Thank you. Next, we'll go to the line of Jerry Revich from Goldman Sachs. Please go ahead.
Jerry Revich: Yes, hi, good morning, everyone.
Speaker Change: Hey, Jerry.
Speaker Change: John, in the prepared remarks, and Luke, you mentioned this as well, the focus on keeping this downturn shorter.
Jerry Revich: that in prior cycles. I'm wondering as you folks look at the moving pieces for 25 that you shared with us in this call. So it sounds like we've got headwinds from the
Speaker Change: Weaker demand that you laid out in the early order program.
Speaker Change: But we've got tailwinds from underproduction of $2 billion of dealer inventory D stock this year.
Speaker Change: We have list price increases and it sounds like there's some cost takeout opportunities, so I'm wondering if there are any other...
Speaker Change: Moving pieces that we should be keeping in mind as we think about 25 as, you know, consensus estimates have earnings is essentially flat 25 versus 24.
Speaker Change: Yeah, I'll maybe start, Jerry, and then John, feel free to jump in. I mean, you know, certainly, you know, as we think about the dynamics that we're seeing on early order programs, I think, you know, one thing to note is that, you know, the sprayer and planter EOPs, when they were open, you know, last summer, you know, we still had corn, you know, they opened at, corn was about $6 a bushel, and then they closed at, at $10.
Speaker Change: at over $5 a bushel. And so, you know, Luke mentioned this in his comments that, you know, those are two product lines that were basically at peak volumes, you know, again, in.
Speaker Change: in 2024. And so
Speaker Change: Some early indication there, as we're seeing that cycling, as we've talked about down double digits on both of those, it's not necessarily a read-through to all product lines, just given the dynamics of those particular individual product lines. But given that, and we've been talking about this all year, is the setup for controlling what we can control, and that starts with inventory management. And so as we've talked in large ag, this is a global statement, but globally, high single digit underproduction for the segment, across all regions, really setting us up to be well-positioned at the low end of our inventory band as we enter in the year. In addition to that, there's been...
Speaker Change: By making those production adjustments, there have been some cost headwinds that have come into the business.
Speaker Change: This year, as we've ramped down production, we've seen some overhead inefficiencies as we've made those adjustments. So that kind of nets out to a positive tailwind next year, as well as some of the cost actions that we've taken. Josh Jepsen mentioned the run rate savings on the workforce adjustment, that will be tailwind into
Speaker Change: We don't know what the year looks like in 2025, we're getting some early reads, but we're doing what we can both from an inventory and cost standpoint to set us up.
Speaker Change: Yeah, Jerry, thanks for the question.
Speaker Change: One of the things we did right away when we started to see some demand soften, you know, we went back and looked at prior periods of
Jerry Revich: of where we saw the industry start to cycle downward or soften.
Jerry Revich: And we saw a lot of mistakes that we made and frankly the industry made as well.
Jerry Revich: and we decided this time we were going to control what we can control and we were going to act with speed, action, and tight collaboration with our dealer channel. And that's all about taking out inventories, underproducing retail demand. It's all about taking out excess costs and restructuring the business to function in a much leaner environment. In the past, that might have taken us two to two and a half years to react.
Jerry Revich: We reacted in the first quarter, and I'm really proud of the team for doing that, and while the changes are difficult, and sometimes it's hard on the employees, it's the right thing to do. The other thing, Jerry, I'd just like to mention is the team also knows it's important while you're doing this to remain focused.
Jerry Revich: on what matters and that's discipline, execution, you know, continue to execute in the factory, obviously proactive inventory management. We've got to build high-quality product.
Jerry Revich: and make sure that we're meeting our customers.
Jerry Revich: Thank you for that question.
Jerry Revich: Next we'll go to the line of David Rosso from Evercore ISI. Please go ahead.
David Rosso: Hi, thank you for the time. Yeah, the spirit of the question is related to, you know, how to look at the fourth quarter. You know, if people are trying to figure out what's that kind of run rate annualized, you know, adjusting for seasonality. I guess I have a question, but just clarification, the first on the fourth quarter.
Speaker Change: The Net Income Guide for the Year implies EPS for the fourth quarter around $4.20.
Speaker Change: But if you run it from the business segment level, it's more implying only $3.
Speaker Change: So I don't know if it's something one-off in the fourth quarter, like sometimes it's a non-service pension income, right, when that's a big income flow from better asset returns.
Speaker Change: It's not in the segments, it's another. But we have the tax rate guide, we have all the segment guide, we have FinCo. So just given the importance of how people are looking at the fourth quarter.
Speaker Change: What's that $1.20 EPS gap? And the real question is, all right, we have the fourth quarter, we have a lot of shutdowns.
Speaker Change: Can we still think about the first quarter of 25, the second quarter of 25, in a normal seasonal way for large ag? Call it global ag, right? Global ag is usually down 20% first quarter versus the fourth. And then it goes up over time, it's like 50%.
Speaker Change: Is the fourth quarter in that similar pattern, the setup, that we should think of it as down 20 in the first quarter, and then goes up from there? Or is the fourth quarter so low it doesn't have to go down sequentially?
Speaker Change: So that's that's the spirit of the questions that fourth quarter number just a clarification and how to think about normal Seasonality have we altered that with how deep the cuts are in the fourth quarter. Thank you
Jepsen: Hey David, thanks for the question. This is Jepsen. I think maybe to start, we don't think the fourth quarter is indicative of how you would run into 2025.
Speaker Change: And the biggest reason are the underproduction and the shutdowns that we've talked about. So Waterloo A-Series tractors, half of the production days in fourth quarter were not producing.
Speaker Change: You know, Harvester Combined is something like two-thirds of the production days we're not operating. Similarly, Monheim, you know, Josh Rohleder mentioned a third of days we're underproducing pretty significantly and construction equipment in the fourth quarter as well. So, you know, that is...
Speaker Change: Even though, you know, typically we have some shut down and, you know, more on the seasonal products like combines, we've pulled that back much more significantly in the fourth quarter. And you're right, margins, EPS, will suffer as a result of that.
Speaker Change: But we don't think that is a good launching point from an EPS perspective or how we run from a margin perspective into 1Q25. While we don't have a 1Q25 guide, I would say, you know, because of that underproduction, probably the typical seasonal patterns in sales.
Speaker Change: should not follow what maybe they would have historically.
Speaker Change: And the gap in the fourth quarter? Oh, come on, the gap in the fourth quarter. What's the, what's, I'm just, clarification please.
Speaker Change: I think what you see there, it's really the operational aspects of what we see flowing through from a margin perspective. So I think that's the biggest driver. I don't see anything significant, you know, from kind of below the line that would drive a significant delta there.
Speaker Change: We can talk all the time, but it is a pretty big gap. Thank you.
Speaker Change: Next we'll go to the line of Kristen Owen from Oppenheimer. Please go ahead.
Kristen Owen: Hi, thank you for taking the question. Also, a little bit of clarification on some of the prepared comments and some of the Q&A afterwards. I just want to make sure I understand. Inventory-to-sales ratio in the third quarter looks like that was flat from 2Q. Just help us understand the difference in end-user demand versus those production declines, and then how we should still think about building to a target of 10% inventory-to-sales. Is that still the outlook? Just a little bit more granularity on some of those comments that you made on the inventory-to-sales ratio. Thank you.
Kristen Owen: Hey, Kristen. Thanks for the question. Yeah, as you talk about, you know, greater than 100 horsepower tractors, you're right, flattish.
Kristen Owen: you know, Laddish from IS Ratio, you know, quarter over quarter. I think it's important, you know, that's such a broad range, the 100 horsepower, it's better to look at.
Kristen Owen: If you look at 220 plus, we're now down about 20%, down to about 20% IS ratio as we exit Q3, which is a pretty normal spot to be. And we are, if you talk about that in absolute units, it's about a 10% reduction in absolute units in the field for over the quarter. So we are seeing the progress.
Kristen Owen: You know that that we anticipated and you know as we mentioned last year you know we talked about about we ended the year at about 15 percent inventory to sales on 220 horsepower plus.
Kristen Owen: We expect to be at that level or better, so maybe a little bit higher than we were talking 10% last quarter, but still on that range of at or lower than the 15% IS ratio that we executed 220 plus last year.
Kristen Owen: Yeah, Kristen, this is Jepsen. I think one thing, too, if you look at 100-plus...
Speaker Change: We're around 30-31% inventory sales ratio.
Speaker Change: is closer to 70. So we're running particularly lean in that, you know, we feel feel good about that and how we're executing in that regard. So we're going to we're going to keep kind of, as John mentioned, you know, controlling what we can there and managing inventories and working really closely with the dealers to execute on those new end use plans.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Next we'll go to Line of Joel Jackson from BMO Capital Markets. Please go ahead.
Joel Jackson: Good morning. Thanks for taking my question. Maybe drilling down more on some of your see and spray early feedback.
Joel Jackson: Commentary. Maybe you could talk about, you talked about how you're, you know, the efficacy, the ROI is all hitting what you saw in some of the early days here. Can you elaborate on that? You know, what are the components that you're really seeing that are working like you thought? What are the lessons you've learned that maybe you've got to work on?
Speaker Change: and do a bit better to get some real-world experience now with some volume.
Speaker Change: Good to hear from you.
Speaker Change: You'll recall, you know, Joel, this year in 2024, there's a limited release of Seed and Spray, you know, both on our ultimate solution, the factory installed ultimate solution and on the premium retrofit.
Speaker Change: And I think, you know, we've been very, very encouraged.
Speaker Change: by the results in the field for those operators that have gotten in and used the technology. You know, Josh Jepsen mentioned, you know, they're seeing savings on their herbicide, you know, at or better than their expectations. You know, for, I think, Seed&Store Premium, as an example, you know, greater than 50% savings for the folks that had it in the field. Yeah, I think what you're seeing is, you know, it is a new technology. You know, Josh Jepsen mentioned this as well, that changes a lot about how our growers do their operations, everything from how they buy their chemical, you know, how they tender their chemical in the field. You know, the efficacy also drives a change of operation. I think you're seeing customers figuring that out in the first year of use. You know, some of our top end customers putting a lot of acres on Seed&Spray as they're figuring out how to use it.
Speaker Change: I think you've had some others in that segment of that limited release this year that are kind of in a trial phase as they figure out how to best implement that into their operations. But I think, you know, the net takeaway is that.
Speaker Change: Everyone's feeling good about the technology and the efficacy, and now it's about implementing and adopting it into their business. I don't know, Luca, if there's anything you want to add.
Luca: I think that's well said, Josh, and, you know, as you look at the performance we've seen across 2024, we've been incredibly encouraged by the number of acres that we're seeing C&Spray utilize. We're also encouraged by the feedback we're hearing from both customers and dealers.
Luca: And Josh, you said it earlier, I think one of the biggest opportunities we continue to have is...
Speaker Change: working with the growers as they think about it from an overall production system, in terms of how do they do their tendering and how do they do the setup. And those are things that we continue to collaborate with our dealers on to help those customers be able to work through those opportunities.
Speaker Change: Yeah, this is Jepsen. Maybe one thing to add just for perspective, you know, when we rolled out Xacta Merge, so, you know,
Jepsen: Really revolutionizing planting, doubling the speed of planting, more precise in terms of seed placement.
Jepsen: First year for that was 2015, and we did about 10% take rate. You know, so to be in not a terribly dissimilar spot with sea and spray.
Jepsen: which is arguably probably a bigger step function change and maybe a bit more disruptive to how you have to plan and execute. We think it's a good start. Obviously, tons of opportunity, and we're going to keep working on this, and delivering that outcome for the customer becomes really important.
Jepsen: Thank you. Next we'll go to Meg Dobre from Bayard. Please go ahead.
Meg Dobre: Thanks. Good morning. Just a clarification on inventories for me as well. If I look at your slide 15 where you discuss Canada and U.S. inventories, the way I'm interpreting that table
Meg Dobre: To me that looks like your unit inventories in both two-wheel drive tractors and combines are flat.
Meg Dobre: versus a year ago.
Speaker Change: Do correct me if I'm wrong here.
Speaker Change: But if that's the case, and I understand it correctly, then I'm sort of curious as to how your production cuts actually flow through here. I mean, is there a natural lag that we should be thinking about? And as we think about what you're going to report next quarter or Q1 of 25,
Speaker Change: How should we think about these metrics given your production cuts? Thank you.
Speaker Change: Yeah, no, great question. Good to hear from you. Yeah, I mean, I think as you, as we talk about North America, specifically in the inventory there, you know, recall that
Speaker Change: You know, primarily for North America, it's been a focus on building in line with retail. You know, the one, the one segment of the industry where we're underproducing is in row crop tractors. And you're seeing that pull down in
Speaker Change: in 220 horsepower plus. Again, a lot of that is going to happen in the fourth quarter. You know, we've mentioned, you know, Waterloo being shut down half the days in the quarter. So it's a significant underproduction quarter on top of that, you know, Q4 for tractor retail, you know, tends to be a very strong retail quarter as well.
Speaker Change: So that's going to be a big quarter for drawdown on the row crop side. But you're going to see underproduction in combines as well. That's part of normal seasonality. You're probably having some more underproduction this year. Again, Josh Jepsen mentioned a few thirds of the days at harvester will be shut down in the quarter. So we'll have some significant drawdown there. So we're very much in line with kind of normal seasonality and a lot of those product lines. But again, you'll see that typical drawdown and probably a greater than normal drawdown in Q4.
Speaker Change #100: Yeah, Josh, you know, I think another important point here is, in my career, I've never witnessed the level of alignment with our dealer network.
Josh: that we have today.
Josh: focused on proactively managing this cycle while investing in our future together.
Speaker Change #101: Our dealers are this time playing a critical role in providing differentiated support that is critical to uptime, reliability, and overall customer support.
Speaker Change #101: So we have full alignment with our dealers. They're working on inventories and they're continuing to serve the customers in industry leading ways. So we're really pleased with where we are.
Speaker Change #101: Thanks for the question, Meg.
Speaker Change #102: I think we've got time for one more.
Speaker Change #103: And for our final question, we'll go to the line of Chad Dillard from Bernstein. Please go ahead.
Chad Dillard: Good morning, everyone. I just had a question for you guys on decrementals in the fourth quarter. So I was hoping you could frame how big the underabsorption impact would be from underproduction across the three seconds of yours.
Speaker Change #105: So, for example, for production precision, it seems like, you know, decrementals are in the 50% range, you know, versus a more typical 35%. So I think you just kind of walk through those moving pieces. Thanks.
Speaker Change #105: Hey Chad, this is Jepsen. I think, yeah, I mean Decker Metal is a bit higher in 4Q compared to what we've done through the year. The underproduction is the biggest driver far and away.
Speaker Change #106: I don't have a good impact on just the fourth quarter, but if you look at the full year, the underproduction is probably a point and a half to two points of margin drag, and that's more than what we would have contemplated earlier in the year.
Speaker Change #107: But in that range for the full year, and fair to say, you know, the majority of that impacts 4Q, and a bit to David's question, really weighs on what we see from, you know, an absolute margin perspective, but also decrementals in the quarter. Thank you.
Speaker Change #108: Thanks all the time we have for today. We appreciate everybody calling in and thanks for joining us.
Speaker Change #109: Thank you all for participating in the Deere and Company Third Quarter Earnings Conference Call. That concludes the call for today. You may disconnect at this time and have a great rest of your day.
Speaker Change #109: [inaudible]