Q4 2024 Deere & Co Earnings Call

Speaker Change: Good morning and welcome to the Deere and Company fourth 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. And thank you, sir, you may begin.

Josh Beal: Hello, welcome, and thank you for joining us on today's call. Joining me on the call today are John May, Chairman and Chief Executive Officer, Josh Jepsen, Chief Financial Officer, Cory Reed, President, Worldwide Agriculture and Turf Division, Production and Precision Ag, Americas and Australia, and Joshua Rohleder, Manager, Investor Communications.

Josh Beal: Today we'll take a closer look at Deere's fourth quarter earnings, then spend time talking about our markets and our current outlook for fiscal 2025. 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 johndeere.com forward slash earnings.

Josh Beal: 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.

Josh Beal: Participants in the call, including the Q&A session, agree that their likeness and remarks on 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 that are subject to uncertainties, risks, changes in circumstances, and other factors that are difficult to predict.

Josh Beal: 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.

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. Gap.

Josh Beal: 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 Joshua Rohleder.

Joshua Rohleder: Good morning, and an early happy holidays to everyone joining us today. John Deere finished the year with a better than expected fourth quarter that included 13.1% margins for equipment operations.

Joshua Rohleder: Full year operating margins came in at 18.2%, reflecting solid, proactive execution throughout our organization amidst a challenging and rapidly changing market environment.

Joshua Rohleder: Our ability to generate just over $6.9 billion in operating cash flow from equipment operations at shipment volumes below mid-cycle levels is indicative of the structural improvements we've made, enabling continued reinvestment in the business and significant cash return to shareholders.

Joshua Rohleder: Looking ahead to 2025, we expect continued contraction of ag markets globally to result in ag and turf equipment demand at or below trough levels.

Joshua Rohleder: Additionally, construction and forestry market demand is expected to be down as healthy end markets are offset by continued uncertainty in equipment purchases.

Slide three begins with the results for fiscal year 2024.

Joshua Rohleder: Net sales and revenues were down 16% to $51.7 billion, while net sales for equipment operations were down 19% to $44.8 billion.

Joshua Rohleder: That income attributable to Deering Company was $7.1 billion, or $25.62 per diluted share.

Next, fourth quarter results are on slide four.

Joshua Rohleder: That income attributable to Deering Company decreased to $1.2 billion, or $4.55 per diluted share.

Joshua Rohleder: Diving into our individual business segments on slide five, we'll review our fourth quarter results, starting with our production and precision ag business.

Joshua Rohleder: Price realization in the quarter was flat, in line with expectations. Currency translation was negative by about one point.

Joshua Rohleder: Operating profit was $657 million, resulting in a 15.3% operating margin for the segment. The year-over-year decrease in operating profit was primarily due to lower shipment volumes and sales mix, which was partially offset by lower production costs.

Turning to small ag and turf on slide 6.

Joshua Rohleder: Net sales were down 25%, totaling $2.306 billion in the fourth quarter, primarily due to lower shipment volumes, although this was partially offset by price realization.

Joshua Rohleder: Price realization in the quarter was positive by approximately two and a half points.

The currency was also positive by approximately half a point.

Joshua Rohleder: The decrease was primarily due to lower shipment volumes and mix along with special non-recurring items. These items were partially offset by price realization and lower warranty expenses.

Joshua Rohleder: Slide 7 details our Fiscal Year 2025 Ag and Turf Industry Outlook.

Joshua Rohleder: We expect industry sales of large ag equipment in the U.S. and Canada to decline approximately 30 percent as demand further moderates amid weak farm fundamentals, high interest rates, elevated used inventory levels, and short-term farmer liquidity concerns heading into next year's growing season.

Joshua Rohleder: For small ag and turf in the U.S. and Canada, industry demand is estimated to be down around 10 percent. The dairy and livestock segment continues another year of strong profitability as elevated protein and hay prices are further enhanced by low input feed costs.

Joshua Rohleder: This is offset by restrained demand in the turf and compact utility tractor markets as single family home sales and home improvement spending remain stagnant amid high interest rates.

Joshua Rohleder: In Europe, the industry is projected to be down between 5 and 10 percent.

Joshua Rohleder: Farm fundamentals in the region continue to deteriorate. Lingering headwinds include depressed yields from unfavorable weather, reduced regional commodity prices, and persistently elevated input costs.

Joshua Rohleder: Confluence of these issues, coupled with high interest rates, are expected to keep industry equipment demand at low levels throughout 2025.

Joshua Rohleder: Within South America, we anticipate industry sales of tractors and combines to be roughly flat, as headwinds from 2024 stabilize but persist.

Joshua Rohleder: Looking forward to 2025, while crop prices are expected to decline, input costs are also decreasing with yields improving as drought concerns abate.

Joshua Rohleder: Coupled with continued soybean acreage expansion, overall sentiment has improved, although this has yet to translate into additional equipment demand.

Joshua Rohleder: Additionally, recent appreciation of the U.S. dollar against the Brazilian Rei offers further profitability tailwinds.

Joshua Rohleder: to farmers as commodity prices are typically quoted in dollars while many input costs are denominated in REI.

Joshua Rohleder: Across the rest of South America, strong yields are offset by low commodity prices and elevated interest rates.

Joshua Rohleder: Argentina, however, is experiencing some favorable tailwinds as government actions begin to stabilize the currency amid a recovery in the ag industry.

Joshua Rohleder: Finally, industry sales in Asia are projected to be down slightly.

Joshua Rohleder: As foundational technology adoption and improving ag fundamentals in India provide moderate demand tailwinds.

Moving to our segment forecasts on slide 8.

Joshua Rohleder: We anticipate production and precision ag net sales to be down approximately 15% in fiscal year 2025. The forecast assumes roughly one point of positive price realization and half a point of negative currency translation.

Joshua Rohleder: Segment Operating Margin Forecast for the full fiscal year is between 17 and 18%, reflecting strong execution amid tough geographic and product mix headwinds.

Joshua Rohleder: Slide nine provides our forecast for the small ag and turf segment.

Joshua Rohleder: We expect fiscal year 25 net sales to be down around 10%. This includes about half a point of positive price realization, as well as half a point of positive currency translation.

Joshua Rohleder: The segment's operating margin is projected to be between 13 and 14 percent.

Joshua Rohleder: Shifting now to construction and forestry on slide 10. Mint sales for the quarter were down 29% year over year to $2.664 billion due to lower shipment volumes. Both price realization and currency translation were slightly positive in the quarter by less than half a point.

Joshua Rohleder: Operating profit decreased to $328 million, resulting in a 12.3% operating margin. Lower shipment volumes and sales mix were partially offset by lower production costs and proceeds from special non-recurring items.

Slide 11 outlines our 2025 Construction and Forestry Industry Outlook.

Joshua Rohleder: Industry sales for earth-moving equipment in the U.S. and Canada are expected to be down around 10%, while compact construction equipment in the U.S. and Canada is expected to be down 5%.

Joshua Rohleder: Fixed end markets in 2025 are expected to temper equipment demand across both construction and compact construction equipment.

Joshua Rohleder: Modest growth in single-family housing starts and U.S. government infrastructure spending will be more than offset by further slowdowns in multi-family housing developments, still softening non-residential building investments, and muted CapEx spending in oil and gas.

Joshua Rohleder: Additional headwinds from historically low levels of earth-moving rental refleeting and somewhat elevated used inventories will further pressure equipment sales as market uncertainty persists into the start of fiscal 2025.

Joshua Rohleder: Global forestry markets are expected to be flat to down 5% as challenged global markets stabilize at low demand levels in 2025.

Joshua Rohleder: Global road building markets are forecasted to be roughly fat, as a modest recovery in Europe compensates for modest slowdowns in other geographies.

Joshua Rohleder: Continuing with our CNF segment outlook on slide 12, 2025 net sales are forecasted to be down around 10 and 15 percent. Our net sales guidance for the year includes about one point of positive price realization and flat currency translation.

Joshua Rohleder: The segment's operating margin is projected to be between 11.5% and 12.5%.

Switching to our financial services operations on slide 13.

Joshua Rohleder: Worldwide Financial Services net income attributable to Deere & Company was $173 million for the fourth quarter.

Joshua Rohleder: The year-over-year decline was mainly due to a higher provision for credit losses.

Joshua Rohleder: partially offset by income earned on a higher average portfolio balance, a reduction in derivative valuation adjustments, and lower SANG expenses. Results were also negatively impacted by the increased valuation allowance on assets held for sale of Banco John Deere.

Joshua Rohleder: For fiscal year 2025, the net income forecast is $750 million.

Joshua Rohleder: Results are expected to be higher year-over-year, primarily due to a lower provision for credit losses, partially offset by less favorable financing spreads. Additionally, 2024 results were affected by the valuation allowance on assets held for sale at Montclair John Deere.

Joshua Rohleder: Slide 14 concludes with our guidance for net income, effective tax rate, and operating cash flow.

Joshua Rohleder: For fiscal year 2025, our full-year net income forecast is expected to be in the range of $5 and $5.5 billion, highlighting structural improvements over previous cycles.

Joshua Rohleder: Next, our guidance incorporates an effective tax rate between 23 and 25 percent. Lastly, cash flow from equipment operations is projected to be in the range of $4.5 to $5.5 billion.

Joshua Rohleder: It is important to emphasize that our implied guidance of around $19 in earnings per share is at subtroph levels.

Joshua Rohleder: With expected sales for fiscal 25 below 80% of mid-cycle, underscoring our commitment to operational excellence as we focus on proactive management to drive customer value at all points in the business cycle.

Joshua Rohleder: The pullback we experienced in global markets this year provided our organization with an opportunity to showcase the structural improvements we've made since announcing the Smart Industrial Operating Model in 2020.

Joshua Rohleder: Notably, our margins in 2024 exceeded 18%, reflecting nearly 700 BIPs of improvement from 2020, which was the last time we were at this point in the cycle.

Joshua Rohleder: This margin expansion has enabled us to invest record levels back into the business this year.

More important than the numbers?

Joshua Rohleder: I couldn't be prouder of the resilience demonstrated by our John Deere employee team this year. The velocity at which markets slowed tested our discipline and our agility. However, in the face of these difficulties, we emerged more focused than ever on our mission.

to help our customers do more with less.

Joshua Rohleder: Our dedicated teams across factories, engineering centers, dealerships, branches, offices, and in the field showed remarkable fortitude as we made proactive decisions based on hard-learned lessons from the past.

We maintain our focus on the customer.

Joshua Rohleder: Ensuring we not only retain but also actively seek out the best talent with the skills and experience necessary to help us solve the significant challenges facing our customers.

Joshua Rohleder: This year also brought about a range of new and exciting solutions as we furthered our progress on many of our LEAP ambitions, including Connected Machines, Engaged Acres, and Autonomous Acres.

Joshua Rohleder: Our flagship Sens-En-Acte technology, See & Spray, covered 1 million acres this year alone, reducing herbicide use by an average of nearly 60 percent.

Joshua Rohleder: This solution, and many other similar technologies we've developed, have not only positively impacted our customers' operations, but the environment as well. And we've only begun to scratch the surface.

Our employees come to work every day.

Joshua Rohleder: driven by a higher purpose that extends beyond merely solving a problem or completing a task. At the end of the day, we can confidently step back and reflect on the fact that our products are making a meaningful difference for our customers and the world.

Speaker Change: Thanks, John. I'd like to continue our discussion about the past year before we dive into 25.

Speaker Change: This past fiscal year clearly represented a very dynamic market, characterized by significant demand declines following peak levels in 2023. Nevertheless, as you noted, John, we ended the year with over $7 billion in net income.

Speaker Change: Josh Beal, can you provide a breakdown of what happened during the quarter and throughout the fiscal year?

Speaker Change: Yeah. Happy to, Josh. And it's best to start off with the quarter, which came in better than expected.

Speaker Change: We targeted field inventory reductions by pulling back production and shipping at our factories across the globe. Large ag retail sales of new equipment generally came in as expected across most geographies and product lines, especially in North America.

Speaker Change: As a result, field inventory of new equipment, particularly North American tractors and combines, ended the year at extremely low levels on both an absolute and inventory-to-sales basis.

Speaker Change: We manage this underproduction while controlling costs, delivering year-over-year improvements in production costs and SAMG and R&D.

Speaker Change: Additionally, we successfully reduced in-process inventory levels, which drove much of the cash flow outperformance relative to our third quarter guide.

Speaker Change: Starting to the full year, John previously highlighted that our performance was marked by resiliency in the face of challenging market conditions, which necessitated tough operational decisions that required significant flexibility and adaptability from everyone—our employees, dealers, and suppliers.

Speaker Change: As a result, we successfully managed operations to lower levels of demand this year.

Speaker Change: Production costs for the full year came in favorable, primarily due to year-over-year improvements in material and freight costs across all business segments.

Speaker Change: Despite muted sales, we remained disciplined and committed to our investments in the business, maintaining record levels of R&D spending.

Speaker Change: We recognize that many of the new product introductions this year stemmed from investments that we made throughout the previous cycle, and we will continue to prioritize these value-creating investments moving forward.

Speaker Change: Overall, the decisive actions we took this year resulted in a solid finish.

Speaker Change: Thanks Josh, that's great color on 24. Let's pivot directions now and discuss our fiscal 2025 outlook for ag and turf.

Speaker Change: With commodity prices down, albeit partially offset by bumper crops across the U.S., farmer margins have been compressed.

Our guide implies a challenging year for farmers in 2025.

Josh Beal: Josh, could you help us unpack what we're seeing here, and what to expect by segment and geography? Sure. It's definitely going to be another dynamic year across the ag industry. Let's start with large ag in North America.

Josh Beal: We expect farm fundamentals to remain depressed globally in 2025, putting additional pressure on farm profitability.

Josh Beal: Given the strong yields from U.S. harvest this past year, we've seen a rebuilding of global stocks, with the USDA forecasting global stocks to reach the fourth-highest level on record.

Josh Beal: Anticipated record production in South America, particularly in Brazil and Argentina, is likely to further pressure global commodity prices in 2025.

Josh Beal: And with input costs relatively flat year-over-year, farm net incomes will remain compressed globally.

Josh Beal: Conversely, dairy and livestock margins remain elevated, supported by significantly lower input feed costs and positive market demand. However, machinery demand for this segment has lagged the margin gains in positive sentiment, as interest rates and slow herd expansion continue to be the primary headwinds.

Josh Beal: Broadly across the ag sector, and despite significant macro headwinds, farm balance sheets remain strong, with land values supporting healthy debt-to-equity ratios.

Josh Beal: That said, as cash receipts have slowed and credit conditions in the industry have tightened, many growers are keeping a greater focus on the liquidity of their operations.

Josh Beal: As we look at the impact on equipment sales in the coming year, it's important to highlight the varying dynamics across each of our primary regions.

Josh Beal: As a reminder, our goal for 2024 was to underproduce global large ag retail by a high single digit.

Josh Beal: In North American Large Ag, we successfully achieved our underproduction goals for the fourth quarter, reaching targeted inventory levels on most of our key products.

Josh Beal: For example, new combine inventory was down mid-teens year-over-year on a unit basis.

Josh Beal: and finish the year at 4% inventory to sales in line with 2023 year-end levels.

Josh Beal: In 220 horsepower and above large tractors, we reduce field inventory by nearly 50% year-over-year, resulting in a year-end inventory-to-sales ratio of 10%, a 500 basis point reduction year-over-year.

Josh Beal: In the last 10 years, inventory-to-sales ratios for 220-horsepower tractors for deer have only been this low twice—in April 2014, just prior to the last down cycle, and in January 2022, due to post-pandemic supply constraints.

Josh Beal: Given the inventory reductions we've achieved, we expect to produce in line with retail demand in North America in 2025.

Josh Beal: We're encouraged by the progress we've made on this front, particularly as industry inventory-to-sales ratios for new equipment are more than double Deere's ratios for both 100-horsepower and above tractors and combines.

Josh Beal: Despite our proactive inventory management, macro factors continue to be a headwind for equipment demand in 2025, resulting in subdued early order program results.

Josh Beal: As a reminder, during our last earnings call in August, we were partway through the early order programs for sprayers and planters in North America, and our combine early order program had just begun.

Josh Beal: As an update, our sprayer program concluded down from 2024, declining in line with our Industry Guide for North American Large Ag, and setting 2025 production levels for sprayers below mid-cycle.

Josh Beal: Planters, on the other hand, experienced a more significant decline, closing with a year-over-year reduction greater than what we saw in sprayers.

Josh Beal: Finally, Combines will complete the second of three Early Order Program phases next week, and when this program closes at the end of January, we expect the product line to be down in a range similar to the reduction we've seen in sprayers.

Josh Beal: North American tractors are managed on a rolling order basis, with row crop tractor order books full through the middle of the second quarter.

Josh Beal: Demand for row crop tractors in 2025 is expected to be down less than the overall industry forecast, with deer shipments decreasing even less as production levels rebound to align with retail demand following our high single-digit underproduction for row crop tractors in 2024.

Josh Beal: Conversely, demand for four-wheel drive tractors in 2025 is expected to decline year-over-year more than the industry guide, but as a reminder, that product line actually saw increased demand in 2024.

Josh Beal: It's worth noting here that our order books for our newest tractor, the high-horsepower 9RX, which we introduced last February at Commodity Classic, are currently full through the middle of the fourth quarter, underscoring the value that we're bringing to the market and the importance of continued investment in our core product lines.

Josh Beal: Hey Josh, this is Cory. I'd like to jump in here to highlight the efforts of our Canadian team and customers. We've seen significant competitive conversions in this market post our smart industrial redesign, which is focused on supporting the production steps that our customers take over the course of a year in their specific crop types and the geography.

Josh Beal: In Canada, the majority of broad acre farming occurs in the western half of the country.

Josh Beal: This primary production system is small grains, which is wheat, canola, and barley, and the operations tend to be large-scale.

Josh Beal: Many of the new product introductions over the past few years have been tailor-made for solving our commodity and small grains customers' toughest challenges, and doing so at the system level, from X9 combines to high-horsepower 9RX tractors to our C-series air carts.

Josh Beal: Coupled with our integrated technology solutions in the John Deere Operations Center, these customers are experiencing significant increases in productivity, in profitability, and in quality of life.

Josh Beal: And finally, when you layer in a dealer network that's committed to investing in their customers and ensuring they get the most out of their deer equipment while delivering uptime and reliability, the result is exceptional system-level value for our Canadian customers.

Speaker Change: Thanks for that call out Cory, clearly a great story with our team up there that should continue into the next year. And Josh, thanks for the update on EOPs in the North American market.

Speaker Change: Now can you walk us through what's happening in South America and maybe more specifically Brazil?

Speaker Change: Of course, as you recall, Brazil represented our largest targeted underproduction in 2024 as we worked to correct excess new field inventory resulting from the market slowdown at the end of 2023.

Speaker Change: Our factory and marketing teams in the region worked diligently over the last year to adjust production and shipping in the midst of a dynamic retail sales environment.

Speaker Change: As a result, we've driven significant reductions in new field inventory units and have reached targeted levels for most product lines, enabling us to produce in line with retail demand in 2025 across most equipment categories.

Speaker Change: Given our flat guide for industry retails in 2025 and the significant underproduction to retail in 2024, producing in line with retail in 2025 will represent a double-digit increase in deer shipments year-over-year in the region.

Speaker Change: The one project where we still have some work to do is combines, where inventories remain elevated following slightly weaker than anticipated retail sales in the fourth quarter.

Speaker Change: As a result, we're planning another year of underproduction for combines in Brazil in 2025, although to a much lesser extent, and with the majority of the inventory drawdown occurring in the first half of the year.

Speaker Change: Hey, this is Jepsen. I wanted to take a moment to express how proud we are of our South American team and the exceptional work they've done to efficiently and resourcefully right-size inventory levels while maintaining strong operating margins.

Speaker Change: Our optimism in the region's prospects remains strong, demonstrated by our continued local investments focused on developing solutions in the region for the region. A great example is our investment in Brazil in our new R&D center in Indiatuba, which will be open in December.

Speaker Change: This center will focus on developing the products our Brazilian customers need to tackle challenges specific to tropical agriculture.

Speaker Change: That's great, Josh. Now let's finish it out with Europe. What are the dynamics over there?

Speaker Change: 2024 was a tough year for the region. We really saw a perfect storm of factors, depressed commodity prices, lower yields, regional conflicts and frustration with ag policy that ultimately drove a retail sales decline much greater than normal for a market that is traditionally less volatile than North and South America.

Speaker Change: We expect this atypical trend to continue in 2025, with another year of declines as uncertainty, interest rates, pressure on cash crop receipts, and elevated field inventory levels weigh on equipment demand.

Speaker Change: To illustrate this challenge, harvest yield in France, the largest grain producer in Western Europe, came in this fall at multi-decade lows, placing significant strain on many growers in that region.

Speaker Change: Similar to other regions, we had success in reducing deer new field inventory units in Europe in 2024, driving levels down over 20% from the start of the year.

Speaker Change: However, due to the ongoing and greater-than-expected declines in retail demand, our field inventory targets have continued to adjust downward in line with the market softening.

Speaker Change: We finished 2024 with inventory-to-sales ratios for both midsize tractors and combines at or slightly above the upper end of our targeted bands, which we feel necessitates further underproduction in those product lines in 2025.

Speaker Change: Order books in the region remain healthy, with orders for Monheim tractors extending into the second quarter of the year.

Speaker Change: One additional point to highlight for the Ag Outlook broadly is that our implied 2025 decrementals are impacted by product and geographic mix.

Speaker Change: As North American large egg equipment, like combines and row crop tractors, experience larger reductions compared to the rest of the world. This is particularly noteworthy in the first quarter, given the year-over-year comparison to strong North American large egg sales in the first quarter of 2024.

Speaker Change: Now, when we think about the first quarter of 2025, we expect top line sales for the equipment operations to be down 15-20% sequentially from 4Q24, with margins 300-400 basis points lower than the full year guide.

Speaker Change: Additionally, we are forecasting production costs to be favorable again in 2025 for the equipment operations.

Speaker Change: driven primarily by improved material costs and lower overhead expenses, all despite significant volume reductions. Overall, we expect to see positive price costs for the full fiscal year, yet another example of the structural improvements our teams continue to deliver.

Speaker Change: Thanks, Josh. That's a great walk around the world, as well as good additional insight into where we're projecting production costs for 2025.

Speaker Change: Now, we've talked extensively about 2025 order books and new inventories.

Speaker Change: But a significant concern heading into next year is North American used inventories.

Speaker Change: Last quarter, we discussed the levers we were pulling to return to long-term averages.

Speaker Change: Cory, this next question for you, can you give us an update on where we stand in North America and what steps we're taking to manage used inventory levels?

Cory Reed: Yeah, sure, Josh. As you just heard, our team has done an excellent job proactively managing new inventories, and we're seeing the benefits of those decisions play out in 2025. But as you noted, our primary focus over the last few quarters, and now heading into the new fiscal year, is to diligently work to bring down use levels.

especially late model harvesting equipment and row crop tractors.

Cory Reed: Broadly speaking, we're seeing used inventory to new sales ratios starting to plateau just above the long-term average. While it's too early to call an inflection point on used equipment, we are encouraged by the slowdown in growth that we saw during the fourth quarter.

Cory Reed: As we look at used inventory by model year, we're seeing a similar phenomenon in both row crop tractors and combines.

Cory Reed: When compared to long-term average distributions, the current mix of used is heavier than normal in 1-2 year old equipment and correspondingly lighter in model year 19-21 equipment.

Cory Reed: This correlates closely to a trade ladder in which second owners, typically by late model equipment every three to five years, will be looking to come back into the market for this first time since pre-inflationary pricing and significant interest rate increases. [inaudible]

Cory Reed: This backdrop, along with compression in farm net incomes, is putting pressure on trade differentials and has slowed in this part of the trade ladder. As a result, we're hyper-focused on helping these farmers transition to this next generation of equipment.

Cory Reed: which is needed based on today's even tighter harvesting windows and transition to precision applications like high-speed planning. In turn, this will help the used market return to a more normal distribution mix by vintage of machines.

Cory Reed: Our approach to reducing used inventories is three-pronged. First and foremost, we've managed new inventory levels to ensure we don't flood the market as equipment demand moderates.

Cory Reed: Second, we're working closely with our dealers to drive targeted programs and engagement with each customer to understand their needs and what's most impactful to their bottom line.

Cory Reed: One example of the changes we made in 2024 as a result of this engagement is the offering of new financing programs.

Cory Reed: which have been greatly appreciated by both our customers and the dealers supporting them. Finally, we're further elevating pool fund contributions to ensure dealers have the necessary funds to drive new sales.

Cory Reed: Stepping back, despite the software end markets, our dealers remain healthy. They're not only focused on managing used inventories in the near term, but are also committed to continue to invest in our technology journey. At the end of the day, our dealers are focused on one goal, consistently delivering greater value to our customers.

Speaker Change: Cory, I wanted to add a comment on the current state of our dealer network. Our dealers are in a structurally better position today versus previous cycles.

Speaker Change: As we continue to work in close partnership with them to stay ahead of inventory demand changes, we recognize that we wouldn't have made the progress that we've seen in the field inventory without the execution of our dealers.

Speaker Change: They have and continue to invest in specialized capabilities while meaning strongly capitalized.

Speaker Change: This strength and our aligned purpose enhance the level of service and support that our customers receive, which remains our primary goal.

Speaker Change: Thanks, Cory and John. That's great perspective. Let's shift now to construction forestry.

Speaker Change: 2024 was a dynamic year and really a story of two halves, starting with solid, stable demand in the first two quarters, consistent with the strong levels that we saw in 23.

Speaker Change: The second half, however, gave way to softening retails and tougher competition, which ultimately pressured margins as we proactively shifted to underproducing retail demand in the earth-moving segment in the fourth quarter.

Speaker Change: Josh Beal, can you walk us through what happened and how this will impact 2025? Yeah, definitely. As you noted, we saw ongoing strength in retail demand for earth removing equipment in the first half of 2024, but that shifted to a softening market in both our third and fourth quarters.

Speaker Change: We're seeing that trend continue this next year, and as reflected in our industry guides for both construction and compact construction, we expect further softening in 2025.

Speaker Change: Construction work is so robust and government infrastructure spending associated with the IIJA is still less than 50% awarded. Our customers continue to see a strong backlog of work, albeit alongside stiffer competition, which is driving down bids and overall project margins.

Speaker Change: Compounded by elevated interest rates and a recently refleeted rental industry, there's less near-term appetite for new equipment purchases.

Speaker Change: Despite these pressures, it's worth reiterating that we continue to see a robust utilization of equipment in the field.

Speaker Change: Joshua Rohleder, earlier you mentioned our decision to underproduce earth-moving retail demand in the fourth quarter of 2024, which successfully drove down field inventories over the past three months.

Speaker Change: Given the additional softening in retail demand that we're anticipating in 2025, we've made the decision to continue to underproduce retail in the first half of next year to ensure inventory levels are appropriately sized to respond to demand changes in the back half of 2025.

Speaker Change: In fact, much like Large Ag this past quarter, earth-moving lines at our North American factories will be shut down for approximately half of the total production days in the first quarter of the year. This will have a material impact on our quarterly decremental margins as well as overall profitability for the segment in the quarter.

Speaker Change: Given the steady outlook for road building, combined with demand in global forestry being slashed down 5 percent, we expect these product lines to provide stability to our overall construction and forestry segment.

Speaker Change: This is Josh. Maybe just to summarize here, we feel good about our CNF business. However, we're being proactive, learning lessons from previous cycles, as well as our ag business. It's important to note that even with this underproduction, we're weathering the demand reduction in a competitive environment better than we have in the past.

Speaker Change: This is a testament to the efforts of our team to drive structural improvements alongside differentiated customer value as we continue to concentrate our investments in margin accretive opportunities.

Speaker Change: Yeah it's great insight into what appears to be a dynamic market right now Josh. Even the tougher competition and uncertainty surrounding long-term and market demand aren't a production should put us in the best position to generate strong returns in the back half of the year.

Speaker Change: Now, for our last topic, I'd like to focus on our technology progress. Josh and Cory, there have been quite a few new product releases and milestones achieved over the last 12 months. Can you walk us through some of those key highlights and what it means for the business going forward?

Speaker Change: Sure I can start. 24 represented a year of significant new product introductions and technological advancements available on our model year 25 equipment.

Speaker Change: These releases, ranging from our most powerful tractor ever designed, to new seeding equipment, to the most advanced harvesting technology to date, are a testament to the success we've seen in our production systems approach.

Speaker Change: At the top end of our tech stack, we're seeing record adoption of some of our most advanced features.

Speaker Change: For example, over 75% of combine EOP orders have opted for our highest level of harvest settings automation because of the immediate value this technology will bring to their operations.

Speaker Change: In fact, we expect our customers will experience up to a 20% boost on average in harvest productivity from this feature alone.

Another great example would be large ag equipment in Brazil.

Speaker Change: We brought our new inventory levels down to target over the course of the year while managing to both maintain and grow market share. And this means that we not only grow the share of acres covered by equipment, but also the number of acres connected to our John Deere Operations Center, which ultimately means more productive, more profitable farmers.

Cory Reed: Yeah, that's right, Cory, and to put that statistic in perspective, we saw our global engaged acres grow by nearly 20% this past year, reaching 455 million acres, with South America up nearly 30%.

Cory Reed: And growth in highly engaged acres, which currently make up over 25% of our total engaged acres, is outpacing the overall growth trend in engaged acres as we see deeper and broader utilization.

Cory Reed: Global year-over-year growth in highly engaged acres is over 30%, with South America notably up nearly 50%.

Cory Reed: And while you noted that the adoption of some of our latest technologies has exceeded expectations, we're also continuing to see significant growth and adoption of some of our more established solutions during this downturn, as farmers seek ways to enhance productivity and improve margins.

Cory Reed: For example, the adoption of exact-applied technology on Model Year 25 sprayers increased by over 10% year-over-year, reaching a nearly 80% take rate in this year's Early Order Program.

Speaker Change: On Seed and Spray, as John mentioned, we covered over 1 million acres in 2024 with just a few hundred units in the field.

Speaker Change: For 2025, across both factory-installed options and retrofit precision upgrades, we have currently taken over 1,000 orders for new C&Spray Premium and Ultimate units. As a result, we expect to see a significant increase in the number of acres covered by C&Spray technology in the 2025 season.

Speaker Change: Exactly. When you have technology that you know is going to save money for your customers, you want to get that solution in their equipment as quickly as possible.

Speaker Change: We recognize this is a revolutionary technology that requires our customers to invest time and effort to transform their crop care programs, but we also know that typically

Speaker Change: When we have a customer see it work in their field or in their operation, they see the value. Our goal is to enable more customers to experience the impact of our see and spray technology by leveraging a different business model to unlock that value, which is more crucial than ever in the current macro environment.

Speaker Change: Cory, this is Jepsen. Maybe one thing to add on to that. There's been quite a bit of discussion about our pay-per-use model and if it's the right go-to-market strategy for some of our latest tech offerings.

Speaker Change: The reality is that we're seeing higher levels of adoption using this model compared to our traditional upfront pricing approach.

But only when it makes sense.

For example.

Take our Precision Ag Essentials Kit.

Speaker Change: We recently changed the pricing model from a one-time cost to a recurring license that allows customers to access the vital technology at a fraction of the traditional upfront investment. In the first year alone, we sold over 8,000 kits. And these kits are being installed on equipment with an average model year vintage of 2012.

Speaker Change: This example highlights the importance of finding new ways to meet our customers at every stage of their precision tech journey. It also emphasizes our commitment to providing cost-scaling solutions that enable all customers to adopt precision technology, regardless of the size of their operations.

Speaker Change: Thanks all. It's great to see so many proof points demonstrating how our continuous through-cycle investment in the business is driving significant innovation and differentiated value for our customers.

Now, before we open up the line for questions...

Speaker Change: Joshua Jepsen, do you have any final thoughts you'd like to share? Yeah, it'd be great. I start by echoing John's comments from earlier. 2024 marked a year of resiliency. Resiliency in our business and resiliency in our employees who, in the face of significant challenges throughout the year, still performed at the highest level and with the utmost determination.

Speaker Change: And as a result, we delivered strong performance, including over $25 in EPS, marking the second best level in company history.

Speaker Change: and returned over $5.6 billion to shareholders via dividends and share buybacks. It's noteworthy that our earnings per share and cash returned to shareholders not only surpassed historical mid-cycle levels, but also historical peaks.

Speaker Change: This performance is yet another proof point of the structural performance improvement that we've made in the business and will build upon going forward.

Speaker Change: And possibly even more important is the fact that we were able to do all of this while maintaining significant investment in the business across both R&D and new product capital spending. As we look forward, we're encouraged by the significant pipeline of opportunities ahead, opportunities that we believe will drive even greater levels of customer productivity and profitability.

Speaker Change: Whether it's our continued rollout of differentiated, high-quality hard iron, or our increasing breadth of precision technology solutions, our focus is on making sure that each dollar unlocks the most incremental value, because at the end of the day, the only way we succeed is if our customers succeed.

Speaker Change: As we look ahead to 2025, we're excited and confident as ever that we can perform at step function levels better than previous cycles.

Speaker Change: Our proactive decisions in 2024 have positioned us well to achieve structurally better margins in what we anticipate will be a sub-80% of mid-cycle year for our equipment operations.

Speaker Change: Said more simply, we expect to deliver higher margins at trough than we did during the previous peak in 2013.

Speaker Change: We're proud of what we've accomplished this year, but we're never satisfied. We come to work every day focused on solving the challenges our customers face.

Speaker Change: 2025 will be another year of discipline, hard work, and renewed focus to ensure our customers can achieve more tomorrow than they did today.

Speaker Change: Thanks, Josh. Now, let's open up the line to questions from our investors.

Speaker Change: 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 our hope to allow more of you to participate in the call, please limit yourself to one question. If we have additional questions, we ask that you rejoin the queue. Operator?

Speaker Change: Thank you. Now if you do have a question, please press star 1. You will be announced by name and company so you know when your line is open. And our first question is from Kristen Owen with Oppenheimer. Your line is now open.

Kristen Owen: Hi, good morning. Thank you so much for taking the question. Lots of color commentary, particularly around some of the cadence in Q1, but I'm just wondering if we could get a little bit of a cleaner bridge on what the margin expectations are for 2025. What are the puts and takes in terms of productivity costs that you're carrying over, raw materials, and the headwinds from the production in the first half?

Yeah.

Speaker Change: Good to see you, Kristen. I'll take a shot and team jump in. I think as we think about margin, there's a few things at play here as you look at 2025. First and foremost, and notably, I think it's just the continued volume declines that we're seeing in the market.

Speaker Change: Expectations, as you look at the individual guides, would be that total equipment operations

You know, would be down, you know, and

Speaker Change: We've got around 13% for the full year, and certainly that continued level of volume reduction is weighing on the margins. As we mentioned, we expect pricing to be positive across all three segments, and Josh Jepsen mentioned favorable production costs as well, so we're seeing favorable price costs.

Speaker Change: And in addition to that, obviously some of the decisions we've made in terms of reducing cost this year, we'll carry over in the next year as well, you know, providing a lift. And so overall, you know, it's a

Speaker Change: As we mentioned, you know, margin expectations relative to history, very strong. I think maybe lastly, if you think about decrementals.

Speaker Change: You know, probably a little bit higher than normal on the large ag business.

Speaker Change: That's really a mix-driven impact, you know, as we think about, you know, the large ag business in North America being down around 30%. You know, our sales reduction will be less than that, given the comp to 2024 and the underproduction that we did this year, but still the outsized reduction, you know, in one of our most profitable regions and so our most profitable product lines will weigh on decrementals next year.

Thanks, Kristen.

Speaker Change: Our next question is from Jerry Revich with Goldman Sachs. Your line is open.

Yes, hi. Good morning, everyone.

Speaker Change: I'm wondering if you could just expand on the pool funds program and the use of pool funds to help the trade-ins for the late model year equipment. I know you can move around pool funds year to year, and given the incentives last year from the rebates to dealers, there's quite a bit that you're able to deploy to get those inventory levels down. Can you just flesh it out for us, and if you don't mind, just share the order of magnitude

How much you can put in that direction.

Speaker Change: Yeah, hey Jerry, as you think about pool funds and maybe it's best to first put in context where we started the year and really the past couple years, you know, the strong.

Speaker Change: Equipment Demand that we saw in 2022 and 2023 and the associated sales there really drove a record level of pool fund balance entering this downturn. And that's by design. That's how we structure the program. It provides stability in the used market when we see a downturn. And we've seen that play out.

Speaker Change: You know, in 2024, as those pool funds are being deployed by our dealers.

Speaker Change: to help drive reductions in used inventory. Because of that, and again, by design, we've seen pool fund balances decline over the course of the year as dealers are using those funds.

Speaker Change: We've put some additional incentives at work to help support that balance. That's what you saw with pricing in the fourth quarter for large ag, as we talk about really flat pricing for the quarter. That was really some specific work targeted towards use and to help shore up the pool funds. And that's actually contemplated in our pricing guide for 2025 as well. We're talking about net price of 1% for the segment. That's inclusive. You think about list price increases for next year in the range of 2% to 3%. We are expecting a little bit higher incentive rate in 2025. And that higher incentive rate is really driven by a focus on continuing to put funds to work in the pool fund area. So again, supporting

Speaker Change: The Reduction in Use that we're driving towards, and we'll continue to do that, and again, we can continue to do that with positive price.

Speaker Change: Hey Jerry, this is Josh. The only other thing I'd add, I mean, on top of just the pool funds unused, you know, we had a good finish to the year from a retail perspective on new, you know, Josh Beal laid out.

Speaker Change: Where we ended from an inventory perspective, whether it's large ag in North America or South America, we also had a really strong retail October in the construction division.

Speaker Change: So, you know, we've talked about the trend, which has been pretty negative the back half of the year. October was a turn for us. We, you know, as noted in pricing, you know, we had a little more incremental incentives in the market, but we had a good month and really brought down inventory, upper teens reduction in inventory in earth moving in 4Q. So I think

Speaker Change: Overall, between deploying incentives in the right places, whether it's for new or used, we're seeing that impact and like how we're positioned as we step into 25. Thanks, Jerry.

Speaker Change: Our next question is from Kyle Mangus with Citigroup. Your line is open.

Speaker Change: Thank you. I was hoping if you could just unpack the four year guidance a little bit sounds like it is back half weighted. Would just love to hear if that's kind of baking in any assumed improvement in retail demand and some of these end markets in ag and construction.

It... It...

Speaker Change: It's more so, Kyle, related to, I think, year-over-year comps. You think about, you know, our segments, and I'll look at large ag and construction and forestry, and just look at it by half. You know, in 2024, large ag in the first half of the year was down 10% year-over-year compared to 2023. In the back half, it was down 30%. Similarly, in construction and forestry, first half of 2024, down 4%. Year-over-year, back half, down 20%. So as you look at how that's going to play out in year-over-year comps.

Speaker Change: You know, for 2025, you know, we would expect, you know, greater year over year declines in the first half of the year for both segments, you know, particularly construction and forestry, where we talked about, you know, significant underproduction in the first half of the year. And then those those comps will get progressively better as we move through the year, you know, when you're comparing to the back half of 2024.

Let's go.

Speaker Change: Our next question is from David Rathel with Evercore ISI. Your line is open.

Speaker Change: Hi, I'm going to slide in two quick ones if you don't mind, just a little sort of piggybacking off the last comment. So the first quarter, just using midpoints, right, it's around $3 of earnings, sales down, you know, over 27%, EPS down about 50.

Speaker Change: But the rest of the year, then it's implied, you know, sales are only down nine, earnings down about 15. Just curious, I'm not trying to pin you to a quarterly cadence, but just we have a sense of how the underproduction ceasing later in the year, at least how you're interpreting it. Are we back to growth year over year by the third quarter?

Speaker Change: And then second, not to get you in trouble, just curious your thoughts, I'll give you the platform to answer. With the new administration coming in, just how are you thinking about the impact of tariffs? Maybe compare it to last time. The immigration question and obviously the appointment of the new Secretary of Health and Human Services. Just how to think about, framework-wise, how that could impact how farmers are thinking about their business.

Thank you.

Speaker Change: Yeah, thanks, David. Thanks for the questions. You know, starting with the first one on the year, yeah, I mean, as Josh Jepsen mentioned, you know, as we think about Q1 particularly, you know, and sequentially, you know, that's going to be down 15 to 20% compared to the fourth quarter. And as Josh mentioned, if you look at the, you know, the margin expectations,

Speaker Change: for the first quarter, 300 to 400 basis points below the full year guide for equipment ops. So certainly you're going to see more of that decline in Q1, particularly again, noting construction and forestry, which will be at the top end of that range, a top line sequential decline that actually margins, if you think about like decrementals.

Speaker Change: for construction and forestry in the first quarter. It'll be it'll be higher than the implied guide for the full year. And again, given the underproduction. And then, you know, to your question, as you as you move throughout the course of the year, those those year over year comps,

Speaker Change: Get better, particularly in the back half, and you get to kind of flattish, if not up a little bit, you know, as you look at 2020, at Q3, Q4 of 2025.

Speaker Change: You know, our suppliers and certainly how it impacts our operations as well. You know, I think too early at this point to know exactly what that means in terms of enacted policy and what the impact will be on those three stakeholder groups, but certainly we're engaging and we'll monitor that as we go forward.

Speaker Change: Yeah, you know, and the other thing I'd like to add is we're, this is John May, by the way, we're positioned really well, we, you know, we rely heavily on our highly skilled employees in the US to design and, and build high quality, the most technology advanced equipment in the world.

Speaker Change: And as a result of that, greater than 75% of all products that we sell in the U.S. are assembled here in the U.S.

Speaker Change: Results in John Deere, Ag and Turf Division, being a net exporter of our products manufactured in the U.S., exporting it to other countries. So, we feel really positioned well. We've been at this for nearly 200 years, building product in the U.S., and I'm very, very proud of our team and what they're able to accomplish.

Thanks for the question, David.

Speaker Change: Our next question from Angel Castillo with Morgan Stanley, your line is open.

Speaker Change: Hi, thanks for taking my question, and I just wanted to maybe follow up a little bit more on the price dynamic, particularly in construction where you noted, you know, some bigger underproduction in the first quarter here. It seems like there's a little bit of a broadening of the softness. I think we had talked about rental fleets.

Speaker Change: as being a factor. And now it sounds like a little bit broader than that. So

Speaker Change: With that in mind, can you just give us a little bit of color of what drives the price guide for the year, being positive in construction, and or maybe how to think about that in the first kind of half of the year versus the second half, and then, yeah, just maybe more color on the trends that you're seeing outside of rental.

Speaker Change: Yeah, thanks for the question, Angel. I mean, yeah, certainly as we've as we've mentioned, you know, I think the the price dynamic and construction and forestry, you know, is competitive.

Speaker Change: And as we've talked, it's a balance that we're maintaining between price and share as we look at the environment going ahead.

Speaker Change: In terms of the cadence of price, I mean really nothing of significance there as you look at the layout of the year. And the other thing I'd remind you to is that if you think about our construction and forestry business and the different elements of that business, that includes road building, you know, which makes up 35 to 40% of that business as well. That's been a lot more stable and there's opportunity to get price, you know, there as well. And so that adds into the mix, which is helpful, but certainly it's dynamic.

Thanks, Andrew.

Speaker Change: Our next question is from Rob Wertheimer with Mellius Research and your line is open.

Speaker Change: Hi, thanks everybody, and thanks for the commentary around so many of the topics, including used equipment. I'm curious if you can talk any more about that. I don't know if you're seeing already the kind of early bow wave of people who would be trading up, you know, nibbling at some of the higher priced, higher valued used equipment. I don't know what, if anything, you can say about where you expect dealer use inventory balances to kind of progress throughout the year. Do we get to mid-year and work them down, you know, based on your production levels and how trade-ins work? Any further commentary on that would be great, because that seems to be a sticking point still.

Speaker Change: Hey Rob, thanks for the question. Yeah, I mean, we feel good about a lot of the progress we've made and I think, you know, as you think about where used inventory sits in North America, you know, it's going to be levels that we're going to work on here over the next few quarters. It's not something you turn overnight. I think we feel good about the stabilized level that we saw in the fourth quarter. You know, keep in mind as you think about quarterly cadence on used, you know, Q4 for us is a big quarter from a retail standpoint of new equipment.

Speaker Change: trade ins you know coming into the pipeline and so to be able to maintain and kind of mitigate the increase we've seen in the quarter, we feel good about Q. One provides a really good opportunity for us as we think about

Speaker Change: Year-end tax buying, production levels are a little bit lower typically in the first quarter. Sequentially, this next quarter in Q1 provides an opportunity to continue to drive that down, but we'll be working over that again over the course of the next couple of quarters.

Cory Reed: Yeah, Rob, this is Cory. You know, we've seen as we closed out the harvest this year, we saw better than expected yields. Obviously, price has been a concern, but we've seen more profitability than was likely expected.

Cory Reed: We had strong retail in the fourth quarter. We underproduced the demand and we saw the effects of that on the news side, but it's also showing up in what we do and use. The dealer's tactical focus on being able to right-size the value of these machines, right-size the value of the trades,

Cory Reed: We're seeing people come back into the market. The bottom line is, if you take a late model used row crop tractor, those products are needed. As people expand high speed planting in the market, we're taking high speed down further into the marketplace as they go out to plant in tighter windows. Late model, high horsepower row crops are needed, and we're seeing people come back into the market for them.

We probably have time for one more question. Thank you.

Speaker Change: Our last question is from Jamie Cook with Truth Securities. Your line is open.

Jamie Cook: Hey, good morning, and thanks for letting me ask the question. Just back to the decrementals on PP&A.

Jamie Cook: You know, a little worse probably than I would have thought. And so my question is, to what degree is pricing, I know you said positive pricing for the year, but like with North America down 30%, can pricing be positive in that region? And then just to follow up, I know you said equipment operations will be 80% of mid cycle for 2025. Just your thoughts are on where large ag is going to be relative to mid cycle as we exit the year and obviously what that means for 26. Thanks.

Speaker Change: Yeah, hey, Jimmy, thanks for the question. Yeah, we expect to maintain, you know, positive price in North America. And again, you know, taking production costs as well. So price, price cost will be positive, you know, more muted, you know, than we've seen, we talked about 1% price realization. And how do we do that? I mean, it starts with with the new inventory levels that we talked about.

Speaker Change: Again, kind of to reiterate, 220 horsepower tractors and above, we reduced the units in the field by 50% over the course of the year. Inventory to sales ratios for 220 horsepower and above, like a 10%.

Speaker Change: So very, very low, you know, combines at 4%. You know, because of those tight levels, you know, that that allows us to maintain that price.

Speaker Change: And again, as I mentioned, we've contemplated some increased level of incentives next year. That increased level is going towards use, it's going towards pool funds, you know, as Cory described, and we'll continue to work that down, continue to support our dealers in helping to make those trades.

Speaker Change: But net-net, given all those ingredients, we still believe we can deliver a positive price in the year.

Josh Beal: Hey, Jamie. This is Josh. The one other thing I'd point out is, you know, Brazil in 24, you know, given kind of all the challenges there was negative from a price perspective. We see that bounce back, and we see a positive price, you know, in.

Speaker Change: In 25, I think reflective of a flatter environment, inventories in better shape. So we expect that to turn favorably. So I think as you walk across the globe, we would expect positive price and PPA in every region of the world.

Speaker Change: Thanks all. That concludes our call for today. We appreciate everybody's time and for those of us in the US, hope you have a great Thanksgiving holiday. Have a great day.