Q1 2025 Deere & Co Earnings Call
Speaker Change: Good morning and welcome to Deere and Company First Quarter Earnings Conference Call. Your lines have been placed on a listen-only until 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: Thank you. Hello, welcome and thank you for joining us on today's call. Joining me on the call today are Josh Jepsen, Chief Financial Officer, and Joshua Rohleder, Manager, Investor Communications.
Speaker Change: Today, we'll take a closer look at Deere's first quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2025. 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 Deere and Company. Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.
Speaker Change: 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 may also 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. I will now turn the call over to Joshua Rohleder.
Joshua Rohleder: Good morning, and thank you for joining us today. John Deere completed the first quarter with a 7.7% margin for the equipment operations.
Speaker Change: Global ag fundamentals generally improved this quarter. However, demand remains constrained by overall uncertainty in the market, which has continued to put pressure on order velocities, particularly in North America.
Speaker Change: Notably, shipping volumes were lower in the quarter versus expectations as we calibrated full year production schedules to build as efficiently as possible. As a result, we expect to recover the first quarter shortfall over the remainder of the year.
Speaker Change: The construction and forestry and market fundamentals remain supportive of replacement demand, albeit dampened by elevated interest rates, macro uncertainty, and a competitive environment.
Speaker Change: Planned underproduction in our earth-moving segment during the first quarter drove further reductions in field inventory levels, enabling production optionality as market demand develops over the course of the year.
Slide three opens with results for the first quarter.
Speaker Change: Net sales and revenues were down 30% to $8.508 billion, while net sales for the equipment operations were down 35% to $6.809 billion.
Speaker Change: At sales of $3.067 billion, we're down 37% compared to the first quarter last year. I am primarily due to lower shipment volumes.
Speaker Change: Price realization was positive by just over one point. Currency translation was negative by roughly two and a half points.
Speaker Change: Operating profit was $338 million, resulting in an 11% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and sales mix, partially offset by lower SANG and R&D expenses and reduced production costs.
Moving on to small ag and turf on slide five.
Speaker Change: That sales were down 28%, totaling $1.748 billion in the first quarter as a result of lower shipment volumes.
Speaker Change: Price realization was positive, by just under 1 point. Currency translation was negative, by just under 1 point as well.
Speaker Change: Operating profit declined year-over-year to $124 million, resulting in a 7.1% operating margin. The decrease was primarily due to lower shipment volumes and sales mix, partially offset by lower production costs.
Speaker Change: Slide six gives our industry outlook for ag and turf markets globally.
Speaker Change: We continue to expect large ag equipment industry sales in the U.S. and Canada to be down approximately 30 percent, but higher interest rates, macro uncertainty, and elevated used inventory levels are slightly tempered by improving ag fundamentals and expectations for farm net income, which is further bolstered by additional government support.
Speaker Change: For small ag and turf in the U.S. and Canada, industry demand estimates remain down around 10 percent.
Speaker Change: The dairy and livestock segment remains at strong levels of profitability, despite reaching the lowest level of cattle inventory in over 70 years. However, profitability in these segments has not yet translated into equipment purchases.
Speaker Change: Moving to Europe, the industry is now projected to decline around 5%.
Speaker Change: Farm fundamentals have stabilized, albeit down, with less volatile commodity prices and stronger dairy margins offsetting macro uncertainty. Additionally, in Central and Eastern Europe, reduced pressure from Ukrainian grain imports is supporting better-than-expected farm net incomes.
Speaker Change: In South America, industry sales of tractors and combines are expected to be roughly flat following two years of significant industry declines. In Brazil, sentiment is showing signs of improvement as depreciation in the REI has pushed local commodity prices higher amidst a year of stronger yields.
Speaker Change: Combined with softening input costs, farm margins are expected to improve. Additionally, declining production, tight global stocks, and strong demand have driven outsized profitability in coffee bean production, supporting equipment demand for small and mid-sized tractors.
Speaker Change: In Argentina, decreased currency risks and export tax reductions will support some improvements in farm margins despite negative impacts of dryness at the beginning of the year. Industry sales in Asia are still projected to be down slightly.
Speaker Change: Next, our segment forecasts begin on slide seven. For production precision ag, net sales are now forecasted to be down between 15 and 20 percent for the full year.
Speaker Change: The forecast assumes roughly 1 point of positive price realization for the full year, offset by 2.5 points of negative currency impact.
Speaker Change: The reduction to our sales guide from the prior quarter is primarily driven by the strengthening of the dollar relative to nearly all foreign currencies, most notably the Brazilian Rei, Canadian Dollar, and Euro.
Speaker Change: For the segment's operating margin, our full year forecast is now between 16 and 17%, also reflecting the impacts of currency fluctuations.
Speaker Change: Slide 8 shows our forecast for the small ag and turf segment.
Speaker Change: We expect net sales to remain down around 10%. This guide now includes a half point of positive price realization, and one and a half points of negative currency translation.
Speaker Change: The segment's operating margin guide remains between 13 and 14 percent.
Shifting now to construction and forestry on slide nine.
Speaker Change: That sales for the quarter declined roughly 38% year-over-year to $1.994 billion due to lower shipment volumes.
Speaker Change: Price realization was negative by roughly one point. Currency translation was also negative by more than one point.
Speaker Change: Operating profit of $65 million was down year over year, resulting in a 3.3% operating margin due primarily to lower shipment volumes and sales mix, as well as unfavorable price realization and higher SA&G and R&D expenses.
Speaker Change: Lower shipment volumes were primarily due to planned underproduction to retail in the quarter as we reduced field inventory levels in our earth-moving segment.
Slide 10 describes our construction and forestry industry outlook.
Speaker Change: Industry sales for earth-moving equipment in the U.S. and Canada are expected to be down around 10 percent, while compact construction equipment in the U.S. and Canada is expected to be down 5 percent.
Speaker Change: And markets remain sequentially unchanged in 2025 with equipment demand tempered by uncertainty across both construction and compact construction equipment.
Speaker Change: U.S. government infrastructure spending remains at historically high levels, while single-family housing starts continue to increase as a result of low levels of existing home inventory.
Additionally, earth-moving rental reflating remains at low levels.
Speaker Change: Global forestry markets are expected to be flat to down 5% as all global markets continue to be challenged.
Speaker Change: Global road building markets are forecasted to be roughly flat, with strong end market demand persisting amid a return to more normal ordering seasonality.
Speaker Change: Moving to the CNF segment outlook on slide 11. 2025 net sales remain forecasted down between 10 and 15 percent. Net sales guidance for the year includes flat net price realization and 1.5 points of negative currency translation.
Speaker Change: The segment's operating margin continues to be projected between 11.5% and 12.5%.
Now transitioning to our financial services operations on slide 12.
Speaker Change: Worldwide financial services net income attributable to Deere and Company in the first quarter was $230 million.
Speaker Change: Excluding this special item, net income decreased due to a higher provision for credit losses, which was partially upset by lower SA&G expenses.
Speaker Change: Finally, slide 13 outlines our guidance for net income, effective tax rate, and operating cash flow.
Speaker Change: For fiscal year 25, our outlook for net income remains between $5 and $5.5 billion.
Speaker Change: Next, our guidance now incorporates an effective tax rate between 20 and 22 percent.
Speaker Change: And lastly, cash flow from the equipment operations remains projected between $4.5 and $5.5 billion.
Speaker Change: Note that during the quarter, we made a voluntary 401H contribution of $520 million to fund our salaried post-retirement health care plan. This will impact our cash flows for the full year. However, our guidance range remains unchanged.
Speaker Change: This concludes our formal comments. We'll now shift to a few topics specific to the quarter.
Speaker Change: Let's begin with Deere's performance this quarter. We saw net sales decline roughly 35% year-over-year and margins come in just under 8%, but we held the majority of our guides for the full year, notably net income. Josh Beal, can you break down what happened this quarter and then walk through what this means for the rest of the year?
Josh Beal: Sure, happy to. I think it's important to start with a few thoughts on what our plans were for the quarter. In North America large ag, our focus was continuing to work down used inventory levels while returning to normal production and shipment seasonality, albeit at lower volumes this year due to the projected industry decline.
Josh Beal: In Brazil, we targeted further reduction in combine field inventory, which was the one product line where we still had a little more underproduction to do following the significant inventory declines we achieved across all product lines in 2024.
Josh Beal: Lastly, in construction and forestry, recall that our plan was to shut down North American earthmoving production for roughly half the first quarter, significantly underproducing retail demand and positioning our field inventories well for the remainder of the fiscal year.
Josh Beal: We feel great about the progress that we've made across all three fronts.
Josh Beal: Similarly, in road building, a shift to more normal seasonality in that industry pushed some shipments into future quarters.
Josh Beal: As a result, we expect to see these sales occur across the remainder of the year for all three divisions.
Josh Beal: Regarding currency, over the quarter we saw a mid-single-digit strengthening of the dollar against nearly all our foreign currency exposures.
Josh Beal: While this lowered our top line results, particularly in production and precision ag, due to the translation impact on non-US dollar sales, currency impact on operating profit was relatively minimal in the quarter due to currency hedges.
Josh Beal: For the full year, the reduction in both our net sales and operating profit guides for large ag are primarily driven by currency changes, as we extend the impact of the stronger U.S. dollar to our rest-of-year projections, including our unhedged currency exposure in the latter quarters of the year.
Shifting to cost management, we had a relatively strong quarter.
Josh Beal: Additionally, lower SANG expenses this quarter reflect our focus and commitment to operational efficiency throughout the business.
Josh Beal: Turning to the full year guide, our market demand outlook remains relatively unchanged this quarter.
Josh Beal: Outside of the FX impacts that moved our PPA guide slightly lower, this quarter was really a story of continued production and inventory management.
Josh Beal: One last item of note, we did benefit from a favorable tax rate this quarter, resulting from two non-repeating discrete items totaling $163 million.
Josh Beal: Therefore, when netted against the negative currency impacts and other quarterly items, our full-year net income forecast remains unchanged from our original 2025 guide.
Speaker Change: Great. Thanks for that breakdown, Josh. So, overall, it was really a quiet quarter once you back out the timing, FX, and tax items.
Speaker Change: I guess moving then to the broader ag industry, I'd like to talk through farm fundamentals. The USDA just updated their 2025 forecast for net cash farm income.
Speaker Change: While U.S. net cash farm income is now forecasted to be up 22% year-over-year, crop cash receipts are still expected to fall 2% driven by lower commodity prices.
Speaker Change: The difference then would be the significant government support expected for farmers this year.
Speaker Change: Obviously, it's still early in the year, but this seems to be a somewhat positive proof point for our customers following a tough 2024.
Speaker Change: Can you add any additional color to what this means for farmers and equipment demand over the rest of the year? Yeah, sure thing, Josh. It's clearly a positive headline with forecasts up year over year, but it's important to break down how we get to that point.
Speaker Change: There are a number of positive data points this quarter, keeping in mind this is all within the context of a trough-level outlook for 2025. For starters, the recent rally in commodity prices has been fueled by both a cut in last season's U.S. yield forecast, along with dryness in South America.
Speaker Change: This provides some benefit for our customers as they market last year's strong harvest.
Speaker Change: On the input side, farmers are continuing to see a decline in input costs for the third consecutive year.
Speaker Change: Further tailwinds this quarter came via $10 billion in additional U.S. support for farmers, as you noted. This assistance will offset some of the margin decline farmers saw in 2024, while potentially helping to relieve concerns around macro risk and high interest rates.
Speaker Change: But ultimately, we don't expect this to translate into immediate order velocity, as general uncertainty continues to persist, and customers remain cautious across all markets.
Speaker Change: Hey, this is Jepsen. I think the takeaway here is the additional support from government payments will help buffer downside risk to farmers' balance sheets as well as the overall industry outlook following a multi-year decline in both farm net income and industry equipment demand. Yeah, definitely, Josh. And if we look globally, Brazil is another geography where farmer sentiment continues to improve.
Speaker Change: Currency movement has been favorable as a weakening real helps improve farm net incomes in the country.
Speaker Change: This is because commodity sales are primarily U.S. dollar denominated, while typically around half of producer costs are in local currency.
Speaker Change: It's still too early to call a market shift there, as we've yet to see this sentiment convert to a meaningful change in order velocity, but it's a positive sign nonetheless.
Speaker Change: Finally, turning to Europe, the continued favorability we've seen in dairy and livestock is now supported by moderately better wheat prices and slightly lower input costs.
Speaker Change: While markets overall remain contracted and pressured by lower yields and macro uncertainty, we've seen this improved sentiment translate to further stabilization in our order books.
Speaker Change: Perfect, thanks Josh. Clearly a dynamic global market, but overall sentiment seems to be improving its hinge.
Speaker Change: Now, given this macro, this market backdrop, can you update us on the business and how we're managing through inventories and order books? Absolutely. As we discussed earlier, this quarter has really been about executing the plan as we continue to manage through this downturn.
Speaker Change: Our setup entering 2025 was solid, as the underproduction of retail that we executed last year drove down field inventories and positioned us well across the globe for another challenging year in terms of in-market demand.
Speaker Change: As we walk around the world, let's start in North America.
Speaker Change: On the new inventory side, we ended the calendar year with large ag field inventory down 25% year-over-year and roughly 15% below pre-2020 averages.
Speaker Change: In fact, we saw our 220-horsepower tractor inventory decline by nearly twice as much as the industry over the past year, allowing us, in partnership with our dealers, to continue our focus on reducing used tractor inventory.
Speaker Change: The industry backdrop remains challenged as we continue to expect demand declines across all large ag product lines in North America.
Speaker Change: Our combine early order program closed a couple weeks ago and compared to last year's EOP was down more than our industry guide.
Speaker Change: As a result, we're targeting to finish the year with new inventory in the U.S. roughly unchanged year-over-year, reflecting our plan to produce in line with retail demand in the region.
Speaker Change: Shifting our focus to North American used equipment, we're starting to see early proof points supporting the operational and marketing decisions we've made over the past few quarters.
Speaker Change: Here, High Horsepower Tractor Used Inventory peaked in November, and we've since seen two consecutive months of moderate unit declines along with compression in auction to asking price spreads.
Speaker Change: Notably, we've also seen two consecutive quarters of improvement in the percentage of late model equipment that makes up Deere's used high horsepower tractor population.
Speaker Change: Your combine used inventory was up this quarter in line with normal season of build but down over 10% from the recent peak in spring 2024 and is currently sitting at around 60% of the prior cycle peak.
Jepsen: This is Jepsen. Maybe one thing to add. I spent time last week with our dealer principals from the US, Canada, Australia, and New Zealand.
Jepsen: We have a high level of alignment and focus on reducing used inventories, and we feel confident in how we, collectively, deer and dealers, have managed this downturn differently, and note our more proactive response to get ahead of the market turning in 24. This enables them to continue investing in their ability to support customers' needs today and tomorrow.
Thanks, Josh. Great to hear that feedback from the channel.
Jepsen: As previously noted, the one exception is combines, where we had a little more work to do in the first half of this fiscal year.
Jepsen: With resilient harvest in January, the end of the calendar year is typically our strongest combine selling season. And to that end, we saw great progress in our combine inventory this quarter. The field level is down over 25% in the past three months and down nearly two-thirds since the end of fiscal 2023.
Jepsen: Along with improving customer sentiment in the region, our strategic focus on tech adoption has been met with strong customer interest.
Jepsen: During the quarter, over 1,500 Precision Ag Essentials kits were ordered in Brazil, along with over 1,200 orders for JDLink Boost, our Starlink-supported satellite connectivity solution, which was just made fully available to the market for order a few weeks ago.
Jepsen: We expect to see continued tech adoption in Brazil as connectivity expands within the region and customers are able to maximize the value of John Deere's Precision Ag solutions in the John Deere Operations Center.
Speaker Change: Hey, this is Josh again. One thing to add on top of the great progress Beal noted is our continued focus on investing in Brazil for Brazil. During the past quarter, we officially opened our Technology Development Center in the country, which we announced last year. This space will enable us to develop and deliver solutions specifically suited for Brazil's tropical agriculture environment.
Speaker Change: We also continue to enhance both dealer and customer support in Brazil.
Speaker Change: Brazilian farmers are ramping up the horsepower curve while simultaneously integrating advanced technology and digital solutions into their operations. We recognize this and are committed to supporting them on this journey. A quarter ago we discussed the growth in engaged acres and highly engaged acres in South America.
Speaker Change: The combination of the equipment, technology, and connectivity we're delivering will support further growth in these metrics, and more importantly, lead to better outcomes for our customers.
Speaker Change: Hey, great call out, Josh. Okay, let's shift now to construction and forestry.
which had a few unique aspects this quarter.
Speaker Change: To that extent, we underproduced retail demand by approximately 35% in the first quarter, resulting in an earth-moving inventory reduction of more than 15% over the past three months and nearly 30% in the prior two quarters combined.
Speaker Change: In fact, this was more than we had initially anticipated as retail sales for compact construction came in better than expected at the end of the calendar year. We're encouraged by these results as they provide us with operational flexibility as earthmoving demand evolves throughout the remainder of the year.
Speaker Change: In markets remain strong with only around 50% of IIJA funds committed and equipment utilization reflecting the fact that construction employment is at record levels and continuing to rise.
Speaker Change: That said, we've found success with selective incentive programs targeting specific products to drive sales.
Speaker Change: Our road building business continues to bolster the CNF segment, as road building is experiencing another year of strong market demand.
Speaker Change: Tech investment and integration in this market continues to drive further customer value on top of an already robust value proposition.
Speaker Change: We are excited to showcase our latest innovations in road building at the upcoming Bama Show in April.
One final thought on the broader CNF segment.
Speaker Change: It's important to note, however, that entry year, we will see an atypical quarterly cadence as price actions taken in the first half of the year will moderate in the third and fourth quarter as we ramp production in the back half of the year.
Josh Beal: That's great color, Josh. Good insight on the unique seasonality of the business this year.
Speaker Change: Okay, shifting gears now. The last topic I'd like to cover is tariffs. Obviously a dynamic and rapidly evolving situation. What details can you provide on the issue, Josh?
Speaker Change: But our primary focus remains on understanding how proposed tariffs may impact our customers' operations as we recognize their need for free and fair trade in ag commodities. This allows them to concentrate on growing crops that feed, fuel, and clothe the world. We remain committed to delivering the products and solutions they need to be productive and profitable as we've done for nearly 200 years.
within Deere's business.
First, a reminder about our operational footprint.
Speaker Change: As you'll recall, we are a net exporter of ag and turf equipment from the U.S., and more than 75% of our domestic U.S. sales are assembled at U.S. manufacturing locations.
Speaker Change: Less than 5% of our U.S. complete goods sales come from Mexico, and of the remaining products produced outside the U.S., the majority come from Europe, notably our 6 Series tractors.
Speaker Change: From an export perspective, over half of our exports serve our Canadian customers, with the remainder going to Europe, Brazil, and Australia.
Speaker Change: In terms of component sourcing, about 10% of our U.S. manufacturing cost of goods sold come from Mexico.
Speaker Change: with less than 2% coming from China and approximately 1% from Canada.
Speaker Change: For the last several years, our teams have focused diligently on both supplier resiliency and cost management.
Speaker Change: This group works to manage and optimize our global trade flows, which position us well to navigate the current environment. And given the rapidly evolving nature of these tariffs, our guide does not contemplate the direct cost or economic benefit impacts resulting from potential future tariffs.
Speaker Change: Thanks, Josh. Great update. And before we open the line to questions, do you have any final comments you'd like to share?
Yeah, certainly.
The first quarter was reflective of the focus.
Speaker Change: Despite all the noise, we maintained discipline, executing to plan as we successfully brought down inventories while managing costs and operational expenses.
Speaker Change: We also returned over $800 million in cash to shareholders through dividends and share repurchases during the quarter, reflecting the structural improvements we've made this cycle over the last.
Speaker Change: I want to reiterate my utmost thanks to our entire team here at Deere, from employees to dealers to suppliers, it takes dedication and hard work from every facet of the business to demonstrate this level of discipline.
Speaker Change: And we'll continue to execute to plan as we manage throughout the rest of the year and across the cycle.
Speaker Change: We're as focused as ever on our steadfast commitment to our customers, and we'll continue prioritizing investment in the most value-added solutions for them. We'll continue to expand our precision offerings across both product lines and geographies, while ensuring we meet the basic needs of quality, uptime, and productivity for our customers.
Speaker Change: Our focus is solving our customers' toughest problems so they can focus on what matters most.
Speaker Change: Thanks Josh. Now let's open it up 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 to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. If you need to withdraw, press star 2.
Our first question comes from
comes from.
and Tim Tehan from Raymond James.
Hi, good morning. Maybe just.
Speaker Change: Some some help in terms of large ag production cadence, given the pushout that you call out for the first quarter, how do we think about that normal seasonal ramp up that you typically see in the second quarter and third quarter? Is that can you maybe just help us in terms of that going to be more weighted to the third quarter than usual? And just as we think about kind of
Speaker Change: segmenting the remaining quarters? This would be a PPA question. Thank you.
Speaker Change: Hey Tim, thanks for the question. I mean, I think, you know, as you think about large ag demand and, you know, shifting some of those shipments out to future years, it's still going to more or less follow normal seasonality, you know, for the business.
Speaker Change: for a, you know, for large ag being down 15 to 20%, you know, quarter over quarter, we'd expect that second quarter year over year comparing to last quarter or last year's quarter to be down more than the guide. So probably down more than the 15 to 20 that you're seeing in the full year. And that gets sequentially better as you go to Q3 and Q4 in terms of the year over year comps.
Speaker Change: Yeah, Tim, this is Josh Jepsen. Maybe one thing I'd add to, you know, as you think about the sequence, you know, Beal laid out kind of how that plays out. I think, you know, for production precision ag, as well as the rest of our businesses, we would expect fourth quarter, we're actually growing year over year, you know, because of some of the comps and actions we took, but we actually start to see increases year over year as we get to 4Q as well. Thank you.
Our next question comes from Steven Volkman from Jeffries.
Speaker Change: Hi, good morning guys. Thank you. I'm curious, I think one of you, Josh, has mentioned that the early order program was kind of below your industry forecast and obviously we saw some pretty weak numbers from AEM yesterday and I'm just curious how you're thinking about
Speaker Change: sort of having confidence in the bottoming process for the end market activity, because obviously that'll drive what you need to do on the inventory side.
Speaker Change: Hey Steve, thanks for the question and maybe I'll talk combines and then walk a little bit around the other product lines as well. As you recall, for North America, our guide for the industry is down 30. If you kind of take product line by product line, Sprayer EOP came in pretty close as that industry guide. We're expecting tractors to be down a little bit less year over year, row crop tractors, and then four-wheel drive tractors will be a little bit more than the guide.
Speaker Change: And as you mentioned, you know, given the results of the combat early order program, we'd expect that to be down a little more than the guide as well. So, you know, waited to get to that industry down 30, but a little bit of difference.
Speaker Change: Uh, you know, by, uh, by by product line, you know, as you saw in the quarter, and this is consistent with the shipment timing that we talked about, you know, the EOP for combines both a little more slowly, uh, this year than it has been in the prior years, and that resulted to a little bit slower ramp up.
Speaker Change: for us in terms of combine shipments in Q1. I think that's reflective of the inventory levels that you're seeing for us. As we talk about 11% inventory to sales for combines as it cools out the quarter, that's a little lower than normal and really reflective of some of those delayed shipments.
Speaker Change: Unknown Speaker You know, 90 ish, you know, plus percent of what we're going to build in a year. So we have those orders locked in. It's just a matter of when we laid those in the schedules. And so, you know, pretty good, pretty good visibility there. Again, it was just a timing, timing with Q1.
Speaker Change: See, this is Jepsen, maybe one thing to add on the you side, you know, combine...
to pull that down. Thank you.
Thanks.
Our next question comes from Jerry Revich from Goldman Sachs.
Yes, hi. Good morning, everyone.
Speaker Change: I'm wondering if you could just expand on the comments that you shared on the Precision Ag update. You gave us the progress in Brazil. Can you just talk about globally expectations for AgEssentials and Sins Prayer Kits for this year? What progress was like?
Speaker Change: in the quarter, and also, if you wouldn't mind, just updating us on the engaged and highly engaged acres, if you have that.
Speaker Change: Yeah, great. Thanks for the question, Jerry. Yeah, I mean, Precision Ag Essentials, which recall, as we think about our tech stack, you know, Precision Ag Essentials is really the foundation of the tech stack. It's those core elements.
Speaker Change: of Guidance of Connectivity and High-Powered Onboard Compute. And, you know, the bundle that we've created with Precision Ag Essentials to lower upfront costs.
Speaker Change: and an annual subscription for the benefit of that technology. I recall we introduced this package last year in 2024 in North America. Really strong reception to that, about 8,000 units that we retailed. Average age of the equipment that those units were being put on was 2012, so we were going deeper in the fleet.
Speaker Change: in terms of connecting people into the deer ecosystem. You know, so we were really encouraged this year, I think, you know, we had a limited release in Brazil in 2024 for Precision Ag Essentials, but more more fully available in 2025. And we've been really encouraged by the results, you know, as I mentioned,
Speaker Change: Over 1,500 orders year-to-date in Brazil for that Precision Ag Essentials base.
Speaker Change: On top of that, you know, just in the middle of January, we made our Starlink-enabled JDLink Boost solution available, you know, in the region, in Brazil. And recall, you know, that connectivity is a big challenge for our customers in-country there. We'd estimate about 70% of ag land in Brazil doesn't have, you know, sufficient cell. And we've seen really, really strong take rates, you know, early on in those couple
Speaker Change: Again, we mentioned, you know, over 1,200 orders, I think there were like 500 orders in the first day, you know, for the solution and so very, very encouraging and excited for the value that's going to unlock.
Speaker Change: for our customers in terms of enabling, you know, that connectivity and enabling, you know, them to take advantage of Precision Ag solutions.
On engaged acres, maybe just to talk about the numbers.
Speaker Change: You know, we're over 455 million globally, year over year, that's up about 15%. South American growth is greater, it's up about 20% year over year. Really where we're encouraged is on the highly engaged side, where we saw growth over 30% year over year, and highly engaged acres now are making up nearly 30% of our engaged acres are highly engaged. And just a reminder, highly engaged acres is more depth and breadth of utilization, you know, covering more production steps.
with your technology.
Jepsen: Hey Jerry, this is Jepsen. Maybe maybe a couple ads. I mean we are continuing to see
Jepsen: technology as a driver, you know, of competitive advantage and what we're able to do from a conversion perspective. And we had an example from our field team, you know, this quarter of where we put essentially Precision Ag Essentials, you know, a year ago on non-competitive machines, you know, call it 20 competitive machines.
Jepsen: And this year we're converting them. We're converting them from combated machines with Deer Tech to deer machines.
I think we're seeing that at a high level.
Jepsen: being a difference maker for for customers in terms of what is
Jepsen: pulling them into deer and the value they see from that.
Speaker Change: Unknown Speaker And I think we're also seeing even things that may be overlooked a little bit like remote display access, the ability for our dealers to remote in, not have to go to the machine, but remote in and take care of them. We've seen significant growth in just the instances of our dealers doing that and we had an anecdote talking to a dealer a month or so ago talking about sitting at home on the couch and actually fixing an issue for a customer because they had remote display.
Speaker Change: real technology that's having real impact for the customer. And we're seeing that, you know, start to build even, even greater. And just to maybe just to put a bow on that remote display, you know, in 2024, we had 2.5 million remote display sessions, you know, through the John Deere Operations Center, that was an 85% increase from two years prior. So again, our ability to better serve our customers through connectivity is huge.
Thanks for the question, Jerry.
Thank you.
Jerry Jepsen: Thank you. My question is going to be on farmer profitability and demand. And I know that parts of this may be hard to answer, but I'm just curious as to whatever insight you can offer. Obviously, your early order programs, I guess, are a combination of, you know, your end farmer professional, big professional farmer demand and dealers trying to balance out trade-ins and all that stuff.
Jerry Jepsen: I suspect your biggest farmers probably still want to buy more than you're making. I don't know if you have any thoughts on how profitable those, you know, biggest first, you know, first buyer kind of customers are right now at current corn and soy and cotton prices.
Speaker Change: Yeah, I mean, maybe a couple points there, Robin, I think, you know, it's hard to pin an exact number on this, because because every operation is a little bit different. And you know, it matters, you know, whether you own all your land, or whether you rent all your land. And as you look at, you know, break even prices, you know,
Speaker Change: Unknown Speaker compared to like 100% owned versus versus 50% that that can you know it's like a 50 cent per bushel difference you know on corn break even depending on if you fully own or you're renting 50% you know similarly the amount of technology you know that you're utilizing on the on the farm can matter a lot in terms of profitability as well you know we recently published our business impact report and in that report we did an update on you know the value that if you employed all all deer
All Dear Available Solutions.
Speaker Change: you know, in a typical corn and soy operation in the Midwest, you know, what value that would bring, and it was just under 50 cents a bushel of improved profitability by fully employing the deer production or the solution set. So, you know, there can be some some pretty massive differences in terms of break even in terms of the size of your operation, how much you rent and own, how much technology you're using. So it's hard to put a number on it. I think what I would say is over the course of the quarter, you know, we feel good about what the positives that we saw,
Unknown Executive, Josh Rohleder, Unknown Executive, Joshua Jepsen, Unknown Executive
Joshua Jepsen: Yeah, Rob, this is Jepsen. I think just to add, and maybe double click into what Josh mentioned, I mean, quarter over quarter, we've seen the ag fundamentals improve.
you know.
Joshua Jepsen: Uncertainty as it relates to macro, uncertainty as it relates to trade policy, but I think the underlying business, as you look at dairy and livestock, which we mentioned already, which are at relatively strong levels, are holding in really well and better than what we would have seen just three months ago.
Thanks, Rob.
Thank you.
Our next question.
Jamie Cook from Truist Securities.
Jamie Cook: Hi, good morning. I guess, you know, one question just wanted to understand better sort of your view on Deere's performance, margin performance, given where we are in the cycle relative to the 20% sort of mid-cycle target. And I guess, Jepsen, just
Speaker Change: Your confidence level, obviously, I think everyone's confident 2025 is the trough. Your view on climbing out of this in 2026, and if you didn't think we were climbing out of this in 2026, do you see the need for incremental restructuring? Thank you.
Speaker Change: Thanks, Jamie. I, you know, as it relates to, you know, where we are.
Speaker Change: It's difficult to say exactly where we are to try to make a prediction on what 26 holds. I would say, you know, we're really focused on what are the things that we can control as it relates to managing inventory levels, managing production, and keeping our arms around the operating cost of the business while funding.
Speaker Change: The strategically important things and we feel like we're in a good spot there. We're able to do that. You know, we're essentially
Speaker Change: you know, flat on R&D, when we're making room elsewhere, elsewhere in the cost structure. So I think those are the pieces that we can control, and that we're working to manage. And stepping back, you know, as it relates to, you know, our longer term goal of 20% of mid cycle, you know,
Speaker Change: This level of performance, you know, this guide, if you look at the equipment operations where we're at, call it, you know, just below 15%, 14.5%.
Speaker Change: Operating Margin, we feel good about where that puts us in terms of progressing towards that goal. And again, just to juxtapose that versus how we performed even in the peak of our last cycle, you know, comparing, you know, where we are below trough levels, below 80%, you know, by our own math.
Speaker Change: I call it 14 and a half, 15 percent, you know, that's better than we performed at the peak of the cycle in 2013.
Speaker Change: So, we feel good about that progress, feel good about the ability to continue investing and doing a lot of work on an ongoing basis, day-to-day, on the cost side of the business.
Thanks, Jamie.
Thank you.
Unknown Speaker
Our next question comes from.
Stephen Fisher from UBS.
Stephen Fisher: Great, thanks. Good morning. Josh Jepsen, I think you mentioned you know feeling good about the the amount of reductions
Speaker Change: You've had in the use inventory during the quarter. Is there any way to is there any way to help us kind of quantify just how much
Speaker Change: used inventory is out there, how much excess you have relative to the target levels, and how long you think it would take to manage down to what the target levels would be.
Speaker Change: Hey Steve, it's Josh Beal. I'll start and then Jepsen you can you can jump in. Yeah, I mean, I think, you know, as you as you characterize where we are on the use side, I mean, maybe first, you know, Jepsen mentioned this earlier, but we feel really good about combines, you know, we did a lot of work on combines earlier in the cycle. And they're sitting at a much better position. Yeah, as we think about, you know, high horsepower tractors, you know, where there's still work to do. We feel good about the progress that we saw, you know, in the last quarter, as we mentioned, you know, in the comments,
Speaker Change: you know, a couple months sequentially of unit decline, you know, relatively modest decline. I think we're down maybe 3% from
November peak, but I think more important and probably a
Speaker Change: Unknown Speaker The bigger challenge right now in high horsepower used is that mix of used equipment, again, being still some more heavily skewed towards you know, one and two year old equipment. And again, you know, we've made progress over the last couple quarters on improving that mix. You know, we saw some improvement in our fourth quarter of 24 we see an incremental improvement in the first quarter of 25.
Speaker Change: But it's still higher than it should be, you know, probably on a percentage basis, you know, probably 2x the number of
Unknown Executive, Joshua Jepsen
Joshua Jepsen: Yes, Steve, it's Jepsen. I think the other thing that we're looking at is...
Speaker Change: Unknown Speaker You'll get through this reduction faster, and you know that I think the actions we took on the new side are helping us to do that, to get focused on use quicker than we did last cycle, I think the other thing too when we look at fleet age.
Speaker Change: I think this is important as we think about, you know, replenishment or replacement over time.
Speaker Change: We're still aging out. So high horsepower tractors, four wheel drive tractors, combines are all getting older on a fleet age perspective. And I think that's
Speaker Change: reflective of we put much less new equipment into the market when things were on the way up, 21, 22, 23. But that aging, I think, will also help us as we think about how do we turn some of that used because replacement needs will continue just because we're seeing, you know, more age, more hours on the fleet.
Thank you.
Our next question comes from David Rossell from Evercore ISI.
Speaker Change: And then you're saying you're targeting to finish the year, I assume that was a fiscal year comment, that the U.S. inventory new will be unchanged year-over-year.
Speaker Change: So, does that mean, do we not plan to reduce any more new inventory from this point forward for the year? Or are we done reducing in North America?
Yeah, I mean, I think, I think the takeaway.
David, and you're right. I mean, the comment around unchanged.
Speaker Change: Relates fiscal year to fiscal year. And so, you know, bookending the fiscal year, you know, our plan and our focus is on building in line with retail demand. And so you should see, you know, absolute units of deer field field inventory relatively unchanged.
Speaker Change: you know at the end of fiscal 25 from from where we ended you know fiscal 24. Now there's there's always uh normal seasonality in our inventory build and so as you think about you know through the course of a year you're going to build tractor inventory, you're going to build combine inventory you know in the first second uh quarter of the year and then you'll start to draw that drive that down in the back half of the year that's just normal normal shipping and candidly a lot of in transit inventory as you'll recall you know a significant piece of our our large equipment is already retail sold and so it's passed through.
Speaker Change: the dealers and you have that in-transit inventory, but yeah, the bookings there is we're going to build in line, in line with retail and North America in 2025, and you should see absolute levels of inventory relatively unchanged year over year.
I was just trying to...
Thank you. Yeah, go ahead.
Speaker Change: Well, I just wanted to make sure that the row crop tractor data in the first quarter, and given the seasonality, I'm comparing this versus traditional first quarters. I understand the seasonality to build. The row crop inventory does seem a bit high.
Speaker Change: Relative to history for where we are in the year, I think four-wheel drives, combines, I appreciate you. You probably can produce at retail the rest of the year, but the row crops, is there not further reduction needed there? I just want to make sure I understand the math of the 34%.
on trail. Yeah, David, this is Jepsen.
Speaker Change: Fair question. And to remind you, you know, that number is 100 horsepower and above.
Speaker Change: And what we see there is really kind of a tale of two stories, or two markets in that regard. 220 above, we feel good about where we're at. We're actually below.
Aaron Wetzel, Joshua Jepsen, Unknown Executive, Joshua Jepsen,
We are...
Speaker Change: higher and probably higher than where we want to be when it comes to, call it that mid-series, mid-size tractor, 6000 series tractor.
Speaker Change: That inventory is higher. You know, as a result, we are underproducing that. So essentially, Mannheim will underproduce North America.
Speaker Change: That 100 plus is a big category. The large A side, the A to R side, we feel good about where we're at. Like I said, slightly below the historical IS ratios for this point in the year. But we got work to do over really the balance of the year, I'll call it the 6,000 series, to pull that down closer to where we want to be. But when we saw the growth,
Speaker Change: quarter on quarter, that's really where it occurred and then not necessarily on the row crop side. Thanks, David. Thank you.
Unknown Speaker . .
Our next question comes from Kirsten Owen from Oppenheimer.
Speaker Change: Thanks for the question. Yeah, I mean, as you heard in the comments, you know, we're seeing some green shoots.
Speaker Change: Out of the region, I think the profitability is looking better there in 2025. And certainly we're seeing favorability on the tech adoption side as well. Recall in Brazil, we have less visibility in terms of the order book. We typically run about a three-month order book, so a little bit less visibility in the full year. So we'll see how it plays out. But there's been some optimism. We've seen some strength.
Speaker Change: you know, kind of in that small to mid-tractor space as well in the region, as Josh Rohleder talked about, you know, some strong sentiment, you know, in the coffee side. And so, you know, there's some positives.
Speaker Change: Unknown Speaker As it relates to price, we're seeing favorability there as well. We had favorable, you know, positive low single digit price realization in the quarter. We're expecting to be positive for the full year. That's a good contrast to last year where we were
Speaker Change: We had negative prices. We drove downfield inventories. Now that we right-sized, you know, the inventory situation in Brazil and are seeing, you know, some of these positive hints of optimism in terms of how that market plays out, we're seeing a lot more strength on the pricing side as well.
Thanks Preston.
Our next question comes from Angel Castillo from Morgan Stanley.
Speaker Change: for this year. I was just wondering, as you think about the incentives or maybe what needs to be done to support.
The Continued Reduction of Used Inventories.
Speaker Change: As well as just any other kind of ongoing incentives there, can you just talk about the level of confidence that
Speaker Change: and then similarly on the construction side, you lowered that to flat this quarter, or I guess, for the full year.
Speaker Change: Can you talk about there as well, the level of confidence in a, you know, that actually be in flat now versus, you know, perhaps some of the competitive dynamics you're seeing, you know, to kind of drive and move volume in that segment.
support that used market.
Speaker Change: We feel good about where pool fund balances are. You know, there's still levels that are supportive of
Aaron Wetzel, Joshua Jepsen, Unknown Executive, Joshua Jepsen,
Speaker Change: We're very strong in terms of moving moving sales. We had a really, really strong December based on some of those programs. We're going to expect, just given dynamics in the market, that we'll probably see some continued price pressure, particularly in the early part of the year. I think as you look at our second quarter, we'd expect price pressures to continue. That moderates some, Angel, as you move through the year. Some of that's comps as well. You know, as we did some price action in the back half of 25, the comps get a little bit easier on the construction and forestry side. That's what gives us that flat guide.
Angel: Yeah, maybe one thing to add just on the CNF side, you brought up a good point, Josh, in terms of a little more price pressure in 2Q. We could see that we probably have a little more underproduction on the earth moving side in 2Q there as well. So that'll impact kind of
Angel: their cadence of margins as we go through the year, you know, they'll actually we'd expect them actually build from a margin perspective and improve as we go.
Josh Beal: Through the remainder of the year, 2Q probably being the most challenged, and then we start to, to Beal's point, we start to lap some of the price actions that we took last year, so the comps get a little bit easier in the back half of the year as well. Thank you.
Our next question comes
from McCrea-Dobre from Bayard.
Speaker Change: Okay, all right, thanks for taking the question. I'm wondering if you can...
Maybe give us a little bit of hand-holding on margins.
Speaker Change: Getting to the full year guidance. And again, this is a question that applies across the board, all three segments. Thank you.
Speaker Change: Yeah, I mean, I think, you know, as you're seeing, you know, building a full year guide, it is a little bit, you know, atypical in some segments. I mean, Jepsen just mentioned, you know, the construction forestry side, you know, that's going to be very different than what we normally see in a year, just given, given the underproduction in the first half, a little bit on the price cadence as well, you know, you're going to see, you know, gradually improve, you know, sequentially, throughout the year on
Speaker Change: construction and forestry. You know, large ag, as we mentioned, you know, it's going to be a lot more like normal seasonality in terms of sales and in that, that segment, you know, we'll see
Speaker Change: We would expect to see sales peak in the second quarter in large ag as we typically do, so that will likely be the strongest margin quarter from the
Speaker Change: for the year. Now, you're going to see, you know, from the sales side, you know, year over year comps in terms of reduction be different, just given given the underproduction we did in the back half of the year. But it'll be a lot more normal seasonality on the sales side.
Speaker Change: And then, as I mentioned, 4Q, normally lighter on revenue, but we should mark the turn from sales being down year-over-year for the quarter to moving up.
Thanks, Vic. We'll go ahead and take one more question.
Thank you.
J.P.
Hi, good morning. Thank you so much.
Speaker Change: So the farmer aid package from December, how long would it take for farmers to receive bulk of the money such that it can provide some tailwind?
Speaker Change: Yeah, thanks, Tammy. This is, this is Josh Jepsen. I would say, you know, when we saw some of this occur in the past,
Speaker Change: When we saw some payments come through in collate late 19. Generally what we saw is a lot of those things went to shore up balance sheets, pay down debt, buy inputs and those sorts of things. So, I think our expectation is, doesn't probably drive new equipment demand in 25. But likely shores that balance sheets.
Speaker Change: Thanks Tammy and thanks all that's all the time we have for today. We appreciate everyone's time and thanks for joining us.