Q2 2025 Deere & Co Earnings Call
Good morning, and welcome to Deere <unk> Company second quarter earnings Conference call. Your lines have been placed on listen only until the question and answer session of today's conference I would now like to turn the call over to Mr. Josh Beale director of Investor Relations. Thank you you may begin.
Speaker Change: Hello, Welcome and thank you for joining us on today's call joining.
Speaker Change: Joining me on the call today are John May Chairman, and Chief Executive Officer, Josh Jepsen, Chief Financial Officer, Josh Real leader manager Investor Communications.
Speaker Change: Today, we'll take a closer look at Deere's second quarter earnings.
Speaker Change: I spent some time talking about our markets and our current outlook for fiscal 2025 after.
Speaker Change: After that we'll respond to your questions.
Speaker Change: Please note that slides are available to complement the call. This morning.
It can be accessed on our website at John Deere Dot com forward Slash Ernie.
Speaker Change: First a reminder.
Speaker Change: This call is broadcast live on the Internet and recorded for future transmission and use by <unk> company.
Speaker Change: 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 on the call, including the Q&A session agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
Speaker Change: This call includes forward looking statements concerning the company's plans and projections for the future that are subject to uncertainties risks changes in circumstances.
Speaker Change: Other factors that are difficult to predict.
Speaker Change: Additional information concerning factors that could cause actual results to differ materially.
Speaker Change: And in the company's most recent form 8-K risk factors in the annual Form 10-K as updated by reports filed with the Securities and Exchange Commission.
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.
Speaker Change: Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website at John Deere Dot Com forward Slash earnings on a quarterly earnings and events.
John made: I will now turn the call over to John made for opening comments before we begin with our formal remarks.
John: Good morning, and thank you for joining US today. This quarter was marked by historic levels of volatility and significant uncertainty across our end markets given the dynamic global trade backdrop.
John: During times like this it's important to reflect on and reaffirm our core values and the priorities that drive our teams at John Deere everyday, which we've noted on slide three of our presentation.
John: Doing so helps us maintain our focus and resilience, providing a stable foundation that guides, our decision, making and actions ever.
John: Everything that we do at John Deere starts with our customers, who provide food fuel clothing shelter and infrastructure for the world.
John: We are honored to have served them for nearly 200 years and we will continue to do so for the next 200.
John: In times of uncertainty, we must remain steadfast in this commitment practice.
John: Practically speaking this means being deliberate in every action and keeping customers at the forefront of every decision.
John: We will continue to honor our commitments from agreed upon prices to delivering the highest level of uptime and reliability expected from our products.
John: It's in times like these that we have the opportunity to foster new.
John: And strengthen existing customer relationships it end up enduring for generations.
John: Our second priority is our commitment to executing our plan.
John: Which involves taking actions to navigate more uncertain markets, while also maintaining investments in value unlocking products and solutions.
John: Our commitment to our smart industrial strategy remains unwavering.
John: The opportunity to make our customers more productive.
John: Profitable and sustainable is tremendous.
John: And we never lose sight of that.
John: In the near term, we will continue to proactively manage what we can control cost production inventory and quality to navigate this environment, while driving the margins that fuel our investments in the future.
John: Our performance this quarter is a powerful testament to the results that come from this approach on that note.
John: I'd like to commend our teams for the excellent results. They delivered this quarter. Despite the difficult macro environment, we were facing.
John: Finally, I'd like to reaffirm our investment in the future.
John: A future rooted in innovation that began nearly two centuries ago, and a blacksmiths shop and Grand Detour, Illinois.
John: Today that innovative spirit continues with smart industrial.
John: Our strategy that combines investment in advanced technology with.
John: With our legacy of manufacturing excellence.
John: We're proud of our storied U S history.
John: And with nearly 80% of our U S sales and 25% of our international sales built right here in U S manufacturing locations.
John: We standby and continue to embrace our American manufacturing heritage as we deliver value for our customers around the world.
John: Smart industrial unlocks value through the integration of cutting edge technology with premium hard iron equipment.
John: We will continue to robustly invest capital.
John: And R&D to bring these integrated solutions to market enhancing our global competitiveness.
John: I'm proud that this innovative work will build on our American routes and we are prepared to invest $20 billion in the U S. Over the next decade, as we spearhead new product development.
John: Cutting edge technologies and more advanced manufacturing.
John: These strategic investments are an opportunity to further leverage an already broad base of U S assets that include.
John: Steve facilities across 16 states supported.
Supported by a highly skilled workforce that has built John deere into the iconic brand it is today.
John: As we look forward, we're more excited than ever about the opportunities ahead.
John: And our ability to drive unparalleled value for our customers worldwide by leveraging our rich heritage.
John: It's a testament to our dedication to innovation excellence.
John: And our customers success.
John: Thanks, John we'll now proceed with our remarks on the quarter.
John: John Deere delivered a better than expected second quarter with an 18, 8% margin for the equipment operations, demonstrating exceptional execution amidst challenging market dynamics.
John: Notably margins exceeded projections, despite tariff headwinds due to better than expected sales and favorable production costs stemming from efficiency gains and our material sourcing and factory operations.
John: Over as we look to the second half of the year global uncertainty continues to weigh on customer sentiment across end markets.
John: And while the top end of our fiscal 2025 outlook remains relatively unchanged from prior guidance.
John: Fluid tariff environment has led us to broaden our guidance range as we actively work to mitigate impacts to both our customers and dear.
Slide four opens with our results for the second quarter.
John: Net sales and revenues were down 16% to 12, 676 3 billion, while net sales for the equipment operations were down 18% to 11 171 billion.
John: Net income attributable to <unk> company was 180 4 billion or $6 64 per diluted share.
John: Turning to our individual segments, we begin with the production and precision AG business on slide five.
John: Net sales of $5 $2 3 billion were down 21% compared to the second quarter last year, primarily due to lower shipment volumes.
John: Price realization was positive.
John: Under one point.
John: Currency translation was negative.
John: By roughly two points.
John: Operating profit was 114 8 billion, resulting in a 22% operating margin for the segment the.
John: The year over year decrease was primarily due to lower shipment volumes and an unfavorable sales mix coupled with the negative effects of foreign currency exchange.
John: These headwinds were partially offset by lower production costs and price realizations.
John: Moving now to small AG and turf on slide six.
John: Net sales were down 6% totaling $2 99, 4 billion in the second quarter as a result of lower shipment volumes, partially offset by price realization.
John: Price realization was positive I just under one point.
John: Currency translation was negative by roughly half a point.
John: Operating profit was approximately flat year over year at $574 million, resulting in a 19, 2% operating margin.
John: Lower production costs, lower warranty expenses and price realization were offset by lower shipment volumes and an unfavorable sales mix.
John: Slide seven gives our industry outlook for AG and turf markets globally.
John: We continue to expect large AG equipment industry sales in the U S and Canada to be down approximately 30% due to pressures from high interest rates elevated late model used inventory levels and trade uncertainty.
John: These headwinds are slightly mitigated by stable crop prices, given tighter global stocks and bolstered farm balance sheets strengthened by the distribution of government funds.
John: For small AG <unk> turf in the U S and Canada industry demand is now expected to be down between 10 and 15%.
John: While the dairy and livestock segment remains at historically strong levels of profitability and certain high value crops like almonds returned to profitability equipment purchases remained subdued due to prevailing uncertainties and elevated costs.
John: Demand has been further restrained by deterioration in turf and compact utility tractors sales due to consumer confidence and high interest rates weighing on purchase decisions.
John: Moving to Europe, the industry is still projected to decrease approximately 5%.
John: Sentiment in the region is trending higher given strong dairy and livestock margins and an improving arable outlook.
John: Stabilized commodity prices and input costs, along with improving interest rate environment should provide more planning certainty despite below average yields in key markets.
John: In South America industry sales forecast for tractors and combines remained roughly flat.
John: In Brazil sentiment continues to improve as crop yields recover in corn and soybean profitability returns.
John: Additionally continued high margins in coffee production are driving increased demand for small and mid sized tractors.
John: Over record crop production levels are likely to put pressure on commodity prices capping overall growth and farm profitability for the region.
John: High interest rates continue to temper demand.
John: Industry sales in Asia are in Asia are now projected to be flat as the outlook for tractor sales in India improves supported by favorable growing conditions steady crop acreage and increased availability for agricultural credit.
John: Next our segment forecast to begin on slide eight.
Our production in precision AG, our net sales forecast for the full year remains down between 15 and 20%.
John: Our forecast now assumes roughly a point of positive price realization for the full year offset by one and a half points of negative currency translation.
John: Our full year forecast for this segment's operating margin is now between 15, 5% and 17% primarily due to tariff impacts.
John: Slide nine shows our forecast for the small AG and turf segment.
John: We now expect net sales to be down between 10 and 15%. The guide includes a half point of positive price realization and flat currency translation.
John: The reduction from the prior quarter is primarily due to softening demand in the U S turf and compact utility tractors segments.
John: Partially offset by improved sales projections are midsized tractors in Europe, and small tractors in India.
John: The segment's operating margin guide is now between 11, five and 13, 5%, primarily due to tariff impacts and the reduction in projected U S turf and compact utility tractors shipment volumes.
John: Shifting over to construction and forestry on slide 10.
John: Net sales for the quarter declined roughly 23% year over year to $2 $94 7 billion due to lower shipment volumes.
John: Price realization was negative by just under one five points currency.
John: <unk> was also negative by roughly less than half a point.
John: Operating profit was down year over year at $379 million, resulting in a 12, 9% operating margin due primarily to lower shipment volumes and an unfavorable sales mix as well as negative price realization.
John: Slide 11 describes our construction and forestry outlet.
John: Industry sales projections for Earth moving equipment in the U S and Canada remained unchanged with construction equipment expected to be down around 10% and compact construction equipment expected to be down around 5%.
John: And markets continued to see high utilization as construction backlogs are steady in construction employment remains at all time highs. However, create uncertainty and high interest rates are pressuring order activity for both construction and compact construction equipment.
John: U S government infrastructure spending continues to provide support to the industry. However.
John: However, projections for single family housing starts are moderating given macro uncertainty and higher mortgage rates.
John: Similarly.
John: <unk> sales continue to soften while high interest rates continued to pressure multifamily and commercial real estate markets.
John: Global Forestry markets are expected to be flat to down 5% as all global markets remain challenged.
John: Global Road building markets are forecasted to be roughly flat with continued strong end market demand globally in particular record sales at our <unk> Tradeshow in April reinforced the uptick we're seeing in sentiment and demand throughout Europe.
John: Moving on to the construction and forestry segment outlook on slide 12.
John: 2025, net sales remain forecasted to be down between 10% 15%.
John: Net sales guidance for the year includes one point of negative net price realization and flat currency translation.
John: The segment's operating margin is now projected to be between $8, five and 11, 5% due primarily to tariff impacts and to a lesser degree lower price realization.
John: Now transitioning to our financial services operations on slide 13.
John: Worldwide financial services net income attributable to Deere <unk> company in the second quarter was $161 million net.
John: Net income was flat due to less favorable financing spreads and a higher provision for credit losses, which were offset by lower <unk> expenses and a reduction in derivative valuation adjustments.
John: For fiscal year 'twenty five our outlook remains at $750 million as benefits from a favorable compare to special items related to the sale of Funko, John Deere and lower <unk> expenses are partially offset by less favorable financing spreads.
John: And finally slide 14 outlines our guidance for net income effective tax rate and operating cash flow.
John: For fiscal year 2025, our outlook for net income has widened to between $4 75, and $5 5 billion.
John: That's our guidance incorporates an effective tax rate between 2020 to 'twenty, and 2020, 20% and 22%.
John: And lastly, cash flow from the equipment operations remains projected between four five and $5 5 billion.
John: This concludes our formal comments, we will now shift to a few topics specific to the quarter before we open up the lines to questions from our investors.
John: Let's begin our discussion with <unk> performance in the quarter.
John: We saw net sales increase sequentially, albeit down year over year.
John: Additionally, margins were down roughly two points year over year, but grew sequentially to come in at just under 19% for the quarter.
Bill: While there are clearly macro headwinds at play the quarter represents strong operational performance. So just bill can you kick us off with a breakdown of the quarter.
Bill: Sure, Josh and I think John said it best earlier.
Bill: This quarter was about resilience through uncertainties despite.
Bill: Despite the macro volatility we executed a plan and achieved better than expected results across all three of our equipment operations segment.
Bill: Our factories ran well supporting higher than expected sales volumes, particularly in North American large AG.
Bill: Additionally, production cost favorability was better than anticipated, reflecting our focus on driving material costs and overheads out of the business as we manage through this downturn.
Bill: Also recall that lower net sales in the first quarter reflected a shift of shipments later in the fiscal year.
Bill: This quarter, we saw some of those volumes materialized.
Turning to construction and forestry, our second quarter results reflected a return to seasonal production in line with retail demand across our Earth, moving factories, which were shut down for nearly half of the first quarter as we right size inventory levels.
Bill: Sequential sales and margin improvements were partially offset by negative price realization in the quarter. However.
Bill: However, our road building business delivered another quarter of strong margins from a stable global sales helping.
Bill: Helping support our overall division financials.
Bill: Maybe one final point on the quarter, it's important to contextualize that the equipment operations results that we delivered were net of roughly $100 million in incremental tariff headwinds.
Bill: All in we feel really good about what we were able to accomplish across all divisions in Q2.
Speaker Change: Thanks, Jeff that's a great segue into my next question, which is probably top of mind for everyone. Given theres been a lot of fluctuation in trade policy over the last few months.
Speaker Change: As you noted we saw roughly a $100 million of tariff headwinds in the second quarter.
Speaker Change: What should we expect going forward and what have we incorporated into our guide for the rest of the year.
Speaker Change: Sure Josh as you noted the trade environment is certainly fluid evidenced by trade agreements and adjustments to tariff levels announced in this past week.
Speaker Change: We're monitoring these developments closely while concurrently planning and executing mitigation strategy.
Speaker Change: To provide context on deere's potential tariff exposure, we've provided a geographic breakdown of U S complete good and component sourcing and the appendix of today's slide deck.
Speaker Change: As John noted earlier, nearly 80% of U S. Complete good sales are from products built at our U S manufacturing facilities with over 75% of the components used at those facilities sourced from U S based suppliers.
Speaker Change: The majority of the U S completed sales of sourced outside of the U S are tied to mid sized tractors and road building equipment from Europe on.
Speaker Change: On the component side, our primary primary non U S sourcing is from Mexico and Europe.
Speaker Change: As it relates to our forecast, we expect a pre tax tariff impact in fiscal year 2025 of just over $500 million.
Speaker Change: Should these tariff levels continue throughout the remainder of the fiscal year.
Speaker Change: This forecast is based on the impacts of tariffs in effect as of May 13 include.
Speaker Change: Including the reductions and reciprocal and retaliatory tariffs between China, and the United States announced earlier this week.
Speaker Change: Using this baseline assumption as a starting point, we've expanded our guidance range to account for scenarios that may evolve as the year plays out.
Speaker Change: For context in the split by business unit, we would expect 40% of the cost to impact our construction and forestry operations with about 35% hitting small <unk> at about 25% hitting production and precision that.
Jeff: Hey, this is Jeff I'd like to quickly call out a few of the mitigation efforts, we're taking to minimize the impact of tariffs on our customers dealers and dear.
Jeff: Teams across the organization are working diligently not only to understand and quantify risks.
Jeff: Bill noted, but also to mitigate impacts where theyre clear executable solutions available. One example is the work we've done to certify eligible products for U S. MCA and agg use only exemptions for Mexico and Canada. These certifications were not required historically as our products were generally duty free.
Jeff: A few weeks, we've been able to successfully certified complete using components that make up the majority of the potential exposure from these countries. Additionally, our supply management team has been working to optimize our global trade flows actively moving component sourcing, where we see no regret solutions overall, our teams are doing exceptional job to position.
Jeff: Well as we navigate the current environment.
Jeff: Now turning to potential price actions, we don't see much opportunity for price mitigation to impact fiscal 2025, given our order books for the for most product lines are nearly full for the remainder of the year.
Jeff: That being said, we're contemplating tariff impacts on our cost structure as we look to model year 'twenty six pricing. However, we are doing so been very mindful of the dynamic environment and the pressures our customers have had to deal with over the past few years.
Speaker Change: Thanks for that color Josh Josh.
Speaker Change: Going back to the breakdown on tariff costs by segment can you walk us through why we're seeing such outsized impact on our CNS business and then more broadly can you give us an update on market commentary and how that's impacting our guidance.
Speaker Change: It's a great callout, Josh and an important point to clarify.
Speaker Change: I'll start by reiterating that the majority of the margin compression <unk> seen in our updated see enough guide this quarter was driven by forecasted tariff impacts.
Speaker Change: Now that exposure is primarily driven by three areas.
Speaker Change: First U S sales from a road building business are exposed to the 10% global tariffs as production is located almost entirely in Germany.
Speaker Change: Second we currently operate under supply agreement with our former JV partner for excavators, a product line that makes up roughly 40% of the earthmoving market.
Speaker Change: The supply agreement applies to both complete goods sourced from Japan, along with Japanese source components for production in our North Carolina factory.
Speaker Change: It's important to note. However that this exposure will reduce over the next few years as we begin to rollout Deere designed and U S manufactured excavators.
Speaker Change: Finally, the earthmoving market is more exposed to China component sourcing in our AG business, given the robust and mature supply base for construction equipment. The developed in that region over the past two decades.
Speaker Change: Looking at the <unk> industry utilization of earthmoving equipment in our end markets remains healthy while current uncertainty has weighed on new equipment replacement demand.
Speaker Change: Higher levels of price competition are also impacting Europe, maybe first moving market, which is reflected in our revised pricing outlook for the year.
Speaker Change: It is notable though that better than expected material favorability is helping to offset some of the margin impact of the additional pricing actions that were taken.
Speaker Change: This is Jeff one thing I would like to add here relates to a real building business. Just this past month, we were in Munich for Beaumont, the world's largest construction machinery show held every three years. This is an incredible event for Burton team not only do we see strong sentiment and record orders, but we had the opportunity to showcase the significant strides were making.
Speaker Change: And tech advancements for the industry, including the including the launch of the John Deere Operations Center for Road building production systems. This was on top of the integration of gender engines guidance systems and displays into road building equipment at the show.
Speaker Change: Given the significant similarities between large AG and road building in terms of repeatable jobs and precise execution to define specifications. We can extend the <unk> to <unk> and equipment to enable more digitalization automation and ultimately value for our customers.
Speaker Change: Yes. This is John it's important to highlight that the Virgin Tech story is exactly what we envisioned when we launched our smart industrial strategy in 2020 by focusing on the jobs that our customers do in their respective production systems, we can target our development to solve.
Speaker Change: Their biggest pain points.
Speaker Change: <unk>, combining that focus with a centralized tech stack, which makes leveraging technology across production systems easier and more efficient we can bring value accretive solutions to our customers faster and with greater impact and better capital outlook.
Speaker Change: Allocation.
Speaker Change: Thanks, Sean it's really exciting to watch as our tech stack expands beyond just our large AG business.
Turning now to AG I would like to start with farm fundamentals. So <unk> can you walk us through what our farmers are experiencing as well as what that means for deere in the back half of the year, Yes sure thing Josh trade uncertainty is having an impact on customer sentiment, creating a headwind for the market.
Speaker Change: However, crop prices have generally stabilized, albeit at lower profitability levels due.
Speaker Change: Due to tight stocks driven by better than expected consumption and lower than expected crop production.
Speaker Change: Notably, excluding Ciena stock global grain and oilseed stocks to use ratios are roughly at 20 year lows.
Speaker Change: Additionally, input costs have fallen for a third consecutive year, while they remain above long term averages.
Speaker Change: Finally, nearly 75% of the $10 billion in direct U S government payments under the emergency commodity assistance program had been distributed providing American farmers with liquidity following a challenging 2024 and 2025 crop year.
Speaker Change: So when excluding tariffs we've seen some stabilization in the North American AG market.
Speaker Change: To offer some Richard reap some reassurance that uncertainty levels of base over the course of the year.
Speaker Change: It is also worth noting that as we solve the trade deal announced last week with the UK AG commodities and egg based energy are at the forefront of U S. Administration's trade policy agenda additional demand and market access for U S. Producers is positive and incremental demand may drive improved prices based on the tight stocks to use.
Speaker Change: Ratios that Josh mentioned good.
Speaker Change: Good point, Josh shifting the global markets, we are continuing to see early signs of sentiment shift in South America as Brazilian farmers benefit from improved corn and soybean profitability as crop yields recover amid a weakened real.
Speaker Change: While European markets remained at sub trough levels, we're seeing some green shoots in that region as well.
Speaker Change: Growers are seeing.
Speaker Change: Stability in wheat prices, which along with a return to trend yields should support a recovery in key arable crop markets alongside an already strong dairy and livestock segment.
Speaker Change: Turning to order books availability for both North American produced large tractors and European produced <unk> is into October.
Speaker Change: And in Brazil, Our order books are full through the third quarter.
Speaker Change: Worth, noting that we have less order visibility and turf equipment in compact utility tractors the reduction in our small AG and turf guide Embeds low demand in these markets driven by weaker consumer confidence.
Josh: Thanks, Josh.
Speaker Change: Shifting to inventory can you unpack, what we're seeing over the last quarter for both new and used.
Josh: Yes, absolutely.
Josh: Our current focus for Deere is centered on used inventory in North America as actions, we took over the prior 18 months helped to rightsize new inventory levels in the U S and globally.
Josh: For example, in North America, our new inventory for tractors about 220 horsepower is down over 40% year over year on a unit basis.
Josh: While new combines are down nearly 25%.
Josh: It's always a little bit different for us inventory for a higher than normal mix of late model year tractors continues to persist in the North American market.
Josh: While deere used high horsepower tractors were up slightly quarter over quarter.
Josh: Important to call out the seasonal build and use that occurs as pre planting deliveries of new equipment drive a higher level of trade it.
Josh: Despite the seasonal increase we feel confident in our plan to reduce new striker inventory as <unk> seen the impact of similar actions reduced combine inventory by nearly double digit year over year to below the 10 year average.
Josh: Combine late model equipment have declined more significantly than other vintages.
Josh: <unk> returned used combines to a more normal distribution of equipment age.
Josh: Through increased composite contributions to full funds for dealer development, new financing options that support customer purchases and make incentive dollars go further and our dealer network working with every customer to understand their individual needs for executing our plan to drive down used inventories.
Josh: Yes. This is John it's worth emphasizing that we are tightly aligned with our channel and our focus on right sizing that secondary market that Josh referred to we have the best dealers in the industry and together, we're taking the actions needed to bring <unk>.
Josh: Down tractor inventories I am confident that our approach will yield results and I'm appreciative of our dealers for their support in this effort.
Josh: Thanks, John and Josh.
Josh: <unk> with large AG 225 represents a major milestone in our tech journey as we not only announced the commercialization of autonomous tillage and model year 'twenty six but we're also lapping the first year cohort of tech offerings like <unk> spray and precision essentials can you give us an update on the latest progress across our precision AG solutions.
Josh: Absolutely, Josh and I think it's important to frame this across three areas capabilities adoption and utilization.
Josh: I'll start with capabilities, which is a part of this sector or any that we don't speak about enough and is underappreciated in terms of its importance.
Josh: Capabilities of the foundational building blocks, primarily internal to deere and our dealers.
Josh: That ensure our customers are maximizing the value of our technology and our <unk>.
Josh: <unk> and easy to access manner.
Josh: We've been investing in these capabilities for the last several years and are now beginning to see their benefits come to fruition.
Josh: For example, we've implemented and scaled our license management system integrated with a gender operation center to handle hundreds of thousands of licensees.
Josh: Enhancing the customer experience for purchasing and redeeming solutions.
Josh: We've also built out a customer success function that helps ensure our customers are getting the most out of our technology.
Josh: For example, the <unk>.
Josh: Spring season, we're using automated intervention to ensure that customers are realizing the full value of <unk> in the field.
Josh: Our channel is aligned with us on this work as our dealers are also invested in capabilities through connected support and precision AG specialist roles that support customers as they integrate new solutions and technologies into their operation.
Josh: These capabilities are foundational platform that will continue to build as we progress on our smart industrial journey.
Josh: Turning to adoption, we're seeing continued growth in customers choosing precision sac, because we expand our suite of offerings and bring them to more geographies across the globe.
Josh: Furthermore, many of these technologies our solutions as a service business model makes tech more affordable accessible and adaptable for our customers.
Josh: A perfect example is precision essentials.
Josh: In 2025, we're seeing greater adoption as we expand the solution to additional markets in fact in the first half of this fiscal year. We have already received nearly 10000 orders globally exceeding the not the entire fiscal 2024 order count in just six months.
Josh: Brazil alone accounts for over 3500 of those 2025 orders and we're seeing strong order activity in North America, and Europe as well.
Josh: Going forward success for this and other subscription based technologies will depend heavily on our ability to drive license renewals year over year.
Josh: 25 marks our first year of renewals for the 2020 for precision essentials cohort, where we have a year one goal of 70% renewal.
Josh: Nearly two thirds of eligible machines have renewed thus far and we expect that to increase as we continue to engage with our customers in the renewal process.
Josh: Finally, the best way to enable technology growth is through utilization.
Josh: <unk> growth in the number of acres covered by Deere's precision offerings is the best indicator that customers are seeing value in the technology and we will continue to use it season after season for.
Josh: We're encouraged by the momentum we're seeing in utilization of seeing spray.
Josh: As Youll recall in 2024, we had a few hundred seeing Sprague units running in North America, but those units ultimately covering 1 million acres during last few years for spring season.
Josh: In 2025, we have over 1000, new orders for <unk>, and spray, which significantly increases the population of machines that will be running this year.
Josh: It's worth highlighting for the customers that Ramsey and spray in 2024, we're seeing greater utilization on the same machines in the 2025 season.
Josh: Those same customers have invested in more seeing spray units this year.
Josh: Effectively what we're seeing is a compounding effect more units with more utilization across more farms.
Josh: The combination of capabilities adoption and utilization is continuing to drive more depth and breadth of engagement with deere precision technologies across the world.
Josh: Digital engagement is a great proof point for this represented by the utilization growth, we're seeing in the John Deere operations Center.
Josh: Year over year engaged acres grew by nearly 15% to just over 475 million acres, while highly engaged highly engaged acres grew by over 25% and now represent nearly 30% of total engaged acres.
Josh: We are encouraged by the trend lines, we're seeing these numbers validate not only the effectiveness of our technology, but also the strategy by which we are bringing them to market.
Josh: This is Jeff and one point to add here, which we increasingly talk about is the opportunity to extend these technologies to our Brazilian customers who are in many cases, just beginning their tech journey. In fact earlier. This month, we had our largest product introduction to date Brazil's agro show.
Josh: Given this immense opportunity in our commitment to investing in Brazil for Brazil. We are also excited to announce our Brazil Investor day on June 10th and <unk> at our recently opened R&D Center.
Josh: As we celebrate our 20 <unk> anniversary in Brazil, our livestream event will showcase the incredible opportunity that exists along with the strong foundation, we have built over the past quarter century, which uniquely positions us to drive differentiated value and sustainable growth for our customers and dear.
Josh: Additional information can be found in the quarter's presentation and on our website.
Josh: Really exciting news Josh.
Speaker Change: Shifting now to our last topic I'd like to walk through our capital allocation strategy, Josh Jepsen, given the market volatility and uncertainty what can you share about the actions, we're taking to ensure we can support both customers and shareholders. During this time.
Speaker Change: Our use of cash policy remains the same it starts with maintaining our mid single a or better credit rating to ensure John Deere financial can continue to provide customers with cost effective financing. This is even more important in the current environment. When many financial institutions are less willing to participate in the AG space.
Speaker Change: Our next priority is investing in the business.
Speaker Change: By focusing on value accretive projects and solutions at all points in the cycle, we're able to exit downturns with a strong pipeline to deliver growth and competitive differentiation.
Speaker Change: Ultimately by driving more value for our customers, we can drive more value for our shareholders, which will distribute via dividends and share repurchases.
Speaker Change: All of this is predicated on prudent cash management for the business and.
Speaker Change: And even more so during periods of heightened market volatility and.
Speaker Change: And as we have in the past, we've taken steps to solidify our balance sheets and bolster liquidity.
Speaker Change: I'm confident in our use of cash policy and ability to proactively plan and strategically execute in any market environment.
Speaker Change: Thanks, Josh Great update before we open up the line to questions do you have any final comments you'd like to share.
Speaker Change: Yes, Thanks, Josh.
Speaker Change: The second quarter highlight the strong execution across the organization and I'm proud of what the team has accomplished and the resiliency demonstrated in the face of significant uncertainty.
Speaker Change: Responded with measured actions to deliver optimal long term outcomes for all stakeholders.
Speaker Change: Our near term plan is focused on how we navigate this cycle. The actions we've taken continue to yield results and positioned us well for the future.
Speaker Change: And we are encouraged by the customer value. Our long term strategy is generating customers are choosing our production system offerings, because they understand the outcomes. The deere solution provides.
Speaker Change: We're excited by the opportunities to expand our technology across business units and product lines, leveraging our investments in one business to drive returns and others.
Speaker Change: We will continue to explore and invest in opportunities both organic and inorganic that provide strong returns for our customers and dear.
Speaker Change: In closing, we're committed to our customers and focused squarely on driving long term value for them as we look to mitigate disruptions and volatility in their day to day operations.
Speaker Change: We take seriously the trust our customers place in Dear to ensure they can execute their work and to do so and to do so we hold ourselves to the highest standards to ensure we can deliver on our promise of providing the highest quality machines, most value enhancing technologies and best customer service and support in the industry.
Speaker Change: Thanks, Josh and let's open it up to questions from our investors are now ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure.
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Speaker Change: Operator, we're ready for the first question.
Speaker Change: Thank you we will now begin our question and answer session I would like to ask a question. Please press star One. Please press star two if you'd need to withdraw your question again that is star one to ask a question. Our first question comes from Rob Wertheimer from Melius Research. Your line is open.
Speaker Change: Thanks.
Speaker Change: Apologies everybody I'd like to start out with a strategic question because I thought your comments on the SaaS and the adoption.
Speaker Change: The continued rollout of sandstorm really interesting can you kind of talk about how many different.
Speaker Change: SaaS model as you kind of have.
Speaker Change: Currently I am not sure I understand fully what the precision of central cohort.
Speaker Change: Product line is and then what does the pipeline look like for that we obviously all understand your long term goals.
Speaker Change: A bunch of features that you are kind of rolling out this year next year.
Speaker Change: And how many different offerings are doing in that first row now I know you've worked hard on getting farmers can sort of see the value of it I'm carrying back curious about your progress. Thank you.
Rob Wertheimer: Hey, Rob Thanks for the question I can start off I mean, I think if you think about our SaaS offering.
Rob Wertheimer: It's fair to put them in really three buckets first think about.
Rob Wertheimer: Precision digital technologies things like precision AG essentials things like our <unk> licenses.
Rob Wertheimer: Many of those are the foundational pieces of the tech stack, so precision essentials again as those core elements.
Rob Wertheimer: Of precision the connectivity guidance onboard compute.
Rob Wertheimer: For precision essentials, we're offering at a much lower upfront cost and then an annual license.
Rob Wertheimer: Depending on the level of precision that you have so precision technologies precision has kind of foundational digital elements in one.
Rob Wertheimer: Second one I think you can broadly call as like <unk>, and <unk> technologies things like <unk> and spray, which are usage based and depending on the savings that youre seeing in the field on things like exact shot and then the third which is forthcoming we'll be as we progressed towards the economy again with the goal of our affiliate Panama's corn production system by the end of 2030, you will see many of those.
Rob Wertheimer: Autonomy solutions.
Rob Wertheimer: As a SaaS model as well.
Rob Wertheimer: Rob, It's Jess shifts and I think one thing to add to US is today a lot of those are based on the given solution. A single solution that we have I think increasingly as we as we progress and as we drive outcomes and utilization I think youll see some of those come together more than bundle to make that easier from a customer perspective and thinking about.
Rob Wertheimer: How do they do their jobs across the production system. So not just on a given machine, but across multiple so I think that will will evolve I think.
Rob Wertheimer: We're very early in that stage, but I think that will give us opportunities to demonstrate the value that we see that comes from an integrated production system. So from preparing the land all way through harvest and then leveraging.
Rob Wertheimer: The data across that that we can provide and demonstrate that value in a different way, but early early today from where we are thank you probably you had asked about the pipeline for you. So maybe just real quick on that I mean, it's.
Rob Wertheimer: Think about that in terms of both both expanding on additional <unk>.
Rob Wertheimer: Expanding on current foundational platforms, and we think it's probably like a platform.
Rob Wertheimer: They were in corn soy cotton.
Rob Wertheimer: In North America, we have the ability over time to expand that different crop types expand that to different geographies as well.
Rob Wertheimer: Autonomy.
Rob Wertheimer: Is it <unk>.
Rob Wertheimer: To develop and rollout over the next few years you saw in CES has taken that autonomous platform beyond large AG commercial mowing the orchards to construction.
Rob Wertheimer: And then the ability to continue to build on the digital side as well both on expanding their production systems.
Rob Wertheimer: We mentioned that.
Rob Wertheimer: This call, where we've taken the op center and brought that to a road building as well. So it's a combination of building a platform is expanding their capabilities in a different production systems and geographies as well. Thank you Rob.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Tim Thein with Raymond Research I'm, Sorry, Raymond James Your line is open.
Speaker Change: Alright. Thank you Yeah. My question is on the implied profitability in the second half for.
Speaker Change: Or the PPA segment, and basically how we should be or shouldn't be viewing that in the context of kind of a stepping off point heading into 2006 and.
Speaker Change: If I add back.
Speaker Change: I think call it $100 million, what you outlined in terms of the tariff impact for that segment.
Speaker Change: You would imply decrementals are going to like 80%.
Speaker Change: In the back half versus I think something like a mid <unk> in the first half so.
I know that the comparisons get skewed because of just the <unk>.
Based on the numbers, especially in the fourth quarter, when I assume youre expecting to be growing revenues, but maybe Josh jepsen just a comment there in terms of what we should be thinking about in terms of the key kind of elements in that that implied profitability in the.
Speaker Change: Second half thank you.
Speaker Change: Yes, Thanks, Tim.
Speaker Change: I would say there is a few things that play there I mean, certainly the tariff impact, which you described which is which is impactful given.
Speaker Change: What we see there. Thank you also have a mix impact there north American large AG.
Speaker Change: Being down the industry being down where it is even producing to retail at a much lower level is.
Speaker Change: Impactful as it relates to the decremental and then I think on top of that while prices favorable it's favorable to a less extent than a year ago. So those things I think stacked on top of each other drive.
Speaker Change: The vast majority of that decremental.
Speaker Change: And as you noted a smaller change on the top line.
Speaker Change: Just creates the denominator in that math.
Speaker Change: Push at those numbers a bit higher than what you traditionally see.
Tim: Thanks, Tim got it thank you Josh.
Jamie Cook: Thank you. Our next question comes from Jamie Cook with <unk> Securities. Your line is open.
Jamie Cook: Hi, Good morning, a nice quarter I guess my first question. My question is just the.
Jamie Cook: The world worrying with tariffs et cetera. Your approach as we enter in 2026 in terms of the early order program, whether there'll be any change there on pricing and then I guess, Josh typically for.
Jamie Cook: <unk>, if we enter a year with flat sales, but we're producing in line with retail demand that generally means.
Jamie Cook: <unk> can manufacture earnings growth can you still see that as potential or should we be less.
Jamie Cook: Optimistic about your ability to fully offset tariffs and looking out into 2026. Thank you.
Speaker Change: Yeah. Thanks, Jamie I mean first starting with early order programs and those programs are just getting underway and in fact, we just logged sprayers yesterday.
Jamie Cook: And planters will be forthcoming at the beginning of June.
Speaker Change: Youre right.
Jamie Cook: Structure of the early order programs will be similar to the past.
Jamie Cook: Occur in phases over the next several months I think the beauty of that structure, particularly in an uncertain environment is it gives us some some price flexibility phase by phase as we see this.
Jamie Cook: With this ever changing.
Jamie Cook: <unk> environment play out.
Jamie Cook: And so we do have structured some optionality.
Jamie Cook: And those programs Optionality to wait as we think about the price and discount structure for upcoming phases.
Jamie Cook: Tariffs.
Jamie Cook: Evolve over the next few months. So we've got that built in as you think about what that means for next year and building in line with retail.
Jamie Cook: The point I would make is and we mentioned this in our comments.
Jamie Cook: We've done a lot of work last year, and then that continued in the first half of this year and some select geographies.
Jamie Cook: To get new inventory.
Jamie Cook: So there's still very very low level candidly, we've talked about the work we did last year in the U S. U S is in line with retail this year.
Jamie Cook: Combines in South America, we had a little more under production to do in the first half of 'twenty five that's complete now.
Jamie Cook: In fact, the back half of this year in Brazil, actually built a little bit of seasonal inventory as we go into the spring selling season.
Jamie Cook: Season in the region and then in Europe as well, we mentioned some green shoots there.
Jamie Cook: Our plan now with mid tractors in Europe is to build in line with retail given some of the pickup there. So we feel really good about where new inventories are positioned and that positions us well to be in line with retail.
Jamie Cook: In 2000, <unk> well thanks for the question Jami.
Speaker Change: Thank you. Our next question comes from David Raso with Evercore ISI. Your line is open.
David Raso: Hi, Thank you I just wanted to dig into the second half large AG margins again, just so we understand a bit.
David Raso: Again, the implied decrementals or for the whole the whole second half don't worry about third and fourth quarter just in aggregate just seem to be particularly weak and I'm, just making sure I understand is this.
David Raso: Pricing that we're price protecting the backlog with retail invoices and that sort of sort of the pain point, but I would've thought you would have baked that into the 100 million number right.
David Raso: 5% of the back half of the year $400 million total tariff hit I'm, just making sure I understand why the margins would be that low in the second half of the year. It seems sort of strikes me as very conservative and at the same time I don't want to be thinking about 26, that's really.
David Raso: And appropriate low starting point.
David Raso: I'm, just making sure the mix being the mix shouldn't be that different than what we've seen already so I apologize to beat the dead horse a little bit, but can you help us understand why the margins of that.
David Raso: Soft in the second half it just strikes me as very conservative. Thank you.
David Raso: They will walk through a couple of things here I mean, I think if you think about.
David Raso: First and foremost the impact of <unk>.
David Raso: Tariffs as we said of it's $500 million for the full year, we incurred $100 million.
David Raso: In the second quarter is about $400 million rest of year.
David Raso: The full year impact on the equipment operations.
David Raso: For those.
David Raso: Of that tariff impact of $5 500 million is about is about one point to a point and a half, but again being so back end loaded.
David Raso: And back half margins Thats two to two five points in the back half. So if you if you account for that.
David Raso: And foremost.
David Raso: That's a pretty big lift.
David Raso: The decremental math candidly gets a little bit funny, just because of the change in sales is relatively small.
David Raso: Year over year as you look at the second half of $25 for the second half of <unk>.
David Raso: 24 or so.
David Raso: These changes these tariff impacts have an outsized impact on the decremental math, just given the smaller denominator from a sales change as we mentioned.
David Raso: A little bit.
David Raso: Little bit less price in the back half as we think about that a little bit less material available material favorability I was really really strong in the front half of the year.
David Raso: That pulls back a bit.
David Raso: In the back half we expect.
David Raso: Production costs ex tariffs continue to be positive they will be positive for the full year.
David Raso: But to a lesser extent in the back half. So I think between all of those elements, David I think thats, what thats whats driving a little bit of the compare there. Thanks for the question.
David Raso: Yes.
Speaker Change: Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Jerry Revich: Yes, hi, good morning, everyone and congratulations on the strong quarter.
Jerry Revich: Wondering can you just revisit just philosophically.
Jerry Revich: <unk> cost conversation.
Speaker Change: Visit the prepared remarks, I mean, historically you folks have pushed pricing ahead of inflation with value and so you had mentioned for 2006 list prices are under review to see if that can continue yes can you just expand on that because your competitors are facing the same.
Jerry Revich: Worst cost pressures than you and you folks have a really strong track record of pushing through.
Jerry Revich: Inflation in all forms. So can you just talk about is there any scenario under which you might be price tariff cost negative.
Jerry Revich: In 2006, thank you.
Speaker Change: Hey, Jerry it's Josh Jepsen, I guess I would start and then maybe reiterate a little bit of what I said earlier I think one of the unique.
Speaker Change: The components that we face today is just coming through a period of significant inflation and we're very mindful of how much prices been pushed pushed through the system as an industry over over call. It the last four five years.
Jerry Revich: And as a result, I think very mindful of what do we do here as we go forward given given where the industry sits today so.
Jerry Revich: Do we believe we will get price yes.
Jerry Revich: This year, we're doing about one point of price and in a challenged market.
Jerry Revich: If we look at in production precision AG some of the early order programs that are out there.
Jerry Revich: Prices were in the low single digit range, 2% to 4% price.
Speaker Change: And as Josh mentioned, we will continue to evaluate those.
Speaker Change: As we go forward, but we think thats reasonable.
Speaker Change: We're trying to take a measured approach there.
Speaker Change: As we think about not only the customer dynamics, but what does it mean from a from a margin perspective.
Speaker Change: As we March forward at the same time, we're going to continue to put more and more effort into not only mitigation efforts, but what are we doing on production cost whether thats material costs logistics costs, overheads, which had been favorable thus far this year, we're going to keep pressing on those things, which we have control over so too early I think to predict exactly what <unk>.
Speaker Change: Six looks like I think we've got a lot of actions that we can take but definitely trying to be measured and mindful.
Speaker Change: From a price perspective for for customers. Thanks.
Jerry Revich: Thanks Jerry.
Speaker Change: Thank you. Our next question comes from Chad Dillard with Bernstein. Your line is open.
Chad Dillard: Hey, good morning, guys.
Chad Dillard: So I guess just to kind of continue with that that tariff conversation.
Chad Dillard: Just trying to think through how you guys are thinking about sharing the tariff cost across all of the constituents here with the vendors yourselves dealers customers just given that your partners have seen a lot of price increase over the last several years.
Chad Dillard: Its like some combination of all.
Chad Dillard: Yeah.
Chad Dillard: But I'd just love to get a sense of just a.
Chad Dillard: A philosophical approach.
Speaker Change: Yes, Thanks, Ed I think first and foremost in.
Speaker Change: We've mentioned this but it's certainly underscoring the dynamic environment and through all of this we're trying to understand what the levels are going to be and again as we've seen in the last three or four days.
Chad Dillard: That can change pretty quickly and so I think first and foremost just reaffirming.
Chad Dillard: Taking a measured approach in all of this in a measured approach in terms of the decisions that we make how quickly react just because it is changing changing so quickly so.
Chad Dillard: With that as a backdrop certainly is Josh Jepsen mentioned.
Speaker Change: We're going to take price.
Speaker Change: <unk> seen that and the actions that we've taken thus far on early order programs again.
Chad Dillard: Ranging from 2% to 4% and the programs that are out there.
Chad Dillard: Thus far and as I mentioned, we've got some optionality.
Chad Dillard: And in those phases of the earlier programs to adjust.
Chad Dillard: Is the environment that potentially could change as well as it relates to sourcing we certainly work with our suppliers.
Chad Dillard: Two.
Chad Dillard: Just to make sure we're equally sharing what we are seeing at the same time, we're continually looking for the best cost options, we do that.
Chad Dillard: Tariff environment, and not a tariff environment and Thats just a continual good good practice good hygiene that we have to look for those lowest cost options. We've done a lot of work over the last several years in terms of dual sourcing in terms of supply of resiliency and those efforts are still very much in play right now.
Chad Dillard: The environment changes so it's a combination of all of the above and I think short answer is it will it will be sharing across all those stakeholders.
Chad Dillard: <unk> that we mentioned.
Chad Dillard: Chad.
Chad Dillard: Okay.
Speaker Change: Thank you. Our next question comes from Christian Owen with Oppenheimer. Your line is open.
Christian Owen: Hi, Good morning. Thank you for taking the question I wanted to come back to your used inventory comments in your prepared remarks.
Chad Dillard: And just get a sense of velocity.
Chad Dillard: <unk> of that used equipment and you did note some of the cap dollars that have started to flow and how you're thinking about and how that could influence your net pricing capability, whether that's in the back half or as we get into 2026.
Speaker Change: That influence of the huge market would be very helpful. Thank you.
Chris: Yes, Chris Thanks for the question.
Speaker Change: As we mentioned in the used market in North America.
Chad Dillard: Really have seen good progress on combines over the last last year or so so the focus here is really around high horsepower tractors in North America.
Chad Dillard: And what we've seen in that segment is some stabilization.
Chad Dillard: The year over year increases.
Chad Dillard: In horsepower used.
Chad Dillard: Mitigating a moderating I should say.
Chad Dillard: We saw some seasonal build in the quarter, but I think we did see a little bit of.
Chad Dillard: A slowdown just over the last three or four weeks of April just given the volatility in the market.
Chad Dillard: I think I think pace to your question Kristen is still a bit unknown and theres a lot of factors in play there.
Chad Dillard: There is some stability in AG fundamentals, albeit at lower levels.
Chad Dillard: You mentioned, the economic system Thats coming through we view that as a good thing.
Chad Dillard: For our customers and again, we're continuing to put put those ingredients in place keeping new inventories low.
Chad Dillard: As well as pull funds that are that are supporting the supporting our dealers as they work on the used market. So very mindful of the pace is very much a focus area.
Chad Dillard: We'll see how plays out of the back half of the year.
Speaker Change: Kristen maybe a slightly slightly different way to answer that is I think there is an underlying question of kind of what unlocks the AG cycle in North America, and I think uses one one part of that.
Speaker Change: As we can move move and work through some of that used I think thats certainly helpful. I think having a farm bill in place will provide some certainty for our customers, which would be supportive and then I think there is given where stocks to use are theres, a few things that could drive.
Speaker Change: Some upside whether that's trade deals that we talked about like I mentioned with U K that are driving AG commodities in AG energy.
Speaker Change: Year around <unk>, as we think about demand for ethanol.
Speaker Change: And then certainly there is always weather impacts that that can be impactful. So think uses important certainly and I think there are a couple of other things that we could see that.
Speaker Change: If occurred could could drive a little bit of a turn in the shape of the cycle, where we're at.
Speaker Change: We have time for one more question.
Speaker Change: Thank you our last question comes from Stephen Volkmann with Jefferies. Your line is open.
Stephen Volkmann: Well. Thank you guys just split in there.
Speaker Change: Maybe just kind of tug at this threat around tariffs one more way.
Speaker Change: Ultimate goal to price so that you protect margin.
Speaker Change: Or is it your ultimate goal to sort of cover the dollars that tariffs might sort of add to your P&L.
Speaker Change: Instead.
Speaker Change: Hey, Steve This is Josh ups and it's a great question.
Speaker Change: Some of them worked through and wrestled with and when we saw some of the inflationary pressures really over the last five plus years.
Speaker Change: Ultimately the goal would be to find ways to protect margin and thats not just price. That's what we're doing from a cost structure perspective, and how we can how we can add value now I think seeing that.
Speaker Change: <unk>.
Speaker Change: There is multiple pieces of that and the timelines of those probably vary a little bit, but I think overall the view is we want we want to protect margin.
Speaker Change: Both through through activities on cost as well as what we do from a price realization perspective.
Speaker Change: That's all the time that we have for today, we appreciate everyone's time and thanks for joining us on our call have a great day.
Speaker Change: Thank you that concludes today's conference. Thank you for participating you may disconnect at this time.