Deere & Company

Good morning and welcome to the Deere and Company Fourth Quarter Earnings Conference Call. Your lines have been placed on a listen only until the question and answer session of today's conference. I would now like to turn the call over to Josh Jepson, Director of Investor Relations. Thank you. You may begin.

Thanks, Robin. Hello. Also on the call today are Ryan Campbell, our CFO. Jamie Hindman, our Chief Technology Officer, and Brent Norwood, Manager, Investor Communications. Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2021. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at johndeere.com slash earnings. First, a reminder, This call is being 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. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8K and periodic reports filed with the Securities and Exchange Commission. This call may also include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP. Additional information concerning these measures, including reconciliations to comparable gap measures, is included in the release and posted on our website at johndeer.com slash earnings under quarterly earnings and events. I'll now turn the call over to Brent Norwood.

John Deere demonstrated strong execution in the fourth quarter, resulting in a 12% margin for the equipment operations and net income exceeding our full year forecast. Despite significant uncertainty early in the year for large ag markets, fundamentals improved throughout the fourth quarter, driving growth prospects for 2021. Meanwhile, markets for our construction and forestry division also improved in the fourth quarter, leading to a solid finish to the year and modest levels of recovery projected for fiscal year 21. Now, let's take a closer look at our year-end results for 2020, beginning on slide three. For the full year, net sales and revenue were down 9% to $35.54 billion, while net sales for equipment operations were down 10% to $31.272 billion. Net income attributable to Deere and Company was $2.751 billion, or $8.69 per diluted share. Net income for the year was negatively affected by impairment charges, losses on business disposals, and employee separation costs of $458 million after tax. For the same periods in 2019, the similar charges were $82 million. Slide 4 shows the results for the fourth quarter. Net sales and revenue were down 2% to $9.731 billion, while net sales for the equipment operation were down 1% to $8.659 billion. Net income attributable to Deere and Company for the quarter was $757 million or $2.39 per diluted share. Fourth quarter net income was negatively affected by impairment charges and employee separation costs of $211 million after tax compared to $74 million for the same period in 2019. Turning to a review of our individual businesses starting with agriculture and turf on slide five. Net sales were up 8% compared to the fourth quarter last year, primarily due to price realization and higher shipment volumes, partially offset by the unfavorable effects of currency translation. Price realization in the quarter was positive by five points, while currency translation was negative by one point. Operating profit was $860 million, resulting in a 13.9% operating margin for the division. The year-over-year increase was driven by price realization and lower R&D expenses and reduced SG&A, improved shipment volumes and mix, and lower warranty expenses. The items were partially offset by impairments and employee separation expenses, which totaled $164 million in the quarter. Please note that the $153 million shown on the waterfall is net of $11 million in separation costs from 2019. For the full year, the Ag and Turf Division incurred $286 million in non-recurring charges, including employee separation expenses, impairments, and a loss on a sale. Before reviewing our industry outlook, we'll first provide commentary on the regional dynamics impacting ag markets and deer operations around the globe, starting on slide six. In the U.S., farmer sentiment showed improvement over the quarter. as the combination of government support and improved commodity prices boosted farm income prospects for the year. Meanwhile, concerns over market access temporarily subsided, with exports to China rebounding compared to last year. Stocks to use and carry out estimates for corn and soybeans are now forecast at multi-year lows due to diminished production on account of some regionally dry weather and a diretro storm in August, as well as increased export activity. The improvement in fundamentals and farmer sentiment is reflected in the progress of our early order programs. At this time, we've concluded all three phases of our planter and sprayer programs, while our combine program recently finished phase two. Sales for planters are up 10% compared to last year, with sprayers and combines up even further. Meanwhile, our large ag tractor order book has strengthened over the last quarter with orders up nicely compared to the previous year. Lastly, retail activity picked up in the fourth quarter, leaving new and used inventory positions at multi-year lows. Shifting to South America, record soybean production, higher commodity prices, and favorable exchange rates continue to drive positive producer margins in Brazil this year. As a result, activity accelerated in the fourth quarter and far exceeded our forecast. making a very strong finish to 2020. For fiscal year 2021, the order book is quite strong, reflecting the positive fundamentals with order coverage now extending well into the first half of the year. Similar to North America, the strong finish to the year in Brazil depleted equipment inventory levels below historic averages, keeping momentum for new equipment demand healthy as we begin the year. In Europe, Healthy prices for small grains such as wheat have boosted sentiment for arable farmers and spurred demand in the back half of 2020. Overall, arable margins should see modest gains this year, though results vary throughout some regions experiencing lower production due to dry conditions. Meanwhile, dairy and livestock producers may experience some pressure in fiscal year 21 from soft dairy margins and growing concerns with respect to African swine fever. Importantly, Deere's operations in Europe have benefited from a more focused strategy and demonstrated an uptick in large ag market share as well as much improved profitability for the region. Looking ahead, the tractor order book is up relative to last year, providing solid visibility into 2021. Turning to Asia Pacific, key markets like India and Australia rebounded nicely from the early pandemic lockdowns and are expected to resume growth in fiscal year 21. Meanwhile, operations and other markets are benefiting from some of the disciplined portfolio actions we've taken to date. With that context, let's turn to our 2021 Ag and Turf Industry Outlook on a slide seven. In the US and Canada, we expect ag industry sales to be up between five to 10% for the year. The increase year-over-year reflects improved fundamentals in the ag sector as well as the historically low inventory levels at the start of the year. Moving on to Europe, the industry outlook is forecast to be flat to up 5%, with strength in arable offsetting some weakness in dairy and livestock. In South America, we expect an industry sales increase of about 5%, with solid visibility into the first half of the year, especially in Brazil. Industry sales in Asia are forecast to be down slightly, though key markets for deer are performing slightly better. Lastly, sales of turf and utility equipment are expected to be flat to up 5% following a solid year in 2020. Moving on to our ag and turf forecast on slide 8. Fiscal year 2021 sales of worldwide ag and turf equipment are forecast to be up between 10% and 15%. The incremental increase relative to the industry guidance reflects plans to recover inventory levels in small ag, which ended the year at historic lows for inventory to sales ratios. The forecast also includes expectations of three points of positive price realization, as well as a currency tailwind of about one point. For the division's operating margin, our full year forecast Now, let's focus on construction and forestry on slide 9. For the quarter, net sales of $2.461 billion were down 16% primarily due to lower shipment volumes partially offset by price realization. Operating profit moved lower year-over-year to $196 million due to lower sales volumes and mix, impairments, and employee separation expenses. The decrease in profit was partially offset by price realization and lower R&D expenses and reduced SG&A, lower warranty expenses, and improved production costs. The total costs for impairments and employee separation charges were $76 million for the quarter, while the full-year costs were $184 million. Let's turn to our 2021 Construction and Forestry Industry Outlook on slide 10. Construction equipment industry sales in the U.S. and Canada are now forecast to be down about 5%, with continued uncertainty expected in the oil and gas and non-residential sectors. Meanwhile, compact construction equipment industry sales are expected to increase about 5% as the housing market fundamentals continue to be positive through 2021. Moving on to global forestry, we now expect the industry to be flat to up 5% as a recovery in lumber demand, particularly in North America, should lead to increased production throughout the year. Moving to the CNF division outlook on slide 11. Deere's construction and forestry 2021 net sales are forecast to be up between 5% to 10% compared to last year. Our net sales guidance for the year includes expectations of about one point of positive price realization and a currency tailwind of about one point. We expect the division's operating margin to be ranged between 9% to 10% for the year, benefiting from price, volume, and non-recurring expenses from 2020. Let's move now to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere and Company in the fourth quarter was $186 million, benefiting from lower impairments and reduced losses on operating lease residual values and favorable financing spreads, partially offset by a higher provision for credit losses and employee separation expenses. For fiscal year 2021, the net income forecast is $630 million, which contemplates a tax rate between 24% to 26%. The provision for credit losses forecast for 2021 is 27 basis points. Before moving on to the 2021 company outlook, I'd like to welcome our Chief Technology Officer, Jamie Hindman, to the call. Jamie recently assumed the CTO position and played a pivotal role in shaping our smart industrial strategy and vision for Deere's technology stack. Jamie?

Thanks, Brent. As noted, I recently assumed the newly created chief technology officer position, and I spent the last few months finalizing our organizational design and refining our technology strategy to best enable the smart industrial operating model. I've been with Deere for over 20 years in a variety of engineering roles in both the ag and turf and construction and forestry divisions, and most recently led engineering for the global tractor product family. Most simply put, the chief technology office is responsible for delivering Deere's technology stack. Think of our tech stack as the full set of components required to deliver technology solutions to our customers. For nearly 25 years, Deere has invested in core technologies and capabilities that can be leveraged across the enterprise. These core competencies are primarily focused around machine guidance, digital connectivity, machine intelligence, and more recently, autonomy. Historically, Deere operated within multiple disparate business units that were spread out throughout the enterprise to pursue innovations in these core technologies. As part of our redesign, we've consolidated these units under the CTO organization. This drives a higher degree of focus and unlocks significant efficiencies for our R&D investments. Our approach to precision technology, as shown on slide 13, is distinct within the industry as we've maintained end-to-end development responsibility for our tech stack. developing unique solutions from the embedded hardware and software in our equipment to the digital platforms our customers utilize. While we pursued a vertically integrated path for our core capabilities, we have chosen to partner with others for non-core technologies, things like graphical processing units and cameras. Additionally, we've opened up our digital platform to include over 185 API partners. Over time, our philosophy has remained consistent, as depicted on slide 14. We seek to develop or acquire core technologies that add value and are unique to the jobs that our customers do, while outsourcing non-core technologies when partners can bring scale or offer faster speed to market. In any case, we maintain the development responsibility for the final solution to ensure seamless integration into our equipment. This approach has served us well, and it traces its genesis back to our acquisition of NavCom in 1999. At that time, we decided to own certain technology competencies, starting with satellite guidance. The acquisition delivered a foundational element to our tech stack, and it enabled us to lead the industry in innovation from the early days of AutoTrack to turn automation and now AutoPath, which is our latest solution for path planning. Furthermore, by owning this technology, we've been able to scale guidance innovation throughout our entire large ag fleet. We followed similar blueprints with other core technologies from our acquisition of Phoenix International in 1999 to the organic development of the John Deere Operations Center beginning in 2012. Our acquisition of Blue River Technology in 2017 reflects our view that machine learning and computer vision are essential competencies required for the next generation of machine intelligence and automation. Similar to other core technologies, we see wide applicability of Blue River's competencies across our large ag product portfolio and also intend to leverage the vision systems for obstacle detection in our construction and forestry division. Essentially, this technology can be applied to optimize machine use and job outcomes anywhere a human operator controls or adjusts machine settings. Ultimately, we believe that a complete tech stack delivers the most value for our customers when it's paired with the underlying equipment and a dealer network that can support it. This seamless integration is key to achieving the highest levels of productivity and sustainability and is a requirement for innovations like plant level management and autonomy. Furthermore, our comprehensive system delivers the ability for equipment to become smarter throughout the course of a production system. While many industry players offer point solutions for a given technology or a specific production step, we offer customers a system advantage where the combined equipment and the information from the technology stack passes insights to each proceeding and subsequent step in the production system. For example, our sprayers leverage the guidance lines from planting for more efficiency and accuracy, resulting in less crop damage, while our tillage operations are informed by the previous year's harvest data. Slide 15 highlights the comprehensive systems we are building. The first component of our precision ag system is the most important and can't be overlooked. Our precision ag strategy begins with the underlying equipment that executes a job in the field. While our industry is attracting new players from nontraditional disciplines such as software or robotics, these technologies must ultimately be paired with ag equipment to accomplish the tasks in the field. As a result, Deere's primary advantage comes from a product offering that spans each step in the production system, paired with the industry's largest installed base, and coupled with complementary technology applied to each product within that production system. The last component required to deliver precision solutions is a dealer network that can sell, service, and support the latest technologies. Increasingly, the last mile is becoming one of the most critical enablers for precision adoption, and our channel has been leading the industry in terms of modernizing their capabilities and their staff. In short, our precision strategy is very much a system of ag equipment combined with core technologies and a dealer support network working in concert together to make farming more productive and more sustainable. While we are immensely proud of the success we've achieved so far, we are even more enthusiastic about the runway of opportunity that's ahead of us. Throughout our precision journey, we've experienced several inflection points where technology advancements unlock new possibilities and extend our runway beyond our prior ambitions. Innovations in connectivity, advanced onboard computing, and artificial intelligence have reset the realm of possibilities. Today, we see many years of runway for each of our existing core technologies individually. Furthermore, the opportunity set extends much further as we begin stacking these core capabilities to create new functionality in our future product roadmaps. Over the course of the year, we look forward to providing further details regarding the opportunity set in front of us and will also provide further color on some of the exciting product releases coming to market in the near term. Before turning the call back over, I'd like to offer a few comments on the acquisition of Harvest Profit, a software platform that's focused on farmer profitability. We are striving to make our customers the most profitable and sustainable in their industry. We can't accomplish that without being able to help customers measure profitability. Harvest Profit gives us a significant boost in ensuring we help customers make more profitable and sustainable decisions in the years to come. Additionally, with the precision ag opportunity set growing substantially over the next decade, we see significant value in our ability to ascribe value of our precision tools to our customers, and this acquisition provides us a path to attribute that value, thus furthering the adoption of technology. At this time, I'll turn the call over to Ryan Campbell for year-end guidance and closing thoughts. Ryan? Thanks, Jimmy. Slide 16 outlines our guidance for net income, our effective tax rate, and operating cash flow. For fiscal year 21, our full-year outlook for net income is forecast to be between $3.6 to $4 billion. It's important to note that constraints in the supply base and labor force availability due to COVID-19 remain key risks to our fiscal year 21 guide. The guidance incorporates an effective tax rate projected to be 26% to 28%. Lastly, cash flow from the equipment operations is expected to be in the range of $3.8 to $4.2 billion and contemplates a $700 million voluntary contribution to our OPEB plan. Before we respond to your questions, I'd like to offer some perspective on 2020, the prospects ahead of us, and a few thoughts on our portfolio and capital allocation strategy. As we look back on 2020, it's important to acknowledge the exceptional efforts taken by our employees, suppliers, and dealer channel this year. Employees across our company logged extra hours and adapted to an ever-changing environment to create safe working conditions and ensure the supply of parts and equipment to our customers so that they could continue their essential work. Similarly, our dealers quickly adjusted to the pandemic and played a critical role keeping our customers' businesses operating. This year served as a reminder of just how impressive our dealer group is, and we are grateful for the tremendous performance they put forth. And as a result of the effort put forth by employees, suppliers, and dealers, we posted one of the strongest fourth quarter performances in company history. Excluding costs associated with employee separations and impairments, our construction and forestry division achieved 11% margins, the highest fourth quarter since 2014. Similarly, ag and turf fourth quarter margins, excluding special items, were approximately 16.5%. which is the highest fourth quarter in the division's history, eclipsing results from 2013 despite around $1 billion less in net sales. While encouraged by our recent results, we are even more excited by the opportunity ahead of us. In the midst of addressing a global pandemic, we also instituted a new strategy for the company over the year. In doing so, we accomplished three primary objectives. One, we've reorganized the company around production systems to mirror the way our customers do business. Two, we've taken significant strides towards optimizing our cost structure. And three, we've adapted our investment priorities to ensure a greater degree of focus on the products and solutions that are most differentiated and unlock the highest value to our customers. A more focused R&D investment strategy is essential to realizing the value of the technology stack that Jamie just described. While we spent decades investing in the core competencies that comprise our current technology stack, we see significant runway ahead to build on what we have done and advance technology for our next generation of solutions. And our new strategy plays a vital role in unlocking the necessary capital to achieve the potential we believe is possible. 2020 has been a year of change at Deere, and that has included some activity with respect to our portfolio. In some cases, we've made decisions to exit businesses or reduce footprint to serve markets more efficiently. While in other areas, we've added to our capabilities, such as our recent purchases of Unimil and Harvest Profit. As we contemplate 2021, we expect to continue our portfolio evaluation, which may result in additional activity throughout the duration of the year. As such, we intend to provide regular updates on subsequent earnings calls as we take actions in this area. Now, while we've made efforts to better focus the internal investments we are making, please know that our overall priorities related to our cash resources remain the same. We remain committed to our A rating and will continue to fund our operations at levels that support our strategic initiatives. Next, we'll pay a dividend within our targeted income range. And with other priorities secured, we will return capital through our share repurchase program. We resumed the program in the fourth quarter and will continue to execute on our capital priorities in 2021.

Thanks, Ryan. Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the procedures. In consideration of others and our hope to allow more of you to participate, please limit yourself to one question. If you have additional questions, we'd ask that you please rejoin the queue. Robin?

And thank you. At this time, to ask a question, it is star followed by the number one. Mute your line. Recall your name clearly as prompted. And our first question is from Jerry Refich with Goldman Sachs.

Good morning and happy Thanksgiving, everyone.

Thank you, Jerry.

I'm wondering if you can talk about ag and turf incremental margins from here. Obviously, you got two really strong margins much earlier in the cycle than most of us expected. How do we think about operating leverage from here, assuming we do get a multi-year ag and turf recovery? Can you still, off of these higher levels, deliver 30% plus in current margins as we think about what a multi-year recovery could look like?

Yeah, thanks, Jerry. As it relates to the margins and, you know, thinking about this next year, 2021, you know, 15.5 to 16.5 absolute margins, you know, we do expect that we can do the, you know, roughly 30 to 35, you know, from an incremental basis. uh, in, in kind of the underlying operations. I mean, I think when you think about this, this year, you know, a few things to consider as far as, you know, potential or not potential headwinds in, in the forecast would be incentive comp has moved up and is, is a bit higher in 21, you know, from, from a company wide perspective, that's about $160 million headwind. And then we are seeing a little bit higher, um, Overhead costs, some of that's related to volume, but certainly still have some of that related to just overall caution as it relates to COVID and the impacts as we're seeing spread and contagion in a lot of our key geographies. Yeah, Jerry, it's Ryan.

I wanted to think about it. We've structurally improved the profitability of the equipment operations, including ag and turf. But we intend over the long run to still operate with that flexibility that gives us the ability to perform on an incremental basis in the 30% to 35% range.

Thanks.

Thanks, Jerry.

Thank you. Our next question is from Jamie Cook with Credit Suisse. Your line is open.

Hi, good morning. Happy Thanksgiving and nice quarter. I guess my question, if you assume the high end of your guide on the sales and on the margins front, it implies your margins are already almost hitting. you know, the 15% mid-cycle margin target that you guys have laid out. So I'm just, you know, what's embedded in your view of the cycle and your 2021 guidance? And I guess the longer term question is, are we further along than we thought we would be? Do we need to revisit that target? I'm just wondering if the market under appreciates the margin story for dear longer term. Thank you.

If you think about where we're at in the cycle, ag and turf, this year we're projecting to be pretty close to mid-cycle. That said, mix is still not normal. We think large ag in North America is around 90% of mid-cycle, small ag overall a little bit above mid-cycle. Relatively close, but not there. I think what we've seen is significant progress on the margin front. As Ryan mentioned, I feel like we've structurally improved our ability to perform and execute and drive that margin level. So we're continuing to work on that. And as implied with our guide this next year, expecting above that 15% target for ag and turf in 2021.

But in total for the companies, is the 15% too low now, I guess I'm asking? You know, because we're getting there on a combined basis and we're not even at mid-cycle.

Yeah, Jamie, the goal was for 2022, kind of at mid-cycle, you know, we'll continue to execute and deliver on that. And then 2022, we'll take a step back and reflect on what we want to drive into the future, particularly focusing on making the investments that really can change the game for our customers and create value for them. So hang with us and wait until, you know, we execute and deliver in 2022. But we've got a long runway of things that we can do to make our customers better.

Okay. Thank you. Have a great Thanksgiving.

And thank you. Our next question is Stephen Fisher with UBS.

Thanks. Good morning. I'm just curious to ask you about how you're factoring in raw materials costs for fiscal 21. We're seeing some steel price increases, but I notice your COGS percent assumed is lower in the forecast. So just curious how you've thought about that and front half versus back half. Thanks.

Steve, when we look at material, we've had a tailwind in 2020 from a material point of view, in particular on steel. That's after we saw increases in 18 and into 19. So it's been favorable. um you know in in 2021 you know our contracts we tend to cover you know a quarter a little bit more in terms of you know the the lag time between you know price movements and when we see those come through so we have you know some some coverage there so to to your point you know uh to the extent you see some of that inflation probably more impactful later in the year That said, as we kind of step back and look at material overall, you know, are seeing some of those trends in terms of prices moving up, but we're also pretty confident in some cost reduction projects and things we have going on that we think about material kind of coming in, you know, relatively stable year over year. Thanks, Steve.

Happy Thanksgiving.

Thank you. Our next question is from Stephen Volkman with Jefferies. Your line is open.

Hi. Good morning, everybody. I wonder if we can spend a moment on the pricing question. You guys obviously had very good pricing, especially in A&T in the fourth quarter, and I guess the outlook is pretty good as well. Can you just kind of describe what you're seeing there and why it's as positive as it is?

Pricing, Steve, you're right, was better than expected in the fourth quarter. I think, you know, maybe backing up, you know, what hasn't changed is our philosophy on pricing, continuing to focus on value and the upside that we can create for our customers. I think when you look specifically at what we saw in the fourth quarter for ag and turf, There were a few things that drove that level of pricing. One, and we noted, Brent kind of mentioned this in his comments, we had tighter inventory positions kind of across most of our geographies and models, in particular on small tractors and turf. That drove less spend as a result of tighter levels of inventory. That's one component. The other piece, and we talked a little bit about this last quarter, we saw more of it this quarter, was the cost for low-rate programs. So buying down interest rates to offer low-rate programs to our customers. which are pretty prevalent in small tractors and turf, that cost was lower as a result of just lower interest rates in the market. So that was impactful. And then lastly, we saw pricing overseas. We had continued strength in a number of overseas markets. that benefited price in the quarter. So, you know, we ended the year, you know, strong, obviously, and we're forecasting, you know, about three points next year. So, you know, continue to manage that. I think part of that, too, you think about as we go into the year with tighter inventories, you know, we think that lends itself to, you know, a little bit lighter incentive spending as we work to recover some of that inventory in 21. Thanks, Steve. Go ahead and jump to our next question.

Thank you. Our next question is from Ann Deggan with JP Morgan. Your line is open.

Hi, good morning. It's Ann Deggan.

Hi, Ann.

Hi. I just wanted to ask you about your comment that you're only at about 90% of mid-cycle and large ag going into fiscal 21. You know, that seems a little inconceivable to me, given that farmers are sitting there with $50 billion in excess government payments this year on top of $24 billion that they received last year. And so, you know, the notion that if they're not spending now, given the fundamentals and given the extra money they have, and with government payments expected to revert to normal going forward, you know, why wouldn't 21 represent the new peak, not 90% of normal?

Yeah, so maybe as we think about that, I mean, maybe a little bit of a journey. You know, last year, 2020, we were around 80% of mid-cycle for large ag in North America. So we're seeing that step up to about 90. So we are seeing that. You know, maybe taking a few of those pieces of your comments there, you know, as it relates to what's going on. Government support, obviously, has been very strong. I think from a customer perspective, the preference would be access to markets over aid. I think that's underlying. And as we've seen some of the export markets open up, I think you're seeing more sentiment improve. But the aid has, in large part, in our view, been used to pay down debt and really manage and shore up balance sheets. So I think that's been a positive, you know, and underlying that also you're seeing strong land values, you know, in the Midwest, seeing some upward movement in land values. So, you know, I think underpinning there a really strong balance sheet for farmers, particularly as we exit the year. Fundamentals have moved, and they've moved really over the last six weeks. It's been pretty recent on the back of revisions down of ending inventories of commodities, China purchases, and then obviously the aid that you mentioned. All of those, we've seen impact sentiment. Those things have been positive. I think as it relates to looking forward, we don't expect aid to recur, but we do believe higher commodity prices are going to benefit cash receipts as we go forward. So we don't expect a huge downward movement in cash receipts for principal crops in 2021. Saying all of that, I think we step back and say we are seeing demand pick up. We're seeing that in early order programs and the large tractor order book that Brent mentioned. So I think we're really kind of at an inflection point right now where we're seeing demand move. We would say there's still a long runway of replacement demand as you look at the age of the fleet and those sorts of things. So we think we're a ways off mid-cycle, let alone peak. Thanks, Anne. We'll go ahead and jump to our next question.

And thank you. Our next question is from Robert Wertheimer with Malus Research.

Hey, good morning, everyone, and thanks. I mean, obviously, you've had a very dynamic year with a lot going on. I wonder if you have any updated thoughts on either, you know, the buckets of margin, you know, as you think of getting your structural goal. Others have mentioned you're pretty far advanced on that path. And maybe if not that, I mean, do you see the same sort of long-term potential rising up in construction margins? You know, there's a little bit less strength there, I guess, you know, versus ag. and then just maybe a little bit less potential on the tech side. I'm not sure. So just your thoughts on margin buckets and or construction structural margins. Thank you.

Yeah, Rob, I think overall, bucket-wise, not a lot of change as we think about the past 15. Certainly cost, we've done a lot of work on the cost side as it relates to structure as well as we've begun work on footprint and those sorts of things. So I think that we feel good about the progress there. Aftermarket continues to be something we're focused on. That's not something that changes immediately, but we like the organizational structure and the priorities that we've laid out there. for the team and making making good initial progress in the precision ag you know jamie you know outlined you know continues to be an opportunity for us and i think you know uh as we continue to develop technologies i think we see more and more opportunity to leverage and that's really where uh you know jamie's new org It steps in. As it relates to construction, certainly I think continuing to operate efficiently there, we've tried to be really disciplined on price, and you've seen that over the course of 2020, which has aided margins. The road building side of the business, you know, we think is going to be a substantial contributor, you know, as we think about the overall, you know, delivering 15% margin. And, you know, this year, you know, the road building side, you know, worked through a really choppy year and performed, you know, very, very well and proved out, you know, part of the hypothesis there that they're going to be less cyclical. And that was certainly the case. You know, they ended the year down about 8%, you know, compared to construction, which was down much more significantly this And maybe the last thing, you know, on the construction side where we do think we have an opportunity to drive margin and differentiation is on technology. So maybe I'll ask Jamie to talk a little bit about how we think we can leverage technology in CNF and road building.

thanks rob for the question you know i do think if you if you look at precision uh generally right many of the technologies that we're developing on the ag side have applicability at the component level within our construction and road building products as well and the benefits of precision extend to that business also this this need to be more precise with equipment reduce the amount of time the equipment spends on a job site to do the job those sorts of things all factor into our ability to take technology that we're developing within the enterprise and apply it to the construction and road building products as well. Thanks, Rob.

We'll go ahead and go to our next question.

And thank you. Our next question is from Chad Dillard with Bernstein. Your line's open.

Hi. Good morning, everyone. So can you talk about your precision ag take rates in the early order program? How are the rates for exact immersion apply, how they compare versus last year? And have you started to offer see and spray as a part of the early order program? And if you could give some color and take rates there. And then just lastly, just maybe you could talk about the roadmap for precision ag beyond corn and soybean ecosystem and, you know, will it require new technology beyond the current offering? Just that. Thank you.

yeah i'll start there i mean from an early order program you know we we saw it you know take rates uh kind of at in line with what we talked about a quarter ago you know so in the you know in the low 40s on exact emerge you know high 40s near 50 on exact apply and then uh combine advisor actually in the 70s you know so you know those those specific solutions now we've got you know a few years under our belt we're seeing you know continued strong adoption there which has been positive, and I think just clearly demonstrating the value of what those can do when you think about executing the jobs that those customers are performing. Maybe from a see and spray perspective, Jamie, you want to talk a little bit just about what we've seen from a technology perspective, having it out in the field?

We've had machines with customers over the last 12 months, and especially this summer, learned a lot. We will have machines with customers next summer as well. The feedback has largely been outstanding. People gravitate to the value proposition. They get it. They understand it. and it's easily demonstrable. I'll maybe take this a different direction past sea and spray and just talk maybe about the question on how applicable is technology outside of corn and soy from a production system perspective. I'll tell you what we're really doing is we're giving machines vision and intelligence, right? And that extends well past this sort of a multidimensional runway. It extends well past corn and soy into other ag production systems. It also extends past the ag production systems into several of our construction, forestry, and road building segments. And so there's a lot of opportunity out there just with making machines more capable from a vision and intelligence perspective. And then there's another dimension of that that's the data thread that that creates that links all of these steps within a production system together. So really exciting stuff to come and definitely applicable outside of corn and soy.

Yeah, maybe one last thing to add on to that, Chad, is, you know, we're also seeing the opportunity on geographic growth from a precision ag perspective. We've seen really strong, you know, upward movement, you know, in engaged acres, you know, globally, but, you know, in particular in South America and in Europe. So, you know, as we think about, you've got this opportunity on geographic basis across ag and turf and CNF, and then, you know, essentially every job that customers are doing. Thanks, Chad. We'll go ahead and go to our next question.

Thank you. Our next question is Joe Tis with BMO.

Hey, guys. I just wondered if you can talk a little more deeply about CNF from like a structural standpoint and the ability to get to 15% operating margins and maybe also just touching on the ability to get paid for putting precision software into the machines. Thank you.

Yeah, I think on the margin side, you know, we're seeing, you know, we've seen, I think, the division perform pretty resiliently through a year in which, you know, sales were down pretty significantly. And we, you know, we, North American construction equipment, you know, we took out about 30%. of field inventory. So, you know, pretty significant action this year to put us in position to build in line with retail next year. So, you know, I think the actions were taken overall as a company as it relates to cost structure are beneficial here. Jamie's organization from CTO perspective, you know, pulling the technology together to be able to leverage across, we think that's a big opportunity. And he just mentioned a few examples of where we think we can do that. The road building side continues to be one where we see the opportunity to continue to grow there and grow margin as we execute both integration plans and everything else there. So I think we feel like we've got a runway there to improve and continuing to focus on markets and products where we can differentiate to deliver margin performance. Thanks, Joel. We'll go ahead and jump to our next question.

Thank you. Our next question is from David Russell with Evacor.

Good morning. With the A&T sales midpoint guide, the 12.5%, but 4% of that you note is price and currency, that's only about, obviously, 8.5% implied volume. So if my math's right, the way you destocked small ag this year, I mean 2020, the small ag business alone just returning back in line with retail, with their production, it almost accounts for almost all that 8.5% volume growth. So I just want to make sure, if those numbers are correct, are you indeed implying large ag sales in 21 are really not growing much at all? And if so, given the order book commentary, the inventory commentary, why is that?

Yeah, so when you think about the kind of the sales and linking that up with the outlooks, I mean, the biggest, you know, components that are from a large ag perspective, North America, we expect to build in line with retail. um you know small small ag roughly we expect to be flat in north america uh to your point we will produce above retail on uh on small tractors and we expect you know to to build some inventory we're coming off historic lows you know last year i think we ended at 55 inventory to sales this year we ended at 20. uh so you know we will see some recovery there but again we expect that market to be relatively flat but we will build some inventory there In South America, Brazil in particular, we will probably recover. We expect to recover a little bit of inventory that got depleted in 4Q as the market turned pretty strongly in the fourth quarter. So, you're right. I mean, I think when you combine price and FX with kind of North America being up some, South America being up some, and then overproduction to recover replenished inventory on small tractors. That's kind of the math to get to those numbers.

But the clarification, you said large ag in North America in line with retail. Is that not up in an up retail forecast, meaning did you not destock at all in 2020 to where you'll actually produce lower than retail sales? Again, I don't understand the flat coming off a year of some D stock, and you think retail's up.

Yeah, we produced in line with retail and large ag in 2020, and we intend to do the same in 21. Retail up a little bit. Okay. All right. Thanks, David. We'll go ahead and jump to our next question.

Thank you. Next question is from Nicole DeBlaze with Deutsche Bank.

Yeah, thanks. Good morning, guys.

Hi, Nicole.

Hey there. Just wanted to make sure you could hear me. So I guess maybe looking at the October retail sales trend, I think, you know, in all the categories, X four-wheel drive tractors, it looks like, you know, gear came in a bit below the industry. Could you just maybe explain a bit about what's going on there?

yeah you know i think you know there are a few things in play there i think you've given our order fulfillment model you know focus on inventory management and and obviously you know some some of this demand is is lumpy throughout the year you know we will at times you know lose a little bit of short-term market share at inflection points and i think that's some of what we saw this year particularly as we got towards the end of the year where we were tighter on inventory. And as we worked through 2020 with the uncertainty kind of broad range across agriculture and even on the small tractor and turf side, we tried to pretty diligently manage those inventories. And we were lighter at the end of the year when we saw the inflection. Historically, what we've seen is we've been able to recover that, you know, as we build that back up. So, you know, I think that's our expectation that you see us recover that as we go forward.

Yeah, that's right. And as Josh said, you know, sometimes in inflection points, given our order fulfillment strategy, you know, we may on the margin miss a few tractor or combine shares, but history would tell us that we recover that back very quickly. And over the long run, you know, we're heads down focused on creating sustainable market share growth through creating differentiated value for our customers. So that's really what we're focused on.

Thanks, Nicole. We'll go ahead and go to our next question.

Thank you. My next question is Larry DiMaria with William Blair.

Thanks. Good morning, everybody. Appreciate the tech stack discussion. We don't see on there is obviously deer prescribed agronomy, but obviously agronomy is embedded everywhere. But now that you've bought a software company, you're developing and have bought some AI capabilities, it seems logical from the roadmap that maybe being positioned to recommend seed, since you have the data, and you're getting down to the individual plant level. So I'm just kind of curious, as this roadmap plays out, can you get into the prescription seed recommendation game? Because it seems like it's going that way. Or alternatively, maybe it's more about making sure you can attribute value to deer so you can attain greater pricing and greater, you know, a wild share from customers. So just trying to think and see how this plays out over the next few years and as you maybe come into more conflict with seed companies.

Thanks for the question. I'll take it. I think the way to think about that right now is we're really focused on creating the data and collecting the data that any individual grower needs in order to make decisions exactly like the one that you're talking about. seed hybrid they might plant in any given year. And at some point in the future, I think we'll have the growers have enough information because of the data they've collected over the previous production system steps over the previous years to optimize that seed choice. But in the end, that's their choice to make. They have a responsibility or they have a relationship with their trusted advisors, whoever that might be in their agronomic community, and they're the ones that are going to end up making that decision as they see it as best for their farm in any given year, given their operations.

Thanks, Larry. We'll go ahead and jump to our next question.

Okay, our next question is Adam Oldman with Cleveland Research.

Hi, guys. Good morning. Congrats on the quarter. Ryan, I was wondering if you could provide us a little bit more color on the guidance for the year in terms of how you see the cadence playing out, maybe first half to second half in terms of sales and margin, any important moving pieces that we should keep in mind. And then can you confirm if there's any material restructuring charges left in the guidance for this year? Thanks.

Josh, I'll start. I mean, I think as you think about kind of cadence of the year, I don't think we expect to see much abnormal from a seasonality perspective. So I think we'd expect both divisions to kind of play out relatively normally, nothing major that would disrupt that. I think as it relates to one-time charges, those sorts of things, on the employee separation actions, we don't expect anything in 21 in the guide. We've got that all in 2020. To the extent we continue to work on portfolio optimization, those sorts of things, we could see charges there, but as we would execute on those, we'll provide updates then.

Yeah, as Josh said, nothing unique in next year's cadence. And then, you know, we don't have forecasted charges in the guide for next year. You know, we are still assessing kind of operations and footprint globally as we make those decisions. We'll obviously identify any costs associated with those during our quarterly calls.

Thanks, Adam. We'll go ahead and go to our next question.

There's Jobry with Baird. Your line's open.

Thank you. Good morning, everyone. I wanted to go back to construction and forestry, the margin discussion there and, you know, recognizing that you had a lot of sort of discrete costs that that impacted you in fiscal 20 that now are clearly going away. It seems if I'm doing the math right here that the incremental margin that you're guiding to is somewhere in the low 20s, low to mid 20s here. So I guess my question is this. First, where are we in terms of Bergen or road buildings margin? And, you know, is the path to 13%, 14% operating margin for that business still there? And how do you see that? And sort of what's really embedded here in terms of – incremental margins longer term?

Yeah, I think for incrementals on the business in 21, we're in that range of 20 to 25, which is traditionally where we'd expect to be. As you think about road building, we had a really, really strong quarter in road building in 4Q. And as we look forward, we think that that continues to improve. Even X items where we were this year, we expect next year with top line moving up, call it roughly 10%, we think that that margin steps up again. So, yeah, I think we feel really good about the performance there. And maybe just to reiterate a comment I made earlier, you know, as we think about the 15% and how do we get there, you know, we think the road building piece is a substantial contributor to that margin story as we go forward. Thanks, Mig. We'll go ahead and go to our next question.

Thank you. Courtney Yacovones with Morgan Stanley. Your line is open.

hi um good morning guys um just wondering uh maybe following on the road building discussion i think on cnf you gave us an outlook for um north america construction and compact and forestry but um can can you maybe just share with us what your thoughts on the outlook for road building was and um you know was there substantial underproduction uh you know how did those inventory levels kind of finish this year and what we should be thinking um for next year And also as it relates to North America versus China.

Yeah, so we expect it's a little bit hard on the industry. So we tend to talk about road building more just what we expect from our business there. And, you know, we think that's up about 10% next year, you know, after being down about 8%. in 2020. So seeing some some nice recovery there in that business inventory wise, I think we feel like we're in good shape, you know, I think over the course of 19, and a little bit of 20, you know, we took some more targeted actions on some of the different brands to, to adjust inventory as we integrated order fulfillment, you know, philosophies, but now I feel like, you know, we feel like going into 21, we're in good shape in, in across across those, those brands. Thanks, Courtney.

Our next question is from Ross Girardi with Bank of America.

Thanks, guys. Good morning. Can you clarify that the 90% of mid-cycle for large ag is projected 2021 where you'll finish, or was that actual 2020? And then historically, how far above are you mid-cycle at the peak for ag and turf? I mean, some of the concern out there seems to be that 21 is somehow peak in ag and turf, which seems very hard to contemplate when revenue growth hasn't even turned positive yet, and you only have 21 ag and turf up 10% to 15%.

Yeah, so the 90% is our forecast as we stand now for 2021. 80 to 90 as we look forward. Now, I mean, importantly, you know, we've really seen kind of activity turn in the last four to six weeks. So, you know, obviously we've had early order programs going, but, you know, if you think about kind of underlying fundamentals for farmers, things have, you know, improved from a commodity price perspective and, lower stock levels, that's all really happened very, very recently. So, I think I wouldn't overly interpret what's happened in four weeks and that's everything that's possible there. So, we're still managing it, working through with our dealers and customers where we're at. We feel like we're pretty well positioned, having managed new inventories tightly. Maybe more importantly, used is in really good shape. You know, used inventory levels are, you know, down in places we haven't been since, you know, called before 2014. Used prices on the large ag side are, you know, are seeing upward pressure. So, you know, I think the backdrop and all those things that we've thought would drive replacement demand and support replacement demand that have been, you know, stalled over the last year or two, you know, we've seen some of those things turn and be more favorable for farmers.

Thanks, Ross. On that, wouldn't your normal peak be 20% to 25% above mid-cycle for ag and turf? I mean, if that's the case, historically, the trough to peak move would be something like a 30% type number, not a 10% to 15% number. That's what I'm just trying to clarify in my question.

Yeah, sorry, I forgot that part of your question. Yeah, we would consider 120, you know, 20% above as peak, you know, and that's as we plan. And certainly if you go back to, you know, 2013, you know, large ag in North America was 130%. So, you know, that was, you know, so we've been much higher and higher than even 120, but that's the way we plan. So thanks, Ross. We'll go ahead and try to get one more question.

Thank you. Our next question is from Seth Weber, RBC Capital Markets.

Great, guys. Thanks, and good morning. Happy Thanksgiving. Just a question on the South American industry ag outlook. Up 5% seems kind of conservative. It sounds like your messaging that your order book is up materially here at the end of the year. So can you just You know, frame that. Are you expecting something to really sort of drop off in the back half of the year in South America? Is it just some uncertainty around financing programs or any color you talk to as to the 5% growth for South America? Thanks.

Yeah, so, I mean, yeah, a five for all of South America. I mean, I think your question may be a little more targeted on Brazil specifically. Fundamentals have been really strong. You know, we saw fourth quarter, you know, demand was from a, you know, from a retail perspective was strong and strong enough that you actually saw, you know, the year swing from kind of a negative industry to positive. So that's moved quickly. Brent mentioned our order books were ordered out there through March. One thing that does, when you think about the comparison, the strong fourth quarter is now in our comp. So we'll anniversary that strong industry in 21. So I think that's part of it. But I think overall we're seeing, you know, the dynamics there have been favorable. There may be a little bit of caution as it relates to China buying more grains from the U.S. and what exactly does that mean for them. But overall, I think very, very positive outlook on Brazil. Thanks, Seth. Well, with that, I think we're at the top of the hour, so we'll wrap it up. But I appreciate all the interest. I hope everyone has a good Thanksgiving, and we'll talk soon. Thank you.

And thank you. This does conclude today's conference call. You may disconnect your lines, and thank you for your participation.