Deere & Company

Good morning, and welcome to Deering Company's third quarter earnings conference call. Your lines have been placed on a listen-only mode until the question-and-answer session of today's conference. I would now like to turn the call over to Mr. Brent Norwood, Director of Investor Relations. Thank you. You may begin.

Hello. Also on the call today are Corby Reid, President of Worldwide Production and Precision Ag, Raj Kalithar, Chief Financial Officer and President of John Deere Financial, Josh Jepson, Deputy Financial Officer, and Rachel Bach, Manager of Investor Communications. Today, we'll take a closer look at Deere's third quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2022. 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 also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP, Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at johndeer.com slash earnings under quarterly earnings and events. I will now turn the call over to Rachel Bach.

Thanks, Brent. Good morning. John Deere achieved higher production rates in the third quarter, resulting in a 25% increase in net sales, despite ongoing supply challenges. Financial results for the quarter included an 18% margin for the equipment operations. Ag fundamentals remain solid with our order books beginning to fill for model year 23 products, reflecting continued healthy demand as we look ahead. The construction and forestry markets also continue to benefit from demand, contributing to the division's strong performance in the quarter. Similarly, order books are now extending into 2023, providing visibility into the new year. Slide three shows the results for the second quarter. Net sales and revenues were up 22% to $14.1 billion, while net sales for the equipment operations were up 25% to $13 billion. Net income attributable to Deere and Company was $1.884 billion, or $6.16 per diluted share. Looking at results by segment, beginning with our production and precision ag business on slide four, Net sales of 6.096 billion were up 43% compared to the third quarter last year, largely due to higher production and shipment volumes. Price realization in the quarter was positive by about 15 points, whereas currency translation was negative by about four points. Operating profit was 1.293 billion, resulting in a 21% operating margin for the segment. The year-over-year increase in operating profit was primarily due to price realization and higher shipment volumes, partially offset by higher production costs and higher SANG and R&D spend. The production costs were mostly elevated material and freight. Overhead spend was also higher for the period as persistent supply challenges continued to cause production inefficiencies. Despite these challenges, factories were able to achieve higher rates of production and made progress on reducing the number of partially completed machines in inventory. Our factories are focused on finishing and shipping the remaining machines in the fourth quarter, which will help our progress toward restoring productivity and efficiencies going into next year. The increased SANG and R&D spend reflects our continued development of our technology stack and our progress on our LEAP ambitions, both of which will unlock additional value for our customers. Next, small wagon turf on slide five. Net sales were up 16%, totaling 3.635 billion in the third quarter due to higher shipment volumes and price realization more than offsetting negative currency translation. Price realization in the quarter was positive by 10 points, while currency translation was negative by over four points. For the quarter, operating profit was down year over year at 552 million, resulting in a 15% operating margin. The decreased profit was primarily due to higher production costs, specifically material, offset by price realization. Turning now to the industry outlook on slide six, we expect US and Canada industry sales of large egg equipment to be up around 15%. While the industry continues to be constrained by supply, demand remains robust, and our guidance assumes a heavier back-end loaded year for industry retails. Relative to the industry, we've had our strongest results in high horsepower row crop tractors, and we plan to end the year approaching our highest market share on record. Our order books for the remainder of the current fiscal year are full, and we see signs of robust demand into 2023 with some order books already full through the first half of next year. Small ag and turf industry demand continues to be estimated generally flat this year, While we see steadiness from our hay and forage segment, consumer products such as compact utility tractors and turf equipment are down due to supply constraints, low turf inventory, and moderating demand. Moving on to Europe, the industry is forecast to be roughly flat despite solid demand. While supply constraints and operating challenges are affecting the industry, we expect to finish the year with higher shipments and market share gains. In South America, we expect industry sales of tractors and combines to increase by about 10 to 15%. Despite below trend crop yields due to inclement weather, customers are very profitable this year, benefiting from high commodity prices. Industry sales in Asia are still forecast to be down moderately as India, the world's largest tractor market by units, has moderated from record volumes achieved in 2021. Moving on to our segment forecast on slide seven, production and precision ag net sales continue to be forecasted up between 25% and 30% in fiscal year 22. The forecast assumes nearly 14 points of positive price realization for the full year, which will allow us to be price cost positive for the fiscal year. This is partially offset by roughly two points of currency headwind. For the segment's operating margin, Our full year forecast is between 20 and 21%. The forecast reflects higher costs for material and freight inflation, as well as the elevated overheads associated with the supply constraints that have introduced a number of factory inefficiencies this year. Slide 8 shows our forecast for the small ag and turf segment. We now expect fiscal year 22 net sales to be up in the range of 10 to 15%. This guidance includes over nine points of positive price realization, partially offset by three points of unfavorable currency impact. The segment's operating margin is now forecasted between 14% and 15%. The margin guidance reflects higher material costs and lower expectations for volume, as small engine availability has been especially challenging. Price cost remains neutral for the year. Changing to construction and forestry on slide nine, For the quarter, net sales of $3.269 billion were up 8% due to price realization. Operating profit increased year-over-year to $514 million, resulting in a 16% operating margin. Favorable price realization offset higher production costs during the quarter. The production costs were mainly a result of elevated material and freight, as well as higher overhead spend. Now let's take a look at our 2022 construction and forestry industry outlook on slide 10. Industry sales of earth moving equipment in North America are expected to be up approximately 10%, while the compact construction market is forecast to be flat to down 5%. Though demand remains strong for compact construction products, the downward revision reflects extremely low levels of inventory and supply challenges constraining shipments. And markets for earth moving are expected to remain strong as oil and gas activities remain steady, U.S. infrastructure spend begins to ramp, and CapEx programs from the independent rental companies drive reef-leading efforts. Housing starts have moderated, though still remain elevated versus historical levels. Additionally, record low levels of new and used equipment will dampen any slowdowns. In forestry, we now expect the industry to be flat to down 5%, primarily due to supply constraining the ability to meet demand. Global road building markets are expected to be flat to up 5%. Road building demand remains strongest in the Americas, while China and Russia markets are down significantly. The CNF segment is on slide 11. Deere's construction and forestry 2022 net sales are forecast to be up around 10%. Our net sales guidance for the year includes about 10 points of positive price realization and three points of negative currency impact. The segment's operating margin outlook remains at a range of 15.5% to 16.5%. Shifting over to our financial services operations on slide 12, worldwide financial services net income attributable to Deere and Company in the third quarter was $209 million. This is a slight decrease compared to the third quarter last year, due to unfavorable discrete income tax adjustments, a higher provision for credit losses, and lower gains on operating lease residual values. These were partially offset by income earned on a higher average portfolio. For fiscal year 22, we maintain our net income outlook at $870 million, slightly lower than fiscal year 21, due to a higher provision for credit losses, less favorable financing spreads, and higher S&Gs. The higher provisions for credit losses are primarily related to Russia. The segment is expected to continue to benefit from income earned on higher average portfolio balance. Overall, financial services continues to deliver steady results. Credit loss provisions, lease return rates, and past dues are all in good shape, reflecting the solid balance sheets for our customers. Slide 13 outlines our guidance for net income, our effective tax rate, and operating cash flow. For fiscal year 22, we adjusted our outlook for net income to be between $7 and $7.2 billion. The full-year forecast is inclusive of the impact of higher raw material prices, higher logistics costs, and production inefficiencies caused by supply disruptions. Our forecasted price realization is expected to outpace both material and freight costs for the entire year. Moving on to tax, Our guidance incorporates an effective tax rate projected to be between 21 and 23%. Lastly, cash flow from the equipment operations is now expected to be in the range of $5.3 to $5.5 billion. The decrease reflects the adjusted income forecast and increases in working capital required through the end of the fiscal year, as we expect to maintain higher production levels heading into the first quarter of 2023. At this time, let's discuss a few topics for the quarter in more detail. First, I would like to take a closer look at Production and Precision Ag's third quarter results. An impressive jump in net sales, both compared to the third quarter last year, as well as compared to the second quarter this year. Net sales were up 43% year over year and up 19% sequentially, which is not our typical seasonality. Corey, can you talk through some of the factors that enabled us to achieve that?