Deere & Company

Good morning and welcome to Deere and Company's fourth quarter earning 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. Brent Norwood, Director of Investor Relations. Thank you. You may begin.

Hello. Also on the call today are John May, Chairman and Chief Executive Officer, Josh Jepson, Chief Financial Officer, and Rachel Bach, Manager of 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 year 2023. 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 backslash 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 backslash earnings under quarterly earnings and events. I will now turn the call over to Rachel Bach.

Good morning. John Deere finished the year with strong fourth quarter thanks to a 40% increase in net sales. Financial results for the quarter included an 18.5% margin for the equipment operations. Across our businesses, performance was driven by continued strong demand, higher production rates, and progress on reducing our inventory of partially completed machines. Looking ahead, ag fundamentals remain positive, continuing to drive healthy demand as evidenced by our order books full into the third quarter of fiscal year 2023. The construction and forestry markets also continue to benefit from solid demand, contributing to the division's notable performance in the quarter. Similarly, order books are extended into the second half of 23 providing visibility and confidence in the new fiscal year. Slide three shows the results for fiscal year 2022. Net sales and revenues were up 19% to $52.6 billion, while net sales for the equipment operations were up 21% to $47.9 billion. Net income attributable to Deere and Company was $7.1 billion, or $23.28 per diluted share. Next, fourth quarter results are on slide four. Net sales and revenues were up 37% to $15.5 billion, while net sales for the equipment operations were up 40% to $14.4 billion. Net income attributable to Deere and Company was $2.2 billion, or $7.44 per diluted share. Let's take a closer look at fourth quarter results by segment, beginning with our production and precision ag business on slide five. Net sales of $7.434 billion were up markedly at 59% compared to the fourth quarter last year. This was primarily due to higher production rates both year over year and sequentially. Additionally, we made progress on clearing partially completed machines from inventory. Both contributed to higher shipment volumes for the quarter. Price realization in the quarter was positive by about 19 points. whereas currency translation was negative by about three points. Operating profit was $1.74 billion, resulting in a 23.4% operating margin for the segment. The year-over-year increase in operating profit was primarily due to higher shipment volumes and price realization, partially offset by higher production costs and higher S&G and R&D spend. Operating profit for the quarter was negatively impacted by higher reserves on the remaining assets in Russia, affecting the quarter's margin by about one point. The production costs were mostly elevated material and freight. Overhead spend was also higher for the period as factories continued to experience some production inefficiencies due to supply challenges and clearing of partially completed machines and inventory. Despite these headwinds, our factories were able to maintain higher rates of production and reduced the number of partially completed machines and inventory, allowing us to deliver more equipment to our dealers and customers. Moving to Smalling and Turf on slide 6, net sales were up 26%, totaling $3.544 billion in the fourth quarter due to higher shipment volumes and price realization, which more than offset negative currency translation. Price realization in the quarter was positive by nearly 13 points, while currency translation was negative by over 6 points. For the quarter, operating profit was higher year-over-year at $506 million, resulting in a 14.3% operating margin. The increased profit was primarily due to price realization and improved shipment volumes and mix. These were partially offset by higher production costs, higher R&D and S&G expenses, and unfavorable currency impacts. Please turn to slide seven for the fiscal year 2023 Ag and Turf Industry Outlook. We expect large ag equipment industry sales in U.S. and Canada to be up 5 to 10%, reflecting resilient demand that continues to be higher than the industry's ability to supply, bolstered by the need to replace aging fleets. Our order books now extend into the third quarter, and dealers remain on allocation for 23. For small ag and turf, industry demand is estimated to be flat to down 5%. The dairy and livestock segment remains steady. However, demand for products more correlated to the general economy, such as compact utility tractors and turf equipment, is softening. Shifting to Europe, the industry is forecast to be flat to up 5%. Farm fundamentals in the region are generally stable since small grain prices continue to outpace input inflation. Meanwhile, supply constraints in 2022 are extending the equipment replacement into 2023. In South America, we expect industry sales of tractors and combines to be flat to up 5%, moderated by supply chain constraints. The region remains one of the stronger end markets, especially in Brazil, where they are forecasting record production and strong profitability for the year. Industry sales in Asia are projected to be down moderately as India, the world's largest tractor market by units, stabilizes after record highs in 2021. Turning now to our segment forecast on slide eight, we anticipate production and precision ag net sales to be up between 15 and 20% in fiscal year 23. The forecast assumes approximately 11 points of positive price realization and one point of negative currency translation. For the segment's operating margin, our full-year forecast is between 22% and 23%. Slide 9 shows our forecast for the small-legged and turf segment. We expect fiscal year 23 net sales to be flat to up 5%. This guidance includes about seven points of positive price realization, partially offset by two points of unfavorable currency impact. After accounting for the effects of price and FX, the guide implies a slight volume decrease due to softening in certain product segments. The segment's operating margin is projected to be between 14.5% and 15.5%. Sending to construction and forestry on slide 10, price realization and higher shipment volumes both contributed to a 20% increase in net sales for the quarter to $3.373 billion. Price realization in the quarter was positive by nearly 13 points. This was partially offset by almost five points of negative currency translation. Operating profit increased to $414 million, resulting in a 12% operating margin. Favorable price realization and higher shipment volumes more than offset higher production costs during the quarter. Segment quarterly results were also negatively impacted by one and a half points of margin due to higher reserves on the remaining assets in Russia. Now I'll cover our 2023 construction and forestry industry outlook on slide 11. Industry sales of both earth moving and compact construction equipment in North America are expected to be flat to up 5%. And markets overall are expected to remain steady as oil and gas, U.S. infrastructure spend, and CapEx programs from the independent rental companies offset moderation in the residential sector. Global forestry markets are expected to be flat as stronger European demand continues to be limited by the industry's ability to produce and demand in North America begins to subdue. Global road building markets are also expected to be flat. Demand remains strongest in the Americas while Europe is softening and Asia remains sluggish. Our CNF segment outlook is on slide 12. 2023 net sales are forecast to be up around 10%. Our net sales guidance for the year includes about eight points of positive price realization and just over one point of negative currency translation. The segment's operating margin is projected to be 15.5% to 16.5%. Note, fiscal year 22 operating margin would have been 14.5%, excluding special items such as the one-time gain from the remesherment of the Deere Hitachi assets. Let's transition to our financial services operation on slide 13. Worldwide financial services net income attributable to Deere and Company was slightly higher in the fourth quarter year over year, mainly due to income earned on a higher average portfolio, partially offset by less favorable financing spreads. The provision for credit loss increased, reflecting economic uncertainty in Russia. Financial services received an intercompany benefit from the equipment operations, which guarantees investments in certain international markets, including Russia. For fiscal year 2023, the net income forecast is $900 million. Results are expected to be slightly higher year over year, primarily due to income earned on a higher average portfolio. The portfolio has continued to grow in line with growth in the equipment operations. Overall, financial services is expected to continue to deliver steady results. Credit loss provisions, lease return rates, and past dues all remain in good shape. reflecting sound balance sheets for our customers. Slide 14 outlines our guidance for net income, our effective tax rate, and operating cash flow. For fiscal year 23, our full year net income forecast is a range of $8 to $8.5 billion. We expect favorable price realization and higher volumes to more than offset increased spend. Next, our guidance incorporates an effective tax rate between 23% and 25%, And lastly, cash flow from equipment operations is projected to be between $9 and $9.5 billion. Before we transition to Q&A, John, I'd like to thank you for joining us today. Do you have anything you'd like to add?