Deere & Company

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Thanks, Brent, and good morning. John Deere completed the first quarter with solid execution. Financial results for the quarter included 20% margin for the equipment operations. While still far from normal levels, fewer supply chain disruptions enabled our factories to operate at high levels of production. Strong ag fundamentals remain. Our order books still on allocation are full well into the fourth quarter, and in some cases full through the balance of the year. Likewise, the construction and forestry division continues to benefit from healthy demand with order books full into the fourth quarter and orders still on an allocation basis. Slide 3 shows the results for the first quarter. Net sales and revenues were up 32%. to $12.652 billion, while net sales for the equipment operations were up 34%, to $11.402 billion. Net income attributable to Deere and Company was $1.959 billion, or $6.55 per needed share. Taking a closer look at the individual segments, beginning with the production and precision ag business on slide four, net sales of $5.198 billion were up 55% compared to the first quarter last year and up versus our own forecast, primarily due to higher shipment volumes and price realization. Price was positive by about 22 points. We expect price realization to be the highest early in the fiscal year, due in part to model year 21 machines produced and shipped in the first quarter of 2022, effectively including two model years when compared to the first quarter of 23. Currency translation was negative by roughly one point. Operating profit, 1.208 billion, resulting in a 23.2% operating margin for the segment compared to an 8.8% margin for the same period last year. The year-over-year increase was primarily due to favorable price realization and improved shipment volume and mix. These were partially offset by higher production costs and increased R&D and S&G. Prior year results were negatively impacted by lower production from the delayed ratification of our labor agreement, as well as by the contract ratification bonus. Moving to small leg and turf on slide five, net sales were up 14%, totaling $3.001 billion in the first quarter as a result of price realization and higher shipment volumes partially offset by negative effects of currency translation. Price realization was positive by just over 11 points, while currency translation was negative by nearly four points. Operating profit was up year over year at $447 million, resulting in a 14.9% operating margin. The increased profit was primarily due to price realization and higher shipment volume, partially offset by higher production costs, R&D, and SDGs. Slide six shows our industry outlook for the ag and turf markets globally. We expect industry sales of large egg equipment in U.S. and Canada to be up approximately 5% to 10%, reflecting another year of durable demand. The dynamics of strong egg fundamentals, advanced fleet age, and low field inventory all remain. We expect demand to exceed the industry's ability to produce for yet another year. For smalling and turf, we estimate industry sales in the U.S. and Canada to be down around 5%. Within the segment, order books for products linked to ag production systems remain resilient, while demand for consumer-oriented products, such as compact tractors under 40 horsepower, has softened considerably since last year. Moving on to Europe, the industry is forecast to be flat to up 5%. Fundamentals continue to be solid, though moderating from recent highs, and net farm cash income remains healthy. In South America, we expect Industry sales of tractors and combines to be flat to up 5%, following a very strong year in fiscal year 22. Farmer profitability remains high as our customers benefit from robust commodity prices, record production, and bearable currency environment. And while the backdrop to large dig is favorable, demand for low horsepower equipment softened a bit over the first quarter. Industry sales in Asia are forecast to be down moderately. Now our segment forecasts. beginning on slide seven. For production and precision ag, net sales are forecast to be up around 20% for the full year. Forecast assumes about 14 points of positive price realization for the full year and minimal currency impact. As noted earlier, we expect to achieve higher price realization in the first half of the year and then see it moderate a bit in the latter half. The segment's operating margin is now between 23.5% and 34.5%. Slide 8 shows our forecast for the small land and turf segment. We expect net sales to be flat to up 5%. This guidance includes eight points of positive price realization and less than half a point of currency headwind. The segment's operating margin is projected between 14.5% and 15.5%. Changing to construction and forestry on slide 9, Net sales for the quarter were $3.3 billion, up 26%, primarily due to higher shipment volumes and price realization. Results were better than our own forecast for the quarter. Price realization was positive by over 13 points, while currency translation was negative by about 3 points. Operating profit of $625 million was higher year over year resulting in a 19.5% operating margin due to price realization and higher shipment volumes, partially offset by higher production costs. CNF had several miscellaneous items that were positive to the first quarter results. The impact of these positive items was approximately 1.5 points of margin, and we do not expect them to repeat. Priority results include the impact of the lower production in the first quarter due to the delayed ratification of our labor agreement, as well as the contract ratification bonus. Let's turn to our 2023 Construction and Forestry Industry Actives on slide 10. Industry sales of earth-moving and compact construction equipment in North America are both projected to be flat to up 5%. And markets for earth-moving and compact equipment are expected to remain strong. While housing has softened, infrastructure, the oil and gas sector, and robust CapEx programs from the independent rental companies have continued to support demand. Retail sales have remained robust and dealer inventory is well below historic levels. Global road building markets are forecast to be flat. North America remains the strongest market, compensating for softness in Europe as well as in parts of Asia. In forestry, we estimate the industry will be flat as softening in the U.S., Canada is offset with strength in Europe. Moving to the CNF segment outlook on slide 11, Deere's construction and forestry 2023 net sales are forecast to be up between 10 and 15%. Our net sales guidance for the year considers around nine points of positive price realization. Operating margin is expected to be in the range of 17 to 18%. Shifting to our financial services operations on slide 12, worldwide financial services net income attributable to Deere and Company in the first quarter was 185 million. the decrease in net income was mainly due to less favorable financing spreads. For fiscal year 2023, our outlook is now $820 million as the less favorable financing spreads, higher SANG expenses, and lower gains on operating lease dispositions are expected to more than offset the benefits from a higher average portfolio balance. The less favorable financing spreads in both the first quarter results and outlook are a function of the velocity of interest rate increases and the less interest rate changes. Credit quality remains favorable with very low write-offs as a percentage of the portfolio. Slide 13 outlines our guidance for net income, our effective tax rate, and operating cash flow. For fiscal 23, we are raising our outlook for net income to be between 8.75 and 9.25 billion, reflecting the strong results of the first quarter, and continued optimism for the remainder of the year. Next, our guidance incorporates an effective tax rate between 23% and 25%. Lastly, cash flow from the equipment operations is now projected to be in the range of $9.25 to $9.75 billion. That concludes our formal comments. Now we'd like to spend a little time going deeper on a few things specific to this quarter. Let's start with farmer fundamentals. The USDA recently updated its farm income forecasts. U.S. net cash farm income is forecast to be down in 2023 compared to 2022, but still well above long-term averages and at levels supportive of continued replacement demand. Importantly, crop cash receipts are predicted to be down only 3% and remain at very healthy levels for row crop producers. And while expenses are expected to be up, some key inputs like fertilizers have moderated since peaking in 2022. All in, the 2023 farm income forecasts are solid and will continue to support equipment demand. This may be specific to the U.S., but the message is similar across our various global markets. Right, Brent?

That's right. And I would add that global stocks to use remain very tight, keeping grain prices elevated, even if they are down a bit from the highs of last summer. So the story here is one of slightly lower net income, but still quite profitable, which is true in most ag markets globally. As noted earlier, profitability in Europe remains solid. While grain prices have come off peak levels, input costs have also declined, keeping margins at supportive levels there. The relative profitability varies a bit by region, with Central Europe faring a bit better than Western Europe, but overall still solid across the region. And in Brazil, higher production and favorable FX has kept profitability solid, making the region one of the strongest from a fundamentals perspective. The political transition and rising interest rate environment could result in some softening for smaller ag equipment, but large ag equipment demand is holding steady.