Deere & Company

Good morning, and welcome to Deere and Company first 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 Beal, Director of Investor Relations. Thank you. You may begin.

Hello. Welcome, and thank you for joining us on today's call. Joining me on the call today are John May, Chairman and Chief Executive Officer, Josh Jepson, Chief Financial Officer, Aaron Wetzel, Vice President, Production Systems for Production and Precision Ag, and Josh Rolliter, Manager, Investor Communications. Today, we'll take a closer look at Deere's first quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2024. 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 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 statements concerning the company's plans and projections for the future that are subject to uncertainties, risks, changes in circumstances, and other factors that are difficult to predict. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8K, Risk Factors in the Annual Form 10K, as updated by 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'll now turn the call over to Josh Rolliter.

Good morning. John Deere completed the first quarter demonstrating solid execution across the cycle. Financial results for the quarter included an 18.5% margin for the equipment operations. Fundamentals in the end markets that we serve remain supportive of equipment replacement demand. Ag fundamentals, while down from the record highs of the last few years, have returned to near mid-cycle levels. In construction and forestry, we see fundamentals stabilizing at levels supportive of demand across most markets. This demand backdrop is reflected in our order books. While fleet replenishment is moderating, our order books remain at healthy levels representative of normalized volumes. Notably, our first quarter performance demonstrates the structural business improvements that we've achieved, enabling us to deliver higher levels of profitability across all points in the business cycle. Slide three begins with the results for the first quarter. Net sales and revenues were down 4% to $12.185 billion, while net sales for the equipment operations were down 8% to $10.486 billion. That income attributable to Deering Company was $1.751 billion, or $6.23 per diluted share. Turning now to our individual segments, we begin with the production and precision ag business on slide four. Net sales of $4.849 billion were down 7% compared to the first quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive, by about four points. Currency translation was also positive, by roughly one point. Operating profit was $1.045 billion, resulting in a 21.6% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and higher SANG and R&D expenses. These were partially offset by price realization. Moving to small ag and turf on slide five. Net sales were down 19%, totaling $2.425 billion in the first quarter as a result of lower shipment volumes partially offset by price realization. Price realization was positive by just over three points. Currency was also positive by roughly half a point. Operating profit declined year over year to $326 million, resulting in a 13.4% operating margin. The decrease was primarily due to lower shipment volumes and higher SANG and R&D expenses, which were partially offset by price realization and lower production costs. Slide 6 gives our industry outlook for ag and turf markets globally. We continue to expect large ag equipment industry sales in the U.S. and Canada to decline 10 to 15 percent, trending closer to the lower end of that range. as normalizing farm fundamentals and elevated interest rates are somewhat tempered by resilient farm balance sheets, lower input costs relative to record peaks seen over the last few years, and fleet age, which even after multiple years of strong replacement, remains at or above long-term averages. For small ag and turf in the U.S. and Canada, industry demand estimates remain down 5 to 10 percent. The dairy and livestock segment continues to remain healthy thanks to elevated cattle and hay prices. The compact utility tractor market remains soft as the industry works to bring down inventory levels, while demand for turf products has stabilized. Moving to Europe, the industry is now forecasted to be down 10% to 15%. Demand is expected to be softest in Central and Eastern Europe as local commodity markets remain disrupted by the ongoing conflict in Ukraine. Western Europe is faring better, although uncertainty related to current cash crop receipts Ag policy changes and high interest rates is increasing caution for some customers. In South America, industry sales of tractors and combines are expected to be down around 10%, continuing the demand moderation that began in 2023. Brazil, in particular, is experiencing adverse weather conditions in the current growing season. Coupled with high interest rates, demand is expected to remain down from recent record highs. Argentina is expected to deliver strong ag production after multiple years of drought, while the industry will remain regulated by ongoing economic challenges. Industry sales in Asia remain forecasted to be down moderately. Next, our segment forecasts begin on slide seven. For production and precision ag, net sales are forecasted to be down around 20% for the full year. The forecast assumes roughly 1.5 points of positive price realization for the full year, and minimal currency impact. For the segment's operating margin, our full year forecast is now between 21.5 and 22.5 percent, reflecting the further tempering in net sales as demand normalizes. Slide 8 shows our forecast for the small ag and turf segment. We expect net sales to remain down between 10 and 15 percent. This guidance now includes 1.5 points of positive price realization and flat currency translation. The segment's operating margin remains between 15% and 16%. Shifting to construction and forestry on slide 9. Net sales for the quarter were roughly flat year over year at $3.212 billion, with positive price realization offset by lower shipment volumes. Price realization was positive by nearly three points. Currency translation was also positive by just under one point. Operating profit of $566 million was down year over year, resulting in a 17.6% operating margin due primarily to higher production costs, lower shipment volumes, unfavorable currency translation, and higher SANG and R&D expenses. These were partially offset by price realization and a favorable sales mix. Turning now to our 2024 construction and forestry industry outlook on slide 10. Industry sales for earth moving equipment in the U.S. and Canada are now expected to be flat to down 5%, while compact construction equipment in the U.S. and Canada is expected to be flat. Improvements in the industry outlook are reflective of a better-than-expected demand backdrop and stabilized optimism through the balance of the year as dealer inventories return to more normal levels, and markets remain healthy with single-family housing starts improving, infrastructure spending continuing to increase, and elevated manufacturing investment levels offset by further declines in commercial investments. Global forestry markets are expected to be down around 10% as all global markets continue to be challenged. Global road building markets are forecasted to be roughly flat with strong infrastructure spending in the U.S. offset by continued softness in Europe. Moving to this construction forestry segment outlook on slide 11. 2024 net sales are now forecasted to be down between 5% and 10%. Net sales guidance for the year includes about 1.5 points of positive price realization and flat currency translation. The segment's operating margin remains projected between 17% and 18%. Transitioning to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere and Company in the first quarter was $207 million. The increase in net income was mainly due to a higher average portfolio balance, which was partially offset by less favorable financing spreads. For fiscal year 2024, our ELIC remains at $770 million as benefits from a higher average portfolio balance offset less favorable financing spreads. As a reminder, fiscal year 2023 net income was also impacted by a non-repeating one-time accounting correction. Finally, slide 13 outlines our guidance for net income our effective tax rate and operating cash flow. For fiscal year 2024, our outlook for net income is now expected to be between 7.5 and 7.75 billion. Next, our guidance incorporates an effective tax rate between 24 and 26%. And lastly, cash flow from the equipment operations is now projected to be in the range of seven to seven and a half billion dollars. This concludes our formal comments. John, before we shift to a few topics specific to the quarter, would you mind sharing your thoughts on how 2024 is progressing?