Deere & Company

Good morning, and welcome to Deere and Company's second 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 Josh Jepson, Chief Financial Officer, Corey Reed, President, Worldwide Agricultural and Turf Division, Production and Precision Ag, Americas and Australia, and Josh Rolliter, Manager of Investor Communications. Today, we'll take a closer look at Deere's second 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 forward 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 8-K, Risk Factors in the Annual Form 10-K, 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 JohnDeere.com forward slash earnings under quarterly earnings and events. I will now turn the call over to Josh Rolliter.

Good morning. John Deere concluded the second quarter with solid execution. Financial results for the quarter included a 21.2% margin for the equipment operations. Trends in the end markets that we serve remain broadly unchanged from last quarter. Ag fundamentals continue to abate, leading to more challenging market conditions in the back half of the year. In construction and forestry, fundamentals remain stable at levels supportive of demand across most end markets. Demand shifts coupled with proactive inventory management are reflected in our production schedules for the balance of the fiscal year, with many product lines anticipating retail demand under production to close out 2024. Notably, our projected financial performance in these dynamic market conditions demonstrates our ability to deliver better results across the business cycle. We now begin with slide three and our results for the second quarter. Net sales and revenues were down 12% to $15.235 billion, while net sales for the equipment operations were down 15% to $13.61 billion. Net income attributable to Deere and Company was $2.37 billion, or $8.53 per diluted share. Digging into our individual business segments, we'll start with the production and precision ag business on slide four. Net sales of 6.581 billion were down 16% compared to the second quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive by just under two points. Currency translation was roughly flat. Operating profit was 1.65 billion, resulting in a 25.1% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and higher production costs. These were partially offset by price realization. Turning to small ag and turf on slide five, net sales were down 23%, totaling 3.185 billion in the second quarter as a result of lower shipment volumes partially offset by price realization. Price realization was positive by 1.5 points. Currency translation was roughly flat. Operating profit declined year over year to $571 million, resulting in a 17.9% operating margin. The decrease was primarily due to lower shipment volumes, which were partially offset by price realization. Slide 6 provides our industry outlook for ag and turf markets globally. Across all our major markets, we see continued softening in grower sentiment as the combined impacts of rising global stocks, lower commodity prices, high interest rates, and weather volatility weigh on customer purchase decisions. Amidst this backdrop and rising uncertainty, we're seeing customers exercise greater discretion in their equipment purchases, which is reflected in the changes in our industry guide this quarter. Large ag equipment industry sales in the U.S. and Canada are now expected to decline 15%, reflecting further demand reduction in the back half of the year, primarily in large tractors. In addition to the aforementioned factors, increases in used inventory levels, particularly late model year machines, are having an impact on purchase decisions. These headwinds are partially offset by fleet fundamental tailwinds, including elevated fleet age, stable farmland values, and strong farmer balance sheets. For small ag and turf in the U.S. and Canada, industry demand estimates are now down 10%. In the quarter, we saw notable reductions in our expectations for the turf segment, particularly riding lawn equipment, where high interest rates are impacting purchase behavior following several years of strong market demand. In Europe, the industry is now forecasted to be down 15%, reflecting increasing grower uncertainty in the region. Wet conditions have raised concerns for winter crop yields, while elevated input costs are weighing on margin expectations. Despite the softening, arable cash flows remain at roughly 10-year averages, and dairy and livestock fundamentals are expected to improve due to stronger pricing amid lower feed costs. In South America, industry sales of tractors and combines are now expected to decline between 15 to 20 percent. Brazil remains the largest affected market with Additional pressure stemming from strong global yields driving down commodity prices. Both soy and corn margin expectations softened over the quarter. Conditions are further impacted by elevated interest rates and an expected strong recovery in Argentina production levels following last year's drought. Industry sales in Asia continue to be forecasted down moderately. Next, our segment forecasts begin on slide seven. For production and precision ag, net sales are forecasted to be down between 20 and 25% 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 20.5 and 21.5% due to demand softening and proactive inventory management. Slide 8 shows our forecast for the small ag and turf segment. We now expect net sales to be down between 20 and 25%. The guide includes 1.5 points of positive price realization and flat currency translation. The segment's operating margin is now between 13.5% and 14.5%, in line with slowing net sales. Shifting to construction and forestry on slide 9. Net sales for the quarter were down 7% year-over-year at $3.844 billion due to lower shipment volumes. Price realization was positive by roughly half a point, while currency translation was flat. Operating profit of $668 million was down year over year, resulting in a 17.4% operating margin due primarily to lower shipment volumes and higher R&D and SANG expenses. Slide 10 gives our 2024 construction and forestry industry outlook. Industry sales expectations for earth-moving equipment in the U.S. and Canada remain flat to down 5%, while compact construction equipment in the U.S. and Canada is expected to be flat. Industry fundamentals remain vastly unchanged, with stabilized demand supported by visibility into the balance of the year. And markets continue to be healthy as U.S. government infrastructure spending further increases. Investments in manufacturing persist, and single-family housing starts to improve. Tailwinds are tempered by declines in commercial real estate and softening in rental demand throughout the balance of the year. Global forestry markets are expected to be down around 10% as all global markets continue to be challenged. Global road building markets are now forecasted to be flat to down 5% as strong infrastructure spending in the U.S. is offset by continued softness in Western Europe. Moving to the construction and forestry segment outlook on slide 11. 2024 net sales remain forecasted to be down between 5 and 10 percent. Net sales guidance for the year includes about 1.5 points of positive price realization and flat currency translation. The segment's operating margin is projected to be around 17 percent. Transitioning to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere and Company in the second quarter was 162 million. That income was positively impacted by a higher average portfolio balance, which was partially offset by a higher provision for credit losses and less favorable financing spreads as a reminder net income in the second quarter of 2023 was also impacted by a non repeating one time accounting correction. For fiscal year 2024. Our outlook for net income remains at $770 million as benefits from a higher average portfolio balance offset a higher provision for credit losses and less favorable financing spreads. Finally, slide 13 outlines our guidance for Deere and Company's net income, our effective tax rate, and operating cash flow. For fiscal year 24, our outlook for net income is now expected to be approximately $7 billion. Next, our guidance incorporates an effective tax rate between 23% and 25%. And lastly, cash flow from the equipment operations is now projected to be in the range of $7 to $7.25 billion. This concludes our formal comments. We'll now shift to a few topics specific to the quarter. Let's begin with Deere's performance this quarter. We saw net sales decline roughly 15% year over year, yet operating margin came in at just over 21%. Across all business segments, we saw better than expected performance despite a more challenging macro backdrop. Josh Beal, can you walk us through what went well for Deere?