Deere & Company

Joining me on the call today are John May, Chief Executive Officer, Josh Jepson, Chief Financial Officer, Luke Gakstetter, Senior Vice President, Ag and Turf Sales and Marketing for Americas in Australia, and Josh Rolliter, Manager of Investor Communications. Today we'll take a closer look at Deere's third quarter earnings and 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 johndeer.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 johndeer.com forward slash earnings under quarterly earnings and events. I will now turn the call over to Josh Rolliter.

Good morning, and thank you for joining. John Deere completed the third quarter with disciplined performance amid a tough macro backdrop. Financial results for the quarter included an 18.5 percent margin for the equipment operations. Ag fundamentals remain muted, and market demand in construction and forestry has tempered alongside continued price competition, resulting in another quarter of overall challenging market conditions. Despite tougher markets in both ag and construction, we continued to execute to our plan, focusing on proactive inventory and cost management, notably for the quarter, we adjusted rest-of-year production schedules in our earth-moving product lines to target lower year-end field inventory levels. As a result, order books across all segments are effectively full for the remainder of the fiscal year as we position our business to respond to changes in retail demand. These actions, along with a continued focus on cost control, are essential to keeping our business healthy as we continue to invest in future growth. We now begin with slide three and our results for the third quarter. Net sales and revenues were down 17% to $13.152 billion, while net sales for the equipment operations were down 20% to $11.387 billion. Net income attributable to Deere and Company was $1.734 billion, or $6.29 per diluted share. Double-clicking into our individual business segments, we'll start with production and precision ag on slide four. Net sales of 5.099 billion were down 25% compared to the third quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive by slightly more than two and a half points. Currency translation was negative by a little more than one point. Operating profit was 1.162 billion with a 22.8% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and employee separation program expenses. These were partially offset by price realization and lower warranty expenses. Next, we'll turn to small ag and turf on slide five. Net sales were down 18% year-over-year, totaling $3.053 billion in the third quarter because of lower shipment volumes partially offset by price realization. Price realization was positive by more than one and a half points. currency translation was negative by just under half a point. Operating profit declined year over year to $496 million, leading to a 16.2% operating margin. The decrease was primarily due to lower shipment volumes and higher warranty expenses, which were partially offset by price realization. Slide six gives our 2024 industry outlook for ag and turf markets globally. Across all major markets, we continue to see muted demand resulting from a challenging macro environment. Global stocks of grains continue to rebuild with excellent growing conditions leading to better than expected production and lower commodity prices. High interest rates and geopolitical uncertainty further weigh on customers' purchase decisions, resulting in reduced demand across all end markets. In the U.S. and Canada, we continue to expect large ag equipment industry sales to be down approximately 15% during the quarter. Demand continues to be pressured by declining farm margins and elevated used inventory levels in late model year machines, which is partially offset by an elevated fleet age, rising farmland values, and stable farm balance sheets. Within small ag and turf in the U.S. and Canada, industry demand estimates remain down approximately 10%. Further declines in the turf and compact utility tractor segments, which are more sensitive to interest rates, are partially offset by improving dairy and livestock fundamentals. Turning to Europe, the industry is forecasted to be down approximately 15%, reflecting yield headwinds and weekend margins. Volatile weather patterns continue to drive commodity price and arable cash flow uncertainty, which is enhanced by slightly elevated input costs. However, dairy and livestock fundamentals remain healthy, providing moderate stability to the segment. In South America, we expect industry sales of tractors and combines to decline between 15% and 20%. commodity price softening, and elevated interest rates continue to pressure grower profitability, especially in Brazil, our largest market in the region. Fundamentals are further pressured by better than expected production in Brazil despite regional weather challenges and a slower than forecasted recovery in Argentina. Industry sales in Asia are forecasted down moderately. Moving on to our segment forecast beginning on slide seven. Production in precision ag. our net sales forecast remains down between 20 and 25% for the full year. The forecast now assumes roughly two points of positive price realization and flat currency translation for the full year. For the segment's operating margin, our full year forecast remains between 20.5 and 21.5% despite muted demand. Slide 8 covers our forecast for the small ag and turf segments. We expect net sales to remain down between 20% and 25%. The guide now includes two points of positive price realization and flat currency translation. The segment's operating margin continues to be forecasted between 13.5% and 14.5%, in line with slowing net sales. Shifting now to construction and forestry on slide 9, net sales for the quarter were down 13% year-over-year to $3.235 billion due to lower shipment volume. Price realization was negative by one point. Currency translation was also negative by more than half a point. Operating profit of $448 million was down year over year, resulting in a 13.8% operating margin due primarily to lower shipment volumes, unfavorable sales mix, and negative price realization. Slide 10 provides an update to our 2024 construction and forestry industry outlook. Industry sales for earth moving equipment in the US and Canada is now expected to be down 5 to 10%, while compact construction equipment in the U.S. and Canada is now expected to be flat to down 5%. Demand for earth moving and compact construction equipment is down from robust levels in 2023 and increasingly competitive as rental reflating decelerates and used inventory levels rise. While U.S. government infrastructure spending remains supportive and manufacturing investments continue to increase, we are witnessing a sequential slowdown in single-family housing starts amid interest rate uncertainty. This is compounded by continued declines in multifamily housing starts and persistent weakness in the commercial real estate sector. Global forestry markets are projected to remain down around 10% as all global markets continue to be challenged. The global world building market forecast remains flat to down five as strong infrastructure spending in the U.S. is offset by continued softness in Western Europe. Moving on construction and forestry segment outlook on slide 11. 2024 net sales estimates are now expected to be down between 10 and 15% as moderating demand is coupled with planned underproduction. Net sales guidance for the year now includes about half a point of positive price realization in flat currency translation. The segment's operating margin is now projected to be around 15%, reflecting a tougher competitive environment, decelerating demand, and underproduction of construction equipment. Transitioning to our financial service operations on slide 12. Worldwide financial services net income attributable to Deere and Company in the third quarter was 153 million. Net income was lower due to a higher provision for credit losses and less favorable financing spreads, which were partially offset by a higher average portfolio and favorable discrete tax items. For fiscal year 2024, our outlook for net income is now at 720 million. as benefits from a higher average portfolio balance are expected to be more than offset by a higher provision for credit losses and less favorable financing spreads. Subsequent to the quarter, we announced an agreement with Banco Bradesco to invest and become 50% owners in our Brazilian financing subsidiary, Banco John Deere. This strategic decision reduces incremental financing risks while allowing for continued investment and growth in the Brazilian market. is expected to close in the second fiscal quarter of 2025. In our quarterly results, we classified Bonco John Deere as a business held for sale, which resulted in the net impact of a pre-tax and after-tax loss of $15 million accounted for in SA&G within the financial services segment. Next, slide 13 outlines our guidance for Deere and Company's net income, our effective tax rate, and operating cash flow. For fiscal year 24, we remain We maintain our outlook for net income at approximately $7 billion. Next, our guidance continues to incorporate 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 $6 to $6.5 billion. And finally, on slide 14, I'd like to hand it over to John May to say a few words.

Thank you, Josh. The third quarter was another solid quarter thanks to the efforts of the entire John Deere team in partnership with our outstanding dealer network and supply base. As mentioned in the opening comments, our customers across nearly all business segments are facing headwinds, including softer commodity prices and elevated interest rates. Against this backdrop, I'm extremely proud of our team's unwavering commitment to and execution of our key priorities. They have navigated the business cycle through proactive inventory management and disciplined cost control while continually striving to deliver value to our customers. Effective cycle management begins with ensuring that inventory levels are appropriately aligned to end market demand. Throughout 2024, we've prudently and proactively adjusted production schedules in our large ag business at a faster pace than ever before in order to reduce field inventory in our end markets. This quarter, we made a similar adjustment for many of our earth moving product lines in North America in response to signs of moderating demand. We will also continue to focus on reducing used inventory levels, particularly in North American large ag for the remainder of the year. As we approach the start of fiscal 2025, the lean levels of field inventory resulting from these actions will best position our operations in both segments to respond effectively to changes in market demand. Proactively managing our production schedules also facilitates discipline cost control. In this lower volume environment, we've made challenging decisions that impact both our factories and our offices to ensure that our cost structure aligns with current market demand. And while these actions have been hard and certainly not something we take lightly, they help us maintain our competitiveness throughout the business cycle, allowing us to continue investing in the products and solutions that empower our customers to address their unique challenges. That is our ultimate purpose, delivering value for our customers. In the near term, this means continuing to build and ship the highest level quality and most productive equipment to our customers. I want to extend My heartfelt gratitude to all of our John Deere team members who have maintained this commitment at the highest level throughout 2024, despite necessary adjustments we've had to make in our operations. None of this happens without a high-performing team that shows up to deliver for our customers every single day. In the medium and long term, our ability to deliver value for our customers is rooted in Deere's unique position to help them do more with less by developing precision solutions that leverage our extensive product portfolio, our vertically integrated tech stack, and unparalleled service and support. Looking ahead, We are optimistic about the opportunities before us. Our machines are delivering ever greater cost savings and promoting sustainable operations for our customers. We see significant potential to leverage our existing technologies across various production systems, enabling us to scale innovation and enhance value delivery across our customer base. Ultimately, this results in a continually expanding offering of solutions that drive improved outcomes for our customers, dealers, and Deere alike.