Deere & Company

Good morning and welcome to Deere and Company First Quarter Earnings Conference Call. Your lines have been placed on a listen only until 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.

Thank you. Hello. Welcome and thank you for joining us on today's call. Joining me on the call today are Josh Jepson, Chief Financial Officer, and Josh Rollator, 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 2025. 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 about the express written consent of DEER 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 10-K, as updated by reports filed with the Securities and Exchange Commission. This call may also 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 us today. John Deere completed the first quarter with a 7.7 percent margin for the equipment operations. Global ag fundamentals generally improved this quarter. However, demand remains constrained by overall uncertainty in the market, which has continued to put pressure on order velocities, particularly in North America. Our fiscal 2025 ag outlook remains largely unchanged from prior guidance when excluding the impacts of currency movement over the past quarter. Shipping volumes were lower in the quarter versus expectations as we calibrated full year production schedules to build as efficiently as possible. As a result, we expect to recover the first quarter shortfall over the remainder of the year. In construction and forestry, end market fundamentals remain supportive of replacement demand, albeit dampened by elevated interest rates, macro uncertainty, and a competitive environment. Land under production in our earth moving segment during the first quarter drove further reductions in field inventory levels, enabling production optionality as market demand develops over the course of the year. Slide 3 opens with results for the first quarter. Net sales and revenues were down 30% to $8.508 billion, while net sales for the equipment operations were down 35% to $6.809 billion. Net income attributable to Deere and Company was $869 million, or $3.19, per diluted share, which included 163 million of discrete tax benefits related to special items. Turning to our individual segments, we begin with the production and precision ag business on slide four. At sales of 3.067 billion, we're down 37% compared to the first quarter last year, primarily due to lower shipment volumes. Price realization was positive by just over one point. Currency translation was negative by roughly two and a half points. Operating profit was $338 million, resulting in an 11% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and sales mix, partially offset by lower SANG and R&D expenses and reduced production costs. Moving on to small ag and turf on slide five. that sales were down 28%, totaling $1.748 billion in the first quarter as a result of lower shipment volumes. Price realization was positive by just under one point. Currency translation was negative by just under one point as well. Operating profit declined year over year to $124 million, resulting in a 7.1% operating margin. The decrease was primarily due to lower shipment volumes and sales mix. partially offset by lower production costs. Slide six 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 be down approximately 30%, but higher interest rates, macro uncertainty, and elevated use inventory levels are slightly tempered by improving ag fundamentals and expectations for farm net income, which is further bolstered by additional government support. For small ag and turf in the U.S. and Canada, industry demand estimates remain down around 10 percent. The dairy and livestock segment remains at strong levels of profitability despite reaching the lowest level of cattle inventory in over 70 years. However, profitability in these segments has not yet translated into equipment purchases. U.S. and Canada demand has been further impacted by continued weakness in turf and compact utility tractors as high interest rates weigh on purchase decisions. Moving to Europe, the industry is now projected to decline around 5%. Farm fundamentals have stabilized, albeit down, with less volatile commodity prices and stronger dairy margins offsetting macro uncertainty. Additionally, in Central and Eastern Europe, reduced pressure from Ukrainian grain imports is supporting better-than-expected farm net incomes. In South America, industry sales of tractors and combines are expected to be roughly flat following two years of significant industry declines. In Brazil, sentiment is showing signs of improvement as depreciation in the RIAI has pushed local commodity prices higher amidst a year of stronger yields. Combined with softening input costs, farm margins are expected to improve. Additionally, declining production, tight global stocks, and strong demand have driven outsized profitability in coffee bean production, supporting equipment demand for small and mid-sized tractors. In Argentina, Decreased currency risks and export tax reductions will support some improvements in farm margins despite negative impacts of dryness at the beginning of the year. And industry sales in Asia are still projected to be down slightly. Next, our segment forecast begins on slide seven. For production precision ag, net sales are now forecasted to be down between 15 and 20% for the full year. The forecast assumes roughly one point of positive price realization for the full year, offset by two and a half points of negative currency impact. Reduction to our sales guide from the prior quarter is primarily driven by the strengthening of the dollar relative to nearly all foreign currencies, most notably the Brazilian RIAI, Canadian dollar, and euro. For the segment's operating margin, our full year guide forecast is now between 16% and 17%, also reflecting the impacts of currency fluctuations. Slide eight shows our forecast for the small ag and turf segment. We expect net sales to remain down around 10%. This guide now includes a half point of positive price realization and one and a half points of negative currency translation. The segment's operating margin guide remains between 13 and 14%. Shifting now to construction and forestry on slide nine. Net sales for the quarter declined roughly 38% year-over-year to $1.994 billion due to lower shipment volumes. Price realization was negative by roughly one point. Currency translation was also negative by more than one point. Operating profit of $65 million was down year-over-year, resulting in a 3.3% operating margin due primarily to lower shipment volumes and sales mix, as well as unfavorable price realization and higher SA&G and R&D expenses. Lower shipment volumes were primarily due to planned underproduction to retail in the quarter as we reduced field inventory levels in our earth-moving segment. Slide 10 describes our construction and forestry industry outlook. Industry sales for earth-moving equipment in the U.S. and Canada are expected to be down around 10%, while compact construction equipment in the U.S. and Canada is expected to be down 5%. And markets remain sequentially unchanged in 2025, with equipment demand tempered by uncertainty across both construction and compact construction equipment. U.S. government infrastructure spending remains at historically high levels while single family housing starts continue to increase as a result of low levels of existing home inventory. These tailwinds are offset by subdued multifamily housing starts and a softening commercial real estate market as high interest rates continue to weigh on overall investment. Additionally, earth moving rental reflating remains at low levels. Global forestry markets are expected to be flat to down 5% as all global markets continue to be challenged. Global road building markets are forecasted to be roughly flat with strong end market demand persisting amid a return to more normal ordering seasonality. Moving to the CNF segment outlook on slide 11, 2025 net sales remain forecasted down between 10 and 15%. Net sales guidance for the year includes flat net flat net price realization and 1.5 points of negative currency translation. The segment's operating margin continues to be projected between 11.5 and 12.5 percent. Now transitioning to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere and Company in the first quarter was 230 million. Net income was favorably impacted by a decreased valuation allowance on assets held for sale of Monco John Deere. Note that Deere completed this transaction with Bradesco for the sale of 50% ownership in Banco John Deere subsequent to the quarter in February. Excluding this special item, net income decreased due to a higher provision for credit losses, which was partially offset by lower SA&G expenses. For fiscal year 2025, our ALEC remains at $750 million as benefits from a lower provision for credit losses are partially offset by less favorable financing spreads. Finally, Slide 13 outlines our guidance for net income, effective tax rate, and operating cash flow. For fiscal year 25, our outlook for net income remains between $5 and $5.5 billion. Next, our guidance now incorporates an effective tax rate between 20 and 22%. And lastly, cash flow from the equipment operations remains projected between $4.5 and $5.5 billion. Note that during the quarter, we made a voluntary 401 contribution of $520 million to fund our salaried post-retirement healthcare plan. This will impact our cash flows for the full year. However, our guidance range remains unchanged. 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 35% year over year, and margins come in just under 8%. But we held the majority of our guides for the full year, notably net income. Josh Beal, can you break down what happened this quarter and then walk through what this means for the rest of the year?