Deere & Company

Good morning and welcome to Deere and Company fourth quarter earnings conference call. Your lines have been placed on a 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 and happy early Thanksgiving for those of you celebrating tomorrow. Joining me on the call today are John May, Chairman and Chief Executive Officer, Josh Jepson, Chief Financial Officer, Deanna Kovar, President, Worldwide Agriculture and Turf Division, Production and Precision Ag, Americas in Australia, and Chris Seibert, Manager, Investor Communications. Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2026. 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, risk, 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 Chris Seibert.

Thank you, Josh, and good morning to everyone joining us today. John Deere's fiscal 2025 results for the fourth quarter and for the full year reflect resilience of our business amidst the challenging and uncertain market backdrop. In the fourth quarter, the equipment operations delivered 9.2% margins, Full-year operating margins came in at 12.6%, and we delivered over $5 billion in net income, financial performance that represents our best results yet at this point in the cycle. Our teams continue to manage this downturn effectively by focusing on what we can control, and we believe the progress we have made throughout this past fiscal year positions as well as we enter fiscal year 2026. Looking ahead to 2026, We anticipate that large ag in North America will continue to be subdued. However, there are indications of stabilization, and we also see areas of optimism emerging in other segments and geographies. Notably, we see opportunities for growth ahead in our small ag and turf and construction forestry businesses. Slide three begins with the results for fiscal year 2025. Net sales and revenues were down 12% to $45.7 billion. while net sales for equipment operations went down 13% to $38.9 billion. Net income attributable to Deere and Company was $5 billion, or $18.50 per diluted share. Next, fourth quarter results are on slide four. Net sales and revenues were up 11% to $12.4 billion, while net sales for the equipment operations were up 14% to $10.6 billion. Net income attributable to Deere and Company decreased to $1.1 billion, or 393 per diluted share. Diving into our fourth quarter results for our individual business segments, we'll begin on slide five with our production precision act business. Net sales of 4.74 billion were up 10% compared to the fourth quarter last year, primarily due to higher shipment volumes and favorable price realization. Price realization in the quarter was positive by approximately three points. Currency translation was also positive by about a point. Operating profit was 604 million, resulting in a 12.7% operating margin for the segment. The year-over-year decrease in operating profit was primarily due to higher production costs, higher tariffs, and special items, which were partially offset by price realization and higher shipment volumes. Turning to small egg and turf on slide six, net sales were up 7% year-over-year, totaling 2.57 billion in the fourth quarter, primarily due to higher shipment volumes. Price realization in the quarter was positive by approximately one point. Currency was also positive by more than half a point. For the quarter, operating profit declined year over year to 25 million. The decrease was primarily due to higher tariffs, warranty expenses, and production costs. Slide seven details our fiscal year 2026 Ag and Turf industry outlook. We expect industry sales of large equipment in the US and Canada to be down 15 to 20%. Row crop farmers continue to face challenging farm fundamentals, which are pressuring short-term liquidity. Used equipment, while continuing to improve over the past quarter, remains a constraint to investment in new machinery. However, strong crop yields and consumption, new trade agreements, growing demand for biofuels, and supportive government payments support potential upside. For small ag and turf in the US and Canada, industry demand is estimated to be flat to up 5%. The dairy and livestock sector continues to generate profits driven by strong beef prices. Additionally, a modest recovering curve is anticipated, following a rebound in the housing market and growth in the overall economy. In Europe, the industry is projected to be flat to up 5%. The outlook for the dairy sector continues to be robust, with stabilizing interest rates helping to support investment decisions. In addition, margins for arable farmers are strengthening as crop yields recover in major European ag markets. Within South America, we anticipate industry sales of tractors and combines will remain flat in 2026. While soybean and corn acreage is expected to grow at trendline pace in Brazil, customer demand for equipment has been tempered due to the high interest rate environment. Additionally, strong global crop yields are weighing on prices, and the recent trade agreement between China and the US creates uncertainty around demand for Brazil exports of soybeans. In Argentina, Industry growth is anticipated to moderate after robust growth in 2025. Industry sales in Asia are expected to be down 5%, following slight gains in India last year. Moving to our segment forecast on slide 8. We anticipate production and precision ag net sales to be down 5% to 10% in fiscal year 26. The forecast assumes roughly 1.5 points of positive price realization and about 1.5 points of positive currency translation. Segment operating margin for the full year is forecasted between 11% and 13%, reflecting stability in international markets amidst incremental tariff and mixed headwinds, with large ag in the U.S. declining another year. Slide 9 provides our forecast for the small ag and turf segment. We expect fiscal year 26 net sales to be up around 10%. This includes two points of positive price realization, as well as one point of positive currency translation. The segment's operating margin is projected to be between 12.5% and 14%, reflecting strength in the dairy and livestock segment. Shifting to construction and forestry on slide 10, net sales for the quarter were up 27% year-over-year to $3.382 billion due to higher shipment volumes. Price realization was negative by about a point, while currency translation was positive in the quarter by roughly 1.5 points. Operating profit increased to 348 million, resulting in a 10.3% operating margin. Higher shipment volumes and a positive sales mix were partially offset by increased production costs driven by higher tariffs and special items. Slide 11 outlines our 2026 construction forestry industry outlook. Industry sales for earth moving equipment in the US and Canada are expected to be flat to up 5%. And compact construction equipment in the US and Canada is also expected to be flat to up 5%. Construction markets are expected to experience modest growth, supported by employment at all-time highs and construction backlogs at robust levels. US government infrastructure spending continues to bolster the industry. Additionally, declining interest rates, increasing investments in rental fleets, and surging data center construction starts are also providing support. And while US single family housing starts are expected to show modest improvement in 2026, investment activity in the private commercial sector continues to be restrained. Global forestry markets are expected to remain flat. Global road building markets are expected to remain flat at strong levels. Continuing with our CNF segment outlook on slide 12. 2026 net sales are forecasted to be up around 10%. Our net sales guidance for the year includes about three points of positive price realization and one point of positive currency translation. The segment's operating margin is projected to be between 8% and 10%, as the benefits of higher North American earth moving volumes and price realization are tempered by incremental tariff expense. Switching to our financial service operations on slide 13. Worldwide financial services net income attributable to your company was 293 million for the fourth quarter. The year-over-year increase was mainly due to favorable financing spreads, special items, and a lower provision for credit losses. For fiscal year 26, the net income forecast is 830 million. Results are expected to be lower year-over-year, primarily due to lower portfolio levels driven by volume, partially offset by favorable financing spreads. Slide 14 concludes with our guidance for net income effective tax rate and operating cash flow. For fiscal year 26, our full year net income forecast is expected to be in the range of $4 and $4.75 billion. Included in this estimate is projected pre-tax direct tariff expense of approximately $1.2 billion, with additional inflationary pressures also contemplated from the indirect impacts of tariffs. Our guidance incorporates an effective tax rate between 25% and 27%, which is higher year over year as a result of fewer discrete items and a less favorable geographic mix driven by projections for a higher percentage of income coming from outside the United States. Lastly, cash flow from equipment operations is projected to be in the range of 4 to 5 billion. We would like to highlight that our implied midpoint guidance of approximately $16 in earnings per share reflect sub-draft conditions in PPA with projected fiscal year 26 sales at less than 80% of mid-cycle levels. This level of performance reflects the structural improvements we have made to the business over the last several years. Our ongoing efforts to managing the cycle through proactive inventory management and cost control and the resilience that comes from a more diversified business as both small ag and turf and construction forestry are projected to grow in 2026. This concludes our formal remarks. We'll now cover a few topics before opening the line for Q&A. But before we get into the details, John, would you like to share your thoughts on the year?