Deere & Company

Good morning and welcome to Deere and Company first quarter earnings conference call. Your lines have been placed in 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, Brian Campbell, President Worldwide Construction and Forestry and Power Systems, and Chris Seibert, 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 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 DEAR 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 forward slash earnings, under quarterly earnings and events. I will now turn the call over to Chris Seibert.

Good morning, and thank you for joining us today. John Deere completed the first quarter with a 5.9% operating margin for the equipment operations. Our results reflect the strength and resilience of a diversified portfolio spanning multiple end markets and geographies. All business segments delivered higher net sales year over year, with both small ag and turf and construction forestry top line growing by over 20%. Our results for the quarter exceeded our forecast, driven by shipping volumes that were ahead of our initial plan. Importantly, over the course of the quarter, we saw continued strengthening of our order books across several product lines, most notably in small ag and turf, as well as construction. In earth moving, double digit year over year growth in retail settlements and a growing order bank have prompted us to increase our industry outlooks for both construction and compact construction equipment in North America. In small ag, order activity for mid-sized tractors supporting the dairy and livestock production system has remained solid, while order velocity for North American turf equipment and compact utility tractors has increased. Global large ag fundamentals, while still challenged, were largely stable over the quarter. This stability has enabled a modest improvement in our net sales forecast for North American large egg this year as our combined early order program finished better than expected and large tractor order activity has increased. These improvements have helped us to offset softer projections for the South American egg equipment market in 2026. The developments over the course of the past three months have strengthened our belief that 2026 marks the bottom of the current cycle. as we project mid-single-digit net sales growth for the equipment operations this fiscal year. Slide three starts with the results for the first quarter. Net sales and revenues were up 13% to $9.611 billion, while net sales for the equipment operations were up 18% to $8.001 billion. Net income attributable to Deere and Company was $656 million, or $2.42 per diluted share. Turning to our individual segments, we begin with the Production and Precision Act business on slide four. Net sales of 3.163 billion were up 3% compared to the first quarter last year, primarily due to positive effects of foreign currency translation. Price realization was roughly flat. Price realization in North America was positive, though was offset by additional incentives for the South American market. Currency translation was positive by nearly four points. Operating profit was $139 million, resulting in a 4.4% operating margin for the segment. The year-over-year decrease was primarily due to higher tariffs, unfavorable sales mix, and higher warranty expenses. Moving on to small egg and turf on slide 5. Net sales were up 24%, totaling $2.168 billion in the first quarter because of higher shipment volumes and positive effects of foreign currency translation. Price realization was positive. by two points. Currency translation was also positive by just under two and a half points. Operating profit increased year over year to 196 million, resulting in a 9% operating margin. The increase was primarily due to higher shipment volumes, favorable sales mix, and price realization, partially offset by higher tariffs. Slide six gives our industry outlook for ag and turf markets globally. We continue to expect the large ag equipment industry in the US and Canada to decline 15 to 20% this year. However, we're seeing encouraging developments that should provide stability to the segment in the near term, while also improving the setup for return to growth. While global row crop production remains strong, robust demand for commodities and a normalization of trade flows are providing support for prices at current levels. which are above the lows that growers experienced last summer. Additionally, government programs are supporting farmer liquidity in the short term. Ongoing improvement in the used inventory market is providing a better environment for machine replacement while the age of the fleet continues to grow. Additionally, proposed government policy actions, including additional support for biofuels, provide potential tailwinds for growth. For small agriturf in the U.S. and Canada, industry demand estimates remained flat to up 5%. The dairy and livestock sector remains profitable due to strong beef prices, while the turf market is seeing a modest return to growth, as that sector normalizes after several years of declines. Moving to Europe, the industry is still projected to be flat to up 5%. The underlying fundamentals of the ag sector are largely unchanged, with no near-term material impact expected from newly negotiated EU trade agreements or recent declines in milk prices. Interest rates are steady, long-term financing costs are manageable, and the region continues to show resilience across key arable markets. In South America, industry sales of tractors and combines are now expected to be down approximately 5%, driven by the Brazilian market, where subdued commodity prices, high interest rates, and a stronger REI are putting pressure on producer margins. Industry sales in Asia are now projected to be flat to down 5%. The Indian market is now expected to only be down slightly from the strong level seen in 2025. Next, our segment forecasts begin on slide seven. For production and precision ag, net sales are still forecasted to be down between 5% and 10% for the full year. The forecast assumes roughly 1.5 points of positive price realization and about 3 points of positive currency translation. For the segment's operating margin, Our full year forecast remains between 11 and 13%. Slide eight shows our forecast for the small ag and turf segment. We now expect net sales to be up about 15%. This includes two points of positive price realization, as well as two points of positive currency translation. The segments operating margin guide is now between 13 and a half and 15%. Shifting now to construction forestry on slide nine. Net sales for the quarter increased roughly 34% year-over-year to 2.67 billion due to higher shipment volumes and positive effects of foreign currency translation. Price realization was negative, but just under half a point. Currency translation was positive, but 3.5 points. Operating profit of 137 million more than doubled year-over-year, resulting in a 5.1% operating margin due primarily to favorable shipment volumes as well as production efficiencies partially offset by higher tariffs. Slide 10 describes our construction forestry industry outlook. Industry sales for both construction equipment and compact construction equipment in the U.S. and Canada are now expected to be up around 5% year over year. Construction markets remain solid, supported by U.S. government infrastructure spending, declining interest rates, strong rental demand, and data center construction starts. Our year-to-date retail settlement activity is running ahead of our expectations, and our order books continue to grow. Global forestry markets are still expected to remain flat. Global road building markets are now expected to be up around 5%, driven by market increases in both North America and Europe. Moving to the CNF segment outlook on slide 11. 2026 net sales are now forecasted to be up around 15%. Our net sales guidance for the year includes about two and a half points of positive price realization and just over two points of positive currency translation. Our projection for the segments operating margin also increased and is now estimated to be between nine and 11%. Now, transitioning to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere & Company in the first quarter was $244 million. The year-over-year increase was mainly due to favorable financing spreads and a lower provision for credit losses, partially offset by favorable special items recorded in the first quarter last year. For fiscal year 2026, our outlook increased to $840 million, primarily driven by lower provision for credit losses. Finally, slide 13 outlines our guidance for net income, effective tax rate, and operating cash flow. For fiscal year 2026, our updated outlook for net income is now between $4.5 million and 5 billion. Next, our guidance continues to incorporate an effective tax rate between 25% and 27%. And lastly, projections for cash flow from the equipment operations increased by 500 million at both ends of our range and is now expected to be between 4.5 and 5.5 billion. This concludes our formal comments. We'll now shift to a few topics specific to the quarter. To start, Let's review this results this quarter. Net sales increased by about 18% year over year, and margins were just under 6%. Although the first quarter of fiscal year 25 had an easier top line compare, given last year's underproduction in small ag and turf and construction forestry, it still performed ahead of our plan. Josh Beal, could you explain what happened this quarter and how it affected our full year outlook?

Yeah, absolutely, Chris. Let's start with our expectations for the quarter. Overall, we were projecting double-digit net sales growth in the equipment operations, driven by estimates for over 20% growth in both small ag and construction and forestry, while large ag sales were expected to be flat year over year. Despite the projected net sales increase, we were expecting lower equipment operations operating margin year over year due to incremental tariff expenses and an unfavorable product and regional mix in large ag. Across all three business units, we executed ahead of our plan for the quarter. And as a result, our performance reflects better top line and margins than originally forecasted. Better than expected shipment volume was the primary driver of both the top line and margin beat. In PPA, shipments of North America large tractors were ahead of plan, while CNF benefited from higher road building sales in Europe and North America, as well as ahead of plan shipments of both construction and compact construction equipment in North America. On the pricing front, CNF pricing was slightly negative this quarter. although competitive price pressures have started to show signs of easing. The results from the quarter in CNF had a slight impact on the timing of our expected price realization in the segment, and as a result, we've revised our full-year forecast down by half a point. PPA pricing was neutral during the quarter, primarily due to discounts implemented in South America responding to FX movements as well as targeted field inventory reductions. Our PPA price guidance for the full year remains unchanged, and we still expect positive full-year price realization in South America. Foreign exchange was also impactful in the quarter. The U.S. dollar was weaker year-over-year against several relevant currencies for deer, particularly the euro and Brazilian real. The translation impact drove year-over-year net sales gains for all three business units. Transitioning to cost management, excluding tariffs, production costs were lower year-over-year for all business segments in the first quarter. This was largely attributable to operational efficiencies from higher production and disciplined overhead spending. Tariffs for the year are still projected at around $1.2 billion, as mitigation on Section 232 steel tariffs and some relief in India have been offset by volume growth. As you mentioned in your opening comments, our full-year industry demand outlooks for most markets improved over the course of the quarter. We maintained our net sales guidance for PPA, even though South America softened, due to some incremental improvement in North America, and we increased the net sales ranges for SAT and CNF by five points. That resulted in higher projected margin ranges for small ag and CNF, resulting in an increase in that income forecast of $4.5 to $5 billion.

Perfect. Thanks for that breakdown, Josh. It is encouraging to see that our teams continue to execute and focus on what we can control while also seeing some pickup in end market demand. Now, let's take a moment to talk about the broad ag industry. Since late last year, we've seen several supportive developments in the U.S. market, including the recently announced $12 billion pharma bridge assistance program, and renewed purchase commitments for U.S. commodities. Can you add some additional color to what this could mean for U.S. growers?

Sure, Chris. I'll start by reiterating a couple comments on the global ag economy that you mentioned in your opening. Global crop production remains strong, but so does global demand. At current commodity price levels, producer margins remain pressured in many geographies. Specifically for the U.S., the USDA just updated their 2026 forecast for net cash farm incomes. While 2026 U.S. net cash farm income is forecasted to be up around 3% from 2025, much of this increase is being driven by more government payments. Crop cash receipts are expected to be up slightly this year, but expenses are projected to increase as well. Given this setup, we continue to anticipate a challenging environment for many row crop farmers. However, as you mentioned, we're starting to see some stability for producers as China has resumed purchasing U.S. soybeans. and the recently approved government support program looks to provide some near-term liquidity. Additionally, strong farmland values are keeping debt ratios low despite the lower margin backdrop. Notably, the U.S. fleet age is high and continues to get older as customers put more hours on their equipment. With the stabilization that we're seeing in U.S. ag fundamentals, along with an improving used market, our expectation is that we'll start to see some replacement demand return.

This is Jepson. Maybe one key point to... The government payments should continue to mitigate downside risks for farmers' balance sheets, acting as a bridge in an environment where crop cash receipts are under pressure. We believe that future policies around renewable fuels and additional export opportunities should drive demand and provide continued stability.

Great.

Thank you both. With the developments over the quarter in North America, it appears that we've moved past peak uncertainty and that the market is stabilizing. Building off that, could you also share an update regarding global ag inventories and audiobooks?

Yeah, definitely. Let's start with large ag in North America. On the new inventory side, we continue to be in a great position and hold onto our plan to produce in line with retail demand in fiscal 2026. We also continue to make progress in North American used inventories. We saw a typical seasonal increase in used-year combines during our first quarter, However, current inventory levels for deer combines remain about 15% below their peak in March 2024 with model year distribution at a normal mix. Deer high horsepower tractor units were down mid-single digits in our first quarter and have declined by over 10% from their March 2025 peak. Late model mix is improving too. It's notable that while total deer high horsepower tractors are down over 10% from March, Model year 22 and model year 23 8R tractors are down more than 40% in that same time period. Just this past quarter alone, model year 22 and model year 23 8Rs were down over 20% sequentially, with model year 24 8Rs also declining by over 10%. While continued reduction in used tractors remains a focus, we're encouraged by the progress that we're seeing. At the same time, large tractor order velocity for the North American market has picked up, and our rolling order books now provide visibility into the fourth quarter. We also just recently took our last calls for North American combine orders for the year, and while we still expect that overall North American large ag industry to be down 15 to 20% this year, combines will be down less than that range. Similar to North America, we feel good about our new inventory positions in both Europe and South America. The one exception is combines in Brazil, where we're a bit higher than we want to be. We'll underproduce retail for Brazilian combines in our second and third quarters to bring those inventory levels down. Despite being higher than our target, our current inventory to sales ratio for combines is still significantly lower than what we see with competitors. As far as order visibility, European tractor order books are currently four to five months out, while South American orders are full through our second quarter. Turning to small ag and turf in North America, last year's underproduction resulted in healthy beginning inventory levels for this segment that remain in place today. For reference, current... New field inventory for both tractor horsepower categories in this segment, that's the less than 100 horsepower category and the 100 to 220 horsepower category, are each about 40% lower year over year. Our ability to maintain those lower inventory levels reinforces our plan to build in line with retail demand and small ag this year. And commitment to that plan has been further supported by strength and order activity in the first quarter.

This is Jepson. Maybe share an additional perspective following Beale's comments. Our channel has consistently worked to reduce used inventory levels, and our deliberate approach to managing production and inventories set us up favorably both this year and into the next. With growing demand across various other markets and segments, we feel good about how we're positioned to execute for the remainder of 26.

Thank you both. Now, let's move on to construction forestry. Josh Beale. We've already touched on CNF's performance in Q1, but can you please give us an update on the current business environment and outlook for 2026?

Yeah, happy to, Chris. Let me start with the current market environment, and Ryan, please jump in with any additional color you might have. As you noted earlier, construction markets are a bright spot and continue to demonstrate resilience, bolstered by U.S. government infrastructure investments, decreasing interest rates, and improved rental demand. Recall that we underproduced retail in the first half of fiscal 2025, which set us up to produce in line with retail demand this year. We saw strength in our first quarter in retail sales that exceeded our estimates, as settlements of construction and compact construction equipment were both up mid-teens year-over-year in our first quarter. What's perhaps most encouraging is that our order bank has risen by over 50% in the past quarter, reaching its highest point since May of 2024. This provides us with clear visibility into the second half of the fiscal year, allowing the construction and forestry team to optimize their production plans accordingly. Overall, we're very encouraged by the momentum that we've seen to start the year. Brian, is there anything you'd like to add?

Absolutely. I share your enthusiasm and I'm excited about what's on the horizon for this business. As I mentioned at our recent investor event in New York, there are numerous reasons for my optimism. At a macro level, the world is facing growing urgency to upgrade or replace key infrastructure. Investment in single family housing, especially across the United States, needs to increase. And there's a huge demand to support the required infrastructure for AI investments. To get all this work done, the industry must boost productivity significantly, with machines doing more work with precision and utilizing less resources overall. Meeting these goals requires smart machines and data-driven insights to execute tasks and manage job sites efficiently. And we believe we can help customers meet these challenges and will continue to invest on our side to ensure success. Hey, thanks for the recap, Ryan.

Could you remind us of the investments that we're making to meet those challenges?

Sure, Chris. Let's start with excavators. As we've talked about, we are excited to announce our new Deere Design 20-ton class excavators at the upcoming ConExpo show in Las Vegas. We've included additional information in the appendix of the earnings presentation for those interested in more detail. Excavators represent about 40% of the North American construction equipment industry, and these models are the first introduction of fully Deere-designed and Kernersville, North Carolina-built machines to the market. We packed the new units with easy-to-use, productivity-enhancing technology while remaining absolutely focused on and making further improvements in quality and durability. This is the first step of what will be a multi-year launch plan for a complete line of excavators. We couldn't be more excited about sharing these first models with our customers. The ConExpo event will feature 24 product launches, including world premieres of equipment from John Deere and six market debuts from the Vertcon Group. The last several years, our efforts have been heavily focused on excavators. However, we continue to innovate across the product portfolio. From new equipment designs to the latest in precision and job site technology, we have never felt better about our complete product portfolio.

Thank you. Hey, on the digital side, yesterday, we completed the acquisition of Tenna. Could you please provide your insights on this acquisition and discuss how it aligns with the broader CNF business and strategy?

Yeah, we're incredibly excited about bringing the Tenna team and their capabilities into the John Deere portfolio of businesses. It might help to take a step back and talk through our strategy at a high level in the CNF division. We think about the construction industry and how we want to compete in three different layers, machines, tasks, and job sites. On the machine side, completing our product portfolio of best-in-class earth-moving equipment, both in high-precision machines and those that are more basic, is our focus at that level. Second, we're enhancing the tasks that the machines do individually on the job site through precision technologies like SmartGrade, SmartDetect, and SmartWay. The agreements with the three survey providers to provide a fully integrated grade control experience through our equipment is an example of what we are working on in this area. Third, it's having the capabilities to help contractors and customers optimize their fleets, operations, and job sites. Tenna provides a leading technology platform that automates contractor workflows. gives near real-time insights into equipment operations and maintenance, and enhances visibility. Planning and coordination to boost productivity and cut costs. TEN is leading fleet-based products and services, combined with the productivity solutions from Virtual Superintendent, who we acquired a little over a year ago, along with the foundational capabilities we've built through the John Deere Operations Center, give us a unique value proposition to offer customers as they work to optimize their fleets, operations, and job sites. Importantly, Tenna and Virtual Superintendent are and will continue to be brand agnostic, focused on mixed fleet solutions and step with the reality of the fleets and job sites in the industry.

Thank you, Ryan. It sounds like there's a lot to be excited about in the construction forestry segment going forward.

This is Jefferson. Maybe one thing in addition to the CNF product releases, I'd like to share a quick comment about innovation in our other businesses. At the end of this month, we'll be at Commodity Classic in San Antonio, Texas, with several major product launches and updates to our advanced technology solutions. And just last week, at the World Ag Expo in California, we showcased several innovations that are helping drive value for our high-value crop producers as well.

Thank you both for your comments. Josh, do you have any final thoughts before we open the line for questions? Yeah, thanks, Chris.

The first quarter demonstrated great execution from our teams. All business segments operated efficiently and delivered results ahead of plan. At the same time, we saw stabilization and improvement in a variety of our end markets. Our channel maintained focus on inventory management, particularly in North American used equipment. Our financial strength has allowed us to maintain high levels of investment throughout the cycle, which positions us well for future growth, particularly as the cycle inflects. The recent and upcoming product and technology introductions are tangible examples of that outcome and bolster our confidence and our growth aspirations through the end of the decade and beyond. Over the quarter, we returned nearly $750 million in cash to shareholders through dividends and share repurchases, demonstrating that strong through-cycle financial performance supports both reinvestment in the business and shareholder return. Finally, I'd like to express my sincere appreciation to all members of the Deere team. The commitment and dedication demonstrated by our employees, dealers, and suppliers across every area of the business have been instrumental in maintaining this high level of discipline. The Deere team is committed to executing our strategy and focused on solving our customers' biggest challenges.

Thanks, Josh. Now, let's open it up to questions from our investors.

We're now ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. In consideration of others and to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue.

Thank you. If you would like to ask a question, please press star 1. If you need to withdraw your question, press star 2. Our first question comes from Kristen Owen from Oppenheimer.

Hi, good morning. Thank you for taking the question. And just briefly, Justin, thank you so much for all the help over the years. If I could start maybe with a pricing question. You gave some helpful commentary on PPA pricing, but I'm just wondering how we should think about the bridge from here at neutral in Q1 to the full year guide of 1.5%. And similarly, if you could help us, you trimmed your expectation on CNS. Can you just maybe walk us through what you're seeing on the pricing side there? Thank you so much.

Yeah, thanks, Kristen. Happy to. Starting with large ag, the first quarter, as we mentioned, we did put some incremental incentives in place. Sorry, feedback. There we go. We put some incremental incentives in place in South America. As you mentioned, we've seen a little bit of a slowdown in that market. And as a result, we're going to pull down inventory a little bit in that market, just in combines. And maybe just for perspective, too, on the combine inventory, while we've come up a little bit in Q1, we're still about half of the levels on combines that we saw that we peaked at in 2023. So still in really good shape, but want to be proactive there. And as we've seen a little bit of a slowdown, we've taken some action. We don't expect that to continue through the year. As we mentioned, our expectation is for Brazilian price realization to be positive for the full year. And we've seen positive price in North America today. Recall that we did some accrual in the third quarter of last year in large ag for pool funds. That should provide some easier comps as we move through the course of the year as well. So our expectation is to still maintain that point and a half for large ag price.

Yeah, Chris, and this is Jeff. And I think on the PPA side, you know, that point and a half for the full year. And I think we would expect that really as we run through the remaining quarters. So not too lumpy or different as we go to through 4Q.

Yeah, maybe just a bit on CNF. You know, we, we took the guy down slightly. That wasn't a function of our, our lack of confidence in us being able to execute price increases really a function of how fast the year started. Um, we announced some price increases in January and quite frankly, we were surprised at how quickly we had built our backlog, uh, in the first couple of months of the year. So the price actions are going to be delayed a little bit. You know, it's important to keep in mind that, you know, it's, it's vert again, it's parts and also earth moving. And so it's a combination. Each one will do a little bit differently. And then over the rest of the year, we'll start to lap some of the more aggressive pricing actions that we had to take last year. So overall, we still feel very confident in the price realization for the year. Thanks, Kristen.

Our next question comes from Angel Castillo from Morgan Stanley.

Hi, thanks for taking my question. Just want to maybe follow up on that, if you could just talk a little bit more in detail about what's going on in terms of the order strength. In particular, I guess on the CNS data, to the comments on the pricing and the strength that you've been surprised by, I recognize it might be difficult to unpack, but just curious if you're seeing, if you're able to split that up between what might be, you know, one big beautiful bill, kind of bonus depreciation related, you know, any kind of versus end market driven versus kind of DR performance driven by, you know, all the portfolio product innovation you were talking about, or just merchandising incentives. Just curious, you know, the puts and takes across the various kind of tailwinds that might be driving some of the strength and if you're able to kind of unpack that.

Yeah, I'll start. Angel and Ryan, just jump in. I mean, first and foremost, you know, I would just point to, you know, contractor confidence. You know, more and more as we have conversations with contractors, they feel good about their backlog. And candidly, they feel good about that backlog growing even as they look into 2027 as well. So, I think it's strength in their end markets and particularly around larger projects. I mean, infrastructure, mega projects, certainly supporting data centers as well, as we're seeing more of that strength. You know, housing still subdued to start the year. You know, there's some expectation that that'll pick up a little bit as we get some easing as we move through the course of the year. But that's still a segment, you know, for smaller contractors where there's still challenge on the housing side. But again, particularly for those larger folks, you know, they're seeing strength in their order book. And I think that's starting to translate into order activity.

Yeah, just to add to that, Angel, we've seen rental refleeting, which has been positive. Our retails were at mid-teens in the quarter, so we've seen strength there. So not only order activity, but retail more than matching, which has helped as well. So I think that's given us more confidence as we've seen that build.

Yeah, just maybe to summarize, kind of all of the above of the things that you identified here, Um, and I've been out quite a bit with, with customers, you know, geographic mix and, and a broad swath of, of the different types of construction and, and it's really broad based. Uh, they feel confident. I think the construction activity has been strong the last couple of years. They, they were probably a little more cautious with respect to fleet for various reasons, um, last year and the year before that, but now they're the confidence in their backlogs is growing and, and they need to start making more investments in the fleet. And maybe it's one last comment on Verk inside too.

We're seeing strength there. We mentioned that it's not just concentrated in North America, certainly strong infrastructure investment there, but Europe as well. You know, we're seeing some pickup, you know, infrastructure in Germany as an example has been positive. So, you know, strengthen both of those markets as well on the road building side. Thanks, Angel.

Thank you. And Justin, wish you all the best.

Our next question comes from Steven Volkman from Jefferies.

Michael Prast- hey good morning everyone maybe i'll just stay with this topic, I guess, given what you're you guys are all saying, which sounds very reasonable. Michael Prast- The kind of up to up five percentage kind of forecast feels pretty conservative. Michael Prast- So i'm curious if you think there's some headwinds that we should be keeping in mind, maybe, as the year progresses, or something. And then sort of on that same note, your net sales forecast in CNF is quite a bit higher than your end market forecast. So maybe you could tease that part out as well.

Yeah. You know, I think you're right, Steve, that there's certainly optimism. You heard us say that in our prior answer. You know, it is mixed in some segments. You know, housing has still been subdued. Um, you know, so I, I think that's part of it. Um, but, uh, yeah, I'm an overall optimistic, um, and, and we're seeing strength there on the sales guide. Um, you know, up 15, recall that we did, um, some, some pretty strong under production last year, which has really set us up well, um, you know, for, for this upturn. I mean, it was, it was close to 10%. Um, just kind of high single digits for the segment last year. And so we're building in line with retail this year. So that, um, you know, that, that is helping on top of that, you know, you're getting, you know, two half points of price or getting positive price. And currency has been a tailwind as well. So for all those reasons, you know, we're much closer to 15% now versus, you know, those markets we're seeing are up five. Thanks, Steve.

Our next question comes from David Rasso from Evercore ISSI.

Hi. Thank you. And so we'll misadjust. When it comes to the large ag commentary, I was intrigued by the order book color. um but obviously you're not willing to change the the guide on large ag i was just curious that order book is it coming in just in a sense earlier than you would have thought in the sense of you have the same view and the order book just came into the level where now you feel you have just better visibility or are we at the stage where waterloo or east moline is starting to kind of increase line rates and i'm not just talking seasonality i'm speaking about versus your original budget. I'm just curious how you're sort of digesting the least more stable, better order book on large ag when, as you pointed out, I mean, grain prices, even this morning, some of the USDA, you know, corn acre number came in, I thought kind of constructive, but corn's still not reacting positively. And I'm just trying to put together how you're thinking about that order of book versus corn prices just aren't really supporting the the improvement. Thank you.

Yeah, I know. Thanks for the question, David. I mean, on the North American side, you know, our guide is still for the industry down 15 to 20, and maybe breaking that down by product lines. You know, our spring seasonal products, things like sprayers and planters, you know, those EOPs, you know, happened over the course of last summer, you know, wrapped up in August, September. Still a lot of uncertainty in the market, and, you know, prices for commodities were much lower at the time. You know, those Those product lines are probably at the upper end of that range, closer to 15. What we've seen over the course of the quarter from a – oh, sorry, closer to 20 at the upper end of that range for those product lines. What we saw over the course of the quarter on the tractor side was some pickup and order velocity, particularly in the last month or so. So we're probably closer to down 15 or so on tractors, the lower end of that range. And then combines, as we mentioned in our commentary – As we close out that EOP, that'll finish better than the range, more like probably down 10 to 15 for combines in that segment. So, yeah, what are we seeing? What's driving that? I mean, as you're right, I think from an ag fundamental standpoint, still challenged and haven't seen a whole lot of change there over the course of, the quarter. However, we do feel like things are more stable, certainly, than where we were, you know, end of last summer, you know, end of the fall. We've seen China come back to the market. You know, we've seen some stability in grain prices. Not a lot of upside at this point in time, to your point, even on some of the recent news. But we've seen some stability there. And then I think the other thing to keep in mind is that, you know, the age of the fleet is getting older. We haven't seen much replacement over the last couple years. And you do have some folks that do need to look to replace even sort of despite of what we're seeing with ag fundamentals. And when you see an improving used inventory market, and we mentioned some significant improvement, even over the course of the quarter. And I think most notably like model year 22, 23, eight hours down 20% sequentially in the quarter, just gives you a sense of how those are starting to move. You know, that's starting to free up the trade ladder, you know, free up movement there. And so we are seeing a little bit of pickup from a replacement demand, not a, not a massive inflection again, given where, where the, the fundamentals are. But replacement does come back over time, just given, given that situation.

Yeah, that's just the only thing I'd add to that, David, to your question is, yeah, we, we are seeing some increased, you know, build rates in, in tractors and it's kind of back half related to, to these, this order activity that we saw come through, you know, as Josh mentioned, we're already out, you know, nearly through, you know, 3Q. So back half of the year, we see some of that step up, but that that's based on, you know, actual orders that we're seeing. And I think really underlying, some of the replacement that Josh just mentioned. And as we see use get healthier, I think that's aiding that trade ladder, aiding the ability to move those use. We've seen stability in use prices. And then as you take inventory down, it's facilitating more activity there. Thank you. Thank you.

Our next question comes from Tim Time from Raymond James.

Thank you, good morning, and yeah, Josh, Jepson, all the best, and thank you for your help over all these many years. Just a question, circling back on kind of the outline as we came into the year with respect to price versus production costs, given the maybe slower start to the year in some of these segments, but you've also mentioned some maybe fluctuations on the cost and tariff side. Has anything changed in terms of the expectation for the full year and how you expect to play out in terms of price versus cost. Thank you.

Yeah, thanks, Tim. I mean, you're right, some changes over the course of the quarter. We're probably closer now to price-cost neutral for the full year, just given a particular little bit of a reduction on the pricing side in CNF. You know, tariff costs, and by the way, that price cost neutral is inclusive of the $600 million of incremental tariffs that we're seeing this year. So we're covering that tariff piece coming into the business in 2026. But we've, you know, tariffs have been, you know, roughly, you know, flattish quarter over quarter. There were some puts and takes there, but, you know, that billion two for the full year guide on tariffs is still unchanged. we've seen a little bit of change, maybe a little bit more inflationary pressure on materials, but offset by some improvements on the overhead side, as we've added volume, we're seeing more overhead efficiency. And so we'll be slightly unfavorable from a production cost standpoint, X tariffs, but overall, again, price cost neutral with the price actions that were taken.

Yeah, maybe just one thing, you know, first quarter X tariffs, we were production cost favorable. So I think speaks to just the things we can control and how we're operating in an environment with a fair bit of uncertainty. Thanks, Tim.

Our next question comes from Stephen Fisher from UBS.

Thanks. Good morning. And I echo my sentiments. Thanks a lot, Josh. Really appreciate the help. In terms of some of the regional dynamics, I think there were expected to be some pretty big differences between North America and Europe in the first quarter. It sounds like maybe North America ended up being a little bit better on the tractor side, perhaps. Anything in particular from a regional production perspective we should be expecting or just general for Q2, how to model that and any of the differences there? for the rest of the year, because I think those can certainly affect the margin progression in large ag.

Yeah, thanks for the question, Steve. That regional mix was certainly an impact on large ag in the first quarter. I mean, if you look at overall volume in a large ag business in Q1, we were effectively flattish year over year in terms of total volume, but that mix was Europe up, Asia was just a smaller part of our large ag business, but Asia up, And then both North America and South America down year over year in Q1. So given the different profitability profiles, excuse me, for those different geographies, that was unfavorable mix for us in the first quarter. That starts to change as you move through the course of the year. I mean, as we'll see a pickup, you know, particularly in North America production here in the second quarter. And as Josh Jepson mentioned, you know, our order books are for tractors as an example, now into the fourth quarter. So we've got good confidence that we'll see that pickup. And we'll revert to a more normal mix going forward. And that will aid margins. I mean, you can expect us in large ag to do double digit margins. you know, each quarter for the rest of the year. So it really is a mix that's improving as you move through 2026.

Yeah, Steven, I think you see that too, like in gross margins, that really rings through. And when you look at the first quarter versus the rest of the year, where we bounce back and look a lot more like, you know, what do we do for gross margins and PPA, you know, in 2025 and the remainder of the year, that's where it operated. And a big part of that is a little bit more normal mix geographically. Thank you very much. Thank you.

Our next question comes from Chad Dillard from Bernstein.

Hey, good morning, guys. I've got a quick question for you on tariffs. So if we get the tariff relief, will that get rolled back to farmers, and how soon could that happen? Is that something we need to wait to see until the 27th model year pricing?

Yeah. Yeah. And so maybe just to break down a little bit, Chad, on the exposures. like I mentioned, um, you know, total, total tariff, uh, costs, uh, this year in 2026 is, is a billion two, um, pre-tax. And if you, if you break that down, you know, kind of by exposure, it, uh, the, the IEPA tariffs is a little less than half of that, a little bit higher in 232, but a little less than half is, is, is IEPA. Um, so we'll see, you know, what happens on the Supreme court side. Um, you know, It's been a very dynamic environment, so it's hard to say if those go away or something else doesn't come back. So we'll watch how that plays out. We won't react too quickly. Similar to when we saw tariffs going up last year, we didn't take immediate price action, and you can expect a similar approach for us this year in 2026 as well.

Yeah, I'd just reiterate, Chad. I mean, we were... relatively muted. I mean, we're well below normal or historical averages for price. I mean, last year in PPA, we did just below a point. We're talking about a point and a half here this year. So we haven't taken outsized price as it's related to tariffs. We're focused on how do we mitigate, how do we work our way through those. We've seen good progress on mitigation on 232, and teams continue to do a lot of really good work. So I think we're kind of heads down, focused on that, and we'll see how the environment changes. But we're going to keep working on that and focused on the things that we can manage. Thanks, Chad.

Our next question comes from Jerry Revich from Wells Fargo.

Hey, this is Kevin on for Jerry Ravitch. Just had a quick question about large ag-used inventories. Based on our data, we're seeing North America large ag-used inventory D-stock accelerated over the quarter by 4%. Just trying to understand, were there any higher pool funds or other incentives? And is this pace of D-stock sustainable based on what you're saying?

Yeah, Kevin, thanks for the question. As we mentioned, we see all really good progress in the first quarter and maybe worth repeating again. I mean, particularly late model tractors, we saw a really significant reduction over the quarter. I mean, 22s and 238Rs down 20% sequentially in the quarter. Even model year 24s, you know, down 10%. So really good, really good movement there. You know, we did this in 2025. We increased the pool fund contribution rate to keep those levels healthy for our channel. And we'll continue to support the market with pool funds. We did a little bit. in Q1, but still positive price for North America. So like I said, we're seeing good momentum there. We're seeing good movement. Our first quarter tends to be the strongest quarter of the year for use reduction. You do see a lot of year-end calendar buying. So you'll see probably more moving in Q1 than you will be as you get to some of these other quarters. But we've seen continued progression quarter over quarter really for the last better part of the year or so. We'd expect that to continue going forward. Thanks, Kevin. Thanks.

Our next question comes from Jamie Cook from Truist Securities.

Hi. Good morning. And Josh Jepson, thanks for your help throughout the years and best of luck to you. I guess just my question in terms of how we're managing, you know, large ag, you know, seems like things are getting better. You talked about the combines coming in better, order velocity improving. To what degree, I know you have orders through the third quarter, to what degree do you want to limit production, I guess, in 2026 to set yourself up for a better 2027 in terms of how you're managing things? And then I guess my second question, just, you know, with large ag getting better, you know, production sort of moving up, surprised your margins, and in the mix getting better with more North America, just surprised margins wouldn't be more towards the upper end of the range for the year and production and precision ag. Thank you.

Thanks, Jamie. Certainly, as you mentioned, we've seen improvement over the course of the quarter. You know, for combines, as you know, you know, we base our production for the year on that early order program. You know, so that largely defines what we're going to build this year. And so, you know, I wouldn't say, you know, there's any really much change. It will be pretty level through the rest of the year on combines. I mean, tractors, as we've mentioned, you know, order book is now into the fourth quarter. Um, you know, we've seen some increased momentum there. Um, and, and as Josh Jepson said, we'll pick up some production towards the back half of the year, probably not a whole lot of change now at this point. And we're getting pretty close to where that, that the full year, um, we'll have the year filled up. We'll see how things play out, you know, over the next quarter or so as we build out the book for the rest of the year. But, um, you know, we'll, we'll be pretty steady, pretty, pretty level now based on our, with our plans for, for the rest of the year. Yeah, I mean, margin, you know, certainly as we see North America come back, you know, that's good mix. We've seen a little bit of softening in South America. That's a very profitable region for us as well. And so, you know, there's some puts and takes there that don't drive the margin too different from what we've originally forecasted.

Yeah, Jamie, Jeffson, I think the one thing I point out is, you know, we're still below trough levels for production precision ag overall. and North America below that. You know, so when you, when you just the, the overall magnitude of North America being down 15 to 20 and the, the poll, uh, or negative impact on margins is, is real there. So I think, you know, we're, we're, we're glad to see some of that order activity move, but it's not to Josh's point. It's not, it's not a bounce. It's not inflicting hard. It's just, you know, we're seeing some positive progress and momentum. So, um, You know, that, I think, does demonstrate, you know, we should see momentum as we go forward. Inventories are in good shape. Factories are running really lean. So, you know, as we see demand come back, I think we will see strong, strong incrementals, particularly ex-tariffs. But we're still, we're still kind of coming off of very low levels right now.

Thanks, and congrats.

Our next question comes from Tammy Zakaria from JP Morgan.

Hi. Good morning. Thank you so much for taking the question. My question is on the new excavator, which is quite exciting. Curious whether you can comment on any marketing plans around the launch of this. Are you expecting to put in some promotions to gain share, any financing promotions intended for dealers, or anything along those lines to start off on a strong note?

Yeah, I think the big splash that we have is out at ConExpo, and so that'll be the big launch event. We spent a lot of time with a lot of different operators from customers across the country testing and understanding the capabilities of the equipment. We had a big launch party and launch event with them. And so I think the capability and the quality of the equipment and what we're going to deliver to the marketplace is pretty well known. We've done more testing than we have in the past. With respect to incentives, you know, the excavator market, has been pretty challenging from a price perspective over the last couple of years. This new model gives us differentiation that we haven't had over the last couple of years. We're not going to significantly take price with that, but the value that we're offering to our customers through this and through all the work that we've done We feel like they really understand it and continue to do that. And again, at ConExpo, we'll continue to emphasize the message of the value that we're delivering through technology, through improved durability, and just the productivity and capability of the new excavator. We think we're in a great spot to launch. And the teams are super excited. The dealers are super excited. There are good products in the market today. We've had a longstanding relationship with Hitachi with good products. This is a truly differentiated product that we're super excited to bring to the marketplace. Thanks, David.

Our next question comes from Sabahat Khan from RBC Capital Markets.

It's great. Thanks and good morning. Just a two-parter there. I think the initial comments around some of the shipments during the quarter being a little bit better. I guess based on the order book, are you finding that this is more of a structural shift in the outlook that the farmers on the ground have maybe because of some of the trade issues easing and or other factors? And then secondly, just as the trade issues do ease for the U.S. and China starts to order. How are you thinking about the offset in South America where maybe some of the orders for soybeans and other things might moderate? So how do you think about that on that basis? Thanks very much and all the best.

Thanks. I mean, specific to the quarter, I would say largely we ran really well in our factories. We talked about, you know, overhead efficiencies that we saw in the quarter as we ran so well. You know, tractors in North America, we shipped a little bit more than we anticipated, you know, just given how the factory ran. And so I wouldn't say in the quarter that production was so much demand related versus just how we ran in our operations. But, yeah, I mean, as you think about, you know, overall for large ag, we've talked about the pickup in North America. We've hit that point already just on some of the improved optimism we've seen there. Again, it's a minor inflection, but we've seen some positive momentum there. You know, South America, the way I would describe that is just a little more caution in the market. I mean, there's a few factors, you know, at play there. Certainly, you know, the high interest rates that we've seen in the region, you know, have been pressuring customers. We saw the Real appreciate quite a bit. you know, over the course of really the past month, month and a half. Given, you know, the structure of our customers' operations, they sell a lot of their commodities in U.S. dollars. That puts some pressure on their margins. So we've seen a little more caution there as well. And certainly, you know, they're keeping an eye on the election, presidential election in the country that's coming up at the end of the year as well. So for all those reasons, a little more caution in the market. And we've seen just a bit of a cautious ordering as a result.

I think the one thing to your point on trade flows and how does this balance North America, South America, I think there's a couple positive things here, and that's domestic consumption in both geographies, North and South America. In North America, we're seeing more crush of soybeans domestically, more use domestically, and conversely, exports of corn and ethanol are higher domestically. And in part, you're seeing Brazil actually consume more corn and more ethanol domestically. So I think you're seeing some puts and takes and just shifts in terms of how domestic markets are evolving vis-a-vis what's happening in exports. So I think positive is we're seeing strong demand both in-country when you go U.S. and South America, Brazil in particular. And then obviously some shifting as trade impacts that. But I think as things settle there, I think the important part is the strong demand we're seeing that's consuming those grains domestically. Thanks, Alex.

Our next question comes from Mike Schliske from D.A. Davidson.

Yes, hi, good morning. Thanks for taking my question, and I want to add my sentiments. Josh, thanks for everything. All the best to you. I kind of wanted to just maybe dive into your a little more optimistic tone on large ag and some of the order trends that you're seeing, especially in combines. Are you seeing or do you think you'll be seeing any market share gains this year? And I was curious whether you could tell us about tech attachments on some of your combines or other products. Are there more farmers taking on the ultimate package or other descriptions this year that might start to benefit you in 2027?

Yeah, thanks, Mike. Yeah, I mean, I think overall in large ag in North America, you know, over the last 12 to 18 months, we've seen a little bit of share. I think as we've been leaner on the new inventory side, more focused on driving use down, and we've talked about the progress that we've seen there. As a result, we're set up really well, you know, coming into 2026. Our expectation is we've got some opportunity there. you know, to gain some share as we move through the course of the year. Yeah, on the tech side, on combine, super excited. You know, last year was our first year of harvest settings automation, predictive ground speed automation. We saw really good success in the field. I mean, on harvest settings automation, you know, over 60% utilization of operators in the cab, you know, had that tech on while they were harvesting last fall and saw really good productivity gains, really good throughput gains. And as a result, we're seeing a pickup in take rates on that option as well. So 99% of the combines that were ordered this year through the EOP had some level of harvest automation. And nearly 80% of that were taking the highest level, the ultimate package. That's four or five points, Mike, better year over year. And so we've seen really good gains there and would expect that to translate into good utilization in the fall as well.

Yeah, maybe stepping back to as we think about just overall tech adoption and our conversations around are we covering acres with more deer technology? Are engaged acres stepped up again this quarter or 500 million engaged acres? That's over 10% increase from a year ago and about a 25% increase on highly engaged. So nearly a third of those engaged acres are highly engaged. So we're continuing to see progression there. which speaks to what we're doing on connectivity and making sure we're reaching deeper into the fleet. But we're seeing that progress, and we're seeing it progress really across the world, which is positive as well. Thanks, Mike.

Thanks. Our next question comes from Jairam Nathan from Daiwa.

Hi. Thanks for taking my question. So, Justin, you mentioned in your comments about biofuels. If you could just expand on that and what your expectations are. you know, medium term. And on construction, I think one of your competitors yesterday talked about bringing back some of the incentives. If you could kind of address that as well. Thank you.

Yeah, thanks. Sorry, everyone. Sorry, on the biofuels question. I mean, certainly, you know, as Josh said, you know, around the world, we've seen, you know, the power of increased consumption of biofuels. I mean, Brazil is a great example where more and more of their corn production is going into ethanol and that's having a positive impact. You know, looking forward, we're looking at a number of different areas, certainly in the near term, some of the opportunity around the RVO and what that might mean for 2026 and 2027. Keep an eye on that. I mean, E15, you know, as that legislation continues to move, you know, through Congress as well. We see opportunity there to increase consumption longer term for corn through E15. So, you know, a number of different fronts, you know, we see opportunity there. On the switching to the competitive side on construction and forestry, I mean, certainly that's been a competitive market. You know, we've seen that over the last, you know, 12, 18 months. You know, we've seen, you know, competition, you know, as of late last quarter or two, you know, take some price increase, signal some price increase. The timing of that, we're keeping an eye on. Many of our competitors still have a lot of inventory in the field. So as those price increases for 2026 start to manifest themselves in transaction price, there's a bit of a lag there that creates some pressure. But overall, as we said, we feel good about the price increases that we've taken and the opportunity to continue to drive increased realization as we move through the course of the year. Thanks, Aaron. Thanks.

Our last question comes from Evan McCall from BMO Capital Markets.

Hi, good morning. It's Evan for Joel. Just wanted to talk about your cadence of earnings for the year. If you could just give some color on that and if you see growth in Q3 as possible or would Q4 be the first possible quarter of growth? Thank you.

Yeah, I mean, as we look to, you know, through the, through the balance of the year for equipment operations as a total, um, yeah, our expectation, um, you know, is to see a bit of growth as we move through, through the entire of the year. I mean, it's, it's, it's less evident than we saw in Q1, as we mentioned, you know, Q1, we lapped, um, some significant underproduction, particularly in construction and forestry, uh, last year. So, um, you know, so it was an easier comp in Q1, but you'd expect to see, you know, kind of mid single digit growth, um, you know, for most quarters for the balance of the year.

Yeah, I think PBA, you know, if you look at that one specifically, Evan, you can think about that, that you're probably the toughest comp is 2Q and then get easier way to get to the back half of the year from a top line perspective. And then, you know, you've got kind of the, call it a pretty equal tariff burden as you, as you move through the year. Thanks, Evan.

It looks like, That's the last call we have for the day. Thanks all for taking the time, taking time with us today. We appreciate your time and thanks for joining. Have a great day.

That concludes today's conference. Thank you for participating. You may disconnect at this time.