Deere & Company

Good morning and welcome to Deere and Company's second quarter earnings conference call. Your lines have been placed on listen only until the question and answer session of today's conference. I would now like to turn the call over to Mr. Josh Beal, Director of Investor Relations. Thank you. You may begin.

Hello. Welcome and thank you for joining us on today's call. Joining me on the call today are Brent Norwood, Chief Financial Officer, and Chris Seibert, Manager, Investor Communications. Today, we'll take a closer look at Deere's second quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 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 expressed 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 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 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, if any, 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. In John Deere's second quarter, we delivered year-over-year net sales growth of 5% and an equipment operations margin of 16.9%, reflecting solid execution and a strong diversified portfolio of businesses spending multiple industries and geographies. The quarterly results also benefited from recording a recovery for refund claims relating to IEPA tariffs, which we'll discuss in more detail later in the call. Our construction and small ag and turf business units continue to benefit from supportive industry fundamentals. Notably, robust infrastructure spending and rental fleet replacement are driving increased demand for construction and road building equipment, while small ag and turf is benefiting from a recovery in turf end markets and healthy cash flow in the dairy and livestock sector. Our large ag business consumption of ag commodities continues to grow, supported in part by increased biofuel use and higher energy prices. And we see the potential for tighter air commodity supplies in upcoming crop years as higher fertilizer costs potentially impact production levels. However, customer sentiment remains muted, despite recent grain price increases as growers' margins face headwinds from elevated and volatile input costs and high interest rates. Amidst this backdrop, DEER continues to strengthen its position in advance of the large ag cycle recovery with low levels of new field inventory, continued improvement in used inventory, and robust introductions of new products and technology solutions that are driving market share gains and are expected to enable future growth as markets recover. As an enterprise, we remain confident in our ability to bring increased value to customers and deliver structurally higher performance for deer across the cycle. The diversification of our business segments evidenced in 2026 with all three operating at different points in the cycle, provides increased resilience and enhanced growth opportunities for the organization. As a result, this quarter, we maintain our overall net income outlook for fiscal 2026 while continuing to progress towards our 2030 LEAP ambitions. Slide three opens with our results for the second quarter. Net sales and revenues were up 5% to $13.369 billion while net sales for the equipment operations were up 5% to $11.778 billion. Net income attributable to Deeren Company was $1.773 billion, or $6.55 per diluted share. Turning to our individual segments, we begin with the production and precision ag business on slide four. Net sales of $4.503 billion were down 14% compared to the second quarter last year. primarily due to lower shipment volumes that were partially offset with favorable currency translation impacts. Price realization was positive by about a point. Currency translation was also positive by roughly three points. Operating profit was $706 million, resulting in a 15.7% operating margin for the segment. The year-over-year decrease was primarily due to the lower shipment volumes and higher production costs that were partially offset by the favorable effects of currency exchange. Moving now to small egg and turf on slide five. Net sales increased 16% to 3.485 billion in the second quarter, driven by higher shipment volumes and favorable currency translation. Price realization was positive by around one and a half points. Currency translation was also positive by roughly two and a half points. Operating profit of 719 million was also up for the quarter, resulting in a 20.6% operating margin. The improvement in operating profit was primarily a result of the higher shipment volumes and the effects of favorable price realization. Slide six gives our industry outlook for ag and turf markets globally. We continue to expect large ag equipment industry sales in the US and Canada to decline 15 to 20%, driven by elevated input costs and ongoing global market uncertainty. However, Robust commodity demand and projections for tightening supply have supported improvements in crop prices, while U.S. government programs continue to provide liquidity support for farmers. Recent biofuels policy support, including approval of the RVO and potential year-round E15, should help provide greater stability and support future demand for U.S. growers. For small ag and turf in the U.S. and Canada, industry demand is expected to remain steady ranging from flat to up 5%. We're projecting modest strengthening in the turf market, as demand has expanded following several years of industry decline. The dairy and livestock sector also continues to maintain strong margins, supporting ongoing product demand. In Europe, industry demand remains relatively stable and is expected to range from flat to up 5%. While elevated interest rates continue to affect purchasing decisions, customer profitability and replacement activity are relatively stable. Although the arable sector remains a bit muted, favorable dairy margins continue to support the broader industry outlook. Moving to South America, industry sales of tractors and combines are now expected to decline about 15%. While production and yield performance remain strong alongside improving crop prices, elevated interest rates, higher input costs, and a stronger Brazilian REI are pressuring customer profitability and reducing equipment demand in the near term. Industry sales in Asia are now projected to be roughly flat year over year, mainly driven by modest improvements within the India market. Next, our segment forecast begins on slide seven. For production and precision ag, our net sales forecast is unchanged and remains down between 5% to 10% for the full year. This forecast now reflects roughly a point of positive price realization for the full year, as well as just under three points of favorable currency translation. Our full year forecast for the segment's operating margin is also unchanged and remains between 11 and 13%. Slide eight shows our forecast for the small ag and turf segment. We continue to expect net sales to be up approximately 15% for the full year. This guide includes one and a half points of positive price realization, as well as roughly one point of favorable currency translation. The segment's operating margin guide remains between 13.5% and 15%. Shifting over to construction and forestry on slide 9. Net sales for the quarter increased by 29% year-over-year to 3.79 billion as a result of higher shipment volumes and favorable currency translation. Price realization was favorable by more than 2.5 points. Currency translation was also favorable by a little more than three points. Operating profit of 561 million was also up year over year, resulting in a 14.8% operating margin. This improvement was a result of higher shipment volumes and favorable price realization, which were partially offset by unfavorable production costs. Slide 10 describes our construction forestry industry outlook. Industry sales projections for earth-moving equipment in the US and Canada remain unchanged, with both construction equipment and compact construction equipment expected to be up around 5%. The fundamentals behind the construction industry remain favorable, with healthy customer backlogs being supported by infrastructure and large project spending that is more than offsetting softness in residential construction. Global forestry markets are expected to decline 5%. reflecting continued pressure from weak residential construction activity and low log and lumber prices. We now expect global road building markets to grow approximately 10% year-over-year, supported by elevated road construction spending across multiple geographies. Moving on to the CNF segment outlook on slide 11. The 2026 net sales are now forecasted to be up approximately 20% for the full year. This net sales guidance for the year includes 2.5 points of favorable price realization and approximately 2 points of favorable currency translation. The segment's operating margin has also been increased and is now projected to be between 10% and 12% for the full year. Now, transitioning to our financial service operations on slide 12. Worldwide financial services net income attributable to Deere & Company in the second quarter was $190 million. The year-over-year increase is a result of favorable financing spreads and favorable derivative valuation adjustments partially offset by the impact of a lower average portfolio. For fiscal year 26, we raised our full-year outlook to $860 million, primarily driven by favorable fair value adjustment and improved provision for credit losses. And finally, slide 13 outlines our guidance for net income effective tax rate, and operating cash flow. For fiscal year 26, our net income forecast remains unchanged between 4.5 and 5 billion. Next, our guidance now incorporates an effective tax rate between 24 and 26%. And lastly, cash flow from the equipment operations remains projected between 4.5 and 5.5 billion. This concludes our formal remarks. I will now turn the call over to Brent Norwood for opening comments before we cover a few quarter-specific topics.