Deere & Company

Good morning and welcome to Deere & Company third 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. Chris Seibert, 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, Deanna Kovar, President Worldwide Agriculture and Turf Division, Production and Precision Ag, Sales and Marketing Regions of the Americas and Australia, and Dan Pulley, Manager, Investor Communications. Today, we'll take a closer look at Deere's third quarter earnings, then spend some time talking about our end 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 slash earnings. First, a reminder. This call is broadcast live on the internet and recorded for future transmission and use by Dear & 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, change in circumstances, and other factors that are difficult to predict. Additional information concerning factors that could cause actual results that 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 Security 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 gap measures, is included in the release and posted on our website at johndeer.com slash earnings under quarterly earnings and events. I will now turn the call over to Dan Pulley.

Good morning, and thank you for joining us. John Deere delivered a strong third quarter with equipment operations achieving 14.4% operating margin. While conditions vary across our end market, We continue to see pockets of strength. In agriculture, producers remain focused on managing profitability, impacted by fluctuating commodity fundamentals and uncertainty around input costs and crop demand, all of which are influencing capital spending decisions by region. At the same time, construction, compact construction, and turf markets remain supported by healthy project activity and steady demand fundamentals, reinforcing the value of Deere's diversified portfolio. Against this backdrop, Deere's performance continues to underscore the strength of our operating model. Across our factories, warehouses, and offices, teams executed well throughout the quarter, delivering strong performance while maintaining cost discipline. We also made continued progress improving inventory health, positioning Deere, our dealers, and our customers to respond effectively as market conditions evolve. We now begin with slide three and our results for the third quarter. Net sales and revenues were up 5% to $12.608 billion, and net sales for the equipment operations were up 6% to $10.999 billion. Net income attributable to Dearn & Company for the quarter was $1.379 billion, or $5.10 per diluted share. Diving into our individual business segments, we'll start with production and precision ag on slide four. Net sales of $3.998 billion were down 6% compared to the third quarter last year, primarily due to lower shipment volumes, partially offset by favorable price realization and currency translation. Price realization was positive by 2.5 points. Currency translation was also positive by slightly over 1.5 points. Operating profit was $527 million, with a 13.2% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and higher production costs, which were partially offset by favorable price realization and the effects of currency exchange. Next, we'll turn to Small Ag and Turk on slide 5. Net sales were up 12% year-over-year, totaling $3.383 billion in the third quarter due to higher shipment volumes and favorable price realization. The price realization was positive by a little over 1.5 points. Currently, translation was negative by roughly half a point. Operating profit increased year-over-year to $622 million, leading to an 18.4% operating margin. The increase was primarily due to higher shipment volumes and sales mix, along with favorable price realization partially offset by higher production costs. Slide six gives our industry outlook for ag and turf markets globally for 2026. In U.S. and Canada, we continue to expect the large ag equipment industry sales to decline 15% to 20% year over year, as farm profitability remains muted and producers navigate elevated input costs, commodity price volatility, and the ongoing uncertainty around agricultural markets. The small ag and turf industry in the U.S. and Canada remains relatively stable, with industry sales expected to be flat to up 5%. Thank you for joining us today. and higher interest rates continue to pressure farm economics and impact equipment purchase decisions. We now expect the industry outlook to be down 15 to 20%. Lastly, in Asia, we continue to expect industry sales to remain approximately flat, supported by relatively stable end market conditions across the region following the modest improvements in India we communicated last quarter. Moving on to our segment forecast beginning on slide seven. For Production and Precision Ag, we've trended toward the bottom end of our prior guidance range and now expect net sales to be down approximately 10% for the year. This update reflects further industry softening within South America and Europe. The forecast also includes a point of positive price realization for the year, as well as close to 2.5 points of favorable currency translation. Our full year forecast for the segment's operating margin has been narrowed and is now between 11% and 12%. Slide eight covers our forecast for small ag and turf segments. 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 half a point of favorable currency translation. The segment's operating margin guide has been increased to between 14.5% and 15.5%. Shifting now to construction forestry on slide nine. Net sales for the quarter were up 18% year-over-year to $3.618 billion, a result of higher shipment volumes and favorable price realization. Price realization was positive by eight points, reflecting year-over-year impact of lapping retail incentive programs from the prior year, combined with favorable pricing in the current year. Currency translation was also positive by roughly half a point. Operating profit of $436 million was up year-over-year, resulting in a 12.1% operating margin driven by a favorable price realization which was partially offset by higher SANG and R&D costs. Slide 10 provides an update to our 2026 construction forestry industry outlook. Industry sales for earth moving equipment in the U.S. and Canada are now expected to be up 5% to 10% for construction equipment and up 5% for compact construction equipment reflecting strong demand from large scale infrastructure, data center, and energy related projects, as well as continued investment in rental fleet to support elevated levels of end market activity. Within global forestry, we now expect the industry to be down 10% for the year as subdued residential construction activity and softer log and lumber prices continue to weigh on equipment demand, especially in North America. The projection for global road building market remain steady at up approximately 10% for the year, supported by favorable infrastructure spending trends, healthy contractor backlogs, and continued investment in road construction across key regions. Moving on to the construction forestry segment outlook on slide 11, the 2026 net sales forecast remains steady at up approximately 20% for the full year. The guidance for the year now includes three points of favorable price realization, and approximately one and a half points of favorable currency translation. The forecast for this segment's operating margin has been tightened to between 10 and a half and 11 and a half percent for the year. Transitioning to our financial services operation on slide 12. Worldwide financial services net income attributable to Deere & Company in the third quarter was 219 million. Net income was higher in the quarter due to favorable price financing spreads partially offset by the impact of lower average portfolio compared to the prior year. For fiscal year 2026, our full year outlook has increased to $870 million. On slide 13, we outline our guidance for net income, effective tax rate, and operating cash flows. For fiscal year 2026, we improved our net income outlook, raising it to a range of $4.75 to $5 billion, reflecting the strong results delivered in the quarter and our confidence in the outlook for the remainder of the year. This guidance continues to reflect an effective tax rate between 24% and 26%. And lastly, cash flow expectations from the equipment operations have also improved to now be in the range of $5 to $5.5 billion. This concludes our formal comments. We'll now shift to a discussion to cover a few topics specific to the quarter. Starting off with Deere's performance In the third quarter, equipment operations net sales improved 6% year-over-year, and we saw equipment operations operating margins come in at 14.4%. Chris, can you provide some additional color on the performance for this quarter?