Deere mpany : 3Q Earnings Call Transcript

Published: 2024-08-16 14:21:04 ET DE

Corrected Transcript

15-Aug-2024

Deere & Co. (DE)

Q3 2024 Earnings Call

Total Pages: 21

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Deere & Co. (DE)

Corrected Transcript

Q3 2024 Earnings Call

15-Aug-2024

CORPORATE PARTICIPANTS

Josh Beal

Joshua Jepsen

Director-Investor Relations, Deere & Co.

Senior Vice President & Chief Financial Officer, Deere & Co.

Joshua Rohleder

Luke Gakstatter

Manager-Investor Communications, Deere & Co.

Senior Vice President-Ag & Turf Sales & Marketing, Americas and

John C. May

Australia, Deere & Co.

Chairman & Chief Executive Officer, Deere & Co.

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OTHER PARTICIPANTS

Jamie Cook

Kristen Owen

Analyst, Truist Securities, Inc.

Analyst, Oppenheimer & Co., Inc.

Angel O. Castillo

Joel Jackson

Analyst, Morgan Stanley & Co. LLC

Analyst, BMO Capital Markets Corp. (Canada)

Tami Zakaria

Mircea Dobre

Analyst, JPMorgan Securities LLC

Analyst, Robert W. Baird & Co., Inc.

Jerry Revich

Chad Dillard

Analyst, Goldman Sachs & Co. LLC

Analyst, Sanford C. Bernstein & Co. LLC

David Raso

Analyst, Evercore ISI Institutional Equities

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Deere & Co. (DE)

Corrected Transcript

Q3 2024 Earnings Call

15-Aug-2024

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, and welcome to the Deere & Company Third Quarter Earnings Conference Call. Your lines have been placed on a listen-only mode 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.

Josh Beal

Director-Investor Relations, Deere & Co.

Hello. Welcome, and thank you for joining us on today's call. Joining me on the call today are John May, Chief Executive Officer; Josh Jepsen, Chief Financial Officer; Luke Gakstatter, Senior Vice President-Ag & Turf, Sales & Marketing for Americas and Australia; and Josh Rohleder, Manager of Investor Communications.

Today, we'll take a closer look at Deere's third quarter earnings and spend some time talking about our markets and our current outlook for fiscal 2024. 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/earnings.

First, a reminder. This call is broadcast live on the Internet and recorded for future transmission and use by Deere

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 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/earnings under Quarterly Earnings & Events.

I will now turn the call over to Josh Rohleder.

Joshua Rohleder

Manager-Investor Communications, Deere & Co.

Good morning, and thank you for joining. John Deere completed the third quarter with disciplined performance amid a tough macro backdrop. Financial results for the quarter included an 18.5% margin for the equipment operations. Ag fundamentals remain muted, and market demand in Construction & Forestry has tempered alongside continued price competition, resulting in another quarter of overall challenging market conditions.

Despite tougher markets in both ag and construction, we continued to execute to our plan, focusing on proactive inventory and cost management. Notably for the quarter, we adjusted rest of year production schedules in our earthmoving product line to target lower year-end field inventory levels. As a result, order books across all segments are effectively full for the remainder of the fiscal year as we position our business to respond to

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Deere & Co. (DE)

Corrected Transcript

Q3 2024 Earnings Call

15-Aug-2024

changes in retail demand. These actions, along with the continued focus on cost control, are essential to keeping our business healthy as we continue to invest in future growth.

We'll now begin with slide 3 and our results for the third quarter. Net sales and revenues were down 17% to $13.152 billion, while net sales for the equipment operations were down 20% to $11.387 billion. Net income attributable to Deere & Company was $1.734 billion or $6.29 per diluted share.

Now, looking into our individual business segments, we'll start with Production & Precision Ag on slide 4. Net sales of $5.099 billion were down 25% compared to the third quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive by slightly more than 2.5 points. Currency translation was negative by a little more than 1 point. Operating profit was $1.162 billion, with a 22.8% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and employee separation program expenses. These were partially offset by price realization and lower warranty expenses.

Next, we'll turn to Small Ag & Turf on slide 5. Net sales were down 18% year-over-year, totaling $3.053 billion in the third quarter because of lower shipment volumes, partially offset by price realization. Price realization was positive by more than 1.5 points. Currency translation was negative by just under 0.5 point. Operating profit declined year-over-year to $496 million, leading to a 16.2% operating margin. The decrease was primarily due to lower shipment volumes and higher warranty expenses, which were partially offset by price realization.

Slide 6 gives our 2024 industry outlook for Ag & Turf markets globally. Across all major markets, we continue to see muted demand, resulting from a challenging macro environment. Global stocks of grains continue to rebuild, with excellent growing conditions leading to better-than-expected production and lower commodity prices. High interest rates and geopolitical uncertainty further weigh on customers' purchase decisions, resulting in reduced demand across all end markets.

In the US and Canada, we continue to expect large ag equipment industry sales to be down approximately 15% during the quarter. Demand continues to be pressured by declining farm margins and elevated used inventory levels in late model year machines, which is partially offset by an elevated fleet age, rising farmland values, and stable farm balance sheets. Within Small Ag & Turf in the US and Canada, industry demand estimates remain down approximately 10%. Further declines in the turf and compact utility tractor segments, which are more sensitive to interest rates, are partially offset by improving dairy and livestock fundamentals.

Turning to Europe, the industry is forecasted to be down approximately 15%, reflecting yield headwinds and weakened margins. Volatile weather patterns continue to drive commodity price and arable cash flow uncertainty, which is enhanced by slightly elevated input costs. However, dairy and livestock fundamentals remain healthy, providing moderate stability to the segment.

In South America, we expect industry sales of tractors and combines to decline between 15% and 20%. Commodity price softening and elevated interest rates continue to pressure grower profitability, especially in Brazil, our largest market in the region. Fundamentals are further pressured by better-than-expected production in Brazil, despite regional weather challenges and a slower-than-forecasted recovery in Argentina. Industry sales in Asia are forecasted down moderately.

Moving on to our segment forecast, beginning on slide 7. Production & Precision Ag, our net sales forecast remains down between 20% and 25% for the full year. The forecast now assumes roughly 2 points of positive

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Deere & Co. (DE)

Corrected Transcript

Q3 2024 Earnings Call

15-Aug-2024

price realization and flat currency translation for the full year. For the segment's operating margin, our full year forecast remains between 20.5% and 21.5%, despite muted demand.

Slide 8 covers our forecast for the Small Ag & Turf segment. We expect net sales to remain down between 20% and 25%. The guide now includes 2 points of positive price realization and flat currency translation. The segment's operating margin continues to be forecasted between 13.5% and 14.5%, in line with slowing net sales.

Shifting now to Construction & Forestry on slide 9. Net sales for the quarter were down 13% year over year to $3.235 billion due to lower shipment volumes. Price realization was negative by 1 point. Currency translation was also negative by more than 0.5 point. Operating profit of $448 million was down year-over-year, resulting in a 13.8% operating margin due primarily to lower shipment volumes, unfavorable sales mix, and negative price realization.

Slide 10 provides an update to our 2024 Construction & Forestry industry outlook. Industry sales for earthmoving equipment in the US and Canada is now expected to be down 5% to 10%, while compact construction equipment in the US and Canada is now expected to be flat to down 5%. Demand for earthmoving and compact construction equipment is down from robust levels of 2023 and increasingly competitive as rental re-fleeting decelerates and used inventory levels rise. While US government infrastructure spending remains supportive and manufacturing investments continue to increase, we are witnessing a sequential slowdown in single-family housing starts amid interest rate uncertainty. This is compounded by continued declines in multifamily housing starts and persistent weakness in the commercial real estate sector.

Global forestry markets are projected to remain down around 10% as all global markets continue to be challenged. The global roadbuilding market forecast remains flat to down 5%, as strong infrastructure spending in the US is offset by continued softness in Western Europe.

Moving on to Construction & Forestry segment outlook on slide 11. 2024 net sales estimates are now expected to be down between 10% and 15% as moderating demand is coupled with planned underproduction. Net sales guidance for the year now includes about 0.5 point of positive price realization and flat currency translation. The segment's operating margin is now projected to be around 15%, reflecting a tougher competitive environment, decelerating demand, and underproduction of construction equipment.

Transitioning to our financial service operations on slide 12. Worldwide Financial Services net income attributable to Deere & Company in the third quarter was $153 million. Net income was lower due to a higher provision for credit losses and less favorable financing spreads, which were partially offset by a higher average portfolio and favorable discrete tax items. For fiscal year 2024, our outlook for net income is now at $720 million as benefits from a higher average portfolio balance are expected to be more than offset by a higher provision for credit losses and less favorable financing spreads.

Subsequent to the quarter, we announced an agreement with Banco Bradesco to invest and become 50% owners in our Brazilian financing subsidiary, Banco John Deere. This strategic decision reduces incremental financing risks, while allowing for a continued investment and growth in the Brazilian market. The transaction is expected to close in the second fiscal quarter of 2025. In our quarterly results, we classified Banco John Deere as a business held for sale, which resulted in a net impact of a pre-tax and after-tax loss of $15 million, accounted for in SA&G within the Financial Services segment.

Next, slide 13 outlines our guidance for Deere & Company's net income, our effective tax rate, and operating cash flow. For fiscal year 2024, we remain - we maintain our outlook for net income at approximately $7 billion. Next,

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Deere & Co. (DE)

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Q3 2024 Earnings Call

15-Aug-2024

our guidance continues to incorporate an effective tax rate between 23% and 25%. And lastly, cash flow from the equipment operations is now projected to be in the range of $6 billion to $6.5 billion.

And finally, on slide 14, I'd like to hand it over to John May to say a few words.

John C. May

Chairman & Chief Executive Officer, Deere & Co.

Thank you, Josh. The third quarter was another solid quarter, thanks to the efforts of the entire John Deere team, in partnership with our outstanding dealer network and supply base. As mentioned in the opening comments, our customers across nearly all business segments are facing headwinds, including softer commodity prices and elevated interest rates. Against this backdrop, I'm extremely proud of our team's unwavering commitment to and execution of our key priorities. They have navigated the business cycle through proactive inventory management and disciplined cost control, while continually striving to deliver value to our customers.

Effective cycle management begins with ensuring that inventory levels are appropriately aligned to end-market demand. Throughout 2024, we've prudently and proactively adjusted production schedules in our Large Ag business at a faster pace than ever before in order to reduce field inventory in our end markets. This quarter, we made a similar adjustment for many of our earthmoving product lines in North America in response to signs of moderating demand. We will also continue to focus on reducing used inventory levels, particularly in North American Large Ag for the remainder of the year.

As we approach the start of fiscal 2025, the lean levels of field inventory resulting from these actions will best position our operations in both segments to respond effectively to changes in market demand. Proactively managing our production schedules also facilitates disciplined cost control. In this lower volume environment, we've made challenging decisions that impact both our factories and our offices to ensure that our cost structure aligns with current market demand. And while these actions have been hard and certainly not something we take lightly, they help us maintain our competitiveness throughout the business cycle, allowing us to continue investing in the products and solutions that empower our customers to address their unique challenges.

That is our ultimate purpose: delivering value for our customers. In the near term, this means continuing to build and ship the highest level quality and most productive equipment to our customers. I want to extend my heartfelt gratitude to all of our John Deere team members who have maintained this commitment at the highest level throughout 2024, despite necessary adjustments we've had to make in our operations. None of this happens without a high-performing team that shows up to deliver for our customers every single day.

In the medium and long term, our ability to deliver value for our customers is rooted in Deere's unique position to help them do more with less by developing precision solutions that leverage our extensive product portfolio, our vertically integrated tech stack, and unparalleled service and support.

Looking ahead, we are optimistic about the opportunities before us. Our machines are delivering ever greater cost savings and promoting sustainable operations for our customers. We see significant potential to leverage our existing technologies across various production systems, enabling us to scale innovation and enhance value delivery across our customer base. Ultimately, this results in a continually expanding offering of solutions that drive improved outcomes for our customers, dealers, and Deere alike.

Joshua Rohleder

Manager-Investor Communications, Deere & Co.

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Corrected Transcript

Q3 2024 Earnings Call

15-Aug-2024

Thank you, John. This concludes our formal comments. We'll now shift to discussions on a few topics specific to the quarter. Starting off with Deere's performance in the third quarter, net sales declined approximately 20% year- over-year, but we still saw our operating margin come in at over 18%. Clearly a challenging macro environment, but we've managed to hold margins.

Josh Beal, can you kick us off with what happened this quarter?

Josh Beal

Director-Investor Relations, Deere & Co.

Absolutely. Thanks, Josh. As you mentioned, our strong margin performance is encouraging, given the difficult market backdrop, particularly as we pull the inventory management levers that John noted. In both ag segments, we saw declines in net sales as end user demand continued to soften. However, by keeping inventories in check, we've been able to maintain solid price realization.

In addition, our strategic partnerships with our supply base are helping drive down material and freight costs, which are offsetting overhead efficiencies as we bring down production rates at our factories. In Construction, we saw a downshift in demand and an uptick in used inventories as rental re-fleeting cooled and home starts slowed amid interest rate uncertainty, all while a competitive market environment drove increased incentive spending.

This put pressure on both volumes and price in the quarter. And, as a result, we adjusted our North American construction equipment production schedule for the rest of the year to lower our ending field inventories and better position us for 2025. And with roughly two months of order visibility in the segment, we are confident in our ability to execute our plan.

Joshua Rohleder

Manager-Investor Communications, Deere & Co.

Great recap, Josh. On your note about the challenging quarter and decline in demand, farm fundamentals are clearly top of mind right now with corn, soy, and wheat prices all down more than 15% year-over-year, which brings down farm margins as well. Can you walk us through what we're seeing and what this means for both farmers and equipment demand?

Josh Beal

Director-Investor Relations, Deere & Co.

Sure. It's definitely a tough - different and tougher environment today than it was a year ago. If you take North America as an example, on the one hand, farmers are experiencing one of their best crops in years, thanks to excellent weather conditions. But then, on the other hand, the high levels of production resulting from these strong expected yields are causing crop prices to decline, as you mentioned. Although input costs are projected to be down this year, it's not enough to offset the lower commodity prices, leading to projected year-over-year declines in farm net incomes, which ultimately puts pressure on equipment demand.

Brazil is experiencing a similar situation in North America with ag commodity prices softening due to replenished global supplies, another year of near-record yields, and expansion of soybean acreage. Unit profitability for Brazilian customers is magnified by persistently high interest rates in the region, leading to further pullbacks in equipment sales.

In Europe, farm investments continue to soften as weather uncertainty pressures crop yield estimates. And while living conditions remain tight, input costs have remained elevated in the region, leading to depressed margins and

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Q3 2024 Earnings Call

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weaker farmer sentiment. However, steady prices and reduced input costs in the dairy and livestock segment are providing some moderating tailwinds on what is otherwise a challenging equipment demand environment in the region.

Joshua Jepsen

Senior Vice President & Chief Financial Officer, Deere & Co.

This is Jepsen. One important note regarding fleet fundamentals is that North America, we continue to see an elevated fleet age, which enables replacement purchases. Additionally, strong balance sheets are providing support in a downturn, driven by farmland values that are up nearly 5% year-over-year. So, while it's definitely a challenging market for customers, there are some supportive factors to account for.

John C. May

Chairman & Chief Executive Officer, Deere & Co.

Yeah. This is John. I'd like to share an additional thought. Last week, I was in Brazil speaking with some of our customers in the region about the near and long term prospects for agriculture in the country. The near term, while the market has experienced a decline, it appears to be more stable now than it was just a few months ago, which is encouraging for 2025. Looking ahead, there is a strong sense of optimism regarding the region's prospects, with significant opportunities still on the horizon. One customer mentioned that his business has structurally improved over the years. He is eager to continue investing in solutions and technologies that enhance productivity and profitability. Deere is committed to supporting this need through ongoing investments in the region as we continue to introduce new product and technologies, specifically designed in Brazil, for Brazil.

Joshua Rohleder

Manager-Investor Communications, Deere & Co.

Perfect. Thank you, all, for that great color. Now, with that context on ag fundamentals, I'd like to move on to our early order programs in North America to better understand how this is translating into equipment sales for model year 2025. Luke, our EOPs typically account for roughly 90% of our production for seasonal products each year. Can you walk us through what's transpired so far as we begin to get some insights into next year?

Luke Gakstatter

Senior Vice President-Ag & Turf Sales & Marketing, Americas and Australia, Deere & Co.

Absolutely, Josh. It's probably best to start with what's changed in our process year-over-year. Historically, our early order programs would leverage multiple phases to help shape demand and fill our production schedules. Under this approach, generally speaking, the earlier an order is placed in the program, the greater the discount for the customer. Now, during the last few years of constrained supply, this all changed, and we leveraged more of an allocation approach in attempt to meet our dealer and customer needs in a time of high demand.

Now, given the return to more moderated demand, we have returned to our traditional approach of multiple phases with tiered discounts for products like planters, air feeders, sprayers, and combine. Planters and sprayers opened earlier this summer and are currently in their second or third phase, while combines just opened last week with list price increases across all EOPs currently in the 2% to 3% range. Tractors, as a reminder, are on a rolling order book, with roughly four months of visibility, providing confidence in our production plans as we close out the portfolio.

Now, as we shift and talk about progress on our early order programs, coming off last year's near peak demand levels, the model year 2025 sprayer EOP is currently down double digits. That said, orders are tracking slightly

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Q3 2024 Earnings Call

15-Aug-2024

above pre-2022 EOP volumes. Planter sales are also down double digits and down relatively more than sprayers on a year-over-year basis. It's worth noting that historically, we have seen greater variability with implement sales throughout the ag cycle when compared to self-propelled product lines. And given North American planters were another product well above mid-cycle volumes in 2024, it is not unexpected to see a larger reduction with planters relative to sprayers this year.

Additionally, history would tell us that in times of uncertainty, we typically see more activity at the end of the EOP phases compared to the beginning as customers time their purchases to better align delivery with their seasonals. The current high interest rate environment further extends this trend as both customers and dealers look to minimize carrying costs and be as efficient as possible with their assets.

While planter and sprayer EOP orders are down for model year 2025, tech adoption continues to accelerate as customers adopt precision solutions to help increase profitability amidst a tougher macro environment. Across our more established solutions, we have seen average adoption rates well above 80% with ExactApply in particular up nearly 10 points.

For our newest and most advanced offerings like ExactShot and See & Spray, we are seeing healthy adoption rates during the first year. And in particular, our See & Spray technology has achieved high single-digit take rates in its first full year of commercial availability, at a pace commensurate with historical precedents.

Joshua Jepsen

Senior Vice President & Chief Financial Officer, Deere & Co.

One thing to highlight beyond just the take rates for our latest solutions is the feedback we're receiving from both customers and dealers on the efficacy of the technology. We continually hear that See & Spray savings are meeting or exceeding expectations, and that the ROI pencils out. That said, See & Spray does require significant shifts in the way our customers manage their crop care programs. Everything from what chemicals they buy, to how much they buy, to how often they're tendering their equipment in the field must change, which is a significant investment on the part of the customers.

We understand this, which is why we are more committed than ever to dealer engagement and customer success, ensuring we provide the solutions, support, and, most importantly, the outcomes that our customers need to succeed.

Joshua Rohleder

Manager-Investor Communications, Deere & Co.

Thanks for the additional detail, Josh. And, Luke, if I can come back to you once more, we've covered ag fundamentals, which, in turn, has resulted in early indications on our planter and sprayer EOP sales. How does this relate to inventory levels? Can you give us an update on how we're progressing in our inventory management plan?

Luke Gakstatter

Senior Vice President-Ag & Turf Sales & Marketing, Americas and Australia, Deere & Co.

Yeah. You bet. And just as a reminder, our decision to under-produce is rooted in our learnings from the last cycle. Given that, we began taking actions last year and again this year to drive inventories lower. And while this has caused some short term pain, it is the right plan to manage the cycle and better sets us up for whichever way the market moves.

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Corrected Transcript

Q3 2024 Earnings Call

15-Aug-2024

And so with that, I would start by highlighting our situation in Brazil. This market has remained challenged, as you noted earlier. However, we significantly under-produced the market. And despite the industry demand declining more than anticipated, we've still seen inventory declines so far this year and fully anticipate that this trend will accelerate throughout the remainder.

Relative to the North American Large Ag segment, we are beginning to see the impacts of our proactive inventory management decisions with absolute units of new inventory declining double digits over the past quarter, outpacing the industry. We expect further reductions to occur during the fourth quarter, which is in line with historical trends. And while we expect our inventory to sales ratios, which remain below industry levels, to end the year at roughly the same level as last year, this reflects a material decrease in the absolute number of units.

In fact, to put this into perspective, on an absolute basis, we are forecasting to end the year with less than one row crop tractor per dealer level.

Josh Beal

Director-Investor Relations, Deere & Co.

If I may jump in and quickly add some color to Luke's comment on rest of the year reductions in North America, the underproduction of large tractors we highlighted last quarter will be a significant driver of the implied margin decline in our fourth quarter. For example, our guide contemplates planned shutdowns of our 8 Series tractor production line in Waterloo, Iowa for about 50% of the total production days in the quarter, which will have a material impact on our decremental margins.

It's important to note here that these are shutdown days rather than line rate shifts, as we work to implement our planned underproduction for fiscal 2024 as efficiently as possible while remaining agile enough to respond to any future demand changes next year.

Joshua Rohleder

Manager-Investor Communications, Deere & Co.

That's a great point to highlight, Josh. And, in fact, we're taking that approach at other factories around the world. For example, our 6-Series tractors in Mannheim, Germany are also planning a similar shutdown for roughly a third of their fourth quarter production days. This will have an impact on small ag margins as well.

But to shift back to inventory levels, Luke, can you walk us through the used side?

Luke Gakstatter

Senior Vice President-Ag & Turf Sales & Marketing, Americas and Australia, Deere & Co.

Certainly. On the used inventory side, we've seen total units increase across all product lines year-over-year. While combines did peak near 10-year averages last quarter, we have since seen volumes retreat as dealers work through normal intra-season swing. As we look to finish out the year and into 2025, one of our primary focus areas is used equipment.

To that end, last week, we hosted our dealer CEOs and key leaders at various locations across North America. Our message to our dealers is clear: reduction in used inventory was our number one priority right now, and we were further committed to helping them drive down used inventories.

Furthermore, we rolled out additional programs and tactics to support them. The best example would be our increase in pool fund, which, as a reminder, are dollars dealers earned from new sales that can be applied as

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Deere & Company published this content on 15 August 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on August 16, 2024 at 18:20:02 UTC.