Deere & Company Price & Performance (DE)

Hello. Welcome and thank you for joining us on today's call. Joining me on the call today are Josh Jepsen, Chief Financial Officer and Josh Rollator, Manager, Investor Communications. Today, we'll take a closer look at Deere's first quarter Deere. Then spend some time talking about our markets and our current outlook for fiscal twenty twenty five. 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 johndeer.com/earnings Deere. 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 Deere is strictly prohibited. Participants in the call, including the Q and 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 eight ks Risk Factors in the annual Form 10 ks, as updated by reports filed with the Securities and Exchange Commission.

This call may also include financial measures that are not in conformance with accounting principles generally accepted in The United States Of America. [indiscernible] Additional information concerning these measures including reconciliations to comparable GAAP measures, is included in the release and posted on our website at Deere under Quarterly Earnings and Events. I will now turn the call over to Josh Rollater. Good morning, and thank you for joining us today. John Deere completed the first quarter with a 7.7% margin the equipment operations Global ag fundamentals generally improved this quarter. However, demand remains constrained by overall uncertainty in the market which has continued to put pressure on order velocities particularly in North America. Our fiscal twenty twenty five ag outlook remains largely unchanged from prior guidance when excluding the impacts of currency movement over the past quarter. Notably, shipping volumes were lower in the quarter versus expectations as we calibrated full year production schedules billed as efficiently as possible, As a result, we expect to recover the first quarter shortfall over the remainder of the year. In Construction and Forestry, end market fundamentals remain supportive of replacement Deere. Albeit dampened by elevated interest rates, macro uncertainty and a competitive environment Planned under production our Earthmoving segment during the first quarter drove further reductions in field inventory levels enabling production optionality as market demand develops over the course of the year.

Slide three opens with results for the first quarter. Net sales and revenues were down 30% to $8,508,000,000 while net sales for the equipment operations were down 35% to $6,809,000,000 Net income attributable to Deere and Company was $869,000,000 or $3.19 per diluted share. Which included $163,000,000 of discrete tax benefits related to special items.

Turning to our individual segments, we begin with the Net sales of $3,067,000,000 were down 37% compared to the first quarter last Deere. Primarily due to lower shipment volumes. Price realization was positive by just over one point Currency translation was negative. By roughly 2.5 points Operating profit was $338,000,000 resulting in an 11% operating margin for this segment. The year over year decrease was primarily due to lower shipment volumes and sales mix partially offset by lower SING and R and D expenses and reduced production costs. Moving on to small ag and turf on Slide five, Net sales were down 28% totaling $1,748,000,000 in the first quarter as a result of lower shipment volumes. Price realization was positive, by just under one point.

Currency translation was negative by just under one point as well. Operating profit declined year over year $124,000,000 resulting in a 7.1% operating margin The decrease was primarily due to lower shipment volumes and sales mix. Partially offset lower production costs.

Slide six gives our industry outlook for ag and turf markets globally. We continue to expect large ag equipment industry sales in The U. S. And Canada which as higher interest rates macro uncertainty, and elevated used inventory levels are slightly tempered by improving ag fundamentals and expectations for farm net income, which has further bolstered by additional government support. For small ag and turf in The U. S. And Canada, industry demand estimates remain down around 10% The Deere and livestock segment remains as at strong levels of profitability despite reaching the lowest level of cattle inventory in over seventy years.

However, profitability in these segments has not yet translated into equipment purchases. U. S. And Canada demand has been further impacted by continued weakness in turf and compact utility tractors as high interest rates weigh on purchase decisions. Moving to Europe, the industry is now projected to decline around 5%. Farm fundamentals have stabilized, albeit down with less volatile commodity prices and stronger dairy margins offsetting macro uncertainty. Additionally, in Central And Eastern Europe, reduced pressure from Ukrainian grain imports is supporting better than expected farm net incomes. In South America, industry sales of tractors and combines are expected to be roughly flat following two years of significant industry declines. In Brazil, sentiment is showing signs of improvement as depreciation in the real has pushed local commodity prices higher amidst a year of stronger yields. Minor softening input costs farm margins are expected to improve Additionally, declining production, tight global stocks, and strong demand have driven outsized profitability coffee bean production. Supporting equipment demand for small and midsize tractors. In Argentina, decreased currency risks and export tax reductions will support some improvements in farm margins despite negative impacts of dryness at the beginning of the Deere. Industry sales in Asia are still projected to be down slightly.

Next, segment forecast to begin Slide seven, for production precision ag, net sales are now forecasted to be down between 1520% for the full year. Forecast assumes roughly one point of positive price realization for the full year offset by 2.5 points of negative currency impact. Reduction to our sales guide from the prior quarter is primarily driven by strengthening of the dollar relative to nearly all foreign currencies most notably the Brazilian real, Canadian dollar and euro. For the segment's operating margin, our full year guide forecast is now between 1617%, also reflecting the impacts of currency fluctuations. Slide eight shows our forecast for the small ag and turf We expect net sales to remain down around 10%. This guide now includes a 0.5 of positive price realization and 1.5 points of negative currency translation. The segment's operating margin guide remains between 1314%. Shifting now to Construction and Forestry on Slide nine. Net sales for the quarter declined roughly 38% year over year to $1,994,000,000 due to lower shipment volumes Price realization was negative, four Currency translation was also negative. By more than one point. Operating profit of $65,000,000 was down year over year resulting in a 3.3% operating margin primarily to lower shipment volumes and sales mix as well as unfavorable price realization and higher SA and G and R and D expenses.

Lower shipment volumes were primarily due to planned underproduction to retail, in the quarter as we reduced field inventory levels [indiscernible] Slide 10 describes our Construction and Forestry industry outlook. Industry sales for earthmoving equipment in The U. S. And Canada are expected to be down around 10% while compact construction equipment in The U. S. And Canada is expected to be down 5%.

End markets remain sequentially unchanged in 2025 with equipment demand tempered by uncertainty across both construction and compact construction [indiscernible] U. S. Government infrastructure spending remains at historically high levels while single family housing starts continue to increase as a result of low levels of existing home inventory. These tailwinds are offset by subdued multifamily housing starts and a softening commercial real estate market. As high interest rates continue to weigh on overall investment Additionally, earthmoving rental reflading remains at low levels. Global forestry markets are expected to be flat to down 5% as all global markets continue to be challenged. Global road building markets are forecasted to be roughly flat with strong end market demand persisting Deere return to more normal ordering seasonality. Moving to the C and F showing an outlook on Slide 11. 2025 net sales remain forecasted down between 1015% Net sales guidance for the year includes flat net flat net price realization and 1.5 points of negative currency translation. The segment's operating margin continues to be projected between eleven point five percent and twelve point Now transitioning to our financial services operations on Slide 12.

Worldwide financial services net income attributable to Deere and Company the first quarter was $230,000,000 Net income was favorably impacted by a decreased valuation allowance on assets held for sale of Monco John Deere.

Note that Deere completed this transaction with Bradesco for the sale of 50% ownership in Banco John Deere subsequent to the quarter in February.

Excluding this special item, net income decreased due to a higher provision for credit losses which was partially offset by lower SA and G expenses. For fiscal year twenty twenty five, our outlook remains at $750,000,000 as benefits from a lower provision for credit loss partially offset by less favorable financing spreads Finally, Slide 13 outlines our guidance for net income, effective tax rate and operating cash flow. For fiscal year twenty twenty five, our outlook for net income remains between $5,000,000,000 and $5,500,000,000 Next, our guidance now incorporates an effective tax rate between 2022%. And lastly, cash flow from the equipment operations remains projected between $4,500,000,000 and $5,500,000,000 Note that during the quarter, we made a voluntary four zero one contribution of $520,000,000 to fund our salaried post retirement healthcare plan. This will impact our cash flows for the full year However, our guidance range remains unchanged.

This concludes our formal comments. We'll now shift to a few topics specific to the quarter.

Let's begin with Deere's performance this quarter. We saw net sales decline roughly 35% year over year and margins come in just under 8%. But we held the majority of our guides for the full Deere. Notably net income. Josh Biel, you break down what happened this quarter and then walk through what this means for the rest of the year?

Sure.

Happy to. Think it's important to start with a few thoughts on what our plans were for the quarter. In North America large ag, focus was continuing to work down used inventory levels while returning to normal production and shipment seasonality. Albeit at lower volumes this year due to the projected industry decline. In Brazil, we targeted further reduction in combined field inventory, which was the one product line where we still had a little more underproduction to do following the significant inventory declines we achieved across all product lines in 2024. Lastly, in Construction and Forestry, recall that our plan was to shut down North American earthmoving production for roughly half the first quarter. Significantly underproducing retail demand and positioning our field inventory We feel great about the progress that we made across all three fronts. The plans that we executed, while contributing to the 35% year over year decline in sales that you mentioned, reflect our ongoing focus on proactively managing our business through this downturn. There were a few variances this quarter that caused sales to decline slightly more than we had anticipated. Specifically the timing of shipments and currency translation. Within our ag and turf divisions, we saw the timing of certain product deliveries get pushed out into second and third quarters as we work to optimize schedules for the full year.

Similarly, in road building, a shift to more normal seasonality in that industry pushed some shipments into future quarters. As a result, we expect to see these sales occur the remainder of the year for all three divisions. Regarding currency, over the quarter, we saw mid single digit strengthening of the dollar against nearly all our foreign currency exposures, While this lowered our top line results, particularly in production and precision ag, due to the translation impact on non U. S. Dollar sales, currency impact on operating profit was relatively minimal in the quarter due to currency hedges. For the full year, the reduction in both our net sales and operating profit guides for large ag are primarily driven by currency changes. As we extend the impact of the stronger U. S. Dollar the rest of your including our unhedged currency exposure in the latter quarters of the Deere, Shifting to cost management, had a relatively strong quarter, In both of our Ag and Turf segments, we saw favorable production costs primarily due to reduced material costs and muted overhead headwinds. Additionally, lower SING expenses this quarter reflect our focus and commitment to operational efficiency throughout the business. Turning to the full year guide, our market demand outlook remains relatively unchanged this quarter.

Outside of the FX impacts that moved our PPA guide slightly lower, this quarter was really a story of continued production and inventory management. One last item of note, did benefit from a favorable tax rate this quarter, resulting from two non repeating discrete items totaling $163,000,000 Therefore, when netted against the negative currency impacts and other quarterly items, our full year net income forecast remains unchanged from our original 2025 guide. Great. Thanks for that breakdown, Josh.

So overall, it was really a quiet quarter once you back out the timing, FX and tax items.

I guess moving then to the broader ag industry, I'd like to talk through Farm Fundamentals. The USDA just updated their 2025 forecast for net cash farm income. While U. S. Net cash farm income is now forecasted to be up 2022% year over year, crop cash receipts are still expected to fall 2% driven by lower commodity prices.

The difference then would be the significant government support expected for farmers this year.

Obviously, it's still early in the year, but this seems to be a somewhat positive proof point for our customers following a tough 2024. Can you add any additional color to what this means for farmers and equipment demand over the rest of the year? Yes, sure thing, Josh.

Clearly a positive headline with forecast up year over year. It's important to break down how we get to that point. There are a number of positive data points this quarter. Keeping in mind, this is all within the context of a trough level outlook for 2025. For starters, the recent rally in commodity prices has been fueled by both a cut in last season's U. S. Yield forecast along with dryness in South America. Additionally, the USDA forecast for global ending stocks of corn, soy and wheat declined over 10% during the quarter as stocks to use retreated. This provides some benefit for our customers as they market last year's strong harvest. On the input side, farmers are continuing to see a decline in input cost for the third consecutive Deere.

Further tailwinds this quarter came via $10,000,000,000 in additional U. S. Support farmers as you noted, This assistance will offset some of the margin decline farmers saw in 2024 while potentially helping to relieve concerns around macro risk and high interest rates. But ultimately, we don't expect this to translate into immediate order velocity. As general uncertainty continues to persist and customers remain cautious across all markets. Hey, this is Jeff. So I think the takeaway here is the additional support from government payments will help buffer downside risk to farmers' balance sheets as well as the overall industry outlook.

Following a multiyear decline in both farm net income and industry equipment demand.

Yeah, definitely, Josh. And if we look globally, Brazil is another geography where farmer sentiment continues to improve. Currency movement has been favorable, as a weakening real helps improve farm net incomes in the country. This is because commodity sales are primarily U. S. Dollar denominated, while typically around half of producer costs are in local currency. It's still too early to call a market shift there as we've yet to see the sentiment convert to a meaningful change in order velocity but it's a positive sign nonetheless. Finally, turning to Europe. The continued favorability we've seen in dairy and livestock is now supported by moderately better wheat prices slightly lower input costs. While markets overall remain contracted and pressured by lower yields and macro uncertainty, we've seen this improved sentiment translate to further stabilization in our order books. Perfect. Thanks, Josh.

Clearly a dynamic global market. But overall sentiment seems to be improving a tinge. [indiscernible] given this macro this market backdrop, can you update us on the business and how we're managing through inventories and order books? Absolutely. As we discussed earlier, this quarter has really been about executing the plan as we continue to manage through this downturn.

Our setup entering 2025 was solid. As the underproduction of retail that we executed last year drove down field inventory and positioned us well across the globe for another challenging year in terms of end market demand. As we walk around the world, let's start in North America. On the new inventory side, we ended the calendar year with large ag field inventory down 25% year over year. And roughly 15% below pre-twenty twenty averages. In fact, we saw our two twenty horsepower tractor inventory Deere by nearly twice as much as the industry over the past year. Allowing us in partnership with our dealers to continue our focus on reducing used tractor inventory. The industry backdrop remains challenged we continue to expect demand declines across all large ag product lines in North America. Our combined early order program closed a couple of weeks ago and compared to last year's EOP, was down more than our industry guide. Additionally, our rolling tractor order books continue to provide roughly Deere months of visibility as they're now full late into our fiscal third quarter. As a result, targeting to finish the year with new inventory in The U. S. Roughly unchanged year over year.

Reflecting our plan to produce in line with retail demand in the region. Shifting our focus to North American used equipment, we're starting to see early proof points supporting the operational and marketing decisions we've made over the past [indiscernible] Here high horsepower tractor used inventory peaked in November. And we've since seen two consecutive months of moderate unit declines along with compression in auction to asking price spreads. Notably, we've also seen two consecutive quarters of improvement in the percentage of late model equipment that makes up Deere's used high horsepower tractor population. Deere combine used inventory was up this quarter in line with normal seasonal build. But down over 10% from the recent peak in spring twenty twenty four and is currently sitting at around 60% of the prior cycle peak. While progress has been made, normalizing used inventory levels in North America, particularly in high horsepower tractors, remains a top priority for the fiscal year. This is Jeff. Maybe one thing to add. I spent time last week with our dealer principals from The U. S. Canada, Australia and New Zealand.

Have a high level of alignment and focus on reducing used inventories.

And we feel confident in how we collectively Deere and dealers Deere managed this downturn differently and note our more proactive response to get ahead of the market turning in 'twenty four.

This enables them to continue investing in their ability to support customers' needs today and tomorrow.

Thanks Josh. Great to hear that feedback from the channel.

Now continuing outside The U. S, we're seeing some bright spots in Brazil as the work we put in last year to bring on inventory levels has also resulted in a return to production levels in line with the industry Deere, As previously noted, the one exception is combines, where we had a little more work to do the first half of this fiscal year.

With Brazilian harvest in January, the end of the calendar year is typically our strongest combine selling season And to that end, we saw great progress on our combined inventory this quarter. Levels down over 25% in the past three months and down nearly two thirds since the end of fiscal twenty twenty three. Along with improving customer sentiment in the region, our strategic focus on tech adoption has been met with strong customer interest. During the quarter, over 1,500 precision ag essentials kits were ordered in Brazil, along with over 1,200 orders for JDLink Boost, our Starlink supported satellite connectivity solution, which was just made fully available to the market for order, a few weeks ago We expect to see continued tech adoption in Brazil as connectivity expands within the region and customers are able to maximize the value of John Deere's precision ag solutions and the John Deere Operations Center. Hey, this is Josh again. One thing to add on top of the progress, Beal noted, is our continued focus on investing in Brazil for Brazil.

During the past quarter, we officially opened our technology development center in the country, which we announced Last year, This space will enable us to develop and deliver solutions specifically suited for Brazil's tropical agriculture environment. We also continue to enhance both dealer and customer support in Brazil Deere, Brazilian farmers are ramping up the horsepower curve while simultaneously integrating advanced technology and digital solutions into their operations. We recognize this and are committed to supporting them on this journey. A quarter ago, we discussed the growth in engaged acres and highly engaged acres in South America.

The combination of the equipment, technology and connectivity we're delivering will support further growth in these metrics and more importantly, to better outcomes for our customers. Hey, great call, Josh. [indiscernible] Let's shift now to Construction and Forestry. Which had a few unique aspects this quarter. As you mentioned earlier, we discussed the roughly 50% production shutdown days we had planned in earthmoving as we proactively work to reduce inventories and build order banks. Shashbiel, could you provide an update on how that turned out? Along with any broader market commentary for the year? Yes, no problem, Josh.

As you rightly noted, our first quarter in 35% Deere the first resulting in an earthmoving inventory reduction of more than 15% over the past three months and nearly 30% in the prior two quarters combined. In fact, this was more than we had initially anticipated as retail sales for compact construction even better than expected at the end of the calendar Deere. We're encouraged by these results as they provide us with operational flexibility earthmoving demand evolves throughout the remainder of the year. Turning to the broader industry, we remain focused on supporting sales in a highly competitive North America market.

End markets remain strong with only around 50% of IIJA funds committed. And equipment utilization reflecting the fact that construction employment is at record levels and continuing to rise. However, equipment purchases remain constrained given macro uncertainty and persistently high interest rate. That said, we found success with selective incentive programs targeting specific products to drive Our road building business continues to bolster the C and F segment. As road building is experiencing another year of strong market demand. Tech investment and integration in this market continues to drive further customer value. On top of an already robust value proposition.

We are excited to showcase our latest innovation innovations in road building at the upcoming Bauma Show in April.

One final thought on the broader C and F segment. Headwinds from strong price competition and unfavorable currency This has resulted in a point reduction to our net price realization forecast. Although that negative margin impact is being offset by strong cost execution, leading to expectations for more favorable production costs this year than initially expected, It's important to note, however, that intra year we will see an atypical quarterly cadence, as price actions taken in the first half of the year will moderate in the third and fourth quarter as we ramp production in the back half of the year. That's great color, Josh.

Good insight on the unique seasonality of the business this year. Okay, shifting gears now, the last topic I'd like to cover is tariffs. Obviously, a dynamic and rapidly evolving situation, What details can you provide on the issue, Josh? Yes. I'd start by reinforcing the statement you made. The situation is certainly fluid and we continue to monitor changes in policy as they occur.

Teams across the organization are continually running potential scenarios to understand risks along with opportunities to mitigate these impacts.

But our primary focus remains on understanding how proposed tariffs may impact our customers' operations. As we recognize their need for free and fair trade in ag commodities.

This allows them to concentrate on growing crops that feed, fuel and clothe the world.

We remain committed delivering the products and solutions they need to be productive and profitable as we've done for nearly two hundred years.

Within Deere's business, a reminder about our operational footprint. As you'll recall, we are a net exporter of Ag and Turf equipment from The U. S. And more than 75% of our domestic U. S. Sales are assembled at U. S. Manufacturing locations. Less than 5% of our U. S. Complete goods sales come from Mexico, and of the remaining majority come from Europe, notably our six Deere tractors. From an export perspective, over half of our exports serve our Canadian customers with the remainder going to Europe Brazil and Australia.

In terms of component component sourcing, about 10% of our U. S. Manufacturing cost of goods sold come from Mexico.

With less than 2% coming from China, and approximately 1% from Canada.

For the last several years, our teams have focused diligently on both supplier resiliency and cost management.

The actions taken by our supply management team in response to pandemic disruptions such as dual sourcing, strengthening relationships with key suppliers are prime examples of the step function change our organization has made to build a more resilient and adaptable business.

This group works to manage and optimize our global trade flows, which position us well to navigate the current environment. And given the rapidly evolving nature of these tariffs, our guide does not contemplate the direct cost or economic benefit impacts resulting from potential future tariffs. It is important to know, however, our exposure to the recently enacted China tariffs is expected to have an immaterial amount on our business.

Thanks, Josh. Great update. And before we open the line to questions, do you have any final comments you'd like to share?

Yes, certainly. The first quarter was reflective of the focus that we've maintained as a business despite significant internal pressures ranging from market demand more competitive environment, and macro uncertainty.

Despite all the noise, [indiscernible] Executing to plan as we successfully brought down inventories while managing costs and operational expenses.

We maintained our investment in the business which continue to yield results as evidenced by our recent successes in Brazil, our autonomous solution announcements at CES last month and our upcoming product launches at Bauma in April. I'm as excited as ever about the value we're unlocking for our customers across the world. We also returned over $800,000,000 in cash to shareholders. Through dividends and share repurchases during the quarter. Reflecting the structural improvements we've made this cycle over last. I want to reiterate my utmost thanks to our entire team here at Deere from employees to dealers to suppliers, it takes dedication and hard work from every facet of the business to demonstrate this level of discipline.

And we'll continue to execute execute to plan as we manage throughout the rest of the year and across the cycle. We're as focused as ever on our steadfast commitment to our customers we'll continue prioritizing investment in the most value added solutions for them. We'll continue to expand our precision offerings across both product lines and geographies while ensuring we meet the basic needs of quality, uptime and productivity for our customers. Our focus solving our customers' toughest problems so they can focus on what matters most.

Building critical infrastructure and growing the crops that feed fuel and clothe the world. Thanks, Josh. Now let's open it up to questions from our investors.

We're now ready to begin the Q and 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.

Thank you. We will now begin the question and answer Our first question comes from Tim Tehan from Raymond James.

Hi, good morning.

Maybe just Some help in terms of large ag production cadence given that the push out that you call out for the first quarter. How do we think about kind of that normal seasonal ramp up that you typically see in second quarter and third quarter, is that Can you maybe just help us in terms of that going to be more weighted to the the third quarter than usual? And just as we think about kind of segmenting the remaining quarters, this would be a PPA question. Thank you.

Yes. Hey, Tim. Thanks for the question. I mean, I think as you think about large ag demand and shifting some of shipments out to future years, it's still going to more or less follow normal seasonality for the business. As we look at the second quarter, it's still we'd anticipate being the highest quarter for us in terms of sales. Full year guide for for large ag being down 15% to 20%, Quarter over quarter, we'd expect that second second quarter year over year comparing to last quarter or last year's quarter, be down more than the guide, so probably down more than the 15% to 20% that you're seeing in the full Deere. And that gets sequentially better as you go to Q3 and Q4 in terms of the year over year comps.

Tim, this is Josh, Jeff. So maybe one thing I'd add too. As you think about sequence, Beal laid out kind of how that plays out. I think for production precision ag as well as the rest of our business, is, we would expect fourth quarter where actually growing year over year because of some of the comps and actions we took, but we actually start to see increases year over year as we get to 4Q as well. Thank you.

Our next question comes from Stephen Volkmann from Jefferies.

Hi, good morning, guys. Thank you.

I'm curious, I think one of you, Josh, has mentioned that the early order program was kind of below your industry forecast. And obviously, we saw some pretty weak numbers from AEM yesterday. And I'm just curious how you're thinking about sort of having confidence in the bottoming process for the end market activity because obviously that will drive what you need to do on the inventory side?

Hey, Steve. Thanks for the question. And maybe I'll talk combines and then walk a little bit around the other product lines as well.

Yes, as you recall for North America, our guide for the industry is down 30 If you kind of take product line by product line, sprayer EOP came in pretty close to that industry guide. We're expecting tractors to be a little down a little bit less year over year row crop tractors and then four wheel drive tractors will be a little bit more than the guide And then as you mentioned, given the results of the comment earlier program, we'd expect that to be down a little more than the guide as well. So, Deere to get to that industry down 30, but a little bit of difference by product line. Yes, as you saw in the quarter, this is consistent with the shipment timing that we talked about. The EOP for combines both a little more slowly this year than it has in the prior years and that resulted to a little bit for us in terms of combined shipments in Q1, I think that's reflective of the inventory levels that you're seeing for us as we talk about 11% inventory to sales.

For combines as it cooled out the quarter, that's a little lower than normal and really reflective some of those delayed shipments As you look to the full year, I think what gives us confidence is as you know, the combined early order program typically represents 90 ish percent of what we're going to build in a year. So we have those orders locked in. It's just a matter of when we laid those in the schedules. And so pretty good visibility there. Again, it was just a timing with Q1.

Steve, this is Jeff. So maybe one thing to add on the use side. Your combined we saw combines start to turn earlier July, of twenty twenty four was kind of where we saw the highest inventory level in combines and that worked down over the course Deere the year. We see a little bit of seasonal build Deere. But I think we Deere probably earlier on actions as it related to combines and I think feel feel good about the progress we're making to to pull that down Thank you.

Thanks.

Our next question comes from Jerry Revich from Goldman Sachs.

Yes.

Hi. Good morning, everyone. I'm wondering if you could just [indiscernible] comments that you shared on the Precision Ag update you gave us progress in Brazil. Can you just talk about globally expectations for Ag Essentials and Since Prayer kits for this Deere, what progress was like in the quarter? And also, if you wouldn't mind, just updating us on the engaged and highly engaged acres, if you have that?

Yes, great. Thanks for the question, Jerry. Yes, I mean, Precision Mag Essentials, which recall as we think about our tech stack, Precision Ag Essentials is really the foundation of the tech stack. It's those core elements. Of guidance of connectivity, high powered onboard compute and the bundle that we've created Precision Ag Essentials, the lower upfront cost and then annual subscription for that for the benefit of that technology. Recall we introduced this package last year in 2024 in North America. Really strong reception to that, about 8,000 units that we retailed Average age of the equipment that those units were being put on was 2012, so we were going deeper in the fleet. In terms of connecting people into the Deere Deere. So we were really encouraged this year. I think we had a limited release in Brazil in 2024. From Precision Ag Essentials, but more fully available in 2025. And we've been really encouraged by the results. As I mentioned, over 1,500 orders year to date in Brazil for that Precision Ag Essentials base. On top of that, just in the January, we made our Starlink enabled JDLink Boost solution available in the region in Brazil And recall, connectivity is a big challenge for our customers in country Deere.

Estimate about 70% of ag land in Brazil doesn't have sufficient cell And we've seen really, really strong take rates early on. In those couple of weeks since that ordering has opened up.

Again, we mentioned over 1,200 orders. I think Deere were like 500 orders in the first day.

For the solution. And so very, very encouraging and excited for the value that's going to unlock.

For our customers in terms of enabling that connectivity and enabling them to take advantage of Precision Ag Solutions. On engaged acres, maybe just to talk about the numbers, We're over $455,000,000 globally Deere over year. That's up about 5015% South American growth is greater It's up about 20% year over year. Really Deere we're encouraged is on the highly engaged Deere.

Where we saw growth over 30% year over year and highly engaged acres now are making up nearly 30% of our engaged acres are highly engaged. And just a reminder, highly engaged acres is more depth and breadth utilization covering more production steps with your technology.

Hey, Jerry, this is Jeff. So maybe a couple adds. I mean, we are continuing to see technology as a driver of competitive advantage and what we're able to do from a conversion [indiscernible] this quarter of where we put essentially precision Essentials a year ago on non competitive machines. Call it 20 competitive machines. Brought them into connectivity, brought them into digital side from an operation center perspective. And this year, we're converting them. We're converting them from machines with Deer Tech to Deer Deere. So I think we're seeing that at a high level being a difference maker for customers in terms of what is pulling them into Deere and the value they see from that. And I think we're also seeing even things that may be overlooked a little bit like remote display access, the ability for our dealers to remote in, not have to go to the machine, but remote in and take care of them. We've seen significant growth in just the instances of our dealers doing that.

And we had an anecdote, you're talking to a dealer a month or so ago, talking about sitting at home on the couch and actually fixing an issue for a customer because they had remote display. So I think these are big and small things. They're all making a really important impact as we think about real technology that's having real impact for the customer, And it's and we're seeing that start to build even greater. Maybe just to put a bow on that remote display, in 2024, we had 2,500,000 remote display sessions through the John Deere Operations Center.

Was an 85% increase from two years prior. So again, our ability to better serve our customers through connectivity is huge. Thanks for the questions, Thank you.

Our next question comes from Rob Wertheimer from Melius Research. Thank you. My question is going to be on farmer profitability and Deere. And I know that parts of this may be hard to but I'm just curious as to whatever insight you can offer. Obviously, your early order programs, I guess, are a combination of your end farmer professional, big professional farmer demand and dealers trying to balance out trade ins and all that stuff.

I suspect your biggest farmers probably still want to buy more than you're making.

I don't know if you have any thoughts on how profitable those biggest first first buyer kind of customers are right now at current corn and soy and cotton prices. And I don't know if you have any thoughts on where your used profit your used buyers really need corn make it easy to be before they're profitable and able to kind of clear out some of the inventory.

Thanks. Yes.

I mean, maybe a couple of points.

There, Robin. I think it's hard to pin an exact number on this because every operation is a little bit Deere. And it matters whether you own all your land or whether you rent all your land. And as you look at breakeven prices, compared to like 100% owned versus 50%, that can it's like a $0.5 per bushel difference on corn breakeven depending on if you fully own or you're renting Similarly, the amount of technology that you're utilizing on the farm can matter a lot in terms of profitability as well. We recently published our business impact report And in that report, we did an update on on the value that if you employed all Deere all Deere available solutions in a typical corn and soy operation in the Midwest, what value that would bring And it was just under $0.5 a bushel of improved profitability. By fully employing the Deere production or the solution set. So So there can be some pretty massive differences in terms of breakeven in terms of the size of your operation, how much you rent to own, how much technology you're using. So it's hard to put a number on it.

I think what I would say is over the course of the quarter, we feel good about what the positives that we saw. Certainly, we saw rebound in commodity prices.

You've got corn futures hanging around $5 now.

Certainly, the government support that was announced prior to the holidays is beneficial as well. So net net quarter over quarter we've seen some pickup in the fundamentals.

Yes, Rob, this is Jeff. So I think just to add and maybe double click into what Josh mentioned. I mean, quarter over quarter, we've seen the the bank fundamentals improve Global consumption is outpacing global supply for grains and oil seeds first time in four years Deere. If we look at grain stocks to use, particularly if you take out the stocks in China, the lowest level in twenty years. So we're seeing a really tight as you look at corn and wheat in particular, I think that's a favorable setup And then on top of that, you talked about some of the things that Josh mentioned in terms of an increase in net income expectations from USDA. I think the backdrop and the sentiment is is improved. I think you have you still have an impact of uncertainty as it relates to macro uncertainty as it relates to trade policy. But I think the underlying business and then as you look at Deere and livestock, which we mentioned already, which Deere at relatively strong levels, are holding in really well and better than what we would have seen just three months ago. Thanks, Rob. Thank you.

Our next question comes from Jamie Cook Truist Securities. Hi, good morning. I guess one question, just wanted to understand better sort of your view on Deere's Deere performance, margin performance given where we are in the cycle relative to the 20% sort of mid cycle target? And I guess, Jepsen, just your confidence level, obviously, I think everyone's confident 2025 the trough. Your view on climbing out of this in 2026 And if you didn't think we were climbing out of this in 2026, do you see the need for incremental restructuring? Thank you. Yes. Thanks, Jamie.

As it relates to where we are at Difficult to say exactly where we are to try to make a prediction on what '26 holds.

I would say, we're really focused on what are the things that we can control as it relates to managing inventory levels, managing production and keeping our arms around the operating costs of the business while funding the strategically important things. And we feel like we're in a good spot Deere, we're able to do that. We're essentially flat on R and D, when we're making room elsewhere in the cost structure. So I think those are the pieces that we can control and that we're working to manage. And stepping back, as it relates to our longer term goal of 20% of mid cycle, This level of performance, this guide, if you look at the equipment operations where we're at, call it, just below 15%, 14.5%, operating margin feel good about where that puts us in terms of progressing towards that goal. And again, just to juxtapose that versus how we performed even in the peak of our last cycle, comparing Deere we are below trough levels, below 80% by our own math, I call it 14.5%, 15% that's better than we performed at the peak of the cycle in 2013. So we feel good about that progress, feel good about the the ability to continue investing and doing a lot of work on an ongoing basis day to day on the cost side of the business.

Thanks, Jamie.

Thank you. Our next question comes from Steven Fisher from UBS.

Great. Thanks. Good morning.

Josh, Jeppesen, I think you mentioned feeling good about the amount of reductions you've had in the used inventory Deere the quarter. Is there any way to help us kind of quantify just how much used inventory is out Deere, how much excess you have relative sort of the target levels? And and how long do you think it would take to manage down to what the target levels would be?

Hey, Steve. It's Josh. I'll [indiscernible] can jump in. I mean, I think as you you characterize where we are on the used side, I mean, maybe first Jeff has mentioned this earlier, but we feel really good about combines. We did a lot of work on combines. Earlier in the cycle. And they're sitting at a much better position As we think about high horsepower tractors, Deere there's still work to do, we feel good about the progress that we saw in the last quarter. As we mentioned in the comments, a couple of months sequentially of unit decline relatively modest declines. I think we're down maybe 3% from from the November peak. But I think more important and probably the bigger challenge right now in higher horsepower used is that mix of used equipment. Again being still somewhat heavily skewed towards one and two year old equipment. And again, we've made progress over the last couple of quarters.

On improving that mix.

We saw some improvement in our fourth quarter of twenty four. We've seen incremental improvement in the 25%. But it's still higher than it should be, probably on a percentage basis, probably 2x. The number of one and two year old equipment that we would normally want in that population that we would normally see. And so continue to work to do Deere, and we'll continue to focus on that through the course of the year.

I would expect it'll be the next several quarters still we continue to drive that down. [indiscernible] the other thing that we're looking at is how can we one, shrink the duration, but how can we make this get through this reduction faster? And that think the actions we took on the new side are helping us to do that. To get focused on use quicker than we did last cycle. The other thing too, when we look at fleet age, I think this is important as we think about replenishment or replacement over time. We're still aging out. So higher star tractors, four wheel drive tractors, combines are all getting older on a fleet age perspective. And I think that's reflective of we put much less new equipment into the market when things were on the way up 2021, 2022, 2023. But that aging, I think, will also help us as we think about how do we turn some of that used, because replacement needs will continue just because we're seeing more age, more hours on the fleet. Thank you. Very helpful.

Thanks. Our next question comes from David Rassell from Evercore ISI.

Hi, thank you. I just want to make sure I understand the North American new inventory commentary.

Essentially, you said by calendar year end, not your fiscal the large ag field inventory was down 25%.

Year over year. And then you're saying you're targeting to finish the Deere, assume that was a fiscal year comment, that The U. S. Inventory new will be unchanged year over year? So does that mean do we not plan to reduce any more new inventory from this point forward for the year? Or are we done reducing in North America? Or new?

Yes. I mean, I think the takeaway David, and you're right, I mean, the comment around unchanged relates fiscal year to fiscal year. And so book ending the fiscal year our plan and our focus is on building in line with retail Deere. And so you should see absolute units of Deerfield inventory relatively unchanged at the end of fiscal twenty twenty five from where we ended fiscal twenty twenty four. Now there's always normal seasonality in our inventory build. And so as you think about through the course of the year, you're going to build tractor inventory, you're going to build combined inventory, in the first, second quarter of the year and then you'll start to draw that write that down. The back half of the year. That's just normal shipping and candidly a lot of in transit inventory. As you recall, a significant piece of our large ag equipment is already retail sold and so it's passed through the dealers and you have that in transit inventory. But yes, the bookings there is Deere going to build in line line with retail in North America in 2025 and you should see absolute levels of inventory relatively unchanged year over year.

I was just trying to Thank you.

Yes, go ahead.

Well, I just wanted to make sure that the row crop tractor data in the first quarter and given the seasonality, I'm comparing this versus traditional first quarters. I understand seasonality to build. The row crop inventory does seem a bit high, relative to history for where we are in the Deere.

I think four wheel drives combines, I appreciate your probably can produce at retail the rest of the year. But the row crops is there not further reduction needed there? I just want to make sure I understand the math of the 34% on trail.

Yes. David, this is Justin.

Fair question.

Remind you, that number is 100 horsepower and above So that's a wide category. We think about large high horsepower above two twenty.

And what we see there is really kind of a tale of two two stories or two markets in that regard. Two twenty above, we feel good about where we're at. We're actually [indiscernible] where we would be on our averages. If we look at a ten year Deere, We're probably slightly below from an inventory to sales perspective. We are higher and probably higher than where we want to be when it comes to call it that mid series, mid sized tractor, 6,000 series tractor, that inventory is is higher As a result, we are underproducing that.

So essentially Manheim will underproduce North America for those tractors. So I think there's that 100 plus is a big category. The large A side, the 8R side, we feel good about where we're at. Like I said, slightly below the historical IS ratios for Deere this this point in in the Deere, but we got work to do over really the balance of the year on call it the 6,000 Deere.

To pull that down closer to where we want to be. But when we saw the growth Quarter on quarter, that's really where it occurred and then not necessarily on on the row crop side.

Thanks, David.

Our next question comes from Kirsten Owen from Oppenheimer.

Hi, good morning. Thanks for taking the questions guys.

Just given some of the positive comments that you had on Brazil I'm wondering if you can give us a sense of what your expectations are for any sort of improved volume recovery or even price [indiscernible] more granular look at what's happening down there.

Yes. Hey, Kristen. Thanks for the question. Yes, I mean, as you heard in the comments, Deere seeing some green shoots out of the region. I think the profitability is looking better there in 2025. And certainly, we're seeing favorability on the tech adoption side as well.

Recall in Brazil, we have [indiscernible] less visibility in terms of the order book. We typically run about a three month order book. So a little bit less visibility in the full year. So we'll see how it plays out. But but there's been some optimism. We've seen some strength kind of in that small to mid tractor space as well in the region as Josh wrote earlier talked about some strong sentiment in the coffee side. And so there's some positives there that we're seeing. As it relates to price, we're seeing favorability there as well. We had favorable positive low single digit price realization in the quarter. We're expecting to be positive for the full Deere. That's a good contrast to last year where we were we had negative price as we drove downfield inventories. Now that we right sized the inventory situation in Brazil, and are seeing some of these positive hints of optimism as in terms of how that market plays out. Deere seeing a lot more strength on the pricing side as well. Thanks, Preston.

Our next question comes from Angel Castillo from Morgan Stanley.

Hi, good morning. Thanks for taking my question.

Wanted to maybe revisit the price question, but a little bit more broadly for PPA. You You reiterated the 1% realization for that segment. For this year. I was just wondering as you think about the incentives or maybe what needs to be done to the continued reduction of used inventories as well as just any other kind of ongoing incentives there. Can you just talk about the level of confidence that in that plus 1% And then similarly on the construction side, you lowered that to flat this this quarter or I guess for the full year.

Can you talk about there as well the level of confidence in that actually being flat now versus perhaps some of the competitive dynamics you're seeing to kind of drive and move volume in that segment?

Yes, sure. Thanks for the question, Angel. Starting with large ag, again, as you mentioned, our full year guide is 1%. And that contemplates additional incentives to help support the used market. You'll recall North America as an example list price increases in our early order programs and on tractors will kind of range from 2% to 3%.

For the year The net price realization of one contemplates some additional contributions on incentives to pool funds to help support that used market We feel good about where pool fund balances are There's still levels that are supportive of moving that market getting it back to equilibrium. And so so based on the visibility we have on the order books, based on the early order programs, and the dynamic of that price guide incorporating those additional incentives for the used market. We feel really good about the price guide in large ag. Ag. On the Construction and Forestry side, yes, I mean, as you saw in the quarter, negative price in the quarter, we have seen more price pressure Deere. And as a result, we lowered the full year guide from a point down to flat. We saw some and by the way, on those incentives too, we saw that the quarter translate to some positive retail movement, particularly in compact construction, some lower rate financing incentives. We're very strong in terms of moving sales. We had a really, really strong December Deere. Based on some of those programs. Going to expect, just given dynamics in the market that we'll probably see some continued price pressure.

Particularly in the early part of the year. I think as you look at our second quarter expect price pressures to continue That moderates some Angel as you move through the year. Some of that's comps as well. As we did some price action in the back half of twenty twenty five, the comps get a little bit easier on the construction and forestry side. That's what gives us that flat guide.

Yes. Maybe one thing to add just on the C and F side. You brought up a good point, Josh, in terms of a little more price pressure in 2Q, we could see that. We probably have a little more underproduction on the earthmoving side in 2Q there as well. So that will impact their cadence of margins as we go through the Deere, they'll actually we'd expect them to actually build from a margin perspective and improve as we go through the remainder of the Deere. 2Q probably being the most challenged and then we start to to be able to point, we start to lapse some of the price actions that we took last Deere. So the comps get a little bit easier in the back half of the year as well. Thank you. Our next question comes from Macriya Dobre from Bayard. [indiscernible] All right. Thanks for taking the question. I'm wondering if you can maybe give us a little bit of hand holding on margins We're starting pretty slow, obviously, Q1 across all segments. How do you sort of see getting to the full year guidance? And again, this is a question that applies across the board, all three segments.

Yes, Mig, I mean, I think as you're seeing, building a few full year guide, it is a little bit atypical in some segments. I mean, Jeffson just mentioned construction and forestry side, that's going to be very different than what we normally see in a year just given the underproduction in the first half and a little bit on the price cadence as well. You're going to see margins gradually improve sequentially throughout the year [indiscernible] Large ag, as we mentioned, it's going to be a lot more like normal seasonality in terms of of sales in that segment. We'll see We'll see we would expect to see sales peak the second quarter in large ag as we typically do So that will likely be the strongest margin quarter. From the for the year [indiscernible] you're going to see from the sales side year over year comps in terms of reduction be different just given the underproduction we did in the back half of the Deere.

But it'll be a lot more normal seasonality on the sales side.

Yes. Megan, this is Jeff. I think from a margin perspective, similarly, we would expect 2Q as normal to be strong, strongest quarter like 3Q probably not terribly far off that. And so strength kind of in tune three, which is a little more normal. And then as I mentioned, 4Q, normally lighter on revenue but we'll be we should mark the [indiscernible] from sales being down year over year for the quarter to moving up Thanks, Mig. We'll go ahead and take one more question. Thank you. Our last question comes from Tami Zakaria from JPMorgan.

Hi, good morning. Thank you so much. So the Pharma Aid package from December Deere, how long would it take for farmers to receive bulk of the money such that it can provide some tailwind to equipment Deere. If you're able to share any past examples or anecdotes that would be helpful. What I'm basically trying to understand is whether this could accelerate demand in the back half of twenty twenty five or more like early twenty twenty six of your fiscal? [indiscernible] I would say, when we saw some of this occur in the past, we saw some payments come through in call it late twenty nineteen. Generally, what we saw is a lot of those things went to shore up balance sheets, pay down debt, buy inputs and those sorts of things. So I think our expectation is doesn't probably drive new equipment Deere in 2025. But likely shores of balance sheets potentially helps move some used inventory But I think those are good outcomes. But likely Deere term, probably not a driver immediately of equipment orders. Thanks, Tammy. And thanks all all the time we have for today. We appreciate everyone's time and thanks for joining us.