The Deere & Company Third Quarter Earnings Conference Call began with Brent Norwood, Director of Investor Relations, introducing Josh Jepsen, Chief Financial Officer, and Josh Rohleder, Manager of Investor Communications. They discussed the company's third quarter earnings, markets, and outlook for the year. The call was recorded and broadcast live on the Internet, and participants agreed that their likeness and remarks may be stored and used. Additionally, the call included forward-looking statements and financial measures that may not be in accordance with GAAP.

John Deere reported a strong third quarter performance, with net sales and revenues up 12% to $15.801 billion and net income attributable to Deere & Company at $2.978 billion. The Production & Precision Ag business reported net sales of $6.806 billion, up 12% due to price realization and positive currency translation. Operating profit was $1.782 billion, resulting in a 26.2% operating margin. Additional information about the performance is available on the John Deere website.

Net sales for the third quarter were up 3%, totaling $3.739 billion, driven by price realization and partially offset by lower shipment volumes. Operating profit improved year-over-year to $732 million, due to price realization and partially offset by higher production costs, lower shipment volumes, and increased SA&G and R&D spending. In the U.S. and Canada, large ag equipment sales are expected to be up 10%, while small ag & turf sales are expected to be down between 5-10%. Midsized tractors are sold out for the rest of the year, while production cuts in the sub 40 horsepower compact tractor range have helped bring inventory levels down.

The industry is forecasted to have mixed results in 2023, with hay and forage seeing year-over-year increases, Europe being flat to up 5%, South America being flat to down 5%, and Asia being down moderately. Production & Precision Ag is expected to have a net sales increase of around 20%, Small Ag & Turf is forecasted to remain up around 5%, and Construction & Forestry had a net sales increase of 14%, due to positive price realization and higher shipment volumes.

Deere & Company's Construction & Forestry segment is projected to have net sales increase 15-20% in 2023, with operating margin between 18.5-19.5%. The company's Worldwide Financial Services net income increased 3% year-over-year to $216 million due to income earned on a higher average portfolio, partially offset by less favorable financing spreads.

In the third quarter, Deere had a strong performance, with net sales for equipment operations up 10% year-over-year and operating margins at 22.6%. The factories ran well, allowing them to hit production schedules as planned. This success is expected to continue into 2023, with a return to normal seasonality. For fiscal year 2023, the outlook is for $630 million, with net income between $9.75 billion and $10 billion and an effective tax rate of 21-23%. Cash flow from equipment operations is projected to be in the range of $10.5 billion to $11 billion.

Brent explains that the return to normal seasonality is important for meeting customer commitments and is a testament to the factory teams. All three divisions saw lower-than-expected production cost inflation due to cost reduction activities. This was especially notable for Construction & Forestry, which saw record year-to-date margin performance. Supply chains have improved and material cost inflation has come down, leading to smoother operations, leaner in process inventories, and better ability to meet delivery commitments, resulting in a better customer experience.

Construction industry fundamentals remain strong due to job growth and government funding for clean energy projects. Demand is expected to remain steady and the residential housing market has stabilized. Manufacturing projects and sectors linked to office and apartment building construction are sluggish. Inventory to sales ratios remain below target levels. For the ag industry, farmers are expected to have another strong year relative to historicals, with crop yields down and stocks tightening according to the WASDE forecast.

Brent Norwood and Josh Jepsen discuss the farmer fundamentals in North America and Brazil. In North America, farmers are projected to have another year of healthy net income, due to downward trending input cost and continued constraint on grain supplies globally. In Brazil, earlier in the year political uncertainty and delayed financing plans weighed on sentiment, but profitability has been good and production has been record-breaking. Additionally, the government-sponsored financing program is now in place, providing support for the industry.

In North America, all large ag production is sold out for the year, and new field inventory levels are expected to be modest. In-season inventory increases have largely been in line with quarterly production schedules and are currently down from their peak. High horsepower tractor inventory is flattish in the third quarter, but will drop off in the fourth quarter. Used inventories have risen significantly year-over-year, but dealers have been managing them proactively.

The early order programs (EOP) for sprayers and planters have been launched and in some cases, closed. Sales for model year 2024 sprayers have been up double digits when compared to model year 2023, reflecting improved supply conditions. Orders for planters are relatively flat compared to the same point in time as the program last year and down 5% relative to the end of last year's EOP. By the end of August, the final read on this year's early order program will be available. Josh Jepsen has noted that by year-end, both new and used inventory levels are expected to be below historic levels on a unit basis.

Brent Norwood provides an outlook for Europe in 2024, noting that while order books are stretching into the second quarter, it is too early to form a view on the outlook for the year. Western markets are seeing arable cash flow stabilize at supportive levels and declining input costs, while dairy margins may see some pressure. Markets with close proximity to Ukraine are facing lower commodity prices due to reduced port access and grains flowing over neighboring borders. Europe is expected to remain a dynamic market in 2024.

Josh Jepsen and Josh Rohleder discuss the strong performance of Deere in 2023, which has allowed them to invest in both organic and inorganic projects while still returning a significant amount of earnings to shareholders. This has included increasing R&D by 15%, pulling ahead some CapEx projects into 2023, and delivering over $5.5 billion to shareholders year-to-date through dividends and share repurchases. Josh Jepsen then shares his excitement for the future and the opportunities they see ahead.

Josh Jepsen is discussing the company's strategy of delivering more value per unit and the positive trend of increasing revenues on lower new units. He also mentions that the trend should accelerate in the coming years and that the company is utilizing its production systems approach and leveraging the tech stack to help customers do their jobs more profitably and sustainably. He then opens up the line for questions from investors.

Brent Norwood and Josh Jepsen discussed the success of John Deere's technology innovations, such as ExactEmerge and ExactApply, which have seen mid-single digit year-over-year increases in take rates. Combine Advisor and the automation activation suite for tractors have almost reached 100% take rates. These technologies are driving higher average selling prices and will begin to generate recurring revenues in the next few years. Additionally, John Deere is seeing growth in both engaged and highly engaged acres due to the value created by its digital tools.

Brent Norwood responds to Jamie's questions about supply chain and inventory levels for Deere in 2024 and the company's margin performance. He states that the factories ran well in the third quarter and the production cost inflation numbers were half of what was originally anticipated. He also mentions that delinquencies are down to pre-COVID levels, freight costs are down, and labor and energy are up.

The company is aiming to reduce costs and increase resiliency in the supply base for the upcoming year. To reduce inventory volatility, they are working to manage costs, introduce technology into their machines, and provide lifecycle solutions for customers. They plan to produce in line with retail sales and leave themselves some optionality to determine the right level of inventory.

Brent Norwood discussed the company's plans to dampen cyclicality, shift to a solutions-as-a-service business model, and increase profitability. In Brazil, the company has made production cuts and has a full order book for the rest of the year. They are managing the year carefully and looking ahead to '24.

Brazil is one of the most important growth markets for the company, despite the market dynamics of this year. The company has taken modest production cuts in the fourth quarter in order to end the year with inventory at target. The company has also been proactive in managing the dynamic market in almost real time, with a more dynamic order book, pricing strategy and production management. The company is also over 90% retail sold and is well positioned for the coming year.

In the second quarter there was a larger than expected step down in pricing for Production & Precision Ag. Brent Norwood explained that the pricing was mostly in line with expectations and that production cost inflation was also decreasing at a similar pace. For the third and fourth quarter the price realization should be in the high single digits. For next year, pricing is expected to be in the 2% to 4% range and the incentive spend will also be managed.

Brent Norwood explains that Deere has been taking structural steps to improve the Construction & Forestry business over the last four to five years, such as acquiring Wirtgen to enter the roadbuilding market. They are also in the process of executing their excavator strategy, which includes the dissolution of the Deere-Hitachi joint venture and the delivery of Deere designed excavators. These moves have allowed the Construction & Forestry segment to close the gap with the large ag business and improve their margin performance.

Josh Jepsen explains that C&F is looking to further differentiate themselves in the market by integrating technology into their products to make them more efficient, productive, and sustainable. They are already doing this with their automation tools, like grade control, and they are excited about the future opportunities this will create for their customers and the company. Brent Norwood adds that they are looking to charge for the value their products deliver to customers.

Rob Wertheimer discussed pricing in the construction equipment markets and the headroom for higher average selling prices due to technology and innovation. Josh Jepsen noted that the timeline for integrating technology is similar to the journey they began in 2013-14 and they are just getting started with the excavator. He is excited about the future and believes they are still in early days. Steve Volkmann asked for insight into the size of the robust cost agenda for next year, but no answer was given.

Brent Norwood and Josh Jepsen discuss the cost inflation and inefficiency costs Deere has experienced due to the COVID pandemic and the deferred ratification of the UAW contract. They explain that there is room for improvement in 2024, and that they are actively renegotiating to reduce costs. They also mention that the last three years have been far from usual operations, so they are continuing to root out disruption costs and drive efficiency.

Brent Norwood explains that in the fourth quarter of the year, revenues in large ag will be flattish or slightly down due to normal seasonal factory shutdowns at Harvester Works in September and/or October, resulting in a decrease in margins from the third quarter. Josh then comments on the Construction & Forestry order book, which extends into the second quarter of 2024 and has year-over-year growth.

Brent Norwood discussed the impact of the fourth quarter on the company's divisions, including a heavier R&D spend and less Brazil mix, which would bring down margins. He also discussed the order book for C&F, which is expected to have similar production rates for '23 and '24, with less disruption expected in '24. Finally, he discussed the new battery manufacturing location, which is expected to be operational soon, and will feed into various products with potential cost savings and margin impacts.

Brent Norwood responds to a question about the acquisition of Kreisel Electric and the timeline for the facility to be up and running. He also explains that the company is prioritizing the development of charging technology and batteries to support the long-term adoption of electrification in their products. He mentions that they are producing batteries in Europe on a small scale, but they have a robust pipeline for Deere products that will incorporate Kreisel batteries. Lastly, he explains that the average age of the fleet has five different owners and there is a bulge in age.

The average age of the fleet has been slow to decrease due to production delays caused by labor shortages, supply chain issues, and inflation. This has caused the age of four-wheel drive tractors and 220-plus horsepower tractors to remain above historic averages. The age of combines has been reduced slightly in the past year, but still remains above historic averages. It will take more time to bring down the age of the fleet, particularly for four-wheel drives and sprayers, which have been particularly constrained.

The speaker discusses the importance of trade ladder demand for technology and how it underlies the age of the fleet and the health of the trade ladder. He mentions that they recently spoke with a dealer principal about this fact, and that customers desire to upgrade technology no matter where they are in the chain. The last question is from Seth Weber with Wells Fargo Securities, who asks about the small ag business and whether the structural changes in Europe are permanent. The speaker also comments on small ag inventory coming off the peak, suggesting that things will get better or less bad going forward.

Small Ag & Turf is in a structurally sounder state than in previous years, and inventory levels have been reduced for compact utility tractors. The bulk of the business revolves around midsized tractors for dairy, livestock, hay, and forage operations. Going forward, there will be higher levels of technology from Production & Precision Ag, such as autonomy and electrification, to meet the demands of customers in high-value crop production systems. There will also be a factory shutdown in Monheim which will impact the revenue and margin for Small Ag & Turf.

Josh Jepsen and Brent Norwood concluded the call by discussing the strong global performance of Small Ag & Turf and the opportunities that technology is bringing to the farm in India. Seth Weber thanked the participants for joining the call and concluded the conference.

This summary was generated with AI and may contain some inaccuracies.