The operator welcomes participants to Deere & Company's Fourth Quarter Earnings Conference Call and introduces the speakers. The call will discuss Deere's fourth quarter earnings, market outlook, and fiscal year 2024 projections. Participants are reminded that the call is being recorded and their remarks may be used. The call may include forward-looking statements and non-GAAP financial measures.

John Deere had a strong fourth quarter, with excellent margins and a 16% increase in net sales and revenue for the year. The company expects to maintain profitability in the face of declining demand in the agriculture market. The construction and forestry market remains uncertain, but there are potential opportunities from infrastructure spending. In the fourth quarter, net sales and revenues were slightly down, but net income increased. The company's production and precision ag business also had positive results. More information can be found on the company's website.

In the fourth quarter, net sales for the company were down 6% due to lower shipment volumes, but price realization and currency translation had a positive impact. Operating profit increased due to price realization, but was partially offset by lower shipment volumes and higher expenses. In the Small Ag and Turf segment, net sales were down 13% due to lower shipment volumes, but price realization and currency translation had a positive impact. Operating profit declined due to lower shipment volumes and higher expenses. For the fiscal year 2024, the company expects a decline of 10-15% in large ag equipment industry sales in the U.S. and Canada, but this will be tempered by a healthy farm balance sheet and continued profitability. Sales for Small Ag and Turf in the U.S. are also expected to decline.

In North America, the demand for tractors and combines is expected to decrease by 5% to 10%, with steady demand in the dairy and livestock segment offset by lower demand in the turf and compact utility tractor markets. In Europe, the industry is forecasted to decrease by 10%, with mixed farm fundamentals in Eastern and Western Europe. South America is expected to see a 10% decrease in sales due to political uncertainty and adverse weather conditions. In Asia, sales are projected to decrease moderately, with India's tractor market down by 5%.

In fiscal year 2024, the company expects a decrease of 15-20% in production and precision ag net sales, with a positive price realization and flat currency translation. The operating margin for this segment is forecasted to be between 23-24%. The Small Ag and Turf segment is projected to have a 10-15% decrease in net sales, with positive price realization and flat currency translation. In the Construction and Forestry segment, there was an 11% increase in net sales due to price realization and higher shipment volumes. The industry outlook for this segment predicts a 5-10% decrease in earthmoving equipment sales and flat to 5% decrease in compact construction equipment sales in the U.S. and Canada. Global forestry markets are expected to be down 10%, while global road building markets are forecasted to be flat.

The company's C&F segment is projected to experience a 10% decrease in net sales in 2024, with a 17-18% operating margin. The financial services segment saw a decline in net income in the fourth quarter due to various factors, but is expected to see an increase in 2024. The company's guidance for net income, effective tax rate, and operating cash flow for 2024 is between $7.75 billion and $8.25 billion, with a projected cash flow from equipment operations of $8 billion to $8.5 billion. The company remains confident in their ability to generate strong profits despite industry challenges.

The speaker discusses the company's record-breaking fourth quarter and full-year results, attributing their success to solid execution and disciplined inventory management. They also mention positive year-over-year production cost comparisons and relief on raw materials and freight prices. Overall, the company had a strong finish to the year and was able to deliver products to customers on-time and at expected costs.

In this paragraph, Josh Jepsen and Josh Rohleder discuss the steady-state of execution and seasonal patterns for production and deliveries in the farm and construction equipment industry. They also mention that the first quarter of 2024 is expected to have lower production rates and margins due to model year changeovers and factory maintenance. Brent Norwood then provides a breakdown of what to expect in terms of markets and profitability by segment and geography, specifically focusing on large agriculture in North America. He mentions that while farm fundamentals are expected to remain strong, they will be slightly down from record highs in recent years. However, customers are still profitable and have low debt-to-equity ratios.

In 2024, commodity prices are expected to be lower, but crop cash receipts will still be the third-highest. Corn and soy cash margins will also be down, but still higher than in previous years due to lower input costs. North American yields are better than expected, leading to potential tax buying for used equipment. Despite lower commodity prices and higher interest rates affecting equipment demand, cash margins are still supportive of replacement at mid-cycle volumes. There will be a mixed bag in equipment sales in 2024, with strong early order program results for sprayers and flat results for planters. However, minimal post-season deliveries for crop care products and lower combine early orders are expected to put downward pressure on shipment volumes. Row-crop tractor orders are booked through the second quarter with similar production levels to 2023.

The paragraph discusses the inventory levels for four-wheel drive tractors in the third quarter of 2024. It mentions that there is high demand and limited availability for these products. The team has done a good job managing production in line with retail demand in 2023 and is well-positioned for the upcoming year. Inventory levels for new equipment and used equipment are at a good level, with used inventory being down from previous years. The team has learned from past cycles and knows how to manage through them.

The guide explains that the current replacement period in the North American market is distinct from previous ones due to factors such as lower inventory levels, older fleet age, healthier farmland balance sheets, and available financing options. Deere's improved inventory discipline and production constraints in recent years position the company well for when demand increases in 2024. The company has also improved its management of the replacement cycle compared to the past.

The second factor that contributes to the company's ability to help farmers reduce costs and increase profits is the availability of new precision ag technologies. This has been particularly beneficial in the competitive global market. In South America, there were temporary headwinds in 2023 which affected demand for combines and large tractors. As a result, the company ended up with more inventory than planned but will bring it back to target levels in 2024. Europe remains stable and consistent in terms of volumes.

The company saw a decrease in demand for mid tractors and combines, but managed production accordingly and is well-positioned for 2024. They expect orders to be down in line with industry demand and have good visibility through the first half of the year. The focus remains on offering value to customers through precision technology. In regards to the C&F division, there is caution in the guide due to elevated interest rates in the residential and office/commercial sectors, but there is potential for growth in infrastructure projects and U.S. manufacturing. The company's inventory levels are still lower than the industry average, but there may be further inventory build in 2024.

The company has improved its margins in the last four years due to strategic decisions like the acquisition of Wirtgen and focusing on margin-accretive areas. The C&F business has also shown strong performance. The company has made progress in its tech portfolio, particularly with the launch of See & Spray and plans for autonomy. The company is targeting a significant push for See & Spray premium in 2025 and has seen interest in its limited release of the retrofit kit. The company also plans to expand its autonomy through paid pilots in 2024.

The company's key metrics have improved significantly, setting them up for broader commercialization and increased utilization through retrofitting autonomy. The new Gen-5 display and StarFire receiver allow for basic precision features to be added to older equipment, making tasks easier for less experienced operators. The company is committed to delivering customer value and productivity, regardless of equipment age. Maintaining gains and profitability requires diligent cost management, and the company plans to continue reducing costs in 2024.

The company has successfully tackled inefficiencies related to disruptions and is now focused on reducing costs in various areas such as direct and indirect materials, logistics, and labor. The fourth quarter showed positive results in production costs due to these efforts. The company's priority is to maintain and improve its cost position while also taking care of customers. The management team is committed to cost management and expects to see the benefits of their efforts in the future. In terms of cash flow, the company plans to continue its focus on cost management in 2023 and allocate capital accordingly.

The company had a successful year in 2023 with strong cash flow conversion and a good credit rating, allowing them to invest in the business. They plan to maintain investments in R&D and have increased their dividend and completed share repurchases. The company has focused on restructuring and centralizing technology development to drive results.

The company has made significant changes to improve its customer service and financial performance. This includes creating a new organization to support customers throughout the product lifecycle, implementing a disciplined approach to capital allocation, and focusing on creating value for customers through technology and exiting unprofitable markets. These improvements are expected to result in higher profitability and returns for the company, while still investing in R&D and new products. Overall, the company is confident in its ability to achieve consistent and strong performance in the future.

The speaker discusses the potential for future growth and confidence in their strategy. They then open the floor for questions and the first question is about cost management. The speaker explains that while there may be opportunities to mitigate costs, some of their most profitable markets are down and they are maintaining a 35% decremental. They also mention that they have seen disciplined cost management in the fourth quarter, with production costs becoming deflationary.

The company has a significant agenda for 2024 and is pleased with the progress made in the fourth quarter of 2023. They aim to neutralize production cost inflation and potentially drive it to a deflation tailwind. This will be achieved through reducing costs in the supply chain and increasing resiliency, as well as designing cost out of equipment. Opportunities for cost reduction are seen in raw materials, freight, and logistics. The company expects a 35% decremental and is confident in achieving further reductions. They anticipate margins to be nearly double compared to previous mid-cycle periods.

The company expects to see a 0.5% increase in pricing for PPA and C&F and a 1% increase for SAT in 2024. This forecast includes a return of retail discounts and the company has been able to control their inventory positions in most markets, which will help protect their pricing strategy. They do not expect any segments to go negative in terms of pricing in 2024.

Seth Weber asks for context on the company's guidance for P and PA and other segments where their decline is expected to be bigger than industry declines. Brent Norwood explains that the company will underperform in Brazil due to inventory levels, and in small ag and turf due to slow single-family housing starts. However, they will be in line with the industry for the rest of small ag and turf, and in construction and forestry, the company did not build inventory at the same pace as the industry.

The speaker mentioned that production costs are expected to be favorable for the company in 2024, with some segments experiencing more favorable costs than others. They clarified that the overall production costs for the company are expected to be on the plus side throughout 2024.

In 2024, production costs are expected to be flat or slightly lower due to reductions in materials and freight costs. However, labor costs may increase due to scheduled step-ups in labor contracts. Overall, the company expects a positive outlook for production costs in 2024. When it comes to capital allocation, the company plans to prioritize internal investments in technology and R&D, with a slight increase in spending. The dividend payout ratio is expected to be between 25% and 35% at mid-cycle, but the company has not yet announced its dividend outlook for next year.

The company is focused on implementing Sense & Act technologies across its portfolio and sees significant opportunities in autonomy. They have received positive feedback from customers about this technology and are also working on alternative propulsion solutions. The company has increased its dividend by 20% and plans to continue investing in the business, paying dividends, and repurchasing shares with the expected cash generated. They believe this will drive value for the company in the long-term.

Jerry Revich from Goldman Sachs asks about the 15-20% production cut in large agriculture and how it will balance used inventories. Brent Norwood explains that the industry has benefited from production constraints in recent years, which will have a dampening effect on the cycle. Used inventories have started to increase in 2023, but dealers have been proactive in keeping them below historic averages. For example, combines are 40% below the average and tractors are 20% below.

The company has increased their incentive spend on used inventory in the second half of 2023 to help dealers manage their inventory. They have also changed their leasing options to avoid the issue of short-term leases that caused excess used inventory in the past. They expect a healthy balance of new and used inventory in 2024. The decremental margin in large ag is around 38%, with a significant double-digit volume decline in shipments. R&D investment will remain relatively flat or slightly increased throughout the cycle. The company is interpreting the negative early order program as a shift in time or a cycle-specific issue.

The company is experiencing negative mix headwinds due to a decrease in combines and the Brazilian market. However, their focus on cost management is helping them maintain traditional decrementals. The decrease in combines is due to their shorter useful life and a decrease in fleet age. The company is also investing in R&D and their business model transformation, which they expect will drive more stable business and better margins in the future. They believe that 2024 will be a mid-cycle year.

The speaker asks about the mid-cycle projections for each segment and the corresponding margin implications. The response is that the production and precision ag segments are closest to mid-cycle, while construction and forestry are slightly higher and small ag and turf are lower. The company measures structural profitability at similar points in the cycle and is pleased with their current performance compared to 2019. The speaker adds that their current performance is significantly better than in the past and they expect to perform even better at the bottom of the cycle. They are excited about future opportunities.

Deere is focused on managing the cycle and sees potential for growth in creating value for customers through technology and reducing volatility. There is a lot of room for improvement in the next decade. The conference call has ended and the participants can disconnect.

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