The operator introduces the Deere & Company Third Quarter Earnings Conference Call and hands it over to Josh Beal, Director of Investor Relations. Beal is joined by other executives to discuss the company's earnings, markets, and outlook for fiscal 2024. The call is broadcast live and recorded for future use, but any other use without consent is prohibited. The participants agree to have their remarks and likeness used as part of the call. The call includes forward-looking statements and information on factors that could affect actual results.

John Deere's Q3 financial results included measures that are not in accordance with GAAP. The call also included information on how to access these measures on the company's website. Despite challenging market conditions, the company remained disciplined and focused on proactive inventory and cost management. Sales and revenues were down, but net income was still strong. The company's focus on cost control and adjusting production schedules helped to keep the business healthy. The call then moved on to discuss individual business segments, starting with Production and Precision Ag.

The third quarter results for the company's Net Sales and Small Ag & Turf segments were down compared to the same quarter last year due to lower shipment volumes. However, there was a slight offset from price realization. The operating profit for both segments also decreased, mainly due to lower shipment volumes and higher expenses. Looking ahead, the company expects muted demand in the global Ag and Turf markets, with a decline in large Ag equipment sales in the U.S. and Canada due to factors such as declining farm margins and geopolitical uncertainty.

The small agricultural and turf industry in the U.S. and Canada is expected to see a 10% decline in demand, with further declines in certain segments due to interest rates. In Europe, the industry is forecasted to be down 15%, while South America and Asia are expected to see moderate declines. Despite these challenges, the company's net sales forecast remains down 20-25% for the year, with a positive price realization and flat currency translation. The operating margin is expected to be between 20.5% and 21.5% for the Production and Precision Ag segment, and between 13.5% and 14.5% for the Small Ag and Turf segment.

Net sales for construction and forestry in the quarter were down 13% due to lower shipment volumes, negative price realization, and currency translation. Operating profit was also down, resulting in a 13.8% operating margin. The 2024 industry outlook predicts a decrease in sales for both earthmoving and compact construction equipment, as well as a 10% decline in global forestry markets. The Construction & Forestry segment's net sales for 2024 are expected to be down 10-15%, including positive price realization and flat currency translation.

In the third quarter, the segment's operating margin is expected to be around 15%, due to tougher competition and lower demand for construction equipment. The Worldwide Financial Services net income for Deere & Company was $153 million, but is projected to be lower for fiscal year 2024 due to higher credit losses and less favorable financing spreads. Deere & Company has also announced an agreement with Banco Bradesco to invest in their Brazilian financing subsidiary, which is expected to close in the second fiscal quarter of 2025. In terms of guidance, Deere & Company maintains its outlook for net income at approximately $7 billion for fiscal year 2024 and an effective tax rate between 23% and 25%. Operating cash flow from equipment operations is projected to be in the range of $6 billion to $6.5 billion. John May will now speak.

John Deere had a successful third quarter thanks to the efforts of their team, dealers, and suppliers. Despite challenges in the market, they have effectively managed inventory levels and costs, making adjustments to production schedules and reducing used inventory. These actions have positioned them well for the upcoming fiscal year and allow them to continue investing in products and solutions for their customers.

John Deere's ultimate purpose is to deliver value for their customers and they are grateful for their team members who have maintained this commitment despite necessary adjustments in operations. In the medium and long-term, their ability to deliver value is rooted in their unique position to develop precision solutions and leverage their extensive product portfolio, tech stack, and service and support. They are optimistic about future opportunities and see potential to scale innovation and enhance value delivery for their customers. The formal comments end and the discussion shifts to Deere's performance in the third quarter, where net sales declined but operating margin remained strong. The challenging macro environment is discussed and Josh Beal gives an outlook on the quarter.

The company's strong margin performance is encouraging despite the difficult market conditions, thanks to inventory management and strategic partnerships. In the Ag segments, there were declines in net sales due to soft end-user demand, but solid price realization was maintained by managing inventories. In the construction segment, demand decreased and used inventories increased, putting pressure on volumes and prices. The company adjusted its production schedule to lower field inventories and is confident in its ability to execute its plan. The decline in demand is due to lower crop prices, which affects farm margins and equipment demand.

The article discusses the current state of the agriculture market in different regions, including North America, Brazil, and Europe. Input costs are projected to be down, but this is not enough to offset lower commodity prices, leading to a decline in farm net incomes and pressure on equipment demand. In Brazil, high interest rates and weather uncertainty are further impacting equipment sales. In Europe, farm investments are softening due to elevated input costs and depressed margins. However, the dairy and livestock segment is seeing some moderating tailwinds. In North America, there is an elevated fleet age and strong balance sheets, providing some support in a challenging market. The article also mentions a sense of optimism for the future of agriculture in Brazil.

Luke Gakstatter, from Deere, discusses the company's early order programs in North America for model year '25. These programs typically account for 90% of production for seasonal products each year. In the past, the company used a multi-phase approach with tiered discounts, but during times of high demand, they switched to an allocation approach. With demand moderating, they have returned to the multi-phase approach and have increased list prices for combines. Tractors are on a rolling order book with 4 months of visibility, providing confidence in production plans.

The paragraph discusses the progress on early order programs for sprayers and planters in the agricultural industry. It mentions that orders are down for model year '25, but still above pre-2022 levels. The decrease in planter sales is expected due to higher volumes in the previous year. The adoption of precision solutions, particularly Exact Supply and See & Spray technology, is increasing. The feedback on the technology's effectiveness is positive from both customers and dealers.

The company's See & Spray technology is meeting or exceeding expectations, but requires significant changes in how customers manage their crop care programs. The company is committed to dealer engagement and customer success to ensure positive outcomes. The decision to underproduce is based on previous cycles and has caused short-term pain but is the right plan for managing the current market. Inventory levels in Brazil have declined despite a challenging market, and in North America, proactive inventory management has led to a double-digit decline in new inventory, surpassing industry trends.

The company expects further reductions in inventory during the fourth quarter, which is in line with historical trends. They anticipate ending the year with a decrease in the absolute number of industry. The underproduction of large tractors will have a significant impact on the company's margins in the fourth quarter. The company is taking a planned approach to underproduction in order to remain agile in responding to future demand changes. On the used inventory side, total units have increased year-over-year, but have since retreated as dealers work through normal seasonal fluctuations.

Deere is focused on managing used inventory and supporting their dealers through various programs and tactics. The CEO recently met with dealers and came away feeling optimistic about their strong alignment and focus on managing used inventory, the winning strategy of high-quality iron and technology, and the continued transformation to add value for customers. Additionally, one of the largest dealers in the U.S. believes that this downturn will not be as prolonged as the last cycle due to Deere's proactive steps in managing inventory.

The current state of the industry and the proactive measures being taken to manage it were discussed by Luke and John. Josh Beal then breaks down the increased volatility in the Construction & Forestry sector, specifically in the earthmoving and roadbuilding businesses. While roadbuilding remains stable, earthmoving is experiencing hesitation in equipment purchases due to increased competition and higher costs for customers. This has led to a slowdown in order velocity and decreased rental CapEx spending. Deere, along with the industry, has been rebuilding inventory levels in recent years.

In the recent quarter, the company has taken steps to underproduce retail demand in their construction and compact construction equipment segments in order to prepare for 2025. However, there has been robust competition in the market and rising inventory levels, leading to net pricing declines. The company also made difficult decisions to reduce their global salaried workforce, resulting in a onetime expense of $150 million. This has also caused volatility in their working capital and a downward revision in their operating cash flow guide.

The speaker discusses the cost management actions being taken by John Deere, including efforts to reduce production costs and freight, as well as design out costs from new equipment. These actions are expected to yield savings in 2024 and contribute to the company's net income goal of $7 billion for the fiscal year. The speaker also emphasizes the company's focus on driving a better business and investing in value-enhancing products for customers. The Q&A portion of the call then begins, with the first question regarding the company's ability to raise price assumptions for 2024 in precision and production Ag to 2% from 1.5%. The speaker responds by discussing the factors behind this increase, including regional pricing and receptivity to announced price increases for 2025.

The company has seen stable prices in both the North American and European markets, with a slight increase in Brazil. They have also been able to reduce incentives for the back half of the year due to lower used inventory levels. The pricing for early order programs for 2025 is also appropriate. In the Construction segment, the company is implementing an underproduction strategy similar to what they have done in the Ag segment. This is to address rising inventories and they are being disciplined in managing incentives to best position inventory for 2025.

The speaker is responding to a question about the company's inventory levels and production plans. They state that they have been building inventories for the past year, but have recently seen some softening in retail sales and order velocity. As a result, they have proactively reduced inventory levels to the lower end of their normal range. They anticipate a mid-single-digit underproduction in construction equipment for the year, but still plan to build inventories for compact construction. Overall, they believe this will position them well for the future and do not expect any significant changes in their inventory levels.

During a conference call, Tami Zakaria from JPMorgan asked about pricing for seasonal Ag products and construction orders for the next fiscal year. Josh Rohleder responded by saying that they do not have a guide for 2025 yet, but they have seen increased price competition in the construction market and have lowered their full year guidance for 2024. They are balancing price and share in the face of competition. Jerry Revich from Goldman Sachs also asked about the company's focus on keeping downturns shorter and any potential moving pieces for 2025. Josh Rohleder mentioned headwinds from weaker demand in the early order program, but also tailwinds from dealer inventory destocking, list price increases, and potential cost takeout opportunities. John may also have additional input.

The speaker discusses the dynamics of early order programs and notes that the sprayer and planter EOP saw a decline in sales due to the high prices of corn last summer. However, this is not indicative of all product lines and the company is focused on controlling inventory and managing costs to prepare for the upcoming year. They have made production adjustments and taken cost actions to set themselves up for success in 2025.

The company reacted quickly to the softening demand by looking at past mistakes and taking control of what they could. They focused on reducing inventory and costs, restructuring the business, and remaining disciplined in execution. The team knows it is important to remain focused on meeting customer needs, generating profits, and reinvesting in the business. The net income guide for the year suggests an EPS of $4.20 for the fourth quarter, but running it from the business segment level suggests only $3.

The speaker is unsure if the fourth quarter's low EPS is due to a one-time event or a normal seasonal pattern. They have a tax rate guide and segment guide but are uncertain about the fourth quarter's $1.20 EPS. The speaker clarifies that the fourth quarter's production shutdowns are not indicative of how the company will perform in 2025. They mention that there were significant underproduction days in the fourth quarter for Waterloo tractors, harvester combines, and construction equipment. This has led to a more significant pullback in production compared to previous years.

In the paragraph, the speaker is responding to a question about the impact of production declines on margins and EPS. They clarify that while there will be some negative impact, it will not significantly affect their operations or financials in the first quarter of 2025. They also discuss the inventory to sales ratio and explain that while there was a flattish trend in the third quarter, there was a 10% reduction in absolute units in the field. They mention that the progress they anticipated is being seen.

The company discussed their inventory levels and their plans to keep them at or below 15%. They also mentioned their success with their See & Spray technology, with early feedback showing high efficacy and good ROI. They plan to continue working closely with dealers to execute their new end-use plans.

Josh Jepsen, a spokesperson for the company, discusses the cost savings and changes in operations that customers are experiencing with their new technology, See & Spray. He mentions that some customers are still in the trial phase of implementing it into their operations, but overall, everyone is pleased with the technology and its effectiveness. Luke Gakstatter, another company representative, adds that they are working with customers and dealers to help them incorporate the technology into their production system. Jepsen also notes that a large number of acres have already been utilizing See & Spray.

In 2015, ExactEmerge was rolled out, doubling the speed and precision of planting. The take rate for this technology was 10%. See & Spray, which is a bigger step function change, has a similar take rate and is expected to be disruptive. The company is focused on delivering outcomes for customers. In terms of inventories, there has been a flat unit inventory for wheel drive tractors and combines in Canada and the U.S. due to production cuts. The company expects a lag in the impact of these cuts and will provide updates in the next quarter. The focus has been on building in line with retail, except for underproduction in row crop tractors. The fourth quarter is expected to have significant underproduction due to the shutdown of the Waterloo facility and strong retail for tractor sales.

The fourth quarter is expected to see a big drawdown on the row crop side and underproduction in combines due to normal seasonality. 2/3 of the days at Harvester will be shut down, resulting in significant drawdown. There is full alignment with dealers in managing this cycle and investing in the future. Decrementals in the fourth quarter will be higher due to underproduction, with an estimated 1.5 to 2 points of margin drag for the full year.

The speaker is discussing the financial projections for Deere & Company for the full year and the impact on margins and decrementals in the fourth quarter. They thank the participants for joining the call and end the call.

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