Deere & Company — 2024 Q1

Hello. Welcome, and thank you for joining us on today's call. Joining me on the call today are John May, Chairman and Chief Executive Officer; Josh Jepsen, Chief Financial Officer; Aaron Wetzel, Vice President, Production Systems for Production and Precision ag; and Josh Rohleder, Manager, Investor Communications.

Good morning. John Deere completed the first quarter, demonstrating solid execution across the cycle. Financial results for the quarter included an 18.5% margin for the equipment operations. Fundamentals in the end markets that we serve remain supportive of equipment replacement demand. Ag fundamentals, while down from the record highs of the last few years, have returned to near mid-cycle levels.

Thanks, Josh. I'd be happy to. We've had a great start to the year. The quarter was strong, and I truly appreciate the efforts of the entire Deere team to deliver these results.

Great. Thanks, John. Now let's start off with farm fundamentals this quarter. The USDA just updated 2024 forecast for net cash farm income as well as global supply and demand estimates. U.S. net cash farm income is forecasted to be down over 20% from 2023 levels, albeit up from November estimates. At the same time, global stocks for corn and soybeans are expected to fully recover from decade lows despite lower production in Brazil. Josh Beal, can you provide some additional color on what this means for both farmers and equipment demand over the rest of 2024?

Absolutely, Josh. I think that's a great place to start. What's most important in this conversation is context. We've certainly seen better-than-expected crop production over the past 6 months. We had record corn yields in the U.S., recovering Argentina crop production is offsetting the losses you mentioned in Brazil and 2 consecutive years of bumper wheat crops in Russia are offsetting losses in Ukraine and Australia. All of that is supporting rising carryover stocks, which are putting downward pressure on prices, culminating and lowered expectations for crop margins. All of these fundamentals are captured in the reduction in the U.S. net cash farm income forecast that you cited.

Thanks, Josh. It's helpful to understand where fundamentals are in relation to historical levels and encouraging to hear that despite a moderation in demand, there remains a supportive macro backdrop.

Thanks for the question, Josh. During my recent visits with both dealers and customers across North and South America these past few weeks, I've heard a similar sentiment from customers to what you've outlined. All are coming off record highs these past few years. And with lowering commodity prices and increasing interest rates, they're beginning to shift to a more typical replacement pattern. Dealers in the U.S. continue to see good demand for products, and are proactively managing inventories as the underlying fundamentals of the market change.

That's great, Aaron. It's good to hear perspective from our customers and dealers.

Absolutely. And it's probably best to start with new inventory. An essential element of our performance across the cycle is inventory management. We structure our production schedules to maintain the appropriate level of field inventory, for wherever we are in the cycle. Notably, that's why we continue to produce to retail demand in the North America large ag market.

Yes. In fact, just a few weeks ago, I had the opportunity to visit both dealers and customers in Brazil. I was able to spend time with both sugarcane producers as well as soybean customers in the Mato Grosso.

This is Jepsen. I want to add is our continued focus in investing in Brazil for the long term. During last past quarter, we announced an investment in a Brazil technology development center to focus on product and solutions suited for tropical agriculture. This should enable us to deliver -- develop and deliver solutions for Brazil, in Brazil and bring them to the market more rapidly.

Awesome. Thanks all for that additional color. It's great to hear about the developments and optimism in such an exciting growth market.

Yes, definitely. Within used inventory, in North America, we've seen year-over-year increases in both combines and tractors, most notably in the high horsepower tractor segment. Again, to put these increases into context, while levels are up from recent lows, they're still in line with historical averages.

This is Jepsen again. It's also worth noting that most dealers experienced an end-of-year seasonal increase in used equipment, as they take in trades, as they deliver new machines. This increase in used equivalent typically occurs in the first half of the year, which our dealers are accustomed to handling.

Thank you all. That's really helpful perspective on what has been a topic of interest lately. And on that note, one overarching impact from this discussion that we've yet to address is the updated outlook for the quarter.

Yes. Great points, Josh, and definitely worth unpacking here. Let's start with our production and precision ag and small ag and turf businesses.

This is Aaron. I'd like to add quickly. I believe the key opportunity here is our proactive management of production levels to adjust for the changes we are seeing in our end market demand. We have been highly effective in managing through the changing market dynamics in the U.S., and we'll continue to remain focused on disciplined execution of our pricing strategies in order to maintain performance as we move through the cycle.

Thanks, Aaron, and Josh. That's really helping bridge between the ag industry outlook and our tier forecast.

Absolutely. The key takeaway from the quarter is that underlying demand is stabilizing at levels higher than expected, while at the same time, the industry has become more competitive, given inventory availability.

This is Jepsen. I'd like to emphasize quickly the runway that remains on government infrastructure projects in the U.S. Through 2023, roughly 40% of the IIJA dollars have been awarded, but relatively minimal amounts have actually been spent thus far. Needless to say, we expect infrastructure spending to provide a strong tailwind well into '25 and '26 across both our construction and road building segments, as dollars are awarded and projects commence.

Thanks for that color, Josh. It really helps contextualize the opportunity ahead.

Yes, for sure. First and foremost, it's proactive actions to ensure we stay ahead of demand changes. All of our factories and product lines have a list of levers we pull, depending on the magnitude and direction of the volume change that we're seeing. Those efforts are ultimately grounded in our focus on inventory management, which we spoke about earlier. The underproduction in retail in certain geographies and production to retail in North America directly reflect this laser focus on inventory management as a key pillar to maintaining price discipline and structural profitability across the cycle.

One more thing to add here. All of this work ultimately impacts our decremental margins, as we make decisions to proactively manage production and inventory levels. As we've noted, we'll underproduce in some regions, which will impact decrementals, as we dial down production faster than we realized savings from pulling levers.

Awesome. And that's a great segue into my last question, which is for Aaron.

Sure. Within our production and precision ag business, our Leap Ambitions are to help customers produce more with less, less inputs like herbicides and fertilizers and more productivity through more efficient use of labor. One measurement for this progress is through our engaged acre metrics, where we are planning to achieve 500 million acres engaged by 2026. As customers use our machines and technologies, we expect to see those engaged acres continue to grow. To propel this, we will continue to make significant investments in R&D, prioritized by the needs of our customers around the world and the value we can unlock.

product leadership, system leadership; and finally, go-to-market leadership. Our products are our machines. They are the foundation of our work and enable customers to do the job in the field every day. Customers rely on our machines during critical times of the year, like planting or harvesting, and need those machines to perform. In fact, we will be reinforcing this focus through one of our most significant new product launches coming in a few weeks.

Thanks, Aaron. It's great to hear about the foundational heart iron that enables us to invest in more advanced solutions. And it sounds like there's a lot more to come on the new product front, beginning with the commodity classic event at the end of the month. So we'll wait to say any more until then.

Sure. The system is the key differentiating factor for us in the market. It's the integration of our technology solutions into our machines that make it easier for customers to more precisely plant seeds and apply chemicals and nutrients. The seamless integration of capturing the data from the action in the field and sending it to the cloud, allows customers to make better decisions and develop more efficient and sustainable practices on their farms.

That's really well articulated, Aaron. You can clearly see how complete system integration creates value, well beyond any individual component and how connectivity is foundational to unlocking this opportunity.

Yes. The third pillar of our strategy is around our dealer channel and our go-to-market capabilities to sell and support not only the equipment, but also the suite of technologies available for customers. Our dealers understand deeply the needs of their customers and where their customers are in their own technology journey, as they work with each customer to provide them solutions to improve their operations.

And one more thing to add as it relates to go to market. We've seen tremendous response to our newly released precision ag essentials upgrade kit, which is our display, receiver and modem with a SaaS go-to-market approach, offering low upfront cost and annual subscription.

Thanks, Aaron, and Josh. That's a great update. And before we open the line to questions, Josh Jepsen, any final comments?

It was a good first quarter, with strong results to get the year going. Fundamentals, overall, began normalizing across our businesses and are supportive of near mid-cycle volume levels.

Thanks, Josh. Now let's open it up to questions from our investors.

Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. [Operator Instructions]