Release Date: May 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Deere & Co (DE, Financial) reported a solid execution in the second quarter with a 21.2% margin for the equipment operations.
- Net income attributable to Deere & Co (DE) was $2.37 billion or $8.53 per diluted share, demonstrating strong financial performance.
- Price realization was positive across several segments, contributing to the overall profitability of the company.
- Deere & Co (DE) has been proactive in managing inventory levels, aligning production with market demand to optimize financial performance.
- The company continues to invest in technology and innovation, enhancing its product offerings and maintaining a competitive edge in the market.
Negative Points
- Net sales and revenues were down 12% to $15.235 billion, and net sales for the equipment operations were down 15% to $13.61 billion, indicating a decrease in market demand.
- Operating profit in several segments, including Production and Precision Ag and Small Ag and Turf, declined due to lower shipment volumes and higher production costs.
- Global agricultural market conditions are challenging, with softening grower sentiment and high interest rates impacting customer purchase decisions.
- Industry sales forecasts for large ag equipment and small ag and turf in key markets like the U.S., Canada, and Europe have been revised downward, reflecting reduced demand.
- The Construction and Forestry segment also saw a decrease in net sales and operating profit, affected by lower shipment volumes and increased R&D and S&A expenses.
Q & A Highlights
Q: Can you discuss the underlying drivers for the updated guidance for Production and Precision Ag, which implies 50% decrementals and high teens margins?
A: Josh Beal, Director of IR, explained that the updated guidance is primarily volume-driven, particularly in the ag and turf segments. The global agricultural market's challenging conditions have led to a decline in farmer sentiment and softer retail environments, impacting demand. The forecast change reflects a proactive approach to align production with retail demand, especially in North America, where there has been a noticeable softening in large tractor markets.
Q: How significant is the underproduction in both Production and Precision Ag (PPA) and Small Ag and Turf (SAP), and how should we think about dealer inventories exiting fiscal '24?
A: Josh Beal noted that globally, underproduction for PPA is in the high single digits, with specific emphasis on North America and Brazil for large tractors and combines. For SAP, significant underproduction is noted in compact utility tractors. Cory Reed, President of Precision Ag, added that Deere aims to reduce inventory levels significantly by the end of the year, ensuring they are well-positioned for 2025.
Q: Given the high level of underproduction in the second half of the year, what actions have been taken to protect decremental margins?
A: Josh Beal mentioned ongoing efforts to reduce material and freight costs to offset the impact of underproduction on margins. Joshua Jepsen, CFO, highlighted that aligning the cost structure with reduced production rates will benefit the company moving forward, setting a more favorable stage for 2025.
Q: Can you provide insights on the current state of pricing across regions and segments, and expectations for next year?
A: Josh Beal detailed that pricing in North America and Europe is within the normal range of 2-3%, with strong pricing continuing. In South America, particularly Brazil, there is an expected mid-single-digit decline in pricing due to inventory adjustments. For 2025, it's too early for detailed pricing projections, but the company maintains a disciplined approach to balance market share and pricing dynamics.
Q: How are you managing the rising used inventories, and what is your level of confidence that late model inventories will stabilize?
A: Cory Reed emphasized proactive inventory management, particularly in North America, where Deere is underproducing to manage new and used inventory levels effectively. This strategy is expected to allow time for the used equipment market to absorb existing inventories without exacerbating the situation.
Q: What are the expectations for the crop care Early Order Program and Construction & Forestry (C&F) decrementals?
A: Josh Beal mentioned that it's too early to comment on the crop care program as it has just begun. Regarding C&F decrementals, a temporary issue with discount accruals affected price realization, but this is expected to normalize, supporting the full-year guidance of 1.5% price realization.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
