Release Date: August 15, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Deere & Co (DE, Financial) maintained an 18.5% margin for equipment operations despite a challenging macro environment.
- Proactive inventory and cost management helped maintain solid price realization.
- Order books across all segments are effectively full for the remainder of the fiscal year.
- Strategic partnerships with suppliers are driving down material and freight costs.
- Continued investment in future growth and technology, such as precision solutions, is showing positive adoption rates.
Negative Points
- Net sales and revenues were down 17% year-over-year, with equipment operations down 20%.
- Ag fundamentals remain muted, and market demand in construction and forestry has tempered.
- High interest rates and geopolitical uncertainty are weighing on customer purchase decisions.
- Lower shipment volumes and higher warranty expenses negatively impacted operating profit in the small ag & turf segment.
- Increased competition and rising inventory levels in the construction segment led to net pricing declines.
Q & A Highlights
Q: Can you explain the factors behind the strong margin performance this quarter despite the challenging market conditions?
A: (Josh Beal, Director of Investor Relations) Our strong margin performance is encouraging given the difficult market backdrop. We managed to maintain solid price realization by keeping inventories in check and driving down material and freight costs through strategic partnerships with our suppliers. Additionally, we adjusted our North American construction equipment production schedule to better position us for 2025.
Q: What are the current ag fundamentals and how are they impacting equipment demand?
A: (Josh Beal, Director of Investor Relations) Farmers are experiencing one of their best crops in years due to excellent weather conditions, but high levels of production are causing crop prices to decline, which in turn pressures equipment demand. In Brazil, ag commodity prices are softening due to replenished global supplies and high interest rates, leading to further pullbacks in equipment sales. In Europe, weather uncertainty and tight lending conditions are depressing margins and weakening farmer sentiment.
Q: Can you provide insights into the early order programs (EOPs) for model year '25 and how they are translating into equipment sales?
A: (Luke Gakstatter, Senior Vice President, Sales & Marketing, for the Agriculture & Turf Division) Our early order programs have returned to a traditional approach with multiple phases and tiered discounts. Planter and sprayer EOPs are currently down double digits year-over-year, but pack adoption continues to accelerate as customers adopt precision solutions to increase profitability amidst a tougher macro environment.
Q: How are you managing inventory levels, particularly in North America and Brazil?
A: (Luke Gakstatter, Senior Vice President, Sales & Marketing, for the Agriculture & Turf Division) We have significantly under-produced in Brazil, leading to inventory declines. In North America, we are seeing double-digit reductions in new inventory units over the past quarter. We expect further reductions in the fourth quarter, aligning with historical trends. Our proactive inventory management decisions are helping us better position for future demand changes.
Q: What steps are you taking to manage the construction and forestry segment amid increased volatility?
A: (Josh Beal, Director of Investor Relations) We are under-producing retail demand in both our construction and compact construction equipment segments through the remainder of the year to better position ourselves for 2025. We are also deploying additional incentives into the market to address rising inventory levels and increased competition.
Q: Can you elaborate on the special decisions made this quarter and their impact on the overall state of the business?
A: (Joshua Jepsen, Chief Financial Officer, Senior Vice President) We made difficult decisions to align the business with current market conditions, including a mid-single-digit reduction in our global salaried workforce. This resulted in a one-time expense of approximately $150 million but will deliver roughly $230 million in run-rate savings. Despite market pullbacks, our cost management actions are yielding savings, giving us confidence in our net income guide of approximately $7 billion for the fiscal year.
Q: How are you managing pricing in the construction segment amid increased competition?
A: (Josh Beal, Director of Investor Relations) We have lowered our full-year guide to 0.5 points for 2024 due to increased price competition. We are balancing price with share as we navigate the competitive market environment, and for the full year, we expect to see about 0.5 points of price realization.
Q: What are the key moving pieces to consider for fiscal year 2025?
A: (Josh Beal, Director of Investor Relations) We are controlling what we can, starting with inventory management and cost control. We are under-producing retail demand to set ourselves up at the low end of our inventory bands as we enter the year. Additionally, cost actions taken this year will provide tailwinds into 2025. While we don't fully know what 2025 will look like, we are positioning ourselves well through proactive measures.
Q: How should we think about the seasonality and production cuts in the fourth quarter and their impact on the first quarter of 2025?
A: (Joshua Jepsen, Chief Financial Officer, Senior Vice President) The fourth quarter is not indicative of how we will run into 2025 due to significant underproduction and shutdowns. While margins and EPS will suffer in the fourth quarter, we don't expect this to be a launching point for 2025. Typical seasonal patterns in sales should not follow historical trends due to these adjustments.
Q: Can you provide more details on the early feedback and performance of the See & Spray technology?
A: (Josh Beal, Director of Investor Relations) We have been very encouraged by the results in the field, with customers seeing savings on their herbicide at or better than expectations. The technology is meeting or exceeding expectations, and while it requires significant shifts in operations, we are committed to dealer engagement and customer success to ensure the best outcomes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
