DEERE & CO Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Inventory Management: In North America, large ag field inventory ended the calendar year down 25% year over year. In Brazil, combine inventory was down over 25% in the past three months. Construction and forestry segment underproduced retail demand, reducing earthmoving inventory.
• Market Fundamentals: Global ag fundamentals improved, but demand constrained by market uncertainty. USDA 2025 forecast for US net cash farm income up 22% y/y, but crop cash receipts down 2% due to lower commodity prices. Industry sales outlooks vary by region; US and Canada large ag industry sales expected down ~30%, small ag and turf down ~10%; Europe industry projected to decline ~5%; South America roughly flat.
• Currency Impacts: Strong dollar negatively impacted sales and operating profit, particularly in production and precision ag.
• Cost Management: Favorable production costs in ag segments; lower SG&A expenses in the quarter.
• Regional Highlights: Brazil saw tech adoption growth with over 1,500 Precision Ag Essentials kits ordered; Europe farm fundamentals stabilized; Central and Eastern Europe benefited from reduced Ukrainian grain imports; Argentina saw improved farm margins due to decreased currency risks and export tax reductions.

Segment Performance

• Production and Precision Ag: Net sales were $3.067 billion, down 37% compared to the first quarter last year. Operating profit was $338 million, resulting in an 11% operating margin. Price realization was positive by just over one point, but currency translation was negative by roughly two and a half points.
• Small Ag and Turf: Net sales totaled $1.748 billion in the first quarter, down 28% due to lower shipment volumes. Operating profit declined year over year to $124 million, with a 7.1% operating margin. Price realization was positive by just under one point, and currency translation was negative by just under one point.
• Construction and Forestry: Net sales for the quarter declined roughly 38% to $1.994 billion. For 2025, net sales remain forecasted down between 10% and 15%.
• Financial Services: Worldwide Financial Services net income attributable to Deere & Company in the first quarter was $230 million, favorably impacted by a decreased valuation allowance on assets held for sale of Banco John Deere.

Guidance

• Net Income: Outlook for net income remains between $5 billion and $5.5 billion for fiscal year 2025.
• Effective Tax Rate: Guidance incorporates an effective tax rate between 20% and 22%.
• Cash Flow: Cash flow from the equipment operations remains projected between $4.5 billion and $5.5 billion.
• Production and Precision Ag: Net sales forecasted down between 15% and 20% full-year, with full-year operating margin guide between 16% and 17%.
• Small Ag and Turf: Net sales expected to remain down around 10%, with operating margin guide between 13% and 14%.
• Construction and Forestry: Net sales forecasted down between 10% and 15% for 2025, with operating margin projected between 11.5% and 12.5%.

Risks

• Tariff Uncertainties: Fluid situation with ongoing monitoring of proposed tariffs and their impact on customers' operations.
• Macroeconomic Uncertainty: High interest rates, market uncertainty, and competitive environment impacting demand.
• Inventory Mix: In higher horsepower used equipment, mix of one and two-year-old equipment remains skewed higher than desired.

Question and Answer

• Q: Good morning. Maybe just some help in terms of large ag production cadence given the push out that you call out for the first quarter. How do we think about kind of that normal seasonal ramp-up that you typically see in the second quarter and third quarter? Is that going to be more weighted to the third quarter than usual? And just as we think about kind of segmenting the remaining quarters, this would be a PPA question. A: Yeah. Hey, Tim. Thanks for the question. I mean, I think, yeah, as you think about large ag demand and, you know, shipping some of those shipments out to future years, it's still going to more or less follow normal seasonality, you know, for the business. You know, as we look at the second quarter, you know, it's still we'd anticipate being, you know, the highest quarter for us in terms of sales. You know, full-year guide for large ag being down 15% to 20%, you know, quarter over quarter, we'd expect that second quarter year over year comparing the last quarter or last year's quarter to be down more than the guide. So probably down more than the 15% to 20% that you're seeing in the full year. And that gets sequentially better as you go to Q3 and Q4 in terms of the year-over-year comps.
• Q: Hi, good morning, guys. Thank you. I'm curious. I think one of you, Josh, mentioned that the early order program was kind of below your industry forecast. And, obviously, we saw some pretty weak numbers from AEM yesterday. And I'm just curious how you're thinking about sort of having confidence in the bottoming process for the end market activity because, obviously, that'll drive what you need to do on the inventory side. A: Hey. Hey, Steve. Thanks for the question. And maybe, you know, I'll talk combines and then walk a little bit around the other product lines as well. Yeah. As you recall for North America, you know, our guide for the industry is down 30%. You kind of take product line by product line, you know, sprayer EOP came in pretty close to, you know, that industry guide. We're expecting tractors to be down a little bit less year over year. Row crop tractors. And then four-wheel-drive tractors will be a little bit more than the guide. And then as you mentioned, you know, given the results of the combine early order program, we'd expect that to be down a little more than the guide as well. So, you know, a way to get to that industry down 30%, but a little bit of difference, you know, by product line. Yeah. You know, as you saw in the quarter, this is consistent with the shipment timing that we talked about. You know, the EOP for combines is both a little more slowly this year than it has in prior years, and that resulted in a little bit lower ramp-up for us in terms of combine shipments in Q1. I think that's reflective of the inventory levels, you know, that you're seeing for us. We talk about 11% inventory to sales, you know, for combines as it pulls out the quarter, that's a little lower than normal and really reflective of some of those delayed shipments. You know, as you look to the full year, you know, I think what gives us confidence is, as you know, you know, the combine early order program typically represents, you know, 90% plus of what we're going to build in a year. So we have those orders locked in. It's just a matter of when we laid those in the schedules, and so, you know, pretty good visibility there. Again, it was just a timing issue in Q1.