Deere stock is at critical resistance. Why did DE hit a new high?
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Operator
It’s. Good morning and welcome to Deere & Company First Quarter Earnings Conference call. Your lines have been placed in. Listen only until the question and answer session of today’s conference. I would now like to turn the call over to Mr. Josh Beal, Director of Investor Relations. Thank you. You may begin.
Josh Beal (Director of Investor Relations)
Welcome and thank you for joining us on today’s call. Joining me on the call today are Josh Jepson, Chief Financial Officer Ryan Campbell, President, Worldwide Construction, Forestry and Power Systems and Chris Seibert, Manager, Investor Communications. Today we’ll take a closer look at Deere’s first quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2026. After that, we’ll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our [email protected] Earnings First, a reminder. This call is broadcast live on the Internet and recorded for future transmission and use by Deere Company. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q and A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward looking statements concerning the Company’s plans and projections for the future that are subject to uncertainties, risks, changes in circumstances and other factors that are difficult to predict. Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8K risk factors in the annual Form 10K, as updated by reports filed with the securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America. Gaap. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our [email protected] Earnings under quarterly earnings and events. I will now turn the call over to Chris Seibert.
Chris Seibert (Investor Communications)
Good morning and thank you for joining us today. John Deere completed the first quarter with a 5.9% operating margin for the equipment operations. Our results reflect the strength and resilience of a diversified portfolio spanning multiple end markets and geographies. All business segments delivered higher net sales year over year, with both Small Ag and turf and Construction Forestry Top Line growing by over 20%. Our results for the quarter exceeded our forecast, driven by shipping volumes that were ahead of our initial plan. Importantly, over the course of the quarter we saw continued strengthening of Our order books across several product lines, most notably in small ag and turf as well as construction in earthmoving. Double digit year over year growth in retail settlements and a growing order bank have prompted us to increase our industry outlooks for both construction and and compact construction equipment in North America. In small ag, order activity for midsize tractors supporting the dairy and livestock production system has remained solid while order velocity for North American turf equipment and compact utility tractors has increased. Global large ag fundamentals, while still challenged, were largely stable over the quarter. This stability has enabled a modest improvement in our net sales forecast for North American large AG this year as our combine early order program finished better than expected and large tractor order activity has increased. These improvements have helped us to offset softer projections for the South American ag equipment market in 2026. The developments over the course of the past three months have strengthened our belief that 2026 marks the bottom of the current cycle as we project mid single digit net sales growth for the equipment operations this fiscal year. Slide 3 starts with the results for the first quarter, net sales and revenues were up 13% to 9.611 billion while net sales for the equipment operations were up 18% to 8.001 billion. Net income attributable to Deere & Company Was 656 million or $2.42 per diluted share. Turning to our individual segments, we begin with the production and precision ag business on slide 4. Net sales of 3.163 billion were up 3% compared to the first quarter last year primarily due to positive effects of foreign currency translation. Price realization was roughly flat. Price realization in North America was positive though was offset by additional incentives for the South American market. Currency translation was positive by nearly 4 points. Operating profit was 139 million resulting in a 4.4% operating margin for the segment. The year over year decrease was primarily due to higher tariffs, unfavorable sales mix and higher warranty expenses. Moving on to Small Ag and Turf on Slide 5, net sales were up 24% totaling 2.168 billion in the first quarter because of higher shipment volumes and positive effects of foreign currency translation. Price realization was positive by 2 points. Currency translation was also positive by just under 2.5 points. Operating profit increased year over year to 196 million resulting in a 9% operating margin. The increase was primarily due to higher shipment volumes, favorable sales mix and price realization partially offset by higher tariffs. Slide 6 gives our industry outlook for ag and turf markets globally. We continue to expect the large ag equipment industry in the US and Canada to decline 15 to 20% this year. However, we are seeing encouraging developments that should provide stability to this segment in the near term while also improving the setup for return to growth. While global row crop production remains strong, global production remains strong. Robust demand for commodities and a normalization of trade flows are providing support for prices at current levels which are above the lows that growers experienced last summer. Additionally, government programs are supporting farmer liquidity in the short term. Ongoing improvement in the used inventory market is providing a better environment for machine replacement while the age of the fleet continues to grow. Additionally, proposed government policy actions, including additional support for biofuels, provide potential tailwinds for growth for small ag and Turf in the US and Canada, industry demand estimates remain flat to up 5%. The dairy and livestock sector remains profitable due to strong beef prices, while the turf market is seeing a modest return to growth as that sector normalizes after several years of declines. Moving to Europe, the industry is still projected to be flat to up 5%. The underlying fundamentals of the ag sector are largely unchanged with no near term material impact expected from newly negotiated EU trade agreements or recent declines in milk prices. Interest rates are steady, long term financing costs are manageable and the region continues to show resilience across key arable markets. In South America, industry sales of tractors and combines are now expected to be down approximately 5% driven by the Brazilian market where subdued commodity prices, high interest rate and a stronger REAI are putting pressure on producer margins. Industry sales in Asia are now projected to be flat to down 5%. The Indian market is now expected to only be down slightly from the strong level seen in 2025. Next, our segment forecasts begin on Slide 7 for production and precision ag, net sales are still forecasted to be down between 5 and 10% for the full year. The forecast assumes roughly 1.5 points of positive price realization and about 3 points of positive currency translation. For the segment’s operating margin. Our full year forecast remains between 11 and 13%. Slide 8 shows our forecast for the small egg and turf segment. We now expect net sales to be up about 15%. This includes two points of positive price realization as well as two points of positive currency translation. The segment’s operating margin guide is now between 13.5% and 15%. Shifting now to construction forestry. On slide 9, net sales for the quarter increased roughly 34% year over year to 2.67 billion due to higher shipment volumes and positive effects of foreign currency translation. Price realization was negative by just under half a point. Currency translation was positive by 3.5 points. Operating profit of 137 million more than doubled year over year, resulting in a 5.1% operating margin due primarily to favorable shipment volumes as well as production efficiencies partially offset by higher tariffs. Slide 10 describes our construction forestry industry outlook. Industry sales for both construction equipment and compact construction equipment in the US and Canada are now expected to be up around 5% year over year. Construction markets remain solid, supported by US government infrastructure spending, declining interest rates, strong rental demand and data center construction starts. Our year to date retail settlement activity is running ahead of our expectations and our order books continue to grow. Global forestry markets are still expected to remain flat. Global road building markets are now expected to be up around 5%, driven by market increases in both North America and Europe. Moving to the CNF segment outlook on slide 112026 net sales are now forecasted to be up around 15%. Our net sales guidance for the year includes about two and a half points of positive price realization and just over two points of positive currency translation. Our projection for the segment’s operating margin also increased and is now estimated to be between 9 and 11%. Now transitioning to our financial services operations. On slide 12 worldwide financial services net income attributable to Deere and Company in the first quarter was 244 million. The year over year increase was mainly due to favorable financing spreads and a lower provision for credit losses, partially offset by favorable special items recorded in the first quarter last year. For fiscal year 2026, our outlook increased to $840 million, primarily driven by lower provision for credit losses. Finally, slide 13 outlines our guidance for net income, effective tax rate and operating cash flow for fiscal year 26. Our updated outlook for net income is now between 4.5 and 5 billion. Next, our guidance continues to incorporate an effective tax rate between 25 and 27%. And lastly, projections for cash flow from the equipment operations increased by 500 million at both ends of our range and is now expected to be between 4.5 and 5.5 billion. This concludes our formal comments. We’ll now shift to a few topics specific to the quarter to start. Let’s review these results. This quarter, net sales increased by about 18% year over year and margins were just under 6%. Although the first quarter of fiscal year 25 had an easier top line compare, given last year’s underproduction in small lake and turf and construction forestry, it still performed ahead of our plan. Josh Beal could you explain what happened this quarter and how it affected our full Year outlook?
Josh Beal (Director of Investor Relations)
Yeah, absolutely Chris, let’s start with our expectations for the quarter. Overall, we were projecting double digit net sales growth in the equipment operations driven by estimates for over 20% growth in both small ag and construction and forestry, while large AG sales were expected to be flat year over year. Despite the projected net sales increase, we were expecting lower equipment operations operating margin year over year due to incremental tariff expenses and an unfavorable product and regional mix in large AG across all three businesses. Business units we executed ahead of our plan for the quarter and as a result our performance reflects better top line and margins than originally forecasted. Better than expected Shipment volume was the primary driver of both the top line and margin beat in PPA shipments of North America. Large tractors were ahead of plan while Construction and Forestry benefited from higher road building sales in Europe and North America as well as ahead of planned shipments of both construction and compact construction equipment in North America. On the pricing front, Construction and Forestry pricing was slightly negative this quarter, although competitive price pressures have started to show signs of easing. The results from the quarter in Construction and Forestry had a slight impact on the timing of our expected price realization in the segment and as a result we’ve revised our full year forecast down by half a point. PPA pricing was neutral during the quarter, primarily due to discounts implemented in South America responding to foreign exchange movements as well as targeted field inventory reductions. Our PPA price guidance for the full year remains unchanged and we still expect positive full year price realization in South America. Foreign exchange was also impactful in the quarter. The US Dollar was weaker year over year against several relevant currencies for Deere, particularly the Euro and Brazilian Real. The translation impacts drove year over year net sales gains for all three business units transitioning to cost management. Excluding tariffs, production costs were lower year over year for all business segments in the first quarter. This was largely attributable to operational efficiencies from higher production and disciplined overhead spending. Tariffs for the year are still projected at around $1.2 billion as mitigation on Section 232. Steel tariffs and some relief in India have been offset by volume growth. As you mentioned in your opening comments, our full year industry demand outlooks for most markets improved over the course of the quarter. We maintained our net sales guidance for PPA even though South America softened due to some incremental improvement in North America and we increased the net sales ranges for T and Construction and Forestry by five points. That resulted in higher projected margin ranges for small AG&Construction and Forestry resulting in an increased net income forecast of 4.5 to 5 billion doll.
Chris Seibert (Investor Communications)
Perfect. Thanks for that breakdown, Josh. It is encouraging to see that our teams continue to execute and focus on what we can control while also seeing some pickup in end market demand. Now let’s take a moment to talk about the broad ag industry. Since late last year, we’ve seen several supportive developments in the U.S. market, including the recently announced 12 billion Farmer Bridge Assistance Program Assistance Program and renewed purchase commitments for U.S. commodities. Can you add some additional color to what this could mean for US Growers?
Josh Beal (Director of Investor Relations)
Sure, Chris. I’ll start by reiterating a couple comments on the global ag economy that you mentioned in your opening Global crop production remains strong, but so does global demand at current commodity price levels. Producer margins remain pressured in many geographies. Specifically for the U.S. the USDA just updated their 2026 forecast for net cash farm income. While 2026 U.S. net cash farm income is forecasted to be up around 3% from 2025, much of this increase is being driven by more government payments. Crop cash receipt receipts are expected to be up slightly this year, but expenses are projected to increase as well. Given this setup, we continue to anticipate a challenging environment for many row crop farmers. However, as you mentioned, we’re starting to see some stability for producers as China has resumed purchasing U.S. soybeans and the recently approved government support program looks to provide some near term liquidity. Additionally, strong farmland values are keeping debt ratios low despite the lower margin backdrop. Notably, the US Fleet age is high and continues to get older as customers put more hours on their equipment. With the stabilization that we’re seeing in US Ag fundamentals along with an improving used market, our expectation is that we’ll start to see some replacement demand return.
Josh Jepsen (Chief Financial Officer)
This is Jepsen maybe one key point to reinforce the government payment should continue to mitigate downside risks for for farmers balance sheets acting as a bridge in an environment where crop cash receipts are under pressure. We believe that future policies around renewable fuels and additional export opportunities should drive demand and provide continued stability.
Chris Seibert (Investor Communications)
Great. Thank you both. With the developments over the quarter in North America, it appears that we’ve moved past peak uncertainty that the market is stabilizing. Building off that, could you also share an update regarding global ag inventories and auto books?
Josh Beal (Director of Investor Relations)
Yeah, definitely. Let’s start with large ag in North America. On the new inventory side, we continue to be in a great position and hold on to our plan to produce in line with retail demand in fiscal 2026. We also continue to make progress in North American used inventory. We saw a typical seasonal increase in used deer combines during our first quarter. However, current inventory levels for deer combines remain about 15% below their peak in March 2024 with model year distribution at a normal mix, Deere high horsepower tractor units were down mid single digits in our first quarter and have declined by over 10% from their March 2025 peak. Late Model mix is improving too. It’s notable that while Deere While total Deere high horsepower tractors are down over 10% from March model year 22 and model year 23 ADAR tractors are down more than 40% in that same time period. Just this past quarter alone, model year 22 and model year 23 ADARs were were down over 20% sequentially with model year 24 ADARs also declining by over 10%. While continued reduction in used tractors remains a focus, we’re encouraged by the progress that we’re seeing. At the same time, large tractor order velocity for the North American market has picked up and our rolling order books now provide visibility into the fourth quarter. We also just recently took our last calls for North American combine orders for the year, and while we still expected overall North American large ag industry to be down 15 to 20% this year, combines will be down less than that range. Similar to North America, we feel good about our new inventory positions in both Europe and South America. The one exception is combines in Brazil where we’re a bit higher than we want to be. We’ll under produce retail for Brazilian combines in our second and third quarters to bring those inventory levels down. Despite being higher than our target, our current inventory to sales ratio for combines is still significantly lower than what we see with competitors. As far as order visibility, European tractor order books are currently four to five months out while South American orders are full through our second quarter. Turning to small Ag and turf in North America, last year’s underproduction resulted in healthy beginning inventory levels for this segment that remain in place today. For reference, current new field inventory for both tractor horsepower categories in this segment, that’s the less than 100 horsepower category and the 100 to 220 horsepower category are each about 40% lower year over year. Our ability to maintain those lower inventory levels reinforces our plan to build in line with retail demand and small AG this year, and commitment to that plan has been further supported by strength in order activity in the first quarter.
Josh Jepsen (Chief Financial Officer)
This is Jepsen, maybe share an additional perspective following Beal’s comments. Our channel has consistently worked to reduce used inventory levels and our deliberate approach to managing production and inventories set us up favorably. Both this year and into the next. With growing demand across various other markets and segments, we feel good about how we’re positioned to ...
