Deere Q4 2024 Earnings Call Summary and Insights

Deere (DE 8.04%)
Q4 2024 Earnings Call
Nov 21, 2024, 10:00 a.m. ET

Key Highlights of the Earnings Call:

• Prepared Remarks Overview
• Interactive Questions and Answers Session
• List of Call Participants

Prepared Remarks Overview:

Operator

Good morning and welcome to the Deere & Company fourth quarter earnings conference call. For the duration of today’s call, all lines have been muted for listening purposes only until we enter the question-and-answer segment. It is my pleasure to introduce Mr. Josh Beal, director of investor relations, to kick off the call.

Thank you, sir. You may proceed.

Josh Beal — Director, Investor Relations

Hello everyone, and thank you for joining us for today’s earnings call. I am pleased to have alongside me several key executives, including John May, our chairman and chief executive officer; Josh Jepsen, our chief financial officer; Cory Reed, president of the worldwide agriculture and turf division, production and precision ag for the Americas and Australia; and Josh Rohleder, our manager of investor communications. During this call, we will provide detailed insights into Deere’s fourth-quarter earnings, discuss market trends, and share our outlook for fiscal 2025.

We’ll also hold a session for your questions following our remarks. Please note that slides are available to enhance your understanding of the call; they can be accessed on our website at johndeere.com/earnings. I would like to remind everyone that this call is being broadcast live on the internet and recorded for future reference. Any unauthorized use, recording, or distribution of this copyrighted material without the express written consent of Deere is strictly prohibited. Participants in today’s call, including during the Q&A, consent to their likeness and remarks being stored for future use as part of this earnings call. This call may contain forward-looking statements regarding our business plans and projections that could be influenced by various uncertainties, risks, and changes in circumstances that are hard to predict.

For additional details regarding factors that may cause actual results to diverge materially from our expectations, please refer to our most recent Form 8-K and risk factors detailed in our annual Form 10-K, as updated by subsequent reports filed with the Securities and Exchange Commission. Furthermore, this call may include financial metrics that do not conform to Generally Accepted Accounting Principles (GAAP). Further information about these metrics, including reconciliations to comparable GAAP measures, can be found in the press release and on our website under the quarterly earnings and events section. I will now turn the call over to Josh Rohleder.

Josh Rohleder — Manager, Investor Communications

Good morning, and happy early holidays to all attendees. We are pleased to report that John Deere concluded the year with a fourth quarter that exceeded expectations, showcasing a remarkable 13.1% margin for equipment operations. Over the course of the full year, our operating margins reached 18.2%, which reflects our strategic and proactive management amid a challenging and dynamic market landscape. Our impressive ability to generate over $6.9 billion in operating cash flow from equipment operations, even while shipment volumes remained below midcycle levels, underscores the structural enhancements we have implemented, allowing us to continuously reinvest in our business and return significant cash to our shareholders.

Looking forward to fiscal 2025, we anticipate a continued contraction in global agricultural markets, which will likely keep demand for ag and turf equipment at or below the lowest levels experienced in previous cycles. Moreover, demand in the construction and forestry markets is also expected to decline, as strong end-market conditions are countered by ongoing uncertainties in equipment purchases. Slide 3 presents the results for fiscal year 2024, where net sales and revenues decreased by 16% to $51.7 billion, with net sales for equipment operations falling 19% to $44.8 billion.

Net income attributed to Deere & Company was reported at $7.1 billion, translating to $25.62 per diluted share. Moving to the fourth quarter results as shown on Slide 4, net sales and revenues declined by 28% to $11.1 billion, while net sales from equipment operations were down 33% to $9.3 billion. Net income attributable to Deere & Company decreased to $1.2 billion, equating to $4.55 per diluted share.

In examining our individual business segments on Slide 5, we will delve into the fourth quarter results, beginning with our production and precision ag business. This segment experienced net sales totaling $4.305 billion, down 38% year-over-year, primarily due to reduced shipment volumes. Price realization remained flat, aligning with expectations, while unfavorable currency translation negatively impacted results by about 1 percentage point.

Operating profit for this segment stood at $657 million, yielding a 15.3% operating margin. The decline in operating profit was mainly attributed to the reduced shipment volumes and sales mix, although this was partially mitigated by decreased production costs. As a reminder, we had anticipated tougher year-over-year comparisons for the production and precision ag segment in the fourth quarter, influenced by extended factory shutdown days related to planned underproduction at several facilities. Transitioning to small ag and turf on Slide 6.

Net sales for this segment saw a 25% decline, totaling $2.306 billion in the fourth quarter, largely due to lower shipment volumes, although this was somewhat counterbalanced by positive price realization, which increased by approximately 2.5 percentage points. Currency effects were also beneficial, contributing about half a point.

During the quarter, operating profit fell year-over-year to $234 million, resulting in a 10.1% operating margin. The decline was mainly due to diminished shipment volumes and an unfavorable sales mix, compounded by special nonrecurring items. However, these factors were partially offset by favorable price realization and reduced warranty expenses. Slide 7 elaborates on our fiscal year 2025 outlook for the ag and turf industry.

We project that industry sales of large ag equipment in the U.S. and Canada will decrease by approximately 30% as demand continues to soften due to weak farm fundamentals, high interest rates, elevated used inventory levels, and short-term liquidity issues faced by farmers as we approach the next growing season. In the small ag and turf sectors, industry demand is estimated to decline around 10% in both the U.S. and Canada.

The dairy and livestock segment is expected to maintain strong profitability as elevated prices for protein and hay are bolstered by low input feed costs. However, demand remains constrained in the turf and compact utility tractor markets, where stagnant single-family home sales and reduced spending on home improvements due to high interest rates are impacting growth. In Europe, we foresee a decrease in the industry ranging between 5% and 10% as farm fundamentals continue to deteriorate.

Persisting challenges include unfavorable weather resulting in reduced yields, declining regional commodity prices, and consistently high input costs. The convergence of these issues, alongside elevated interest rates, is likely to sustain low equipment demand throughout 2025. In South America, we predict that sales of tractors and combines will remain relatively stable as the challenges from 2024 stabilize but continue to persist. Looking ahead to 2025, while crop prices are expected to fall, input costs are also declining, with yields improving as drought concerns lessen.

Additionally, the expansion of soybean acreage contributes to an overall positive sentiment, although this has yet to translate into increased equipment demand. The recent strengthening of the U.S. dollar against the Brazilian real provides further profitability benefits for farmers, as commodity prices are typically quoted in dollars while many input costs are in reals.

In other parts of South America, strong yields are offset by low commodity prices and high-interest rates. However, Argentina is experiencing favorable conditions as government measures stabilize the currency, aiding the recovery of the agricultural sector. Lastly, we expect industry sales in Asia to see a slight decrease, while the adoption of foundational technology and improving agricultural fundamentals in India will provide moderate demand support. Moving to segment forecasts on Slide 8.

For fiscal year 2025, we anticipate production and precision ag net sales to decrease by approximately 15%. This forecast includes an assumption of roughly 1 percentage point of positive price realization, alongside half a point of negative currency translation. The segment’s operating margin is projected to range between 17% and 18%, reflecting strong execution amid significant geographic and product mix challenges. Slide 9 provides insights into our expectations for the small ag and turf segment.

We project net sales for fiscal year 2025 to decline around 10%. This estimate incorporates about half a point of positive price realization, as well as half a point of positive currency translation. The operating margin for this segment is forecasted to be between 13% and 14%. Now, transitioning to construction and forestry on Slide 10.

Net sales for the quarter saw a 29% year-over-year decline, totaling $2.664 billion, primarily due to lower shipment volumes. Both price realization and currency translation showed slight positive contributions in the quarter, each less than half a point. Operating profit decreased to $328 million, resulting in a 12.3% operating margin. The reduction in shipment volumes and sales mix was partially offset by lower production costs and proceeds from special nonrecurring items.

Slide 11 outlines our industry outlook for construction and forestry in 2025. We expect sales of earthmoving equipment in the U.S. and Canada to decline around 10%, while compact construction equipment is projected to decrease by 5%.

The demand dynamics across the construction and compact construction equipment sectors are expected to be tempered by mixed end-market conditions in 2025. While modest growth in single-family housing starts and ongoing U.S. government infrastructure spending provides some support, this is outweighed by slowdowns in multifamily housing development, continued softness in nonresidential building investments, and muted capital expenditure spending in the oil and gas sector. Additional headwinds, including historically low levels of earthmoving rental fleet replenishment and elevated used inventory levels, will further pressure equipment sales as market uncertainties persist into the beginning of fiscal 2025.

Global forestry markets are anticipated to be flat to down by 5%, as previously challenged global markets stabilize at low demand levels in 2025. The global roadbuilding equipment market is forecasted to remain roughly flat, as modest recovery in Europe offsets slight slowdowns in other regions. Continuing with our C&F segment outlook on Slide 12, we predict that net sales for 2025 will decline between 10% and 15%.

Our net sales guidance for the year factors in about 1 percentage point of positive price realization and flat currency translation. The operating margin for the segment is projected to range between 11.5% and 12.5%. Now, moving to our financial services operations on Slide 13.

Worldwide financial services net income attributable to Deere & Company was $173 million for the fourth quarter. The year-over-year decline was primarily due to a higher provision for credit losses, though this was partially offset by income earned on a higher average portfolio balance, a reduction in derivative valuation adjustments, and lower selling, administrative, and general expenses. Results were also adversely impacted by an increased valuation allowance on assets held for sale of Banco John Deere. For fiscal year 2025, the net income forecast stands at $750 million. This projection is expected to be higher year-over-year, primarily due to a lower provision for credit losses, albeit countered by less favorable financing spreads.

Additionally, the results for 2024 were influenced by the valuation allowance on assets held for sale of Banco John Deere. Slide 14 concludes with our guidance on net income, effective tax rate, and operating cash flow. For fiscal year 2025, our net income forecast is expected to range between $5 billion and $5.5 billion, indicating significant structural improvements compared to previous cycles. Furthermore, our guidance includes an effective tax rate of between 23% and 25%.

Lastly, cash flow from equipment operations is projected to be between $4.5 billion and $5.5 billion. It is crucial to emphasize that our implied guidance of around $19 in earnings per share is at sub-trough levels, with anticipated sales for fiscal year 2025 falling below 80% of midcycle, highlighting our commitment to operational excellence as we focus on proactive management to deliver customer value across all aspects of our business cycle. This concludes our formal remarks. We will now discuss a few key topics before opening the lines for questions.

Before we dive deeper into these details, John, would you like to share your reflections on the year?

John C. May — Chairman and Chief Executive Officer

Thank you, Josh. The year 2024 was marked by our resilience amid significant challenges. The downturn in global markets presented our organization with an opportunity to highlight the structural enhancements we’ve implemented since the introduction of the Smart Industrial operating model in 2020.

Starting with our financial performance, we consistently demonstrated improved results throughout the business cycle. Notably, our margins for 2024 surpassed 18%, reflecting nearly 700 basis points of improvement since 2020, which was our last comparable position in the cycle. This margin expansion has allowed us to reinvest record amounts back into the business this year. More importantly, I am immensely proud of the resilience exhibited by our John Deere team this year.

The speed at which market conditions deteriorated tested our discipline and agility. However, in the face of these challenges, we emerged with a renewed focus on our mission to assist our customers in achieving more with less. Our dedicated teams across factories, engineering centers, dealerships, branches, offices, and in the field exhibited remarkable determination as we made proactive decisions informed by valuable lessons learned from the past. We maintained our customer-centric approach, ensuring we not only retained but actively sought out the best talent with the skills and experience necessary to address the significant challenges faced by our customers.

This year also ushered in a range of innovative solutions as we advanced our initiatives on several of our Leap Ambitions, including connected machines, engaged acres, and autonomous operations. Our flagship Sense & Act technology, See & Spray, covered an impressive 1 million acres this year alone, resulting in an average reduction of nearly 60% in herbicide usage. This solution, along with numerous other technologies we’ve developed, has not only had a positive impact on our customers’ operations but also on the environment. And this is just the beginning.

Our employees are driven by a higher purpose that goes beyond simply solving problems or completing tasks. At the end of the day, we can confidently reflect on the fact that our products are making a significant difference for our customers and the world at large.

Josh Rohleder — Manager, Investor Communications

Thank you, John. I would like to continue our discussion about the past year before we delve into our 2025 outlook. The previous fiscal year represented a highly dynamic market, characterized by notable demand declines following peak levels in 2023. Nevertheless, as you pointed out, John, we concluded the year with over $7 billion in net income.

Josh Beal, could you provide us with a breakdown of what transpired during the quarter and throughout the fiscal year?

Josh Beal — Director, Investor Relations

Absolutely, Josh, and it’s best to start by discussing the quarter, which exceeded our expectations. We aimed for field inventory reductions by scaling back production and shipments across our global facilities. Large ag retail sales of new equipment aligned closely with our forecasts across most geographies and product lines, particularly in North America.

Consequently, field inventory of new equipment, especially North American tractors and combines, ended the year at remarkably low levels, both in absolute terms and relative to sales. We managed this intentional underproduction while effectively controlling costs, resulting in year-over-year improvements in production costs and reductions in selling, administrative, and general expenses as well as research and development expenses. Additionally, we successfully minimized in-process inventory levels, which significantly contributed to our cash flow performance relative to our third-quarter guidance. Turning to the full year.

As John previously highlighted, our performance demonstrated resilience in the face of challenging market conditions, which necessitated difficult operational decisions that required significant flexibility and adaptability from all stakeholders: our employees, dealers, and suppliers. Consequently, we successfully navigated operations to lower levels of demand this year. Production costs for the year came in favorably, primarily due to improvements in material and freight costs across all business segments. Despite weaker sales, we remained committed to our investments in the business, maintaining record levels of research and development spending.

We acknowledge that many of the new product introductions this year are a result of investments made during the previous cycle, and we will continue to prioritize these value-creating investments going forward. Overall, the decisive actions we undertook this year resulted in a solid finish. We closed fiscal year 2024 with strong returns while successfully reducing new field inventory levels, effectively positioning the business to execute in what are expected to be challenging market conditions in 2025.

Josh Rohleder — Manager, Investor Communications

Thank you, Josh. That provides valuable insight into 2024. Now, let’s shift our focus toward the fiscal 2025 outlook for agriculture and turf. With commodity prices declining, albeit partially offset by bumper crop yields across the U.S., farmer margins are tightening. Our guidance suggests a challenging year ahead for farmers in 2025. Josh, could you help us break down the current landscape and what to expect by segment and geography?

Josh Beal — Director, Investor Relations

Certainly. We anticipate that the upcoming fiscal year will be dynamic across the agricultural sector. Let’s begin with large ag in North America. We foretell that farm fundamentals will remain depressed globally in 2025, further squeezing farm profitability.

Given the robust yields from this year’s U.S. harvest, we’ve witnessed a rebuilding of global stocks, with the USDA forecasting global stocks to reach the fourth-highest levels in history. Anticipated record production in South America, particularly in Brazil and Argentina, is likely to exert additional pressure on global commodity prices in 2025. With input costs projected to remain relatively stable year-over-year, net incomes for farmers will continue to be under stress.

Conversely, dairy and livestock margins remain strong, supported by significantly lower input feed costs and positive market demand. Nevertheless, machinery demand in this segment has not kept pace with margin gains and positive sentiment, primarily due to high interest rates and slow herd expansion, which pose ongoing challenges. Broadly, despite significant macro headwinds, farm balance sheets remain robust, with land values supporting healthy debt-to-equity ratios. However, as cash receipts have slowed and credit conditions tighten, many growers are increasingly focused on their operational liquidity.

As we examine the potential impact on equipment sales in the coming year, it is critical to highlight the diverse dynamics across each of our primary regions. During the previous year, our goal for 2024 was to strategically underproduce on a global scale for large ag retail by a high single digit. In North American large ag, we successfully achieved our underproduction goals for the fourth quarter, attaining targeted inventory levels for most key products. For instance, new combine inventories decreased by mid-teens year-over-year on a unit basis, concluding the year at a 4% inventory-to-sales ratio, consistent with 2023 year-end levels.

In the case of large tractors with 220 horsepower and above, we reduced field inventory by nearly 50% year-over-year, resulting in a year-end inventory-to-sales ratio of 10%, a 500-basis-point reduction compared to previous years. Over the past decade, inventory-to-sales ratios for 220-horsepower tractors for Deere have only been this low on two occasions: in April 2014, just before the last down cycle, and in January 2022, due to supply constraints post-pandemic. Given the inventory reductions we’ve achieved, we anticipate producing in line with retail demand in North America during 2025. We are encouraged by the progress made on this front, particularly as industry inventory-to-sales ratios for new equipment are more than double Deere’s ratios for both 100-horsepower and above tractors and combines.

Despite our proactive inventory management, macroeconomic factors continue to challenge equipment demand in 2025, resulting in subdued early order program results. As a reminder, during our last earnings call in August, we were partway through early order programs for sprayers and planters in North America, and our combine early order program had just commenced. As an update, our sprayer program concluded down from 2024, declining in accordance with our industry guidance for North American large ag, which sets production levels for sprayers below midcycle. Conversely, planters experienced a more pronounced decline, closing with a year-over-year reduction greater than what we saw in sprayers.

Finally, combines will complete the second of three early order program phases next week. When this program closes at the end of January, we expect the product line to reflect a decline in a range similar to the reduction observed in sprayers. North American tractors are managed on a rolling basis, with order books for row crop tractors full through the middle of the second quarter. We expect demand for row crop tractors in 2025 to decline less than the overall industry forecast, with Deere’s shipments anticipated to decrease even less as production levels are adjusted to align with retail demand following this year’s high single-digit underproduction for row crop tractors.

In contrast, demand for four-wheel-drive tractors in 2025 is expected to experience a more significant year-over-year decline compared to the industry guidance. However, it is important to highlight that this product line witnessed increased demand in 2024. Notably, our order books for our newest tractor, the high-horsepower 9RX, which was introduced last February at Commodity Classic, are currently full through the middle of the fourth quarter, which underscores the value we are bringing to the market and the significance of continued investment in our core product lines.</