Deere & Company Q3 2023 Earnings Results & Report

Deere & Company EPS Results

• Actual EPS: $10.20
• Consensus EPS: $8.22
• Beat/Miss: Beat by +$1.98
• One Year Ago EPS: $6.16
• EPS Beat Rate: 7 of last 8 quarters

Deere & Company Revenue Results

• Actual Revenue: $14.28 billion
• Expected Revenue: $14.14 billion
• Beat/Miss: Beat by +$140.90 million
• YoY Revenue Growth: +9.90%

Deere & Company (NYSE:DE), founded by blacksmith John Deere in 1837, is a global manufacturer of agricultural, construction, forestry and turf-care equipment. The company is headquartered in Moline, Illinois, and operates under the John Deere brand.

Its products include tractors, combines, planters, sprayers, harvesting equipment, loaders, excavators, motor graders, forestry machines, mowers and compact utility equipment. Deere also provides replacement parts, equipment support, financing and technology-enabled solutions designed to improve machine productivity, automation and precision in farming and other industries.

Deere serves customers through dealerships and operations across North America, Latin America, Europe and other international markets. Its business is organized primarily around Production & Precision Agriculture, Small Agriculture & Turf, and Construction & Forestry. John C. May serves as the company’s chairman and chief executive officer.

Deere & Company Q3 2023 Earnings Call Transcript

Key Takeaways

• Deere reported 10% year-over-year net sales growth in equipment operations to $14.3 billion and delivered a 22.6% operating margin in Q3, driving net income of $2.98 billion ($10.20/share) aided by a favorable Brazilian tax ruling.
• Full-year net income guidance was raised by $500 million to $9.75–$10.00 billion, and equipment operations cash flow is now projected at $10.5–$11.0 billion, while $5.5 billion has been returned to shareholders YTD through dividends and share buybacks.
• Production & Precision Ag net sales rose 12% with a 26.2% margin, and global large ag industry sales are expected to climb ~10% in FY 23 on healthy farm economics, tight grain stocks and a full order book.
• Construction & Forestry net sales grew 14% in Q3 with a 19.1% margin, and full-year C&F sales are guided to increase 15–20% with margins of 18.5–19.5% powered by infrastructure spending and a six-month rolling order backlog.
• Supply chain improvements enabled factories to meet production schedules, cut premium freight costs by nearly 50% YTD and lower production cost inflation more than anticipated, underpinning further margin expansion.

Presentation

[Operator]

Morning, welcome to Deere & Company's third quarter earnings conference call. Your lines have been placed on listen-only until the question-and-answer session of today's conference. I would now like to turn the call over to Mr. Brent Norwood, Director of Investor Relations. Thank you, sir. You may begin.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Hello. Also on the call today are Josh Jepsen, Chief Financial Officer, and Josh Rohleder, Manager of Investor Communications. Today, we'll take a closer look at Deere's third quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2023. 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 website at johndeere.com/earnings. First, a reminder, this call is being 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.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Participants in the call, including the Q&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 8-K, Risk Factors in the Annual Form 10-K, 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 website at johndeere.com/earnings under Quarterly Earnings and Events.

[Brent Norwood, Director of Investor Relations at Deere & Company]

I will now turn the call over to Josh Rohleder.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Good morning. Thank you all for joining. John Deere finished the third quarter with another strong performance, resulting in 22.6% margin for equipment operations. Performance exceeded expectations as a result of sustained demand for both farm and construction equipment, as well as sound operational execution across all business units. Ag fundamentals continue to remain healthy, with a full order book and positive customer sentiment supporting a strong finish to fiscal year 2023. Meanwhile, Construction & Forestry remains sold out for the remainder of the fiscal year, with robust shipments driven by strong retail demand and rental re-fleeting. Slide 3 begins with results for the third quarter. Net sales and revenues were up 12% to $15.801 billion, while net sales for the equipment operations were up 10% to $14.284 billion.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Net income attributable to Deere & Company was $2.978 billion, or $10.20 per diluted share. third quarter net income results include a $243 million tax benefit and a $47 million of associated interest income stemming from a favorable tax ruling on Brazilian VAT tax subsidies. Turning now to slide 4, let's begin our segment review with the Production & Precision Ag business. Net sales of $6.806 billion were up 12% compared to the third quarter last year, primarily due to price realization. Price realization for the quarter was positive by just under 12 points. Currency translation was also positive by approximately 1 point. Operating profit was $1.782 billion, resulting in a 26.2% operating margin for the quarter.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

The year-over-year increase was driven by favorable price realization, improved shipment volumes, and favorable sales mix, which was partially offset by higher production costs, increased SA&G and R&D spending, and unfavorable currency exchange. Shifting to Small Ag & Turf on Slide five. Net sales were up 3%, totaling $3.739 billion in the third quarter. The increase was a result of price realization, which was partially offset by lower shipment volumes. Price realization was positive by slightly over 9 points. Currency was also positive by slightly under 0.5 points. Operating profit improved year-over-year to $732 million, resulting in 19.6% operating margin. The year-over-year increase was primarily due to price realization and was partially offset by higher production costs, lower shipment volumes, and increased SA&G and R&D spending.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Slide 6 shows our industry outlook for ag and turf markets globally. In the US and Canada, we expect industry sales of l& arge ag equipment to be up approximately 10% during the fiscal year, reflecting a continuation of strong demand. Ag fundamentals remain solid, with farm net income expected to be near historical highs, even if down from last year's record levels. Drier weather conditions over the summer put some downward pressure on yields, tightening ending grain stock estimates and further supporting commodity prices. Solid order visibility provides a high level of confidence as we move into the fourth quarter. Within Small Ag & Turf, we estimate industry sales in the US and Canada to be down between 5%-10%, as strength for mid-sized equipment continues to be offset by weaker consumer-oriented products, which have been pulled down in part by high interest rates.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Mid-size tractors in the 100 to 180 horsepower range are sold out for the remainder of the year, while production cuts in the sub 40 horsepower compact tractor range have helped bring inventory levels down from April highs. Hay and forage continues to see significant year-over-year increases as production shortages in 2022 fully abate. Turning to Europe, the industry is forecasted to be flat to up 5% for fiscal year 2023. Our visibility for the rest of 2023 remains excellent, as order books are largely pre-sold at this point in the year. In South America, we expect industry sales of tractors and combines to be flat to down 5%, following a record year of equipment in 2022. Positive sentiment around record grain production in 2023 was somewhat offset by political uncertainty and a delayed government-sponsored financing plan.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

The market remains stable, and order books now provide visibility through the remainder of 2023. Industry sales in Asia are forecasted to be down moderately, as volumes in India remain subdued when compared to record levels in 2021. Moving now to segment forecasts on slide 7. For Production & Precision Ag, net sales continue to be forecasted up around 20% for the fiscal year. The forecast assumes a roughly 15 points of positive price realization for the full year and minimal currency impact. Segment operating margin for the year remains between 25%-26%, reflecting strong execution globally. Slide 8 gives our forecast for the Small Ag & Turf segment. Net sales are expected to remain up around 5% in fiscal year 2023. Guidance includes about 9 points of positive price realization and approximately 1 point of currency headwind.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

The segment's projected operating margin is now between 17%-18%, reflecting stronger than expected operational efficiency, notably in Europe. Now switching to Construction & Forestry on slide 9. Net sales for the quarter were $3.739 billion, up 14%, primarily due to price realization and higher shipment volumes. Price realization was positive by nearly 10 points, and currency translation was also positive by approximately 0.5 points. Operating profits increased year over year to $716 million, resulting in a 19.1% operating margin due to price realization and improved shipment volumes. These were partially offset by increased SA&G and R&D expenses, higher production costs, and unfavorable currency impacts. Slide 10 shows our 2023 industry outlook for Construction & Forestry.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Industry sales of earthmoving and compact construction equipment in North America are both projected to remain flat to up 5%. Demand for earthmoving and compact construction equipment remains robust, driven primarily by the early stages of infrastructure spending and rental re-fleeting. The industry has also benefited from some stabilization in housing, as well as reshoring efforts in the manufacturing sector, which are helping to offset weaknesses in office and commercial real estate. In forestry, we estimate the global industry will be flat to down 5%, with growth in Europe offset by softening markets in the US and Canada. Global road building markets are forecasted to be flat to up 5%. Strong performance in North America and emerging markets in South America and India are supporting flat fundamentals across Europe. Continuing on with the C&F segment outlook on slide 11.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Deere's Construction & Forestry 2023 net sales are now forecasted up between 15% and 20%, with results likely to converge towards the middle of that range. Our net sales guidance for the year contains about 11 points of positive price realization. Operating margin is now expected to be between 18.5%-19.5%. Next, we'll transition to our Financial Services operations on slide 12. Worldwide Financial Services net income attributable to Deere & Company in the third quarter was $216 million. The 3% year-over-year increase was due to income earned on a higher average portfolio, partially offset by less favorable financing spreads.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

For fiscal year 2023, our outlook remains at $630 million, reflecting less favorable financing spreads, the second quarter correction of the accounting treatment for financing incentives, a higher provision for credit losses, increased SA&G expenses, and lower gains on operating lease dispositions. These were partially offset by benefits from a higher average portfolio balance. Finally, slide 13 outlines our guidance for net income, effective tax rate, and operating cash flow. For fiscal year 2023, we are raising our outlook for net income by $500 million, to be between $9.75 billion and $10 billion, reflecting another quarter of strong results and continued optimism for the remainder of the year. Our guidance incorporates an updated effective tax rate between 21%-23%, which reflects the impact of a favorable tax ruling in Brazil, as mentioned earlier.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Lastly, cash flow from equipment operations is now projected to be in the range of $10.5 billion-$11 billion. This concludes our formal remarks. We will now turn to a few specific topics relevant to the quarter before opening the line for Q&A. Let's begin with Deere's performance this quarter, Brent. We had another really strong quarter with operational results coming in just ahead of our own expectations. Net sales for equipment operations were up 10% year-over-year, while operating margins came in at 22.6% for the quarter. Can you break down what went well for us this quarter?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Thanks, Josh.

[Brent Norwood, Director of Investor Relations at Deere & Company]

First, our factories ran really well in the third quarter. We saw continued progress from our supply base, enabling our operations to hit production schedules almost exactly as planned. This precise execution from our factories is evident in our top line quarterly cadence, which will show a return to normal seasonality in 2023 when compared to 2022. A return to normal seasonality is incredibly important to us because it means that we are delivering on our customer commitments to get them machines in season. Importantly, this is a real testament to our factory teams, and the real story, as you alluded to, is around margins, right?

[Brent Norwood, Director of Investor Relations at Deere & Company]

All three divisions saw lower than expected production cost inflation as our operational teams continued to deliver on cost reduction activities, having eliminated many of the inflationary and disruption-driven costs over the last couple of years. This was especially notable for Construction & Forestry, which delivered record year-to-date margin performance. In addition to exceptional near-term execution, Construction & Forestry is also benefiting from executing on our business strategy, as shown by our successful integration of Wirtgen, the dissolution of our Deere-Hitachi joint venture, and the strategic portfolio actions that have helped us focus the business. As it relates to the quarter, these results underpin our commitment to operational excellence. With supply chains continuing to improve, we have been able to reduce delinquencies and improve resiliency in our supply base.

[Brent Norwood, Director of Investor Relations at Deere & Company]

In premium freight alone, we've been able to reduce costs by nearly 50% this year when compared to last year. From a production standpoint, we've seen material cost inflation come down meaningfully throughout the year. We expect this trend to continue throughout the rest of the year. When you successfully execute on all of these different initiatives simultaneously, you get factories that fundamentally run better. Across the board, we're seeing smoother operations, leaner in-process inventories, and better ability to meet our delivery commitments, which ultimately lead to a better customer experience.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

That's great. Thanks, Brent. With operations running much more smoothly, maybe we can flip to the other side of the equation. There's been a large amount of focus on industry fundamentals, both from a construction and an ag perspective. I'd like to start with construction equipment. We've seen record amounts of government funding announced in the past few years. Alongside the IIJA and CHIPS Act, the IRA has already announced more than $130 billion worth of clean energy projects. How are construction fundamentals faring today?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yes, that's great context, Josh. You know, earthmoving industry fundamentals remain quite strong, driven by construction job growth across most sectors, and in particular, large infrastructure project spending. Coupled with continued rental industry refleeting, demand is expected to remain steady throughout the remainder of the year. While we see nice tailwinds from mega project spendings tied to government funds, most of these projects will primarily benefit 2024 and potentially even 2025, supporting an elongated cycle for construction equipment sales. In the near term, the residential housing market, while down from the highs in 2021, has stabilized despite elevated interest rates. For non-res demand, reshoring trends are driving manufacturing projects, while sectors linked to office space and apartment building construction remain quite sluggish.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Ultimately, this demand backdrop translates to a strong six-month rolling order book extending into the second quarter of 2024. Finally, while we have had some success increasing inventory from historic lows, inventory to sales ratios still remain well below target levels.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Okay, that's perfect. Near-term construction fundamentals remain resilient, and the business appears to be very well positioned on the construction side heading into 2024. Focusing now on ag fundamentals. Farmers are expected to have another strong year relative to historicals. WASDE just released its latest forecast last week, showing crop yields down and stocks tightening. How should we be thinking about farmer fundamentals, Brent?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Grain prices have definitely seen a large amount of volatility this year, equipment demand has remained strong, particularly for large ag. While down year-over-year, crop prices are forecasted to be the third highest in over a decade. In North America, farmers are projected to have another year of healthy net income. You know, additionally, farm inputs have trended back down to pre-COVID levels, providing a benefit to next year's farm margins. Finally, as grain production remains subject to ever-volatile weather patterns and adverse geopolitical events, expect stocks-to-use to remain tighter for a bit longer. In summary, ag fundamentals are still supportive in the North American market. Farmers will continue to see relatively healthy economics supported by downward trending input costs and continued constraint on grain supplies globally.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Thanks, Brent. That's great color on the U.S. and Canada. If we look outside North America, how will we see these fundamentals impacting Brazil?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah, Brazil has been a real dynamic market this year. You know, earlier in the year, we saw some of the political uncertainty and the delayed government-sponsored financing plans weigh on sentiment. You know, while profitability has been very good, some farmers generated lower than expected income due to lower grain prices, combined with a strengthening Brazilian currency relative to the U.S. dollar. You know, as such, we saw the industry forecast come in a bit, and as a result, we trimmed our equipment production some in the back half of 2023. You know, at this point, the order book extends through the fiscal year, and our pre-sold position is robust, eclipsing 90% for combines.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Hey, Brent, this is Josh Jepsen. Just to add to that, Brazil still experienced record production this year. We're seeing continued acreage expansion and a supportive government-sponsored financing programs now in place. Long term, Brazil remains a key market for us that we'll continue to invest in for the future as we accelerate precision technologies in the region.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Thanks, Josh. Now, switching back to the North American market. With order books full through the end of the year, how are new field inventory levels shaping up as we exit 2023 and begin planning for 2024?

[Brent Norwood, Director of Investor Relations at Deere & Company]

That's a great question, Josh. You know, starting from the top, all of our North America large ag production is sold out for this year. We expect ending year-over-year changes in new field inventory to be modest. In-season inventory in- increases have largely corresponded to our quarterly production schedules, which will come down in the fourth quarter. Combine inventory, for example, saw its highest level in the second quarter and is currently down from its peak. We will see that figure step down further in connection with seasonal retail activity ahead of harvest. While high horsepower tractor inventory remains sequentially flattish in the third quarter, we'll see that drop off in the, at the end of the fourth quarter, which is typically the highest retail quarter for tractors. Keep in mind that combines and high horsepower tractors are 95% plus retail sold, to customers already.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Perfect. We will expect to see inventories wind down further throughout the fourth quarter. Now, what about used inventories? We've seen those rise pretty significantly year-over-year from their historic lows last year.

[Brent Norwood, Director of Investor Relations at Deere & Company]

We have. The key phrase here is historic lows last year. When you are starting with a historically small existing inventory base, like we had in 2022, even modest changes in units will reflect large % increases. That said, our dealers have been watching used inventories very closely and have been managing them proactively. Large ag equipment has roughly 4-5 owners over its useful life in North America. For every combine or tractor we sell, a dealer will typically facilitate 3-4 additional transactions as used equipment works its way down the trade ladder. When you put it in the context of my previous comments around new inventory, it would make sense that we saw inventory levels rise during the middle part of the calendar year.

[Brent Norwood, Director of Investor Relations at Deere & Company]

However, if we look at used combines, for example, we saw a 10% decrease in used inventory since May. Also, August tends to be an important month for used inventory, so we'll watch closely how that trends. Importantly, used Deere inventory for both combines and tractors remains about 20% lower than the 7-year average on a unit basis.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

This is Josh. Maybe one thing to highlight, just the, I mean, the important takeaway here is that by year-end, we expect both new and used inventory levels to be below historic levels on a unit basis. Really positioning us well as we exit 2023 into 2024.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Perfect. How are we doing from an EOP perspective in North America?

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, at this point, we've kicked off, and in some cases, closed our early order programs for a few product lines. I want to caveat here that it is still early, and while we don't have a fully formed view, the early order programs are giving us some early data points. We launched our sprayer EOP back in May, and the program ended July 31st. We have sold out all of our model year 2024 production slots, with unit sales up double digits when compared to model year 2023 sprayers. The 2024 year-over-year increase reflects improved supply conditions, which had disproportionately limited sprayer production in 2023. Phase two of planters opened in mid-July and has just under two weeks left to go in the program.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Orders are relatively flat compared to the same point in time as the program last year, and down 5% relative to the end of last year's EOP. However, we won't have the final read on this year's early order program until the end of August. Importantly, we are seeing favorable mix towards our larger planters and higher take rates on technology. Our combine early order program just opened at the beginning of this month and has gotten off to a nice start, but it remains too early to extrapolate any data points for 2024 as the program will continue through the end of November. Likewise, our tractor order book has just opened this week for 2Q 2024, and we don't have any data points to share at this time.

[Brent Norwood, Director of Investor Relations at Deere & Company]

I would note, however, that the order book is currently full through, the calendar year 2024.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Thanks for the color on North America, Brent. Clearly too early to tell here, but it sounds like preliminary data is supportive. To round out our discussion, can we focus on Europe and discuss how things are shaping up there for next year?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah, absolutely. Actually, Josh, I just want to amend my prior statement. Tractors are sold out through calendar year 2023, not 2024. In Europe, however, order books are stretching into the 2Q of 2024, providing decent visibility, but with some early order programs having just kicked off, it remains too early to form a view on 2024 outlook. Expect markets in Europe to remain dynamic, with outlooks varying a bit between Western Europe versus Central and Eastern markets. Western markets are seeing arable cash margins, are seeing arable cash flow stabilize at supportive levels, while declining input costs will help buttress financials going into next year. Meanwhile, dairy margins may see some pressure in 2024.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Markets with close proximity to Ukraine will contend with lower commodity prices as reduced port access means grains are flowing over neighboring borders, pressuring local prices. Expect Europe to remain a dynamic market going into 2024. We'll have a more informed view as we get closer to the start of our fiscal year.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

One point I'd add to highlight in Europe is our dealer network. We continue to see higher levels of sales flowing through dealers of scale. This has driven better market share, higher rates of precision ag adoption, and overall stronger businesses for our dealers and Deere.

[Josh Rohleder, Manager of Investor Communications at Deere & Company]

Perfect. That's great insight. I now have one last question for you, Josh. Given the high level of cash flow this year, we've had an opportunity to execute on all elements of our capital allocation priorities.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Can you walk through some of the decisions we've made this year with respect to funding further investments in our business, both organic and inorganic, while at the same time returning higher levels of capital back to investors?

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, great question, Josh. This is first and foremost, a direct reflection of the strong performance this year, which is projected to yield between $10.5 billion-$11 billion in operating cash flow for the equipment operations. We're very proud of what we've been able to accomplish this year and are encouraged by our ability to both invest aggressively in the business, while at the same time, returning a significant amount of earnings to our shareholders. During the year, we've increased R&D 15%. We've pulled ahead some CapEx projects into 2023, and have still managed to simultaneously deliver over $5.5 billion to shareholders year to date through dividends and share repurchases. It further reinforces our excitement for the future and the opportunities we see ahead as we execute on the strategy, unlocking value for customers.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Thanks, Josh. Before we open up the line for questions, do you have any final thoughts you'd like to share?

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, thanks. As previously noted, the team is executing at a high level in 2023, which is evident in our results. We're actively working to reduce some of the inflationary and disruption costs experienced over the past couple of years, and we expect to see that benefit continue. Over the last decade, we've been on a journey to deliver more value per unit. This is clearly visible today through our higher revenues on lower new units, making us less dependent on new unit sales to drive increased levels of performance. As we continue to execute our strategy, this trend should accelerate even faster over the coming years. By utilizing our production systems approach and leveraging the tech stack, we can help our customers do their jobs more profitably and sustainably. That is our purpose, and we are more excited about it each day.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Thanks, Josh. Now let's open up the line for questions from our investors.

[Operator]

Thank you very much.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Now

[Operator]

To begin the Q&A portion of the call. Please press star one if you would like to ask a question. If you would like to withdraw your request, that would be star two. Again, to ask a question at this time, please press star one. Our first question is from Jerry Revich with Goldman Sachs. Sir, your line is open.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Yes. Hi, good morning, everyone. Josh, I'm wondering if we just, continue the discussion, you just touched on in terms of, higher value per unit. In the past, you folks have been able to, outgrow, ASPs by 3%-4% per year beyond price. Do you have a finer point that you can share on what that might look like in, in 2024? If you could, just touch on Precision Ag, take rates, and how they're tracking, as, part of that conversation, as well, if you don't mind.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah. Thanks, Jerry. I appreciate the question. I, I think we're seeing that continued trend, of, you know, three, four points on top of the, the, the, the inflationary price as it relates to technology, and, and the appetite we're seeing to, to continue to drive technology into the machines. You know, as we look forward and start to drive, you know, the business model shift, that may, that may change a little bit as, as we see, and build a little more recurring revenue. I think all in, we're, we're continuing to see the, the benefits, you know, on the unit economics, through what we're doing in technology and the value that we can create for customers.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah, Jerry, and, you know, as it relates to, to take rates on, on technology, obviously, we just finished up our, our sprayer early order program, and are near complete on planters. You know, those are two product lines that have a high degree of technology embedded in, in those solutions. You know, for some of those, you know, mainstay technology innovations like ExactEmerge and ExactApply, we continue to see those take rates increase, you know, mid-single digits year-over-year. I mean, both of those are really approaching high levels. I think ExactEmerge is around 60% for 2024. ExactApply is, is a little over 70%. So great progress on those. You know, other products like Combine Advisor, have almost just become standard.

[Brent Norwood, Director of Investor Relations at Deere & Company]

I think we're, we're at almost 100% take rate there, and the same is true for our Premium and Automation Activation suite for our tractors, which is almost at near 100% take rates. These things are really driving that higher average selling price that Josh talked about. And, you know, as we begin to launch some of those next-generation technologies, I think we've got opportunity to supplement the higher average selling prices with, you know, some, some, some reoccurring revenues as we get into, you know, 2025, 2026 and beyond.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, Jerry, maybe one last thing I'd add, too, that, that bodes well in terms of the direction we're headed is we're seeing growth in engaged acres, and we're seeing growth in highly engaged acres. The interaction we're seeing, the value that we can create with our digital tools and having that all in one place in the John Deere Operations Center for our customers, is continuing to, to drive value. And, and we're seeing that, that continue to aid in, in our, our, our business. Thanks, Jerry.

[Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs]

Thank you.

[Operator]

Thank you. Our next question is from Jamie Cook with Credit Suisse. Your line is now open.

[Jamie Cook, Managing Director at Credit Suisse Securities]

Hi, good morning. Congrats on a nice quarter. I guess my, my first question, you know, as it relates to it sounds like supply chain is, is, is getting better, which probably bodes well for 2024. As you're thinking about supply chain getting better and you, you know, what you're seeing so far in terms of the early order program, can you talk to your approach with, with inventory next year, both for Deere and both at the Deere dealer level, whether you think you would overproduce retail demand so dealers can get to more normalized inventory levels? I guess that's my first question.

[Jamie Cook, Managing Director at Credit Suisse Securities]

My second question, Josh, again, you know, just on the margin performance, you know, of this company, you know, can you talk to where you are with regards to reducing the volatility of your margins, you know, so that that there was, you know, a downturn coming, how resilient you are, this will be, how, how it's incremental hold in some of the internal initiatives? Thank you.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Hey, good morning, Jamie. Thanks for the question. I'll, I'll start with some comments on supply chain and what that means for our inventory position next year, and Josh can comment on the margin progress. You know, I, I think, I think you've, you've been able to see from our results that, you know, our factories ran really well in the third quarter. We've got a robust cost agenda still to come in the next year, but, you know, we're really pleased that the progress we've made on reducing production cost inflation, particularly in the third quarter. If you look at our production cost inflation numbers in Q3, I mean, they came in about half what we had originally anticipated, so that was really good work by our factory teams and our supply management teams.

[Brent Norwood, Director of Investor Relations at Deere & Company]

I think what you're seeing is, we're driving a lot of progress in terms of getting delinquencies down to, you know, almost pre-COVID levels. We're driving freight costs down. We're still seeing a little bit of pressure on, you know, some, some of the purchased components and labor and energy are up, but things are trending in the right direction, and I think we've got a really robust agenda for next year around further cost reduction in the supply base, further resiliency in the supply base, and then just designing out costs for future programs next year. All, all of that's gonna help us manage inventory.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, as we noted, for, for large ag inventory, we've been sort of below historic levels, and below target levels. Now, you know, we'll end the year relatively low as we sort of work through, sort of the fourth quarter retail sales that we would anticipate to happen. You know, that said, our, our starting position or sort of our default position, if you will, beginning any fiscal year, is always to produce in line with retail sales. You know, then we'll leave ourselves some optionality to build as we get through the selling season.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Once we have a fully formed view on, on next year, after, you know, all of our early order programs are done, and after we've made some progress on our tractor order book, you know, we'll, we'll leave ourselves a little optionality to determine, you know, what's the right level of inventory. You know, obviously, our dealers will help, help with that input as well. Again, right now, our, our default position is to produce in-line, but we'll given the exit position that we'll have, which will be really attractive from an inventory perspective, we'll leave ourselves some optionality for next year.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, Jamie, if you think about reducing volatility, I think there's, you know, there's some near-term things that we're working on. You know, Brent mentioned what we're doing as it relates to cost management, continuing to take some of the, the, the costs that we've seen through inflation and disruption out of the system. That's an important one. Continuing to drive technology into our machines, driving, as I just mentioned, you know, more value per unit from an economics point- perspective will be beneficial. There's, there's a lot of work, great work going on in terms of life cycle solutions and how we take care of our customers, through the life of, of our products, from first owner down to, you know, the fourth and fifth owner. That activity will help dampen and, and some, some cyclicality as well.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

I think the, the last one is maybe a little bit longer term, is we are building the infrastructure to drive solutions as a service for our business, in terms of how we shift business model on some of our new technologies. That's gonna help us to deliver more value to customers and importantly, to more customers and more acres more quickly. That's a focus area. Some of those, you know, we're early in the journey. Others, you know, we feel really good about what we're executing on. I think importantly, you know, structurally, we feel like we're performing from a profitability perspective, at a different level.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Our expectation is, you look at where we're performing today, you know, with volumes as they shift and move up or down, you know, we would move up or down, you know, that, that line, you know, based on where we're performing. We think this is a meaningful structural shift in profitability and one that we're gonna keep, keep working on. Thanks, Jamie.

[Jamie Cook, Managing Director at Credit Suisse Securities]

Thank you.

[Operator]

Our next question is from Tim Thein with Citigroup. Sir, your line is open.

[Timothy Thein, Managing Director at Citigroup]

All right. Great. Thanks. Good, good morning. Maybe just on, on ag, just coming back to the comments on Brazil, if you can just maybe help us frame that up a bit, just in terms of... You mentioned the, some of the, the production cuts you made or you're, I guess, targeting in, in the second half of the year. How, how do you think that, obviously, again, a lot of moving parts in a volatile market, but how do you think you end the year from an inventory perspective, in Brazil, as we go into, into 2024, and, and, and obviously, the dealer inventories? That's the question. Thank you.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Tim. Yeah, good, good morning.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, as it relates to Brazil, as we noted in our opening comments, you know, it's been a really dynamic year. I think a lot of puts and takes. You know, at this point, the order book is full for the rest of 2023, and, you know, it- managing the year has been interesting. You know, we've seen record production for corn and soy, and near record production for cotton and sugar. You know, really healthy profitability for customers there, down from 2022. Again, you know, to refer back to our opening comments, probably a little bit less than expected from our customers there. As you know, they had lower levels of forward selling this year, and I think some difficulty marketing the sizable crop that they had in 2023.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, you had a little political uncertainty and a delay in a, you know, government-sponsored financing program, that was all kind of embedded in our reduced industry guide, we went from flat to flat to downslide, and that really reflects for us, lower production in the fourth quarter. A great example of kind of how we intend to be proactive, you know, in managing, you know, a dynamic market in, in almost real time. Brazil has always operated that way. You know, we're more dynamic in terms of our order book, our pricing strategy, and how we manage production there. You know, the goal is with, you know, some of the modest production cuts that we took in the fourth quarter is that we would end the year there with inventory really at target.

[Brent Norwood, Director of Investor Relations at Deere & Company]

So that we would start the year again in that default position of an intent to produce in line with retail sales for 2024. You know, the good news is there, from a combine perspective in particular, I think we're 90 per- over 90% retail sold. We should, we should have a pretty good read on where inventory is heading for the end of the year, which should, you know, well position us for next year.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, longer term, though, you know, despite maybe some of the, the market dynamics of this year, you know, Brazil is still one of our most important growth markets, and it's gonna be a market that we're gonna continue to invest in, you know, for the long term, even while we manage, you know, production in the, in the short term. Thanks, Tim.

[Operator]

Our next question is from Steven Fisher with UBS. Your line is now open.

[Steven Fisher, Managing Director and Senior Equity Research Analyst at UBS Securities LLC]

Thanks. Good morning. The year-over-year step down in pricing and Production and Precision Ag from Q2 was a bit bigger than the kind of headwind you had from tougher comparison than the year before. I guess, were you expecting such a big step down in pricing? I mean, you didn't change your pricing forecast, so maybe it's really not any surprise. I'm curious if the environment and what you're seeing in the order activity is still supportive of a 2%-3% pricing, including incentives, and how is the need for incentives kind of shaping up here?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Hey, Steven Fisher. You know, as it relates to, to pricing, I would say that the second quarter came in almost, you know, right on the forecast for, for Production and Precision Ag, and Construction & Forestry. Small Ag & Turf probably fared just a, a shade better as they're retaining a little more price than we had in the forecast. You know, all of this is, is largely in line with our expectations, particularly as we lap some of the midyear price increases that we took in 2022. We would expect from a percentage basis to see that price realization come in. You know, for Production and Precision Ag, I think we were 12% in the third quarter. That should be high single digits in the fourth quarter, as expected.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, importantly, though, you know, we're seeing production cost inflation ratchet down at a similar pace. When you look at the absolute delta between price and cost, you know, for Production and Precision Ag, for example, I think we were, you know, about $1.4 billion positive in the, in the first half. Second half should be something, you know, not, not dissimilar to that. We are maintaining that price-cost discipline, I think, throughout the, the entire year. As, as it pertains to, to next year, yeah, no, no change in some of the early pricing that we've put out there, which has been, you know, in the sort of 2%-4% range. You know, we, we are, we are certainly managing, you know, our, our incentive spend as well, embedded in that.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, we would expect, you know, overall realization to be within that range, inclusive of whatever discounts begin to get layered back into the market for, for 2024. Thanks.

[Steven Fisher, Managing Director and Senior Equity Research Analyst at UBS Securities LLC]

Thank you.

[Operator]

Our next question is from Kristen Owen with Oppenheimer. Ma'am, your line's open.

[Kristen Owen, Managing Director and Senior Analyst at Oppenheimer & Co., Inc.]

Great, thank you for taking the question. wanted to ask about the construction margins. you lifted the target once again and really narrowing the gap with, with your ag businesses at what is arguably a different point in the cycle. just given some of the comments of normalization in pricing across the portfolio and, and what you talked about in the prepared remarks, for 2024, you know, how we should think about the sustainability of that improved margin performance in the construction segment? Thank you.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Hey, good morning, Kristen. Yeah, you know, as it relates to Construction & Forestry margins, you know, I, I would kind of refer back to some of the comments we made in our opening remarks around the structural things that we've been doing in Construction & Forestry for really the last 4 to 5 years that have really, really reformed that business into a, to a more sound and solid business that, to your point, has closed some of the gap between large ag over the last 2 years. You know, first and foremost, the, you know, the most important move we made was the inclusion of, of a road building business. You know, that's an end market that we view as, you know, high growth, lower volatility, and it's a very attractive market to be in.

[Brent Norwood, Director of Investor Relations at Deere & Company]

We, we acquired the number one asset in that, in that business via, via Wirtgen. You know, we're really still early days executing our excavator strategy. You know, the first important step there was the dissolution of the Deere-Hitachi joint venture, which we successfully negotiated last year, and we're on our way to delivering, you know, a full line of Deere-designed excavators, which I think is really sort of the next phase of, of the strategy there and how we'll see that business continue to drive further margin performance, you know, going forward.

[Brent Norwood, Director of Investor Relations at Deere & Company]

And, you know, we didn't tout this a lot, publicly, but, you know, we were very, active in portfolio management, you know, over the last couple of years, really focusing that portfolio on the products where we're most differentiated and in the markets where we really have a right to play and a right to win. That's... You know, we think all of those things are structural and continue, on a go-forward basis.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, Kristen, one thing I'd add is, you know, as we, as we look forward and you think about what, is there another leg in this journey for C&F? We, we believe there is, and it's around technology, and how do we integrate technology to help do the jobs that our customers do and do them better and more efficiently, more productively, and more sustainably? You know, we're seeing that with, with, you know, our first suite of automation tools, things like grade control. We see more and more opportunities to leverage technology into construction, into road building in particular, that are going to create real value for customers. We think we can differentiate in the marketplace. As we create that value for customers, you know, in turn, get paid as well.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

We're excited about the future there, and we see continued opportunities. Thank you.

[Operator]

Our next question is from Rob Wertheimer with Melius Research. Your line is open.

[Rob Wertheimer, Director of Research at Melius Research LLC]

Thanks. Actually, I wanted to follow up on, on exactly what Josh was just talking about, where, you know, construction pricing, what you've achieved to date, is that largely market related, or do you feel like you've had enough technology flow in to sort of support a, you know, a rising price overall? Maybe as a part of that question, I, I suppose definitionally, if you, if you have a tech widget, you charge for that, and that's in volume, I think. But I assume there's just a, an overall price hike, you know, as your, your products deliver more value to customers. Maybe just talk about where you are in technology thing and thanks.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah. Rob, you know, as it relates, I'll, I'll, I'll first start with the comment around pricing, and then we can talk about technology more broadly. You know, as it relates to the pricing that, that we've achieved, I mean, I think you've seen that, you know, broadly in the construction equipment markets. You know, we, we, we work hard to, to, to, to lead in price as best we can. We, you know, we try to be one of the most disciplined, you know, industry players as it pertains to price. I think we're still early days in terms of getting higher Average Selling Prices, you know, on account of, of more technology, more innovation in equipment. We are starting to see that. I think on specific product lines, we can definitely see that.

[Brent Norwood, Director of Investor Relations at Deere & Company]

In terms of, you know, the entire portfolio rising, we're still early days there. I think more, more, more headroom for us as we begin to integrate technology. Wirtgen is certainly gonna be one of the you know, one of the product lines that, that benefit the most from a higher average selling price as we include more technology in the coming years.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Rob, I, I'd say timeline-wise, you think about this journey we went on, on, on the large ag side in, you know, 2013, 2014, you know, when we began, I would say, I would say we, you know, we're, we're probably similar to that time frame. You know, so, you know, maybe not quite a decade, but I think behind, but, but we're in those early days of starting to, to drive more of that technology in. The excavator is a good example where we're just getting started as we design that, that, that fully integrated machine, where, you know, we're, we're gonna see. You know, in, in our minds, what we're seeing and, and what we're hearing from customers that are testing, you know, really tremendous, tremendous technologies and, and, and usability.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

We're excited about the future there, and we think we're very early days. Thanks, Rob.

[Rob Wertheimer, Director of Research at Melius Research LLC]

Perfect. Thanks.

[Operator]

Our next question is from Stephen Volkmann with Jefferies. Your line is open.

[Stephen Volkmann, Equity Analyst at Jefferies LLC]

Hi. good morning. Thanks for fitting me in here. I wanted to go back. I think a couple of you have used the words robust cost agenda for next year a couple of times. I'm just wondering if there's any way for us to think about sizing that. Is this, like, sort of a big deal where we could see these, sort of production costs in your waterfall chart, could they actually be positive next year? Is this kind of continuous improvement a better way to think about that?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Hey, Steve. It's a great question. You know, we've seen over the last couple of years, you know, you know, $ billions of cost inflation flow into our operations. Some of that is coming from, you know, systemic inflation. You know, a portion of that, though, is coming from, you know, just, I would call it COVID disruption cost, inefficiency cost, you know, also associated with our deferred ratification of our UAW contract in 2022. All of those things cost overheads to run higher than they normally do. We're bringing a lot of those back in 2023. I think there's more room to run, certainly in 2024.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, I, I would not probably characterize it as just a normal continuous improvement program here at Deere, because we do have line of sight to specific costs that we wanna take out, particularly as, you know, some commodity prices have come down. It's really easy to capture that in our raw material spend, and we did see a tailwind in raw mats in the third quarter. For a lot of our purchase components that have those raw materials embedded in their, their purchase price, you know, there's an opportunity to go back and actively renegotiate. We're very proactive there on executing the strategy, and we do have a formalized, you know, process in place to, to take further action in 2024.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, Steve, the only thing I'd add on top of that is, you know, just coming through the last three years, which have been far from, you know, from, from usual operating procedures in terms of, you know, pandemics, supply chain disruptions, et cetera, is, is continuing to, to root out that disruption cost that, that had come in and, and made its way in, you know, on top of, you know, we were seeing strong demand. So I think there's, there's, there's gonna be work done, certainly, and, and I think ongoing, you know, getting back to a cadence that, that we would expect in terms of continuing to, to take cost out and drive efficiency in the operations. So we're, we, we think there's, there's, there's more room to go here for sure. Thanks.

[Operator]

Thank you. Our next question is from David Raso with Evercore. Your line is open.

[David Raso, Senior Managing Director at Evercore ISI]

Hi, thank you very much. The comment earlier about the construction, the demand backdrop, right? You were saying the six-month rolling order book extends into the second quarter of 2024. Can you give us a sense of that order book? Are your orders up year-over-year? Is that implying growth in Construction & Forestry through the second quarter? Is that what that comment meant? Any help on the pricing within that order book would be, would be great. Then a quick question on large Ag. Maybe I'm misreading it, but for the fourth quarter for large Ag, I, I know go back to normal seasonal times, the fourth quarter does have a, a pretty weak sequential margin. Large Ag, you have profits sequentially down almost as much as revenues are implied down.

[David Raso, Senior Managing Director at Evercore ISI]

I'm just making sure I understand, are there any unique costs, or you mentioned Brazil, negative mix? Just something on why the profits would fall almost as much as the revenues are gonna fall sequentially. Thank you.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah. Hey, hey, David, let me, let me start with the, the first, the last part of that question on, on the ag side, and then I'll let, I'll let Josh comment on Construction & Forestry. Yeah, you know, if, if you think about the, the fourth quarter, we'll see, you know, revenues, you know, flattish to, to maybe down a little bit in, in ag. You know, the big driver there, and then to your point, margins will come in a, a shade from where they were in the third quarter. You know, the big driver there is we are seeing a return to, again, this normal seasonality, which does mean that we will institute normal factory shutdowns, particularly at Harvester Works, which historically we've, we've, we've done factory shutdowns in the months of September and/or October.

[Brent Norwood, Director of Investor Relations at Deere & Company]

I think what you're gonna see is the impact of shutting that down. We haven't done that the last couple of years as we've been running behind on delivering machines to customers in, you know, late 2021, and then all the way really through 2022. That's really the big impact that we're gonna see happen in the fourth quarter. I think the other thing I would note, specific to the fourth quarter, and this would actually be true for all three divisions, you know, we'll see a heavier R&D spend in the fourth quarter. That's a timing thing. Our fourth quarter does tend to be a little heavy, most years from an R&D perspective. That is certainly gonna be true this year as well.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Then the other, the other thing I would add on the fourth quarter is, you know, you'll see a little less Brazil mix as, as well in the fourth quarter. Kind of all three of those things will conspire together to bring down margins just a shade in the fourth quarter when you compare them to third quarter results.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, as it relates to C&F, and if you look at the order book, I mean, I'd say, you know, comparing year-over-year is a little bit difficult because we were constrained last year, so probably not a good way to compare just total order activity. What I would say is, on the order book that we have, you know, we're looking at similar production rates, you know, in 2023 to 2024, so not a significant change there. Realistically, obviously, less disruption expected as well, you know, in 2024 than we saw in 2023. Thanks, David.

[Operator]

Our next question is from Tami Zakaria with JPMorgan. Ma'am, your line is open.

[Tami Zakaria, Executive Director at J.P. Morgan]

Hi, good morning. Thank you so much. I wanted to step away from the quarterly trend and ask you about your new battery plan. I think you just picked a new battery manufacturing location. Can you tell us a bit more on that? When it will be operating at runway? What volume you expect at runway? What products you expect it to feed into? Any, any impacts on margins or potential cost savings, so any, any, any thoughts on this initiative?

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, certainly, Tami. Thanks for the question. You know, so, this stems from, you know, the, the acquisition we, we made, you know, a little over a year ago, on with, with Kreisel, Kreisel Electric. You know, this is, you know, really the next step as we continue that evolution to build, you know, manufacturing capacity for, for batteries, and, and charging, and which was announced here earlier this week in, in North Carolina. You know, I, I would say, you know, stepping back and looking at this as, as this is a strategic investment, you know, in growing our production capacity, you know, aimed to, to being a leader, particularly in off-highway.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

As off-highway is evolving, you know, we're, we're prioritizing development of robust charging technology, in addition to a battery, battery portfolio that can support, you know, the, the long-term adoption of, of electrification in, in our products. You know, timeline, we're, we're, we're probably, you know, a year or, or, or so out in terms of, you know, this facility up and running. We're, we're, we're producing them in Europe today, you know, at, at a relatively small scale. We see, we see the opportunity with the technology we have, to, to really drive, charging here in the near term. We've developed, you know, relatively robust pipeline or, portfolio plan for, for Deere products that will begin to incorporate the Kreisel batteries here as we go forward.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

You know, starting probably below 125 horsepower, and then, you know, we'll, we'll continue to evolve that, that portfolio as we go forward, and you'll see, you know, hybrid technologies and the like. Thanks, Tami.

[Tami Zakaria, Executive Director at J.P. Morgan]

You're welcome.

[Operator]

All right. Our next question from Chad Dillard with Bernstein. Your line is open, sir.

[Chad Dillard, Senior Analyst at Bernstein]

Hi, everyone. I want to spend some time on the average age of the fleet. Can you just talk about where we will be exiting the year versus normal? You know, I recall you talking about how there are, I guess, you know, five different owners, you know, within the fleet. Like, where's the bulge in, in age in terms of the fleet? Then just the last question is, is the higher average age structural? Why or why not?

[Brent Norwood, Director of Investor Relations at Deere & Company]

Hey morning, Chad. you know, as it relates to the average age of the fleet, it, you know, I, I think what you're seeing is the impact of this, you know, replacement cycle really having a, a sort of delayed or deferred start, right? You know, if you think about when, demand really inflected, it was the beginning of 2021, and you really had three factors conspiring to slow down the production, really not just for Deere, but the, the industry at large, right? We had, you know, the industry was, you know, suffering from labor shortages, supply chain delinquencies, delays, as well as significant inflation, you know, affecting production.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, in, in the last three years, you know, demand has outpaced supply, and, you know, what that's done is it has really slowed the, the, you know, the ability of the industry to bring down the age of the fleet. You know, if I look at, at, at, at four-wheel drives and 220 plus horsepower tractors, you know, we, we continued to age out most years since really 2013. You know, we've started to sort of flatten the curve a little bit. I wouldn't say we brought down the age significantly or even at all for, for either one of those, and we're still probably a couple of years older than historic averages.

[Brent Norwood, Director of Investor Relations at Deere & Company]

you know, combines is, you know, one where we, we, you know, this last year, we were probably the industry was able to make a little bit of progress, bringing down the age of that fleet a little bit. We'll make further progress in 2024, but we'll still be, you know, just above kind of historic averages there. you know, I think it's gonna take a little more time on, on tractors, just given some of the challenges that we've had. I think particularly for four-wheel drives, which, you know, you guys can see this in the AEM data.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, we just haven't seen- you know, it's been one of the more constrained product lines from an industry perspective, kind of similar to sprayers, you know, where, where it's just gonna take maybe a little more time to bring down the age of the fleet. You know, if you ask kind of where, where is the, the, the, the, the bulge, so to speak, in the, you know, the age of the fleet, I mean, it's really. You know, if you go back to this, the, the, you know, vintages of machines that were kind of 2010 to, to 2014, that's still a big part of the installed base, and those are the ones that are really aging out on us at a faster rate than, than, than the industry has been able to replace it in the last couple of years.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Thanks, thanks for the question, Chad.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yeah, maybe one thing I'd add just on top of that is, I think the important piece, too, is we are continuing to see demand for technology across the trade ladder in our equipment. We were just speaking with a dealer principal a couple of weeks ago, and he was talking about this very, very fact. It's not just demand for the latest technology by the first owner, but it's the second, third, fourth, or fifth. I think when we think about the age of the fleet and the health of those, the trade ladder, that is a, that is a big, big driver because there's a desire to upgrade technology, no matter where the customer may be in that chain.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

I think that's an important piece that, that underlies, not only the age, but, but the demand.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah, Chad, thanks for the question. Fran, I think we have time for one last caller.

[Operator]

Thank you very much. Our last question now is from Seth Weber with Wells Fargo Securities, and your line is open.

[Seth Weber, Managing Director and Senior Equity Research Analyst at Wells Fargo Securities]

Hey, guys. Good morning. Thanks for fitting me in. I, I guess I wanted to ask about the small ag business. Margin was a lot better than what we were expecting. I think I heard you say something about Europe. I'm just wondering, are those, you know, structural changes that we should think about, you know, as being in place going forward? Then just your comment about small ag inventory kind of coming off the peak. Do you think that we're past the, you know, past the, the challenges there, and things are gonna start getting better or just less bad going forward? Thanks.

[Brent Norwood, Director of Investor Relations at Deere & Company]

Yeah. Hey, Seth. Thanks, thanks for the question. You know, as it relates to Small Ag & Turf, you know, it's certainly a, a structurally, you know, sounder business today than, you know, if you went back to, to prior cycles. You know, as you think about, and I'll talk a little bit more about some of the margin puts and takes there. Let me answer your question on inventory first, though. You know, as it relates to, to inventory for Small Ag & Turf, I know there's been a lot of focus on what I would call the small end of Small Ag & Turf, so like the under 40 horsepower category of compact utility tractors. You know, we, I think we've seen the industry level out, even come down a little bit here recently.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, you know, it, it does appear as that maybe we're, we're kind of past that elevated in- or, you know, the, the- we're in the early stages of getting past those elevated inventory levels on the compact utility tractor side. You know, the bulk of the, of that business r- is- really revolves around mid-size tractors that are going into, you know, dairy and livestock operations, hay and forage operations or high-value crops. I think, you know, we're, we're probably closer to target level inventory there. We don't see quite the, the, the, the, the abundance of, of inventory for those categories of machines. You know, and we're also gonna see, you know, just some, some seasonality impact, just as it relates to the rest of the year from a margin perspective.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, we'll, we'll, we'll do a factory shutdown in Mannheim, which is our, our single source location for those 6 Series tractors, those mid-series tractors that makes up a significant portion of the Small Ag & Turf revenue and margin for that matter. You know, going forward, though, from a margin perspective, I think what you'll see, particularly on, on those mid-size tractors, is higher levels of technology that is gonna be leveraged from Production & Precision Ag. I would say if you went back to prior years, you wouldn't see a lot of technology that gets leveraged from Production Precision Ag into Small Ag & Turf, but you're gonna see more of that as, you know, our customers, particularly in, like, high-value crop production systems.

[Brent Norwood, Director of Investor Relations at Deere & Company]

You know, they're, they're demanding, solutions like autonomy and electrification, and that's gonna be an opportunity to, I think, further buttress the, the margin profile that we've achieved this year and extend that into years to come.

[Joshua Jepsen, Senior Vice President and CFO at Deere & Company]

Yes, Brent, one last thing I would add is, is just the, the geographic diversity of Small Ag & Turf. It's, it's, it's much broader in terms of global coverage and, you know, we're seeing performance really, you know, strong across the globe. To Brent's point on driving technology, you know, we're, we're seeing technology be driven into, you know, utility tractors in India, leveraging telematics and bringing connectivity to the farm there. There's, there's a lot of activity that we see that is going to, you know, both create customer value and also, you know, drive a, a different business in Small Ag & Turf than, than, than you've seen in the past. Thank you.

[Brent Norwood, Director of Investor Relations at Deere & Company]

That concludes today's call. We appreciate everyone's time, and thank you for joining us today.

[Operator]

This conference is concluded.

Participants

Executives

• Brent Norwood, Director of Investor Relations
• Josh Rohleder, Manager of Investor Communications
• Joshua Jepsen, Senior Vice President and CFO

Analysts

• Chad Dillard, Senior Analyst at Bernstein
• David Raso, Senior Managing Director at Evercore ISI
• Jamie Cook, Managing Director at Credit Suisse Securities
• Jerry Revich, Managing Director and Senior Equity Research Analyst at Goldman Sachs
• Kristen Owen, Managing Director and Senior Analyst at Oppenheimer & Co., Inc.
• Rob Wertheimer, Director of Research at Melius Research LLC
• Seth Weber, Managing Director and Senior Equity Research Analyst at Wells Fargo Securities
• Stephen Volkmann, Equity Analyst at Jefferies LLC
• Steven Fisher, Managing Director and Senior Equity Research Analyst at UBS Securities LLC
• Tami Zakaria, Executive Director at J.P. Morgan
• Timothy Thein, Managing Director at Citigroup