Q2 2024 Earnings Summary
- Despite a 15% year-over-year decline in net sales, equipment operations margin exceeded 21%, ranking as one of the best quarters in company history.
- Deere's technology adoption is expanding rapidly, with 415 million engaged acres globally, and highly engaged acres growing by double digits, demonstrating strong customer adoption and value creation through their integrated equipment, technology, and digital tools.
- Management is demonstrating proactive and disciplined operational decisions, such as underproducing retail demand to align inventories, ensuring better structural profitability throughout the cycle.
- Deere is experiencing declining demand in its agricultural segments due to softening grower sentiment, driven by rising global stocks, lower commodity prices, high interest rates, and weather volatility, leading to further reductions in sales guidance. ,
- The company is underproducing retail demand in large agricultural equipment in North America in the second half of the year to reduce field inventory levels, indicating expectations of continued demand weakness. ,
- Rising used equipment inventories, particularly in high horsepower tractors, are causing Deere to reduce new equipment production, which may impact revenues and margins in future periods.
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Underproduction and Inventory Management
Q: How large is underproduction, and impact on inventories?
A: Underproduction globally in Production and Precision Ag is in the high single digits, with North America large tractors possibly higher. We're reducing ending inventory levels, expecting row-crop tractor inventories to decrease from 15% to 10% by year-end. This proactive approach aims to align production with retail demand and positions us well for 2025. -
Margin Protection Amidst Underproduction
Q: How are you offsetting underproduction to protect margins?
A: We're adjusting production rates and aligning our cost structure to mitigate the impact of underproduction. Efforts include taking material and freight costs out of the business and preparing for major new product launches in 2025, which will bring added value to customers. -
Pricing Trends Across Regions
Q: What are you seeing in pricing across regions and segments?
A: In North America, we're achieving price realization in the 2% to 3% range, at the top end or slightly better. Europe shows similar pricing trends. In South America, due to inventory levels built in 2023, we're experiencing negative pricing in the mid-single digits, which is expected to mitigate later in the year. Overall, we aim to maintain 1.5 points of price realization for the year. -
Decremental Margins in Construction & Forestry
Q: Why were decremental margins high in C&F this quarter?
A: We had lower price realization than anticipated due to a discount accrual on field inventory, affecting sales for the balance of the year. This is a timing issue, and we maintain our full-year price guidance at 1.5 points. We don't expect this to continue, and the back half should support our full-year pricing. -
Demand for Larger Equipment
Q: Can larger machines find buyers among smaller farms?
A: Yes, we believe so. The adoption of technologies like Exact Emerge is driving demand for higher-horsepower tractors. In 2024, 70% of tractors above 220 horsepower are over 300 horsepower, up from 30% in 2014. Farmers across the board seek to improve productivity and efficiency, especially during tight planting windows. Our dealers are adept at matching equipment with the right customers. -
Late-Model Inventory Levels
Q: Will late-model inventories stop rising?
A: We're confident they will. By underproducing certain models and reducing new inventory levels, we're preventing further buildup. There's strong demand for high-speed planting equipment, and we expect used units to move into the market as customers adopt new technologies. -
Crop Care Early Order Program
Q: How is the Crop Care early order program performing?
A: It's too early to comment, as the sprayer order program opened just 1.5 to 2 weeks ago. Order activity often starts slowly in uncertain times as customers wait to see how the planting season develops.