Deere & Co Q1 FY2021 Earnings Call

Good morning, and welcome to Deere & Company's First 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. Josh Jepsen, Director of Investor Relations. Thank you. You may begin. Thank you. Good morning. Also on the call today are Ryan Campbell, our Chief Financial Officer and Brent Norwood, Manager, Investor Communications. Today, we'll take a closer look at Deere's first quarter earnings, then spend some time talking about our markets and our current outlook for fiscal '21. After that, we'll respond to your questions. Please note, that slides are available to complement the call this morning and 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 used by Deere & Company. Any other use, recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks and all media may be stored and used as part of the earnings call. This call includes forward-looking comments concerning the Company's plans and projections for the future, that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission. This call may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America or GAAP. Additionally, 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. I'll now turn the call over to Brent.

John Deere showcased impressive performance in the first quarter, achieving a 17% margin for Equipment Operations. Agricultural fundamentals saw substantial improvement over the quarter, which is reflected in our updated order books and early ordering initiatives. The market conditions for our Construction & Forestry division also enhanced in the first quarter, resulting in improved profitability and an optimistic outlook for the remainder of the year. In the first quarter, net sales and revenue increased by 19% to $9.1 billion, with Equipment Operations net sales climbing 23% to just above $8 billion. The net income attributed to Deere & Company was $1.224 billion, or $3.87 per diluted share. During the same quarter of 2021, we recorded impairments totaling $50 million before tax on certain long-lived assets but were able to offset this by a favorable indirect tax ruling in Brazil amounting to $58 million pre-tax. Compared to last year, we had minimal employee separation costs, which were $127 million before tax in Q1 2020. I would like to point out some changes to our segment reporting. We have implemented a new segment reporting structure starting fiscal year 2021 to correspond with our recent strategic and operational model announced last summer. Consequently, our agriculture and turf operations have been divided into two new segments. The Production and Precision agriculture segment focuses on developing and delivering equipment and technology solutions for large-scale growers, with key products including large and mid-sized tractors, combines, cotton pickers, and seeding equipment. The Small Agriculture and Turf segment focuses on market-driven products for mid-sized and small growers, as well as turf customers, with primary products such as small tractors and lawn equipment. There are no changes in reporting for the Construction and Forestry and Financial Services segments, and we will now report across these four segments. Moving on to our Production and Precision Ag business, we saw net sales of $3.069 billion, a 22% increase from the same quarter last year, driven by higher shipment volumes and price realization, despite some negative currency translation effects. Operating profit reached $643 million, resulting in a 21% operating margin, a significant rise from 8.7% margin during the previous year, largely due to positive price realization, increased shipment volumes, and a favorable tax ruling in Brazil, although there were some unfavorable impacts from foreign currency exchange. Excluding one-time items like the tax ruling, first quarter margins were around 19.5%. It's worth noting that last year’s results included employee separation costs of $42 million. Regarding price realization, the exceptional performance this quarter stemmed from various factors, including slight increases in North American list prices and mid-year price adjustments for select foreign markets to counter currency fluctuations. Additionally, some products in the U.S. and Canada saw mid-year adjustments due to recent launches. Low inventory levels industry-wide also contributed to reduced incentive spending, enhancing net price realization. We expect price realization to normalize towards the latter half of the year. In the Small Ag & Turf segment, net sales climbed 27% to $2.515 billion, mainly due to higher shipment volumes and positive price realization. Operating profit for this segment was $469 million, leading to an 18.6% operating margin, a rise from 7.9% a year earlier, attributable to increased shipment volumes, positive sales mix, and price realization, while last year was impacted by voluntary employee separation costs of around $36 million. Moving to the industry outlook, we anticipate a 15% to 20% increase in industry sales of Large Ag equipment in the U.S. and Canada, boosted by improved agricultural fundamentals. Our early order program results showed double-digit unit orders compared to last year, and we have seen strong growth in our combine early order program as well. Additionally, our large tractor order book extends into the fourth quarter, reflecting a higher production schedule versus last year. For Small Ag and Turf equipment, we expect sales to rise by about 5%. In Europe, we forecast a 5% increase in industry sales, with strong conditions in the arable segment overshadowing some weakness in dairy and livestock. Our tractor order book in Mannheim also extends into the fourth quarter, offering good visibility for FY 2021. In South America, we foresee a 10% industry sales increase, driven by favorable conditions due to higher commodity prices and production levels. In Asia, however, sales are expected to decrease slightly, although important markets for Deere are performing better than others. Looking ahead to our segment forecasts, we expect net sales for Production and Precision Ag to range between $15.5 billion to $16.5 billion for fiscal year 2021, with favorable currency and price realization effects. Operating margins are projected to be between 19.5% and 20.5%. For Small Ag and Turf, net sales are forecasted between $10.5 billion and $11.5 billion, accounting for positive price realization and favorable currency impacts, with operating margins expected between 14.5% and 15.5%. In the Construction and Forestry segment, net sales for the quarter were $2.467 billion, representing a 21% increase due to higher shipment volumes and positive price realization. Operating profit for this division rose to $268 million, despite increased production costs and some impairments. Looking into our Construction and Forestry industry outlook, we project a 5% increase in the North American construction equipment industry, with compact construction equipment sales expected to rise by about 10%. The demand in earthmoving and compact equipment has been fueled by the housing market and recovery in the oil and gas segment. We now expect the Construction and Forestry segment’s net sales to be between $10.5 billion and $11 billion for 2021, anticipating positive price realization and a currency boost, while operating margins are expected between 10.5% and 11.5%. Concerning our Financial Services operations, net income for the first quarter was $204 million, benefiting from favorable financing spreads and lower losses on leases. For fiscal year 2021, we forecast net income of around $730 million, with credit loss provisions expected to be 23 basis points compared to the average portfolio managed. Our outlook for net income for fiscal year 2021 is projected to be between $4.6 billion and $5 billion, with an effective tax rate estimated between 24% and 26%. Additionally, we expect cash flow from Equipment operations to be between $4.6 billion and $5 billion, which includes a voluntary contribution of $700 million to our OPEB plan. I will now pass the call to Ryan Campbell for final remarks.

Before we respond to your questions, I'd like to offer a few thoughts on our fiscal year '21 outlook, as well as address some of the key themes covered in our latest Sustainability Report, published earlier this month. With respect to our outlook, we've seen underlying fundamentals continue to improve since the last quarter. Higher commodity prices and improved market access have boosted sentiment in Ag markets and are reflected in the results of our early order programs and order books. In addition, we've seen further strength and demand for compact utility tractors and turf equipment, as consumers continue to focus on home and landscape projects. Furthermore, those businesses are also benefiting from our channel partners' desire to boost inventory levels from historic lows. Meanwhile, our C&F business has benefited from a very strong housing market, a modest recovery in the oil and gas sector and the industry's proactive inventory management. While we are encouraged by some of the end market tailwinds, it is also important to point out some key risks. Dynamics in our supply base remain tight globally. While trends for COVID rates are improving, many areas are still impacted by high levels of absenteeism and are also facing growing constraints for some electronic components. To date, we've been largely successful keeping our production rates on schedule. However, we acknowledge, the situation is very fluid and will remain so for the foreseeable future. Furthermore, prices for key raw materials such as steel, have risen significantly over the last quarter, while freight and logistics costs have also experienced upward pressure. Our current forecast contemplates the impact of rising input costs and includes an additional $500 million related to material and freight. Despite these challenges, we are encouraged by the strength in our end markets, as well as the execution our employees have delivered so far this year. Our first quarter results demonstrated the highest net income and Equipment Operations margins in the history of the Company. While we are still in the early phases of executing our new operating model, we are encouraged by the progress made so far. Importantly, we are seeing the benefits of our new agile structure, allowing us to make decisions quickly and operate more efficiently. I'd like to close with some perspective on our recent efforts driving sustainability. Our vision is that John Deere customers will lead their industry by becoming the world's most profitable and sustainable businesses. We believe we are uniquely positioned to deliver this for our customers. Our continued technology advancements allow our customers to make every seed, every drop and every hour count. This makes their operations more sustainable and have less impact on the environment, while also saving them time and money. Earlier this month, we released our 2020 sustainability report. In it, we highlighted how our precision technologies are already making our customers more sustainable and productive. Using technologies like Autotrac, Section Control, ExactApply, ExactEmerge, TrueSet and Combine Advisor, our corn and soybean customers use less fuel, save time, apply less herbicides and fertilizers and emit less greenhouse gases throughout their production cycles. A John Deere customer farming 6,500 acres in the Midwest can lower their greenhouse gas emissions on an annual basis by the equivalent of nearly 1 million passenger vehicle miles driven, just by incorporating these technologies into their operations. At the same time, these six technologies are improving the economics of our customers' businesses, as fewer inputs translate into lower costs. In addition to reducing inputs, our approach also translates into higher yields. Taken together, this suite of technologies available today can conservatively deliver savings of $40 per acre to our customers. These outcomes, scaled across our platform of global engaged acres, provide an opportunity unlike any other for us to impact the sustainability and productivity of our customers' operation. On the Earthmoving and Roadbuilding side of the business, we are also making progress in delivering our customers the tools to operate in a more sustainable manner. For example, our grade control technology delivers significant time and material savings through automating control of the edge of the bulldozer. This ultimately translates into cost savings for our customers, through reduced labor costs, reduced fuel usage and reduced asphalt costs. These same reductions translate into lower greenhouse gases emitted and less natural resources utilized on each job. Our Roadbuilding business is leading the industry in both efficiency and sustainability in repaving technology with its cold recycler. Cold recycling reuses the existing materials of a roadway, significantly minimizing the cost and environmental impact of repaving. While the traditional process of repaving involves milling up the old pavement, hauling the old materials away and hauling new materials to the worksite, the Wirtgen cold recycler enables the old asphalt from the existing roadway to be mixed with additives on-site to be reused. This technology can increase the life of the roadway while utilizing 90% less material and reducing greenhouse gas emissions by the equivalent of 12 million passenger miles driven per job. These are just a few examples of technologies that are already making an impact on sustainability. And what we're most excited about is that despite the multi-decade investment we've already made, we are still just getting started on this journey. As we look to our future technology roadmap, we will enable our customers to do more with even less, as well as adapt to the dynamic future nature of weather patterns, consumer trends and the global regulatory environment. In addition to our industry-leading equipment and technology stack, we have one of the most collaborative data platforms in the industry and we're exploring ways that data can help our customers participate in new markets and programs that will reward our customers for incorporating sustainable practices into their operations. Our tools will allow customers to demonstrate the impact of their sustainable outcomes, enabling them to tap into new markets for revenue and financing. The key will be giving growers the ability to seamlessly document the appropriate data and provide them with the digital tools to confidently evaluate agronomic and business trade-offs. As we look ahead, our biggest opportunity lies in delivering solutions that make our customers more productive and sustainable. But we also remain committed to running our own operations in a sustainable and socially responsible manner. In that regard, we continue making progress toward our 2022 sustainability goals. We have steadily reduced the greenhouse gas emissions from our facilities and we have leveraged important partnerships to convert a significant portion of our electricity footprint to renewable sources. We are improving our water practices around the world, exploring new and innovative ways for recycling waste at our facilities and through our new strategic focus on our aftermarket business, we'll continue to grow and expand our portfolio of remanufactured products. And we can only deliver on this opportunity if we have a diverse and highly engaged workforce. Employee safety is and always has been of the highest importance to us. And throughout 2020, we took action to ensure that our employees were protected and had the proper tools to do their jobs effectively and safely. We also launched new strategic initiatives that are focused on leading and lagging indicators designed to enable continuous measurement of safety performance and drive continuous improvement. We know that diverse teams working together result in better ideas and better solutions. Therefore, we are committed to improving diversity at our Company. To do this, we are partnering with key universities and professional organizations to recruit diverse talent and we are providing employees the opportunity to connect with others that have common experiences through our employee resource groups. Moving forward, we will continue to attract, retain and develop employees with diverse backgrounds and experiences, as it will be critical to delivering sustainable outcomes for all of our stakeholders.

Now, we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedures. In consideration of others and our hope to allow more of you to participate, please limit yourself to one question. If you have additional questions, we’ll ask that you rejoin the queue. Sherlyn?

Thank you. We will now begin the question-and-answer session. Our first question or comment comes from Brett Linzey from Vertical Research Partners. Your line is open.

Hey, good morning, everybody. I was hoping you might be able to put a finer point on the better margin expectations for the production in Precision Ag business, in any way you can bucket that between what's related to be a larger mix of Large Ag versus Precision Ag pull-through and then cost and productivity, anyway to unbundle that?

Thanks, Brett. When considering what we've observed from Production Precision Ag, it's primarily focused on Large Ag, and we're noticing the ongoing integration of Precision Ag within that. This separation allows us to have a clearer understanding of what constitutes Precision Ag compared to Production Ag, highlighting the combination of machinery and technology. Regarding performance, we've definitely seen an increase in volume. Price, as Brent mentioned, played a significant role this quarter due to various factors. We benefited from above-average normal price increases and substantial adjustments made over the past year in international markets related to currency, along with new products introduced mid-year. These factors are having a noticeable impact. Furthermore, the advantage of low inventory coupled with strong demand has led to reduced incentive spending. These were the main contributors to our performance this quarter, particularly in R&D, where timing has shifted towards the latter part of the year due to program schedules. It's also important to highlight that excluding the Brazil tax item, Production Precision Ag achieved approximately 19.5%, and we expect R&D as a percentage of sales in that segment to be higher compared to the rest of the business.

So, thanks, Brett. We'll go ahead and go to our next question.

Thank you. Our next question or comment comes from Jamie Cook from Credit Suisse. Your line is open.

Hi, good morning, and congratulations on a successful quarter. Regarding the Production and Precision Ag business, could you help us understand your approach to pricing in the Precision Ag segment this cycle compared to previous cycles? The 6% price increase is significant. How much of this increase will positively impact the margins for this segment over time? Additionally, your order books look strong across Large Ag. I am curious about the potential for increasing production if the market conditions remain favorable. Thank you.

Thank you, Jamie. Regarding our order book, we've made clear adjustments compared to last quarter, resulting in increased sales. We have also enhanced production by adding shifts in major facilities, such as Waterloo and some South American locations. However, the real challenge, as Ryan mentioned, lies in the supply chain. We are facing tight availability of certain components and parts, which we are managing closely. Our supply management team is consistently liaising with suppliers, monitoring availability closely, with some components being assessed on a week-to-week basis. Given the ongoing demand, we will strive to respond positively, but it remains a challenging environment concerning key components. In terms of pricing, we are experiencing a notable price increase this year, around 6 points for production precision agriculture. This increase is not solely due to price but also reflects a changing mix, as average selling prices of our large agricultural machinery are on the rise due to the ongoing integration of technology and solutions into the business. This trend is contributing significant value to our customers, particularly from the perspectives of sustainability and economics, and we are observing increased adoption of the latest tools across most of our large agricultural machinery.

Hey, Jamie, it's Ryan. I think what you're seeing there and what we've talked about is, as we've built this Precision infrastructure with the equipment, guidance, telematics, the John Deere Operations Center, now we're stacking on applications that have more of a software content on them, that are focused specifically on the jobs our customers are doing. And as that continues to adopt and our customers continue to adopt that, you get a higher software mix in our margin profile. So, that's another factor. To Josh's point on average selling prices going up, that's true, but also those selling prices include a richer mix of software.

Thank you. We'll go ahead and go to our next question.

Thank you. Our next question or comment comes from Jerry Revich from Goldman Sachs. Your line is open.

Yes. Hi, good morning, everyone.

Hi, Jerry.

In regard to the comment about the mix, Ryan, you mentioned that in the past, you have talked about a 3 point tailwind to the average selling price due to increasing features. It seems that, based on the adoption rates for Precision Ag technologies you've shared, this is accelerating to around 5% this year. Could you provide some insight on that? Additionally, as we consider the cycle-over-cycle margin performance for Production and Precision Ag, how much of a tailwind do you expect in your long-term margin targets from the rising adoption rates of software and Precision Ag that you discussed?

Jerry, I'll begin there. Regarding the incremental benefit we observe, a range of 2 to 3 points is still quite reasonable based on our experiences. We believe there are opportunities moving forward to see continued improvement, particularly with more sensing and acting capabilities in the field. For example, we have discussed See & Spray, but we also see potential to expand beyond herbicides into fungicides, pesticides, other fertilizers, and different tasks such as machine forest planting. As we've mentioned before, we are progressing on our automation journey, getting closer to full autonomy. I highlight these points to emphasize that as we pursue these initiatives, they will create additional opportunities to drive revenue and establish a more recurring revenue base that can add value from job to job and pass to pass. In terms of our current cycle and its implications for Production and Precision Ag margins, we are currently just above 105% of mid-cycle for Production and Precision Ag, with a middle range margin of about 20%. For context, in 2013, we were well above peak levels for Large Ag with around 16% margins at that time. Therefore, we are achieving higher margins with lower sales, and we are optimistic about the opportunities related to the points I mentioned earlier, which continue to provide strong tailwinds with significant potential.

Thanks, Jerry. We'll go ahead and go to our next question.

Thank you. Our next question or comment comes from Ann Duignan from JP Morgan. Your line is open.

Yes, hi, good morning. Maybe still on the Large Ag sector. How do you plan on managing the cycle this time versus the last cycle? I mean last cycle we saw farmers start to roll equipment annually, we saw multiple unit discount programs and eventually, dealers ended up with excess used equipment. So, new sales increases are great, but how are you going to manage the cycle differently this time around, or is there anything you can do so we don't end up in the same position as we did at the bottom of the last cycle?

Thanks, Ann. I think when we think about the cycle, we're certainly coming into this, where we've seen demand inflect here over the last three, four months, coming into a position of very low new inventories, very low used inventories. So, that dynamic has certainly helped in terms of the starting point and the tightness we're seeing in overall inventory levels. I think the lessons learned from the past cycle certainly play into that, how do we make sure we're not pulling additional customers in, pulling ahead demand potentially that would have occurred later on. And I think, as we look at 2021 right now, with demand that we're seeing, our order books, large tractors, for example, are into the fourth quarter. With the early order programs, they account for nearly the entire full year production. So, I think we've got really good visibility, but I think that it's a good indicator of the replacement demand that we've been expecting. And if that, we would see over the last couple of years, coming to fruition here. But, I think we are definitely working very closely with the dealers in terms of how do we manage the cycle, but acknowledge, right now we're early days in terms of seeing some of this demand pick-up.

Annual, it's Ryan. Maybe I'll add to that. I think it’s the total industry, including ourselves, having the discipline to make sure that those new customers we're providing new product for them, but also those customers that historically have purchased used and used makes more sense of them, to really be disciplined to continue to provide them with high-quality used equipment, so we maintain that trade cycle and trade later throughout this upturn that we have.

Yes, I think one other piece that will help us there and we're very early, is in performance upgrades and the ability to upgrade existing machine fleets, which provide the ability to take a used machine, it could be a generation or two old and outfit that with updated equipment, which in some cases may alleviate some of the pressure on new, because you can get a significant amount of productivity at a little bit less of a total investment cost for the customer.

Thanks, Ann. We'll go ahead and go to our next question.

Thank you. Our next question or comment is from Stephen Volkmann from Jefferies & Company. Your line is open.

Hi. Good morning, everybody. I appreciate the breakout of the Small and the Production Ag equipment. I'm curious to what your view is going forward relative to any difference in incremental margins we should be thinking about in those two segments, that I assume the Large stuff is bigger. But, just anything you want to kind of give us on that would be great.

Thanks, Steve. Regarding incremental margins, in the past, we've indicated that Ag and Turf margins range from 30% to 35% depending on our sales mix. Currently, we see that the Production Precision Ag side is at the higher end of that range, while Small Ag & Turf is likely closer to the lower end. This trend is a good guideline. This year, particularly in Small Ag & Turf, we are experiencing a strong advantage due to significantly lower retail production of small tractors last year, and we plan to increase inventory this year. This shift from underproduction to overproduction positively impacts our margin profile.

Thanks, Steve. We'll go ahead and jump to our next question.

Thank you. Our next question or comment is from Tim Thein from Citigroup. Your line is open.

Thank you. Good morning, Josh and Ryan. I have a question regarding the dividend and your perspective on mid-cycle earnings for the Company. As you've mentioned, we're moving into a significantly higher margin level, and connecting this to your earlier comment about Large Ag being close to your view of normalized levels, I wanted to ask about the annualized dividend run rate of approximately $3. How does that align with your payout target of 25% to 35%? Thank you.

Hey, Tim. It's Ryan. As we've mentioned, we maintain our dividend at a mid-cycle earnings ratio of 25% to 35%, and with the structural improvements we've implemented, we are likely below that range with the current dividend. This is definitely something we are considering, and based on the overall liquidity situation of the Company, we will be assessing this further this year.

Thanks, Tim. Go ahead and go to our next question.

All right, thank you. Our next question comes from Ross Gilardi from Bank of America. Your line is open.

Thanks. Good morning, guys. You explained that you think you are at 105% of mid-cycle for Large Ag, can you remind us where you expect to be relative to cycle for your other segments through the end of this year, based on your guidance? And when should we expect you guys to recast your mid-cycle margin targets, just along with that, how does the 20% mid-cycle that you're seeing for Large Ag in fiscal '21 compare to your initial estimate when you put out the 15% target to begin with?

Ross, when we think about present to mid-cycle, so, actually the Production Precision Ag and Small Ag & Turf are pretty much in the same range, kind of right between, call it 105% and 110% of mid-cycle. The C&F business is right around mid-cycle as well, like pretty nearly dead on. There is a little bit of mix impact in there, where compact construction equipment is much higher and we're obviously coming kind of, off of the bottom after 2020, from a construction equipment perspective. So, there is some variation amongst the segments there in C&F, but overall about mid-cycle. I think when you think about kind of our mid-cycle margins, certainly, we've talked a lot about the 15% continuing to focus on executing and I'd say in '21, a very strong first quarter and I'd say there's lots of focus on delivering the guide that we have this year, in the performance that we feel confident in, but I think post that, I think is when we'll start to think about what's next for the Company.

Yes, Josh this is Don Ads. Can you address at all, how the 20% at mid-cycle for the Large Ag compares to your initial estimate?

Yes, I think what we're seeing from that business and what we've seen in the first quarter, kind of ex-items, about 19.5%, I think feels like strong performance for us. I think we're seeing some benefits of things like strong pricing and obviously the volume rebounding and operational leverage coming through, is solid and I think aligned with where we would hope it would be, knowing that we feel like we've got opportunity as we go forward. That businesses sees the majority of the headwind on material and freight, that Ryan mentioned, that weighs on the full year there as well.

Hey, Ross, it's Ryan. I do think it's fair to say, we're probably a little bit ahead of where we thought we would be, but we're heads down and focused on delivering this from a sustainable perspective and then in 2022, we'll take a step back and reflect on what's appropriate going forward.

Thanks, guys. We'll go ahead and go to our next question.

Thank you. Our next question comes from Rob Wertheimer from Melius Research. Your line is open.

Thank you and good morning. In the new segments, I think I can clarify a lot and align well with your focus. The Small Ag segment was particularly impressive for me. Since we talk less about it compared to Large Ag, could you discuss the workflows that have contributed to the margins we observed this quarter? Additionally, could you reiterate what challenges we might face for the rest of the year, given the outlook? Thanks.

Yes, Rob. When you think about Small Ag and Turf and you're right, it tends to be a little bit less of story. What we've seen here is really, really solid performance and I think a starting point is, some of the actions we've taken from executing the new strategy, I think we're seeing the benefits in Small Ag and Turf. A number of the exits or closures that we did in fiscal '20 are benefiting there and those were mostly in the Small Ag and Turf part of the business. So, that focus is definitely helping. I think we're seeing really strong execution. Again, the benefit of moving from under-producing to slightly over-producing on small tractors helps, where the pricing point of view is solid as well. I mean, when you think about small tractors and turf, those are going to be pushing much higher than call it that kind of between 105% and 110% of mid-cycle. So, there is benefit there as well. Also, embedded in that is a large portion of Small Ag and Turf is in Europe, which has tended to be a more stable market. So, we see a little bit less, less volatility there. And we've seen some strength in that market, which have been beneficial as well.

Rob, I think taking the two businesses apart, I think, Josh alluded to, we focused on the Small Ag and Turf side with some of our fix and exit strategies and then focusing on markets where our value proposition makes sense, given the industry and market dynamics. I think when you do those things and think about capitalizing, the business is a little bit different, focus in the R&D portfolio a little bit differently. The results show that you can have a great business in the small side and both of them are equally important for us to drive our strategy going forward.

Yes. And I'm sorry, Rob, I forgot about your portion of your question, kind of what, what are the headwinds in the remainder of the year and not dissimilar, I'd say, all of our businesses have material and freight headwinds, the $500 million of material and freight cost that Ryan mentioned is all really kind of 2Q through 4Q. I think, so there is a portion of that, that is impacting Small Ag & Turf. Price, we don't expect to be as strong as we move through the year, 2% for the full year compared to a strong first quarter there. And then the other, maybe two things I mentioned, R&D there similarly is a little bit back-end weighted, so you see that be based on timing of programs impacting the rest of the year. And there are some inefficiencies related to overheads with accommodation of COVID and supply challenges that we've got embedded in the forecast, as well.

Thanks, Rob. We'll go ahead and go to our next question.

Thank you. Our next question comes from Steven Fisher from UBS. Your line is open.

Thanks, good morning everyone. The supply chain challenges we are currently facing, while improving now, remind me of the difficulties you encountered in 2017 and 2018. It was quite tough back then, but you seem to be better equipped to manage the situation this time. Is that an accurate observation, or is it possible that the current up-cycle is stronger, allowing you to address the $500 million increase you are experiencing? I'm interested in your confidence regarding your ability to navigate the supply chain challenges and fully benefit from this favorable cycle as it develops.

Steve, looking at our supply base, our team has learned a lot from the experiences during the 2017-18 period, including the tariffs with China and the initial COVID phase, which had their impacts. The team has done an excellent job of gaining a deeper understanding of suppliers, identifying constraints, capacities, and challenges. This knowledge has definitely helped us. So far, we've managed to minimize disruptions, but there are still challenges that vary weekly in terms of operations. We are working closely to execute our forecasts and meet customer demand, and we have prepared a range in our forecasts to account for the challenges we know we will continue to encounter throughout the rest of the year.

Yes, it's Ryan. I mean, we're also seeing the benefit and we went through the activity to look at kind of each position in the Company and how those positions worked over the last year and I think we're seeing the benefit from a more focused and agile organization that we put in place last year and finished effectively with that, towards the end of last year.

Thank you.

Thanks, Steve. We'll go ahead and go to our next question.

Our next question or comment comes from Kristen Owens from Oppenheimer. Your line is open.

Hi, good morning. Thank you for taking my question. I wanted to point back to Slide 15 here in the deck. The $40 an acre economic value to the customer that you've outlined and that's pretty significant when you think about the impact to net farm income across your connected acres, where do you feel like your customers are at this stage in terms of understanding that potential value? And when you think about the backdrop of this improved commodity prices and land values, how do you see adoption cycles moving forward?

Yes. Thanks, Kristen. It's a great point. I mean, I think as we look across those different technologies, there is a varying range of adoption individually, where at the highest end, you think about something like guidance, which would be very, very highly, adopted and then maybe on the lower end, something like ExactEmerge, which is in the low 40s% so, varying degrees in terms of how deeply engaged our farmers are, across all of those jobs. But we think that's increasingly where we see the opportunity to drive that value. And particularly, when you start to think about additional opportunities, Ryan mentioned this a little bit, you start to think about the combination of carbon markets or differentiating crops because of the practices that are utilized and then our position of, one, executing the jobs, but two, having the operation center that documents those and can provide that information very seamlessly, we think that creates a pretty significant opportunity for our customers. So, when you think about not only the technology that we have in place today, those that are coming and then, what feels like just a burgeoning opportunity for some additional revenue, I think well-positioned our customers and we feel like we're in a really good spot too to be able to unlock and enable that.

Thanks, Kristen. We'll go ahead and go to our next question.

Thank you. Our next question is from Chad Dillard from Bernstein. Your line is open.

Hi, good morning. I was curious if you could provide insight into the progression of Precision Ag adoption in Latin America and Europe compared to the US. For instance, if the US is at 100%, where do those two regions stand? Additionally, you mentioned 230 million engaged acres globally; how is that distributed regionally, and what is the total addressable market in terms of engaged acres available to you?

When considering regional performance, particularly in North America, there’s still significant progress to be made regarding the integration of various technologies on farms and their potential benefits. This represents a substantial opportunity in the North American market, which is continuing to grow. In South America, and specifically Brazil, we have observed remarkable growth in engaged acres, with an increase of about 60% in Latin America last year. As we address challenges such as double cropping and improve efficiency, our dealers are also adapting to these changes. They now operate over 40 digital operation centers to support customer fleets. Overcoming connectivity issues represents a major opportunity for us, and our recent partnership with Qaro aims to enhance connectivity and bandwidth, which we believe will further enable the use of our technologies. In Europe, we have traditionally provided guidance, but we are beginning to see a shift toward greater connectivity, with engaged acres growing significantly by triple digits last year. Considering the impact of regulatory changes in Europe and potentially in other regions, there is a growing interest in precision agriculture tools, especially for applications like spraying. We are optimistic about our current position and see vast opportunities ahead.

Thanks, Chad. We'll go ahead and go to our next question.

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

Hi, good morning. Given the supply chain constraints and amid the strong farm equipment demand, I'm curious, are you already taking tractor orders beyond fiscal '21? And are you willing to open up your early order programs for other products earlier this year than normal? And the other question is, we don't have the baseline for the new segments within Ag and Turf, of the revenue increase that you put into A&T, I thought was impressive that on those incremental sales, the incremental margin is 44%. So, it's pretty impressive. But of that revenue increase, just so we have a sense of the mix what changed, how much of the increase was the Production and Precision Ag versus how much was Small Ag and Turf? Thank you.

Yes. First, regarding orders, we have not opened anything for fiscal year 2022 yet. We are extending our timeline into the end of this fiscal year, particularly for large tractors. At this stage, we have not made any adjustments to the timing of the early order programs. You've raised a valid point about the timing. When we concluded our crop care early order programs, we were just starting to see a shift. If you consider the low double-digit increases we noted in planters and sprayers, those were mostly ahead of the shift we observed this fall. There’s a lot yet to unfold, which is promising, but we haven’t changed the timing at this moment. In terms of sales growth from the former Ag & Turf in Production and Precision Ag as well as Small Ag and Turf, the percentage increases are quite similar. Looking at these segments year-over-year, both are up approximately 20%, showing a balanced growth compared to the previous quarter.

Thank you, David. We'll go ahead and go to our next question.

Thank you. Our next question comes from Larry De Maria from William Blair. Your line is open.

Hi, thanks and good morning everybody. If we could go just go back to Slide 15. Obviously, we are seeing is the green and green solution can deliver us $40 return and we know there's a lot of mixed fleets out there still. So, there's growth. But, can you give us what is the annual cost, what's the ROI and how does that $40 return stack up, when you're thinking and when you're competing with seed and fertilizer companies. In other words, green and green solution delivers $40, what's the ROI and how does that compare to seed and fertilizer companies?

Yes, I mean when you think from a payback or an ROI perspective, we think about these tools and solutions, we've traditionally been in the year to two-year payback period and I think across those, that would be fair. Some of those are going to be much shorter, that we've seen in months compared to years of payback. So, I think as you look at those technologies that we've got there, I think it would be very fair to say, well under two years would be a reasonable payback period for what we're seeing there. So, I think that's where we're at. And I think what was exciting about it is, there is opportunity as we start to think about kind of what's coming next, to grow that, from both the economic value, but also delivering increased sustainability outcomes as well.

Thanks, Larry. We'll go ahead and jump to our next one.

Thank you. Our next question comes from Nicole DeBlase from Deutsche Bank. Your line is open.

Yes, thanks. Good morning guys.

Hi, Nicole.

Can we just focus a little bit on South America, about the comments that you gave around North America order book as well as Europe and how far it extends was helpful, but there was just a bit less around what you're hearing from South America farmers and maybe how far the order book extends there?

Latin America, especially Brazil, is experiencing strong farm profitability due to various positive factors like production and currency movements. We noticed this shift in our fourth quarter, and our orders extend into May and June, indicating strong activity. Following a period in 2020 where we had historically low inventory, we are focused on meeting demand and possibly increasing inventory levels since we ended up quite low. Overall, demand in South America, particularly in Brazil, is robust, with customers feeling confident and dealers actively engaged. Furthermore, as we assess the bigger picture beyond South America, our strong performance this year, particularly in the first quarter, indicates that we are benefiting from significant profitability on a global scale.

Thanks, Nicole. We'll go ahead and go to our next question.

Thank you. Our next question comes from Courtney Yakavonis from Morgan Stanley. Your line is open.

Hi, good morning guys. If we can just talk a little bit about C&F, I guess it's going to be just first a clarification and you have the extra amount of work in the quarter is, are we going to see any difference in the fourth quarter of this year or is it to the full year and did that have any impact on the margins, the increase in the margin guidance? And then, I guess my actual question is just in the context that C&F is at mid-cycle, can you help kind of walk us through what's going to get you to the 15% margins in that segment, because I think you've historically talked about that 15% margin target being for both segments. And I think you've historically talked about the work and synergies being back half weighted, so just try to understand if that's flowing through sooner or if that's still going to be a 2022 story? Thanks.

Thanks, Courtney. When considering the additional month of work, it didn't have a significant impact on margins as it aligned with the quarter's performance. Therefore, it didn't change our overall guidance or the division's total guidance. Regarding our Roadbuilding business, we are quite optimistic about what we are observing there. We anticipate an increase of around 20% in this fiscal year, with about half of that attributed to the extra month, which means the underlying business is expected to grow about 10%. In terms of the core Roadbuilding business, we are satisfied with the margins being delivered, which align with our expectations. We're aiming for mid-teens margins in that business, and we are making solid progress towards that goal. If we take a broader view, we believe there is potential for C&F, especially as Wirtgen continues to perform, which could enhance margins. There are also technological opportunities for us. In Construction & Forestry, we are still at an early stage in terms of integration, but we expect that to improve performance as well. We provided an example regarding grade control and its positive impacts on customer economics and sustainability. We are exploring various initiatives, like obstacle detection, that we believe can be implemented effectively in that division to enhance performance. We are also maintaining a strong focus on operations and executing precisely in a business that can be volatile and cyclical.

With that, I think we've got time for one more question.

Thank you. Our final question comes from Adam Uhlman from Cleveland Research. Your line is open.

Hi guys, thanks for squeezing me in. And congrats on the strong quarter. I wanted to go back to the material costs discussion that we're having before, would you be willing to break down the $500 million by segment and then maybe, perhaps the cadence, I think Josh, you said that it was going to start to hit in the second quarter, is that equally weighted throughout the rest of the year or should we be thinking about this as more of a fourth-quarter impact and then do you think you need to implement any more price increases to offset what's happening with materials and freight costs? Thanks.

Thanks, Adam. Regarding the $500 million, we haven't pinpointed an exact figure yet. However, the majority, more than half, is related to PPA, Production Precision Ag. The Small Ag & Turf segment represents the smallest portion, but it does impact those businesses. Historically, we haven't increased prices solely based on commodity costs; we strive to be disciplined in our pricing strategy and align it with the value we provide. At this moment, we haven't considered a price increase. Looking at the bigger picture, the prices we are receiving are compensating for materials, but they are also causing some drag on our incremental growth as we progress through the rest of the year. I would say the impact is fairly balanced over the next three quarters.

So with that, I think we'll wrap up. We appreciate everyone's time, and look forward to catching up with everyone. Thank you.

Thank you. That concludes today's conference call. Thank you for your participation. You may disconnect at this time.