Good morning, and welcome to Deere & Company Second Quarter Earnings Conference Call. I would now like to turn the call over to Mr. Josh Beal, Director of Investor Relations. Thank you. You may begin.

Hello. Welcome, and thank you for joining us on today's call. Joining me on the call today are Josh Jepsen, Chief Financial Officer; Cory Reed, President Worldwide Agriculture and Turf Division, Production & Precision Ag Americas and Australia; and Josh Rohleder, Manager of Investor Communications. Today, we'll take a closer look at Deere's second-quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2024. 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 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 expressed written consent of Deere is strictly prohibited. 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.

Good morning. John Deere concluded the second quarter with solid execution. Financial results for the quarter included a 21.2% margin for the equipment operations. Trends in the end markets that we serve remain broadly unchanged from last quarter. Ag fundamentals continue to abate, leading to more challenging market conditions in the back half of the year. In construction and forestry, fundamentals remained stable at levels supportive of demand across most end markets. Demand shifts, coupled with proactive inventory management, are reflected in our production schedules for the balance of the fiscal year, with many product lines anticipating retail demand under production to close out 2024. Notably, our projected financial performance in these dynamic market conditions demonstrates our ability to deliver better results across the business cycle. We now begin with Slide 3 and our results for the second quarter. Net sales and revenues were down 12% to $15.235 billion, while net sales for the equipment operations were down 15% to $13.61 billion. Net income attributable to Deere & Company was $2.37 billion or $8.53 per diluted share. Digging into our individual business segments, we'll start with the Production and Precision Ag business on Slide 4. Net sales of $6.581 billion were down 16% compared to the second quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive by just under 2 points. Currency translation was roughly flat. Operating profit was $1.65 billion, resulting in a 25.1% operating margin for the segment. The year-over-year decrease was primarily due to lower shipment volumes and higher production costs. These were partially offset by price realization. Turning to Small Ag and Turf on Slide 5, net sales were down 23%, totaling $3.185 billion in the second quarter as a result of lower shipment volumes, partially offset by price realization. Price realization was positive by 1.5 points. Currency translation was roughly flat. Operating profit declined year-over-year to $571 million, resulting in a 17.9% operating margin. The decrease was primarily due to lower shipment volumes, which were partially offset by price realization. Slide 6 provides our industry outlook for ag and turf markets globally. Across all our major markets, we see continued softening in grower sentiment as the combined impacts of rising global stocks, lower commodity prices, high interest rates, and weather volatility weigh on customer purchase decisions. Amidst this backdrop and rising uncertainty, we're seeing customers exercise greater discretion in their equipment purchases, which is reflected in the changes in our industry guide this quarter. Large ag equipment industry sales in the U.S. and Canada are now expected to decline 15%, reflecting further demand reduction in the back half of the year, primarily in large tractors. In addition to the aforementioned factors, increases in used inventory levels, particularly late model year machines are having an impact on purchase decisions. These headwinds are partially offset by fleet fundamental tailwinds, including elevated fleet age, stable farmland values, and strong farmland balance sheets. For Small Ag and Turf in the U.S. and Canada, industry demand estimates are now down 10%. In the quarter, we saw notable reductions in our expectations for the turf segment, particularly riding lawn equipment where high interest rates are impacting purchase behavior following several years of strong market demand. In Europe, the industry is now forecasted to be down 15%, reflecting increasing grower uncertainty in the region. Wet conditions have raised concerns for winter crop yields, while elevated input costs are weighing on margin expectations. Despite the softening, variable cash flows remain at roughly 10-year averages, and dairy and livestock fundamentals are expected to improve due to stronger pricing amid lower feed costs. In South America, industry sales of tractors and combines are now expected to decline between 15% to 20%. Brazil remains the largest affected market, with additional pressure stemming from strong global yields driving down commodity prices. Both soy and corn margin expectations softened over the quarter. Conditions are further impacted by elevated interest rates and an expected strong recovery in Argentina production levels following last year's drought. Industry sales in Asia continue to be forecasted down moderately. Next, our segment forecast begins on Slide 7. For Production and Precision Ag, net sales are forecasted to be down between 20% and 25% for the full year. The forecast assumes roughly 1.5% of positive price realization for the full year and minimal currency impact. For the segment's operating margin, our full-year forecast is now between 20.5% and 21.5% due to demand softening and proactive inventory management. Slide 8 shows our forecast for the Small Ag and Turf segment. We now expect net sales to be down between 20% and 25%. The guide includes 1.5 points of positive price realization and flat currency translation. The segment's operating margin is now between 13.5% and 14.5%, in line with slowing net sales. Shifting to Construction and Forestry on Slide 9. Net sales for the quarter were down 7% year-over-year at $3.844 billion due to lower shipment volumes. Price realization was positive by roughly 0.5 point while currency translation was flat. Operating profit of $668 million was down year-over-year, resulting in a 17.4% operating margin due primarily to lower shipment volumes and higher R&D and SA&G expenses. Slide 10 gives our 2024 Construction and Forestry industry outlook. Industry sales expectations for earthmoving equipment in the U.S. and Canada remained flat to down 5% while compact construction equipment in the U.S. and Canada is expected to be flat. Industry fundamentals remain vastly unchanged with stabilized demand supported by visibility into the balance of the year, and markets continue to be healthy as U.S. government infrastructure spending further increases. Investments in manufacturing persist and single-family housing starts improve. Tailwinds are tempered by declines in commercial real estate and softening in rental demand throughout the balance of the year. Global forestry markets are expected to be down around 10% as all global markets continue to be challenged. Global road building markets are now forecasted to be flat to down 5% as strong infrastructure spending in the U.S. is offset by continued softness in Western Europe. Moving to the Construction and Forestry segment outlook on Slide 11. 2024, net sales remain forecasted to be down between 5% and 10%. Net sales guidance for the year includes about 1.5 points of positive price realization and flat currency translation. The segment's operating margin is projected to be around 17%. Transitioning to our Financial Services operations on Slide 12. Worldwide financial services net income attributable to Deere & Company in the second quarter was $162 million. Net income was positively impacted by a higher average portfolio balance, which was partially offset by a higher provision for credit losses and less favorable financing spreads. As a reminder, net income in the second quarter of 2023 was also impacted by a non-repeating one-time accounting correction. For fiscal year 2024, our outlook for net income remains at $770 million as benefits from a higher average portfolio balance offset a higher provision for credit losses and less favorable financing spreads. Finally, Slide 13 outlines our guidance for Deere & Company's net income, our effective tax rate, and operating cash flow. For fiscal year '24, our outlook for net income is now expected to be approximately $7 billion. Next, our guidance incorporates an effective tax rate between 23% and 25%. And lastly, cash flow from the equipment operations is now projected to be in the range of $7 billion to $7.25 billion. This concludes our formal comments. We'll now shift to a few topics specific to the quarter. Let's begin with Deere's performance this quarter. We saw net sales decline roughly 15% year-over-year, yet the operating margin came in at just over 21%. Across all business segments, we saw better-than-expected performance despite a more challenging macro backdrop.

Yes. Absolutely, Josh. This is really a story of executional discipline across the organization. We were able to outperform on the top line as demand held up slightly better than we expected. In particular, we saw resilient earthmoving and road building market that exceeded our expectations despite a tough competitive environment. Turning to production costs. Freight came in solidly favorable year-over-year. However, as you noted earlier, we are experiencing offsetting headwinds and overheads as we adjust production to moderating demand. All that being said, it's worth noting that this quarter's performance with equipment operations margin over 21% ranks as one of the best quarters in company history. We're encouraged by the start to the year, and we're focused on executing our plan in the remaining two quarters.

Thanks, Josh. That's a great summary and a great point you bring up. It's clearly been a strong executional start for the year, but we've revised our full-year guidance. What's driving the delta in the back half of the fiscal year?

Right. The forecast change is really volume-driven, primarily in our ag and turf segments. Underlying the demand decline is a tougher backdrop in global ag, which, as you mentioned in your opening comments, has continued to weigh on our customer base. Uncertainty has caused a decline in farmer sentiment. And as a result, we are seeing a softer retail environment today than we did just six months ago. Primary crop margins globally are forecasted to be down. Inventory levels are expected to be above historical averages, thanks to multiple years of favorable growing conditions and record global yields; used inventories have risen and persistently high interest rates are impacting purchase decisions. Despite all these headwinds, we experienced strong demand in the first half of the year, albeit down from the highs of 2023, which drove solid first half production volumes for ag and turf. Given the environment that I just mentioned, we do expect incremental demand decline in the back half of 2024. Notably, our production volumes will decline more than demand in the back half as we're taking proactive steps to drive down field inventories. This is true for all of our major markets: South America, Europe, and also now for North America large tractors. We believe this approach best positions us to build the retail demand for ’25.

This is Jepsen here. Maybe a couple of things to add. First, I want to commend our employees for the work they've done to drive the overall decrementals for the business despite the velocity of declines we're experiencing this year. We're delivering value for our customers and driving operating margins that are structurally better at this point in the cycle than ever before. However, there's always an opportunity to do better, and we'll continue to take action on costs throughout the remainder of the year while still investing in our future.

Thanks for that additional color, Josh. And you make a great point about the decrementals. We're definitely being impacted more significantly than usual by the unfavorable mix associated with higher margin products and regions declining more significantly. But I think the key differentiator this year is around more proactive management. Both you and Beal alluded to the rate at which we're bringing in production. Cory, I'd like to bring you into the conversation now. You've been in the ag business nearly your entire career. What is different in terms of how we have managed the changing environment in this cycle?

Yes. Thanks, Josh. We are coming down from a period of high demand, and historically, we would have, as an industry, been slow to react to that change. Often, we would drive higher levels of field inventory to the detriment of the following years. Within Deere, we're managing this year differently, which is a testament to the fact that both we and our dealers have learned from the past cycles. This is probably best exemplified by our decision to underproduce large tractor retail demand in North America in the back half of the year. We ended 2023 with really low levels of large tractor inventory, but we think it's prudent to drive those levels even lower as we close out our ’24. The key here is that by staying ahead of demand changes, we're giving ourselves the optionality to react most efficiently to whichever way the market moves in the next year. I think it's important to note that we're not implying that we know where 2025 demand will be; frankly, this season's crops aren't even in the ground yet. So it's still way too early to opine on that. But we're focused on proactive management to ensure that we keep inventories in balance with demand. This is a key component to ensuring better structural profitability throughout the cycle for our business.

This is Jepsen. One other thing to highlight beyond the current environment and where we see the long-term strategy leading us is related to technology and how we engage with our customers. We're starting to think about market share not only as the number of units sold but as the number of acres covered by Deere products and technologies as a percentage of total acres farmed. In the future, we're going to continue accelerating the utilization of technology as we grow our precision upgrade retrofit business as well as Solution-as-a-Service offerings. Our engaged acre journey helps demonstrate the progress we've made in delivering value for customers and making their jobs easier to do. In fact, at the end of the quarter, we now cover over 415 million engaged acres globally, and importantly, highly engaged acres, which, as a reminder, means three production steps and value-creating activities in the John Deere operations center are performed, make up over 25% of the engaged acres amount, having grown by double digits this past quarter alone. While all parts of the world are seeing growth, Brazil is growing faster than North America on both engaged and highly engaged acres, which is a positive sign as we bring more technology to the market, in particular with satellite communications coming soon. And customers there see increased value given the multiple crop harvest each year as well as the ability to improve efficiency, profitability, and sustainability in their operations.

Those are excellent proof points. But one thing we haven't covered yet is costs. A key benefit of proactive cycle management should theoretically be the associated cost savings. We're seeing another year of positive price cost. But can you break down what's driving that positive differential for us?

Definitely, yes. That's a great point, Josh, and I'm happy to start. I'd begin by referencing back to what Josh Jepsen talked about earlier. Along with structural cost reductions, we continue to prioritize managing to our structural lines, which essentially means as production and sales come in, we pull levers to bring in costs. Our speed in pulling those levers and the subsequent timing of those actions hitting the bottom line is a top priority right now. The outcomes of these efforts show up in the production cost bar in our quarterly earnings bridge. Given that there's a lot that goes into that cost category, it might be helpful to walk through a few of the notable components. Starting with freight and material, we're beginning to see the benefits of our ongoing cost reduction efforts. We're encouraged by the opportunity to get back significant costs on freight and logistics as well as in our material spend. We're truly building strategic partnerships with our supply base as we jointly work to structure sourcing in a way that ultimately creates value for both parties. Coupled with our dual sourcing strategies, we've been able to enhance supply chain resiliency in tandem with cost savings, which has been crucial to optimizing returns amidst lower demand. Those cost reduction efforts are important given we have seen some manufacturing overhead efficiencies associated with managing to lower production levels. This references back to my comment on the timing of lever pulling and the timing of those actions impacting financials. We're actively taking steps to manage costs as we see demand change, essentially rightsizing the cost structure for a given production level. But in a year when we're moving down in volume, we've experienced some inefficiency as we make those adjustments. This headwind is showing up in the production cost bar as well, largely offsetting the gains that we're seeing in freight, logistics and material spend this year.

This is Jepsen. Maybe one thing worth mentioning is we also pull levers on assets. And that's evident when you look at our cash flow guidance change, which is now less in this guide compared to the change in net income. This is reflective of the fact we're starting to see our inventory come down following our production rate reductions in the first half of the year, creating a source of cash for the business. We're continuing to manage working capital and expect further reductions throughout the remainder of the year.

Perfect. And in the spirit of inventory management, I'd like to briefly touch on new and used inventories. Josh Beal, could you give us an update on where we stand today and what to expect in the back half of the year?

Yes, absolutely. And I'll start with new equipment. In North America, large ag, we're seeing intra-season inventory build as expected, albeit below industry levels and inventory to sales ratios increases in line with historical norms. That said, given our proactive underproduction previously discussed, we expect these numbers to fall by year-end with beginning 2025 inventory to sales ratios down significantly from where they stand today. Furthermore, we expect to see the largest decline in new inventory levels to occur during the fourth quarter as normal year-end seasonal declines are amplified by our planned underproduction for the year. On the used inventory side, we've seen total used units up year-over-year. While combines are up from decade lows, they remain below the highs seen in the last downturn. Meanwhile, used high horsepower tractors have increased more rapidly and are skewing more predominantly to later models, driving up the average value of the equipment. The trend that we're seeing in used high horsepower tractors was a key factor in our decision to underproduce retail demand in North America.

Josh, this is Cory. Just one thing to add here. As you look at the industry as a whole, we've been relatively disciplined. Our large ag new inventory in North America currently represents less than half of the industry's unit inventory and is significantly below the industry on an inventory to sales ratio basis. This is reflective of the discipline we're showing in this cycle. And on the used side, our dealers are hyper-focused on used inventory, managing them appropriately to ensure that they maintain a healthy trade ladder for their customers. For example, this cycle, we put a strong focus on our dealer pool funds to help manage used inventories. Dealers accumulate these funds based on new equipment sales and then use them to create competitive packages to help move used equipment. Our dealers prudently built up these funds over the last several years, nearly tripling their total available balance, which is now providing valuable support in the current market environment.

Thanks, Cory and Josh. That's a good reminder on intra-year seasonality swings and how those play into our larger production and inventory management. Shifting now to a region we haven't talked much about yet. I'd like to focus on Brazil. There's been quite a bit of buzz down there between the first crop harvest, Agrishow two weeks ago, and the recent devastating flooding in Rio Grande do Sul. Josh Beal, do you want to kick us off with a quick overview on the state of the business there?

Yes, happy to. And definitely a dynamic market to unpack. And I'd like to first start by extending our deepest sympathies to those affected by the tragic flooding you mentioned, Josh, including a significant number of our employees, customers, and suppliers. We want to wish everyone well in the recovery, and I want to emphasize that the safety and security of our employees is our first priority as we assess and respond to the impacts of the event. Operationally, while we do have facilities in the region, we do not anticipate any long-term impacts to the business at this time. Turning to the broader Brazilian ag environment. Soybean farmers saw profitability decline due to adverse weather conditions and global supply surpluses. That said, we do expect some favorable offsets with a strong cotton crop this year and a better-than-expected corn crop, which should provide some support to farmer sentiment for the 2024 season. All in all, the ag equipment retail demand in the region continues to decline, driving the change in our industry guide. While production cuts came through as expected for the quarter, retail sales came in lighter than anticipated. Nevertheless, we remain committed to underproducing retail demand in the region this year as we target year-end inventory levels, supportive of building in line with retail in 2025. Ultimately, we'll see more of the planned inventory reduction for the region in the back half of the year.

Perfect. Thanks for setting the stage, Josh. Now Cory, I believe you were just down there for Agrishow. Could you give us an update on what you saw there and the sentiment you were hearing from dealers and customers?

Absolutely. That sentiment was positive, Josh. This is not to say that we've reached an inflection point, given Josh Beal's comments earlier about retail activity. But I think the biggest takeaway was the excitement that we're seeing for our latest tech offerings. In fact, we're taking preorder interest for our StarLink connectivity solution and ended up oversubscribed by the first day of the show. We similarly sold out of our allotments for See & Spray Select and our Precision Ag Essentials bundle that was also a great success. Fundamentally, we're at the forefront of bringing our full ecosystem of solutions to the Brazilian market, and our customers there are very calculated in their investments. They adopt when it makes financial sense. Given the double or sometimes even triple crop rotations they're able to achieve, the payback for much of our technology and equipment is significantly faster than in the North American market. I'll take sprayers as an example. In the U.S., the corner soybean farmer may only spray three times annually. But in Brazil, a farmer on a soybean and cotton rotation could spray as much as 20 times a year. This is why we're so focused on bringing our customers the solutions and connectivity that enables them to drive more value from their operations. And the great thing is that tech adoption was only half the story at the show at Agrishow. We saw equipment order interest rebound from last year's lows, including some of our most productive product offerings like our new 9RX tractors and X9 combines. Adding in the strong fundamentals and demand for sugar cane harvesters, we feel optimistic about the future of agriculture in Brazil. So while the competitive landscape continues to expand in the region, we feel confident not only in our ability to deliver additional value to our customers via our integrated solutions, but also through the strong dealer network that we've worked hard to build out. These dealers are providing industry-differentiated support to our customers, helping to drive uptime and reliability required in an environment where there's no off-season.

Awesome. That's really great insight, Cory. Now for the last topic, I'd like to briefly touch on Construction and Forestry, which is relatively stable this quarter. Earthmoving end markets remain largely unchanged quarter-over-quarter, while road building has seen some minimal shifts in North America, albeit remaining at strong demand levels. Josh Beal, can you give us a little more color on this part of the business and what we should expect for the balance of the year?

Definitely, Josh. The key takeaway for the quarter is what you noted: minimal change at healthy levels of demand. As we've noted on previous calls, we expected some decline year-over-year unrelated to end market demand as we build less inventory this year relative to 2023. While contractor backlogs remain healthy and utilization at sustainable levels, we've seen rental CapEx come in, in our new and used inventory levels currently around long-term averages. Our guide is also supported by an order book for earthmoving equipment that extends out approximately 4 months into the fourth quarter. The only other point I'd highlight is around pricing. In addition to strong demand, we're also seeing strong competition, bolstered by industry inventory levels that have recovered and a shift in the competitive landscape with a stronger U.S. dollar. However, we remain committed to a disciplined approach that balances both market share and price. Overall, our earthmoving and road building segments continue to deliver structurally better financial performance than we've seen historically.

Thanks, Josh. That's a great update. And before we open the line to questions, Josh Jepsen, any final comments?

Certainly. The second quarter was strong, concluding the first half of the year positively. Even with a changing global agricultural market and a competitive construction environment in North America, we performed at higher levels throughout the business. In light of the recent downturn in agricultural markets, we now anticipate finishing the year moderately below mid-cycle levels. This quarter, we returned about $1.5 billion in cash to shareholders through dividends and share repurchases and remain dedicated to returning cash to shareholders while also investing in the business through value-enhancing capital expenditures and research and development. I want to emphasize that we are experienced with market cycles and have learned from past challenges, which has made us a more resilient and well-prepared business. Our proactive management showcases this, illustrating that we are in a structurally stronger position today with equipment margins projected just above 18% despite an unfavorable mix in a rapidly evolving global environment. Consequently, we believe we are positioning ourselves optimally for the future. Regardless of our place in the cycle, we remain focused on our customers and their needs, ensuring our solutions provide genuine value to their businesses while Deere and our dealers offer the necessary support for their success. Progress in technology adoption and usage, particularly with our engaged acre initiatives, underscores the benefits of our integrated offerings of equipment, technology, and digital tools. Ultimately, we are dedicated to enabling our customers to accomplish more with less effort, and we are increasingly excited about the numerous opportunities ahead of us.

Thanks, Josh. Now let's open it up to questions from our investors.

We're now ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure.

Our first question comes from Jerry Revich with Goldman Sachs.

I'm wondering if you could just expand on the...

Jerry, we lost you. You've broken up a little bit. We can't hear what you're saying.

Our next question comes from Angel Castillo with Morgan Stanley.

This is Grace on for Angel. I think your updated guidance for Production and Precision Ag, I believe, implies 50% decrementals and high teens margins. So can you talk about the underlying drivers of that? And what you see as ultimately the normalized level of profitability for the segment? And as part of that, what gives you comfort that we will see margins move lower to the low to mid-teens range?

Thank you for the question. In the quarter, we noticed a further decline in markets for Production and Precision Ag globally, which is reflected in our industry guidance. We experienced pullbacks in North America, Brazil, and Europe. Consequently, we've adjusted production to align with retail demand. One significant change from our previous commentary involves North America, where we observed a softening primarily in large tractors. With this decline, there has also been an increase in used inventory for high-horsepower tractors. Therefore, we've decided to produce below retail demand for large tractors this year in North America to reduce our ending inventory. We believe this strategy positions us well for 2025, given current market conditions. This is evident in some of the declines you've noticed. In the first half of the year, we maintained production at healthy levels in line with strong retail demand, but we have seen a pullback that is reflected in the decrementals.

Yes, Grace. This is Josh Jepsen, maybe just to comment around decrementals. I think full year, I think we expect PPA to do around 44%. I think the back half is actually pretty similar to that, so not materially different. And maybe important just compare juxtaposition terms of the structural profitability of that business is if we look back to 2020, the business was around, call it, 90% of mid-cycle, which is not terribly far from where we are today for Production and Precision Ag. And we did around 16% operating margin adjusted for some one-time things that occurred during that time. So 16%, today, the middle of our guide is 21%. So I think underlies the shift we're seeing from a structural profitability perspective, even with, as we noted earlier, a mix that has been less than favorable for us, both from products as well as regional shifts.

Our next question comes from Mig Dobre with Baird.

I'm wondering if you can maybe put a finer point and help us understand how large is this underproduction in both PPA and SAP? What percentage of revenue or the revenue decline, if you would, is related to this underproduction? And as we're looking at your disclosure on Slide 15 for dealer inventories, how should we think about that two-wheel drive tractor number exiting fiscal '24?

Thank you, Mig. I appreciate the questions. In terms of total underproduction for the year, starting with the large agriculture segment, we expect global underproduction to meet solid retail sales to be in the high single digits. In North America, for large tractors, it may be around that range, possibly slightly higher. In South America, particularly Brazil, we are seeing higher numbers as we reduce inventory in combines and tractors. In Europe, our second region, tractor production aligns with this guidance in the midsize category, while combines are somewhat heavier. Overall, for Production and Precision Ag, we anticipate about high single-digit underproduction globally. Regarding tractor inventory levels, we are currently at about 30%, which is typical for this seasonal build, potentially a bit above the historical average but within that range. Importantly, we expect a notable decrease in ending inventory levels in the latter half of the year. Last year, row-crop tractors finished with around 15% inventory to sales. This year, it will likely be closer to 10%, indicating significant underproduction on a unit basis.

Yes, Mig, this is Cory. I want to provide some additional details regarding our inventory situation. We are currently on a unit basis significantly below the overall industry levels. For row crops, for example, we are at half of the industry's new inventory, and we plan to reduce that even further. As Josh mentioned, we expect to lower our inventory from over 15 percent to around 10 percent by the end of the year. This will result in reduced production in the second half of the year while still maintaining strong margins throughout PPA. This strategy puts us in a favorable position to respond to future retail demand. We will be reducing those inventories, and expect them to be in the hundreds by year-end for new row crop tractors.

Yes, this is Josh Jepsen. Compared to the past, we are ensuring that our inventories are strategically placed, being as proactive as possible and avoiding any delays in addressing demand. This approach reflects lessons learned and we believe it positions us better for the future. Additionally, it influences the overall duration of the cyclical impact we experience.

Yes, maybe a final point on that to support Josh is that actually in the month of April, we saw the industry peak in row crop tractors, and we're proactively pulling back at the peak before the decline comes. So I think that's another indicator.

You had asked about small ag as well. I mean, just maybe a couple points there. I don't have it for the whole segment, but if you kind of break down some of those subcomponents. Small tractors have been high inventory, particularly in compact utility tractors. Pretty significant underproduction there. It's double digits. On sort of the mid tractor space, they're kind of in line with our comments around tractors, it's kind of a high single digit on the midsize.

Our next question comes from Kristen Owen with Oppenheimer.

Mine will be somewhat of a follow-up to the last, which is given the high level of underproduction in the back half of the year, and as mix implications being more toward this high-value large form factors, I'm wondering if you could talk a little bit more about those offsets, what you've done already to help protect that decremental margin? Arguably, that should be actually significantly higher given the mix. So what actions you've taken already? And how to think about the cost benefits layering into the back half of the year that's offsetting that underproduction?

Thanks Kristen. I'll start and jump in as well here. I think a few things. I mean, certainly, I think as you think about 2024 and particularly underproduction, primarily shifted towards the back half of the year, we have had some adjustments in rates and things. And we've talked about that in terms of some of the overhead and efficiencies that have come into the business as we made those changes. You're seeing that in production cost. That's a headwind there that's offsetting the tailwinds that we see in material and freight, excuse me. So that is having an impact on some of the changes. And certainly, that underproduction plays a part in terms of what we're seeing there as far as decrementals. We're definitely taking cost steps. Our focus on taking material and freight out of the business continues, and we expect that to build in the back half. That is helping offset some of the decrementals as we pull down production in the latter part of the year.

Kristen, it's Jepsen. I would say we definitely expect to see a larger impact in Q4 due to the seasonal increase in retail activity, along with seasonal shutdowns. As we progress through the second half of the year, we're adjusting production rates, as Josh mentioned, and aligning our cost structure, which will benefit us moving forward. The way we are finishing 2024 is not a reflection of what we anticipate 2025 will be like as we enter that year, regardless of the trends in the end markets.

One thing I would add, I mean, one of the additional points I'd make is we're actually preparing for probably the largest new product launch going into 2025 we ever have. So while we're pulling production down, we're also readying to launch some of the highest, most productive products we've ever had. So all new combines, all new four-wheel drive tractors, all of that is taking place and included in what we're doing to prepare in terms of the cost structure as we head into '25 and bring a value proposition even higher for our customers going forward.

Yes. And I think just building on that too Cory, excitingly, a lot of those new products are coming with great tech, harvest setting automation, predictive ground speed automation, exact shaft for vision. There's a lot of great solutions coming in '25 as well.

Our next question comes from Nicole DeBlase with Deutsche Bank.

Could you share your insights on the crop care Early Order Program so far? Also, I noticed that the C&F decrementals were a bit high this quarter. Are you expecting this trend to continue? What are your thoughts on decremental margins for the second half of the year?

You're right that the answer is quick on crop care Early Order Programs. So that sprayer Early Order Programs just opened up at the beginning of the month. So we're about, what, 1.5 weeks, 2 weeks in now to that. It's early, and that tends to build throughout the course of the program. So really not enough to comment at this point just based on the very early stages of that program.

Nicole, this is Jepsen also on EOP. I think one thing important to note we've seen, as we get into times of uncertainty, order activity tends to probably push a little bit later through the phases of those programs as customers dealers exercise a little more optionality and want to have a little bit firmer view of how this planting season goes and how is crop emerging, just another point of reference there.

Yes. I think maybe shifting, Nicole, to your question on C&F decrementals for the quarter. I think the one thing to point out there is we did have lower price realization than originally anticipated. That was due to a discount accrual that we put on some field inventory that will affect really sales for the balance of the year. So it's a little bit of a timing around price realization. That's why you see us keeping that full-year guide at 1.5. We don't expect that to continue. It's just really a timing of making that change in back half should support that full-year price about 1.5.

Our next question comes from Jairam Nathan with Daiwa.

I wanted to ask if you could provide more detail on pricing. What trends are you observing across different regions and segments? Also, could you give us an overview of what we might expect next year regarding pricing?

Yes. I mean a bit early to talk about 2025 pricing. But I think as we talk 2024 and where it stands, and then we kind of do a walk around the world here, again, in large ag, we're talking about 1.5 points price realization for the year, as we kind of step through the different regions. North America, we would say normal price realization is in the range of 2% to 3%. We're actually in that range. In fact, on the top end of that, if not a little bit better there. So we've seen strong pricing and expect that to continue through the course of the year. South America, we've talked Brazil specifically with the inventory that we built in 2023. We will have some negative price there this year kind of in the mid-single digits. Candidly, as that sort of plays out through the course of the year, was higher on the front end, it starts to mitigate on the back end. And then Europe, very, very similar to North America. We're seeing pricing in kind of that normalized range of 2% to 3%. And we expect that really to continue through the course of the year. Small Ag and Turf, very similar comments. I think in Construction and Forestry, again, we've seen certainly a more competitive environment there. We talked about the discounts that we accrued this year. But again, we're managing that balance and that dynamic and then feel good about the 1.5% price realization that we're going to maintain through the course of the year.

Our next question comes from Rob Wertheimer with Melius.

My question is kind of a big picture one on Production and Precision Ag in North America. And just how you think about the trade-down cycle? Your machines have gotten bigger, more capable, more productive, more expensive in some ways. And I'm curious if you see this as an unknown whether they all find homes in the second and third owners or whether you guys know the market better than anybody in the chain of buyers? Or whether you see enough of the moderate-sized farms, the second buyers, to kind of absorb the equipment? Just how you think about that playing into the overall cycle?

Yes, Rob, this is Cory. I'll maybe take a first stab. Look, I'll use tractors as an example. One thing we watch very closely is used inventory on row crop tractors. We've seen late model used above 300-horsepower grow, and we've watched it closely. But if I can give you the example, if you went back to the previous peak, 14,000 unit industry back in 2014, there have been about 14,000 units but only 30% of that industry would have been above 300 horsepower. If you fast forward today, to 2024, we're about 13,000 units above 220, and 70% of that is above 300, and that's being driven off of the structural improvement that our customers are making for how they plant predominantly. So you think about the adoption of ExactEmerge, we're seeing ExactEmerge continue to drive forward. We're in the mid-80s headed toward 90-plus percent electric drives on planters, high speed. That drives power requirements, the absorption of that at the top end of the market. We see those tractors being required throughout the market as all customers take on the ability to plant better. Take this year, we got less than 50% of the crop already planted. There's no better time if you think about timeliness than to be able to plant fast in an environment where you have a shortened window. So I think we're set really well. Obviously, the timing of year-over-year trade cycles and interest rates has people pause in an environment like we're in. But if you look at the age of the fleet and you look at where we're headed, we feel really confident that our solutions are set up to move through the market. Combine that with performance upgrades and precision upgrades together with what we're doing with precision ag essentials, and we'll be able to take most of the value we're creating out through the fleet into each of those customers. So we feel pretty good about that.

Yes, Rob. I would like to add that we have confidence because regardless of where the customer is in their ownership journey, whether they are the first owner or the fifth, there is a strong desire for technology upgrades that enhance productivity and efficiency, allowing them to complete tasks within tighter timeframes. As Cory pointed out, the planting season is particularly time-sensitive. This ongoing demand is evident, and a great example is our precision ag essentials program, where we are connecting machines. More than two-thirds of the machines we've equipped with these technologies previously lacked any technological upgrades. Thus, we are bringing new customers into the fold who have not used features like guidance or other tools before. This is significant. Additionally, our dealers put in a lot of effort; they understand their customers thoroughly and are aware of their area responsibilities. They work diligently to ensure that machines are properly specified and assigned to the right customers.

Our last question comes from Jerry Revich with Goldman Sachs.

Yes, I apologize for the sound issue earlier. I wanted to ask, you folks are hyper focused on used inventories just normally. Based on the actions that you've taken, rising use of full fund roughly $2 billion destock, what's your level of confidence that late model inventories will stop moving up from here? I appreciate that it's more of an unknown, but I'd love to hear how you're modeling and thinking about it versus additional potential levers?

Thank you for the question, Jerry. I'm glad to see you back. I'll start, and Cory and Josh can chime in as well. It really begins with our proactive management of new inventory. We've decided to underproduce retail demand for row-crop tractors in North America in 2024 and to reduce our inventory sales levels significantly compared to where we ended last year. This provides us with an opportunity, as Cory mentioned. There's a demand for the equipment, and considering the current environment and interest rates, we realize it's slowed down the movement of equipment through the pipeline, and we don't want to add to that issue. Thus, it seems wise to decrease the new inventory. We're dedicating considerable time to work through the used equipment as well. However, as we just discussed, there is definitely a demand for the value it offers. We can see this even this year with the planting season in the U.S., especially with the delayed spraying and the wet conditions. Being able to quickly engage in high-speed planting is crucial, and the demand for more productive equipment is certainly present. Cory, do you have anything to add?

I used the planting example earlier, but I think it also applies in spring, and it applies in harvesting in the end. Those windows get tighter and the ability to both cover more ground more quickly at all levels and all customers, I think, helps us drive confidence. Together with the fleet age, drives confidence that we will consume that product. And we've got tools in place to be able to do it. Obviously, it slows down when markets are uncertain and crops aren't in the ground. But if you look at the fleet age and you look at the technologies that are coming and you look at how customers are adopting those technologies trend-wise over time, we look at profitability coming down, but it's still solidly profitable in the business. We know that it pays to adopt these technologies, and we expect those used units to move into the market.

Thanks for the question, Jerry. I appreciate all the questions today. I think we're at the end of the list here. That's all the time we have. We appreciate everyone's time. Thanks for joining us. We'll talk soon. Have a great day.

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