Good morning, and welcome to Deere & Company First 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; Ryan Campbell, President, Worldwide Construction and Forestry and Power Systems; and Chris Seibert, 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 2026. 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. I will now turn the call over to Chris Seibert.

Good morning, and thank you for joining us today. John Deere finished the first quarter with a 5.9% operating margin for the equipment operations. Our results demonstrate the strength and resilience of a diverse portfolio that spans multiple markets and regions. Every business segment achieved higher net sales year-over-year, with both small agriculture and turf as well as Construction & Forestry growing over 20%. Our quarter's results surpassed our expectations, fueled by shipping volumes that exceeded our initial targets. Throughout the quarter, we observed a continued strengthening of our order books in various product lines, particularly in small agriculture and turf, alongside construction. In earthmoving, we saw double-digit year-over-year growth in retail settlements, and the expanding order bank has led us to raise our industry outlook for both construction and compact construction equipment in North America. In small agriculture, orders for midsized tractors supporting dairy and livestock production have remained strong, while there's been increased order velocity for North American turf equipment and compact utility tractors. Global large agriculture fundamentals, although still facing challenges, remained stable during the quarter. This stability has allowed us to slightly improve our net sales forecast for North American large agriculture this year, as our combined early order program performed better than expected and large tractor order activity rose. These positive developments helped counterbalance softer forecasts for the South American agriculture equipment market in 2026. The trends we've observed over the last three months have reinforced our belief that 2026 will be the low point of the current cycle as we anticipate mid-single-digit net sales growth for equipment operations this fiscal year. In the first quarter, net sales and revenues rose 13% to $9.611 billion, while net sales for equipment operations climbed 18% to $8.001 billion. Net income attributable to Deere & Company reached $656 million or $2.42 per diluted share. Looking at our individual segments, starting with the Production & Precision Ag business, net sales of $3.163 billion were up 3% compared to the first quarter last year, driven mainly by favorable foreign currency translation. Price realization remained relatively flat, with North America showing positive results, offset by additional incentives in the South American market. Currency translation positively impacted results by nearly 4 points. Operating profit was $139 million, leading to a 4.4% operating margin for the segment. The year-over-year decline was largely due to higher tariffs, an unfavorable sales mix, and increased warranty expenses. In Small Ag & Turf, net sales jumped 24% to $2.168 billion in the first quarter, spurred by higher shipment volumes and positive currency translation effects. Price realization was positive, adding 2 points, while currency translation contributed just under 2.5 points. Operating profit rose to $196 million, resulting in a 9% operating margin due to increased shipment volumes, a favorable sales mix, and price realization, despite the impact of higher tariffs. Regarding our industry outlook for global agriculture and turf markets, we continue to project a decline of 15% to 20% in the large agriculture equipment industry in the U.S. and Canada this year. However, we are seeing positive trends that should stabilize this segment in the near term and improve the conditions for growth. While global row crop production remains strong, robust demand for commodities and normalized trade flows are supporting prices above last summer's lows. Additionally, government programs are aiding farmer liquidity temporarily, and improvements in the used inventory market are enhancing machine replacement opportunities as the fleet ages. Proposed government policies, including additional support for biofuels, could further promote growth. For small agriculture and turf in the U.S. and Canada, we estimate industry demand will remain flat to up 5%. The dairy and livestock sectors are profitable, supported by strong beef prices, and there's a modest recovery in the turf market after years of declines. In Europe, the industry is still forecasted to be flat to up 5%, with steady interest rates and manageable long-term financing costs contributing to stability in key markets. In South America, tractor and combine sales are now anticipated to decline about 5%, primarily due to challenges in the Brazilian market. In Asia, industry sales are expected to be flat to down 5%, with a slight drop forecasted in the Indian market from last year's strong levels. Looking ahead, our forecast for the Production & Precision Ag segment is still anticipated to decline between 5% and 10% for the full year. We expect positive price realization of around 1.5 points and about 3 points of positive currency translation, with the operating margin forecasted between 11% and 13%. For the Small Ag & Turf segment, we now project net sales to increase about 15%, which includes positive price realization of 2 points and currency translation of 2 points, with the operating margin now projected to be between 13.5% and 15%. Moving to Construction & Forestry, net sales for the quarter rose approximately 34% year-over-year to $2.67 billion due to higher shipment volumes and favorable currency effects. Price realization was slightly negative by just under 0.5 points, but currency translation had a positive impact of 3.5 points. Operating profit of $137 million more than doubled year-over-year, resulting in a 5.1% operating margin primarily due to increased shipment volumes and production efficiencies, although this was partially offset by higher tariffs. Industry sales for construction and compact construction equipment in the U.S. and Canada are now expected to grow around 5% year-over-year, supported by U.S. government infrastructure spending and rising rental demand. Our retail settlement activity year-to-date has been better than expected, and our order books are expanding. Global forestry markets are expected to remain flat, while global road building markets should see a growth of about 5%, driven by increased activity in both North America and Europe. For the Construction & Forestry segment outlook, net sales for 2026 are now forecasted to rise around 15%. Our guidance for this year includes about 2.5 points of positive price realization and just over 2 points of positive currency translation. We anticipate the segment's operating margin to increase to between 9% and 11%. In our Financial Services operations, the worldwide net income attributable to Deere & Company for the first quarter was $244 million, reflecting a year-over-year increase largely due to favorable financing spreads and a lower provision for credit losses, despite favorable special items from the previous year's first quarter. For fiscal year 2026, our outlook has improved to $840 million, primarily driven by a reduced provision for credit losses. Finally, our updated outlook for net income for fiscal year '26 is between $4.5 billion and $5 billion, with an effective tax rate expected to range between 25% and 27%. Our cash flow projections from the equipment operations have increased by $500 million at both ends of our range, now expected to be between $4.5 billion and $5.5 billion. This concludes our formal comments. We'll now move to some specific topics related to the quarter. To begin, let's review Deere's results: net sales were up about 18% year-over-year, and margins were just under 6%. The first quarter of fiscal year '25 had an easier top line comparison due to last year's underproduction in Small Ag & Turf and Construction & Forestry, yet our performance still exceeded our plan. Josh Beal, could you explain what happened this quarter and how it affected our full year outlook?

Yes, absolutely, Chris. Let's start with our expectations for the quarter. Overall, we were projecting double-digit net sales growth in the equipment operations, driven by estimates for over 20% growth in both small ag and Construction & Forestry, while large ag sales were expected to be flat year-over-year. Despite the projected net sales increase, we were expecting lower equipment operations operating margin year-over-year due to incremental tariff expenses and an unfavorable product and regional mix in large ag. Across all 3 business units, we executed ahead of our plan for the quarter. And as a result, our performance reflects better top line and margins than originally forecasted. Better-than-expected shipment volumes were the primary driver of both the top line and margin beat. In PPA, shipments of North America large tractors were ahead of plan, while C&F benefited from higher road building sales in Europe and North America as well as ahead of planned shipments of both construction and compact construction equipment in North America. On the pricing front, C&F pricing was slightly negative this quarter, although competitive price pressures have started to show signs of easing. The results from the quarter in C&F had a slight impact on the timing of our expected price realization in the segment. And as a result, we've revised our full year forecast down by 0.5 points. PPA pricing was neutral during the quarter, primarily due to discounts implemented in South America, responding to FX movements as well as targeted field inventory reductions. Our PPA price guidance for the full year remains unchanged, and we still expect positive full year price realization in South America. Foreign exchange was also impactful in the quarter. The U.S. dollar was weaker year-over-year against several relevant currencies for Deere, particularly the euro and Brazilian real. The translation impact drove year-over-year net sales gains for all 3 business units. Transitioning to cost management. Excluding tariffs, production costs were lower year-over-year for all business segments in the first quarter. This was largely attributable to operational efficiencies from higher production and disciplined overhead spending. Tariffs for the year are still projected at around $1.2 billion as mitigation on Section 232 steel tariffs and some relief in India have been offset by volume growth. As you mentioned in your opening comments, our full year industry demand outlook for most markets improved over the course of the quarter. We maintained our net sales guidance for PPA, even though South America softened due to some incremental improvement in North America, and we increased the net sales ranges for SAT and C&F by 5 points. That resulted in higher projected margin ranges for small ag and C&F, resulting in an increased net income forecast of $4.5 billion to $5 billion.

Perfect. Thanks for that breakdown, Josh. It is encouraging to see that our teams continue to execute and focus on what we can control while also seeing some pickup in end market demand. Now let's take a moment to talk about the broad ag industry. Since late last year, we've seen several supportive developments in the U.S. market, including the recently announced $12 billion Farmer Bridge Assistance program and renewed purchase commitments for U.S. commodities. Can you add some additional color to what this could mean for U.S. growers?

Sure, Chris. I'll start by reiterating a couple of comments on the global ag economy that you mentioned in your opening. Global crop production remains strong, but so does global demand. At current commodity price levels, producer margins remain pressured in many geographies. Specifically for the U.S., the USDA just updated their 2026 forecast for net cash farm income. While 2026 U.S. net cash farm income is forecasted to be up around 3% from 2025, much of this increase is being driven by more government payments. Crop cash receipts are expected to be up slightly this year, but expenses are projected to increase as well. Given this setup, we continue to anticipate a challenging environment for many row crop farmers. However, as you mentioned, we're starting to see some stability for producers as China has resumed purchasing U.S. soybeans and the recently approved government support program looks to provide some near-term liquidity. Additionally, strong farmland values are keeping debt ratios low despite the lower margin backdrop. Notably, the U.S. fleet age is high and continues to get older as customers put more hours on their equipment. With the stabilization that we're seeing in U.S. ag fundamentals, along with an improving used market, our expectation is that we'll start to see some replacement demand return.

This is Jepsen. Maybe one key point to reinforce. The government payment should continue to mitigate downside risks for farmers' balance sheets, acting as a bridge in an environment where crop cash receipts are under pressure. We believe that future policies around renewable fuels and additional export opportunities should drive demand and provide continued stability.

Great. Thank you, both. With the developments over the quarter in North America, it appears that we've moved past peak uncertainty and that the market is stabilizing. Building off that, could you also share an update regarding global ag inventories and order books?

Yes, definitely. Let's start with large ag in North America. On the new inventory side, we continue to be in a great position and hold onto our plan to produce in line with retail demand in fiscal 2026. We also continue to make progress in North American used inventories. We saw a typical seasonal increase in used Deere combines during our first quarter. However, current inventory levels for Deere combines remain about 15% below their peak in March 2024 with model year distribution at a normal mix. Deere high-horsepower tractor units were down mid-single digits in our first quarter and have declined by over 10% from their March 2025 peak. Late model mix is improving, too. It's notable that while total Deere high-horsepower tractors are down over 10% from March, model year '22 and model year '23 ADAR tractors are down more than 40% in that same time period. Just this past quarter alone, model year '22 and model year '23 ADARs were down over 20% sequentially with model year '24 ADARs also declining by over 10%. While continued reduction in used tractors remains a focus, we're encouraged by the progress that we're seeing. At the same time, large tractor order velocity for the North American market has picked up, and our rolling order books now provide visibility into the fourth quarter. We also just recently took our last calls for North American combine orders for the year-end, while we still expect that overall North American large ag industry to be down 15% to 20% this year, combines will be down less than that range. Similar to North America, we feel good about our new inventory positions in both Europe and South America. The one exception is combines in Brazil, where we're a bit higher than we want to be. We'll underproduce retail for Brazilian combines in our second and third quarters to bring those inventory levels down. Despite being higher than our target, our current inventory to sales ratio for combines is still significantly lower than what we see with competitors. As far as order visibility, European tractor order books are currently 4 to 5 months out, while South American orders are full through our second quarter. Turning to Small Ag & Turf in North America. Last year's underproduction resulted in healthy beginning inventory levels for this segment that remain in place today. For reference, current new field inventory for both tractor horsepower categories in this segment, that's the less than 100-horsepower category and the 100 to 220-horsepower category are each about 40% lower year-over-year. Our ability to maintain those lower inventory levels reinforces our plan to build in line with retail demand in small ag this year. A commitment to that plan has been further supported by strength in order activity in the first quarter.

This is Jepsen. Maybe share an additional perspective following Beal's comments. Our channel has consistently worked to reduce used inventory levels and our deliberate approach to managing production and inventory set us up favorably both this year and into the next. With growing demand across various other markets and segments, we feel good about how we're positioned to execute for the remainder of '26.

Thank you, both. Now let's move on to Construction & Forestry. Josh Beal, we've already touched on C&F's performance in Q1, but can you please give us an update on the current business environment and outlook for 2026?

Yes, happy to, Chris. Let me start with the current market environment, and Ryan, please jump in with any additional color you might have. As you noted earlier, construction markets are a bright spot and continue to demonstrate resilience, bolstered by U.S. government infrastructure investments, decreasing interest rates, and improved rental demand. Recall that we underproduced retail in the first half of fiscal 2025, which set us up to produce in line with retail demand this year. We saw strength in our first quarter in retail sales that exceeded our estimates as settlements of construction and compact construction equipment were both up mid-teens year-over-year in our first quarter. What's perhaps most encouraging is that our order bank has risen by over 50% in the past quarter, reaching its highest point since May of 2024. This provides us with clear visibility into the second half of the fiscal year, allowing the Construction & Forestry team to optimize their production plans accordingly. Overall, we're very encouraged by the momentum that we've seen to start the year. Ryan, is there anything you'd like to add?

Absolutely. I share your enthusiasm, and I'm excited about what's on the horizon for this business. As I mentioned at our recent investor event in New York, there are numerous reasons for my optimism. At a macro level, the world is facing growing urgency to upgrade or replace key infrastructure. Investment in single-family housing, especially across the United States, needs to increase, and there's a huge demand to support the required infrastructure for AI investments. To get all this work done, the industry must boost productivity significantly with machines doing more work with precision and utilizing fewer resources overall. Meeting these goals requires smart machines and data-driven insights to execute tasks and manage job sites efficiently. And we believe we can help customers meet these challenges and we'll continue to invest on our side to ensure success.

Thanks for the recap, Ryan. Could you remind us of the investments that we're making to meet those challenges?

Sure, Chris. Let's start with excavators. As we've talked about, we are excited to announce our new Deere-designed 20-ton class excavators at the upcoming CONEXPO show in Las Vegas. We've included additional information in the appendix of the earnings presentation for those interested in more detail. Excavators represent about 40% of the North American construction equipment industry, and these models are the first introduction of fully Deere-designed and Kernersville, North Carolina-built machines to the market. We packed the new units with easy-to-use, productivity-enhancing technology while remaining absolutely focused on and making further improvements in quality and durability. This is the first step of what will be a multiyear launch plan for a complete line of excavators. We couldn't be more excited about sharing these first models with our customers. The CONEXPO event will feature 24 product launches, including world premieres of equipment from John Deere and 6 market debuts from the Wirtgen Group. The last several years, our efforts have been heavily focused on excavators. However, we continue to innovate across the product portfolio. From new equipment designs, the latest in precision and job site technology, we have never felt better about our complete product portfolio.

Thank you. On the digital side, yesterday, we completed the acquisition of Tenna. Could you please provide your insights on this acquisition and discuss how it aligns with the broader C&F business and strategy?

Yes. We're incredibly excited about bringing the Tenna team and their capabilities into the John Deere portfolio of businesses. It might help to take a step back and talk through our strategy at a high level in the C&F division. We think about the construction industry and how we want to compete in 3 different layers: machines, tasks, and job sites. On the machine side, completing our product portfolio of best-in-class earthmoving equipment, both in high-precision machines and those that are more basic is our focus at that level. Second, we're enhancing the tasks that the machines do individually on the job site through precision technologies like SmartGrade, SmartDetect, and SmartWay. The agreements with the 3 survey providers to provide a fully integrated grade control experience through our equipment is an example of what we are working on in this area. Third is having the capabilities to help contractors and customers optimize their fleets, operations, and job sites. Tenna provides a leading technology platform that automates contractor workflows, gives near real-time insights into equipment operations and maintenance and enhances visibility, planning, and coordination to boost productivity and cut costs. Tenna's leading fleet-based products and services, combined with the productivity solutions from Virtual Superintendent, who we acquired a little over a year ago, along with the foundational capabilities we've built through the John Deere Operations Center gives us a unique value proposition to offer customers as they work to optimize their fleets, operations, and job sites. Importantly, Tenna and Virtual Superintendent are and will continue to be brand agnostic, focused on mixed fleet solutions in step with the reality of the fleets and job sites in the industry.

Thank you, Ryan. It sounds like there's a lot to be excited about in the Construction & Forestry segment going forward.

This is Jepsen. Maybe one thing in addition to the C&F product releases, I'd like to share a quick comment about innovation in our other businesses. At the end of this month, we'll be at Commodity Classic in San Antonio, Texas with several major product launches and updates to our advanced technology solutions. And just last week, at the World Ag Expo in California, we showcased several innovations that are helping drive value for our high-value crop producers as well.

Thank you both for your comments. Josh, do you have any final thoughts before we open the line for questions?

Yes. Thanks, Chris. The first quarter demonstrated great execution from our teams. All business segments operated efficiently and delivered results ahead of plan. At the same time, we saw stabilization and improvement in a variety of our end markets. Our channel maintained focus on inventory management, particularly in North American used equipment. Our financial strength has allowed us to maintain high levels of investment throughout the cycle, which positions us well for future growth, particularly as the cycle inflects. The recent and upcoming product and technology introductions are tangible examples of that outcome and bolster our confidence in our growth aspirations through the end of the decade and beyond. Over the quarter, we returned nearly $750 million in cash to shareholders through dividends and share repurchases, demonstrating that strong through-cycle financial performance supports both reinvestment in the business and shareholder return. Finally, I'd like to express my sincere appreciation to all members of the Deere team. The commitment and dedication demonstrated by our employees, dealers, and suppliers across every area of the business have been instrumental in maintaining this high level of discipline. The Deere team is committed to executing our strategy and focused on solving our customers' biggest challenges.

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. In consideration of others and to allow more of you to participate in the call, please limit yourself to 1 question. If you have additional questions, we ask that you rejoin the queue.

Our first question comes from Kristen Owen from Oppenheimer.

And just briefly, Josh Jepsen, thank you so much for all the help over the years. If I could start maybe with the pricing question. You gave some helpful commentary on PPA pricing. But I'm just wondering how we should think about the bridge from here at neutral in Q1 to the full year guide of 1.5%. And similarly, if you could help us, you trimmed your expectation on C&S. Can you just maybe walk us through what you're seeing on the pricing side there?

Yes, thank you, Kristen. I'm happy to provide some insights. Starting with large agriculture in the first quarter, we implemented some additional incentives in South America due to a slight slowdown in that market. As a result, we plan to reduce inventory, specifically in combines. To give you some context, while our combined inventory has increased somewhat in Q1, it remains about half of the peak levels we achieved in 2023. We are in a solid position but want to be proactive. Given the slowdown we’ve observed, we've taken some measures, but we don't anticipate this trend to persist throughout the year. We expect Brazilian price realization to be positive for the full year, and we have also seen positive pricing in North America. Additionally, we made some accruals in the third quarter of last year related to large agriculture for pool funds, which should lead to easier comparisons as we progress through the year. Therefore, we still aim to maintain a 1.5-point increase in pricing for large agriculture.

Yes, Kristen, this is Jepsen. I think on the PPA side, that 1.5 points for the full year, and I think we would expect that really as we run through the remaining quarters. So not too lumpy or different as we go through 2 to 4Q.

Yes. Maybe just a bit on C&F. We took the guide down slightly. That wasn't a function of our lack of confidence in us being able to execute price increases, really a function of how fast the year started. We announced some price increases in January. And quite frankly, we were surprised at how quickly we had built our backlog in the first couple of months of the year. So the price actions are going to be delayed a little bit. It's important to keep in mind that it's Wirtgen, it's parts, and also earthmoving. And so it's a combination. Each one will do a little bit differently. And then over the rest of the year, we'll start to lap some of the more aggressive pricing actions that we had to take last year. So overall, we still feel very confident in the price realization for the year.

Our next question comes from Angel Castillo from Morgan Stanley.

Could you elaborate on the current order strength, especially regarding the C&S side? I'm interested in understanding the pricing dynamics and any surprising strength you've encountered. It may be complex to analyze, but I'm curious if you can distinguish factors like significant bonus depreciation, end market influences, Deere's performance tied to your product innovations, or merchandising incentives. I would like to know what different factors might be contributing to this strength and if you can break that down for us.

Yes. I'll start, Angel, and Ryan, Josh jump in. I mean, first and foremost, I would just point to contractor confidence. More and more as we have conversations with contractors, they feel good about their backlog. And candidly, they feel good about that backlog growing even as they look into 2027 as well. So I think it's strength in their end markets and particularly around larger projects, I mean infrastructure mega projects certainly supporting data centers as well is where we're seeing more of that strength. Housing, still subdued to start the year. There's some expectation that, that will pick up a little bit as we get some easing as we move through the course of the year, but that's still a segment for smaller contractors where there's still challenged on the housing side. But again, particularly for those larger folks, they're seeing strength in their order book, and I think that's starting to translate into order activity.

Yes. Just to add to that, Angel, we've seen rental refleeting, which has been positive. Our retails were up mid-teens in the quarter. So we see strength there. So not only order activity, but retail more than matching, which has helped as well. So I think that's given us more confidence as we've seen that build.

Yes. Just maybe to summarize, kind of all of the above of the things that you identified. I've been out quite a bit with customers, geographic mix, and a broad swath of the different types of construction, and it's really broad-based. They feel confident. I think the construction activity has been strong in the last couple of years. They were probably a little more cautious with respect to fleet for various reasons last year and the year before that. But now the confidence in their backlog is growing and they need to start making more investments in the fleet.

And maybe just one last comment on Wirtgen side too, we're seeing strength there. We mentioned it's not just concentrated in North America, certainly strong infrastructure investment there. But Europe as well, we're seeing some pickup. Infrastructure in Germany, as an example, has been positive. So strength in both of those markets as well on the roadbuilding side.

Our next question comes from Stephen Volkmann from Jefferies.

Maybe I'll just stay with this topic. I guess given what you guys are all saying, which sounds very reasonable, the kind of up 5%-ish kind of forecast feels pretty conservative. So I'm curious if you think there's some headwinds that we should be keeping in mind maybe as the year progresses or something. And then sort of on that same note, your net sales forecast in C&F is quite a bit higher than your end market forecast. So maybe you could tease that part out as well.

Yes. I think you're right, Steve, that there's certainly optimism. You heard us say that in our prior answer. It is mixed in some segments. Housing has still been subdued. So I think that's part of it. But yes, I mean, overall optimistic, and we're seeing strength there. On the sales guide, up 15%. Recall that we did some pretty strong underproduction last year, which has really set us up well for this upturn. I mean, it was close to 10%, just high single digits for the segment last year. And so we're building in line with retail this year. So that is helping. On top of that, you're getting 2.5 points of price, so getting positive price and currency has been a tailwind as well. So for all those reasons, we're much closer to 15% now versus those markets we're seeing are up 5%.

Our next question comes from David Raso from Evercore ISI.

We'll miss you, Josh. When it comes to the large ag commentary, I was intrigued by the order book color. But obviously, you're not willing to change the guide on large ag. I was just curious, that order book, is it coming in just in a sense earlier than you would have thought in the sense of you have the same view and the order book just came in at a level where now you feel you have just better visibility? Or are we at the stage where Waterloo or East Moline is starting to kind of increase line rates? And I'm not just talking seasonality, I'm speaking about versus your original budget. I'm just curious how you're sort of digesting the at least more stable, better order book on large ag when, as you pointed out, I mean, grain prices, even this morning, some of the USDA corn acre number came in, I thought kind of constructive, but corn is still not reacting positively. And I'm just trying to put together how you're thinking about that order book versus corn prices just aren't really supporting the improvement.

Thank you for the question, David. On the North American front, our forecast remains that the industry will decline by 15% to 20%. Breaking this down by product lines, our spring seasonal products like sprayers and planters experienced end-of-production cycles last summer, concluding in August and September, during a time of significant market uncertainty and lower commodity prices. Those product lines are likely closer to the upper end of the decline range, around 20%. Over the past quarter, however, we've noticed an increase in order velocity for tractors, especially in the last month, indicating they may be down closer to 15%. Regarding combines, as we noted earlier, we expect that segment to perform better, likely experiencing a decline of around 10% to 15%. In terms of market drivers, while the agricultural fundamentals remain challenging and haven't shifted significantly during the quarter, we perceive a more stable environment than last summer and into the fall. China has returned to the market, and there has been some stability in grain prices, though not much upside at this time. Moreover, the age of the equipment fleet is increasing, with minimal replacements occurring over the past couple of years. There are operators in need of equipment replacement despite the current agricultural market conditions. Additionally, we've observed notable improvements in the used inventory market, with significant changes even within this quarter. For instance, model year '22 and '23 agricultural equipment is down 20% sequentially this quarter, suggesting movement in that market. This is beginning to stimulate some replacement demand, albeit modestly, considering the existing fundamentals, but we anticipate that replacement activity will gradually increase over time due to these factors.

Yes, it's Jepsen, the only thing I'd add to that, David, to your question is, yes, we are seeing some increased build rates in tractors, and that's kind of back half related to this order activity that we saw come through. As Josh mentioned, we're already out nearly through Q3. So the back half of the year, we see some of that step up. But that's based on actual orders that we're seeing. And I think really underlying some of the replacement that Josh just mentioned. And as we see used get healthier, I think that's aiding that trade ladder, aiding the ability to move those used. We've seen stability in used prices. And then as you take inventory down, it's facilitating more activity there.

Our next question comes from Tim Thein from Raymond James.

Josh Jepsen, thank you for your support over the years. I have a question regarding the outline we discussed at the beginning of the year about price compared to production costs. Given the slower start in some segments and your mention of fluctuations in costs and tariffs, has there been any change in expectations for the full year regarding price versus cost?

Yes, you're correct, there have been some changes during the quarter. We are likely now closer to being price/cost neutral for the entire year, particularly due to a slight decrease in pricing for C&F. This price/cost neutral status takes into account the $600 million in additional tariffs we are facing this year. We're managing to cover that tariff impact as we head into 2026. Tariff costs have remained fairly stable from one quarter to the next, although there have been some fluctuations. The full-year guidance for tariffs remains at $1.2 billion. We've noticed a slight increase in inflationary pressures on materials, but this has been balanced by improvements in overhead efficiency as we have increased our volume. Therefore, we may see a slight disadvantage from a production cost perspective, excluding tariffs. Overall, we are maintaining a price/cost neutral position with the pricing adjustments we've implemented.

Yes. And maybe just one thing. First quarter ex tariffs, we were production cost favorable. So I think it speaks to just the things we can control and how we're operating in an environment with a fair bit of uncertainty.

Our next question comes from Steven Fisher from UBS.

I echo my sentiments. Josh appreciate the help. In terms of some of the regional dynamics, I think there were expected to be some pretty big differences between North America and Europe in the first quarter. It sounds like maybe North America ended up being a little bit better on the tractor side, perhaps. Anything in particular from a regional production perspective we should be expecting or just general for Q2, how to model that and any of the differences for the rest of the year because I think those can certainly affect the margin progression in large ag.

Yes. Thanks for the question, Steven. Regional mix was certainly an impact on large ag in the first quarter. I mean if you look at overall volume in the large ag business in Q1, we were effectively flattish year-over-year in terms of total volume, but that mix was Europe up, Asia, it was a smaller part of our large ag business, but Asia up and then both North America and South America down year-over-year in Q1. So given the different profitability profile, excuse me, for those different geographies, that was unfavorable mix for us in the first quarter. That starts to change as you move through the course of the year. I mean, as we'll see a pickup, particularly in North America production here in the second quarter. And as Josh Jepsen mentioned, our order books are for tractors as an example, now into the fourth quarter. So we've got good confidence that we'll see that pick up and we'll revert to a more normal mix going forward, and that will aid margins. I mean you can expect us in large ag to do double-digit margins each quarter for the rest of the year. So it really is a mix that's improving as you move through 2026.

Yes, Steven, I think you see that, too, like in gross margins, that really rings through. And when you look at the first quarter versus the rest of the year, where we bounce back and look a lot more like what do we do for gross margins in PPA in 2025 in the remainder of the year, that's where we operate. And a big part of that is a little bit more normal mix geographically.

Our next question comes from Chad Dillard from Bernstein.

I got a quick question for you on tariffs. So if we get the tariff relief, will that get rolled back to farmers? And how soon could that happen? Is that something you need to wait to see until the '27 model year pricing?

Yes. Yes. And so maybe just to break down a little bit, Chad, on the exposure. So like I mentioned, total tariff costs this year in 2026 is $1.2 billion pretax. And if you break that down kind of by exposure, the IEPA tariffs is a little less than half of that, a little bit higher in 232, but a little less than half is IEPA. So we'll see what happens on the Supreme Court side. It's been a very dynamic environment. So it's hard to say if those go away or something else doesn't come back. So we'll watch how that plays out. We won't react too quickly. Similar to when we saw tariffs going up last year, we didn't take immediate price action, and you can expect a similar approach for us this year in 2026 as well.

Yes, I'd like to emphasize that we have been relatively subdued. Our prices are significantly lower than normal or historical averages. Last year, our price performance assessment was just under 1 point, while this year we're aiming for around 1.5 points. We haven’t implemented significant price increases related to tariffs. Our focus is on finding ways to mitigate the impact and work through these challenges. We have made good progress in addressing the 232 tariffs, and our teams are doing excellent work. So, we are concentrating on this, and we will observe how the environment evolves, but we will continue to focus on the aspects we can manage.

Our next question comes from Jerry Revich from Wells Fargo.

This is Kevin on for Jerry Revich. Just had a quick question about large ag used inventories. Based on our data, we're seeing North America large ag used inventory destock accelerated over the quarter by 4%. Just trying to understand, were there any higher pool funds or other incentives? And is this pace of destock sustainable based on what you're seeing?

Yes, Kevin, thanks for the question. As we mentioned, we saw a really good progress in the first quarter and maybe worth repeating again, I mean, particularly late model tractors, we saw a really significant reduction over the quarter. I mean '22s and '23 AR is down 20% sequentially in the quarter, even model year '24s down 10%. So really good movement there. We did this in 2025. We increased the pool fund contribution rate to keep those levels healthy for our channel. And we'll continue to support the market with pool funds. We did a little bit in Q1, but still positive price for North America. So like I said, we're seeing good momentum there. We're seeing good movement. Our first quarter tends to be the strongest quarter of the year for used reduction. You do see a lot of year-end calendar buying. So you'll see probably more movement in Q1 than you will be as you get to some of these other quarters. But we've seen continued progression quarter-over-quarter really for the last better part of the year or so, and we'd expect that to continue going forward.

Our next question comes from Jamie Cook from Truist Securities.

Josh Jepsen, thank you for your assistance over the years and best of luck to you. I have a question about how we're managing the large agriculture sector. It seems like conditions are improving. You mentioned that the combines are performing better and order velocity is increasing. To what extent do you plan to limit production in 2026 to position yourself for a stronger 2027? Additionally, with the improvement in large agriculture and rising production levels, I'm surprised that your margins, which are benefiting from a better mix with more focus on North America, aren't closer to the upper end of the range for the year in terms of production and precision agriculture.

Yes. Thanks, Jamie. I mean certainly, as you mentioned, we've seen improvement over the course of the quarter. For combines, as you know, we base our production for the year on that early order program. So that largely defines what we're going to build this year. And so I wouldn't say there, there's any really much change. It will be pretty level through the rest of the year on combines. I mean tractors, as we've mentioned, our order book is now into the fourth quarter. We've seen some increased momentum there. And as Josh Jepsen said, we'll pick up some production towards the back half of the year. Probably not a whole lot of change now at this point, I mean we're getting pretty close to where the full year will have the year filled up. We'll see how things play out over the next quarter or so as we build out the book for the rest of the year. But we'll be pretty steady, pretty level now based on what our plans for the rest of the year. Yes. I mean margin, certainly, as we see North America come back, that's good mix. We've seen a little bit of softening in South America. That's a very profitable region for us as well. And so there's some puts and takes there that don't drive the margin too different from what we've originally forecasted.

Yes, Jamie, it's Jepsen. I want to highlight that we are still below the lowest levels for production and precision agriculture, especially in North America. The overall decline in North America is between 15% and 20%, which is significantly affecting our margins. While we are pleased to see some order activity picking up, it’s important to note that, as Josh mentioned, it isn't a significant recovery yet. We are noticing some positive progress and momentum, which suggests that we should see improvement moving forward. Our inventories are well-managed, and our factories are operating efficiently. As demand increases, I believe we will experience strong incremental gains, especially excluding tariffs, although we are still recovering from very low levels at this time.

Our next question comes from Tami Zakaria from JPMorgan.

My question is on the new excavator, which is quite exciting. Curious whether you can comment on any marketing plans around the launch of this? Are you expecting to put in some promotions to gain share, any financing promotions, incentive for dealers or anything along those lines to start off on a strong note?

Yes. I think the big splash that we have is out at CONEXPO, and so that will be the big launch event. We spent a lot of time with a lot of different operators from customers across the country, testing and understanding the capabilities of the equipment. We had a big launch party and launch event with them. And so I think the capability and the quality of the equipment and what we're going to deliver to the marketplace is pretty well known. We've done more testing than we have in the past. With respect to incentives, the excavator market has been pretty challenging from a price perspective over the last couple of years. This new model gives us differentiation that we haven't had over the last couple of years. We're not going to significantly take price with that, but the value that we're offering to our customers through this and through all the work that we've done, we feel like they really understand it and continue to do that. And again, at CONEXPO, we'll continue to emphasize the message of the value that we're delivering through technology, through improved durability and just the productivity and capability of the new excavator. We think we're in a great spot to launch. And the teams are super excited. The dealers are super excited. There are good products in the market today. We've had a long-standing relationship with Hitachi with good products. This is a truly differentiated product that we're super excited to bring to the marketplace.

Our next question comes from Sabahat Khan from RBC Capital Markets.

Maybe just a 2-parter there. I think the initial comments around some of the shipments during the quarter being a little bit better. I guess based on the order book, are you finding that this is more of a structural shift in the outlook that the farmers on the ground have maybe because of some of the trade issues easing and/or other factors? And then secondly, just as the trade issues do ease for the U.S. and China starts to order, how are you thinking about the offset in South America where maybe some of the orders for soybeans and other things might moderate? So how are you thinking about that on a net basis?

I believe that for this quarter, we performed very well in our factories. We experienced overhead efficiencies due to our strong operational performance. In North America, we shipped slightly more tractors than expected based on our factory operations. Therefore, I wouldn't attribute production directly to demand, but rather to how effectively we operated. Looking at the larger agricultural sector, we noted an increase in North America, driven by some improved optimism, though it's a minor shift. In South America, the market seems to be more cautious for several reasons. High-interest rates in the region are putting pressure on customers. The real has appreciated significantly over the past month and a half, and since many of our customers sell their commodities in U.S. dollars, this impacts their profit margins. Additionally, there is apprehension regarding the upcoming presidential election, which adds to the cautious sentiment in the market. As a result, we are observing more cautious ordering patterns.

Yes, it's Jepsen. I think the one thing to your point on trade flows and how does this balance North America, South America. I think there's a couple of positive things here, and that's domestic consumption in both geographies, North and South America. North America, we're seeing more crush of soybeans domestically, more use domestically. And conversely, exports of corn and ethanol are higher. And in part, you're seeing Brazil actually consume more corn and more ethanol domestically. So I think you're seeing some puts and takes and just shifts in terms of how domestic markets are evolving vis-a-vis what's happening in exports. So I think positive is we're seeing strong demand both in country when you go U.S. and South America, Brazil in particular. And then obviously, some shifting as trade impacts that. But I think as things settle there, I think the important part is the strong demand we're seeing that's consuming those grains domestically.

Our next question comes from Mike Shlisky from D.A. Davidson.

I want to echo your sentiments, Josh, and thank you for everything. Wishing you all the best. I would like to delve deeper into your more optimistic outlook on large agriculture and the order trends you are observing, especially concerning combines. Are you expecting to see any market share gains this year? Additionally, can you share information about tech attachments for your combines or other products? Are more farmers opting for the ultimate package or other prescriptions this year that might begin to benefit you in 2027?

Yes. Thanks, Mike. Yes, I mean, I think overall, in large ag in North America, over the last 12 to 18 months, we've ceded a little bit of share. I think as we've been leaner on the new inventory side, more focused on driving used down, we've talked about the progress that we've seen there. As a result, we're set up really well coming into 2026 and our expectation is we've got some opportunity to gain some share as we move through the course of the year. On the tech side, on combine, super excited. Last year was our first year of harvest settings automation, predictive ground speed automation. We saw really good success in the field. I mean, on harvest settings automation, over 60% utilization of operators in the cab had that tech on while they were harvesting last fall and saw really good productivity gains, really good throughput gains. And as a result, we're seeing a pickup in take rates on that option as well. So 99% of the combines that were ordered this year through the EOP at some level of harvest automation and nearly 80% of that, we're taking the highest level of the ultimate package. That's up 4 or 5 points, Mike, better year-over-year. And so we've seen really good gains there and would expect that to translate into good utilization in the fall as well.

Yes. Maybe stepping back to, as we think about just overall tech adoption and our conversations around are recovering acres with more dear technology, our engaged acres stepped up again this quarter or 500 million engaged acres. That's over 10% increase from a year ago and about a 25% increase on highly engaged. So nearly 1/3 of those engaged acres are highly engaged. So we're continuing to see progression there. which speaks to what we're doing on connectivity and making sure we're reaching deeper into the fleet, but we're seeing that progress. And we're seeing it progress really across the world, which is positive as well.

Our next question comes from Jairam Nathan from Daiwa.

So Justin, you mentioned in your comments about biofuels. If you could just expand on that on what your expectations are medium term. And on construction, I think one of your competitors yesterday talked about bringing back some of the incentives. If you could address that as well.

Thanks for the question on biofuels. As Josh mentioned, we've observed a significant increase in biofuel consumption globally. Brazil serves as a prime example where a growing portion of its corn production is being used for ethanol, resulting in favorable outcomes. Looking ahead, we see various opportunities, particularly regarding the Renewable Volume Obligation and its implications for 2026 and 2027, which we are closely monitoring. Additionally, with the progress of E15 legislation in Congress, we recognize the long-term potential to enhance corn consumption through E15. On the competitive landscape within construction and forestry, it has certainly been challenging over the past 12 to 18 months. Recently, some competitors have implemented price increases. We are watching the timing of these changes closely, as many competitors still have substantial inventory. This inventory situation may lead to a delay in how these price increases affect transaction prices, creating some pressure. However, overall, we remain optimistic about the price increases we have implemented and the potential to further boost realizations as we continue through the year.

Our last question comes from Evan McCall from BMO Capital Markets.

It's Evan on for Joel. Just want to talk about your cadence of earnings for the year. If you could just give some color on that? And if you see growth in Q3 as possible? Or would Q4 be the first possible quarter of growth?

Yes. I mean as we look through the balance of the year for equipment operations as a total, our expectation is to see a bit of growth as we move through the entire year. I mean it's less Evan, than we saw in Q1. As we mentioned, in Q1, we lapped some significant underproduction, particularly in construction and forestry last year. So it's an easier comp in Q1, but you'd expect to see kind of mid-single-digit growth for most quarters for the balance of the year.

Yes. If you specifically consider PPA, the toughest comparison will be in the second quarter, and it will become easier as we move into the latter half of the year from a top-line perspective. Additionally, there will be a fairly consistent tariff burden throughout the year.

It looks like that's the last call we have for the day. Thanks all for taking the time with us today. We appreciate your time, and thanks for joining. Have a great day.

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