Deere & Co (DE) Q2 2026 Earnings Call Transcript

Good morning and welcome to Deere & Company's second quarter earnings conference call. Your lines have been placed on listen only until the question and answer session of today's conference. I would now like to turn the call over to Mr. Josh 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 Brent Norwood, Chief Financial Officer, and Chris Seibert, 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 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 forward slash earnings. First a reminder this call is broadcast live on the internet and recorded for future transmission and use by Deere and Company. Any other use recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of DEER 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 contained in the company's most recent Form 8K, risk factors in 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, if any, including reconciliations to comparable GAAP measures is included in the release and posted on our website at JohnDeer.com forward slash 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. In John Deere's second quarter, we delivered year-over-year net sales growth of 5% and an equipment operations margin of 16.9%, reflecting solid execution and a strong diversified portfolio of businesses spanning multiple industries and geographies. The quarterly results also benefited from recording a recovery for refund claims relating to IEPA tariffs, which we'll discuss in more detail later in the call. Our construction and small ag and turf business units continue to benefit from supportive industry fundamentals notably robust infrastructure spending and rental fleet replacement are driving increased demand for construction and road building equipment while small egg and turf is benefiting from a recovery in turf end markets and healthy cash flow in the dairy and livestock sector our large egg business consumption of egg commodities continues to grow supported in part by increased biofuel use and higher energy prices and we see potential for tighter egg commodity supplies in upcoming crop years as higher fertilizer costs potentially impact production levels. However, customer sentiment remains muted despite recent grain price increases as growers margins face headwinds from elevated and volatile input costs and high interest rates. Amidst this backdrop, DEER continues to strengthen its position in advance of the large egg cycle recovery with low levels of new field inventory, continued improvement in used inventory and robust introductions of new product and technology solutions that are driving market share gains and are expected to enable future growth as markets recover. As an enterprise, we remain confident in our ability to bring increased value to customers and deliver structurally higher performance for deer across the cycle. The diversification of our business segments, evidenced in 2026 with all three operating at different points in the cycle, provides increased resilience and enhanced growth opportunities for the organization. As a result, this quarter, we maintain our overall net income outlook for fiscal 2026 while continuing to progress towards our 2030 LEAP ambitions. Slide three opens with our results for the second quarter. Net sales and revenues were up 5% to $13.369 billion, while net sales for the equipment operations were up 5% to $11.778 billion. Net income attributable to Deere & Company was $1.773 billion, or $6.55 per diluted share. Turning to our individual segments, we begin with the production and precision ag business on slide 4. Net sales of $4.503 billion were down 14% compared to the second quarter last year, primarily due to lower shipment volumes that were partially offset with favorable currency translation impacts. price realization what was positive by about a point currency translation was also positive by roughly three points operating profit was 706 million resulting in a 15.7% operating margin for the segment the year-over-year decrease was primarily due to the lower shipment volumes and higher production costs that were partially offset by the favorable effects of currency exchange moving now to small lag and turf on slide five net sales increased 16 to 3.485 billion in the second quarter driven by higher shipment volumes and favorable currency translation price realization was positive by around one and a half points currency translation was also positive by roughly two and a half points operating profit of 719 million was also up for the quarter resulting in a 20.6% operating margin. The improvement in operating profit was primarily a result of the higher shipment volumes and the effects of favorable price realization. Slide 6 gives our industry outlook for ag and turf markets globally. We continue to expect large ag equipment industry sales in the US and Canada to decline 15 to 20 percent driven by elevated input costs and ongoing global market uncertainty. However, robust commodity demand and projections for tightening supply have supported improvements in crop prices, while U.S. government programs continue to provide liquidity support for farmers. Recent biofuels policy support, including approval of the RVO and potential year-round E15, should help provide greater stability and support future demand for U.S. growers. For small egg and turf in the U.S. and Canada, industry demand is expected to remain steady, ranging from flat to up 5%. We're projecting modest strengthening in the turf markets, as demand has expanded following several years of industry decline. The dairy and livestock sector also continues to maintain strong margins, supporting ongoing product demand. In Europe, industry demand remains relatively stable and is expected to range from flat to up 5%. While elevated interest rates continue to affect purchasing decisions, customer profitability and replacement activity are relatively stable. Although the arable sector remains a bit muted, favorable dairy margins continue to support the broader industry outlook. Moving to South America, industry sales of tractors and combines are now expected to decline about 15%. While production and yield performance remain strong alongside improving crop prices, elevated interest rates, higher input costs, and a stronger Brazilian REI are pressuring customer profitability, and reducing equipment demand in the near term industry sales in asia are now projected to be roughly flat year over year mainly driven by modest improvements within the india market next our segment forecast begin on slide seven for production and precision ag our net sales forecast is unchanged and remains down between five to ten percent for the full year this forecast now reflects roughly a point of positive price realization for the full year as well as just under three points of favorable currency translation our full year forecast for the segment's operating margin is also unchanged and remains between 11 and 13 percent slide a shows our forecast for the small lag and turf segment we continue to expect net sales to be up approximately 15 for the full year this guide includes one and a half points of positive price realization as well as roughly one point of favorable currency translation the segment's operating margin guide remains between 13 and a half and 15 percent. Shifting over to construction and forestry on slide nine. Net sales for the quarter increased by 29 percent year over year to 3.79 billion as a result of higher shipment volumes and favorable currency translation. Price realization was favorable by more than two and a half points. Currency translation was also favorable by a little more than three points. operating profit of 561 million was also up year over year resulting in a 14.8% operating margin this improvement was a result of higher shipment volumes and favorable price realization which were partially offset by unfavorable production cost slide 10 describes our construction forestry industry outlook industry sales projections for earth moving equipment in the US and Canada remain unchanged with both construction equipment and compact construction equipment expected to be up around five percent the fundamentals behind the construction industry remain favorable with healthy customer backlogs being supported by infrastructure and large project spending that is more than offsetting the offsetting softness in residential construction global forestry markets are expected to decline five percent reflecting continued pressure from weak residential construction activity and low log and lumber prices. We now expect global road building markets to grow approximately 10% year-over-year, supported by elevated road construction spending across multiple geographies. Moving on to the CNF segment outlook on slide 11. The 2026 net sales are now forecasted to be up approximately 20% for the full year. This net sales guidance for the year includes 2.5 points of favorable price realization and approximately 2 points of favorable currency translation. The segment's operating margin has also been increased and is now projected to be between 10% and 12% for the full year. Now, transitioning to our financial service operations on slide 12. Worldwide financial services net income attributable to Deere & Company in the second quarter was $190 million. The year-over-year increase is a result of favorable financing spreads and favorable derivative valuation adjustments, partially offset by the impact of a lower average portfolio. For fiscal year 26, we raised our full-year outlook to $860 million, primarily driven by favorable fair value adjustment and improved provision for credit losses. And finally, slide 13 outlines our guidance for net income, effective tax rate, and operating cash flow. For fiscal year 26, our net income forecast remains unchanged between $4.5 and $5 billion. Next, our guidance now incorporates an effective tax rate between 24% and 26%. And lastly, cash flow from the equipment operations remains projected between $4.5 and $5.5 billion. This concludes our formal remarks. I will now turn the call over to Brent Norwood for opening comments before we cover a few quarter-specific topics.

Thanks, Chris. I spent several years on Deere earnings calls in my prior time in investor relations, but I've been away for a while working in our construction and forestry business, so it's great to be back, and I look forward to reengaging with our investors and analysts in my new role. As you noted earlier, we continue to operate in a highly dynamic business environment. However, the resilience of our team and the diversification of our business has enabled us to maintain our financial expectations for the current fiscal year while also setting us up well for the years to come. As mentioned, our business segments are performing at different points in the cycle. While large ag is operating below trough levels, small agriculture and turf is progressing towards mid-cycle, and construction and forestry is slightly above mid-cycle. Even so, it's important to keep in mind that we are delivering double-digit margins across all segments, and we expect to grow our top line by more than 5% this year as we progress towards the 2030 growth targets outlined during our investor event at the New York Stock Exchange last December. In the near term, a lot has transpired over the past quarter in the global economy, most notably the conflict in Iran and the associated impacts. However, our baseline view remains that 2026 will represent the bottom of the ag cycle. We've managed field inventories tightly of new equipment and made significant progress on used. and all the while, machine hours continue to accrue, aging out the fleet and driving a base level need for replacement. The pace of recovery from that point on will, of course, depend on several factors, including geopolitical developments, underlying ag fundamentals, and policy outcomes. At the same time, our customers continue to navigate persistent challenges, including labor scarcity, input cost pressure, and tight operating windows to get critical jobs done. Regardless of the cycle or macro environment, our focus remains steadfast, helping them to do more with less and supporting them efficiently and profitably to overcome these challenges. And what gets me really excited is the way we've structurally improved the performance of our business from cycle to cycle. We are delivering structurally higher levels of profitability compared to the last time we were at a similar point in the cycle, despite the headwind that comes from tariffs. This enables us to sustain record investment across cycles to make these value-generating solutions a reality for our customers and the industries they serve.

Thanks a lot, Brent. We're excited to have you back. Pivoting to a few thoughts about the business, let's begin with this quarterly performance. Net sales increased sequentially as expected given seasonality, and we are also up 5% year-over-year. Equipment operations margins came in just under 17% in Q2. So Josh Beale, can you lead off with a breakdown of the quarter?

Yeah, sure, Chris. First and foremost, it's important to mention the unexpected item for the quarter, which was IEPA tariff refunds. As you noted earlier, we recognize a recovery of $272 million related to refund claims associated with IEPA tariffs that were filed and accepted by U.S. Customs and Border Protection, which benefited our production costs this quarter and lifted margins by nearly two and a half points. Outside of tariff refunds, our second quarter came in largely in line with expectations for both top line and margin across all business segments, with the overall equipment operations achieving margins of 16.9 percent. Noting the diversification comment you made earlier, small ag and turf delivered margins over 20 percent in a quarter, and the relative strength in SATN markets is helping to offset some of the pressures being felt by large ag producers. Shifting to some of the larger year-over-year changes for the quarter, let's start with price. As you noted, Chris, price realization was positive for all three business segments in Q2. We saw particular strength in C&F price realization, which came in stronger than we had forecasted, particularly in the road-building business. Foreign currency was also a tailwind in the quarter versus last year, largely driven by a weaker U.S. dollar, which favorably impacts the margins on U.S. products exported to overseas markets. Regarding headwinds, we did see higher year-over-year production costs in the second quarter excluding the impact from tariff refunds without accounting for tariff refunds year-over-year direct tariff expense was approximately 200 million of the headwind with the remainder largely driven by higher material and freight costs thanks josh that leads to my next question which is likely top of mind for many given trade policy dynamics following our q1 earnings call as you noted we benefited from a one-time tariff tailwind in the second quarter so what should we expect from here and how is that reflected in our guidance for the rest of the year yeah first i'd start by reminding everyone of the timing of our q1 earnings release which occurred just prior to the supreme court ruling on iepa since that decision we've seen the invalidation of iepa tariffs the introduction of new section 122 tariffs and adjustments to section 232 tariffs the cumulative impact of these changes is that on a full year basis our direct tariff exposure remains essentially unchanged at approximately $1.2 billion, which is approximately a 3% margin headwind. So net of the refunds are forecast now includes approximately $900 million of tariff costs for the year. Brent, anything additional you'd like to add there?

Sure, Josh. I'd start by recognizing the tremendous effort across the organization to manage what continues to be a very dynamic trade environment. It's worth noting that we've been disciplined and measured regarding net price realization given this backdrop, keeping in mind the inflationary pressures that our customers are experiencing. Recall that last fiscal year, we did not take additional price actions or introduce surcharges following the tariff orders. For fiscal year 2026, our implied net price realization for the equipment operations is between one and a half and two percent for the year, which is consistent with general inflation levels that we are experiencing, excluding the impact of tariffs. To help manage the impact of tariffs, we continue to have teams across the organization working diligently to quantify exposures and identify mitigation opportunities. These actions include product certification and exemption submissions, as well as identifying cost reduction opportunities and sourcing adjustments where clear, no-regret solutions exist. Overall, we believe we are executing well against these opportunities and remain confident in our ability to manage through the current tariff environment effectively. Lastly, as a reminder, approximately 80% of John Deere's U.S. Complete Good sales are produced at our U.S. manufacturing facilities, and roughly 75% of those components used at those facilities are sourced from U.S.-based suppliers. We remain deeply committed to U.S. manufacturing and continue to invest in and expand upon our domestic footprint. For example, this quarter, we recently started building deer-designed excavators in Kernersville, North Carolina, following a $70 million expansion investment to bring U.S. designed and manufactured excavators to the market. And we continue to stand behind our commitment towards $20 billion of investments in U.S. manufacturing over the next 10 years.

Thanks for that context, Josh and Brent. Let's turn to the current market environment. Since our last earnings call, we have seen the start of the conflict in Iran and the associated inflationary impacts on products like oil and fertilizer. Considering that in your response, can you provide an update on broader ag market conditions and how they are reflected in our industry guidance, maybe starting with South America?

Yeah, sure, Chris. As you mentioned earlier, we revised our South American ag industry outlets to down 15 percent from down five percent primarily reflecting incremental softness in brazil since the start of our fiscal year in november deer retail sales in brazil have declined less than the broader tractor and combine industry which has declined about 15 percent in six months in the country in line with our revised industry guide small and mid-sized tractors have been more resilient while large tractors and combines have declined more than the industry overall the situation in iran is affecting brazilian growers at a particularly sensitive point in production cycle as they prepare to plant a new crop in the September time frame. While farmers in other parts of the world have largely locked in inputs for this growing season, Brazilians have more exposure to current spot prices. Interest rates in the country remain high and despite recent easing, expectations for additional cuts later in the year have been reduced given the anticipated inflationary environment. At the same time, the strength of the real against the U.S. dollar is adding incremental margin pressure for growers. Improved crop prices and strong production are positives, but overall the margin outlook for Brazilian growers has been pressured due to these headwinds. As a result, we expect the market to remain cautious through the remainder of the fiscal year.

This is Brent. One comment. While the industry in Brazil is certainly challenged in the near term, I would like to add a few points about our performance in this market. Our team in the region continues to do an excellent job navigating volatility, and improving the business. We continue to see year-over-year market share growth across all tractor categories, while also maintaining our strong position in combines. At the same time, we are delivering positive price realization, we are accelerating portfolio innovation, and we are generating double-digit margins in Brazil, even at drop levels. To be clear, we could not do this without the upstanding work of our dealers who have also managed the cycle and the high interest rate environment very well and very profitably, supported by strong owner equity. Machine hours are building and fleets are aging, which should support replacement demand once the market stabilizes. Collectively, these results highlight the strength of our team and the quality of our portfolio and channel, and they reinforce course, my confidence in the long-term opportunity in Brazil.

Thanks for the additional caller, Brent. It is really exciting to think about the growth prospects for deer in South America. Josh Beal, could you share some thoughts on the ag markets in other geographies?

Absolutely, Chris. First, input costs, particularly fuel and fertilizer, have increased globally and will contribute to higher inflation across the ag economy. As we noted earlier, our customers in North America and Europe largely purchase these inputs ahead of the spring planting season when costs were lower. At the same time, commodity prices have moved higher over the past few months, which helps relieve some near-term pressure. We've also seen encouraging developments on the policy front in the U.S. Higher renewable volume obligations have been approved, which supports incremental consumption of soybeans. In addition, supplemental disaster relief program payment factors have been increased from 35% to 70%, and the House recently passed year-round E15, which we view as a positive step forward. Today, roughly one-third of U.S. corn production goes to ethanol, and broader E15 adoption could, over time, meaningfully expand corn demand as blending infrastructure comes into place. Overall, we don't expect these developments to meaningfully adjust demand levels this fiscal year, and as a result, our ag industry guides outside of South America remain largely unchanged. Brent, maybe moving beyond ag, any thoughts on construction markets?

Yeah, absolutely. Construction demand remains robust, supported by infrastructure spending, rental activity, and accelerating data center investments. Reflecting that strength, we've increased our year-over-year net sales guide to up about 20%. In the U.S. and Canada, our order book continues to strengthen, up more than 60% since November, now at its highest level since April of 2024, with over 80% of production slots filled for the year. At ConExpo in 2026, we generated a lot of buzz around the new John Deere Excavator and a fully integrated job site vision with Tenna, Virtual Superintendent, and the Operations Center, enabling a smarter and safer job site. We had over 140,000 contractors in attendance, and I'm proud to report that nearly all of the production slots for the new John Deere Excavator are spoken for at this point. During the second quarter, we visited with numerous customers who have confidence that incremental demand will extend into 2027. Data center construction is expected to top $100 billion in 2026, with additional double-digit growth into 2027. This is great for our customers in both large-scale site prep, but also water and utility contractors who also support these projects. Beyond data centers, we are also seeing infrastructure funded by IIJA, robust activity in oil and gas, and continued investment in warehousing. Lastly, road building performance also remains stellar, driven by higher year-over-year infrastructure spending. Notably, we increased our industry guide for the segment, given the strength that we've seen year-to-date.

Hey, thank you both. Maybe let's turn to inventory management. Can we talk about what we've seen this quarter for both new but also used ag inventory?

Yeah, definitely, Chris. As you may recall, last quarter we discussed improving inventory trends across all regions, particularly in high-horsepower tractors. I'm pleased to share that those trends have continued this quarter, with inventories remaining favorably positioned and order books healthy. Starting with large ag in North America, our new inventory levels remain favorable. Inventories for both high horsepower tractors and combines are down more than 50% from their mid-2024 peak, with inventory-to-sales ratios in line with historical averages. With these improvements, our plan for the year is to continue to manage production in line with retail demand. We've also made meaningful progress on North American used inventories. Combine inventories are now down by mid-teens from their March 2024 peak, reflecting the benefits of proactive inventory management throughout this industry cycle. years north american high horsepower tractor used inventories are similarly improving used tractor inventory is down mid teens from this cycle's peak and down low single digits sequentially during the quarter which is a period that we typically see seasonal inventory builds notably model year 22 to model year 23 8r tractors are now down around 45 percent from their peak levels last year other north american product lines including sprayers and planners have also seen meaningful used inventory improvement but sprayer inventory is down approximately 30 percent and planter inventory is down roughly 50 percent from recent peak levels shifting to our order books in north america order velocity continues to track in line with our expectations model year 26 production of seasonal project products is largely set by our early order programs which have been closed for several months now we're just launching eops from model year 27 spring products which will begin production in the last few months of the fiscal year Regarding Waterloo large tractors, order books are well into the fourth quarter and we look to close out as we look to close out our model year 26 production. Overall, order books remain healthy and consistent with our retail-driven production plans. Within small ag and turf in North America, favorable inventory levels are being maintained following last year's underproduction and we continue to execute against our plan to build in line with retail demand this fiscal year. Outside of North America, inventory levels in Europe and South America are in good shape following significant reductions in fiscal 24 and fiscal year 25. In Europe, 2026 production is largely aligned with retail demand, while in Brazil we expect to underpruce retail demand, most notably in combines. Order visibility in both regions now extends through the third quarter and into the fourth.

Thank you, Josh. We've covered a lot of different aspects of the business, from quarterly results to tariffs to market conditions around the world. Can you help us to put this all together for us in terms of what it means for adjustments to the sales margin and income guides for the fiscal year.

Yeah, absolutely. While the outlook reflects a mix of tailwinds and headwinds, overall performance remains well balanced, supporting an unchanged enterprise net income guide. All three business units benefited from a one-time lift from tariff refunds, which helped offset ongoing inflationary pressures on materials and freight. As discussed, within ag, the dynamics continue to vary by segment. Within large ag, the Brazilian market is navigating elevated uncertainty driven by higher input costs and political factors. At the same time, our small lagging turf business continues to show solid momentum with sustained strength in underlying demand and modest growth in turf. Both PPA and SAT modestly adjusted full-year price realization expectations by approximately half a point, primarily reflecting slightly lower expectations for overseas markets. Construction and forestry continues to perform well, with increased strength and in-market demand, resulting in an increase in both the net sales and margin expectations for that segment.

Taken all together, these dynamics highlight the resilience and balance of our portfolio supporting a stable and consistent overall net income outlook for the company thanks josh one thing i would add is that as you consider the financial outlook for the year for the rest of the year i should say we would expect slightly higher revenue in the back half with the fourth quarter being higher than the third quarter in addition we would expect to see our most favorable cost comparisons in the fourth quarter as well.

That's a good point, Brent. Thank you. Hey, one final topic. Last quarter, we've highlighted innovation in our CNF business through the launch of our new excavators and the tenor acquisition, but we didn't spend much time on ag innovation. Can you update us on the latest progress across our portfolio and precision ag solutions?

Yeah, it's an exciting topic, Chris. We've continued to strongly invest in the ag business, and we're delivering meaningful portfolio expansion, product enhancements, and the continued build-out of our technology stack. As customers navigate a challenging market environment, it only further reinforces the importance of our commitment to through-cycle investment, advancing innovation, and delivering customer value when it matters most. Over the past year, we've launched multiple new products and solutions to strengthen our leadership across each major step of the ag production cycle. Just highlighting a few of these, within tractors, we've launched six new 8R and 8RX tractor models, featuring additional high-horsepower options. These were developed through a ground-up redesign focused on improving performance, maneuverability, and versatility for large-scale operations. The new lineup expands the 8 Series with 440, 490, and 540 horsepower offerings, each powered by a JD-14 engine and enhanced intelligent power management. These tractors are autonomy ready and fully integrated with advanced precision technologies and connectivity solutions and are designed to help farmers cover more acres efficiently throughout the crop cycle in planting new offerings have enabled furrow optimization through our exact depth solution which is designed to provide individual row unit depth calibration from the cab while on the go and also through downforce automation which is enabled by our recently released furrow vision technology when these furrow optimization solutions are paired with our automated fertilizer placement solutions of exact shot with an exact rate farmers can be better positioned to maximize yield potential while reducing rising input costs within type planting windows. For the application job step, our sea and spray technology continues to advance. Recent software enhancements have expanded the targeted application capabilities across a broader range of crops for both new and existing systems, including the notable additions of wheat, barley, and canola. In addition, our recently announced sea and scout capabilities leverage the same camera platform to capture field-level data and generate new agronomic insights for growers, such as weed pressure and stand count maps. As weed resistance continues to be a challenge across various crop production systems, precision and flexibility are critical for farmers, and we're excited to have the preeminent solution to help our customers manage these challenges cost-effectively while also improving yield outcomes. This expansion in portfolio and technology offerings is making a global impact as well. Earlier this quarter, we held Casa John Deere in Brazil. This event brought together over 3,000 customers from over 25 countries and marked the largest product launch ever held by deer in Brazil with over 20 new product and technology solutions being released across both ag and construction. Recall that just a year ago in the spring we were talking about our largest product launch in Brazil ever and we've exceeded that product on our introduction this year. Importantly, all of these product enhancements are underpinned by our industry-leading precision guidance technologies with products such as precision essentials and connectivity solutions. To provide reliable data access in areas with limited or no cell coverage, we continue to leverage our partnership with Starlink for satellite-based connectivity across our global footprint. Since launching that solution in the second half of 2024, we sold more than 12,500 JDLink boost kits and achieved 25% growth within the last quarter alone, expanding our connected fleet and increasing the value of our digital and SaaS offerings. Taken together, this combination of job step innovation, integrated technology, and expanding connectivity positions as well to continue driving productivity for our customers while supporting recurring high-value revenues across the ag cycle.

I'd also note that while engaged acres in John Deere Operations Center increased about 10% year-over-year, highly engaged acres have grown at an even stronger pace. Additionally, the quantity of monthly active digital users continues to grow, now reaching nearly 440,000. Thank you both. Brent, before we open the line for questions, do you have any final comments? Yes, thanks, Chris. In the second quarter, our organization demonstrated strong execution, resulting in nearly a 17% margin for our equipment operations division. For our large ag division, we made meaningful progress in improving used inventory levels while diligently managing new inventory across the business. For small ag and turf and construction and forestry, on the other hand, we've capitalized on favorable demand trends driving growth for the enterprise. These results reflect the discipline of our operating teams and the focus they continue to bring each day, and I'm incredibly proud of what they've accomplished. Over the course of the fiscal year, we launched a significant number of new products and technologies, reinforcing our commitment to innovation and long-term customer success. Looking ahead, we will continue to invest across the portfolio and in technologies that matter the most to our customers. With sustained levels of R&D and capital investment through the cycle, we are positioning the business to help customers reduce inputs, improve productivity, and ultimately drive stronger outcomes in their operations. We also remain committed to disciplined capital allocation. During the quarter, we returned $635 million to shareholders through a combination of share repurchages and dividends, reflecting both the strength of our financial performance and our confidence in the business. As I mentioned earlier, we expect our business to continue growing this year while delivering strong returns. More importantly, we believe we are building a stronger foundation for the future, one that positions us well, not only for the remainder of this year, but for the years ahead. Thank you, Brent. Now let's open the line to questions from our investors.

We're 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 one question. If you have additional questions, we ask that you rejoin the queue. Operator, ready for our first question?

Thank you. If you would like to join the queue, please press star 1. Our first question comes from Patty Bogart from Millis Research.

Hi, guys. Thanks for the question. This year, obviously, construction has been starting out strong, and I know deer has some tailwinds from past underproduction, but the industry forecast had up five compared to your sales growth thus far is a pretty big gap. Are you guys seeing healthy industry growth, and do you see deer gaining a lot of share?

Yeah, thanks for the question, Patty. You're right, and you set up the question correctly. We did some underproduction last year in our earth-moving segment, really in the front part of the year, particularly. And as we build a line with retail demand this year, you do get that natural lift, you know, just from that change. On top of that, you know, we've talked about our industry guides, you know, up 5%, you know, in the earth moving segments, can you do strength, excuse me, in road building as well. So that industry is lifting us. Then on top of that, we have seen some pickup and share over the past 12 months, particularly in the last six or so, as we've made some pricing adjustments in the last year, we're seeing some share gains as well. Thanks, Patty. Thanks.

Our next question comes from Steve Volkman from Jefferies.

Hey, thanks. It's actually Shirog Patel on for Steve this morning. I just wanted to kind of touch on the tariff piece of the pie here just quickly. I wanted to get a better sense of the baseline kind of margin in each of the businesses. If you could break down that 272 a little bit between the segments, that'd be super helpful.

Yeah, happy to. There's obviously a lot of moving pieces there. And I'll start with, you know, tariff expenses as we move through the course of the year. As we said in our comments, you know, there were some moving pieces, you know, over the course of the quarter with IEPA going away, Section 122 coming back, coming in, and then some adjustments to 2232. If you kind of net that, our overall run rate for tariff expense really remains, you know, unchanged at about, you know, $1.2 billion for the full year. And those splits that we've provided in the past, you know, really haven't changed as well. So it's about 45% from the Construction and Forestry Division, about a third or so for small ag and turf, and the remaining piece in kind of round numbers about 20%, you know, for large ag. So full year impact of the tariff expense is about three points. and then you can do the math, you know, for the individual business units. You know, we did recognize, as we talked about, you know, the tariff refund in the quarter, $272 million, you know, on a full-year impact. That's about a point of tailwind, you know, for the equipment operations. So, you kind of net out, you know, the run rate on tariffs versus that one-time refund of a point. To give you some sense of splits, they're pretty close to the tariff exposure as well. About 50% of the refund went to the construction and forestry division, about 30% to small ag and turf, and then the remaining 20 went to the large ag business. Thanks for the question.

Our next question comes from Kyle Manchies from Citigroup. Please go ahead.

Hi, good morning. This is Randy on for Kyle. Just following up on that last question around tariffs, I know you mentioned that you haven't really taken any pricing to offset these tariffs. So I'd just be curious to hear more color on what some of the mitigation strategies you've been taking are, and I guess what kind of progress you've made on that front over the last 12 months or so since tariffs first came into the picture, and then what could be more to come? Thank you.

Yeah, hey, thanks for the question. This is Brent. You know, with respect to our price realization and then how we are thinking about treating tariff costs, you know, it's important to note that our price forecast for the year is ranging between about one and a half and two percent for the equipment operations overall. I would say this compares to our general inflation rates, excluding tariffs, of also about one and a half to two percent. So when you stack on tariffs, our incremental costs are a bit margin dilutive relative to price. But, you know, as we've said before, we are not surcharging our customers on tariffs, I think, especially given the fact that tariff rates have been somewhat inconsistent and been very dynamic here in the recent months. So instead, we are focusing on reducing our tariff exposure through cost actions. So things like resourcing, reshoring, exemption submissions, ensuring USMCA compliance. And I have full confidence that we will largely counter the negative financial impact of tariffs over the coming periods, largely through cost measures without ever having to rely on any surcharges to our customers. And maybe, Randy, just kind of a knock on there, thinking about price costs.

And there's some dynamics, you know, first half, back half of 2026. As we get to the back half of 26 and start to lap, not only the tariff expense that came into the organization in the back half of last year, but also the associated inflation that we've seen towards the back half, you start to see more favorable comps from, again, both a tariff standpoint and a material cost standpoint in the back half. And actually, our price kind of works on the opposite side, where we took some incentives last year in the back half in both construction and forestry and large ag that we're lapping as well. so actually price gets more favorable in the back half and then on the production cost side including tariffs and material costs that gets more favorable as well so price price costs will improve as we move through the balance of the of the fiscal year thanks for the question thank you our next question comes from angel castillo from morgan stanley your line is open hi this is esther um on for angel um thanks for taking my question um can you talk a little bit more about the global ag cycle broadly, we're kind of bouncing along the bottom in most of the markets,

but how would you frame the downside risk on risk to the regional outlooks given the abnormal geopolitical environment? And also, is there any periods we can look at just to have a point of reference to understand farmer behavior during this time?

Yeah, thanks for the question, Esther. And I think first and foremost, maybe, you know, stepping back as we think about the setup, you know, for where the large ag industry is, you know, we're a couple of years into the downturn. We've seen, you know, less replacement. And we're seeing age of fleets continue to grow. You know, as we track this in North America, we're at very elevated levels for high horsepower tractors, you know, very elevated levels in terms of fleet age for combines as well. So you have that underlying replacement demand. And then on top of that, sort of structurally, we've seen the used inventory market, which has really been, you know, a governor slowing down replacement demand, get a lot healthier, you know, and particularly that late model equipment, you know, that was at a higher percentage in the system. I mean, we mentioned the statistics on the call, but, you know, high horsepower tractors, monitor 22 and 23.8, which were our peak years in the most recent cycle, you know, they're down like 45% from their peak a year ago. So some significant structural improvement just in terms of the setup for replacement. Now, that being said, obviously, our customers are experiencing pressure on their margins. That was heightened a bit over the past quarter as we've seen, you know, fertilizer levels increase. And that's been particularly acute, you know, like we mentioned on our comments, in the Brazilian market where they're closer to the planting season, they're also facing headwinds from a currency standpoint. So we did make the adjustment in Brazil down this year. But as we look to the setup of recovery, you know, our expectation still at the baseline that Brent mentioned earlier is that we see recovery in 2027. That pace, and again, this gets your question on sort of indexing in the past, will depend on a number of factors. We've seen some policy improvements that will help support consumption. Obviously, we need to, you know, keep an eye on what's happening with ag fundamentals, the geopolitical situation. But as a base setup, you know, our expectation is that we'll see some level of replacement come back in next year.

Hey, this is Chris. I would just add a few points here. If you think about, you know, Josh talked about, you know, the global situation. I think it's very different, you know, between like Europe, the U.S. and Brazil. You know, about brazil where you know farmers certainly will will see that input cost coming in earlier because of their their crop they plant in the fall but you know for the u.s farmer if you think about commodity prices since august you know both for soybeans and corn they've been up like 20 percent and you know they secured their inputs ahead of the the planting season so actually this year probably for them is is actually looking probably a little bit better compared to the peak uncertainty in August. So, I think that's an important point to make here. Thanks, Esther.

Our next question comes from Kristen Owen from Oppenheimer.

Good morning. This is Mason Manor on for Kristen. Thank you for taking my question. I just want to double-click on the order trends you're seeing in large ag, specifically your seasonal products and maybe trends by regions that are standing up. Thank you.

Yeah, you know, on seasonal products, Mason, as you know, we manage that through our early order programs. Demand in that production plan for 2026 is set at this point. Our EOPs for this year have closed, and we know we're going to build and combine sprayers and planters. We're just on the threshold of getting an indication on that demand for next year. We opened up EOPs for sprayers just a couple weeks ago, so a couple weeks into that program. Just maybe giving you a sense of structure. It'll be a similar two-phase program that we've had in the past. We opened up at the beginning of May. It'll run through the end of August. Planters will be kind of a month lag of that, opening up at the beginning of June and running through the end of September. So again, we're very, very early in terms of some of the indications we're getting on trends for EOPs for next year.

What I would tell you is what we've seen thus far, and you don't want to extrapolate too much into this, just given it's early, but everything we've seen thus far would support our view um that that 2026 still marks the bottom of the ag cycle thanks mason our next question comes from jerry revitch from wells fargo your line is open uh yes hi good morning everyone and brent congratulations again um i want to ask on precision ag can you folks talk about uh your expected scene spray acreage covered this year how retrofit orders are tracking and precision essential renewal rates for the 25 cohort, and any comments you can make on the list price increases for the advanced features that you're rolling out as part of BOP, please.

Yeah, happy to, Jerry. Thanks for the question. You know, C&Spray, we're encouraged by the progress that we're seeing this year. Again, just maybe starting with acres and how many we're going to cover. Recall, you know, year one, we covered a million acres. Last year, globally, it was five million acres we're early in the spring season but again kind of similar to my comments on the eop as we look at those those same customers you know from a year ago um they are year to date spraying more acres with sea and spray um than we saw last year so we're encouraged uh we're encouraged by that pace and and again it what we've what's given us a lot of confidence is the technology is working we're seeing an actual demonstrated you know two two years now 50 to 60 percent savings on herbicide using the technology and that is resulting in um you know increased utilization uh for it for customers so that's that's been that's been fantastic um and and on top of that there's a lot to talk about here and talk about brazil as an example we introduced at casa john deer um you know spray and see and spray green on green for next year so that'll continue to expand that growth as well and i mentioned in my comments um that uh on on the technology itself you know where we're not able to cover more crop types moving into wheat barley canola so that that continues to ramp and maybe last point on sea and spray you know again early in the eop but take rates uh that we're seeing thus far and seeing spray for 27 would exceed what we saw for this year as well so on that technology um some good growth chris did some others yeah maybe jerry asked on precision egg essentials too or precision essentials um i think

orders trending well here and what we see kind of year over year. But more importantly, I think a point I would like to make here is if you think about the customer organizations we get as a result of that into our John D. Operation Center, we have more than 4,000 new customer orgs, you know, as a result of that, actually closer to like 5,000. So I think that's another important point, you know, which and a big benefit, quite frankly, for us.

Maybe one more thing I'd talk about in a couple of years. You asked about renewal rates on precision essentials. We're still in that 70% range overall for renewals. But I think what is really giving us encouragement is we're now getting those customers who are in their second year of renewal. And if you look at that cohort, their renewal rate is over 90%. So for those folks that have been in it now for two years, we think that's going to be a lot stickier and are encouraged about that. Maybe one last point on technology, harvest settings automation, which you didn't ask about, but I just did want to mentioned, utilization there has continued to be very strong. Last quarter, we talked about over 60% utilization of harvest automation in the northern hemisphere harvest. As we've looked at Brazil and their utilization and their most recent harvest, it's over 80%. So given, Brent talked about our excitement in the region, it's not only tech adoption, but utilization as well. It continues to scale and what gives us great excitement for growth prospects in South America. Thanks for the question.

Our next question comes from Tammy Zakaria from JP Morgan. Your line is open.

Good morning. This is Raquel Batesh on for Tammy.

I was wondering if you guys could talk us through the cadence for 3Q and 4Q on both sales and margins and whether there are any items by region or segment that could cause the second half to deviate from normal seasonality. yeah brent brent mentioned that um in in overall that we expect back half you know to be higher uh than than the front half and and q4 um you know would be uh would be a little bit higher than than than q3 overall maybe just stepping through the businesses um you know as you as you look at large ag um you know and looking at sort of rest of you you can do the math on the margin given the guide Q4, a bit stronger than Q3. We talked about at the beginning of the year, some differences in normal seasonality. We've got more, you know, Waterloo large tractor shipments shipping to North America in the back half than the front half of the year. That's abnormal for us, but it reflected how the order book built for the course of the year. On the small ag side, you know, it's pretty normal seasonality. You'll get a little bit of a step down in Q3 and another step down in Q4, you know, just on a normal seasonal basis. and then uh construction and forestry fairly balanced between the two um both top line and margin in the back half maybe a little bit stronger in the fourth quarter than q3 but overall pretty close and i wouldn't i wouldn't call out anything specific um specifically abnormal as we look at that cadence thanks for the question our next question comes from chad dillard from bernstein hi this is federico training for chad thank you for taking my question um so i'm trying understand uh your pricing expectations that look more conservative than peers is that a reflection

of higher discounting repeat the best last part of that sorry i didn't quite catch that expectations versus years so yeah your pressing expectations look more conservative than peers is that a reflection of higher discounting and just confirming are you asking about the large ag business or which, which business?

Yeah, exactly. Yep. Yeah. Um, you know, I think we did, you did see us make an adjustment, uh, this quarter, you know, to, to our pricing. Um, that was really driven by, you know, we talked about what we've seen in Brazil. We took that, that price a bit down quarter over quarter. I think importantly, I would call out, you know, that, uh, um, you know, that all of our regions are expected to be price positive in the large ag business. You know, we 1% price guide for the full year. North America would be a bit better than that. The other two a little bit lower, kind of average out to that one. But we're pretty close to one really across all the businesses.

Hey, this is Chris. A point to add here. I mean, you've seen that in the second half specifically, price will look a little better than the first half, given the comments we made earlier around discounting.

But if you think about the progress we have made on use to the incentives we put into play i think that positions us very well you know we see continued progress even in a quarter we typically see a seasonal build so i think we feel good about the pricing mechanics we have put in place thanks for the question our next question comes from mig dobri from bayard your line is open yes from baird good morning everyone um and first a quick clarification So on the IEPA, $270 million that you kind of clawed back, are we to understand that you have incremental headwinds from other types of tariffs that bring you back to the 1.2? Or is this kind of a true benefit relative to the initial guide? And then related to all of this is I think about margins. I mean, you talk about improvement in price costs as the year progresses, but everything that I'm kind of seeing on the cost side, whether it's raw materials, whether it's components, energy prices, all suggest that things get tougher going forward rather than easier on that front. So, can you maybe, like, square these two items for us?

Yeah, sure, Meg. Thanks for the question. Just clarifying on the tariffs, you know, so the billion two of tariff expense was our run rate last quarter. and and not talking about refunds here but just run rate on tariff tariff expense that's unchanged um so it's a really billion two quarter over quarter again some puts and takes in terms of what's driving that um but the overall ongoing expense remains the same the 272 million refund um is uh you know was new in the quarter and so if you net you net that against a billion two it'll be more like nine uh you know 900 million um this year uh that will pay in net when you put the refund in, but again, that run rate, the run rate didn't change. You know, from a material standpoint, you know, we have seen some inflation come in. We saw some come in over the course of the quarter, as you mentioned, you know, given what's happened, you know, around the globe over the last two or three months. As we talk about back half, though, you know, recall that, you know, we're, and there's a lot happening in the production cost bucket that we show you in the waterfall, but, you know, we're lapping tariffs that we started to see come into business last year and we're starting to lap the indirect inflation that we that we saw come in from tariffs in the back half of the last year as well so the the comps become more favorable but i would agree with you that we are seeing some higher levels of inflation over the last two or three months hey meg this is brent and just to add on to that you know and i think josh has covered this already but you know our pricing uh is much more favorable on the back half half as well so as we think about uh price cost ratios those those do improve meaningfully uh and i think josh has

covered the commentary on inflation quite well. But the other thing that we'll see, particularly for our large ag factories, is a little bit better absorption in the fourth quarter as production rates are significantly higher. And Josh noted that's just the way the order book built this year for a much heavier fourth quarter with respect to our large tractors that are going to be settled here in the U.S. And so that's going to help on the overhead absorption as we move a little bit later in the year. Thanks, Meg.

Our next question comes from Tim tie-in from Raymond James. Your line is open.

Thank you. Good morning. My question is just on the kind of sentiment and the feedback that you and the dealer base is hearing in North America with respect to large ag. I guess you don't try and make it a habit to forecast what happens with the spring EOP, but I'm just curious, I mean, your own expectations or, you know, the feedback you're hearing from dealers, how you expect that, you know, may play out. Obviously, there's a lot of cross-currents in the market, but, you know, coming from a low base and et cetera. So I'm just curious, like, to the extent you, you know, you can kind of think about how you expect that or how the dealers are expecting that plays out. obviously that will give us a lens into first lens into how you know capex is looking into 27 but maybe just any thoughts comments um that you've gathered from the dealers in north america thank you yeah thanks tim you know as we've talked you know our baseline is we expect to see some level of recovery in in the next year and again it's really driven by the setup you know the core age of the fleet what we've done from an inventory standpoint both on new and used and i think our I think our dealers are feeling that as well.

You know, they've seen the reductions in their lots. We just maybe to give you a data point, you know, year over year on our JDF, our general financial business, our trade wholesale. So those that use the equipment that's getting finance on the lots of dealers is down over 15% just in terms of the portfolio size. So that's less on their balance sheets that they freed up and making more opportunity for new sales. Now, certainly, you know with with what's happened or the dynamics of fertilizer um you know customers are watching that i mean chris chris rightly said you know the setup on old crop um you know that that i think there's about a third or so that that still needs to be sold um you know actually the increase you've seen in commodity prices supports that so there's some puts and takes maybe a little bit more caution in terms of input costs for next year but our baseline i think share with the dealers that we expect to see that that recover some uh next year hey tim this is brent i would say the the feedback from dealers has varied a little bit.

You know, we have some dealers who took action early on used and not surprisingly, those are the dealers who are most optimistic about next year. I would say we even, this is a bit anecdotal, we have a couple of dealers who are actually looking to add in select cases to their used fleet. So, you know, I think for those who have worked themselves into a pretty good situation, they're the most positive. We have others who are maybe a little bit more moderate on next year. But again, it's a little bit dependent on how aggressive they've in, managing their inventory. And so I think that'll dictate a little bit of how the season progresses over the next couple of months. Thanks, Tim. Thanks for having time for one more question.

Our last question comes from Avi Jaroslisk from UBS. Your line is open.

Hey, thanks. Good morning. So you noted that you're continuing to see market share improvements in South America, but also have continued to introduce new products there.

So just kind of wondering um are you gaining share within the existing product portfolio or or has it really been driven by these new products that you've been rolling out down there yeah i mean it's and you've heard us talk about this before if you look over the last really really decade and a half we've been on a really steady um steady and and and fairly linear increase in share both in terms of tractors and and combines you know in in the country and that's been supported by you know a number of fronts it's new products new technologies that we've brought to the market you know it's an outstanding dealer channel that's our that supports our our customers in the region it's more localization of products um and and so it's a number of fronts and i think what gets us excited is we continue to support that and amplify that with more and more product introductions and we had what we call the record introduction you know last year last spring we topped that this year with more and more products, you know, new combines, new sprayers, new planters, new technologies like CN Spray, connectivity through Starlink, and all of that is driving an experience for our growers that helps them, you know, save on inputs, drive more value in their operations. I mentioned earlier, but, you know, harvest settings automation for combines is the highest utilization in the globe in Brazil, reflecting the value that our customers see in that region as well. So Brent said it earlier, but we're extremely bullish on the region as a result. We see opportunity for more growth going forward. Thanks very much for the time. We appreciate everybody's time today on the call.

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