Deere & Company 2026 Q3 Earnings Call

Good morning, and thank you for joining us. John Deere delivered a strong third quarter, with equipment operations achieving 14.4% operating margin. While conditions vary across our end markets, we continue to see pockets of strength. In agriculture, producers remain focused on managing profitability, impacted by fluctuating commodity fundamentals and uncertainty around input costs and crop demand, all of which are influencing capital spending decisions by region. At the same time, construction, compact construction, and turf markets remain supported by healthy project activity and steady demand fundamentals, reinforcing the value of Deere's diversified portfolio. Against this backdrop, Deere's performance continues to underscore the strength of our operating model across our factories, warehouses, and offices. Teams executed well throughout the quarter, delivering strong performance while maintaining cost discipline. We also made continued progress improving inventory health, positioning Deere, our dealers, and our customers to respond effectively as market conditions evolve.

We now begin with slide 3 and our results for the third quarter. Net sales and revenues were up 5% to $12.608 billion, and net sales for the equipment operations were up 6% to $10.999 billion. Net income attributable to Deere & Company for the quarter was $1.379 billion or $5.10 per diluted share. Diving into our individual business segments, we will start with Production & Precision Ag on slide 4. Net sales of $3.998 billion were down 6% compared to the third quarter last year, primarily due to lower shipment volumes, partially offset by favorable price realization and currency translation. Price realization was positive by 2.5 points. Currency translation was also positive by slightly over 1.5 points. Operating profit was $527 million, with a 13.2% operating margin for the segment.

The year-over-year decrease was primarily due to lower shipment volumes and higher production costs, which were partially offset by favorable price realization and the effects of currency exchange. Next, we will turn to Small Ag & Turf on slide 5. Net sales were up 12% year-over-year, totaling $3.383 billion in the third quarter due to higher shipment volumes and favorable price realization. The price realization was positive by a little over 1.5 points. Currency translation was negative by roughly half a point. Operating profit increased year-over-year to $622 million, leading to an 18.4% operating margin. The increase was primarily due to higher shipment volumes and sales mix, along with favorable price realization, partially offset by higher production costs. Slide 6 is our industry outlook for ag and turf markets globally for 2026.

In the U.S. and Canada, we continue to expect the large ag equipment industry sales to decline 15%-20% year-over-year as farm profitability remains muted and producers navigate elevated input costs, commodity price volatility, and the ongoing uncertainty around agricultural markets. The small ag and turf industry in the U.S. and Canada remains relatively stable, with industry sales expected to be flat to up 5%. Healthy margins within the dairy and livestock sector, coupled with steady demand in residential and commercial mowing, continue to support the outlook. Shifting to Europe, we now expect industry sales to be approximately flat for the year, reflecting softer market conditions and continued pressure on arable farm profitability. Favorable dairy margins continue to support the broader outlook. In South America, elevated production costs and higher interest rates continue to pressure farm economics and impact equipment purchase decisions.

We now expect the industry outlook to be down 15%-20%. Lastly, in Asia, we continue to expect industry sales to remain approximately flat, supported by relatively stable end market conditions across the region following the modest improvements in India we communicated last quarter. Moving on to our segment forecasts, beginning on slide seven. For Production & Precision Ag, we've trended toward the bottom end of our prior guidance range and now expect net sales to be down approximately 10% for the year. This update reflects further industry softening within South America and Europe. The forecast also includes one point of positive price realization for the year, as well as close to 2.5 points of favorable currency translation. Our full-year forecast for the segment's operating margin has been narrowed and is now between 11% and 12%.

Slide eight covers our forecast for Small Ag & Turf segment. We continue to expect net sales to be up approximately 15% for the full year. This guide includes 1.5 points of positive price realization, as well as roughly half a point of favorable currency translation. The segment's operating margin guide has been increased to between 14.5% and 15.5%. Shifting now to Construction & Forestry on slide nine. Net sales for the quarter were up 18% year-over-year to $3.618 billion, a result of higher shipment volumes and favorable price realization. Price realization was positive by eight points, reflecting year-over-year impact of lapping retail incentive programs from the prior year, combined with favorable pricing in the current year. Currency translation was also positive by roughly half a point.

Operating profit of $436 million was up year-over-year, resulting in a 12.1% operating margin driven by a favorable price realization, which was partially offset by higher SA&G and R&D costs. Slide 10 provides an update to our 2026 Construction & Forestry industry outlook. Industry sales for earthmoving equipment in the U.S. and Canada are now expected to be up 5%-10% for construction equipment and up 5% for compact construction equipment, reflecting strong demand from large-scale infrastructure, data center, and energy-related projects, as well as continued investment in rental fleets to support elevated levels of end market activity. Within global forestry, we now expect the industry to be down 10% for the year as subdued residential construction activity and softer log and lumber prices continue to weigh on equipment demand, especially in North America.

The projection for global road building market remains steady at up approximately 10% for the year, supported by favorable infrastructure spending trends, healthy contractor backlogs, and continued investment in road construction across key regions. Moving on to the Construction & Forestry segment outlook on slide 11. The 2026 net sales forecast remains steady at up approximately 20% for the full year. The guidance for the year now includes three points of favorable price realization and approximately 1.5 points of favorable currency translation. The forecast for this segment's operating margin has been tightened to between 10.5% and 11.5% for the year. Transitioning to our financial services operation on slide 12. Worldwide Financial Services net income attributable to Deere & Company in the third quarter was $219 million.

Net income was higher in the quarter due to favorable price financing spreads, partially offset by the impact of lower average portfolio compared to the prior year. For fiscal year 2026, our full-year outlook has increased to $870 million. On slide 13, we outline our guidance for net income, effective tax rate, and operating cash flows. For fiscal year 2026, we improved our net income outlook, raising it to a range of $4.75 billion-$5 billion, reflecting the strong results delivered in the quarter and our confidence in the outlook for the remainder of the year. This guidance continues to reflect an effective tax rate between 24% and 26%. Lastly, cash flow expectations from the equipment operation have also improved to now be in the range of $5 billion-$5.5 billion. This concludes our formal comments.

We will now shift to a discussion to cover a few topics specific to the quarter. Starting off with Deere's performance in the third quarter. Equipment operations net sales improved 6% year-over-year, and we saw equipment operations operating margins come in at 14.4%. Chris, can you provide some additional color on the performance for this quarter?