DEERE & CO Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Core Values and Commitment: Emphasized commitment to customers amidst market volatility, reaffirming dedication to serving them for nearly 200 years and beyond.
• Execution of Plan: Focus on managing costs, production, inventory, and quality to navigate uncertain markets while maintaining investments in value-unlocking products and solutions. Smart industrial strategy remains unwavering.
• Second Quarter Results: Net sales and revenues down 16% to $12.763B, net income $1.804B ($6.64 per diluted share). Equipment operations net sales down 18% to $11.171B. Margins exceeded projections despite headwinds.
• Tariff Impacts and Mitigation: Fluid tariff environment led to broader guidance range. Mitigation efforts include certifying products for USMCA and Ag use only exemptions, optimizing global trade flows.
• Used Inventory Management: Focus on right-sizing used inventory in North America, with new inventory levels for tractors and combines down significantly YoY. Efforts include dealer development and financing options.
• Precision Ag Solutions Progress: Continued growth in Precision Tech adoption, with Solutions as a Service models making tech more accessible. Utilization of technologies like See & Spray showing positive momentum.

Segment Performance

• Production and Precision Ag: Net sales $5.23 billion, down 21% YoY. Operating profit $1.148 billion, 22% operating margin. Revenue contribution: Not explicitly stated as a percentage but is a key equipment segment.
• Small Ag and Turf: Net sales $2.994 billion, down 6% YoY. Operating profit ~$574 million, 19.2% operating margin. Revenue contribution: Not explicitly stated as a percentage but is a key equipment segment.
• Construction and Forestry: Net sales $2.947 billion, down 23% YoY. Operating profit $379 million, 12.9% operating margin. Revenue contribution: Not explicitly stated as a percentage but is a key equipment segment.
• Financial Services: Worldwide financial services net income $161 million in Q2.

Guidance

• Fiscal 2025 net income outlook widened to between $4.75 billion and $5.5 billion.
• Effective tax rate expected to be between 20% and 22%.
• Cash flow from equipment operations projected between $4.5 billion and $5.5 billion.
• Broader guidance range due to fluid tariff environment, with pre-tax tariff impact in fiscal 2025 expected to be just over $500 million.

Risks

• Tariff Uncertainties: Fluid trade policy impacts margins, with broadened guidance range due to tariff uncertainties.
• Market Sentiment: Global uncertainty weighs on customer sentiment across end markets, affecting sales projections.
• Used Inventory Impact: Velocity of used equipment movement uncertain, with multiple factors (Ag fundamentals, economic stimulus, trade deals) influencing net pricing and market cycle.

Question and Answer

Q: Rob Wertheimer from Melius Research asked about SaaS models, Precision Essentials, and progress on precision Ag solutions.

A: Josh Rohleder and Josh Jepsen responded, describing SaaS offerings in 3 buckets: precision digital technologies, usage-based technologies, and forthcoming autonomy solutions. Mentioned growth in Precision Essentials adoption and utilization of technologies like See & Spray.

Q: Tim Thein from Raymond James inquired about implied profitability in the PPA segment for the second half.

A: Josh Jepsen explained that tariff impacts, mix changes, and less favorable price and material favorability contributed to the decremental margins in the second half.

Q: Jamie Cook from Truist Securities asked about early order programs and pricing for 2026.

A: Josh Jepsen stated early order programs have optionality to adjust with tariff environment, and new inventories are positioned to be in line with retail in 2026 due to low inventories and improved market sentiment in regions like Europe.

Q: David Raso from Evercore ISI questioned second half large Ag margins.

A: Josh Jepsen explained tariff impacts, smaller sales change denominator, less favorable price, and reduced material favorability in the back half contributed to soft margins.

Q: Jerry Revich from Goldman Sachs asked about price cost conversation and tariffs in 2026.

A: Josh Jepsen noted mindful approach to pricing considering past inflation, with early order programs having 2%-4% price increases and focus on cost mitigation.

Q: Chad Dillard from Bernstein inquired about tariff cost sharing.

A: John May responded that price, sourcing, and supplier resiliency efforts are combined to share tariff costs across stakeholders.

Q: Kristen Owen from Oppenheimer asked about used inventory velocity and net pricing.

A: Josh Rohleder and Josh Jepsen discussed used inventory stabilization in North America, impact of Ag fundamentals and economic stimulus, and uncertainty in used market velocity.

Q: Stephen Volkmann from Jefferies asked about tariff margin protection.

A: Josh Jepsen stated the goal is to protect margin through cost activities and price realization, with a measured approach considering dynamic environment.