DEERE & CO (DE) Q2 2026 Earnings Call Transcript

Good morning, and welcome to Deere and Company's Second Quarter Earnings Conference Call.

Your lines have been placed on listen only until the question and answer session of today's call. I would now like to turn the call over to Mr. Josh Beal, Director of 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 Christopher Seibert, Manager, Investor Communications. Today, we will 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 will 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 and 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 and risk factors in the annual Form 10-K, 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 johndeere.com/earnings under quarterly earnings and events. I will now turn the call over to Christopher 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 IEEPA tariffs, which we will discuss in more detail later in the call. Our Construction and Forestry 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 Ag and Turf is benefiting from a recovery in turf markets and healthy cash flow in the dairy and livestock sector. In our Large Ag business, consumption of ag commodities continues to grow, supported in part by increased biofuel use and higher energy prices. We see the potential for tighter commodity supplies in upcoming crop years and higher fertilizer costs potentially impacting production levels. However, customer sentiment remains muted. Despite recent grain price increases, growers' margins face headwinds from elevated and volatile input costs and high interest rates. Amidst this backdrop, Deere continues to strengthen its position in advance of the Large Ag cycle recovery, with low levels of new field inventory, continued improvement in used inventory, and robust introductions of new products and technology solutions driving market share gains that 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 Deere 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 3 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 and 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 was positive by about one 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, which were partially offset by the favorable effects of currency exchange. Moving now to Small Ag and Turf on Slide 5. 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 1.5 points. Currency translation was also positive by roughly 2.5 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 U.S. and Canada to decline 15% to 20%, 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 Ag and Turf in the U.S. and Canada, industry demand is expected to remain steady, ranging from flat to up 5%. We are projecting modest strengthening in the turf market, 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 remained strong alongside improving crop prices, elevated interest rates, higher input costs and a stronger Brazilian real 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 begins on Slide 7. For Production and Precision Ag, the net sales forecast is unchanged and remains down between 5% and 10% for the full year. This forecast now reflects roughly one 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%. Slide 8 shows our forecast for the Small Ag and 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 one point of favorable currency translation. The segment's operating margin guide remains between 13.5% and 15%. Shifting over to Construction and Forestry on Slide 9, net sales for the quarter increased by 29% year over year to $3.790 billion as a result of higher shipment volumes and favorable currency translation. Price realization was favorable by more than 2.5 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 and Forestry industry outlook. Industry sales projections for earthmoving equipment in the U.S. and Canada remain unchanged, with both construction equipment and compact construction equipment expected to be up around 5%. The fundamentals behind the construction industry remain favorable, with healthy customer backlogs being supported by large infrastructure projects that are more than offsetting softness in residential construction. Global forestry markets are expected to decline 5%, reflecting continued pressure from weak residential construction activity and low log and lumber prices. We now expect global roadbuilding markets to grow approximately 10% year over year, supported by elevated road construction spending across multiple geographies. Moving on to 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 two 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 Services operations on Slide 12. Worldwide Financial Services net income attributable to Deere and 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 2026, 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 2026, our net income forecast remains unchanged between $4.5 billion 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 billion 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, Christopher. I spent several years on Deere earnings calls in my prior time in investor relations, but I have been away for a while working in our Construction and Forestry business. So it is great to be back, and I look forward to reengaging with our investors and analysts in my new role. As 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 Ag is up 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 fiscal 2026 will represent the bottom of the ag cycle. We have 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. What gets me really excited is the way we have 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 are excited to have you back. Pivoting to a few thoughts about the business. Let's begin with the quarter's performance. Net sales increased sequentially, as expected, and we are also up 5% year over year. Equipment operations margins came in just under 17% in Q2. Josh Beal, can you lead off with a breakdown of the quarter?

First and foremost, it is important to mention the unexpected item for the quarter which was IEEPA refunds. As Christopher noted earlier, we recognized a recovery of $272 million related to refund claims associated with IEEPA 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 2.5 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%. Noting the diversification comment Christopher made earlier, Small Ag and Turf delivered margins over 20% in the quarter, and the relative strength in SAT end 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. Price realization was positive for all three business segments in Q2. We saw particular strength in Construction and Forestry 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.

That leads to my next question, which is likely top of mind for many given trade policy dynamics following the Q1 earnings call. As you noted, we benefited from a one-time tariff tailwind in the second quarter. What should we expect from here and how is that reflected in our guidance for the rest of the year?

Yes. First, I would start by reminding everyone of the timing of our Q1 earnings release, which occurred just prior to the Supreme Court ruling on IEEPA. Since that decision, we have seen the invalidation of IEEPA tariffs, the introduction of new Section 122 tariffs, and adjustments to Section 32 tariffs. The cumulative impact of these changes is that on a full year basis, our direct tariff exposure remains essentially unchanged at approximately $1 billion to $1.2 billion, which is approximately a 3% margin headwind. Net of the refunds, our forecast now includes approximately $900 million of tariff costs for the year.

I would start by recognizing the tremendous effort across the organization to manage what continues to be a very dynamic trade environment. It is worth noting that we have 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 1.5% and 2% 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 John Deere-designed excavators in Kernersville, North Carolina, following a $70 million expansion investment to bring U.S.-designed and manufactured excavators to the market. 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 impact on products like oil and fertilizer. Considering that, can you provide an update on broader ag market conditions and how they are reflected in our industry guidance? Maybe starting with South America.

As you mentioned earlier, we revised our South American ag industry outlook to down 15% from down 5%, primarily reflecting incremental softness in Brazil. Since the start of our fiscal year in November, Deere retail sales in Brazil have declined less than the broader tractor and combine industry, which has declined about 15% in six months in the country, in line with our revised industry guide. Small and midsized 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 their 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 strengthening 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.

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, accelerating portfolio innovation, and generating double-digit margins in Brazil even at trough levels. To be clear, we could not do this without the outstanding 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 my confidence in the long-term opportunity in Brazil.

Thanks for the additional color, Brent. It is really exciting to think about the growth prospects for Deere in South America.

First, input costs, particularly fuel and fertilizer, have increased globally and will contribute to higher inflation across the ag economy. Our customers in North America and Europe largely purchased 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 have 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 do not expect these developments to meaningfully adjust demand levels this fiscal year, and as a result, ag industry guides outside of South America remain largely unchanged.

Regarding construction markets, demand remains robust, supported by infrastructure spending, rental activity, and accelerating data center investments. Reflecting that strength, we have 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 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 a virtual superintendent and the Operations Center enabling a smarter and safer job site. We had over 140,000 contracts in attendance, and 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 and 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 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 have seen year to date.

Thank you both. Maybe let's turn to inventory management. Can we talk about what we have seen this quarter for both new and also used ag inventory?

As you may recall, last quarter, we discussed improving inventory trends across all regions, particularly in high horsepower tractors. I am pleased to share that those trends have continued this quarter with inventories remaining favorable 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 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 have 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. 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 2022 to model year 2023 high horsepower tractors are now down around 45% from their peak levels last year. Other North American product lines, including sprayers and planters, have also seen meaningful used inventory improvement, with sprayer inventory down approximately 30% and planter inventory down roughly 50% from recent peak levels. Shifting to our order books in North America, order velocity continues to track in line with our expectations. Model year 2026 production of seasonal product products is largely set by our early order programs, which have been closed for several months now. We are just launching EOPs for out-of-year 2027 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 our model year 2026 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, fiscal year 2026 inventory levels in Europe and South America are in good shape following significant reductions in fiscal 2024. In Europe, 2026 production is largely aligned with retail demand, while in Brazil, we expect to underprice retail demand, most notably in combines. Order visibility in both regions now extends through the third quarter and into the fourth.

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

While our 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 that helped to offset ongoing inflationary pressures in 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 Ag and Turf business continues to show solid momentum with sustained strength in underlying demand and modest growth in turf. Both Production and Precision Ag and Small Ag and Turf modestly adjusted full year price realization expectations by approximately 0.5 points, primarily reflecting slightly lower expectations for overseas markets. Construction and Forestry continues to perform well with increased strength in end market demand, resulting in an increase in both the net sales and margin expectations for that segment. Taken altogether, these dynamics highlight the resilience and balance of our portfolio, supporting a stable and consistent overall net income outlook for the company.

One thing I would add is that, for the remainder of the year, 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 is a good point, Brent. One final topic. Last quarter, we highlighted innovation in our Construction and Forestry business through the launch of our new excavators and the Tenna acquisition, but we did not spend much time on ag innovation. Can you update us on the latest progress across our portfolio in Precision Ag Solutions?

It is an exciting topic. We have continued to strongly invest in the ag business, delivering meaningful portfolio expansion, product enhancements, and the continued build out of our technology stack. As customers navigate a challenging market environment, it 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 have 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 have launched six new 8R and 8RX tractor models featuring additional high horsepower options 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 JD14 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 burrow optimization through our ExactDepth solution, which is designed to provide individual row unit depth calibration from the cab while on the go, and also through downforce automation enabled by our recently released Furrow Vision technology. When these furrow optimization solutions are paired with our automated fertilizer placement solutions of ExactShot with ExactRate, farmers can be better positioned to maximize yield potential while reducing rising input costs within tight planting windows. For the application job step, our See 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 See 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 are 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 Deere 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; we have exceeded that product 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 12.5 thousand 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 us well to continue driving productivity for our customers while supporting recurring high value revenues across the ag cycle. I would also note that 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 thousand.

Before we open the line for questions, a few final comments. 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 have 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 am incredibly proud of what they have 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 repurchases 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. Now let's open the line to questions from our investors.

We are ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. In consideration of others, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue. Operator, ready for our first question.

Hi, guys. Thanks for the question. This year, construction has been starting out strong. I know Deere has some tailwinds from past underproduction, but the industry forecast at up 5% compared to your sales growth thus far is a pretty big gap. Are you seeing healthy industry growth and do you see Deere getting a lot of share?

You are right and you set up the question correctly. We did some underproduction last year in our earthmoving segment, particularly in the front part of the year, and as we build in line with retail demand this year, we get that natural lift from that change. On top of that, we have talked about our industry guides being up 5% with continued strength in earthmoving and road building. That industry is lifting us. On top of that, we have seen some pickup in share over the past 12 months, particularly in the last six as we have made some pricing adjustments in the last year, and we are seeing some share gains as well.

Our next question comes from Steven Volkmann from Jefferies.

Hi. This is Sherri Scribner on for Steven. Just wanted to touch on the tariff piece quickly. Wanted to get a better sense of the baseline margin in each of the businesses. If you could break down that $272 million a little bit between the segments, that would be super helpful.

There is a lot of moving pieces there, and I will start with tariff expenses as we move through the course of the year. As we said in our comments, there were some moving pieces over the course of the quarter with IEEPA going away, Section 122 coming in, and some adjustments to Section 32. If you net that, our overall run rate for tariff expense remains unchanged at about $1 billion to $1.2 billion for the full year. The splits that we provided in the past have not changed as well. So it is about 45% from the Construction and Forestry division, about one third for Small Ag and Turf, and the remaining piece, in round numbers, about 20% for Large Ag. So the full year impact of that tariff expense is about three points, and you can do the math for the individual business units. We did recognize the tariff refund in the quarter of $272 million, which on a full year impact is about a one point tailwind for equipment operations. To give you some sense of splits, they are pretty close to the tariff exposure as well: about 50% of the refund went to Construction and Forestry, about 30% to Small Ag and Turf, and the remaining 20% went to the Large Ag business.

Our next question comes from Kyle Menges from Citigroup.

Hi. Good morning. This is Paddy on for Kyle. Following up on that last question around tariffs: you mentioned that you have not really taken pricing to offset these tariffs. Can you provide more color on the mitigation strategies you have been taking? What progress have you made over the last 12 months since tariffs first came into the picture, and what could be more to come?

With respect to our price realization and how we are thinking about treating tariff costs, our price forecast for the year is ranging between about 1.5% to 2% for the equipment operations overall. This compares to our general inflation rates excluding tariffs of also about 1.5% to 2%. When you stack on tariffs, our incremental costs are a bit margin dilutive relative to price. We are not surcharging our customers on tariffs, especially given that tariff rates have been inconsistent and very dynamic in recent months. Instead, we are focusing on reducing our tariff exposure through cost actions, such as resourcing, reshoring, exemption submissions, ensuring USMCA compliance, and identifying sourcing adjustments. I have full confidence that we will largely counter the negative financial impact of tariffs over the coming periods largely through cost measures without relying on any surcharges to customers.

As we get to the back half of fiscal 2026 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 saw towards the back half, we start to see more favorable comps from both a tariff standpoint and a material cost standpoint in the back half. Price also works on the opposite side where we took some incentives last year in both Construction and Forestry and Large Ag that we are lapping. So price becomes more favorable in the back half and production cost, including tariffs and material costs, gets more favorable as well. So the price-cost relationship will improve as we move through the balance of the fiscal year.

Our next question comes from Angel Castillo from Morgan Stanley.

Hi. This is Esther on for Angel. Can you talk a little bit more about the global ag cycle broadly? We are kind of bouncing along the bottom in most markets. How would you frame the downside risk to the regional outlooks given the abnormal geopolitical environment? Also, is there any period we can look at as a point of reference to understand farmer behavior during this time?

Stepping back as we think about the setup for where Large Ag is: we are a couple of years into this downturn. We have seen less replacement and are seeing fleet ages continue to grow. In North America, fleet age for high horsepower tractors and combines is at very elevated levels, which supports underlying replacement demand. Structurally, the used inventory market, which has been a governor slowing replacement demand, has become a lot healthier, particularly late model equipment that was at a higher percentage in the system. For example, high horsepower tractors from model years 2022 to 2023 are down about 45% from their peak a year ago, which is significant improvement. That sets up replacement demand. That being said, customers are experiencing margin pressure that was heightened over the past quarter as fertilizer levels increased, which has been particularly acute in Brazil where farmers are closer to the planting season and face currency headwinds. We adjusted Brazil down this year, but our baseline expectation remains that we see recovery in 2027. The pace of that recovery will depend on factors such as geopolitical developments, ag fundamentals, and policy outcomes. We have seen some policy improvements that will help support consumption, but we do not expect these developments to meaningfully adjust demand levels this fiscal year.

If you think about Josh's point about the global situation, it is very different between Europe, the U.S., and Brazil. In the U.S., commodity prices since August for both soybeans and corn have been up around 20%. U.S. growers secured inputs ahead of planting, so for them this year probably looks a little bit better compared to the peak uncertainty in August. That is an important point to consider.

Our next question comes from Kristen Owen from Oppenheimer.

Good morning. This is Kristen on for Kristen. I want to double click on the order trends you are seeing in Large Ag, specifically seasonal products, and any trends by region that are standing out?

On seasonal products, we manage that through our early order programs. Demand and the production plan for 2026 is set at this point; our EOPs for this year have closed, and we know where we are going to build in combines, sprayers and planters. We are just on the threshold of getting indications on demand for next year. We opened EOPs for sprayers a couple of weeks ago and are a few weeks into that program. Structure-wise, it will be a similar two-phase program: opened at the beginning of May running through the end of August; planters open at the beginning of June and run through the end of September. We are very early in terms of indications for next year, but everything we have seen thus far supports our view that fiscal 2026 still marks the bottom of the ag cycle.

Our next question comes from Jerry Revich from Wells Fargo.

Hi. Good morning. Brent, congratulations again. I want to ask on Precision Ag. Can you talk about your expected acres covered this year, retrofit orders, and Precision Essentials renewal rates for the 2025 cohort? Also, any comments on list price increases for advanced features rolling out as part of EOP?

For See and Spray, we are encouraged by the progress this year. Year one we covered one million acres; last year globally it was five million acres. We are early in the spring season, but year to date customers who used the system last year are spraying more acres with See and Spray than we saw last year, which is encouraging. The technology is working: we have demonstrated 50% to 60% herbicide savings using the technology, and that is resulting in increased utilization. We introduced See and Spray green-on-green for Brazil for next year, which will expand growth. We also expanded crop coverage to include wheat, barley, and canola. Early EOP take rates for 2027 on See and Spray are expected to exceed what we saw for this year. On Precision Essentials, orders are trending well. The important point is the number of customer organizations we bring into the John Deere Operations Center: we added roughly 4,000 to 5,000 new customer organizations from Precision Essentials integration. For renewal rates, overall we are in the 70% range, but the second-year cohort renewal rate is over 90%, indicating stickier adoption for customers after the first year. Additionally, harvest settings automation utilization remains very strong—over 60% utilization in the Northern Hemisphere harvest and over 80% in Brazil's most recent harvest—so utilization continues to scale and supports growth prospects in South America.

To add, the growth in customer organizations integrated into our platform provides a meaningful long-term benefit and reinforces the value of our digital offerings.

Our next question comes from Tami Zakaria from JPMorgan.

Good morning. This is Tami on for Jamie. Can you talk us through the cadence for Q3 and Q4 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?

We expect the back half to be higher than the front half and Q4 to be a bit higher than Q3 overall. For Large Ag, you can do the math on margin given the guide; Q4 will be a bit stronger than Q3. We talked at the beginning of the year about some differences in normal seasonality; we have more Waterloo large tractor shipments to North America in the back half than typical, which is abnormal but reflects how the order book built for the year. For Small Ag, seasonality is pretty normal with a step down in Q3 and another step down in Q4. Construction and Forestry is fairly balanced between the two halves, both top line and margin, with Q4 a little stronger than Q3, but overall pretty close. I would not call out anything specifically abnormal as we look at that cadence.

Our next question comes from Chad Dillard from Bernstein.

Hi. This is Eric filling in for Chad. I am trying to understand your pricing expectations that look more conservative than peers. Is that a reflection of higher discounting?

Are you asking about Large Ag specifically? We did make an adjustment this quarter to pricing driven by what we have seen in Brazil, where we took the price down a bit quarter over quarter. Importantly, all of our regions are expected to be price positive in the Large Ag business. We had a 1% price guide for the full year, with North America a bit better than that and the other regions a little lower, averaging out to about 1% across the business.

To add, price will look a little better in the second half given the lapping of incentives and other dynamics. We feel good about the pricing mechanics we have put in place and the continued progress on used inventory.

Our next question comes from Mig Dobre from Baird.

Good morning. Quick clarification: on the IEEPA $272 million that you clawed back, are we to understand that you have incremental headwinds from other types of tariffs that bring you back to the $1.2 billion run rate? Or is this a true benefit relative to the initial guide? Related to that, costs appear to be rising for raw materials and energy, suggesting things could get tougher going forward. How do you square those two items?

To clarify on tariffs: the $1.2 billion run rate was our run rate last quarter and that is unchanged. The $272 million refund was new in the quarter, so net of that refund our net tariff exposure for the year is closer to $900 million. From a material standpoint, we have seen some inflation come in over the last two to three months given global events. As we talk about the back half, recall that we are lapping tariffs that entered the business last year and the indirect inflation that resulted from those tariffs in the back half of last year, so the comps become more favorable in the back half even though we have seen recent inflation. That said, we do acknowledge elevated levels of inflation in the near term.

To add, pricing is much more favorable in the back half as well. Price-cost ratios will improve meaningfully as we progress through the fiscal year. We also expect better overhead absorption in Large Ag factories in Q4 as production rates are significantly higher given the order book cadence, which will help margins later in the year.

Our next question comes from Timothy Thein from Raymond James.

Good morning. My question is on dealer sentiment and feedback in North America with respect to Large Ag. What are dealers telling you about early order programs and how they expect the market to play out? Any color on dealer behavior that could give a lens into CapEx in 2027 would be helpful.

Our baseline expectation, which dealers generally share, is that we should see some level of recovery next year given fleet age and used inventory improvements. Dealers have seen reductions in their lots; for example, our finance portfolio tied to dealer trade wholesale is down over 15% year over year, freeing up balance sheet capacity and creating more opportunity for new sales. Certainly, fertilizer dynamics and input costs are top of mind and may cause caution, but the underlying structural factors support improvement next year. Dealers who managed used inventory early are the most optimistic and some are even looking to add select cases to their used fleets. Those who were less aggressive are more moderate in their outlook. Dealer behavior will depend on how proactive they have been managing inventory.

The feedback from dealers varies. Those who took action early on used inventory are optimistic about next year. Some dealers are looking to add to their used fleets in select cases. Overall, dealer sentiment depends significantly on how effectively they managed inventory, which will influence how the season progresses over the next couple of months.

Our last question comes from Steven Fisher from UBS.

Good morning. You noted that you are continuing to see market share improvements in South America and have continued to introduce new products there. Are you gaining share within the existing product portfolio, or has it really been driven by these new products that you have been rolling out down there?

Over the last decade and a half, we have had a steady and fairly linear increase in share in both tractors and combines in Brazil. That growth has been supported by several factors: new products and technologies, a strong dealer channel, and increased localization of products. It is a combination across many fronts. We continue to amplify that with more product introductions. This year we had an even larger product introduction than last year: new combines, new sprayers, new planters, See and Spray, connectivity through Starlink, and more. All of this is driving an experience for growers that helps them save on inputs and drive more value in their operations. Harvest settings automation has the highest utilization globally in Brazil, reflecting the value customers see. We remain very bullish on the region and see opportunities for further growth going forward.

We appreciate everybody's time today on the call. That concludes today's conference. Thank you for participating. You may disconnect at this time.