Prepared remarks
Good morning, and welcome to Deere and Company Third Quarter Earnings Conference Call. I would now like to turn the call over to Mr. Christopher Seibert, 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; Deanna Kovar, President, Worldwide Agriculture and Turf Division, Production and Precision Ag, Sales and Marketing, Regions of the Americas and Australia; and Joshua Jepsen, Manager, Investor Communications. Today, we will take a closer look at Deere's third quarter earnings, then spend some time talking about our end 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 express 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-Ks and risk factors in the annual Form 10-K, as updated by reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at johndeere.com/earnings under quarterly earnings and events.
Good morning, and thank you for joining us. John Deere delivered a strong third quarter with equipment operations achieving a 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 will 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 and 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 and 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 and Turf on slide 5. Net sales were up 12% year over year, totaling $3.383 billion for 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 fiscal 2026. In the U.S. and Canada, we continue to expect the large ag equipment industry sales to decline 15% to 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% to 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 forecast beginning on slide 7. For Production and Precision Ag, we have 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 a 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 8 covers our forecast for 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 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 and Forestry on slide 9. Net sales for the quarter were up 18% year over year to $3.618 billion as a result of higher shipment volumes and favorable price realization. Price realization was positive by 8 points reflecting the 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 favorable price realization which was partially offset by higher SG&A and R&D costs. Slide 10 provides an update to our 2026 Construction and Forestry industry outlook. Industry sales for earthmoving equipment in the U.S. and Canada are now expected to be up 5% to 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 fleet 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 the 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 and Forestry segment on slide 11. The 2026 net sales forecast remained steady at up approximately 20% for the full year. The guidance for the year now includes 3 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 and Company in the third quarter was $219 million. Net income was higher in the quarter due to favorable pricing on financing spreads, partially offset by the impact of a 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 to $5 billion, reflecting the strong results delivered in the quarter and our confidence in the outlook for the remainder of the year. Fiscal 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 to $5.5 billion. This concludes our formal comments. 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%. Christopher, can you provide some additional color on the performance for this quarter?
Absolutely, Dan. This quarter's result reflects strong execution across all business segments amid a dynamic market and evolving operating environment. Our factories performed exceptionally well and exceeded expectations on production output, combined with disciplined execution across the business and favorable price realization. This strong operational performance drove results above company and consensus expectations for both revenue and profitability. The quarter also included multiple tariff-related developments. We recognized $110 million of incremental refunds in Q3, slightly above expectations, due to the timing of the Phase II AIPA refund approvals. As a result, total refunds recognized in fiscal year 2026 now stand at $382 million. Notably, the current outlook assumes no further refund activity during the balance of the fiscal year. Following the changes to the Section 122 and Section 321 policies, we now expect direct tariff expense of approximately $1.1 billion for the fiscal year, excluding IEPA refunds. Overall, the quarter underscores the strength and discipline of our operating model. Strong execution across the business, together with improving tariff dynamics, position us well as we close out 2026.
This is Brent. I just had one more point on the outlook. I remain very confident in our team's ability to finish strong for the fiscal year. A combination of our performance year to date and a strong fourth-quarter order book across all segments has enabled us to narrow our guidance ranges and improve our net income and cash flow forecast, despite a very dynamic market backdrop.
Thanks for the additional details, both Brent and Christopher. Building on that, we made a few adjustments in the guidance ranges. Can you help walk us through the rationale, starting with Construction and Forestry?
Sure. For Construction and Forestry, we maintained our sales guidance of approximately 20% year-over-year growth and we narrowed our full-year margin guidance to between 10.5% and 11.5%, reflecting continued confidence in the business and the outlook for the remainder of this year. The order books for 2026 are largely full, as demand fundamentals remain favorable across both the earthmoving and roadbuilding end markets. Large-scale infrastructure projects, data center construction, and pipeline activity continue to support robust customer demand. As a result, customer backlogs now extend well into fiscal year 2027, providing healthy visibility and optimism for next year and supporting our increased 2026 industry guide for construction equipment to be up 5% to 10%. While we have increased production rates across our construction factories, continued order strength and retail momentum now have us producing modestly below retail demand. This puts field inventories at a healthy starting position for next year and enables our dealers to support measured expansion of their rental fleets going into 2027. We are also seeing strong momentum across our technology portfolio. Factory-installed smart grade adoption has increased more than 50% year to date, reflecting the growing role of technology in everyday construction operations. At the same time, sales of our job-site safety solutions have increased nearly 40% year over year as customers increasingly invest in technologies that improve productivity, reduce rework, and enhance safety across the job site. Overall, we remain encouraged by the outlook for the Construction and Forestry business. With steady end market demand, healthy customer backlogs, and increasing adoption of our technology solutions, we believe Construction and Forestry is well positioned as we close out 2026 and move into 2027.
This is Brent. I would add one final perspective on Construction and Forestry. Christopher highlighted the strong growth opportunity we are seeing in both our precision construction technologies and construction portfolio. As we think about our LEAP ambitions, Construction and Forestry represents one of the most significant opportunities across Deere, both from a growth standpoint and in terms of the value we can create for customers. Across both agriculture and construction, labor remains constrained, and customers increasingly rely on technology to do more with less. Deere has a long track record of addressing those challenges in agriculture, and we are seeing similar momentum in construction now. Whether through technology adoption, expansion of our digital ecosystem with solutions like Tenna, or growth of our equipment portfolio, we see a strong runway ahead. Combined with a favorable end market backdrop, these opportunities position Construction and Forestry to be an increasingly important contributor to Deere's long-term growth strategy.
Thanks, Brent. Christopher, can you now walk us through the Small Ag and Turf business?
Yes. While market conditions within Small Ag and Turf vary by end customer and geography, the overall demand environment remains positive and consistent with our expectations, with order books that support the remaining sales outlook for 2026. Our dairy and livestock customers experienced exceptionally strong farm cash flows in 2025 and have been able to maintain healthy margins in 2026, supported by strong beef prices. As a result, they continue to invest selectively in productivity-enhancing equipment and solutions that improve operating efficiency and support long-term profitability. In turf, we continue to see encouraging trends across both our residential and commercial mowing markets. Demand in these categories has improved year over year as the market progresses toward more normalized levels following several years of inventory and demand adjustments. Outside the U.S., India's small tractor market continues to grow, building on a strong 2025 and supported by solid farmer liquidity following the spring harvest. From a profitability standpoint, Small Ag and Turf also benefited this quarter from the favorable impact of the IEPA refund and the adjustments to Section 32 tariff policies. Combining this with strong execution across the business resulted in improved financial performance for the year. We have now increased and narrowed full-year operating margin outlook to 14.5% to 15.5%, reflecting both the favorable policy environment and our confidence in the team's ability to continue executing at a high level as we finish this year. Before we move on, I would like to recognize the Small Ag and Turf team. Strong results delivered so far this year are the outcome of exceptional execution across the organization. From managing costs and production to supporting our customers and dealers, the team has consistently performed at a high level.
Shifting now to Production and Precision Ag. Deanna, can you share your perspective on the business and the current micro-market environment?
Of course. Within Production and Precision Ag this quarter, we have seen softer demand conditions in both South America and Europe, while North America has remained stable. Despite those regional differences, overall demand has evolved largely in line with our expectations, and our order books are now effectively full for the year. As we move through the remainder of 2026, our focus is on executing to our production plans, delivering for our customers, and continuing disciplined management of the business. Let me break down the dynamics we are seeing across each of our key markets. I will start with South America, which remains a challenged region in the near term. Farmers continue to contend with elevated production costs, particularly fertilizer expenses, as well as a higher interest rate environment that has weighed on equipment affordability and purchasing activity. As a result, market conditions remain difficult, impacting retail sales for combines and high-horsepower tractors. Since our order books for the fourth quarter are now closed, we have slightly revised our industry outlook to down 15% to 20% for the year. In response, we have proactively adjusted production levels and are modestly underproducing retail demand in the region, positioning Deere and our dealers with healthy inventory levels as we enter fiscal 2027. Looking ahead, modest improvements in interest rates during the quarter, combined with the MoveAgro financing program, should improve access to capital and help create a more supportive environment for equipment investment as we look toward 2027. Turning to Europe, improvements in wheat commodity prices have provided some support for customer sentiment, yet profitability across much of the arable farming sector remains pressured. Elevated input costs and uncertainties surrounding crop economics from heat and drought have made customers more cautious about capital spending. As a result, demand trends in the region remain mixed and are likely to remain dependent on improvements in farm incomes and global commodity markets as we head into 2027. Demand trends in North America have remained relatively stable throughout the course of the year, albeit at very low levels as market conditions remain challenging for our customers. While a modest increase in commodity prices has improved farm profitability, producers continue to navigate considerable uncertainty around both input costs and trade flows for their crop production. In general, customer balance sheets remain relatively healthy, yet many are taking a measured approach to capital spending as they evaluate crop margins, cash flow expectations, and the broader outlook for agriculture.
Christopher, is there anything you would like to add?
Sure, Deanna. Given the softer demand expectations in South America and Europe, we have adjusted our full-year sales outlook to be down approximately 10%. At the same time, we have tightened our margin guidance to 11% to 12%. This reflects the revised sales outlook while continuing to demonstrate the resilience of our earnings. Our ability to generate healthy margins even at sub-trough demand levels allows us to continue investing consistently through the cycle.
Thank you for all that great color. Let's shift to our model year 2027 early order programs in North America. Deanna, can you give us an update on the progress of those order programs?
Sure. Let's begin with timing. The early order program for sprayers opened in mid-May and is still running through the end of this month. Planters opened at the beginning of June and will close at the end of September, while our combine program just opened. As of right now, we are seeing modest improvements in order intake versus the prior year. Even though the crop care programs are still open, the collective orders for planters and sprayers are already higher than last year. At this time, results are up mid-single digits compared to the completion of last year's program, and we will provide an update next quarter after they have both closed. Overall, we view the early order program results as an encouraging signal that reinforces our view that 2026 represents the bottom of the agricultural equipment cycle. At the same time, underlying fundamentals continue to support a measured recovery rather than a sharp rebound in 2027. Customer profitability has improved modestly, aided by improved year-over-year commodity prices, moderation in certain input costs, and favorable livestock fundamentals within mixed farms. Still, the overall market conditions remain challenging. Farm income remains pressured and producers continue to navigate uncertainty around input expenses and crop demand. Despite these challenges, the building blocks for recovery continue to strengthen. Replacement demand is elevating as fleet age increases across equipment categories. We also see encouraging commodity demand signals, including record levels of soybean crush and ethanol production, which provide strong underlying support for our customers' crops. Combined with healthier dealer inventories, we believe the foundation is in place for a recovery. Its pace will ultimately depend on improving farm economics supported by higher commodity prices, stability in input costs, and growing renewable fuel demand.
Thanks, Deanna. You cited healthier dealer inventories as a key building block for recovery. Can you expand on that?
Throughout this downturn, we have remained highly disciplined in balancing production with demand to support channel health. Those proactive decisions have resulted in meaningful improvements across equipment inventories. Within North America, new inventories remain tight and are well positioned to support customer demand, while late-model used inventory continues to improve. The model-year distribution of used combines is now in a healthy position, and model-year 2023 and 2024 high-horsepower tractors are down nearly 40% from a year ago. Just as importantly, the spread between new and used equipment values has largely normalized, improving replacement economics and creating a healthier environment for equipment trade cycles. Taken together, these trends reinforce the progress made across the channel and leave Deere, our dealers, and our customers better positioned for the next phase of the cycle.
Thanks for the additional perspective. Let's pivot to precision ag technology. Can you talk about how customers are using our solutions this season and what we are seeing in adoption trends?
We continue investing through the cycle in technologies that improve customer profitability across market conditions with a focus on lowering costs, increasing productivity, and maximizing yield. Utilization and adoption continue to reinforce the value we bring with our precision technology portfolio. It also shows the importance of staying committed, particularly in a challenging farm economy. Customers are using See & Spray on significantly more acres year over year while achieving more than 50% herbicide savings. At the same time, current early order program trends suggest factory adoption of See & Spray will nearly double, with the technology included on about one-third of North American sprayers on order. We also see strong momentum and consistent adoption patterns in our next generation of planter technologies. You will remember that we launched our industry-leading ExactEmerge planters over a decade ago and are seeing continued pull for this technology. On these planters, customers are choosing even more advanced offerings to support input cost savings, productivity, and yield benefits. For model year 2027, we are seeing more than 40% of North American planters including our next generation of advanced offerings, such as ExactRate, ExactShot, and FurrowVision. I would also highlight the continued growth of our digital ecosystem and the increasingly important role the John Deere Operations Center plays in helping customers turn data into better decisions. We now have more than 520 million engaged acres across nearly 1.2 million connected machines. Highly engaged acres have grown to more than 190 million acres, representing double-digit growth for the year. Through the Operations Center, we are turning this growing stream of operational data into actionable insights that help growers better understand performance across their operations. We will soon build on that foundation with AI-enabled capabilities designed to unlock even more value from the data within Operations Center. Today, more than 450,000 unique active monthly digital users are engaging with our tools, reinforcing the growing importance of data-driven decisions across the farm. All of this emphasizes our excitement about the value our precision technologies and digital offerings are creating for customers, especially as farm profitability remains under pressure. With seed, fertilizer, and crop protection products representing roughly 70% of a farmer's operating cost, technologies that help optimize those investments play an increasingly critical role. When deployed as an integrated system, our precision agriculture solutions can materially improve farm economics, delivering double-digit savings in variable operating costs and meaningful yield improvement. As input costs rise over time and volatility remains a reality for producers, the opportunity to create value through these technologies will continue to grow as we bring new innovations to market.
Thanks, Deanna. Brent, before we open the line for questions, would you share a few closing thoughts?
Yeah, thanks, Dan. As we wrap up, I want to take a step back and highlight where we are today, how the business is positioned, and why we remain confident in the opportunities ahead. As we discussed, the agricultural environment remains challenging, but we continue to believe that 2026 represents the bottom of the ag equipment cycle. While the recovery is likely to be measured and is expected to vary by region, the underlying trends are moving in the right direction. I also want to recognize the proactive and disciplined actions taken by our employees and our dealers throughout this downturn. Of particular note are the actions taken around inventory management. Those actions have strengthened channel health and better positioned Deere, our dealers, and our customers for the recovery ahead. At the same time, the benefits of Deere's diversified portfolio remain clear. While Production and Precision Ag has managed effectively through the trough of the cycle, our Construction and Forestry business and our Small Ag and Turf business continue to demonstrate strong performance and profitability. That diversification, together with disciplined execution, has enabled Deere to deliver resilient earnings and improve our full-year net income and cash flow outlook. Furthermore, our performance has enabled us to maintain industry-leading investment through the cycle in solutions that help our customers do more with less. As we look ahead to 2027, Deere is well positioned as it enters the next phase of the cycle. We will start the year with healthy inventory channels, a differentiated portfolio, and a resilient business model. Most importantly, our team's focus on creating value for customers remains at the center of everything we do and will continue to support long-term success for all stakeholders. Thanks, Brent.
Questions and answers
We will now open the line for analyst questions. 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. Our first question comes from Jamie Cook from Truist Securities. Your line is open.
Hi, good morning and congrats on a nice quarter. My first question is on the setup for 2027. How are you thinking about production versus retail by region? And then, regarding the early order program up mid-single-digit, can you just talk about what the pricing expectations are for 2027 given concerns about inflationary costs over the past several years on farm equipment? Thank you.
Hey, Jamie. This is Christopher. Maybe I will start first with the production-to-retail type environment. You heard us talk about, specifically for Production and Precision Ag and for Construction and Forestry, modest underproduction this year, call it a couple percentage points for each of these segments. The drivers there: our shipping plans are set for the full year, and the changes we have seen in South America just drive a little more caution for us in that market. On the Construction and Forestry side of things, the continuous pace and growth in retails and given where we are with our order position being four to five months out led us to a minor level of underproduction in 2026.
Yeah, this is Deanna. From an early order program pricing standpoint, we rolled that pricing out several months ago as we started our EOP process, and our focus remains on covering inflation with our pricing. We have done that across the EOP products and also across all of the Production and Precision Ag portfolio as we roll toward 2027. Thanks for the question, Jamie.
Our next question comes from Tami Zakaria from JPMorgan. Your line is open.
Hey, good morning. A question on tariffs: I think you now expect $1.1 billion of impact, which is about $100 million lower than originally anticipated. Is that a function of tariff relief that ag equipment got back in July, or is that reflective of some refunds you expect? Can you help us understand what is driving that tariff expectation change?
Yeah, Tami. Previously, we communicated an annual run rate for fiscal year 2026 of $1.2 billion. That has been updated to $1.1 billion, and that excludes any of the positive impacts we have seen from refunds. The driver from $1.2 billion to $1.1 billion is mainly attributed to the changes in Section 32 tariffs. Previously, on imported goods, we had a tariff rate of roughly 25%, and that dropped to 15%. Given our imports from Europe specifically, that drove the change for the year. Keep in mind these changes have been effective June 1st, so the impact we see for this year are five out of 12 months. You can expect another tailwind for fiscal year 2027 as a result of these changes. Thanks for the question.
Understood. Thank you. My second question is on the excavator launch. Could you give us an update on how that is trending and what you are seeing in terms of when broader adoption would happen?
Hey, Tami. This is Brent. We launched the first models of our Deere-designed excavator earlier this spring, and we are in the process of getting those shipments out and into the hands of customers. We have three models in the market today. The feedback to date has been very positive, so we are excited about the impact it will continue to have in 2027. Keep in mind, our excavator portfolio has a number of models that we will begin to roll out starting this spring through the next three to four years. We are just in the early days in the release of the Deere-designed excavators, but so far, reception from customers has been very positive, and we are eager to get more of these on job sites over the coming months. Thanks, Tami.
Our next question comes from Kristen Owen from Oppenheimer. Your line is open.
Just wanted to follow up on some of the inventory comments and your comments for 2027. When I look at your inventory ratios, it looks like you actually built some tractor inventory in 3Q ahead of the industry. Is that because of demand signals being offset by used and South America? Just want to understand some of that cadence exiting the year. Thank you.
Hey, Kristen. This is Christopher. I would not read too much into the recent changes in Q3. Our shipment plans have been largely set for the full year, and we have the orders on hand. This quarter specifically, we pulled ahead some demand to manage some risk here in Q4, but there is nothing in particular on the inventory side that requires concern.
Our factories continue to deliver and hit the forecast. As we look at our sold-ahead positions and our retail pace across the Americas, they continue to be on trend with historical averages and we have high expectations that we will be able to move through that inventory as expected. If you remember, in North America, we slowly entered 2026 relative to tractor shipments, so we are making up time, but our retail activity has not missed that pace at all.
Hey, Kristen. As you think about the 3Q to 4Q bridge, a couple of notes: for Production and Precision Ag and Construction and Forestry, we would expect a similar net sales level in the fourth quarter as we saw in the third quarter. Keep in mind, from a margin perspective, we will not get the benefit of refunds in the fourth quarter like we had in the third quarter. Specifically for Production and Precision Ag and Small Ag and Turf, both of those divisions typically have a seasonal high of R&D and SG&A that hit in the fourth quarter. So, bridging 3Q to 4Q, net sales will be more or less the same for Production and Precision Ag and Construction and Forestry, but margins will come in a little bit for Production and Precision Ag and Small Ag and Turf as they incur a slightly higher load of R&D and SG&A coming out of the year. Thanks for the question, Kristen.
Our next question comes from Tim Thein from Raymond James. Your line is open.
Hi. My question is on the role that mix could potentially play in 2027. You alluded to technology adoption on Construction and Forestry and the strong contribution in the early order program for ag. In prior years, we talked about perhaps a 2 to 3 point benefit from mix when markets were stronger. How are you thinking about the potential impact from higher technology sales and how that could influence mix in 2027?
When we talk about mix, we need to recognize the industry environment we are in right now. There is still uncertainty, particularly in agriculture with volatility in inputs and commodities, which is driving some caution. We continue to focus on controllables such as inventory management. The recent softness in the EU and Brazil means we need to see how those markets play into 2027; in South America, things can turn quickly. Construction has good fundamentals, but depending on growth there, that could have a mix impact too. The early order program signals show tech adoption, and how those programs wrap up will drive some mix. It is too early to tell definitively, but we are encouraged by the signals we are seeing.
Our next question comes from Jerry Revich from Wells Fargo. Your line is open.
Good morning. Could you unpack comments on the early order program? Deanna, can you comment on what variability in demand you saw depending on region? The early order program result coming in better than expected suggests it could wind up in the high single digits—can you comment on the moving pieces there?
Thanks, Jerry. We are still in the middle of these early order programs with a couple of weeks to go on our sprayer program and longer on our planter EOP. Regionally, the U.S. is trending slightly better than Canada. Canada is a limited part of our planter portfolio, so overall, we continue to see solid expectations from customers wanting the latest technologies in planting and spraying. Some of the best signals we are seeing are the increased technology take rates: the doubling of See & Spray on factory-installed sprayer orders and 40% of our planters taking some of the most advanced technologies, which gives us confidence that we are headed in the right direction relative to our portfolio and that customers are looking to maximize capabilities going into 2027.
Our next question comes from David Raso from Evercore ISI. Your line is open.
Hi. On the early order programs, given the books have been open for some time, especially sprayers, the cadence of orders being up mid-single-digit: was that driven by recent improvement in grain prices or decisions around technology? What have you seen on the cadence?
Thanks, David. From a cadence perspective, I would not read much into it; cadence has been as expected. We made some tweaks to our early order program this year to give dealers more choice, and that has come through as expected. We are pleasantly surprised with the technology take rates and are hopeful that the mid-single-digit increase extends into the year.
Our next question comes from Rob Wertheimer from Melius Research. Your line is open.
Thank you. Any comments on the 8 Series tractor orders? Also, regarding Europe, with heat stress and input cost stress, do you expect crop prices to reflect that stress, and would Europe react similarly to the U.S. if we get a proper price response?
Thanks, Rob. On 8R orders, they are as expected. We have orders being four to five months out. Our model-year 2026 shipment schedule is effectively closed. We are encouraged by recent changes and developments in commodity prices; current futures around $5.05 are a good signal for many growers. In other geographies, like Brazil, we typically work with a three-month order book to manage volatility and have orders for the fourth quarter on hand; we've adjusted our industry guide for that market. In Europe, it's a mixed picture: small ag and turf is supported by dairy and livestock cash flows, which are relatively strong, while arable farmers are more challenged. Overall, order pace is currently as expected, and we have not seen a step-up in the last day or two.
Our next question comes from Stephen Volkmann from Jefferies. Your line is open.
Great, good morning. On Construction and Forestry, how are the early programs shaping up, and can you add granularity on how much of the demand is dealer rental fleet loading and the outlook for that theme?
Hey, Stephen. For Construction and Forestry, trends have been very positive. We have about four to five months of orders on hand, which is a little more than we'd typically like—usually two to three months. Industry has been growing and retails have been growing, supporting our order bank. Drivers include large infrastructure projects, data center starts, participation in the independent rental channel, and dealer-owned rental fleet expansion. As we enter 2027, our underproduction this year will give us an opportunity to fill some demand as well. We feel good about the current situation in Construction and Forestry.
Our next question comes from Steven Fisher from UBS. Your line is open.
Thanks. Clarifying tariff dynamics: you mentioned there is still some benefit that will flow into 2027 because this year only includes partial months. You also mentioned there are no other refunds embedded in Q4. When comparing 2026 to 2027, is this roughly an $800 million net impact this year and would that be a headwind or tailwind going into next year?
Steven, as you think about our tariff expense this year versus next year, net tariffs—direct tariffs paid less refunds—will be a headwind going into next year. We will end up paying about $1.1 billion in direct tariffs this year less $382 million of refunds, so our net tariff exposure this year is approximately $718 million. Going into next year, we would expect a run rate closer to, or right around, $1 billion for the year. So there will be a step up in our tariff expense next year compared to this year.
Our next question comes from Chad Dillard from Bernstein. Your line is open.
Good morning. Two quick questions on Construction and Forestry. First, on pricing: the guidance implies a smaller price benefit versus the 8% in Q3. What are the moving dynamics behind that? Second, on rental: how are you thinking about the size you want dealer rental to grow and how that changes the economics of the business?
Got it. On pricing, we started the year with an expectation around price realization, and Q3 came in strong at 8%. Part of that was an easy comp—Q3 2025 had negative pricing as a result of incentives we deployed last year. So Q3 looked strong versus that comp, but for Q4 and the full-year guide, nothing outsized in comps is expected. Pricing in Construction and Forestry is going well, and road building contributes to that as well. We feel good about pricing here, but the full-year guide reflects a more normalized expectation after the easy comp in Q3.
With respect to rental, there is an opportunity to further increase our exposure. We participate through sales to independent rental houses and through dealer-owned rental fleets. Rental has grown as a percentage of the overall earthmoving business; today anywhere from 30% to 35% of earthmoving transactions start as a rental, and we continue to see that grow. Dealer-owned rental fleets have expanded, and appetite to invest in rental is increasing. This could help boost inventory fill next year, so we will monitor how that progresses into 2027.
Our next question comes from Angel Castillo from Morgan Stanley. Your line is open.
Hi, thanks. On the EOP, you mentioned pricing covering inflation. Could you comment on any merchandising incentives you might be doing and the implication for margins going into next year? Also, on the FTC settlement related to right-to-repair: could you comment on implications for life-cycle parts over the next five years?
Angel, on EOP pricing: there are two components. We have taken measured actions to cover inflation with pricing, and we are committed to covering inflation over time. We have several points in the year where we take pricing—on order books and through early order programs—so it is a composition of decisions. The inflationary environment is dynamic; suppliers also experience tariffs and pass costs to us, so negotiations continue. We remain committed to covering inflation but are managing it in a dynamic environment.
As it relates to our life-cycle solutions business and the right-to-repair, John Deere has always supported our customers' ability to repair their own equipment or use third parties they trust. That has not changed. The agreement formalizes some of the products and tools we offer to the market, and we think these are industry-leading. In particular, the John Deere Operations Center and ProService enable customers to access diagnostic tools, digital manuals, and perform software updates on their own or through independent service providers they choose. We are pleased with these tools and think formalizing access will support our life-cycle solutions business over the long term.
Our next question comes from Mig Dobre from Baird. Your line is open.
Thanks. On Europe: given the CAP budget policy changes set to take place in 2028, do you think there is a chance demand will be pulled forward into 2027? Are dealers indicating that might be the case, or could farmers delay purchases until there is certainty with the new policy? Any color on Europe and any directional forecast for 2027 would be helpful.
I think it is too early to tell. Europe has policy movement, but we typically operate with a four to five month order book, so we are just starting to collect orders for Q1. The region is mixed: dairy and livestock look fairly stable, while arable farmers are more challenged. We'll need to see where input costs and commodity prices trend before we can say whether policy will pull demand forward or delay it. Too early to provide directional forecast for 2027 on that basis.
Our last question comes from Sabahat Khan from RBC Capital Markets. Your line is open.
Good morning. Based on the current outlook and what you are seeing in the EOPs, input costs are a big factor in farmer decisions. Can you share early commentary on the positioning Brazilian farmers are taking and what U.S. farmers are thinking in terms of how input costs may trend and how that affects planting and equipment decisions?
Thanks. There is uncertainty around input prices globally. The impact of fertilizer differs for Brazilian farmers versus U.S. farmers. Markets are reacting and farmers are looking for alternatives, which might include product choices, application amounts, or alternative sourcing. Overall, I would say farmers remain resilient regarding fertilizer; we are not seeing a huge reduction in intended applications. Farmers are focused on yield and are staying nimble in how they might adjust future plans. Some larger farmers have multiple years of inputs contracted and are considering how they might change that going forward. Markets are reacting, and farmers remain focused on driving yield and getting the best outcome they can.
That is all the time we have. We appreciate everyone's time, and thanks for joining us today. That concludes today's conference. Thank you for participating. You may disconnect at this time.