John Stone
President, Construction & Forestry Division and Power Systems at Deere & Company
Thanks, Jahmy. So let's look at Slide 11 and talk about construction forestry's results for the quarter. Seed [Phonetic] net sales of just over $3 billion were up 38% primarily due to higher shipment volumes and price realization. Operating profit moved higher year-over-year to $463 million, resulting in a 15.4% operating margin due to higher shipment volumes and a favorable sales mix and price realization, partially offset by higher production costs.
Turning to Slide 12 and take a look at our industry outlook. North American construction equipment industry sales are forecast to be up between 15% and 20%. Sales of compact construction equipment, expected to be up 20% to 25%. In addition, forestry equipment, driven by strong lumber demand is expected to be up 15%. To date, end markets for earthmoving and compact equipment have benefited from a strong housing market. And while this growth rate has slowed a bit, we are beginning to see positive indicators for non-residential investment and order activity from independent rental companies remains exceptionally strong heading into the fourth quarter. Demand for earthmoving and compact construction equipment will exceed our production for the year, resulting in low inventory levels, as we exit the fiscal year.
Moving to the C&F segment outlook on Slide 13. We expect our sales to be up around 30%. Our net sales guidance for the year includes expectations of 5 points of positive price realization and a favorable currency tailwind of about 2 points. Our operating margin is expected to be between 13% and 14% for the year, benefiting from price, volume and non-recurring expenses from 2020.
Moving on to Slide 14, I'd like to take a few minutes and talk through our construction and forestry strategy and also address how the recent excavator announcements you saw yesterday aligns with our overall smart industrial journey. The first thing I'd call your attention to on the slide is our mission. In our mission, why we exist is to answer the fundamental need for smarter, safer and more sustainable construction so our customers can shape tomorrow's world. As a result of the strategy we initiated last year, C&F division is focused on three main priorities, margin improvement, differentiation with precision technology and a new excavator strategy that will better position Deere and its customers for the future. I'll talk a little bit about each of these priorities.
In the area of margin improvement, we've made considerable progress this year and our guidance implies a line of sight to the highest operating margin in the division's history. We're committed to further improvements that will give C&F the ability to generate 15% margins at mid-cycle volumes.
To improve our current margin profile, we accomplished three main objectives over the past year and a half. First, we reorganized our division around our customers' production systems to mirror the way they do business. This enables us to deliver greater customer value by helping them become more productive, more profitable and while performing their jobs in a more sustainable way. Next, we made significant progress, optimizing our cost structure, while at the same time, maintaining pricing discipline for our products and fixing or exiting unprofitable business segments. Finally, we adjusted our investment priorities to ensure a greater degree of focus on the products and solutions that are the most differentiated and unlock the highest value for our customers. Notably leading the way has been the working group whose performance has substantiated our original deal thesis. As a high-performing business, it demonstrates higher growth with less cyclicality than our legacy businesses. We've made significant improvements in the cost structure and worldwide distribution network for the working group, and I expect the group to generate greater than 15% operating margin this year, inclusive of deal amortization and impairments, which is a structural improvement relative to the 10.7% margin we produced during our first full year of ownership. No doubt, working's best days are still ahead.
Moving to differentiating technology and coming over to C&F from ISG just over a year ago was really eye-opening to see the size of the opportunity in front of us for differentiating technology on the job site and on the roads. Productivity in the construction industry has lagged for years and machine automation, coordination and access to data can address a sizable portion of this productivity gap. Our strategy and technology stack is enabling us to move beyond historical enterprise synergies to leveraging technology-like computer vision, advanced control systems, sensors, software, back-end cloud and machine learning training infrastructure to innovate faster.
Let me give you a few examples on how this technology will make our products smarter, safer and more sustainable. The next generation of Deere's construction equipment will feature a higher degree of our proprietary technology stack, inclusive of grade control, vision systems and remote monitoring. Roads are going digital and we are positioned well to lead this. We see today's state where no individual machine is used to its full capacity and this inefficiency is coming from a lack of data, a lack of communication and coordination between machines in different steps of the production system. Our analysis indicates cost savings in the range of 15% to 30% is possible versus today's traditional methods of road-building and road rehabilitation. And when a three-mile road rehabilitation project and costs $1 million to $1.5 million, this is a big opportunity. These technologies will also serve to make job sites considerably safer, which is a top priority for our customers. And while we use much of the same hardware and software you would encounter on the Blue River See & Spray machine, a construction site is different of course. It's busy, it's crowded, but a lot of the base technology is just the same. But we will collect different data and train our neural networks on different datasets and use different onboard software for machine control.
Lastly, we feel we are uniquely positioned to help further the use of recycled and renewable building materials. And for many reasons, construction equipment is likely to lead the way on full electric machines and we look forward to providing further updates on that in the future.
Moving onto our new excavator strategy, on Slide 15 is a summary of the transaction highlights, which you also saw in our press release and our 8-K. As noted in the press release, we've entered into definitive agreements with Hitachi Construction Machinery to purchase the Deere-Hitachi joint venture businesses, including three factories and a license agreement for the intellectual property for continued manufacture of the current lineup. We will continue to source components from Hitachi and manufacture the current products at our existing locations for the near term.
For those of you who may not be familiar with our longstanding relationship with Hitachi, let me provide a little context. Deere has produced excavators through a joint venture agreement with Hitachi for the last 30 years. Our jointly-owned factories have produced Hitachi designed machines, which were distributed under both the Deere and Hitachi brands through the Deere channel in the Americas. This joint venture has been successful and served us well over the years.
Our new strategy will allow us to leverage our own technology and designs, specifically focused on the markets that matter most to us, furthering the value unlock for our customers with Deere on Deere machines, while accelerating our innovation and response time to customer and dealer feedback on products. To that end, we've been investing in our own proprietary excavator designs for well over a decade, serving markets outside of the Americas, and we have plans to introduce our next generation of excavators in the Americas in a timeline that complements our supply agreement with Hitachi. Finally, I would highlight, we do expect this transaction to be accretive to earnings in year one.
At this point, I'll turn the call back over to Brent.
