Josh Rohleder
Manager of Investor Communications at Deere & Company
Good morning.
John Deere completed the first quarter, demonstrating solid execution across the cycle. Financial results for the quarter included an 18.5% margin for the equipment operations. Fundamentals in the end markets that we serve remain supportive of equipment replacement demand. Ag fundamentals, while down from the record highs of the last few years, have returned to near mid-cycle levels.
In Construction and Forestry, we see fundamentals stabilizing at levels supportive of demand across most markets. This demand backdrop is reflected in our order books. While fleet replenishment is moderating, our order books remain at healthy levels, representative of normalized volumes. Notably, our first quarter performance demonstrates the structural business improvements that we've achieved, enabling us to deliver higher levels of profitability across all points in the business cycle.
Slide 3 begins with the results for the first quarter. Net sales and revenues were down 4% to $12.185 billion, while net sales for the equipment operations were down 8% to $10.486 billion. Net income attributable to Deere & Company was $1.751 billion or $6.23 per diluted share.
Turning now to our individual segments. We begin with the production and precision ag business on Slide 4. Net sales of $4.849 billion were down 7% compared to the first quarter last year, primarily due to lower shipment volumes, which were partially offset by price realization. Price realization was positive by about 4 points. Currency translation was also positive by roughly 1 point. Operating profit was $1.045 billion, resulting in a 21.6% operating margin for the segment. The year-over-year decrease was, primarily due to lower shipment volumes and higher SA&G and R&D expenses. These were partially offset by price realization.
Moving to Small Ag and Turf on Slide 5. Net sales were down 19%, totaling $2.425 billion in the first quarter as a result of lower shipment volumes, partially offset by price realization. Price realization was positive by just over 3 points. Currency was also positive by roughly 0.5 point. Operating profit declined year-over-year to $326 million, resulting in a 13.4% operating margin. The decrease was primarily due to lower shipment volumes and higher SA&G and R&D expenses, which were partially offset by price realization and lower production costs.
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 10% to 15%, trending closer to the lower end of that range, as normalizing farm fundamentals and elevated interest rates are somewhat tempered by resilient farm balance sheets, lower input costs relative to record peaks seen over the last few years and fleet age, which even after multiple years of strong replacement, remains at or above long-term averages.
For small ag and turf in the U.S. and Canada, industry demand estimates remain down 5% to 10%. The Dairy and Livestock segment continues to remain healthy, thanks to elevated cattle and hay prices. The compact utility tractor market remains soft, as the industry works to bring down inventory levels, while demand for turf products has stabilized.
Moving to Europe. The industry is now forecasted to be down 10% to 15%. Demand is expected to be softest, Central and Eastern Europe, as local commodity markets remain disrupted by the ongoing conflict in Ukraine. Western Europe is faring better, although uncertainty related to current cash crop proceeds, ag policy changes and high interest rates is increasing caution for some customers.
In South America, industry sales of tractors and combines are expected to be down around 10%, continuing the demand moderation that began in 2023. Brazil, in particular, is experiencing adverse weather conditions in the current growing season. Coupled with high interest rates, demand is expected to remain down from recent record highs.
Argentina is expected to deliver strong ag production after multiple years of drought, while the industry will remain regulated by ongoing economic challenges. Industry sales in Asia remain forecasted to be down moderately.
Next, our segment forecast begin on Slide 7. For production and precision ag, net sales are forecasted to be down around 20% for the full year. The forecast assumes roughly 1.5 points of positive price realization for the full year and minimal currency impact. For the segment's operating margin, our full year forecast is now between 21.5% and 22.5%, reflecting the further tempering net sales as demand normalizes.
Slide 8 shows our forecast for the small ag and turf segment. We expect net sales to remain down between 10% and 15%. This guidance now includes 1.5 points of positive price realization and flat currency translation. The segment's operating margin remains between 15% and 16%.
Shifting to Construction and Forestry on Slide 9. Net sales for the quarter were roughly flat year-over-year at $3.212 billion, with positive price realization offset by lower shipment volumes. Price realization was positive by nearly 3 points. Currency translation was also positive by just under 1 point. Operating profit of $566 million was down year-over-year, resulting in a 17.6% operating margin, due primarily to higher production costs, lower shipment volumes, unfavorable currency translation and higher SA&G and R&D expenses. These were partially offset by price realization and a favorable sales mix.
Turning now to our 2024 Construction and Forestry industry outlook on Slide 10. Industry sales for earthmoving equipment in the U.S. and Canada are now expected to be flat to down 5%, while compact construction equipment in the U.S. and Canada is expected to be flat. Improvements in the industry outlook are reflective of a better-than-expected demand backdrop and stabilized optimism through the balance of the year, as dealer inventories return to more normal levels.
End markets remain healthy, with single-family housing starts improving, infrastructure spending continuing to increase and elevated manufacturing investment levels offset by further declines in commercial investments.
Global forestry markets are expected to be down around 10%, as all global markets continue to be challenged. Global road building markets are forecasted to be roughly flat, with strong infrastructure spending in the U.S., offset by continued softness in Europe.
Moving to this Construction and Forestry segment outlook on Slide 11. 2024 net sales are now forecasted to be down between 5% and 10%. Net sales guidance for the year includes about 1.5 points of positive price realization and flat currency translation. The segment's operating margin remains projected between 17% and 18%.
Transitioning to our financial services operations on Slide 12. Worldwide financial services net income attributable to Deere & Company in the first quarter was $207 million. The increase in net income was mainly due to a higher average portfolio balance, which was partially offset by less favorable financing spreads.
For fiscal year 2024, our outlook remains at $770 million, as benefits from a higher average portfolio balance offset less favorable financing spreads. As a reminder, fiscal year 2023 net income was also impacted by a non-repeating onetime accounting correction.
Finally, Slide 13 outlines our guidance for net income, our effective tax rate and operating cash flow. For fiscal year 2024, our outlook for net income is now expected to be between $7.5 billion and $7.75 billion. Next, our guidance incorporates an effective tax rate between 24% and 26%. And lastly, cash flow from the equipment operations is now projected to be in the range of $7 billion to $7.5 billion.
This concludes our formal comments. John, before we shift to a few topics specific to the quarter, would you mind sharing your thoughts on how 2024 is progressing?
