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Text: Also on the call today are Ryan Campbell, our Chief Financial Officer; Cory Reed, President of Production and Precision Ag; and Brent Norwood, Manager of Investor Communications.
Today, we'll take a closer look at Deere's fourth quarter earnings and spend some time talking about our markets and our current outlook for fiscal 2022.
They can be accessed on our website at johndeere.com/earnings.
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John Deere finished the year with solid execution in the fourth quarter resulting in a 13.6% margin for the Equipment Operations.
Ag fundamentals remained strong through the course of the year and our order books indicate another year of robust demand in 2022.
Meanwhile, the construction and forestry markets also continue to benefit from strong demand and lean inventories leading to the divisions strongest financial results in over 15 years.
Now let's take a closer look at our year-end results for 2021 beginning on Slide 3.
For the full year, net sales and revenues were up 24% to $44 billion, while net sales for equipment operations increased 27% to $39.7 billion.
Net income attributable to Deere and Company was $5.96 billion or $18.99 per diluted share.
Slide 4 shows the results for the fourth quarter.
Net sales and revenue were up 16% to $11.3 billion, while net sales for the Equipment Operations, were up 19%, to nearly $10.3 billion.
Net income attributable to Deere and Company was $1.283 billion or $4.12 per diluted share.
Before I cover our fourth quarter results, I'd like to recognize all of John Deere's 77,000 employees for their tremendous hard work and dedication throughout a year filled with unpredictability.
I'd also like to recognize the ongoing efforts and unparalleled capabilities of the John Deere dealer network that's not only an integral part of our value proposition in the market, but also often called upon in the toughest of times to keep our customers up and running.
Let's start with fourth quarter results for Production and Precision Ag starting on Slide 5.
Net sales of $4.66 billion were up 23% compared to the fourth quarter last year, primarily due to higher shipment volumes and price realization.
Price realization in the quarter was positive by about 7 points.
And currency translation was also positive by roughly 1 point.
Operating profit was $777 million resulting in a 16.7% operating margin for the segment, compared to 15.2% margin for the same period last year.
The year-over-year increase was driven by positive price realization, higher shipment volumes and mix, partially offset by higher production costs.
Also, it's worth noting that last year's results were negatively impacted by employee separation expenses resulting from restructuring activities.
Shifting focus to Small Ag and Turf on Slide 6.
Net sales were up 17%, totaling $2.8 billion in the fourth quarter.
The increase was primarily driven by higher shipment volumes and price realization.
Price realization in the quarter was positive by just over 4 points, while currency translation was minimal.
For the quarter, operating profit was $346 million, resulting in a 12.3% operating margin.
The higher shipment volumes, sales mix and price realization were partially offset by higher production costs, R&D and SA&G.
When comparing to the fourth quarter of 2020, keep in mind, the prior period included $77 million in separation costs and impairments.
Slide 7 shows our industry outlook for Ag and Turf markets globally.
In the U.S. and Canada, we expect industry sales of large Ag equipment to be up approximately 15%, reflecting another year of strong demand.
In fiscal year '21 customer demand driven by the combination of strong fundamentals and advanced fleet age and low inventory outpaced the industry's ability to supply.
With all of these dynamics still present in '22, we expect demand to exceed the industry's ability to produce for a second consecutive year as supply base delays continue to constraint shipments.
Order books for the upcoming year or mostly full except for a few cases where we paused orders to manage supply challenges and allow us to reevaluate inflationary pressure later in the year.
Currently, orders are complete for the years' production of crop care products, while our combine production slots are over 90% full with the early order program still ongoing.
Meanwhile, large tractor orders are sourced well into the third quarter and we expect the remainder of the book to fill out shortly.
We're encouraged that take rates for our mainstay precision technologies like Combine Advisor, ExactApply an ExactEmerge continue to track higher year-over-year.
More recent product introductions such as ExactRate planners and the X9 combine saw significant increases when compared to last year, while our premium and automation software activation take rates are over 85% for our 8 series and 9R Series Tractors.
Additionally, we saw significant increases in customer engagement with our digital tools in 2021.
Engaged acres now stand at over 315 million acres, due in part to a sharp increase in Europe with a number of engaged acres has doubled over the past year.
Likewise, use of our digital features such as expert alerts and service advisor remote has increased by about 30% compared to last year.
In the small Ag and Turf segment, we expect industry sales in the U.S. and Canada to remain flat for the year as supply challenges continue to limit industry production.
Following two years of very robust demand, field inventory levels are at multi-year lows and are unlikely to begin recovering until some time in 2023.
Moving on to Europe.
The industry is forecast to be up roughly 5% as higher commodity prices strengthen business conditions in the arable segment and dairy prices remain resilient even as margins show some pressure from rising input costs.
We expect the industry will continue to face supply base constraints resulting in demand outstripping production for the year.
At this time, our order book extends into the third quarter for Mannheim tractors.
In South America, we expect industry sales of tractors and combines to increase about 5%.
Farmer sentiment and profitability remain steady at all time highs as our customers benefit from robust commodity prices, record production and a favorable currency environment.
Our order books reflect the strong sentiment and currently extends into the second quarter, which is as far as we've allowed it to grow.
Despite limited government sponsored financing programs, private financing is supporting continued strength in equipment demand, while strong farmer balance sheets enable many customers to purchase using cash.
Industry sales in Asia are forecasted to be flat as India, the world's largest tractor market by units, hold steady in 2022.
Moving onto our segment forecast beginning on Slide 8.
For production and Precision Ag, net sales are forecast to be up between 20% and 25% in fiscal year '22.
Forecast includes expectations of about 9 points of positive price realization for the full year.
For the segment's operating margin, our full-year forecast is between 20% and 21%, reflecting consistently solid financial performance across the various geographical regions.
Slide 9 shows our forecast for the Small Ag and Turf segment.
We expect net sales in fiscal year '22 to be up 15% to 20%.
This guidance includes nearly 7 points of positive price realization and roughly 1 point of currency headwind.
The segment's operating margin is forecasted to range between 16% and 17%.
Now let's focus on Construction and Forestry on Slide 10.
For the quarter, net sales of $2.8 billion were up 14%, primarily due to higher shipment volumes and 6 points of positive price realization.
Operating profit moved higher year-over-year to $270 million resulting in a 9.6% operating margin due to positive price realization and higher shipment volumes, partially offset by higher production cost, SA&G and R&D.
The quarter also benefited from the lack of one-time expenses included in the prior period.
Let's turn to our 2022 Construction and Forestry industry outlook on Slide 11.
Both earthmoving and compact construction equipment industry sales in North America are expected to be up between 5% and 10%.
End markets for earthmoving and compact equipment are expected to remain strong in our fiscal year '22 forecast, benefiting from continued strength in the housing market, increased activity in the oil and gas sector, as well as strong capex programs from the independent rental companies.
Demand for earthmoving and compact construction equipment is expected to exceed our production for the year, resulting in continued low inventory levels, especially for compact construction equipment.
In forestry, we now expect the industry to be up about 10% to 15% as lumber production looks to remain at elevated levels throughout the year even though lumber prices have come down from peaks in mid-summer.
Moving to the C and F segment outlook on Slide 12.
Deere's construction and forestry 2022 net sales are forecasted to be up between 10% to 15%.
Our net sales guidance for the year includes about 8 points of positive price realization.
We expect this segment's operating margin to be between 13.5% and 14.5% for the year, benefiting from price, volume and lack of one-time items from the prior year.
Now, let's move now to our financial services operation on Slide 13.
Worldwide financial services net income attributable to Deere and Company in the fourth quarter was $227 million, benefiting from income earned on higher average portfolio and favorable financing spreads, as well as improvements on the operating lease portfolio, partially offset by a higher provision for credit losses.
Results for the prior period were also affected by employee separation costs.
For fiscal year 2022, the net income forecast is $870 million as the segment is expected to continue to benefit from a higher average portfolio.
Slide 14 outlined our guidance for net income, our effective tax rate, and operating cash flow.
For fiscal year 2022, our full-year outlook for net income is forecasted to be between $6.5 billion and $7 billion.
The full-year forecast is inclusive of the impact from higher raw material prices and logistics costs, which we estimate will add an additional $2 billion in expenses relative to 2021.
At this time, we expect two-thirds of that increase to manifest itself in the first half of the year as the comparisons get easier in the back half of fiscal year '22.
At this time, our forecasted price realization is expected to outpace both material cost and freight for the entire year, though we will likely be price cost negative in the first quarter.
Moving on to tax.
Our guidance incorporates an effective tax rate projected to be between 25% and 27%.
Lastly, cash flow from the equipment operations is expected to be in the range of $6 billion to $6.5 billion and includes a $1 billion voluntary contribution to our pension and OPEB plans.
Before we open up the line for Q&A, we like to first address a few of the likely questions around the current market dynamics, our financial results and the details around our new labor agreement, as well as provide some thoughts on capital allocation for the next year.
To cover the range of topics, I'll engage today's call participants to provide some additional color, and then we'll open up the line for additional questions.
First, I'd like to start with the current demand environment for large Ag equipment.
Cory, can you provide some additional color on demand for large Ag products and which new technologies are resonating with customers.
We're really encouraged by both the velocity of our order books and the take rates for some of our latest technology.
Demand has been strong since the beginning of 2021 and overall that doesn't look like it's going to let up in 2022.
I touched on this earlier, our order books are either full or near full for most of our North American large ag product lines.
Starting with the combine and EOP.
Our EOP for 2022 production will finish in January, where we'll grow the levels of S-series production and we've already sold out of our planned production for X9 combines.
This is the first year in a multi-year ramp up of production for X9 and we'll ship a 1,000 plus units of X9 9 into North America alone.
We'll further solidify our market leadership in the power class 9 plus combine categories, while also establishing a clear new global benchmark in both productivity and efficiency.
We're also seeing strong demand for some of our newer products, products like ExactRate planter applied fertilizer systems and AutoPath.
ExactRate represents an important first step in the precision application of fertilizer.
Future iterations of this product will be critical in helping us improve nitrogen use efficiency for our customers.
In just its second year we're seeing take rates of that product close to 20%, which is really encouraging.
Similarly, in the first full season, we've seen tremendous feedback from the launch of John Deere AutoPath.
AutoPath leverages John Deere's onboard technology like our Gen-4 displays, SF6000 receivers including the SF3 correction signal and embedded software linked to the John Deere operation center throughout a customer's entire production cycle.
The technology leverages data from planting to know exactly where the row unit traveled to plant seeds and then creates a guidance line for each subsequent path, making in-season fertilizer applications, manual cultivation for weeding or crop protection passes easier and more accurate.
At harvest, it makes it easier to find your guess row and makes that easy for harvest to be even more efficient.
In 2021, we saw take rates of the automation package activation or subscription, which includes AutoPath double, leading to more customers enabled with John Deere's highest value Precision Ag software.
In 2022 and beyond, we'll continue to add value to AutoPath for new features and new technologies as a part of our Precision Ag software package strategies and AutoPath will be foundational for even more automated farming in the future, making every step of our customers' production system even better.
Lastly, See and Spray.
See and Spray Ultimate is going to hit the market this year on a limited basis and we're excited to get it in the more customers' hands.
We view See and Spray as just the first step in a long series of sense and act.
In that journey, we're encouraged by to see early demand for both See and Spray itself and multiple products related to plant-level management in future.
Let's dive a little bit deeper on the fluctuations in North American large ag market share for fiscal year '21 and then let's provide some expectations for this next year in fiscal year '22.
Can you first walk us through the progression of market share that we saw in '21, Corey?
Yes, 2021 was a unique year.
Demand inflected sharply from October of '20 to January '21 timeframe.
And as a result, we experienced pressure on market share early in the year due to our asset-light model.
If you recall, we talked about this dynamic in our fourth quarter earnings call last year and noted that we expected to recover that share quickly and that's exactly what happened.
In fact, we gained 2 points of market share in North America for our large Ag products by year-end and you can see an example of that in the last three quarters of retail sales data for the 100 plus horsepower tractor categories.
So how might market share play out this next year, given that our most recent labor agreement didn't ratify until November 17th?
Yes, it's a great question and while it's too early to forecast with a lot of precision, we see the potential for 2022 to play out very similarly.
We're very likely to see similar pressure in the first quarter as we recover from record low inventories, but also expect a production ramp that helps us maintain and even grow our position as we execute throughout the year.
Let's get into some of the details on our latest labor agreement.
One of the most frequent questions out there is on the incremental cost of the new contract relative to the previous one.
So how should investors think about the impact to our cost structure?
First, it's important to note, we're really glad to have our UAW employees back in our factories and proud of the groundbreaking contract that we put in place.
With respect to its impact on our cost [Technical Issues] side of the contracts period.
Over the six-year contract, the incremental costs will be between $250 million and $300 million pre-tax per year with 80% of impacting operating margins.
So, we experienced a gap between the last contract and the current one resulting in a few weeks of lost production.
How does that impact the quarterly cadence of our financial results?
There are a number of unique items impacting the first quarter.
At first we would -- if you think about first quarter '22, we expect the topline for the equip ops to be pretty similar to the first quarter of '21, missing a few weeks plus of production will neutralize some of the benefits that Corey mentioned in terms of ramping up to higher line rates in December and January.
With respect to margins, there are few things to consider.
In the first quarter, we'll have our toughest price cost comp for the year.
We expect that to be negative in the first quarter, but positive for the full year.
We also expect to experience poor overhead absorption due to the lower volumes as mentioned and there are few other one-time items that will provide some additional drag including ratification bonus and some favorable tax credits that we saw in the first quarter of '21 that don't repeat in '22.
All in, we expect first quarter margins to be mid-to high-single digits for the Equipment Operations with those businesses that have been most affected by the delayed ratification to be below that average looking beyond the first quarter, though we do expect margins for the rest of the year to be more favorable and incrementals more in line with historical averages.
Let's conclude with some discussion around capital allocation.
Ryan, how would you characterize our capital allocation strategy in fiscal year '21 and what might we expect this upcoming year?
With respect to 2021, our strong liquidity position and our cash flow generation really allowed us to execute against all of our cash priorities.
We continue to focus on maintaining our solid A credit rating, but beyond that we invested in our strategic growth priorities, both organically and inorganically.
In addition, we returned over $3.5 billion in capital to shareholders through dividends and share repurchases.
Our two dividend increases are evidence of the confidence we have in the structural improvements we've made in the earnings power of our business.
Overall, our actions in 2021 serve as a good blueprint for how to think about 2022 as we expect to again execute against all of our priorities.
It sounds like we'll continue to see discipline with respect to returning capital, but can you elaborate any further on investing back into our businesses?
The smart industrial strategy that we put in place during 2020 is the foundation for us to focus our resources on the areas that are most differentiated from a customer value perspective.
It's through that lens that we are positioned to increase the level of investment back into our business both organically and inorganically through M&A.
As you can see in our guidance, the R&D investment is up 17% in 2022.
The focus of the increase is on further developing our tech stack, which accelerates our capabilities related to sense and act, autonomy, digital solutions, connectivity and electrification.
We're planning to demonstrate many of our new technologies at our Investor Tech Day in mid 2022.
So stay tuned for that exciting event.
Finally, as it relates to M&A, expect us to continue to be active, aligned with the themes that we've discussed over the last year.
Lastly, is there anything else that you'd like to highlight for investors to expect in 2022?
Yes, 2022 is shaping up to be a very important year for us.
We put in place the new strategy and are well positioned to accomplish our goals.
On that note, we do have a set of goals both related to business and sustainability that will sunset this year.
Accordingly, we'll be rolling out our next suite of goals that will highlight the opportunity we have and what we think we can accomplish over the rest of the decade.
Importantly, we are uniquely positioned and that there is direct alignment between our creation of customer value, improving our own earnings and delivering more sustainable outcomes for the environment.
So, Brent expect us to see -- expect to see a comprehensive suite of goals that really brings all of those elements together.
Now, we're ready to begin the Q&A portion of the call.
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user
compname reports q4 sales up 16% to $11.33 bln.
compname reports net income of $1.283 billion for fourth quarter, $5.963 billion for fiscal year.
q4 earnings per share $4.12.
q4 sales rose 16 percent to $11.33 billion.
full-year 2022 earnings forecast to be $6.5 to $7.0 billion, reflecting healthy demand.
anticipate supply-chain pressures will continue to pose challenges in our industries.
looking ahead, we expect demand for farm and construction equipment to continue benefiting from positive fundamentals.
construction & forestry sales moved higher for quarter primarily due to higher shipment volumes and price realization.
small agriculture and turf sales increased for quarter due to higher shipment volumes and price realization.
production and precision agriculture sales increased for quarter due to higher shipment volumes and price realization.
sees 2022 construction & forestry net sales up 10% to 15%.
sees 2022 small agriculture & turf net sales up 15% to 20%.
sees 2022 production & precision agriculture net sales up 20% to 25%.
fiscal-year 2022 net income attributable to deere & company for financial services operations is forecast to be about $870 million.

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