Good morning and welcome to Deere & Company Second Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session of today's conference. I would now like to turn the call over to Mr. Brent Norwood, Director of Investor Relations. Thank you, you may begin.

Hello. Also on the call, today are Josh Jepsen, Chief Financial Officer; Dave Gilmore, Senior Vice-President, Ag and Turf Sales and Marketing; Kanlaya Barr, Director of Corporate Economics; and Rachel Bach, Manager of Investor Communications. Today, we'll take a closer look at Deere's second quarter earnings, then spend some time talking about our markets and our current outlook for fiscal year 2023. After that, we'll 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 being broadcast live on the Internet and recorded for future transmission and use by Deere & 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 on 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, 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. I will now turn the call over to Rachel Bach.

Good morning, and thanks everyone for joining us today. John Deere completed the second quarter with strong performance. Financial results for the quarter included 24% margin for equipment operations. Across our businesses, outperformance was driven by strong demand, favorable pricing, and operational execution enabled by supply-chain improvements. Ag fundamentals remain healthy, providing a strong second half of fiscal year 2023, and support and order backlog that extends throughout the fiscal year. Likewise, the Construction and Forestry continues to benefit from healthy demand with order books virtually full for the remainder of the fiscal year. Slide 3 begins with the results for the second quarter. Net sales and revenues were up 30% to $17.387 billion, while net sales for the equipment operations were up 34% to $16.079 billion. Net income attributable to Deere & Company was $2.86 billion or $9.65 per diluted share. Taking a closer look at the individual segments, we begin with the production and precision ag business on Slide 4. Net sales of $7.822 billion were up 53% compared to the second quarter last year and in fact more than our own forecast, primarily due to increased shipment volumes and price realization. Price realization was positive by about 20 points. We expect price realization to normalize as inflation continues to subside. Currency translation was negative by approximately three points. Operating profit was $2.17 billion, resulting in a 27.7% operating margin. The year-over-year increase was primarily due to favorable price realization and improved shipment volume. These were partially offset by increased R&D and SA&G spending, higher production costs, and unfavorable foreign currency exchange. Prior year results were negatively impacted by an impairment of $46 million related to events in Russia and Ukraine. Moving to small ag and turf on Slide 5. Net sales were up 16%, totaling $4.145 billion…

Thanks, Rachel. I would start by saying the performance came in ahead of our own internal expectations due to two primary drivers. From a top-line perspective, our factories had their best quarter of execution since the beginning of COVID. Supply-chain improvements enabled our factories to hit their line rates and deliver machines at a faster pace. As a result, we were able to pull ahead some of the year's production into the second quarter, which will take some pressure off the back half, so we'd expect revenue to be down sequentially - by a bit over 10% in the third quarter. With factories running more smoothly, we experienced fewer production inefficiencies, in fact - the second quarter saw the lowest level of production cost inflation since 1Q, 2021. Fewer factory disruptions due to labor and supply-chain challenges enabled us to achieve better overhead efficiency and incur lower premium freight costs. Furthermore, production costs benefited from better raw material compares relative to last year.

That's helpful perspective on the benefits of the improving supply chain in our factories. As we pull production forward, how does that shape the back half of the year? Will the supply chain allow for increased production in the second half?

Supply-chain improvements have enabled our suppliers to deliver towards their volume commitments and improve their on-time deliveries. That said, there are still enough constraints in the supply base that will limit higher levels of production later in the year. Our safety stocks for critical components are still low and our margin of error is relatively thin. Given the existing constraints, we expect to execute to schedule, but don't foresee adding a lot more production to the back half of the year. Furthermore, we are also laser-focused on managing field inventory, as we think about exiting fiscal year 2023. The real benefit of the pull ahead is the return to more seasonal production schedules that are closer to our customer's seasonal use of our products.

Great, thanks, Brent. My next question is for Kanlaya. There are a lot of variables impacting farmer fundamentals this season. Farm net income will be at a second all-time high, albeit down from last year's record, commodity prices remain volatile while input prices are coming down. Meanwhile, stock-to-use remain tight and two of the four largest export markets for corn remain severely constrained. How are these factors impacting farmers right now?

Well, thanks for the question, Rachel. There are many factors that are at play here and there's still a lot of uncertainties, especially as we are in the midst of the growing season, and in the end, it all come down to profitability. On the revenue side, although commodity prices are volatile, grain stocks continue to be tight. Bumper crops in Russia, Australia, and Brazil are not enough to offset the combined effect of this year's severe losses in Argentina and Ukraine. Assume a trend yield stock-to-use will remain below the 10-year average. The USDA forecast corn and soybean prices to be the third highest in the past decade and wheat, the second highest. Furthermore, crop insurance reference price will provide a safety net for farmers as well. Now looking on at the cost side, input costs have come down quite a bit. Not all farmers will be able to realize those savings this year, but that could be a tailwind for the next crop. And in the end, we are looking at a lower cost provision [ph] this year. Now putting all of these together, we are coming off a really great year last year, income is going to moderate, but we are still looking at farmer's margin that are going to be above the 10-year average.

And how about elevated interest rates globally? How are farmers contending with this increase in costs over last year?

Interest-rate expense is only about 6% to 7% of total ag production expenses, but a little over half of that is tied to mortgages, which are mostly fixed at lower rate. The portion that tied to operating loans that tends to be more variable is about 3% and that number is even smaller for row-crop producers, their interest rate expend is less than 1% of their overall - operating expenses. So this is nothing, but the impact of higher interest rate is much smaller than the tailwinds from lower input costs and fuel costs. With that said, rising interest rates have - also had an impact on real estate, while the housing market have been significantly affected by the elevated interest rate, the farmland market have been relatively immune, and farmland values continue to hold up through Q2 of this year.

And Rachel, just to add some context from some comments that came from the Federal Reserve Bank of Kansas City, earlier this spring. When you put interest rates in perspective relative to history, roughly $0.12 of every dollar of a Midwest U.S. farm earnings is going to interest cost today versus the long-term average of $0.15. As a result, customers are managing this expense very well. Also as the Fed reported, the marginal increase in interest costs on operating loans is the financial equivalent of an additional 2.5 bushels of yield for corn. That's why a major component of our smart industrial strategy is focused on helping our customers better manage volatile periods by delivering products, and solutions that minimize costs and increased yields. Our goal is to deliver products, and solutions that offset and improve the variable cost structure of our farmers.

Thanks, Dave. That really helps paint the picture. Kanlaya, what other tailwinds or headwinds should we think about over the next few years?

Well, that's great question, Rachel. The volatility and uncertainties will continue to be with us for quite some time. However, we expect a tailwind from growing population and increased income to continue. In addition, bio-fuels will play an increasingly important part in the sustainability journey by providing these alternatives to the transportation segment, including heavy-duty or off-highway vehicles, long-haul aviation, and marine term. And finally, think about technological improvement in farm equipment, which will continue to drive productivities, reduce cost and provide more economic headroom, so overall, still a large number of positive tailwinds to consider.

One other obvious thing to add here is, while we can't control the macro volatility, we can focus proactively on monitoring and staying ahead of shifts in trends to ensure we're helping farmers be more effective and efficient in and out of the field, regardless of the end-market environment.

Thanks, Josh and Kanlaya. Let's dig a little deeper on the global issues you mentioned and focus specifically on the Brazilian market. Dave, Brazil has been one of the strongest markets in the industry over the last three years what's been driving that?

Well, as you correctly said, Rachel, Brazil certainly has been a great market for us both in terms of growth and profitability. It's one of the few geographies in the world, adding production area each year. It's also a market that's rapidly adding efficiencies migrating to higher horsepower and just beginning to adopt precision ag technology, which plays to our strengths. The last few years have seen records both in terms of agricultural yields, but also farmer profitability. The combination of record ag production, favorable currency and growing exports has generated excellent profitability for our customers and, in-turn, has driven significant demand for our equipment over the last few years.

Yes, this is Josh, one thing I'd add to Dave's comments at the onset of our smart industrial strategy, we set a goal to achieve North American like margins or better in Latin America. And so-far, we've achieved that, making the region, very important to the overall financial profile of the company.

I guess that leads right into my follow-up question, Dave, how our current market conditions, trending. Can you give us an update post the Agrishow earlier this month?

Absolutely Rachel, I was just down in Brazil for Agrishow, which is the largest customer farm show in Latin America. The event produced record attendance and sales highlighting customer optimism going forward. That said, sales for small ag equipment have been running behind pace this year, leading to increased field inventory. The government-sponsored financing plan typically gets announced at Agrishow, but it's been postponed for the time-being, which has caused some delay in purchases, especially for small and medium producers who are most rely on the government-sponsored financing for equipment purchases. Large producers on the other hand, tend to be less reliant on government-sponsored financing instead utilizing cash, private credit lines or John Deere Financial. The delayed harvest plan has had limited impact for large ag customers. More pressing for large producers right now is exporting the record crop that they grew this year in a timely manner, given the lack of storage for Brazilian grains. However, demand for large equipment remains stable, though we are monitoring retail activity closely for the back-half of the year. I would note that we do expect to see higher-end season inventory this year, further reflecting a return to normalcy for the market.

I appreciate the additional insight into a pivotal market, everyone is watching very closely right now. I'd like to transition briefly to John Deere Financial and discuss two topics, first, it's been an eventful quarter for many of our nation's regional banks. Josh, can you give us an update on how John Deere Financial is faring in this environment?

Of course, Rachel we're closely monitoring all the challenges in the banking sector, as the market has contended with rising rates over the last year. Fortunately, John Deere Financial remains in excellent condition. There's been no change in our ability to fund the portfolio and the credit quality has been outstanding. As we discussed previously, our forecast this year implies past dues, nonperforming loans and write-offs are stable and remain below long-term averages for our lease portfolio return rates are near-zero and recovery rates are as strong as they've ever been. Our customers have had three very strong years financially, including 2023, so we feel like - we're very well-positioned here.

That's good to hear, and the second question on John Deere Financial, we saw net income affected by $135 million after tax. Correction of accounting treatment, can you explain what that was related to and what impact that might have if any, on future profitability?

Sure thanks. It relates to the accounting treatment of dealer loyalty incentive program. Effectively, we've made an accounting correction on the timing of expense recognition moving from - when incentives are redeemed to when they're earned much in line with our methods for our equipment operation's incentives. Due to the coincidental timing of broader market concerns, I just want to make it abundantly clear that this is a one-time non-cash accounting correction, it is unrelated to the credit quality or performance of GDS portfolio.

Perfect, thanks for the clarification, Josh. The next question is related to inventory. The recent AEM data shows a year-over-year increase in large ag inventory for products like combines and four-wheel drive tractors. Dave, can you explain what's going on with the new field inventory at the moment?

The large ag inventory build seen recently is due to the return to normal seasonality in our production schedules. Keep in mind that year-over-year comparisons aren't as relevant, because of the challenges we faced in the first half of 2022 from the labor disruption to supply-chain obstacles. These challenges caused us to run at low and unhealthy levels during all of 2022, making the year-over-year increase appear somewhat inflated. Compared to historic averages, however, we are still well below seasonally-adjusted target levels with inventory to sales ratios for 220-plus and four-wheel drive tractors in the teens as of the end of April. Pre-COVID both products would have been at least 10 points higher in the second quarter on an inventory to sales ratio basis. Meanwhile, our combined inventory to sales ratio currently sits at 23%, as we were able to pull some of our production ahead into the second quarter. At this time, we expect the second quarter to be the highest production for combines this year. Combine inventory seasonally peaks during the quarter of highest production with historic average IS ratios greater than where we are currently. There are a lot of benefits to returning to normal seasonality, one of which is it contributes to a healthier pace of used trades for our dealers and customers. These were delayed last year, due to heavy fourth quarter deliveries. Last year, customers were reluctant to allow a dealer to remarket their used trade, before the new machine arrived. Being on a more seasonal pace facilitates better-used trade planning prior to the harvest season. So, we've seen used inventories increase seasonally, keeping up with elevated production of new equipment, which is good for both dealers and customers. The most important takeaway is that by the end of the year, large ag inventory to sales will be lower than both historic and target levels.

Thanks, Dave. And one final question, Brent. How would you characterize the market environment for farm equipment as we progress through the back half of the year and into 2024?

It's a great question, Rachel. But first, I think it's best to start with some context on how we got to this point. The current replacement cycle began in 2021 after a six-year period of historic underinvestment in ag equipment. And since 2021, the entire industry has been severely constrained by labor and the supply base, which kept production volumes relatively modest when compared to prior replacement periods. Inventory for new and used equipment remains, below target levels and the fleet has continued to age out for tractors, even if it's down a bit for combines. While it's been difficult working through all the challenges in the post-COVID era, these constraints created an unintended benefit of dampening the amplitude of the equipment cycle for the time being. To quantify that, we are producing roughly 20% to 25% less than the average production volumes of prior replacement periods. As we look ahead to the rest of 2023, we see robust demand with our order books providing excellent visibility through the end of the year. Furthermore, we expect the ending inventories in 2023 to be below target levels, making for a very good starting position entering 2024. With regards to next year, we'll begin to gain more visibility soon with our early order programs and order books continuing through the summer and fall seasons. As evidence of continued healthy demand levels, we opened Phase One of our Sprayer Early Order Program in May and are already sold out of our Phase One allocation. Furthermore, our Sprayer Early Order Program included pricing in line with historic averages, pointing to a reversion to normalcy for the industry. Overall, the environment continues to be healthy and supportive of a business cycle with a, dampened amplitude.

Thanks for the commentary and insight, Brent. And before we open the line for other questions, Josh, any final thoughts?

Sure, we've had a very strong first half of 2023, this is a testament to the extraordinary efforts of the entire John Deere team, everyone from our employees to dealers and suppliers have remained committed, to providing customers with the best experience possible. As we move into the second half of the year, we are encouraged by strong visibility through the remainder of the year. Additionally, while we are seeing improvement in the supply chain, which is helping us to deliver products and solutions for our customers, the situation remains fragile. Overall, fleet dynamics such as inventory and fleet age and unbalanced positive fundamentals put us in a good position to continue to deliver customer value in 2023 and beyond. Although it's too early to have a firm view on '24, the fundamentals, give us confidence as we move into our early order program selling season. Importantly, we will continue to invest for the long-term to unlock value for customers and as we do this, we remain dedicated to drive further structural profitability for Deere as evidenced across all our segments the last couple of years. This will include new ways to add value and create more resilient, sustainable businesses for our customers and Deere.

Thanks, Josh. Now, let's open the line for questions from our investors. Brent.

Thank you. [Operator Instructions] First question Jamie Cook with Credit Suisse. You may go ahead.

Hi, good morning and congrats on a nice quarter. I guess first, with regards to Precision and production ag, your sales guide hasn't changed - with North America large industry better and pricing up a bit. I understand there's a pull forward, get higher production than you thought. But to what degree do you want to -- if supply chain improves, do you want to beat your forecast or to some degree, do you want to match the cycle, which bodes well for 2024? And then I just guess my second question on the margin performance of the company. Obviously, it's been fantastic. How much of this do you think is sort of structural versus your margins are over earning just related to the pricing with inflation and supply chain and freight benefits starting to come in? Thank you.

Hi, good morning Jamie, thanks for the question. I'll start first on production levels. If you look at all segments, roughly, we'll see kind of similar revenue first half to second half. But for all of the segments, second quarter would be the quarter of highest production for PPA, C&F and SAT. So as a result, you're going to see a sequential decline anywhere from 10% to 15% in revenue as we go into the third quarter. And I think quarters three and four will be sort of roughly equal in production levels, and that's true, broadly speaking, for most of our segments. And the reason and the rationale behind that is really to make sure that we are managing end of year inventory levels really, really well. We're here at the midpoint of the year, we want to make sure that as we exit '23, we set ourself for a really good start. So that's a little bit of color on sort of the production schedules. And then again, the other thing I would note there, Jamie, is this is really healthy to return to more seasonal patterns in production and to make sure that our schedules match the - our customers sort of seasonal use of our products. So, we were really pleased to be able to execute well in the second quarter. Now with respect to structural profitability, I think there's, a couple of things at play. First, I would say Deere has been on this journey of structural profitability improvement really for the last four years. The center piece of that has been our investment in technology, right? And over the years, we've been able to add new solutions, new technologies to our equipment. And all of those have come at margin accretive levels. So, we are benefiting from that today in a very structural way, irrespective of where volumes are. That will continue to drive structural improvement for us. I think in addition to that, with the launch of the smart industrial strategy in 2020, you saw us drive portfolio improvements. We consolidated all of our tech spend under our CTO organization. And there's still a lot to come, right? We're not done there yet. I think in the areas of life cycle solutions, precision upgrades, solutions as a service, you're going to see continued effort on our part to better - to improve further our structural profitability. That said, based on the volumes that we're at today, we are achieving margins and a return on assets commensurate with what we think we should be achieving given the structural profitability of the company at the moment.

Yes, Jamie, it's Josh. One thing I'd add. This - as Brent mentioned, I think given where we're at in the replacement cycle, we feel like we're performing in line with where we should be. I think importantly, we are seeing significant structural improvements in our businesses across the board. And maybe to highlight one example would be what we've seen in C&F. So, we have strategically and maybe a bit methodically over the last few years, been executing on a strategy that is delivering the performance you see today. So that is adding with the acquisition of Wirtgen, exposure to road building. It is dissolving our joint venture on excavators to control and own our destiny there in a critical machine form that we have. On top of that, we have managed the portfolio in terms of exiting certain markets while extending our product portfolio in large production class equipment and on the small end on compact construction. And we've done things like extending distribution on compact construction, which probably doesn't get a lot of fanfare, but extending distribution into our ag channel which has been tremendously helpful for that business. And that's driven the performance to where we are today. I think as we look forward, Construction and Forestry will benefit from technology and the ability to bring precision technology to our customers to make them more profitable and more productive. I think, we'll see that across our other businesses. So that's an example of one business. I think those similar things will carry through to other businesses as well. So and on top of that, we will continue to manage costs as we have before thinking about inflationary pressures, how do we route those out and continue to move forward to drive structural profitability for the company. Thank you.

Thank you.

Thank you. Our next caller is Tim Thein with Citigroup. You may go ahead.

Yes thanks. Just to come back on large ag. In terms of the back half and especially the fourth quarter, have your own expectations regarding channel inventory changed from last quarter. It's hard to exactly parse out in terms of, again, this pull forward, but I guess your exit rate in terms of where you expect to exit the year from a channel inventory perspective, again, just relative to the last time we spoke?

Yes. With respect to ending inventory, our forecast for the end of the year actually hasn't changed since our last guidance in the first quarter. I think the only thing that's changed is, again, because of the pull ahead in production in the second quarter. We've seen channel inventories come up a little bit faster than expected. That's a real benefit to our dealers. It's giving them more time to deliver machines to our customers, more time to facilitate used trade-ins. So those are all really positive. And what I'd say is the pull ahead in the second quarter hasn't changed at all our view on end of year. And maybe I'll turn things over to Dave Gilmore, who's our Head of Sales and Marketing, and if he had some further commentary on that.

Yes. Thanks, Brent. You said it. The large ag inventory build seen recently is really due to a return to normal seasonality. And one thing that should be noted relative to the field inventory that's in place right now, a high percentage of that new inventory that's in the field today and reports is retail sold to a customer and a simply pending delivery of that equipment to the retail customer. So, we're returning to normal and seasonality, and that's a very good thing for the industry, and it doesn't change our expectation to meet historically low target levels of inventory at the end of the year. Thanks Tim

Thank you. And our next caller is Steven Fisher with UBS.

Great thanks. Just to maybe follow-up on that inventory question again. I appreciate that it sounds like it's just a return to normal seasonality. And a bit of a pull forward. But also, Brent, I think out of the commentary that you're laser focused on inventories. So I guess, what are the things that you're going to be looking for over the next few months to tell you whether you should still be building channel inventory on large ag or just producing in line with retail? And then do your kind of spray or early orders imply a higher, lower or flat production.

Yes. Steve, in terms of the inventory management, the way that our order fulfillment process works, we'll get great visibility into next year as we progress through the summer and fall months. And then as we begin to dimensional eyes of you on 2024, we'll have an idea of sort of where ending production rates need to be. I think as of right now, the idea is to maintain discipline until some of those data points come in. The EOP the results that, we saw for Phase One of our sprayer program was really encouraging. It's hard to do a year-over-year compare. Last year, we only ran one phase. This year, we are running two and the first phase had a ceiling, and it was allocated we fully met that in a relatively short period of time. So we were pleased with the velocity of that order book. But I would say it's difficult to extrapolate one phase for one product broadly to the rest of the portfolio. What I would say is, as we think about 2024, we do see a return to normalcy for certain dynamics, particularly the supply and demand dynamics of farm equipment should be a little bit more in balance in '24 than what it's been over the last three years. Quite frankly, that's a healthy dynamic that we want to see return to the market in 2024 and our view on sort of ending production rates and inventories may change a little bit as we further discern data from our order books and EOPs, but we'll wait for that information to come in before we further refine any view of next year.

Yes, Steve, it's Josh. Maybe I give you a couple of examples of where we've been monitoring and taking actions. If you look at small tractors in North America, compact Chile tractors where you see the industry come off from a retail perspective, obviously, more exposed there to interest rates and the macro environment, we are - we've seen inventory rise, and we will cut production and they have cut and we'll produce below retail in the back half of the year to try to manage that inventory. Similar to the comments Dave made in Brazil on small tractors, 5,000, 6, 000 Series tractors in Brazil, where you've seen some slowness in the retail environment, because of the lack of financing, we are dialing that back as well. So, I think in a number of places, we will continue to monitor and execute accordingly to manage field inventories. Thanks, Steve.

Thank you so much.

Thank you. Our next caller is Matt Elkott with TD Cowen. You may go ahead sir.

Good morning, thank you. Would love to hear your thoughts - any thoughts you might have on the emerging El Nino event because the last one has some overlap with the equipment down cycle of the mid- to late teens? I know there were very important reasons for that down cycle like coming off the ethanol expansion as well as trade tariffs, but good El Nino and warmer temperatures pose a challenge in the next few years. On the flip side, as precision technology continues to advance, can adoption actually benefit from external challenges like weather as farmers try to offset with higher yields and productivity? Thank you.

Yes, Matt. Thanks. Good question. I'll start maybe on the latter part as it relates to Precision Technologies. I mean certainly, as we see more volatility and more uncertainty in our customers' operations, the ability to be - to get jobs done more quickly, more precisely is hugely beneficial. And we've seen this over the last few years, 2019, a great example, where we had a really wet spring and customers leveraging technologies like exact emerge [ph], high-speed planting, getting their crop planted in a matter of days and hours versus traditional weeks. So, we think that is really important. We think it's a driver to be able to react to more uncertainty from a weather perspective and be able to deliver not just the same outcomes, but better outcomes as it relates to cost, time and then ultimately on the yield side.

Well, regarding the El Nino side, we still looking at the weather pattern and there might be pointing towards more the end of a India and then toward the El Nino. Historically, again, this is still a long way to go here. We have to see if that really happens and how that's going to turn out in the summer. But historically, we will probably see more moisture in North America and some of the dryness in places like Australia or Northern South Africa - I mean South America. So we're still monitoring that. And in North America, if we really see that El Niño, we might have seen some upside on the yield trend as well, but again, this is still - we have months to come for to see how that would play out.

Great, thank you very much.

Thank you. Our next caller is John Joyner with BMO Capital Markets. You may go ahead sir.

Thank you for taking my question. Somehow seasonal normalization is now a negative these days. So with regard to - farmer sentiment, Rachel, you correctly highlighted that even though crop prices have moderated and so has the cost side of the equation, but with such a myopic focus on grain prices, do you get a sense of average farmer profitability today versus, say, six months ago, a year ago and whether there is any hesitation creeping in at all around purchasing new equipment?

Hi John, with regards to sentiment versus farmer fundamentals, it's interesting, and we see all of the farm sentiment indicators and the barometers out there, and they haven't always matched precisely what we're seeing with the actual fundamentals of the industry. And that's been a phenomenon that's -- where those two have maybe become detached over the last two to three years. So sometimes it's difficult to use those barometers as a great read for what's really happening with respect to customers' purchase decisions. That said, customers are going to be very profitable this year. And even as we look ahead into next year and start plugging in some of the kind of early WASD figures, customers are still going to be making good money. And I think you'll still see profitability at levels that are capable of stimulating replacement demand even beyond kind of where we're at today. I don't know, Kanlaya Barr, if you have any further comments on that as well.

No, no, I agree with that, Brent. I mean if you look at, yes, price is coming down, but it's still the top three of the last 10 years. And then we still have good guys on the cost side, cost is coming down as well. So I would think that, yes, we still have pretty good favorable margins for farmers coming into this new crop year.

The other benefit, we're continuing to see strong used values, which are helpful when we think about trade differentials. That's a really important component to that investment decision, and that is still very supportive. We're still on large ag overall relatively low levels of inventory. Thanks John

Thank you. Our next caller is Rob Wertheimer with Melius Research. Sir, you may go ahead.

Thanks. I wonder - my question is going to be on small ag and turf. And I wonder if you would give a little bit of the state of the market and what you have done as Josh, you did in construction. This is a market where you guys are obviously strong, but not as strong as in production precision. The margins were quite good this quarter. And I'm just curious about what you've done, sustainability, whether price can hold up in that market given somewhat high inventories and less strong fundamentals? Thanks.

Hi Rob, regarding small ag and turf and some of the structural profitability improvements made to that business, I think it's a segment that's probably flown under the radar screen. One of the things we've learned over the last couple of quarters, it's also a segment that's not always well understood by investors. It's a very diverse portfolio of products that we offer in the small ag and turf segment. About one-third of that business goes to really the consumer-oriented products, things like our riding lawn equipment as well as compact utility tractors. But the other two-thirds are sold into the farm economy. And I think that's where you've probably seen some of the most structural improvements over the last four years. We've made a lot of the portfolio decisions that we've made over that - over the last four years have been in the small ag and turf business. So we've been very, very discerning and sort of the markets that we play in and the product offerings that we offer to those markets. And then I'd also highlight that the majority of our mid-sized tractors that come out of Monheim, Germany, those are being recorded in our small ag and turf division. And Europe has been a really important driver there. And we've talked a little bit about this on some of the prior calls, our strategy in Europe has been much more focused over the last three years. We've really focused on the high horsepower segment, kind of the 150-plus segment and have a focus that is much more on precision technology I think there's, more differentiated products flowing through our small ag and turf division than maybe investors appreciate. That's what's driven a lot of the improvements over the last couple of years. Dave, anything else you'd add to that comment?

Yes. From a U.S. and Canada perspective, when you referenced the products that we would include in "small ag and turf, a majority of those products are going to customers, perhaps in dairy and livestock operations, which, again, in the U.S. and Canada, those customers are generating profits and expected to continue that profit generation into 2024. So that's been a good market for us as our company and our dealers focus on those customers generating income from a dairy and livestock operation.

Rob, it's Josh. One or two things I'd add to that, on top of everything that Brent and Dave said, I think this is an area where we have been very focused on the cost structure, in the cost structure of these products and driving that down. And we've been very disciplined on price across the globe, which has been beneficial. And then not unlike the other parts of our business, there's emerging opportunities as it relates to technology and the ability to leverage technology that's been developed in production precision ag into things like dairy and livestock like hand forage that we believe will drive continued value. You think about connectivity and driving connectivity and what that means from a customer support and the ability to better take care of customers, a good example where we see opportunity to not only better serve customers but also create value for the company. Thanks Rob.

Thank you.

Thank you. Nicole DeBlase with Deutsche Bank. You may go ahead.

Yes thanks, good morning guys.

Good morning Nicole.

My question is around pricing. So when you guys say that pricing is starting to kind of return to normal, what would you define normal ads, particularly within production precision ag. And then second part of the question is just what are you seeing from a competitive perspective with respect to price? Thank you.

Regarding price, maybe there's a couple of different dynamics at play here. Maybe I'll just start kind of with the rest of the year, and you can see this in our guide. We would expect price realization to moderate as we progress through 2023. And that really reflects some of the midyear pricing actions that we took in 2022. We'll anniversary and we'll lap those here in the third quarter, and you'll see pricing moderate that's effectively implied in our guide, given that in production Precision Ag, for example, we achieved 22% in the first quarter, 20% in the second quarter. Our full year guide is 15%. So that implies that three in 4Q we'll see price realization down significantly. Now on the flip side there, production costs are also moderating. So we think the delta between the two remains relatively static first half to back half of the year. Now as it relates to 2024 pricing, we've said all along, our goal was to get back to more normalized levels of price realization. If you look back over sort of the pre-COVID era, that would be anywhere from sort of 2% to 3% for the entire equipment operations. Production and Precision Ag has typically been on the higher end of that range and some of the other divisions on the lower side. Right now, we're one of the first manufacturers to have early order programs extending into 2024. So we do have prices out for those products. We talked about the sprayer early order program, which was filled relatively quickly. The pricing on those sprayers was depending on the configuration, somewhere in the 2% to 4% range. So right where we would - right in a range that we would view as normal, which again, we think is healthy for the industry. And then importantly, as we have a conversation about price, we also have to have a conversation about production costs. And based on where we stand today, we continue to see further moderation in production costs and line of sight to 2024 appears as though that will stabilize a bit for us then. Thanks Nicole.

Thanks.

Thank you. Our next caller is Tami Zakaria with JPMorgan.

Hi good morning, thanks so much. So following up on the last answer to GP [ph] just to make sure the first phase of the early order programs that's all allocated now which quarter does it extend to for 2024? And also, last year, you said you didn't do it in two phases. So this year it's different versus last year?

Yes, that's right. So typically, historically, we have run two maybe even three phases for early order programs. Last year, the supply and demand dynamics for sprayers and planters were still out of balance that we only had to run 1 phase. Again, as we return to more seasonal patterns and more balance in the supply and demand dynamics for farm equipment, we're going to try to mimic what we've done in historic early order programs. So this year, we're going to run two. Typically, we source about 90% of model year 2024 planter and sprayers through the early order program so these programs are really important for us as we think about production for next year. And Dave you want to talk about the second part of that question there - regarding the shift in phases.

In phases yes and I might also add in addition to ordering products from our factories, the whole goods, this year as well, we have a precision upgrade portion of our early order program that allows a customer that purchased a piece of equipment earlier to upgrade to the most recent John Deere technology that allows them to unlock agronomic, economic and environmental value. So that's another change and improvement to the early order program that Brent referenced. And ultimately, what we're intending to do with those EOPs is getting early indicator of production schedule. So that we can build those and get them in the hands of customers prior to their new [ph] season so we will be taking orders now that will be delivered throughout 2024.

Yes, this is Josh. Maybe one follow-up to Nicole's question on price we talked about normalizing price, and that's purely inflationary price. So historically 2% to 3% and what we have seen though, on top of that is another 3% to 4% of price that comes through additional features, which is effectively is you can think about more technology, and we don't see that trend changing much at all. And if anything potentially accelerating as we drive more features and more opportunity to create more value for customers and drive very, very quick ROI for those investments as they reduce cost and improve yield. So just an add to Nicole's question on price. Thanks we'll go ahead and jump to the next question.

Thank you. The next caller is Kristen Owen with Oppenheimer. You may go ahead.

Great, thank you for taking the question. I wanted to ask about Construction and Forestry. You did mention that the order books there were virtually full for the year. Can you just help us understand the mix there? And then I believe you said inventories were still quite tight. I just wanted to clarify, was that an industry statement or a Deere statement? And I'll leave it there? Thank you.

Yes. Thanks, Kristen, for the question. Regarding C&F, you're correct. If we look at order books, we are almost full for the year. We're certainly full in the U.S. and Canada, the one market that we still have more work to do would be Brazil. That's a market that has really weakened over the first half of the year, and we're monitoring really closely in the back half of the year. And we have seen inventories rise a little bit as retails have suffered here in the last quarter. I think it's a combination of a little bit of political uncertainty earlier in the year, higher interest rates have put a little bit of a downward pressure on that market for us. So that's really the one call out I would have for sort of the rest of 2023. Now as it relates to inventory, our comments on the call have all been Deere specific inventory. Similar to large ag, we've seen a little bit of an increase here in season, but that's all commensurate with our production levels that we had in the second quarter. And our ending inventory forecast right now still shows us running really, really lean at the end of the year. So, we're going to continue to manage that really tightly, as we exit 2023 and create our starting point end of '24.

Yes Kristen, Kristen it's Josh. Maybe one thing to add to that from an order perspective, on North America, we're taking orders into the first quarter of '24. So, we're continuing to see strength there. Contractors for the first time in their careers continue are turning down jobs because of lack of labor. So I think, the desire for more technology, the ability to do jobs in an easier, more simple manner is desirable. So, we see a lot of opportunity there to continue. Thank you.

Hi Michele, I think we have time for one last caller.

Thank you. Our last caller is Stanley Elliott with Stifel. You may go ahead sir.

Good morning I want to thank you for fitting me in. Quick question, can you guys talk about kind of the share repurchase expectation in the back half of the year, you're tracking two times ahead of last year and free cash flow is accelerating? Thank you.

Hi Stanley, it's Josh. I appreciate the question. I think we're seeing here the benefit of our business model and executing the strategy in terms of really strong cash generation. And clearly, with our full year guide, we see that continuing. So, we did about $1.3 billion here this quarter. We don't provide a forecast there, but I think fair to assume we would continue at a similar pace through the year.

Thanks, Stanley. That concludes today's call. We appreciate everyone's time, and thanks for joining us today.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.