This summary is based on the first quarter fiscal 2009 earnings call conducted by Deere & Co. (DE) on February 18, 2009.
Management:
CFO: Michael Mack
VP, IR: Marie Ziegler
IR: Susan Karlix
Key Investor Issues:
- Agricultural equipment sales grew 18% in the quarter.
- Sales for commercial and consumer equipment dipped 25% in Q1.
- Q1 Construction & Forestry sales retreated 28%.
First Quarter Highlights:
The world wide production tonnage was flat in the quarter compared with the previous forecast of up 12%.
- This illustrates that all three equipment divisions are not hesitating in adjusting to changing market conditions.
- World wide production tonnage is expected to decrease about 17% in the second quarter of 2009.
- For the full year, world wide production tonnage is forecast to be down about 12%.
The second quarter net sales are expected to be down about 9% compared with the second quarter of 2008.
- Currency translation on net sales is about a negative six points with about five points of positive price realization.
- The management has however temporarily suspended providing quarterly net income guidance.
- For the full year, net equipment sales are forecast to be down about 8% compared with fiscal year 2008.
- This includes about six points of negative currency translation on net sales and about six points of price realization.
- The current outlook for net income is approximately $1.5 billion for the full year with risk on the downside.
Analysis of Individual Businesses:
Agricultural Equipment:
- Net sales in Ag grew 18% due to higher volume, reflecting strength in the U.S., Canada and Western Europe.
- The Q1 operating profit firmed 5% to $348 million.
- Price reportedly offset the impact of higher material costs.
- Currency had a significant negative impact on Ag Equipment performance for the quarter, basically offsetting the benefit of higher volume.
- The currency movement, both translation and transaction, reduced operating profit by about $150 million in the first quarter.
- The management reported that the extraordinary volatility of exchange rates and the timing of trade flows increased exposure to currency movements in the quarter.
- Looking at Ag sales and operating profit on a constant exchange basis, the division would have had a 23% incremental margin in the first quarter.
- The projected commodity prices for 2008/2009 reflect very little change from last quarter.
- The forecast prices, though down from recent levels, remain higher than the past several years and at levels that generally permit farm customers to earn a good return.
- The U.S. farm cash receipts remain at very good levels and are up significantly fro 2007.
- This supports the expectations that the U.S. farm sector will hold up reasonably well in the year ahead.
- The management reported that the U.S. and Canada as well as Western Europe have recorded very few cancellations.
- South America experienced higher than normal cancellations in the quarter.
- On the contrary, Central Europe and the Commonwealth of Independent States including Russia have seen a high number of cancellations as market conditions have deteriorated.
- The outlook for industry sales for agricultural equipment in the U.S. and Canada is now flat to up 5% in fiscal 2009.
- The management continues to see strength in large tractors and combines in contrast to sales of small tractors and equipment commonly used by livestock producers.
- The cotton equipment sales have reportedly deteriorated since the November outlook.
- The management’s outlook for large equipment remains strong as retail orders in the U.S. and Canada for many products extend through much of the year.
- This includes 8000 and 9000 series tractors, combines, sprayers, tillage and feeding equipments.
- The transition to a new 8000 series tractor will begin later this year when effective ability on the current series has expired.
- The combine early order program closed in early February with nearly 95% of expected 2009 retail sales covered.
- The South America outlook is for the industry to be down 15% to 25% in fiscal 2009.
- The company now expects Western Europe to be down 10% to 15% and Central Europe and the Commonwealth of Independent States including Russia, to be down significantly.
- Collectively, the outlook for the sale of John Deere farm machinery and services in 2009 is projected to be down about 2%.
- Currency translation on net sales is negative by about seven points.
Commercial and Consumer Equipment business:
- The reported net sales were down 25% in the quarter.
- Operating profit was negative $59 million reflecting lower shipment and production volumes and higher raw material costs.
- The division benefited from lower SA&G expenses as it continues to make adjustments in the cost structure as recessionary economic conditions persist.
- Production tonnage was down 20%.
- For fiscal 2009, net sales are projected to be down about 14%.
Construction and Forestry:
- Net sales were down 28% in the quarter.
- Operating profit was $18 million due to lower shipment and production volumes and higher raw material costs.
- C&F had positive price realization; this is a positive in a discouraging market which offset the impact of higher material costs.
- The division remained profitable in spite of extremely weak business conditions in a seasonally slow time of year.
- For the division as a whole, the management expects Construction and Forestry net sales to now be down about 24% in 2009.
- Forestry markets in Europe and Russia weakened dramatically in the quarter.
- The industry forecast for these markets in 2009 is now down almost 50%.
- On the Construction side, the outlook for all geographies weakened in the quarter with the most significant decline occurring in Latin America.
- The
American Recovery and Reinvestment Act of 2009 shows the political will concerning two segments in which the company and customers participate being infrastructure and renewal energy.
- The legislation provides for more than $100 billion in infrastructure funding, extension of bonus depreciation, businesses can write off 50% of the cost of equipment acquired in 2009, extension of Section 179 deduction by an additional year through calendar 2009.
- Customers who place into service qualifying assets with a value of less than $800,000 will be able to expense the first $250,000 of the asset purchases during 2009.
- The legislation also has a three year extension of the production tax credit for electricity from wind and biomass among other sources, $4.5 billion for electricity delivery and energy reliability including upgrades to the transmission grids and programs targeted to help rural development such as more than $7 billion for extending broadband services.
Credit operations:
- The current provision is running at about the very low 10 year average.
- This continues to reflect strong farmer cash flows.
- John Deere Capital Corporation (JDCC) has continued to have access to the global credit market.
- In the first quarter, JDCC issued $4.7 billion in medium term notes and asset backed securities.
- This exceeds all John Deere credit 2009 maturities in those two funding classes.
- The Federal Deposit Insurance Corporation (FDIC) guaranteed debt issuance.
- On December 16, 2008, JDCC agreed to issue $2 billion of FDIC guaranteed debt under the temporarily liquidity guarantee program, TLGP.
- The FDIC has notified the company that JDCC needs additional review and a written determination from the FDIC prior to issuing additional FDIC guaranteed debt.
- JDCC has submitted the documentation to the FDIC related to this and will continue to seek the guidance of the FDIC.
- The enterprise cash, cash equivalents and marketable securities balance at January 31, 2009 was $5.2 billion.
- The company''s total world wide commercial paper outstanding at January 31 was $2.3 billion.
- The Q1 credit operations net income was about $45 million.
- This is a decrease from about $96 million in the first quarter of last year.
- Credit net income for fiscal 2009 is now expected to be about $250 million.
The consolidated trade receivables and inventory ended the quarter higher than a year ago.
- The increase was due to high rates of production of large tractors and combines in the U.S and some product being not shipped in the markets where conditions have softened.
- Although Ag receivables and inventories were up in the quarter, they are forecast to only be up about $75 million by the end of the year.
- For the company, the 2009 year end forecast calls for inventories and trade receivables to be down about $250 million.
