Deere & Company (
DE)
Q3 2008 Earnings Call
August 13, 2008 10:00 am ET
Executives
Marie Ziegler – VP Investor Relations
Susan Karlix – Manager Investor Relations
Bill Ratzburg – Director Investor Relations
Karen Thompson – Investor Relations
Michael J. Mack – Chief Financial Officer
Analysts
Terry Darling - Goldman Sachs
Eli Lustgarten – Longbow Securities
Andrew Obin – Merrill Lynch
David Raso – Citigroup
Henry Kwan – UBS
Jamie Cook – Credit Suisse
Andrew Casey – Wachovia Securities
Ann Duignan – JP Morgan
Robert Wertheimer - Morgan Stanley
Daniel Dowd – Sanford Bernstein
Seth Weber – Banc of America Securities
Barry Bannister - Stifel Nicolaus & Company
Presentation
Operator
Good morning and welcome to the Deere’s third quarter earnings conference call. Your lines have been placed on listen only until the question-and-session of today’s conference. I would now like to turn the call over to Ms. Marie Ziegler, Vice President Investor Relations.
Marie Ziegler – VP Investor Relations
Good morning. Also on today''s call are Mike Mack, our Chief Financial Officer, as well as Susan Karlix, Karen Thompson, and Bill Ratzburg from the Deere Investor Relations staff. Today we’ll take a closer look at Deere’s third quarter earnings, and then spend a few minutes talking about our markets and where things are headed for the remainder of the year. After that we’ll open for your questions. Please note that slides are available to compliment the call this morning. They can be accessed on our website at www.johndeere.com.
First though a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere, Thomson Reuters, and third parties. Participants in the call including the Q&A session, agree that their (inaudible) and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking comments concerning the company’s projections, plans, and objectives for the future that are subject to important risks and uncertainties. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission. The company, except as required by law, undertakes no obligation to update or revise its forward-looking information. The call and the company materials are not on offer to sell or a solicitation of offers to buy any of the company’s securities.
This call also may include financial measures that are not in conformance with GAAP accounting principals generally accepted in the United States of America. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is posted on our website at www.johndeere.com/financialreports under Other Financial Information. Call participants should consider the other information on risks and uncertainties and non-GAAP measures in addition to the information presented on the call.
And now for a closer look at the third quarter, here’s Susan.
Susan Karlix – Manager Investor Relations
Thank you Marie, earlier today John Deere reported another quarter of impressive operating and financial performance. Sales and net income were the highest for any third quarter in the company’s history. Farm conditions remain quite strong throughout the world driving our AG operations at an unprecedented level. In addition, consistent execution is helping our non-AG businesses remain solidly profitable in spite of the slow US economy. What’s more the big picture still looks good. Farm commodity prices have fallen back recently but it wasn’t so long ago that $5 corn and $12 soybeans would have been considered pretty spectacular. Today’s grain prices continue to lend strong support to farm incomes worldwide. Also the underlying fundamentals based on increasing global affluence and the world’s growing need for food, fuel and infrastructure remain in tact. They offer great long-range promise for our company. John Deere is moving aggressively to capitalize on these exciting trends by making continued investments in new capacity, new products and new businesses.
Starting with slide three, you can see that we have continued to invest in growth. To support the strong agricultural equipment markets worldwide and with the outlook strong for some time, the large harvester manufacturing facility in East Moline, Illinois, which ships grain combines around the world will complete a 30% capacity expansion early in 2009. In addition, two acquisitions in the quarter provide scale, customers, products and distribution for John Deere Water Technologies propelling our business to number three globally in agricultural irrigation.
Turning to slide four, this morning Deere reported record third quarter net income of $575 million, the top end of our guidance, on record equipment net sales, of approximately $7.1 billion. Even with the challenging material and logistics cost environment, net income increased 7% and diluted EPS rose 12%.
On slide five, total worldwide equipment operation’s net sales were up 18% compared to the third quarter of 2007. About five points related to positive currency translation, and there were about two points of price realization as well as about two points from acquisitions in the AG and the commercial and consumer equipment divisions. The remainder is from increased volume. On slide six, you can see that our third quarter production tonnage was up 13%. For the fourth quarter worldwide production tonnage is expected to increase 18%. For the full fiscal year 2008 worldwide production tonnage continues to be forecast at a 17% increase. All are driven by a very strong global market in agriculture. Regarding our company outlook, let’s turn to slide seven. For the fourth quarter of 2008, we expect company-wide equipment operation’s net sales to be up about 29% including about three points of currency. Net income is expected to be about $425 million in the quarter. For the full year, we are now forecasting net equipment sales to be up about 21% compared with fiscal year 2007. This includes about five points of currency and about two points of price realization. In addition there are a total of about two points from acquisitions, including LESCO and those in John Deere Water Technologies.
Turning to a review of our individual businesses, let’s start with agricultural equipment on slide eight. While the press release describes the major items affecting financial results, let me mention that of the 35% net sales increase in the third quarter, currency translation accounted for about eight points. Operating profit increased 47% to $634 million. Looking ahead, global AG fundamentals are very encouraging. Worldwide potash-use ratios remain at low levels, particularly for corn and wheat. Slide nine portrays our assumptions for yields for key crops planted in the US during the last three years. Yesterday the USDA updated its 2008/2009 crop outlook increasing the US corn yield to 155 bushels per acre, while reducing the mid point of their price range to $5.40. This price is extremely attractive to grain farmers while lessening the burden on livestock producers and consumers.
Slide 10 highlights Deere’s projection for the prices of corn, wheat, and soybeans which in spite of recent moderations remain very favorable by historical standards. Deere’s forecasted commodity prices are on slide 11. Note the increases for the 2008/2009 crop year from last quarter’s forecast and the corn price is very similar to the USDA’s mid point announced yesterday. The strong markets for crops are driving good levels of farm cash receipts and income globally and as shown on slide 12, note that our forecast for total US farm cash receipts for 2008 and 2009 are considerably higher than our outlook from just one quarter ago and at dramatically increased levels from those of just a few years ago. We ran yesterday’s USDA numbers through our model and the result is a less than 1% difference in 2008 and 2009 cash receipts. All of this translates into an excellent outlook at John Deere not only for tractors and combines, but also for products like sprayers and seeding equipment, and strongly supports our outlook for industry sales of agricultural equipment in the US and Canada as shown on slide 13 which is now up 20% to 25% from last year.
In addition our 2008 industry outlook for South America is now up about 40%. One of the previous uncertainties has been eliminated with the resolution to the reconcione (ph) situation in Argentina. Slide 14 compliments the increased industry forecast for South America, demonstrating solid farm income in Argentina with a dramatic increase in Brazil. Slide 15 highlights the strength in the European agricultural market as well and shown on slide 16, our 2008 industry outlook for Western Europe is now up about 5% for the fiscal year. Demand continues to grow rapidly in Central Europe and the Commonwealth of Independent States countries including Russia, and Australia is recovering from its severe drought with Deere sales there, up nicely. So putting this altogether, slide 17 depicts a stronger worldwide outlook for the sale of John Deere farm machinery and services. Net sales are now projected to be up about 38% with currency translation accounting for about eight points of the increase. Just as currency translation will affect net sales; it will also affect forecasted operating profits adding about a $150 million for the full year.
