This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Deere & Co. (DE) on November 26, 2008.
Management:
Vice President, Investor Relations: Marie Ziegler
Manager, Investor Communications: Susan Karlix
Chief Financial Officer: Mike Mack, Jr.
Key Investors Issues
- EPS were 81 cents per share compared to 94 cents per share last year.
- Net income was $345 million compared to $422.1 million for the same period last year.
- Sales rose 21% to $7.4 billion.
Fourth Quarter Highlights
Net income was $345 million, or 81 cents per share, compared with $422.1 million, or 94 cents per share for the same period last year.
- The quarter included a charge for the closure of factory in Welland, Ontario, Canada. The approximately $35 million after-tax charge was not included in the earnings guidance provided in last quarter’s call on August 13.
- Primarily because of currency translation, the charge in the quarter turned out to be about $10 million lower than expected and the total cost is now projected to be less as well, approximately $65 million after tax. The cost is shared on a 60/40 basis by the AG and Commercial & Consumer Equipment divisions.
- Worldwide net sales and revenues increased 21% to $7.401 billion.
- Net sales of the equipment operations were $6.734 billion compared with $5.423 billion for the respective period last year.
- Currency translation was neutral and there were about 3 points of price realization.
- World-wide production tonnage was up 24%.
Agricultural Equipment did incur higher than forecast material cost, approximately $80 million more than projected in August.
- This simply reinforces the fact that the underlying commodity markets are volatile and extremely hard to predict. The AG division operating profit also includes a charge of approximately $30 million due to the factory closing. Despite these factors operating profit increased 23% to $476 million, reflecting the strong retail activity in most markets.
- Projected commodity prices remain attractive.
- U.S. farm cash receipts for 2008 and 2009 are at good levels and up from most recently as 2007. This is an important point since farm cash receipts are the single most important determinate of farm equipment purchases.
- Retail orders for 8000 and 9000 series tractors grew by 25% and 15% respectively.
- For combines, retail orders are over 50% higher than levels of a year ago and now cover 90% of expected 2009 retail sales.
- There is difficult credit situation in
Brazil. Last year soybean farmers provided about 25% of their own crop input funding. This year it is twice as much, at 50%.
- In
Western Europe retail orders for tractors and combines are up double digits over levels of a year ago. In some key countries, however, the credit crisis has hurt customer confidence and could affect retail activity in the second half of the year. Therefore, initial industry outlook for Western Europe is down 5% to 10%.
Commercial & Consumer Equipment business reported net sales were down 11%.
- Operating profit was negative $16 million, reflecting about $20 million for the factory closing and an additional approximately $20 million in higher material costs.
- Production tonnage was up 14% in comparison with relatively low production levels in the fourth quarter of 2007. At that time the division was in the process of an unusually large number of new product introductions and was managing inventories and production accordingly.
Construction & Forestry net sales were up 3%.
- Operating profit was down $45 million, virtually all due to higher raw material costs of approximately $50 million.
- Production tonnage was down 10%.
- Negative factors on C&F include housing starts in the range of $600,000 to $700,000, the lowest level since 1945, non-residential spending down 15% and GDP growth of negative 1%.
- Forestry markets in Europe and Russian, which have been strong to date, are weakening and forecast to be down 30% in the year ahead.
- Even though present market conditions are challenging, Construction & Forestry has taken two important steps to grow its global footprint and position the division for the long term. Excavator joint venture with XCG closed in June.
- The Chinese government’s $500 billion plus stimulus plan adds further support to this market. The plan is aimed at highway, railroad, and airport infrastructure spending.
- The company announced a second move into the construction markets outside the U.S. and Canada with intent to form a joint venture in India with Ashok Leyland.
Under 70% of the world-wide credit portfolio is AG related, with 20% being Construction & Forestry, the remainder C&CE.
- 75% of the portfolio is U.S.-based, 60% of the portfolio is installment financing, and close to 20% wholesale floor path plan financing is extended to Deere dealers.
- The AG portfolio has experienced low write-offs, averaging about 12 basis points over the last 10 years. Even during the difficult 1980s, losses were low, reflecting the excellent credit quality of the portfolio over time.
