Highlights From DE's Q4 Conference Call: Production Will Pick Up in 2010, But Overall Conditions to Remain Fairly Restrained

November 25, 2009 3:05 PM EST

Deere & Company (NYSE: DE) reports Q4 a EPS of $0.23, versus the analyst estimate of $0.03. Revenue for the quarter was $5.33 billion, which compares to the estimate of $4.44 billion. Shares are up 3.40%

Highlights From DE's Q4 Conference Call:

• Sees FY10 earnings of about $900 million.
  
• FY10 net forecast equals about EPS of $2.14. The Street is currently looking for FY10 EPS of $2.68.
  
• (IR) Earnings alone though tell only part of the story, and the fact is 2009 was a year of significant achievement in many ways. 2009, for example, saw the biggest single year sales decline in company history, over $5 billion. Yet our net income of just under 900 million was the eighth highest ever.
  
• John Deere generated a good deal of cash last year, $1.4 billion from the equipment operations.
  
• Company and dealer inventories came down by well over $1 billion last year.
  
• In spite of the worst financial crisis in memory, the company maintained competitive access to the credit markets. We issued over $9 billion in new debt and have the cash in hand to fund virtually all the
  maturities coming up through 2010.
  
• For the quarter, Deere reported a net loss of $223 million on net sales and revenues of $5.3 billion.
  
• Total worldwide equipment operations net sales were down 30% in Q4 versus Q4 2008.
  
• Currency translation on net sales was positive by about one point with about three points of positive price realization. Both of our equipment divisions had positive price realizations in the quarter.
  
• Production Tonnage was down 38% in the quarter. This is a bit better than our Q4 forecast provided in August.
  
• Worldwide Production Tonnage is expected to decrease about 17% in the first quarter, with Q2 & Q3 being approximately flat and a double-digit upturn in Production Tonnage in Q4.
  
• Q1 net sales are expected to be down about 10% compared with Q1 of 2009.
  
• For the full year, net equipment sales are forecast to be down about 1% compared with fiscal year 2009.
  
• Net income for the year is forecast to be about $900 million.
  
• Let's start with agriculture and turf. In the quarter, net sales were down 26% and production tonnage was down 36%. The division had an operating loss of $24 million in the quarter with the largest factor being lower production and the related loss absorption. Also having a negative impact on operating profit were charges of $365 million for goodwill impairment and voluntary employee-separation.
  
• Lower raw material costs and positive price realization helped to offset these charges all of which resulted in a reported decremental margin of about 34%.
  
• Projected commodity prices are where you can see we have included our first look at commodity prices for the 2010-2011 crop year. Strong demand, the late harvest, and a weaker dollar, which help support on keeping corn prices at attractive levels. For soybeans, tight stocks will keep prices relatively high in the near term. Exports from the U.S. are expected to remain strong due to last year's low South American production and robust Chinese demand.
  
• Forecast prices are below the very high levels of last year, but remain strong on a historical basis. On slide 13, U.S. farm cash receipts are forecasted to be down in 2009, but 2010 cash receipts are expected to show a slight increase.
  
• Our outlook for industry sales of agricultural equipment in the U.S. and Canada is down about 10% in 2010.
  
• Western Europe ag sales are expected to be down 10 to 15% in the year, mainly due to lower incomes in the key sectors of livestock, dairy and grain.
  
• We expect sales in central Europe and the CIS to remain under pressure as well due to weak general economic conditions and tight credit.
  
• We believe Russia offers enormous long-term market potential for our ag, forestry and construction equipment.
  
• South America sales are projected to increase 10 to 15% as parts of the region recover from last year's drought. Brazil farm income is expected to receive support from attractive prices for sugarcane and soybeans, which are main drivers of ag machinery purchases in that country.
  
• We expect retail sales of turf equipment and compact utility tractors in the U.S. and Canada to be flat for the year after a sharp drop in 2009. Deere sales for worldwide ag and turf are projected to be down about 4% in the year.
  
• In 2010, sales of large ag products will be down almost 10%. This will have a negative impact on margins, mix will cost the division about one point of operating margins for full year 2010.
  
• Let's focus now on construction and forestry. With continuing weak markets in the U.S. and abroad, net sales were down 47% in the quarter, production tonnage was down 50%. Even under these conditions, the division had operating profit of $2 million. Again this quarter, C&F demonstrated commitment to its trough management plans to tight expense control. The result was a decremental margin of 15%, which is quite respectable considering the state of the construction and forestry market.
  
• Construction and forestry sales are expected to be up about 18% in 2010 from the very low level of 2009. The focus on inventory management in the last few years will now enable us to produce near retail demand.
  
• Construction and forestry production tonnage is expected to be up by double digits in the last three quarter of the year, which is quite a change after being down 50% in 2009.
  
• Worldwide Credit Operations. Past dues representing customer payment 60 days past due, and full year write-off for ag and turf retail note, which represent more than half of the total portfolio are still extremely low. the worldwide credit operations had a net loss of $22 million in the quarter versus the net income 67 million in Q4 in 2008.
  
• For the company as a whole, receivables and inventories were down nearly $1.3 billion for the year as we aligned production and inventories with retail demand. We anticipate receivables and inventories to be roughly flat in 2010.
  
• Combine industry sales were up 6%, Deere was down double digits. If you look at the bottom chart, for Row-Crop tractors, Deere ended October with inventories at 23% of trailing 12 month sales, up from unsustainably low 11% at the end of 2008. Combine inventories were at 2% of sales.
  
• Raw material and logistics costs were down 235 million in the quarter versus the implied guidance of down about 150 million. We ended fiscal 2009 with a year-over-year increase in raw materials and logistics costs of $215 million. Looking ahead to 2010, we expect material cost decreases of approximately 150 to 200 million for the year all ag and turf.
  
• Looking at R&D expense on slide 29, R&D decreased 4% in Q4, so it was up 4% for the year. R&D expense is expected to be up about 11% in fiscal 2010.
  
• The Q4 and full-year tax rate look odd because most of the goodwill impairment is non-deductible. For 2010, the full-year effective tax rate is expected to be about 35%.
  
• For 2010, Capital expenditures are expected to be between 850 and $900 million, primarily driven by Interim Tier 4. Depreciation and amortization is projected to be about $550 million. Our forecast currently includes about $400 million pension and OPEB contributions in the year, and capital spending for financial services is forecast around $200 million in 2010, primarily for win projects.
  
• Production will pick up later in the year, but remember the conditions overall are expected to remain fairly restrained.
  
• (Q&A) I was hoping we could talk a little bit about cash in 2010, and I'll put my question in follow-up together. Should we be expecting, I guess working capital to start to become a use as things kind of stabilize here and you rebuild a little bit. And give us your thoughts with respect to that? And then, obviously you have basically no net data on the equipment balance sheet here. What's your thinking with respect to how much cash you need to keep on the balance sheet as we go through 2010? (A)Let me start with working capital. Our forecast currently has trade receivables and inventories for the enterprise, but that includes the equipment operation pieces funded by the Capital Corporation staying about flat in the 2010, so I wouldn't expect a big change...In absolute dollar terms. Regarding the second portion of your question, I think I'll turn over to Jim...I think, as we've said before that we've decided in this environment to maintain a relatively conservative financial position with a sufficient amount of liquidity, given the choppy nature of what we saw over the last year and now I think you can anticipate that we will continue with that posture throughout 2010.
  
• Sorry about that everybody. Just one quick cleanup question, I thought your separation charges is about 85 million in 4Q it's 47, are those going to come back later? What was the reason for the forecast
  versus the actual? (A)I think maybe we have got pre-tax or full year or something mixed in here. Bob, the separation for the full year is on an after-tax basis is about, this is what, it's exactly 57.6 million in the quarter, 47.6. And then on a pre-tax basis, the voluntary separation in the quarter is 76 million and I don't have it for the full year, 91.
  
• Okay. So pre-tax in the quarter was 76, I think you expected 85, so it's not such a big gap. Okay. Okay. Second question would be, and this is just a bigger question, when you're talking to farmers especially in US and Canada, are you hearing caution because they don't how they are going to end up the year or are you hearing just -- we just don't want to buy or are you hearing we don't know yet because we haven't finished? And then the second part of that would be are you seeing a big split between tractors and combines, combines have been stronger this year?(A)Well, actually as I think as Susan alluded to earlier, I'm sure you are all aware the harvest has been running very late, so we obtained our farm customers very much focused on trying to get back crop in. Interestingly, in the month of October, we saw a big decline in our used combine inventories that our dealers are financing as customers were getting additional equipment to help support their requirements in the harvest. As we moved out of October and into November, we have seen actually a pickup in the pace of retail activity and it actually influenced our outlook a bit. So we're maybe a little more positive than we would have been a few weeks ago. So we have seen some better than expected retail activity. I can't really differentiate between the combines and the tractors in terms of retail activity in part because the combines have an early order program on them as is our custom and tractors don't.
  
• But what I'm trying to figure, I mean, in the channel, you hear about the 4% comp line increase, three on the tractors, five plus on the new 8000 to be raised on here about some discounting, on the seven, some on the sixes and so forth. And I'm just trying to -- obviously the one to 2% price increase, if maybe you can split it between ag and construction that might be of some help. It looks like the initial ag increases are above that, but this is really from discounting?(A)The initial ag increases, David, are -- on an average, the price increase is about 3%. And we have not told or not published anything to our dealers on the construction side, but we have told them in dealer meetings that they should look for things that are flattish and that really explains the price increase. The other thing is as you're reporting some of those price increases, remember that when we do our price calculation, we strip out any kind of feature upgrade and so -- and we reclassify it into volume. So when you're hearing a list price quote on, say, the new AR Tractors, which is in the four to 6% range, some of that is going to be reclassed into volume because it has -- it reflects higher horsepower, the new features in the cab and things like that.
  
• And then a question, two part, in your statement 2011, you gave 2011 prices for or preliminary prices for the ag market, the implication if I get it correctly that's farm cash received in 2011 still will be relatively flat to down. And the second part of the question, with new management, congratulations everyone.(A)Eli, we're going way over the number of questions, so let's stop with the cash received question. We do not yet have our forecast for 2011 cash receipt, I think we typically provide that, I can't remember if it's February or May when we forecast that. So I don't know because remember that as we look at cash receipt is a function of quantity and price. So -- and at this point, we're not prepared to -- specifically don't have the detail to provide you with any more comments on 2011.

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