Highlights From DE's Q2 Conference Call: Net Sales and Revenues Were Up 22%

August 17, 2011 12:40 PM EDT
Deere & Company (NYSE: DE) reported Q2 EPS of $1.69, $0.02 better than the analyst estimate of $1.67. Revenue for the quarter came in at $7.72 billion versus the consensus estimate of $7.5 billion. Shares are down 1.07% today.

Highlights From DE's Q2 Conference Call:

  • (Susan Karlix, Manager of Investor Communications) John Deere's strong performance continued in the third quarter of 2011 with earnings climbing 15%. Both earnings and sales were the highest for any third quarter in the company's history.
  • Net sales and revenues were up 22% to $8.4 billion in the quarter. Net income attributable to Deere & Company was $712 million, an increase of 15%.
  • Total worldwide equipment operations net sales were $7.7 billion, up 24% quarter over quarter. Currency translation in the quarter was positive by 6 points while price realization on net sales was a positive three points.
  • Worldwide production tonnage was up 9% in the quarter. In response to increased demand, aided by the successful implementation of SAP, construction and forestry tonnage was higher than forecast.
  • For the company, projected worldwide production tonnage is up about 13% in the fourth quarter and up 21% for the full year.
  • With positive currency translation of about 4 points. With a full year, projected equipment net sales will be up about 25% compared with fiscal year 2010.
  • Sales were up 22% in the quarter. Production tonnage was up 7%. Operating profit rose to $859 million yielding a 13% operating margin.
  • On the negative side, raw material costs were about $165 million higher than a year ago. SA & G costs, primarily associated with global growth initiatives, foreign exchange translation and higher incentive compensation expenses were higher by about $75 million.
  • And 2012 is near record boding well for the Ag business.
  • Used equipment levels are low and farmers are increasing their purchases of agricultural equipment. Weather, though, has slightly tempered our near-term outlook.
  • Now turning to a different part of the world, farm net income for Brazil and Argentina is on slide 13. Led by increases in sugar cane and soy beans from 2010 levels, the two crops that drive the bulk of equipment purchases in Brazil, farms net income is now expected to be about $20 billion in 2011. It would be about $6 billion decrease since our last forecast is accounted for by higher input costs, lower, though still strong international commodity prices and Brazilian currency strengthening against the U.S. dollar. Nevertheless, Brazil's 2012 income is expected to improve to about $21 billion, which would be slightly more than this year's record of about 20 billion.
  • In Argentina, farm income is forecasted at about $8 billion in 2011 and about 8.4 billion in 2012. Due to high commodity prices.
  • Fundamentals in the U.S. and Canadian farm sectors remain robust. Our industry forecasts of up 5 to 10% is unchanged from last quarter.
  • Russia continues to take actions to support the Ag sector. Just to name a few, fertilizers, seed and livestock subsidies and six diesel prices are in place. There is increased support for the Ag modernization program and longs and subsidies are being directed to last year's drought regions.
  • Moving to Asia, we continue to expect sales to rise sharply again this year. Industry sales in south America are now expected to be down about 5% in 2011, in relation to last year's strong levels. Underlying economic fundamentals for the region are strong. The trade policies in Argentina continue to restrict sales.
  • Construction and forestry: Deere's net sales were up 34% in the quarter while production tonnage was up 20%. The division's operating profit rose 67% to 110 million helped by higher shipment in production volume and improved price realization.
  • C & S is benefiting from improved sales to independent rental companies as well as strength in the energy and Ag related sectors. Also encouraging Deere dealers continue to see an improvement in rental utilization and used equipment market. Global forestry markets are expected to build on last year's big gains. The industry was up about 50% last year. Our current forecast calls for further increase in 2011 of 25 to 30%.
  • Looking ahead, we are now projecting worldwide financial services net income attributable to Deere & Company of about $460 million in 2011.
  • Retail sales: In the U.S. and Canada for the month of July expressed in units. Utility tractor industry sales were down 8%. Deere was down less than the industry. Row-Crop tractor industry sales were up 11%. Deere was up more than the industry. Four-wheel drive tractor industry sales were up 5%. Deere was down a single digit. Combine industry sales were down 25%. Deere was down more than the industry.
  • Although steel prices have trended down recently, Deere's steel costs lagged market movements by about 3 to 6 months. With about 3 points of price realization forecast for the year, we will roughly cover the raw material cost increases. Looking at our idea expense on slide 25, R&D was up about 22% in the quarter. For fiscal 2011, R&D expense is forecast to be up about 17%.
  • We anticipate cash flow from equipment operations of about $2.7 billion in fiscal 2011.
  • During the third quarter, we re-purchased 5.9 million shares for about $500 million. That brings the total number of shares re-purchased since 2004 to about 133 million shares at a cost of about $7 billion, or almost $53 a share on average.
  • (Q&A) It seems like your net income guidance for the fourth quarter is roughly-- excuse me, 20% decline sequentially, but the segment profits are implied only down five. (A) We don't do any of our comparisons, David, just as a reminder sequentially, because you've got an awful lot of noise in variability quarter to quarter. If you look year over year, obviously we are looking for an improvement over our fourth quarter results. You can do the math. It's about-- in round numbers 100 million.
  • I appreciate that. But unless there's an odd translation from your segment profits to your P & L and there's always a bit of a difference, why would your net income guidance sequentially be down 20 when your operating profit guidance is only down 5? (A) I mean, there's a little lower credit income assumed fourth versus third. My question is around margin and that's a clarification I would first need. Again, why such a divergence. (A) We'll have to go off-line and you'll have to talk about your numbers.
  • Let me go to the bigger question on the margins. The incrementals obviously this quarter were pretty low especially in Ag and Turf. You highlighted some of the costs that were driving that. How should we be thinking about which of those costs are things that evolve away because the new product ramp goes away, maybe better raw material issue and how much is it a mix issue related to geographic divergence we're seeing from slower growth in North America, Ag versus the other regions? How should we be thinking about that in summation for thinking about incremental margins for that division? (A) The 3% incremental versus the third quarter and which of the costs you feel-- how should we think about incrementals for that division if you put up a 3 essentially? (A) Right - Certainly, we talked all year about the headwinds and the tougher compares as we move into and further into the year and really, that's what you're seeing with that 3% incremental margin. As you look at comparable to last year, you know, and keep in mind, we're at 13% absolute margin, but we're comparing to a 16% margin a year ago, and so that's part of the challenge is the compare year over year. As well as the headwinds we've cited and in particular raw material and interim Tier 4 costs would be heavier and more back-end loaded in the year and we've talked about that again throughout the year and that's really what you're seeing reflected in the numbers.

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