Deere 2Q14 Earnings Call Notes

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This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Farm and machinery weak, construction strong though

“Our results did reflect moderating conditions in the global farm sector, which hurt demand for farm machinery and contributed to lower sales and profits for our Ag & Turf business. However, our other divisions, Construction & Forestry and Financial Services, saw improvement in their results.”

Cash receipts expected to be -5% in 2014, -3% in 2015

” farm cash receipts which are forecast to be down somewhat from 2013. Assuming above-trend yields, grain and soybean production levels are expected to be up in 2014, which is resulting in lower prices for those crops. Livestock receipts are forecast to remain at record levels. As a result, our forecast calls for 2014 cash receipts to be about $387 billion, down about 5% from 2013, which is forecast to be the highest level ever recorded. Concerning cash receipts for next year, based on our expectation of record grain yields in 2014 and resulting lower commodity prices, our very early forecast calls for cash receipts to be down about 3% in 2015.”

Shocks could still move prices higher

“Although supplies appear to be adequate, global grain and oilseed demand remains strong. Unfavorable growing conditions in any key growing region of the world’s coupled with the unknown impacts from geopolitical issues could lower production, reduce the stocks-to-use ratio and result in prices quickly moving higher”

our goal is to earn above our cost of capital throughout the quarter

“one of the things we’ve always said, our goal is to earn above our cost of capital throughout the cycle, okay? So think overhead absorption, we will continue to align factory production to demand as we have mentioned in the third quarter press release. So lower production will have a negative impact on overhead absorption for the A&T division and especially true for large Ag products.”

Not a lot of visibility as to whether this is a short term or longer term cycle

“I think the way I would answer that is at this point, and Susan mentioned this in her opening comments, you’re still seeing stocks-to-use ratio at least the expectation of another good year, those stocks will continue to rebuild but given the very strong demand environment on commodities as well, the answer to that question is what’s going to happen with the crop that will get planted next year in terms of do you have yet a third year in a row of good growing conditions on a global basis or do you have a year where those yields moderate a bit due to weather whether that’s in the U.S. or some other region.

So that’s a tough one to answer, and certainly that’s the advantage we have I think of how we’ve structured the business today in the sense of being able to shift pull levers where we need to, to be able to ensure that we’re able to maintain good returns throughout that cycle. So again I think it’s just very premature to try to call whether this is a 12-month phenomenon or longer-term.”

Currently in better shape than the negative cycle in the 90s

“I think one thing I would point out is you mentioned balance sheet and certainly compared to the 1980’s it would be better today, but even compared to the 1990’s, late 1990s, I think if you look at the data you’re in even better shape. We’ve talked a lot about the underlying demand of commodities and we continue to point to that as well in the sense of our, historically the cycles have been much more about changes in supply.”

we’ve made structural improvements to our business too

” we also want to look at the improvements you’ve made structurally to our business that will be a difference from the 1990’s to now. Okay. So we think structurally we are in a better, a position to return above our cost of capital at any point in the cycle now.”