Deere 4Q14 Earnings Call Notes

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Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

More flexible cost structure helped

“Deere’s results for the quarter also demonstrated the progress we’ve made managing costs and creating a more flexible, responsive cost structure.’

Stronger dollar hurts

“One other item worth emphasizing in today’s earnings report is the impact of a stronger U.S. dollar. It is putting significant pressure on reported sales made outside of the United States, a fact reflected in both our first quarter results and our full-year forecast.’

Sales down 27% in ag and turf division

“Sales were down 27% due to lower shipment volumes of large ag equipment in the United States and Canada and lower sales in Europe and Brazil. Operating profit was $268 million. The division’s decremental margin in the quarter was 35%.’

Strong livestock prices leave farm receipts still growing

“U.S. firm cash receipts which in spite of lower grain prices, remain at historically high levels thanks to help from record livestock receipts. As a result, we now see 2014 cash receipts at about $418 billion, up about 1% from 2013 and the highest level ever recorded.’

Farm receipts forecast down 6% in 2015, crop down 23%

“Given the record crop harvest of 2014 and consequently, the lower commodity prices we are seeing today, our 2015 forecast calls for cash receipts to be down about 6%. Of note, crop receipts for 2015 are forecast to be down about 23%, lower than the levels in 2012, which was the record.”

Global inventory balance still tenuous

“global grain stocks-to-use ratios remain at somewhat sensitive levels, even after the abundant harvests of the past two years. Global grain and oilseed demand remains strong, while supplies appear to be fully adequate. Even so, unfavorable growing conditions in any key region of the world as well as unknown impacts from any geopolitical tensions, could lower production, reduce the stocks-to-use ratio and result in prices quickly moving higher.”

China ag equipment growth slowed, monsoon season in India was weak

“In China, the government continues its investment in ag equipment subsidies, but the growth rate has slowed. This, among other things, has led to a decrease in industry sales. Turning to India, the monsoon season rainfall was below normal which could result in lower overall agriculture output.”

Farmer confidence not so high in Brazil

“On balance, though, farmer confidence in Brazil is lower as a result of economic uncertainty and political concerns in the country. This is leading to lower equipment purchases despite positive ag fundamentals.”

Too early to talk about conditions post 2015

“I don’t know that our view has changed necessarily in the last few months. I think the first and maybe the last thing I’ll say on it is, it’s very premature really to talk about market conditions beyond 2015. As we all know, that will largely be impacted by the upcoming growing season and it’s
just very, very early.”

Normal weather patterns mean that usage should exceed production slightly

“If you look at normal weather patterns, trend yields, with the expected lower acreage that most are anticipating for corn as we go into the upcoming growing season that would result in production slightly less than usage. And you would see stocks brought down and pricing being more supported. If that would transpire, we would certainly expect to see some improvement next year.”

Livestock profitability generally expected to continue through 2015

” livestock profitability generally is expected to continue through 2015. There are a couple areas where you will see some margins compressing a bit. Dairy would be one area I would point out that as the herd expanded through 2015, you’re likely to see some squeezing of margin.”

Margins could get squeezed in poultry and pork

“Poultry again coming off of very strong margins last year. We believe those strong margins will continue through the first half of the year. But production is up and so that’s a part of the industry that can recover fairly quickly and so we would expect to see perhaps some margin squeezing there. And pork of course, again we would expect to see some growth in the herd and some reduction as we move through the year. Second half in particular could be a challenge from a margin perspective there.”

Beef takes a while to rebuild herds. Small ag should benefit, more closely tied to livestock

“Beef, of course that takes a while to rebuild herds. So profitability is expected to still be relatively strong, especially for cow/calf producers. And so overall we’re still looking at small ag, which tends to be a little more closely tied to livestock to be relatively strong versus certainly large ag as we move through 2015, again, coming off of some pretty strong years for livestock producers. ‘