John Deere 1Q15 Earnings Call Notes

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Pleased with results in light of weak conditions

our view, the results were impressive in light of the weak conditions plaguing the global agricultural sector.

Strong dollar weighed on results

Another item, weighing on our results, was the strong U.S. dollar. It continued to put pressure on reported sales made outside of the United States and is expected to continue doing so for the rest of the year.

Revenue down 18%

Net sales and revenues were down 18% to $8.171 billion. Net income attributable to Deere & Company was $690 million. This includes a $38 million after-tax gain associated with the previously-announced sale of our crop insurance business. EPS was $2.03 in the quarter.

Crop receipts down 23% but livestock receipts should pad the decline

U.S. farm cash receipts, which in spite of softer commodity prices, remain near historically-high levels, thanks to help from record livestock receipts. As a result, our 2014 forecast calls for cash receipts of about $418 billion, up about 1% from 2013, and the highest level ever recorded. Given the record crop harvest of 2014 and consequently, the lower commodity prices we’re seeing today, our 2015 forecast calls for cash receipts to be down about 6%. Of note, crop receipts for 2015 are forecast to be about 23% lower than 2012’s record.

Grain inventories are still not robust

global grain stock-to-use ratios remain at somewhat sensitive levels, even after the abundant harvest of the past two years. Global grain and oilseed demand remains strong, while supplies are now fully adequate

Brail confidence is low

farmer confidence in Brazil is lower as a result of economic uncertainty and political concerns in the country, leading to lower equipment purchases.

We think a lot of inventory has come out

Yeah, so as you look at dealer inventory, certainly, we took – last year, again as a reminder, we pulled a lot of inventory out, as Susan pointed out in the opening comments, we’re down pretty significantly year-over-year as we ended the quarter this year with receivables and inventory, we’re down almost $2 billion year-over-year for Ag and turf. And certainly there’s a lot of conversation about used equipment levels as well. And we would tell you, as you look at large Ag in total, certainly, we feel – I mean we’re always concerned about used equipment. If you asked us are we more concerned today than we were three months ago or six months ago, the answer would be no.

We are underproducing, allowing inventories to balance

we have under-produced year-to-date and we would continue, especially as we go into the back half of the year, we’ll be under-producing the retail environment and continuing to bring those field inventories down

the state of the crop markets is year to year, dependent on weather

That’s a great – a tough question at this point. And actually I think if you look at the U.S. and Canada markets, for example, and I think it really implies the overall commodity market in general, if you talk to our Chief Economist, he would tell you we’re really in kind of a year-to-year type of mode right now. And as frustrating as it may be for people to hear, it really is about what happens this summer with the current crop that’s in the ground. If you’re going to assume another year of better than average weather, where yields are above trend yield, then certainly it’s going to be a challenging argument to make that 2016 would certainly improve really anywhere around the globe.

Less than ideal weather would have an effect on prices

If you look back at what would the implications be of trend yields or a little less than ideal weather or average weather and you see below trend yield, then that story changes pretty dramatically because we would argue that you’re not – while you certainly have ample supply of commodities and you’re seeing that reflected in commodity prices, there isn’t a glut of commodities either.

Our inventories are low

as you look at inventory as a percent of sales, about half of where our competition was. We would continue to say on large Ag equipment that our inventory levels are, as a percent of sales, about half of what the rest of the industry would be. But certainly, that puts pressure because those inventories need to come down, and so you do see some pricing pressure.

AEM data

when you look at the AEM data, it gets clouded because you have our 6000 Series tractors in those numbers, you have some of our 5000 Series tractors in those numbers. And certainly those are tied much more closely to the livestock industry.

This is the worst downturn in Ag equipment in 25 years

we’re facing, as you know, the deepest downturn in North American large Ag equipment industry in 25 yearly

How they would react if there is another good harvest

certainly, we would continue to look at from a cash perspective. Our CapEx would be one area we’d continue to look at, although we did pull that down quite a bit. You continue to look at options with SA&G and R&D. We talked about, when C&F went through their super-trough in 2009; when you get into levels that you didn’t anticipate you tend to also find levers that you didn’t necessarily anticipate. And depending on the perspective, we kept R&D pretty flat year-over-year in our outlook, and so that would be something you would continue to look at.

Unless there’s better than average weather it’s hard to see commodity prices improving

as we look at the outlook for next year, unless you’re going to argue for better than average weather, it’s hard to argue that you’re going to see a significant drop in commodity prices given the strength in demand that we continue to see on commodities.