Deere FY 1Q17 Earnings Call Notes

Joshua Jepsen

Farm income should be up slightly in 2017

“Before we review the industry sales outlook, let’s look at fundamentals affecting the Ag business. Slide six outlines U.S. farm cash receipts. Given the large crop harvest and consequently the lower commodity prices we’re seeing today, our 2016 forecast calls for cash receipts to be down about 5% from 2015’s levels. Moving to 2017, we expect total cash receipts to be about $367 billion, roughly flat with 2016. It is worth noting that net farm cash income, a good measure of farm business health, is forecast to be up slightly in 2017. You can see this information in the appendix.”

Chinese stocks have increased, but unlikely to be exported

“Chinese grain and oilseed stocks continue to increase in 2016 with supply, domestic production plus imports outpacing the demand. Chinese stocks of grains and oilseeds now represent almost half of the world’s stocks. Remember, these Chinese stocks are unlikely to be exported. That means the world market, particularly oilseeds remain sensitive to any production setbacks, major geopolitical disruptions or trade disputes”

There are signs that the market is nearing bottom

“Still, there are signs the large Ag market is nearing bottom. For example, the magnitude of the industry decline expected in 2017 is considerably less than that experienced in 2016. Also, the used equipment environment is stabilizing. The EU28 industry outlook is forecast to be down about 5% in 2017, due to low crop prices and farm incomes as well as the geopolitical risks mentioned earlier.”

Tony Huegel

Not burning inventories anymore

“I think as you think about new equipment – and where we’ve really talked about through 2016 and even in 2015 is as we ended the year, the target was to have inventories in line with our current retail sales environment. And so, the real difference this year is, we aren’t seeing a significant decline in that retail environment year-over-year as we had both in 2015 and 2016. And as a result of that we’re able to produce largely to retail demand. Obviously there’s going be puts and takes by individual products. But as you think about large Ag in total for the U.S. and Canada, we’re producing in line with retail, which does give us some year-over-year benefit obviously in our sales as we’re able to do that. So really the answer to your question would depend on what happens to the retail environment. In a year where you start to see the retail environment improving, that’s when we would consider starting to lift that inventory level in line with that. ”

Deere 4Q16 Earnings Call Notes

Deere & Company’s (DE) Q4 2016 Results

Josh Jepsen

Farm cash receipts should be about the same in 2017 as 2016

“Given the large crop harvests in 2015 and consequently to lower commodity prices we are seeing today, our 2016 forecast calls for cash receipts to be down about 6% from 2015 levels. Moving to 2017, we expect total cash receipts to be approximately $367 billion, about the same as in 2016 as lower livestock cash receipts are offset by higher crop receipts.”

Anticipate lower industry sales in China

“In China, slower economic growth persists and ag policy changes are causing short-term uncertainty for most domestic and global markets. As a result, we anticipate lowered industry sales. Turning to India, the government continues to focus on reviving growth in the ag sector and improving farm incomes.”

Market demand for construction equipment continues to be weak

“Moving to Slide 16 and looking at the economic indicators on the bottom part of the slide. GDP growth is positive. Construction spending is increasing and housing starts are expected to exceed 1 million units again this year. In spite of these positive signals, the market demand for construction equipment continues to be weak. Factors contributing to the weakness have not changed dramatically over the past quarter. Conditions in the oil and gas sector, for example, continued to be slow. Also, construction contractors are delaying fleet replenishment because of the uncertain markets. Rental utilization rate declines persist, leading to a reduction in fleets and elevated levels of used inventory. Housing starts in the U.S. for single-family homes remain below the long-term average and multifamily home construction is slowing due to overbuilding in some parts of the country. On balance, Deere’s construction and forestry sales are forecast to be up about 1% in 2017 with positive currency translation of about 1 point. Global forestry markets are expected to be roughly flat in 2017. C&F’s full year operating margin is projected to be about 3.5%.”

Tony Huegel

We’re modelling different scenarios for the Trump presidency, but at this point they are speculation

“Yes. I am going to take that question and make it broader than just tax. And what I would tell you is the thing – the most important thing is anything that’s being talked about in media and anywhere else is obviously speculation at this point in terms of what may or may not happen. And so certainly internally, we are evaluating different scenarios. So, the short answer to your question is the, of course, we are looking at what that impact may or may not be, but we are looking at all kinds of scenarios, because at the end of the day, we want to be prepared for whatever does become reality. But we are – at this point, it would be premature to talk about that publicly just because it would be pure speculation, so – but we do appreciate the question.”

John Deere (DE) Q3 2016 Earnings Call

John Deere’s (DE) Josh Jepsen said low agricultural commodity prices still hurting sales of agricultural equipment

“Low commodity prices, weakening farming income and elevated used equipment levels in the U.S. and Canada are continuing to pressure demand for farm equipments especially high horsepower models.”

Construction market continues to get weaker

“Notwithstanding these positive signals the market demand for construction equipment continues to soften. Among the factors contributing to the weakness, conditions in the oil and gas sector continue to be slow with the impact most pronounced in the energy producing regions of the U.S. and Canada. Contractors are less apt to replenish or grow their machine fleets when faced with uncertain markets.”

John Deere’s (DE) Chief Economist JB Penn said consumption of agricultural commodities continues to increase despite not growing at the same pace of a few years ago

“Consumption remains very strong, still rising steadily year-after-year and it has risen without fail every year since 1994, 1995 even including the great recession of 2009. Now fuelled by earlier high prices and after four consecutive great growing seasons worldwide, commodities supplies now are fully adequate to meet all needs. Prices of course have moved off the previously high levels and farmer margins have narrowed.”

Sk Additions:

With commodity prices coming down, mood is less positive

“es, as you might imagine, and we talked last quarter and even the early part of the third quarter where sentiment was a bit more positive as those commodity prices were up, and as we mentioned there, that can change in a hurry, and it certainly with the commodity prices coming down, I think it’s fair to say the overall mood would be less positive than it was a couple months ago even.”

Have seen some pricing stabilization in used equipment

“We’ve seen some pricing stabilization on used equipment, so, again, I think things are stabilizing but I want to be clear we have a lot of work on the actual level of used inventory at our dealers that will continue into 2017.”

Brazil looking better

” I mean if you ask me today which market was likely if I had to pick one which one has the best likelihood of being up, I think I would have to say Brazil or South America in general. One of the things to keep in mind is and we talked about this throughout the year is a lot of downturn there has been related to the uncertainty around the government and the overall economy. Farmers have been pretty profitable. As a result of that with the new government at least today there appears to be a more positive sentiment, inflation is coming down as an example so the overall economy seems to be showing some level of improvement.”

Deere (DE) Q2 2016 Earnings Call

Deere’s Joshua Jepsen said both of the company’s end markets, agricultural and construction, are displaying weakness

“Deere’s performance for the second quarter and first six months reflected the continuing impact of the downturn in the global firm economy as well as weakness in markets for construction equipment.”

Expecting a weak farm economy as well for this year

“Given the record crop harvest of the last three years and the resulting lower commodity prices, our estimates for 2015 cash receipts remains down about 10% from 2014 peak levels. Our 2016 forecast contemplates total cash receipts to be about $375 billion down only slightly from 2015.”

There’s an excess of farm equipment

“Low commodity prices, stagnant farm incomes, and elevated used equipment levels in U.S. and Canada are continuing to pressure demand for farm equipment. The decline is most pronounced in the sale of high horsepower models. Our forecast for industry sales in the U.S. and Canada remains down 15% to 20%, with large Ag equipment sales down 25% to 30%.”

Lower spending by companies in the energy sector is starting to seep into other industries

“The industry continued operating at a slow pace. Contributing factors are rental utilization rates continued to decline. Weak conditions persist in the energy sector. Used equipment is readily available and continues to be redeployed from energy producing regions to other parts of the country.”

Experiencing higher credit losses in their equipment that they lease out

“Recent experience have seen both the higher rate of matured lease inventory being returned to John Deere Financial in addition to higher loss rates upon the remarketing of these lease returns. We’ve taken a number of actions to mitigate risk on our operating lease portfolio, a few examples include lowering residual values for future leases most heavily impacting short-term leases, significantly restricting our short-term lease offerings, and increasing risk sharing with dealers.”

Customers are increasingly preferring to lease equipment as opposed to buying it outright 

“I think there’s a little bit of misunderstanding or information in the marketplace around the level of leasing too. I’ve heard numbers as high as 50% is going into operating lease today. We would tell you year-to-date if you look at operating leases versus retail note its closer to a quarter of the volume is operating lease. Now again to be fair that is higher than what it would have been historically, but it is nowhere near that half type of range that some are talking about.”

Using their financial strength during this agricultural downturn to opportunistically acquire other companies

“o in this type of an industry environment where we have a very strong financial position, some of these inorganic options become more actionable for us. And if they are in the long-term interest of our shareholders for profitable growth in the long-term, we will act on some of those.”

Deere FY 1Q16 Earnings Call Notes

Joshua Jepsen – Manager, Investor Communications, Deere & Co.

Estimate farm cash receipts will be down slightly from 2015

“Given the record crop harvests of the last three years and the resulting lower commodity prices, our estimate for 2015 cash receipts is now down about 10% from 2014’s peak levels. Our 2016 forecast contemplates total cash receipts to be about $381 billion, down slightly from 2015.”

Continue to anticipate lower industry sales in China

“Because of the economic slowdown in China, we continue to anticipate lower industry sales. While the government support of mechanization is helping the sector, changes in government subsidies are causing uncertainty.”

Although economic indicators are encouraging, construction segment impacted by other areas of weakness

“looking at the economic indicators at the bottom part of the slide, GDP growth is positive, construction spending is up from 2015 levels, and housing starts are expected to exceed 1.2 million units this year. In spite of these encouraging signs, the industry is operating at a slow pace. Contributing factors are weak conditions in the North American energy sector and the movement of equipment from energy producing regions to other parts of the country. Rental utilization rates continue to decline, economic growth outside the United States is sluggish and the mix of housing starts in the U.S. is skewed to multifamily homes reducing demand for earthmoving equipment. As a result, Deere’s Construction & Forestry sales are now forecast to be down about 11% in 2016.”

Most of the optimism has been removed from the construction forecast

“when you look at the forecast change for construction, most of that change is really as you look out toward the back part of the year. So as we talked about last quarter, there was some optimism, if you will, towards the back half of the year that we’d start to see, not an incredible amount, but some increase in sales as we went through the year. Most of that optimism candidly has been removed from the forecast, and so what we are forecasting today for construction is we think normal seasonality. So you will see some improved sales as you go through the year, but really nothing beyond again a typical seasonality.”

Used pricing has held relatively firm

“we did see – and I want to be clear. When we came into the downturn, we did see some small decreases in used pricing, but they’ve held very firm at those small single-digit type of declines, at least to date. So we are pleased with that aspect.”

Deere FY 4Q15 Earnings Call Notes

Deere & Company (DE) Management On Q4 2015 Results

Expecting 2016 farm receipts roughly flat with this year

“our 2015 forecast calls for cash receipts to be down about 8% from 2014s peak levels. Moving to 2016, we expect total cash receipts to be about $394 billion, roughly flat with this year.”

Unfavorable growing conditions could result in prices moving quickly higher

“global grain stocks-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. Even so, unfavorable growing conditions in any key region of the world, as well as unknown impacts from any geopolitical tensions could result in prices quickly moving higher.”

Lower sales forecast in China because of economic slowdown

“In China, the governments continued investment in equipment subsidies and mechanization is supportive of agriculture. However, the economic slowdown there and lower commodity prices have lead to a decrease in the industry sales forecast”

Appears there will be continued weakness in the dairy market

“it appears that we’ll continue to have some weakness in the dairy market, as an example as we go well into 2016. And that’s a significant part of the business in Europe. So I think that is probably the biggest difference.”

There’s still more inventory than we would like but we’re making progress

“We would continue to say there is more large row crop tractors in used row crop tractors in the market in the US and Canada than we would prefer. So it does continue to be a focus of ours, as we go through 2016. But we are making progress, so we are seeing that large Ag inventory coming down. In fact if you look at the high point in 2014, we’re down about 18% from that point. So again, making progress.”

Resale values are holding in quite well

“The good news there too is our resale values are holding in quite well. We talked last quarter about if you look over a 2 year kind of horizon, down a small single digit, I’d tell you those used pricing continues – the used pricing continues to remain very steady at those levels and versus competition we’re maintaining a very healthy premium.’

We don’t anticipate a significant decrease in acres planted next year

“We have not at this point disclosed acres and so on for next year’s crop. I don’t think we certainly don’t anticipate a significant decrease in the acres planted. And think I’ll follow up a little bit on the last question you had though, because I think the situation in Argentina with the elections over last weekend could have some impact on that.”

Buildup of used equipment in the UK because usually export to Europe and Euro is weaker

“When you think about used equipment, I’ll split it a little bit. In the UK, certainly we’re seeing some increased levels of used equipment and that’s really coming from the – again it’s FX driven. So the Euro has been impacted more than the British pound and a lot of the used equipment from the UK goes to Europe and into Euro based countries. And so obviously, now with that shift in FX, it is creating more challenge for the export of that used equipment out of the UK.”