JS Notes: CPRT, UHAL, DE

Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

Copart’s (CPRT) CEO Jay Adair, whose firm sells salvaged vehicles, says the firm saw declining average selling prices across their business

“In the quarter we saw further softening of average selling price as what we refer to as ASPs (average selling prices), compared to the second quarter.  Looking at May data, average selling price has dropped again, but we believe we are currently at the bottom in terms of where salvage values will end up for the fourth quarter.”

And he is predicting prices will stay weak

“Additionally, we expect this trend of low ASPs to continue into our future quarters and do not anticipate that average selling price will bounce back in the next couple of quarters. We believe the cause of this lower ASP or average selling price is due primarily to lower scrap prices and softer international bidding.  The lower scrap prices affect many of the lower end vehicles that we sell. The lower scrap price is caused by weakening global demand and a strong U.S. dollar. The softer international bidding primarily affects the higher end units that we sell and is primarily caused by a stronger U.S. dollar.”

They are also forecasting that the average age of a car on the road will continue to increase

“Additionally, we have seen the age of U.S. fleet increase for the past seven years and as we discussed on previous calls older vehicles will sell for last and auction. With the older fleet, we have seen total loss frequency increase. We believe this trend will continue as the fleet ages and so with the likelihood of the vehicles becoming total losses.  We also believe repair cost are up increasing the number of total loss vehicles and fuel prices being lower are causing miles driven to go up again causing more accidents and more total loss vehicles.  We believe the trend of vehicles aging will continue. Therefore average selling price should continue to be soft and volume should be up for the foreseeable future.”

 

 

 

U-Haul (UHAL) Principal Financial Officer Jason Berg says the firm continues to build out their leading network

“Our retail distribution network continues to expand. During all of fiscal 2015, we increased our independent dealer network by 800 net outlets along with another 60 company-owned and operated locations, bringing our total system to nearly 19,800 locations. We once again increased the number of trucks, trailers and towing devices in our rental fleet.”

U-Haul (UHAL) Principal Financial Officer Jason Berg says the company’s small insurance business has a material investment portfolio

“On a combined basis, the annual operating results from our life and property and casualty insurance operations improved by $7 million to $53 million combined and both are performing to expectations. Together our insurance operations have a combined investment portfolio of just over $1.5 billion.”

U-Haul (UHAL) Principal Financial Officer Jason Berg says that prices for self-storage acquisitions have been going up and the company remains disciplined  

“We’ve been mentioning over the last couple of years or the last year really that prices on self-storage project have been going up. So we have been a little bit more careful on acquisitions of existing storage.”

 

 

 

Deere (DE) Finance Manager Susan Karlix said the firm’s flexible cost structure has allowed it to remain enormously profitable even through this most recent downturn in agriculture markets 

“We also saw benefits from our success holding the line on costs and assets, a fact that gives our performance a measure of resilience we have not seen in prior downturns. Of note, crop receipts for 2015 are forecast to be about 23% lower than 2012’s record.  John Deere expects to be solidly profitable in 2015. In fact, the year is forecast to rank among our stronger ones in sales and profits, even with the pullback we’re experiencing in the farm sector. Such an achievement says a lot about the progress we’ve made establishing a wider range of revenue sources and a more durable business model.
And they are seeing many of their customers switch from buying their product outright to a leasing structure
“We are seeing a move towards more leasing. We think some of that has to do with giving some of the lower margins customers are facing. And as well as – so again, when you purchase the equipment, you tend to get a better advantage from a tax deduction perspective.”

 

John Deere 1Q15 Earnings Call Notes

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.

Deere 4Q14 Earnings Call Notes

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. ‘

Deere FY 4Q14 Earnings Call Notes

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

Crop receipts expected to be down 17% from 2012 record levels

“US farm cash receipts which in spite of lower grain prices remained at historically high levels, thanks to help from record livestock receipts. As a result, our forecast calls for 2014 cash receipts to be about $413 billion, up about 1% from 2013, which would be the highest level ever recorded.

Given the record grain yield of 2014 and lower commodity prices going forward, our forecast calls for cash receipts to be down about 5% in 2015. Of note, although livestock receipts remain at high levels, crop receipts for 2015 are forecast to be down about 17% lower than 2012 crop receipt record.”

Unfavorable growing conditions could have a big impact on prices

“global grain stocks-to-use ratios remain at somewhat sensitive levels even after abundant harvest. Global grain and oil seed demand remains strong, while supplies appear to be 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.”

Expect ag and turf equipment sales to be down 20% next year

“fiscal year 2015 Deere sales of worldwide Ag & Turf equipment are now forecast to be down about 20%. The Ag & Turf division operating margin is forecast to be about 8% in 2015 due to lower shipment volumes and a less favorable product mix as large ag machinery shipments declined.”

The long term trends are still in tact

” the trends that hold so much promise for John Deere’s future translates on population growth, rising living standards and increased demand for grain remain very much intact. They are largely unaffected by the periodic ups and downs of the farm economy”

Cash receipts is the best indicator of our future sales

“in some of the analysis that’s been done internally specifically around from our Chief Economist and again we continue to believe that farm cash receipt is the best indicator of sales in the US and Canada”

If you assume normal weather, then demand will outpace production

“much of that increase in the US corn stocks that we’ve seen is related to a bulk normal weather, and that’s resulted in yield really well in excess of trend. If you look out into 2015 and 2016, so the crop that will be planted this spring, if you assume trend yield, so just normal weather, not above normal weather, but normal weather trend yield, assume demand continues at same pace as 2015, so no increase in demand, holding demand solid, even if you assume acreage stays the same, you would see a drawdown in US corn carryovers as a result of that. The demand would outpace the production. And of course, as you’re probably aware, most analysts now expect US corn farmers to reduce acreage somewhat next year. ”

Only one period since 1965 that we’ve had three years of negative sales

“there’s only really one period if you look from 1965 forward where we saw three sequential years of lower sales. And even in that scenario, one of those years, I think, was less than 1% down.”

The worst thing that could happen is really good weather

“I would tell you the biggest downside risk would be that we would have incredibly positive weather again and that you would see trend yields moving forward.”

Deere 2Q14 Earnings Call Notes

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.”

Deere 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Global grain and oil seed demand is strong, unfavorable weather could lead to price spike

“Planting is well underway in North American where farmers appear to be shifting some acreage from corn to soybeans in response to relative prices. But even though supplies appear to be adequate, global grain and oil seed demands remain strong. Unfavorable growing conditions in any part of the world would hurt production, reduce the stock to use ratio and result in prices quickly moving higher.”

Farm income expected to decline slightly

“While remaining near long term averages, grain prices and farm income are expected to decrease in 2014. As a result, farm machinery demand is expected to be lower for the year”

upbeat on construction and forestry markets

“Housing starts are slowing ramping up, home inventories are low and prices are improving. Landscaping activity is picking up and financing for land developers is slowly recovering. Additionally, we continue to see a strong domestic energy sector.”

Pull rather than push inventory model

“keep in mind that one of the difference for Deere versus at least many of our competitors is our order fulfillment process. We have very much a pull type system where our dealers, we don’t push a lot of inventory out into the market. We allow our dealers to pull it as needed and with our pretty short order windows that we at lease attempt to have, we’re much more of a just-in-time type of process versus build up that inventory ahead of time sort of situation.

So we’ve been building much closer to retail and that part of the timing difference that you’ll see for Deere versus maybe some of our competitors who push some significant inventory in the field ahead of those sales materializing.”

John Deere 3Q13 Earnings Call Notes

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.

“Grain production levels are expected to be up in 2014, resulting in lower prices. Livestock receipts are forecast to be about flat with 2013 level. As a result, our forecast calls for 2014 cash receipts to be approximately $380 billion, down about 4% from 2013, which was the second highest level ever recorded. 2014 cash receipts, the number one predictor of farm equipment sales, are expected to remain at a historically high level, which should help keep farmers in a financially sound position.”

“there is already talk about among U.S. farmers looking ahead to the 2014 planting season, about adjusting corn acreage down by about 4% in favor of soybeans.”

“Looking at South America, Informa is forecasting a cut in planted corn area of about 10% in Brazil and of about 30% in Argentina.”

“If 2014 brings unfavorable growing conditions in any part of the world, the U.S., Brazil, and Argentina in particular, corn stock fees [ph] would fall, suggesting the commodity prices would stabilize.”

“what we will tell you is combines today are down year over year on orders. That’s reflected in our outlook. As you look at large tractors, however, it’s still a very, very strong order book. It is open through the end of May today. And so if you look at 8R tractors, our availability on 8R tractors is out to basically early June this year on the wheel tractor. Last year that would have been around April timeframe and then if you look at our 9R tractors again on the wheel variety, available is March this year, of 2014 last year, we would have been in the February timeframe. So both of those are running a little ahead.”