Tony Huegel - Director-Investor Relations Susan Karlix - Manager, Investor Communications Raj Kalathur - Chief Financial Officer & Senior Vice President.
Jamie Cook - Credit Suisse Steven Fisher - UBS Adam Uhlman - Cleveland Research Company Jerry Revich - Goldman Sachs Tim Thein - Citigroup Ann Duignan - JPMorgan Securities Andy Casey - Wells Fargo Securities Mike Shlisky - Global Hunter Securities Eli Lustgarten - Longbow Research Mig Dobre - Robert W.
Baird & Company David Raso - Evercore ISI Vishal Shah - Deutsche Bank Nicole DeBlase - Morgan Stanley Joel Tiss - BMO Asset Management Seth Weber - RBC Capital Markets Ross Gilardi - Bank of America Merrill Lynch Kwame Webb - Morningstar Larry De Maria - William Blair & Company.
Presentation:.
Good morning and welcome to Deere & Company’s Third Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session of today’s conference. I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations. Thank you. You may begin..
Thank you. Also on the call today are Raj Kalathur, our Chief Financial Officer; and Susan Karlix, our Manager of Investor Communications. Today, we’ll take a closer look at Deere’s third quarter earnings then spend some time talking about our markets and our outlook for the remainder of the year. After that, we’ll respond to your questions.
Please note that slides are available to complement the call this morning. They can be accessed on our website at www.johndeere.com. First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company.
Any other use, recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking comments concerning the company’s plans and projections for the future that are subject to important risks and uncertainties.
Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.
This call may also include financial measures that are not in conformance with accounting principles generally accepted in the United States of America or GAAP.
Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/earnings under Other Financial Information.
Susan?.
price realizations of about one point; favorable raw material costs; an unfavorable mix of product and Tier 4 product costs. With respect to R&D expense on slide 20, R&D was down 4% in the third quarter, including four points of negative currency translation. So, essentially flat on a constant exchange basis.
Our 2015 forecast now calls for R&D to be down about 2% for the full year, including about three points of negative currency translation. Moving now to slide 21, SA&G expense for the equipment operations was down 7% in the third quarter, including five points of currency translation.
Our 2015 forecast contemplates SA&G expense being down about 11% with landscapes, water, incentive compensation and currency accounting for about nine points of the change. Turning to slide 22, pension and OPEB expense was up $25 million in the quarter and is forecast to be up about $70 million in 2015.
On slide 23, the equipment operations tax rate was 31% in the quarter. For the remainder of fiscal 2015, the projected effective tax rate is forecast to be in the range of 34% to 36%. Slide 24 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $3.2 billion in 2015.
The company’s fourth quarter financial outlook is on slide 25. Net sales for the quarter are forecast to be down about 24% compared with 2014. This includes about one point of price realization with unfavorable currency translation of about five points.
Turning to slide 26 and the full-year outlook, the forecast now calls for net sales to be down about 21%. Price realization is expected to be positive by about one point with negative currency translation of about four points. Finally, our forecast now calls for net income attributable to Deere & Company to be about $1.8 billion for the full year.
As a closing thought, John Deere is well on its way to another good year and doing so in the face of some pretty significant headwinds. Our performance highlights our success establishing a wider range of revenue sources and a more durable business model.
As a result, the company is showing great resilience and discipline and performing much better than in previous farm downturns. Longer term, we believe our steady investment in new products and geographies will make Deere the provider of choice for a growing global customer base.
What’s more, we believe the impact of these actions will become increasingly clear as the end-markets for our products start moving ahead. These are just some of the reasons we have confidence in the company’s present course and in our ability to deliver significant value to customers and investors well into the future.
I’ll now turn the call back over to Tony..
Thanks Susan. Now we’re ready to begin the Q&A portion of the call. Our operator David will instruct you on the polling procedure. But, in considerations of others and our hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue.
David?.
[Operator Instructions]. Your first question today will be from Jamie Cook with Credit Suisse. Please go ahead with your question..
Hi, good morning..
Hi Jamie..
Hi, I guess two questions.
One, Tony, could you or Susan or Raj speak to where you guys are relative to expectation with regards to inventory in the channel, that’s a big concern in the market and how that sort of impacts2016? And whether the excess inventory rolls into ‘16? And then I guess my second question is if you could just give us some color on the order book, the early order book so far? Thanks..
In the spirit of one question, I’ll go ahead and answer your first one and then we’ll pick the second one up hopefully from someone else or I’ll ask you to get back in the queue, okay..
Okay..
So, as we think about inventory, and I’ll split it between new and used inventory, and I’m assuming, you’re primarily looking at large Ag in the U.S.
and Canada?.
Of course..
Okay. As you think about new inventory and I would say similar situation to what we talked about in the past, in the sense that we continue to have new inventory well below the competitors. We tend to have 50% or less as you look at inventory as a percent of sales and that continues to be the case.
We continue to evaluate that of course as we go through the year and see various changes in the market. Used equipment continues to be a challenge. We are making good progress on used equipment. As you look at some of the factors from a large Ag perspective, we’re down about 10% year-over-year in July in terms of where we’re at with used inventory.
Pricing is holding in okay, if you look at it kind of from a two-year average, we would be slightly below that. But believe we continue to maintain a healthy premium versus our competition.
And again, we are making progress but it’s likely we would expect these efforts will continue into 2016, we continue to coordinate with our dealers to assist with the movement of the used equipment. But it is still especially on large tractors continues to be a challenge that we’re working on within the market..
Okay, thanks. I’ll get back in queue..
Thank you. Next caller..
Your next question will be from Steven Fisher with UBS. Please go ahead with your question..
Great, thanks, good morning.
So, I guess, I’ll pick up on the second half of Jamie’s question on how early order programs are trending year-over-year and specifically if you could talk also about your approach to incentives year-over-year on the early order program?.
One of the challenges that we do have in terms of comparison year-over-year is there are some timing differences in terms of when we have various phases of the early order programs. And the closing of the first phase is a bit different year-over-year.
Now, having said that, so, I just want to make sure I have that clearly out front but directionally what we’re seeing is order activity on those early order programs are off year-over-year. And just to be clear, what we’re talking about is planters sprayers and tillage.
A lot of people will have questions around combine early order programs I’m guessing, but remember those just started up in early August. And candidly it’s just too early to make any type of conclusions related to where that program is.
One of the challenges we do have also as you think about the spring seasonal early order programs, and where we would think that perhaps in this current environment where they may not be as close of a correlation to overall, or as good of an indicator of overall demand going into next year, is the fact that they do have a much higher level of stock component versus retail orders in those spring seasonal order programs.
And again, given the dynamics in the market, there is candidly not as much pressure to put orders in at this particular point. And we really believe the combine early order program, as that continues to develop, will be a better indicator of actual demand.
And again, I want to be clear, I’m not trying to skirt the issue, certainly we are seeing in those early order programs, orders being off year-over-year which historically would indicate some additional weakening as you move into 2016..
Can you say what degree of magnitude they’re off year-over-year?.
Similar to last year we aren’t going to discuss the magnitude again, because and some of that goes back to the timing of the ending of the early order program. And it could give some misleading numbers both, more positive or more negative depending on the program in terms of when they actually close.
So, but again, it is directionally down year-over-year. So we will go to the next..
Thanks a lot..
Okay, thank you. Next question..
Next question is from Adam Uhlman of Cleveland Research Company. Please go ahead with your question..
Hi guys, good morning..
Good morning..
Could you talk a little bit more about what you’re seeing in Europe, you mentioned that you’re seeing some early stage of recovery in that market, maybe talk to your orders on a year-over-year basis for the quarter, do you expect to hit positive sales anytime soon? What are you looking for to confirm that early stage of recovery? Thanks..
Sure. I think some of that, as you look at the general economy, we’re starting to see that.
As you look, there are different confidence indicators that are available as well, and those are starting to trend more positive still – I want to be clear, I mean, they’re still in more negative territory but directionally moving the right direction in the sense of a more positive direction in terms of overall sentiment.
And we are, and as you look at the forecast change, obviously for Ag & Turf we did bring the sales forecast down slightly but there was, there were couple markets that were a little weaker but some offsetting strength in Europe.
So we’re seeing a little bit of improvement but as Susan pointed out, we’re seeing early indications of the possibility that you’re going to start to see some turnaround there..
Okay, thank you..
Great. Thank you. Next question..
Next question will be from Jerry Revich of Goldman Sachs. Please go ahead with your question..
Hi, good morning..
Good morning..
I’m wondering if you can talk about the decision not to cut production more aggressively in the fourth quarter in Construction & Forestry to reduce that channel inventory.
It looks like you’re still planning to build receivables and inventories by $375 million for the year? I guess I’m wondering is that behind the lower margin guidance for 4Q, are you giving yourselves room to reduce the inventory and receivables or should we think that as first half 2016 event?.
Remember, as you think about Construction & Forestry, and we talked about this earlier in the year because there was some question as to why ending receivables and inventory were up as much as they were versus the forecasted sales increase.
And as you recall, there were some changes in 2015 related to wholesale terms which we believe was going to drive some higher level of receivables and that has been the case. So, that’s part of what’s driving that. Now, as you look at the underlying forecast for receivables and inventory, it looks like there was just a slight reduction.
Actually, what’s underlying there is more of a reduction in receivables, so field inventory with some offsetting increase in inventory so Deere company-owned inventories. And again, some of that have to do with final Tier 4 transitions, and plans along that way, as well as recognizing this has been a pretty rapid change in the business environment.
There was about seven-point change in our sales outlook. I’m sorry, apparently I said a decrease in receivables, there is an increase in receivables, no, no, a decrease in the forecasted receivables, in the level of forecast.
So, again, we’re still - just to be clear, we’re still forecasting an increase in receivables but it’s less of an increase versus our prior guidance. And inventory is a little higher than in our prior guidance. And again, a combination of final Tier 4 and as well as just the rapid change in that business environment from an inventory perspective..
I guess, Tony, part of the question there, are you planning to adjust that in 4Q or is that an early ‘16, you mentioned the quick change in the business environment.
Just can you clarify?.
We would always be evaluating as we move forward, and this would be true not just for C&F, this would be true for Ag & Turf as well. We are always evaluating business environment and what we feel we need from an inventory or receivables. So, whether it’s a company owned inventory or a field inventory level.
And what I can tell you is we will make those changes as quickly as we can. And I think fourth quarter last year is a good example of our ability to make those changes very rapidly, if we see the environment changing and necessitating that, so..
Thank you..
Thank you. Next caller..
Next question will be from Tim Thein of Citigroup. Please go ahead with your question..
Thank you, and good morning..
Good morning..
Just one question is on pricing and the change albeit probably modest when you break the numbers down.
But the overall change in pricing for this year, just curious if you can comment directionally if one of the two segments was a bigger contributor to that? I guess, on Ag Tony, you’ve called out the risk on Ag since late or early calendar year, early part of the calendar year.
So, I’m just curious if that’s the change or in light of what you just mentioned in terms of the steep drop-off in construction. Just where the delta if any has been greater between the two segments? Thank you..
Sure. Certainly if you look at our guidance for the year, last quarter we were at 2 points for fiscal year ‘15 and our current guidance is one point. I’ll start with recognizing that both last quarter and this quarter there is some fair amount of rounding to get to that whole number. So we’ve been fluctuating candidly right around 1.5 points.
And we just happen, the last quarter it rounded up and this quarter rounds down. Now, so there hasn’t been a substantial change in the pricing environment since last quarter. And I would say it’s a little bit of both. Certainly I wouldn’t point all to Ag & Turf I mean Construction & Forestry continues to be a challenging environment.
We have competitors in the marketplace who are very aggressive on pricing right now. And that hasn’t changed. And if anything has potentially gotten a bit stronger over the year. And so, it is a little bit of a decrease in terms of price realization really coming from both. Okay, and with that we’ll go to next caller..
Next question will be from Ann Duignan with JPMorgan Securities. Please go ahead with your question..
Hi, good morning guys..
Hi Ann..
And my question is around your outlook for U.S. farm cash receipts, Tony there is one thing that JPMorgan and Deere have always agreed on and that’s the very strong correlation between cash receipts and equipment sales.
So, in an environment where you’re forecasting a decline in 2016 cash receipts, if that holds up and I realize that it’s a forecast, then isn’t it inconceivable that you would be able to forecast an increase in equipment sales at this point?.
Couple of things there. First of all, keep in mind as you think about cash receipts and I think we would agree on this as well, it’s not necessarily one-for-one in the sense of 2016 cash receipts driving 2016 sales. Remember it’s a combination of both current year and prior year.
So, as you look at while it’s relatively flat from ‘15 to ‘16, when you look at the 2014/2015 combination that drove last year’s sales, and the 2015/2016 cash receipts looking in into next year, you’d have to argue that it would be down even more than what just the single year-over-year implications would be.
What I would tell you is, at this point given that outlook in cash receipts, given what we’re seeing and in the very early stages of our early order programs it is likely that you would see some reduction, further reduction in large Ag sales retail sales next year..
Okay. That was my question. Thank you, Tony..
Thank you. Next caller..
Next question will be from Andy Casey with Wells Fargo Securities. Please go ahead with your question..
Thanks. Good morning everybody..
Hi Andy..
I’m just trying to bridge the operating profit elements, tax and credit guidance for ‘15 to the $1.8 billion net income guidance.
Is there any sizeable change in other income or interest expense that’s going to pull down the net income?.
Keep in mind, and again, I hate using this explanation. But do remember that our operating profit outlook forecast for both Ag & Turf and C&F are rounded numbers. And so, it can drive some differences as you come down to operating profit.
I wouldn’t cite anything on any of those factors that you just pointed out that would be a significant change for the year. Obviously on the tax rate, we are as normal. We continue to assume no discreet items and tax rate being in that 34% to 36% range. We’ve had some positive discreet items through the year that have pulled the year-to-date rate down.
But we’d use that 34% to 36% for the forward-looking period but outside of that nothing really noteworthy that I could point to..
Okay, thank you..
Thank you. Next caller..
Next question will be from Mike Shlisky of Global Hunter Securities. Please go ahead with your question..
Good morning guys..
Good morning..
Last quarter you said in the call that summer weather the crus of the growth story going forward. And if the weather cooperates and yields are above trend-line, it would be challenging to see improvement anywhere around the globe in 2016. But here we are, and it does look in fact like yields will be above trend-lines.
So, I’d kind of ask you to follow-up on last quarter, I guess, do you still stand by your statement, and therefore, is the general direction down for 2016 in all regions of the world?.
I would - certainly I would say that I would be a little careful to extrapolate what happens in the U.S. drives global markets. So you would really have to look at that statement would be true if you look at production on a global basis being positive than on a global basis there would be certainly some challenges to see some increases.
And as you look, you see some varying weather patterns but not of any kind of significant factor in that regard.
Again, as we look into next year, well we don’t have of course any guidance until next quarter, we are starting to see some positive signs coming from Europe in that regard that certainly as you look at other parts of the world, we’ll see what happens with the growing conditions in Brazil as we move forward.
They’re heading towards planting season now and we’ll see what factors might be driven there. Keep in mind as we go into 2016, we did have some favorable weather conditions, El Nino actually strengthened through the summer. And that certainly bodes well normally for U.S. market or growing areas.
But keep in mind that can have some more negative and dry impact on other parts of the world.
So, as you think about weather, there are a number of regions of the world that we would point to on a watch-list if you will of what impact El Nino may have, when you think about Southeast Asia, India, Australia, even Brazil and Argentina, quite often that can drive some very wet spring summer type of weather, which a little bit of extra moisture is good in some cases, but if it’s excessive obviously that can have some negative ramifications as well.
So, we’ll see how things develop as we move forward for the rest of the world. But certainly we did have a very good summer here in the U.S. from a weather perspective at least in aggregate. And you’re seeing that reflected in the guidance or the outlook for yields..
Hi Mike, this is Raj. Let me add that broader picture, the weather has been good so far and production for grains on a global basis are likely to be good.
Now, the other side of the equation, demand has grown as well, and that’s always been what we are saying, if you take since the mid-90s the demand for grains have grown consistently and it’s grown very nicely this year as well. So, the demand-supply equilibrium is still pretty tight.
You again see like June/July type conditions where, if there is excess rain or assumptions of any shortfall in weather conditions and the prices just vary quickly. So, again, the demand side is also very healthy..
Great point. Thanks..
Thank you. Next caller..
Next question will be from Eli Lustgarten with Longbow Research. Please go ahead with your question..
Good morning, everyone..
Hi Eli..
Pardon my voice.
Can we get some comment, as you look at the fourth quarter and actually on decrementals in the quarter for the fourth quarter, is there anything happening that will alter this, the kind of decremental we saw in the third quarter into the fourth quarter, are we seeing the same levels? And the second part of it is, production being held up and inventory built because of the Labor Contract on October 1 that you’re maybe developing a little bit of a strike an edge inventory being for yourself?.
As you think about fourth quarter and decrementals, implied within the forecast if you look at sequentially from third quarter to fourth quarter you would see some higher decrementals. So it would be around 32% for equipment ops is roughly, what’s implied there.
But keep in mind you also have a fourth quarter where we’re forecasting the largest reduction in terms of year-over-year sales on a percentage basis at that 24% reduction. And so, the next closest quarter would have been first quarter where our decrementals were 35%.
So, again I would argue sequentially would be a little higher decremental but still very good performance and especially relative to what we in the first quarter, would be very very strong. There was a hint at the UAW contract we’ll begin negotiations later this month to officially kick those off.
Beyond that as agreed on with UAW we really just have no comments related to that. And we’ll have to leave that there. So, we’ll move on to the next caller..
Thank you..
Thank you..
Next question will be Mig Dobre with Robert W. Baird & Company. Please go ahead with your question..
Good morning everyone. I think I’m going to stick with the same line of thinking as Eli here. And obviously, you guys have done a great job in terms of decrementals and in A&T considering the headwinds that you’re dealing with.
But I’m wondering here, can you hold these levels of decrementals in to 2016 given that we’re probably talking about yet another decline.
I’m wondering if there is more left on variable cost that you can do or are we getting to the point that we’re talking about something that requires larger restructuring, more permanent cost take-out if you would?.
Okay Mig, this is Raj. Let me take that. Now, you’re asking kind of hypothetical question. For 2016, now don’t take this answer as indicating any forecast for 2016, right. So the answer depends on the mix of products, the level of softness we’re going to see or level of upside we might see in 2016 and several other factors.
Now, if we assume all of the factors stay the same and say demand for all product lines are down by 10% from the 2015 forecasted levels, we should be able to deliver less than 40% decremental margins like we did this year. And remember, our units prepare not only for the forecasted scenario but also for downside and upside scenarios.
And we expect to manage assets and costs with discipline as always to deliver at least 12% operating, return on operating assets at about 80% of mid-cycle. And at the enterprise level, we have plans in place for 2016 SA&G, R&D and on the cash side capital expenditures.
And if we are able to execute with discipline to our plans as we normally have, we should deliver decent decremental or incremental margins depending on the scenario we face..
That’s helpful. Thank you, Raj..
Thank you. Next caller..
Next question will be from David Raso of Evercore ISI. Please go ahead with your question..
Thank you. I apologize in advance for making this a math question, but guys, I’m sorry I need to understand this because obviously the fourth quarter is going to influence how people think about ‘16.
I know you mentioned rounding Tony but I heard you correctly, C&F margins for the full year 10%, Ag & Turf 8%, that’s just a clarification, correct me if I’m wrong..
That’s correct, yes..
If that’s the case, you’re implying the Construction & Forestry margins in fourth quarter to go up from 8.4% this quarter to 10.3%.
You’re implying the segment profits to be at a level that does not collaborates a net income number to get the full-year to $1.8 billion, I mean, it’s literally like $0.30 of EPS off, it’s a difference between $0.65 implied to the fourth quarter versus roughly $0.95.
So, I apologize but if you can please just for modeling here for the whole street going forward, can you help us understand that’s not rounding? If you stick with your Ag, and you go well, that the wiggles in Construction, it’s the difference between saying C&F margins are 10% in the fourth quarter or break-even.
So, please just indulge us, walk us through what are you really implying about segment margins for the fourth quarter or are you maybe sandbagging the net income implied to the fourth quarter.
Just the math, it just doesn’t make sense?.
I’m not following necessarily your math on, especially on C&F..
Tony, the math, am I wrong you’re saying sales for the year at $6.252 billion right, that’s 5% down, 10% margins are $625 million, that’s a full year EBIT, we only have $464 million year-to-date, so you need profits of $161 million in the fourth quarter to get your full-year C&F.
And on these revenues that’s a 10.3% margin for the fourth quarter its, just the math?.
If you do a full 10% and if that 10% was exactly 10.0%, I would agree with you. But as I said before, remember, when we say 10% that’s anywhere from 9.5% to 10.4% round to….
I don’t mean to make this a math question, but the fourth quarter margin on C&F, even if you get anywhere near that rounding issue, it’s implying a segment EBIT for the whole company well above what you’re implying net income to be to the fourth quarter, I mean, it’s a positive story, maybe it is cushion in the net income number and you think the segments do these numbers, and that’s great.
So, I’m not making a bullish or bearish comment here, I’m just trying to make sure I understand that math doesn’t make sense, it could wildly swing the C&F margin for the fourth quarter and thus influence people’s thoughts on how they model C&F into ‘16? And if need to take it offline that’s fine, but this is not rounding?.
We will have to take it offline, but remember again as I said, this is both the margins are rounded. And so, again, just like we had with pricing there are times when you’re rounding it can be more aggressive than other times. So you have to take that into consideration as you’re trying to reconcile down to where we are with our net income number.
And so, beyond that there is really not much more I can say. When we follow-up later, we can certainly discuss this a bit more..
I appreciate it. And again, I apologize for the math. I just wanted to clarify. So thank you. We’ll talk later..
Thank you. Next caller..
Next question will be from Vishal Shah of Deutsche Bank. Please go ahead with your question..
Yes, hi, thanks for taking my question. Tony, can you maybe comment on the extent of over capacity that you think is coming out of your oil patch and how long it will take to get some of that capacity to be absorbed and the headwinds to overcome? Thank you. .
C&F. Energy Sector. .
I think from our perspective, our dealers tend to react pretty quickly when they see some of those changes in terms of their end demand.
We are hearing, and again, as Susan pointed out in her comments, when you think about C&F, there is little bit of dichotomy because you talk to our contractors, our dealers, the sentiment is generally - fairly positive especially outside of those energy impacted areas.
The underlying fundamentals that we would normally point to are actually fairly positive year-over-year. We’re just seeing a softness in orders. And certainly in energy is weaker year-over-year.
You’re hearing some, there is commentary about some of the independent rental companies for example shifting inventory out of those areas that are more energy dependent into the rest of the country.
And that is in fairly large sizes, some large auctions and in places like Western Canada, in more recent months, so those sorts of things can have some impact. So, again, we’ll see as we move forward where this market ends up going.
But both in current year as well as you look out into 2016, most of the indications from a general economic perspective would be relatively positive. But again, as I started to say, our dealers respond quickly with our order fulfillment process and the ability for them to replenish equipment very rapidly.
They tend to when there is uncertainty, they tend to pull-back quickly and adjust their inventories very rapidly which is exactly what we would hope to see. And that’s really what we’ve seen in the quarter as well as is those dealers making those adjustments quickly. And with that, we’ll go ahead with the next caller..
Next question is from Nicole DeBlase with Morgan Stanley. Please go ahead with your question..
Yes, thanks good morning guys..
Good morning..
I don’t know what’s going to happen, but I’m going to try to ask this in a really simple way.
So, pricing you guys are now seeing 1% growth for the full year, my math suggests that that implies negative pricing in the fourth quarter, can you just confirm if you think pricing goes negative in 4Q or if it’s just decelerating from what we’ve seen in 2Q and 3Q?.
Yes, our forecast would not be negative in the fourth quarter. Keep in mind as you think about that as I mentioned earlier, remember there is rounding in that number.
So, even within some of the other prior quarters, third quarter for example, we were actually running much closely to that 1.5 points versus, even in our prior forecast when you saw the 2 points we were rounding up to that 2 points. Now we’re rounding down to 1 point. And so, the implied change from last quarter to this quarter isn’t a full point..
Okay. That makes total sense, thanks for clarifying..
And just to clarify, both divisions while we don’t talk about details by division, both divisions are forecasting positive price in the fourth quarter..
Okay, thank you..
Thank you. Next caller..
Next question will be from Joel Tiss with BMO Asset Management. Please go ahead with your question..
Hi, I just have one for Raj.
I just wondered if you can talk to us why the free cash flow seemed so weak in the quarter or for the year-to-date given how much inventories are coming down?.
So, I’m not sure why you’re saying it’s weaker. The previous forecast for cash flow from operations was $3.4 billion, the current is about $3.2 billion, but $100 million should be explained by our net income in our guidance reduction from $1.9 billion to $1.8 billion, and the rest of that is essentially working capital.
By the way the $3.2 billion, as we actually achieve would be I think the third best in recent history if not the third best ever..
My question was about free cash flow though not operating and year-to-date it’s about $800 million down from $1.5 billion last year.
And so, with almost $1 billion of inventory coming out year-to-date I wondered why it looks like it’s a lot lower than just the inventory reduction?.
I think we look at operating cash flow, if you look at - if you reduce the capital, the capital expenditures are actually, our forecast for capital expenditures, last quarter to this quarter has actually come down. So, I still am not adding up what you’re adding up yet, so..
Okay, all right..
We can take that offline too and talk about a little bit more detail, but yes, actually again, I think as you look for the year, we’re certainly continuing to forecast we think very strong cash flow, down a little bit as receivables and inventory adjusted in the quarter versus prior guidance, is that adjusted in the quarter but still very healthy level of cash flow.
Okay, next caller..
Next question will be from Seth Weber with RBC Capital Markets. Please go ahead with your question..
Hi, good morning everybody..
Hello..
Hello, hi, can you hear me?.
I can..
Great, thanks. So, the decremental margins in the Construction business, Construction & Forestry about 29%, it looks like you’re forecasting something around 30% for the fourth quarter.
If revenues are down next year, is the 30% decremental the right way to think about Construction & Forestry for next year? And maybe can you comment on mix that you’re seeing there?.
Yes, I think normally we would be, some of that can be mix driven to your point. And I think as you think about that decremental, especially in the third quarter and again in the fourth quarter, keeping in mind some of that is caused by the rapid change in the environment.
So, as you think about pulling some of the levers we would pull, those sorts of things, there are lead times on that. So, if we would continue to see negative sales going into 2016, certainly that division would be looking at ways to improve the decremental sounds like an odd way to say it, but to see lower levels of decrementals..
Lower, relative to the 30%?.
Yes..
Okay, thank you very much..
Thank you. Next caller..
Next question will be from Ross Gilardi with Bank of America Merrill Lynch. Please go ahead with your question..
Hi, good morning everybody..
Hi Ross..
I guess, I just want to ask you quickly about South America, and you’ve taken your outlook down for Ag again. But I mean, the data that’s come out year-to-date still feels like a lot worse than that outlook. So, what are you seeing there, I mean, is the data overall in both Ag and Construction in Brazil just feel terrible.
And I know Deere’s obviously bullish on the long-term.
But any signs of stability at all, why down only 20% to 25%?.
Well, first of all, I would keep one thing to keep in mind is as you’re looking at year-to-date data out of Brazil, that’s a calendar basis.
And we would be looking at a fiscal basis, so we still have within our outlook for fiscal 2015 we still have November/December of last year where those FINAME rates were still at very low levels relative to where they are today.
And so I think that maybe some of the change in terms of what our outlook is versus maybe what you’re seeing in the calendar year-to-date numbers..
Okay.
Just can you comment at all? It was all, meant to be kind of wrapped up in one question, just your thoughts on stabilization at all there? It just doesn’t feel like the data – it feel like the data is still in the process of getting worse not better?.
Yes, I think it’s FINAME financing I would argue has created some stabilization with the announcement earlier this year of rates really through next June of 2016. The funding seems to be appropriate, so they didn’t increase it from where rates went to in April of this year.
And so, there is some stability there of course, there is always risk that that can change. And again, the funding that was announced is, we believe at a very appropriate level for the business, so that’s one positive aspect.
But I think FX creates certainly uncertainty in the environment, farmers there have benefited from the weakening of the real in this year as they sell their crops in U.S. dollars and they convert that back. It’s actually kept their cash receipts and margins pretty favorable.
But there is always the risk of when does that change and move back the other direction. So, there is uncertainty there. And more importantly just around the general economy and that doesn’t seem to be seeing much stabilization at this point. I’d argue that’s probably the biggest risk as we move next year..
Got it, thanks Tony..
Okay. Thank you. Next caller..
Next question will be from Kwame Webb with Morningstar. Please go ahead with your question..
Good morning everyone..
Good morning..
So, maybe just a little bit of a longer-term question, I know you guys have been doing a lot on the Telematics front, recent acquisition in Brazil.
Can you just kind of talk about what are the product development priorities there? And then just any commentary on what if renewal rates been for products like JDLink once customers get beyond the trial period?.
Yes, at this point we really haven’t talked about any kind of renewal rate publicly and that sort of thing but clearly as we’ve talked about longer term from intelligence in machinery that’s a key focus that we continue to have especially around machine and job optimization functions.
From an R&D perspective I think we’ve talked about as well, certainly increasing the amount that we’re spending in that area today. What we spend on intelligence would be comparable to the type of R&D we would have on things like large tractors or combines. So it’s certainly right up in parity.
With that and again just reflects the importance that we see of intelligence as we move forward. And we think we have a great opportunity to continue to provide efficiency to our customers through intelligence and believe that will be a way that we continue to differentiate as we move forward..
Just, if you aren’t willing to give like a hard number, maybe just some commentary on whether it’s trended, renewal rates have been in-line, below or better than expectations?.
Yes, that’s just not something we’ve commented on publicly. So we’re going to have to move on to the final call. We have time for one more call. Thank you..
Your final question will be from Larry De Maria with William Blair & Company. Please go ahead with your question..
Hi, thanks, hi Tony. I guess, not to go back and harp on the book order but if they’re similar to last year, obviously that implies down double-digit, which means that large Ag probably is down like you said. I think you would hope for a flat demand next year and have inventory in shape, which would give you positive delta for next year.
So, I’m just wondering where we stand now, do you think Deere and field inventory can get into relatively decent shape at year-end? And then therefore what kind of order of magnitude if not do we need in production cuts into next year do you think to kind of right-size things?.
Right. First of all I want to be clear we did not have guidance on 2016. I think a lot of people implied some of our commentary to assume we were looking at flat for 2016.
We were using that as an example, just like Raj earlier mentioned if it were down 10% what would our decremental margins be, I want to be clear we are not trying to signal down 10% for next year on all product lines, that’s just an example.
And we similarly use that really to reflect the fact that as we under-produce this year, you don’t need an increase in end-markets, retail sales to necessarily see an increase in Deere sales. But clearly as you look at the early order programs, I want to be clear there as well.
We’re down year-over-year we’re not talking about seeing the type of magnitude of decrease that we saw last year but certainly down directionally is what we’re seeing in those early order programs at this point. So, in that regard we certainly have under-produced this year from a new inventory perspective.
Certainly we feel like, our inventories will be in good shape. But as I mentioned earlier in the call, we will have some additional challenges to work through next year on used equipment especially as it relates to large tractors. Beyond that there is not much more I can really say about 2016..
End of Q&A:.
So, we appreciate your call. But we’re going to have to wrap up. Again, thank you for your participation. And we look forward to the call backs as we go through the rest of the day. Thank you..
Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. All parties may disconnect at this time.Deere & Company (DE) Q3 2015 Earnings Conference Call August 21, 2015 10:00 AM ET.
Tony Huegel - Director-Investor Relations Susan Karlix - Manager, Investor Communications Raj Kalathur - Chief Financial Officer & Senior Vice President.
Jamie Cook - Credit Suisse Steven Fisher - UBS Adam Uhlman - Cleveland Research Company Jerry Revich - Goldman Sachs Tim Thein - Citigroup Ann Duignan - JPMorgan Securities Andy Casey - Wells Fargo Securities Mike Shlisky - Global Hunter Securities Eli Lustgarten - Longbow Research Mig Dobre - Robert W.
Baird & Company David Raso - Evercore ISI Vishal Shah - Deutsche Bank Nicole DeBlase - Morgan Stanley Joel Tiss - BMO Asset Management Seth Weber - RBC Capital Markets Ross Gilardi - Bank of America Merrill Lynch Kwame Webb - Morningstar Larry De Maria - William Blair & Company.
Presentation:.
Good morning and welcome to Deere & Company’s Third Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session of today’s conference. I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations. Thank you. You may begin..
Thank you. Also on the call today are Raj Kalathur, our Chief Financial Officer; and Susan Karlix, our Manager of Investor Communications. Today, we’ll take a closer look at Deere’s third quarter earnings then spend some time talking about our markets and our outlook for the remainder of the year. After that, we’ll respond to your questions.
Please note that slides are available to complement the call this morning. They can be accessed on our website at www.johndeere.com. First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company.
Any other use, recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking comments concerning the company’s plans and projections for the future that are subject to important risks and uncertainties.
Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.
This call may also include financial measures that are not in conformance with accounting principles generally accepted in the United States of America or GAAP.
Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/earnings under Other Financial Information.
Susan?.
price realizations of about one point; favorable raw material costs; an unfavorable mix of product and Tier 4 product costs. With respect to R&D expense on slide 20, R&D was down 4% in the third quarter, including four points of negative currency translation. So, essentially flat on a constant exchange basis.
Our 2015 forecast now calls for R&D to be down about 2% for the full year, including about three points of negative currency translation. Moving now to slide 21, SA&G expense for the equipment operations was down 7% in the third quarter, including five points of currency translation.
Our 2015 forecast contemplates SA&G expense being down about 11% with landscapes, water, incentive compensation and currency accounting for about nine points of the change. Turning to slide 22, pension and OPEB expense was up $25 million in the quarter and is forecast to be up about $70 million in 2015.
On slide 23, the equipment operations tax rate was 31% in the quarter. For the remainder of fiscal 2015, the projected effective tax rate is forecast to be in the range of 34% to 36%. Slide 24 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $3.2 billion in 2015.
The company’s fourth quarter financial outlook is on slide 25. Net sales for the quarter are forecast to be down about 24% compared with 2014. This includes about one point of price realization with unfavorable currency translation of about five points.
Turning to slide 26 and the full-year outlook, the forecast now calls for net sales to be down about 21%. Price realization is expected to be positive by about one point with negative currency translation of about four points. Finally, our forecast now calls for net income attributable to Deere & Company to be about $1.8 billion for the full year.
As a closing thought, John Deere is well on its way to another good year and doing so in the face of some pretty significant headwinds. Our performance highlights our success establishing a wider range of revenue sources and a more durable business model.
As a result, the company is showing great resilience and discipline and performing much better than in previous farm downturns. Longer term, we believe our steady investment in new products and geographies will make Deere the provider of choice for a growing global customer base.
What’s more, we believe the impact of these actions will become increasingly clear as the end-markets for our products start moving ahead. These are just some of the reasons we have confidence in the company’s present course and in our ability to deliver significant value to customers and investors well into the future.
I’ll now turn the call back over to Tony..
Thanks Susan. Now we’re ready to begin the Q&A portion of the call. Our operator David will instruct you on the polling procedure. But, in considerations of others and our hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue.
David?.
[Operator Instructions]. Your first question today will be from Jamie Cook with Credit Suisse. Please go ahead with your question..
Hi, good morning..
Hi Jamie..
Hi, I guess two questions.
One, Tony, could you or Susan or Raj speak to where you guys are relative to expectation with regards to inventory in the channel, that’s a big concern in the market and how that sort of impacts2016? And whether the excess inventory rolls into ‘16? And then I guess my second question is if you could just give us some color on the order book, the early order book so far? Thanks..
In the spirit of one question, I’ll go ahead and answer your first one and then we’ll pick the second one up hopefully from someone else or I’ll ask you to get back in the queue, okay..
Okay..
So, as we think about inventory, and I’ll split it between new and used inventory, and I’m assuming, you’re primarily looking at large Ag in the U.S.
and Canada?.
Of course..
Okay. As you think about new inventory and I would say similar situation to what we talked about in the past, in the sense that we continue to have new inventory well below the competitors. We tend to have 50% or less as you look at inventory as a percent of sales and that continues to be the case.
We continue to evaluate that of course as we go through the year and see various changes in the market. Used equipment continues to be a challenge. We are making good progress on used equipment. As you look at some of the factors from a large Ag perspective, we’re down about 10% year-over-year in July in terms of where we’re at with used inventory.
Pricing is holding in okay, if you look at it kind of from a two-year average, we would be slightly below that. But believe we continue to maintain a healthy premium versus our competition.
And again, we are making progress but it’s likely we would expect these efforts will continue into 2016, we continue to coordinate with our dealers to assist with the movement of the used equipment. But it is still especially on large tractors continues to be a challenge that we’re working on within the market..
Okay, thanks. I’ll get back in queue..
Thank you. Next caller..
Your next question will be from Steven Fisher with UBS. Please go ahead with your question..
Great, thanks, good morning.
So, I guess, I’ll pick up on the second half of Jamie’s question on how early order programs are trending year-over-year and specifically if you could talk also about your approach to incentives year-over-year on the early order program?.
One of the challenges that we do have in terms of comparison year-over-year is there are some timing differences in terms of when we have various phases of the early order programs. And the closing of the first phase is a bit different year-over-year.
Now, having said that, so, I just want to make sure I have that clearly out front but directionally what we’re seeing is order activity on those early order programs are off year-over-year. And just to be clear, what we’re talking about is planters sprayers and tillage.
A lot of people will have questions around combine early order programs I’m guessing, but remember those just started up in early August. And candidly it’s just too early to make any type of conclusions related to where that program is.
One of the challenges we do have also as you think about the spring seasonal early order programs, and where we would think that perhaps in this current environment where they may not be as close of a correlation to overall, or as good of an indicator of overall demand going into next year, is the fact that they do have a much higher level of stock component versus retail orders in those spring seasonal order programs.
And again, given the dynamics in the market, there is candidly not as much pressure to put orders in at this particular point. And we really believe the combine early order program, as that continues to develop, will be a better indicator of actual demand.
And again, I want to be clear, I’m not trying to skirt the issue, certainly we are seeing in those early order programs, orders being off year-over-year which historically would indicate some additional weakening as you move into 2016..
Can you say what degree of magnitude they’re off year-over-year?.
Similar to last year we aren’t going to discuss the magnitude again, because and some of that goes back to the timing of the ending of the early order program. And it could give some misleading numbers both, more positive or more negative depending on the program in terms of when they actually close.
So, but again, it is directionally down year-over-year. So we will go to the next..
Thanks a lot..
Okay, thank you. Next question..
Next question is from Adam Uhlman of Cleveland Research Company. Please go ahead with your question..
Hi guys, good morning..
Good morning..
Could you talk a little bit more about what you’re seeing in Europe, you mentioned that you’re seeing some early stage of recovery in that market, maybe talk to your orders on a year-over-year basis for the quarter, do you expect to hit positive sales anytime soon? What are you looking for to confirm that early stage of recovery? Thanks..
Sure. I think some of that, as you look at the general economy, we’re starting to see that.
As you look, there are different confidence indicators that are available as well, and those are starting to trend more positive still – I want to be clear, I mean, they’re still in more negative territory but directionally moving the right direction in the sense of a more positive direction in terms of overall sentiment.
And we are, and as you look at the forecast change, obviously for Ag & Turf we did bring the sales forecast down slightly but there was, there were couple markets that were a little weaker but some offsetting strength in Europe.
So we’re seeing a little bit of improvement but as Susan pointed out, we’re seeing early indications of the possibility that you’re going to start to see some turnaround there..
Okay, thank you..
Great. Thank you. Next question..
Next question will be from Jerry Revich of Goldman Sachs. Please go ahead with your question..
Hi, good morning..
Good morning..
I’m wondering if you can talk about the decision not to cut production more aggressively in the fourth quarter in Construction & Forestry to reduce that channel inventory.
It looks like you’re still planning to build receivables and inventories by $375 million for the year? I guess I’m wondering is that behind the lower margin guidance for 4Q, are you giving yourselves room to reduce the inventory and receivables or should we think that as first half 2016 event?.
Remember, as you think about Construction & Forestry, and we talked about this earlier in the year because there was some question as to why ending receivables and inventory were up as much as they were versus the forecasted sales increase.
And as you recall, there were some changes in 2015 related to wholesale terms which we believe was going to drive some higher level of receivables and that has been the case. So, that’s part of what’s driving that. Now, as you look at the underlying forecast for receivables and inventory, it looks like there was just a slight reduction.
Actually, what’s underlying there is more of a reduction in receivables, so field inventory with some offsetting increase in inventory so Deere company-owned inventories. And again, some of that have to do with final Tier 4 transitions, and plans along that way, as well as recognizing this has been a pretty rapid change in the business environment.
There was about seven-point change in our sales outlook. I’m sorry, apparently I said a decrease in receivables, there is an increase in receivables, no, no, a decrease in the forecasted receivables, in the level of forecast.
So, again, we’re still - just to be clear, we’re still forecasting an increase in receivables but it’s less of an increase versus our prior guidance. And inventory is a little higher than in our prior guidance. And again, a combination of final Tier 4 and as well as just the rapid change in that business environment from an inventory perspective..
I guess, Tony, part of the question there, are you planning to adjust that in 4Q or is that an early ‘16, you mentioned the quick change in the business environment.
Just can you clarify?.
We would always be evaluating as we move forward, and this would be true not just for C&F, this would be true for Ag & Turf as well. We are always evaluating business environment and what we feel we need from an inventory or receivables. So, whether it’s a company owned inventory or a field inventory level.
And what I can tell you is we will make those changes as quickly as we can. And I think fourth quarter last year is a good example of our ability to make those changes very rapidly, if we see the environment changing and necessitating that, so..
Thank you..
Thank you. Next caller..
Next question will be from Tim Thein of Citigroup. Please go ahead with your question..
Thank you, and good morning..
Good morning..
Just one question is on pricing and the change albeit probably modest when you break the numbers down.
But the overall change in pricing for this year, just curious if you can comment directionally if one of the two segments was a bigger contributor to that? I guess, on Ag Tony, you’ve called out the risk on Ag since late or early calendar year, early part of the calendar year.
So, I’m just curious if that’s the change or in light of what you just mentioned in terms of the steep drop-off in construction. Just where the delta if any has been greater between the two segments? Thank you..
Sure. Certainly if you look at our guidance for the year, last quarter we were at 2 points for fiscal year ‘15 and our current guidance is one point. I’ll start with recognizing that both last quarter and this quarter there is some fair amount of rounding to get to that whole number. So we’ve been fluctuating candidly right around 1.5 points.
And we just happen, the last quarter it rounded up and this quarter rounds down. Now, so there hasn’t been a substantial change in the pricing environment since last quarter. And I would say it’s a little bit of both. Certainly I wouldn’t point all to Ag & Turf I mean Construction & Forestry continues to be a challenging environment.
We have competitors in the marketplace who are very aggressive on pricing right now. And that hasn’t changed. And if anything has potentially gotten a bit stronger over the year. And so, it is a little bit of a decrease in terms of price realization really coming from both. Okay, and with that we’ll go to next caller..
Next question will be from Ann Duignan with JPMorgan Securities. Please go ahead with your question..
Hi, good morning guys..
Hi Ann..
And my question is around your outlook for U.S. farm cash receipts, Tony there is one thing that JPMorgan and Deere have always agreed on and that’s the very strong correlation between cash receipts and equipment sales.
So, in an environment where you’re forecasting a decline in 2016 cash receipts, if that holds up and I realize that it’s a forecast, then isn’t it inconceivable that you would be able to forecast an increase in equipment sales at this point?.
Couple of things there. First of all, keep in mind as you think about cash receipts and I think we would agree on this as well, it’s not necessarily one-for-one in the sense of 2016 cash receipts driving 2016 sales. Remember it’s a combination of both current year and prior year.
So, as you look at while it’s relatively flat from ‘15 to ‘16, when you look at the 2014/2015 combination that drove last year’s sales, and the 2015/2016 cash receipts looking in into next year, you’d have to argue that it would be down even more than what just the single year-over-year implications would be.
What I would tell you is, at this point given that outlook in cash receipts, given what we’re seeing and in the very early stages of our early order programs it is likely that you would see some reduction, further reduction in large Ag sales retail sales next year..
Okay. That was my question. Thank you, Tony..
Thank you. Next caller..
Next question will be from Andy Casey with Wells Fargo Securities. Please go ahead with your question..
Thanks. Good morning everybody..
Hi Andy..
I’m just trying to bridge the operating profit elements, tax and credit guidance for ‘15 to the $1.8 billion net income guidance.
Is there any sizeable change in other income or interest expense that’s going to pull down the net income?.
Keep in mind, and again, I hate using this explanation. But do remember that our operating profit outlook forecast for both Ag & Turf and C&F are rounded numbers. And so, it can drive some differences as you come down to operating profit.
I wouldn’t cite anything on any of those factors that you just pointed out that would be a significant change for the year. Obviously on the tax rate, we are as normal. We continue to assume no discreet items and tax rate being in that 34% to 36% range. We’ve had some positive discreet items through the year that have pulled the year-to-date rate down.
But we’d use that 34% to 36% for the forward-looking period but outside of that nothing really noteworthy that I could point to..
Okay, thank you..
Thank you. Next caller..
Next question will be from Mike Shlisky of Global Hunter Securities. Please go ahead with your question..
Good morning guys..
Good morning..
Last quarter you said in the call that summer weather the crus of the growth story going forward. And if the weather cooperates and yields are above trend-line, it would be challenging to see improvement anywhere around the globe in 2016. But here we are, and it does look in fact like yields will be above trend-lines.
So, I’d kind of ask you to follow-up on last quarter, I guess, do you still stand by your statement, and therefore, is the general direction down for 2016 in all regions of the world?.
I would - certainly I would say that I would be a little careful to extrapolate what happens in the U.S. drives global markets. So you would really have to look at that statement would be true if you look at production on a global basis being positive than on a global basis there would be certainly some challenges to see some increases.
And as you look, you see some varying weather patterns but not of any kind of significant factor in that regard.
Again, as we look into next year, well we don’t have of course any guidance until next quarter, we are starting to see some positive signs coming from Europe in that regard that certainly as you look at other parts of the world, we’ll see what happens with the growing conditions in Brazil as we move forward.
They’re heading towards planting season now and we’ll see what factors might be driven there. Keep in mind as we go into 2016, we did have some favorable weather conditions, El Nino actually strengthened through the summer. And that certainly bodes well normally for U.S. market or growing areas.
But keep in mind that can have some more negative and dry impact on other parts of the world.
So, as you think about weather, there are a number of regions of the world that we would point to on a watch-list if you will of what impact El Nino may have, when you think about Southeast Asia, India, Australia, even Brazil and Argentina, quite often that can drive some very wet spring summer type of weather, which a little bit of extra moisture is good in some cases, but if it’s excessive obviously that can have some negative ramifications as well.
So, we’ll see how things develop as we move forward for the rest of the world. But certainly we did have a very good summer here in the U.S. from a weather perspective at least in aggregate. And you’re seeing that reflected in the guidance or the outlook for yields..
Hi Mike, this is Raj. Let me add that broader picture, the weather has been good so far and production for grains on a global basis are likely to be good.
Now, the other side of the equation, demand has grown as well, and that’s always been what we are saying, if you take since the mid-90s the demand for grains have grown consistently and it’s grown very nicely this year as well. So, the demand-supply equilibrium is still pretty tight.
You again see like June/July type conditions where, if there is excess rain or assumptions of any shortfall in weather conditions and the prices just vary quickly. So, again, the demand side is also very healthy..
Great point. Thanks..
Thank you. Next caller..
Next question will be from Eli Lustgarten with Longbow Research. Please go ahead with your question..
Good morning, everyone..
Hi Eli..
Pardon my voice.
Can we get some comment, as you look at the fourth quarter and actually on decrementals in the quarter for the fourth quarter, is there anything happening that will alter this, the kind of decremental we saw in the third quarter into the fourth quarter, are we seeing the same levels? And the second part of it is, production being held up and inventory built because of the Labor Contract on October 1 that you’re maybe developing a little bit of a strike an edge inventory being for yourself?.
As you think about fourth quarter and decrementals, implied within the forecast if you look at sequentially from third quarter to fourth quarter you would see some higher decrementals. So it would be around 32% for equipment ops is roughly, what’s implied there.
But keep in mind you also have a fourth quarter where we’re forecasting the largest reduction in terms of year-over-year sales on a percentage basis at that 24% reduction. And so, the next closest quarter would have been first quarter where our decrementals were 35%.
So, again I would argue sequentially would be a little higher decremental but still very good performance and especially relative to what we in the first quarter, would be very very strong. There was a hint at the UAW contract we’ll begin negotiations later this month to officially kick those off.
Beyond that as agreed on with UAW we really just have no comments related to that. And we’ll have to leave that there. So, we’ll move on to the next caller..
Thank you..
Thank you..
Next question will be Mig Dobre with Robert W. Baird & Company. Please go ahead with your question..
Good morning everyone. I think I’m going to stick with the same line of thinking as Eli here. And obviously, you guys have done a great job in terms of decrementals and in A&T considering the headwinds that you’re dealing with.
But I’m wondering here, can you hold these levels of decrementals in to 2016 given that we’re probably talking about yet another decline.
I’m wondering if there is more left on variable cost that you can do or are we getting to the point that we’re talking about something that requires larger restructuring, more permanent cost take-out if you would?.
Okay Mig, this is Raj. Let me take that. Now, you’re asking kind of hypothetical question. For 2016, now don’t take this answer as indicating any forecast for 2016, right. So the answer depends on the mix of products, the level of softness we’re going to see or level of upside we might see in 2016 and several other factors.
Now, if we assume all of the factors stay the same and say demand for all product lines are down by 10% from the 2015 forecasted levels, we should be able to deliver less than 40% decremental margins like we did this year. And remember, our units prepare not only for the forecasted scenario but also for downside and upside scenarios.
And we expect to manage assets and costs with discipline as always to deliver at least 12% operating, return on operating assets at about 80% of mid-cycle. And at the enterprise level, we have plans in place for 2016 SA&G, R&D and on the cash side capital expenditures.
And if we are able to execute with discipline to our plans as we normally have, we should deliver decent decremental or incremental margins depending on the scenario we face..
That’s helpful. Thank you, Raj..
Thank you. Next caller..
Next question will be from David Raso of Evercore ISI. Please go ahead with your question..
Thank you. I apologize in advance for making this a math question, but guys, I’m sorry I need to understand this because obviously the fourth quarter is going to influence how people think about ‘16.
I know you mentioned rounding Tony but I heard you correctly, C&F margins for the full year 10%, Ag & Turf 8%, that’s just a clarification, correct me if I’m wrong..
That’s correct, yes..
If that’s the case, you’re implying the Construction & Forestry margins in fourth quarter to go up from 8.4% this quarter to 10.3%.
You’re implying the segment profits to be at a level that does not collaborates a net income number to get the full-year to $1.8 billion, I mean, it’s literally like $0.30 of EPS off, it’s a difference between $0.65 implied to the fourth quarter versus roughly $0.95.
So, I apologize but if you can please just for modeling here for the whole street going forward, can you help us understand that’s not rounding? If you stick with your Ag, and you go well, that the wiggles in Construction, it’s the difference between saying C&F margins are 10% in the fourth quarter or break-even.
So, please just indulge us, walk us through what are you really implying about segment margins for the fourth quarter or are you maybe sandbagging the net income implied to the fourth quarter.
Just the math, it just doesn’t make sense?.
I’m not following necessarily your math on, especially on C&F..
Tony, the math, am I wrong you’re saying sales for the year at $6.252 billion right, that’s 5% down, 10% margins are $625 million, that’s a full year EBIT, we only have $464 million year-to-date, so you need profits of $161 million in the fourth quarter to get your full-year C&F.
And on these revenues that’s a 10.3% margin for the fourth quarter its, just the math?.
If you do a full 10% and if that 10% was exactly 10.0%, I would agree with you. But as I said before, remember, when we say 10% that’s anywhere from 9.5% to 10.4% round to….
I don’t mean to make this a math question, but the fourth quarter margin on C&F, even if you get anywhere near that rounding issue, it’s implying a segment EBIT for the whole company well above what you’re implying net income to be to the fourth quarter, I mean, it’s a positive story, maybe it is cushion in the net income number and you think the segments do these numbers, and that’s great.
So, I’m not making a bullish or bearish comment here, I’m just trying to make sure I understand that math doesn’t make sense, it could wildly swing the C&F margin for the fourth quarter and thus influence people’s thoughts on how they model C&F into ‘16? And if need to take it offline that’s fine, but this is not rounding?.
We will have to take it offline, but remember again as I said, this is both the margins are rounded. And so, again, just like we had with pricing there are times when you’re rounding it can be more aggressive than other times. So you have to take that into consideration as you’re trying to reconcile down to where we are with our net income number.
And so, beyond that there is really not much more I can say. When we follow-up later, we can certainly discuss this a bit more..
I appreciate it. And again, I apologize for the math. I just wanted to clarify. So thank you. We’ll talk later..
Thank you. Next caller..
Next question will be from Vishal Shah of Deutsche Bank. Please go ahead with your question..
Yes, hi, thanks for taking my question. Tony, can you maybe comment on the extent of over capacity that you think is coming out of your oil patch and how long it will take to get some of that capacity to be absorbed and the headwinds to overcome? Thank you..
I think from our perspective, our dealers tend to react pretty quickly when they see some of those changes in terms of their end demand.
We are hearing, and again, as Susan pointed out in her comments, when you think about C&F, there is little bit of dichotomy because you talk to our contractors, our dealers, the sentiment is generally - fairly positive especially outside of those energy impacted areas.
The underlying fundamentals that we would normally point to are actually fairly positive year-over-year. We’re just seeing a softness in orders. And certainly in energy is weaker year-over-year.
You’re hearing some, there is commentary about some of the independent rental companies for example shifting inventory out of those areas that are more energy dependent into the rest of the country.
And that is in fairly large sizes, some large auctions and in places like Western Canada, in more recent months, so those sorts of things can have some impact. So, again, we’ll see as we move forward where this market ends up going.
But both in current year as well as you look out into 2016, most of the indications from a general economic perspective would be relatively positive. But again, as I started to say, our dealers respond quickly with our order fulfillment process and the ability for them to replenish equipment very rapidly.
They tend to when there is uncertainty, they tend to pull-back quickly and adjust their inventories very rapidly which is exactly what we would hope to see. And that’s really what we’ve seen in the quarter as well as is those dealers making those adjustments quickly. And with that, we’ll go ahead with the next caller..
Next question is from Nicole DeBlase with Morgan Stanley. Please go ahead with your question..
Yes, thanks good morning guys..
Good morning..
I don’t know what’s going to happen, but I’m going to try to ask this in a really simple way.
So, pricing you guys are now seeing 1% growth for the full year, my math suggests that that implies negative pricing in the fourth quarter, can you just confirm if you think pricing goes negative in 4Q or if it’s just decelerating from what we’ve seen in 2Q and 3Q?.
Yes, our forecast would not be negative in the fourth quarter. Keep in mind as you think about that as I mentioned earlier, remember there is rounding in that number.
So, even within some of the other prior quarters, third quarter for example, we were actually running much closely to that 1.5 points versus, even in our prior forecast when you saw the 2 points we were rounding up to that 2 points. Now we’re rounding down to 1 point. And so, the implied change from last quarter to this quarter isn’t a full point..
Okay. That makes total sense, thanks for clarifying..
And just to clarify, both divisions while we don’t talk about details by division, both divisions are forecasting positive price in the fourth quarter..
Okay, thank you..
Thank you. Next caller..
Next question will be from Joel Tiss with BMO Asset Management. Please go ahead with your question..
Hi, I just have one for Raj.
I just wondered if you can talk to us why the free cash flow seemed so weak in the quarter or for the year-to-date given how much inventories are coming down?.
So, I’m not sure why you’re saying it’s weaker. The previous forecast for cash flow from operations was $3.4 billion, the current is about $3.2 billion, but $100 million should be explained by our net income in our guidance reduction from $1.9 billion to $1.8 billion, and the rest of that is essentially working capital.
By the way the $3.2 billion, as we actually achieve would be I think the third best in recent history if not the third best ever..
My question was about free cash flow though not operating and year-to-date it’s about $800 million down from $1.5 billion last year.
And so, with almost $1 billion of inventory coming out year-to-date I wondered why it looks like it’s a lot lower than just the inventory reduction?.
I think we look at operating cash flow, if you look at - if you reduce the capital, the capital expenditures are actually, our forecast for capital expenditures, last quarter to this quarter has actually come down. So, I still am not adding up what you’re adding up yet, so..
Okay, all right..
We can take that offline too and talk about a little bit more detail, but yes, actually again, I think as you look for the year, we’re certainly continuing to forecast we think very strong cash flow, down a little bit as receivables and inventory adjusted in the quarter versus prior guidance, is that adjusted in the quarter but still very healthy level of cash flow.
Okay, next caller..
Next question will be from Seth Weber with RBC Capital Markets. Please go ahead with your question..
Hi, good morning everybody..
Hello..
Hello, hi, can you hear me?.
I can..
Great, thanks. So, the decremental margins in the Construction business, Construction & Forestry about 29%, it looks like you’re forecasting something around 30% for the fourth quarter.
If revenues are down next year, is the 30% decremental the right way to think about Construction & Forestry for next year? And maybe can you comment on mix that you’re seeing there?.
Yes, I think normally we would be, some of that can be mix driven to your point. And I think as you think about that decremental, especially in the third quarter and again in the fourth quarter, keeping in mind some of that is caused by the rapid change in the environment.
So, as you think about pulling some of the levers we would pull, those sorts of things, there are lead times on that. So, if we would continue to see negative sales going into 2016, certainly that division would be looking at ways to improve the decremental sounds like an odd way to say it, but to see lower levels of decrementals..
Lower, relative to the 30%?.
Yes..
Okay, thank you very much..
Thank you. Next caller..
Next question will be from Ross Gilardi with Bank of America Merrill Lynch. Please go ahead with your question..
Hi, good morning everybody..
Hi Ross..
I guess, I just want to ask you quickly about South America, and you’ve taken your outlook down for Ag again. But I mean, the data that’s come out year-to-date still feels like a lot worse than that outlook. So, what are you seeing there, I mean, is the data overall in both Ag and Construction in Brazil just feel terrible.
And I know Deere’s obviously bullish on the long-term.
But any signs of stability at all, why down only 20% to 25%?.
Well, first of all, I would keep one thing to keep in mind is as you’re looking at year-to-date data out of Brazil, that’s a calendar basis.
And we would be looking at a fiscal basis, so we still have within our outlook for fiscal 2015 we still have November/December of last year where those FINAME rates were still at very low levels relative to where they are today.
And so I think that maybe some of the change in terms of what our outlook is versus maybe what you’re seeing in the calendar year-to-date numbers..
Okay.
Just can you comment at all? It was all, meant to be kind of wrapped up in one question, just your thoughts on stabilization at all there? It just doesn’t feel like the data – it feel like the data is still in the process of getting worse not better?.
Yes, I think it’s FINAME financing I would argue has created some stabilization with the announcement earlier this year of rates really through next June of 2016. The funding seems to be appropriate, so they didn’t increase it from where rates went to in April of this year.
And so, there is some stability there of course, there is always risk that that can change. And again, the funding that was announced is, we believe at a very appropriate level for the business, so that’s one positive aspect.
But I think FX creates certainly uncertainty in the environment, farmers there have benefited from the weakening of the real in this year as they sell their crops in U.S. dollars and they convert that back. It’s actually kept their cash receipts and margins pretty favorable.
But there is always the risk of when does that change and move back the other direction. So, there is uncertainty there. And more importantly just around the general economy and that doesn’t seem to be seeing much stabilization at this point. I’d argue that’s probably the biggest risk as we move next year..
Got it, thanks Tony..
Okay. Thank you. Next caller..
Next question will be from Kwame Webb with Morningstar. Please go ahead with your question..
Good morning everyone..
Good morning..
So, maybe just a little bit of a longer-term question, I know you guys have been doing a lot on the Telematics front, recent acquisition in Brazil.
Can you just kind of talk about what are the product development priorities there? And then just any commentary on what if renewal rates been for products like JDLink once customers get beyond the trial period?.
Yes, at this point we really haven’t talked about any kind of renewal rate publicly and that sort of thing but clearly as we’ve talked about longer term from intelligence in machinery that’s a key focus that we continue to have especially around machine and job optimization functions.
From an R&D perspective I think we’ve talked about as well, certainly increasing the amount that we’re spending in that area today. What we spend on intelligence would be comparable to the type of R&D we would have on things like large tractors or combines. So it’s certainly right up in parity.
With that and again just reflects the importance that we see of intelligence as we move forward. And we think we have a great opportunity to continue to provide efficiency to our customers through intelligence and believe that will be a way that we continue to differentiate as we move forward..
Just, if you aren’t willing to give like a hard number, maybe just some commentary on whether it’s trended, renewal rates have been in-line, below or better than expectations?.
Yes, that’s just not something we’ve commented on publicly. So we’re going to have to move on to the final call. We have time for one more call. Thank you..
Your final question will be from Larry De Maria with William Blair & Company. Please go ahead with your question..
Hi, thanks, hi Tony. I guess, not to go back and harp on the book order but if they’re similar to last year, obviously that implies down double-digit, which means that large Ag probably is down like you said. I think you would hope for a flat demand next year and have inventory in shape, which would give you positive delta for next year.
So, I’m just wondering where we stand now, do you think Deere and field inventory can get into relatively decent shape at year-end? And then therefore what kind of order of magnitude if not do we need in production cuts into next year do you think to kind of right-size things?.
Right. First of all I want to be clear we did not have guidance on 2016. I think a lot of people implied some of our commentary to assume we were looking at flat for 2016.
We were using that as an example, just like Raj earlier mentioned if it were down 10% what would our decremental margins be, I want to be clear we are not trying to signal down 10% for next year on all product lines, that’s just an example.
And we similarly use that really to reflect the fact that as we under-produce this year, you don’t need an increase in end-markets, retail sales to necessarily see an increase in Deere sales. But clearly as you look at the early order programs, I want to be clear there as well.
We’re down year-over-year we’re not talking about seeing the type of magnitude of decrease that we saw last year but certainly down directionally is what we’re seeing in those early order programs at this point. So, in that regard we certainly have under-produced this year from a new inventory perspective.
Certainly we feel like, our inventories will be in good shape. But as I mentioned earlier in the call, we will have some additional challenges to work through next year on used equipment especially as it relates to large tractors. Beyond that there is not much more I can really say about 2016..
End of Q&A:.
So, we appreciate your call. But we’re going to have to wrap up. Again, thank you for your participation. And we look forward to the call backs as we go through the rest of the day. Thank you..
Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. All parties may disconnect at this time..