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Deere & Company (DE)
ISI Industrial Conference Call
March 5, 2013 10:55 AM ET
Rajesh Kalathur – SVP and CFO
Tony Huegel – IR
Connor Zeere – ISI
Alex Blanton – Clear Harbor Asset Management
Connor Zeere – ISI
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Thank you. I’m really proud here to represent the company. It’s been around for 175 years and doing very well in 175 years. One of the things you may know about John Deere is the quality and reliability of the products to be produced. It’s been second to none in our industry.
Beginning in 2001 through 2010 we embarked on a mission to have a business that is as great as our products as well. So a couple of areas we focused on that we had not focused on prior to 2001, one was operating return on assets and second is shareholder value added. So we started that journey in 2001. Beginning in 2004 until today with the exception of – actually until today we have had positive SVA, shareholder value added, every year.
So in 2010 we looked at the tailwinds that are supporting both agriculture globally, this has more to do with the population and improvements in diet around the world, and the second is move towards more infrastructure development around the world because of the fact that more people are moving into urban areas from rural areas around the world. So those two drivers meant that we could afford to look at higher rates of growth.
So beginning 2010 – historically we have done about 6% to 7% compounded annual growth rate on our top line. 2010 to 2018 we said we are going to shoot for 9.2% compounded annually, and we’re going to do that by also increasing our operating return on sales at mid cycle from about 10% in the past to 12% and also improve our asset turns from 2.2 to about 2.5.
So if you think about prior to 2010 we were delivering – at mid-cycle volumes we were delivering operating return on sales of 10% and turns of about two, so we were doing about 20% operating return on assets. Now we are saying that we’re going to go back to 2.5% and 12% it’s almost 30%. So while at the same time we are now increasing the top line of the compound annual growth we have 9.2%. That’s the journey we’ve embarked on since 2010. We will tell you that since 2010 we have done well in that journey. The last 13 quarters we have had higher quarterly net income over the previous year’s same quarter. 11 quarterly net incomes have been record. Okay so we’ve actually performed well since we started on this new strategy.
You will also notice that in terms of top line growth at mid-cycle we think we are on target to our creating aspiration. In terms of our operating return on sales growth we’ll tell you is slightly below where we want to be and are projected at 12% operating return sales at mid- cycle.
On the asset, and again the asset grow of 2.5% is by 2018. I will tell you that has actually – we were among the best in terms of asset turns in S&P industrials. You know we have taken on a task to actually become better than what we had before while our average dollar of inventory is moving a longer distance and we have more capacity built in more locations that are not fully utilized yet. So that’s going to be even more challenging for us to achieve.
Okay. So we’re making good progress on the 9.2%. We’re making decent progress but less that where we would like to see on a 12% operating return on sales; on the 2.5% we have more work ahead of us.
With that I’ll also provide you a glimpse of where we see growth coming from in the future. In Ag, North America is the most important market for us today. South America, which has the characteristics of North American in terms of soybean, corn, cotton and larger farmers who appreciate technology in their products, it’s possibly the second most important market for us.
And our combined market shares are mid 30% in Brazil. Our tractor market share five years back was about 7%. We’ve grown that to 21% more recently when it’s grown consistently. So that’s a very important market that has additional room for growth. There’s another 17 million hectors available land that can come into agriculture, not from you know the forest areas but way south of there, an Argentina has another 15 -14 million that they can bring into agriculture that’s in pasture land and so on right now. So very promising area for us, North America then South America.
After that we would say CIS which basically includes Russia, Kazakhstan and Ukraine. Those three are very good opportunities for us in terms of Ag. And next up we have a sizeable opportunity for us is in growing our share in EU27, the Western European markets. And then we would say Asia and Africa and longer term Sub-Saharan Africa. So we have a long pipeline of opportunities in the Agree market in front of us for at least the next couple of decades.