Deere & Company (DE)

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Deere & (DE)

Q3 2011 Earnings Call

August 17, 2011 10:00 am ET


Marie Ziegler - Vice President and Treasurer

Susan Karlix - Investor Relations

Tony Huegel -

James Field - Chief Financial Officer, Principal Accounting Officer and Senior Vice President


Ann Duignan - JP Morgan Chase & Co

Jerry Revich - Goldman Sachs Group Inc.

Stephen Volkmann - Jefferies & Company, Inc.

Henry Kirn - UBS Investment Bank

Andrew Casey - Wells Fargo Securities, LLC

Eli Lustgarten - Longbow Research LLC

David Raso - ISI Group Inc.

Andrew Obin - BofA Merrill Lynch

Jamie Cook - Crédit Suisse AG



Good morning, and welcome to Deere's Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations. Thank you. You may begin.

Tony Huegel

Thank you, and good morning. Also on the call today are Jim Field, our Chief Financial Officer; Marie Ziegler, Vice President and Treasurer; and Susan Karlix, Manager of Investor Communications. Today, we'll take a closer look at Deere's third quarter earnings and spend some time talking about our market and how we see the fiscal year ending up. 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

First, a reminder. This call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Thomson Reuters. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express 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 projections, plans and objectives 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 also may 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 reconciliation to comparable GAAP measures, is included in the release and posted on our website at under Other Financial Information. Now for a closer look at the third quarter, here's Susan.

Susan Karlix

Thank you, Tony. John Deere's strong performance continued in the third quarter of 2011, with earnings climbing 15%. Both earnings and sales were the highest for any third quarter in the company's history. More than that, it was our seventh straight quarter of improved earnings and the fifth straight quarter of record earnings for that particular period. Last quarter's gains were broad-based with all divisions contributing higher results.

As we pointed out in the past, it is significant that our record performance is occurring in the face of certain key markets being in the early stages of recovery. This reflects our success managing costs and assets while enhancing our geographic footprint, enriching our product lineup and above all, helping customers throughout the world to be more profitable and productive.

Now let's look at the quarter in more detail. I'm going to start with Slide 3. Net sales and revenues were up 22% to $8.4 billion in the quarter. Net income attributable to Deere & Company was $712 million, an increase of 15% and, again, with our fifth consecutive quarterly income record.

On Slide 4, total worldwide equipment operations and net sales were $7.7 billion, up 24% quarter-over-quarter. Currency translation in the quarter was positive by 6 points, while price realization on net sales was a positive 3 points.

Production tonnage is shown on Slide 5. Worldwide production tonnage was up 9% in the quarter. In response to increased demand, aided by the successful implementation of SAP, construction and forestry tonnage was higher than forecast. For the company, projected worldwide production tonnage is up about 13% in the fourth quarter and up 21% for the full year.

Let's turn to the company outlook on Slide 6. Fourth quarter sales are expected to increase by approximately 20% versus the same quarter of 2010, with positive currency translation of about 4 points. For the full year, projected equipment net sales will be up about 25% compared with fiscal year 2010. This includes about 4 points of positive currency translation and 3 points of positive price realization. Net income attributable to Deere & Company is now forecast to be approximately $2.7 billion in fiscal 2011.

Turning to review of our individual businesses, let's start with agriculture and turf on Slide 7. Sales were up 22% in the quarter. Production tonnage was up 7%. Operating profit rose to $859 million, yielding a 13% operating margin. As we have discussed in the last 3 conference calls, 2011 incremental margins were anticipated to decline as we move through the year. This is borne out with A&T's third quarter incremental margin of 3%.

Of the many factors that affected operating and product costs in the quarter, the primary ones were higher shipment volumes and improved price realization, both of which benefited results. On the negative side, raw material costs were about $165 million higher than a year ago. SA&G costs primarily associated with global growth initiatives, foreign exchange translation and higher incentive compensation expenses, were higher by about $75 million. These factors put pressure on incremental margins.

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