強鹿 (DE) 2008 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning, and welcome to the Deere's third quarter earnings conference call.

  • Your lines have been placed on listen only until the question and answer session of today's conference.

  • Now I will turn the call over to Ms.

  • Marie Ziegler.

  • Vice President of Investor Relations.

  • - VP IR

  • Good morning.

  • Also on today's call are Mike Mack, our Chief Financial Officer, as well as Susan Karlix, Karen Thompson and Bill Radford from the Deere Investor Relations staff.

  • Today we will take a closer look at Deere's third quarter earnings and then spend a few minutes talking about our markets and where things are headed for the remainder of the year.

  • After that we will open for your questions.

  • Please note that slides are available to complement the call this morning.

  • They can be accessed on our web site at www.johndeere.com.

  • First though, a reminder, this call is being broadcast live on the internet and recorded for future transmission and use by Deere, Thomson-Reuters, and third parties.

  • Participants in the call, including the Q&A session, agree that their license and remarks and 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.

  • Actual results might differ materially from those projected in these forward-looking statements.

  • 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.

  • The company, except as required by law, undertakes no obligation to update or revise its forward-looking information.

  • The call and accompanying materials are not an offer to sell or a solicitation of offers to buy any of the company's securities.

  • This call also may include financial measures that are not in conformance with GAAP, according principles generally accepted in the United States of America.

  • Additional information concerning these measures including reconciliations to comparable GAAP measures is posted on our website at www.johndeere.com/financial results under other financial information.

  • Call participants should consider the other information on risks and uncertainties and non-GAAP measures in addition to the information presented on the call.

  • And now, for a closer look at the third quarter, here is Susan.

  • - Assistant Secretary

  • Thank you, Marie.

  • Earlier today, John Deere reported another quarter of impressive operating and financial performance.

  • Sales and net income were the highest for any third quarter in the company's history.

  • Farm conditions remained quite strong throughout the world, driving or ag operations at an unprecedented level.

  • Consistent execution is helping our non-ag businesses remain solidly profitable in spite of the slow US economy.

  • What's more, the big picture still looks good, farm commodity prices have fallen back recently, but it wasn't so long ago that $5 corn and $12 soybeans would have been considered pretty spectacular.

  • Today's grain prices continue to lend strong support to farm incomes world wide.

  • Also, the underlying fundamentals based on increasing global affluence in the world's growing need for food, fuel and infrastructure remain intact.

  • They offer great, long range promise for our company.

  • John Deere is moving aggressively to capitalize on these existing trends, by making continued investment in new capacity, new products and new businesses.

  • Starting with slide 3, you can see that we have continued to invest in growth, to support the strong agricultural equipment markets world wide and with the outlook strong for some time.

  • The large Harvester manufacturing facility in East Moline, Illinois, which ships grain combines around the world will complete a 30% capacity expansion early in 2009.

  • In addition, two acquisitions in the quarter provide scale, customers, products, and distribution for John Deere Water technologies, propelling our business to number 3 globally in agricultural irrigation.

  • Turning to slide 4, this morning, Deere reported record third quarter income of $575 million, the top end of our guidance, on record equipment net sales of approximately $7.1 billion.

  • Even with the challenging material and logistics cost environment, net income increased 7% and diluted EPS rose 12%.

  • On slide 5, total world wide equipment operations net sales were up 18% compared to the third quarter of 2007.

  • About 5 points related to positive currency translation, there were about 2 points of price realization as well as about 2 points from acquisitions in the ag and commercial and consumer equipment divisions.

  • The remainder is from increased volume.

  • On slide 6, you can see that our third quarter production tonnage was up 13%.

  • For the fourth quarter, world wide production tonnage is expected to increase 18%.

  • For the full fiscal year, 2008 world wide production tonnage continues to be forecast at a 17% increase.

  • All are driven by a very strong global market in agriculture.

  • Regarding our company outlook, let's turn to slide 7.

  • For the fourth quarter of 2008, we expect company wide equipment operations net sales to be up about 29% including about 3 points of currency.

  • Net income is expected to be about $425 million in the quarter.

  • For the full year we are now forecasting net equipment sales to be up about 21% compared with fiscal year 2007.

  • This includes about 5 points of currency and about 2 points of price realization.

  • In addition, there are are a total of about 2 points of acquisition including LESCO and those in John Deere Water Technologies.

  • Turning to a review of individual businesses let's start with agricultural equipment on slide 8.

  • While the press release describes the major items affecting financial results, let me mention that at the 35% net sales increase in the third quarter, currency translation accounted for about 8 points, operating profit increased 47% to $634 million.

  • Looking ahead, global ag fundamentals are very encouraging.

  • Worldwide factory use ratios remain at low levels, particularly for corn and wheat.

  • Slide 9 portrays our assumptions for yields for key crops planted in US during the last three years.

  • Yesterday, the USDA updated its 2008/2009 crop outlook increasing the US corn yield to 155 bushels per share while reduces the midpoint of the range to $5.40.

  • This price is extremely attractive to grain farmers, while lessening the burden on livestock producers and consumers.

  • Slide 10 highlights Deere's projections for the prices of corn, wheat and soybeans which in spite of recent moderations remain very favorable by historical standards.

  • Deere's forecasted commodity prices are on slide 11.

  • Note the increases for the 2008/2009 crop year from last quarters forecast, and the corn price is very similar to the USDA midpoint announced yesterday.

  • The strong markets for crops are driving good levels of farm cash receipts and income globally.

  • And as shown as slide 12, note that our forecast for total US farm cash receipts for 2008 and 2009 are considerably higher than our outlook from just one quarter ago and that dramatically increased levels from just a few years ago.

  • We ran yesterday's USDA numbers through our model and the result is a less than 1% difference in 2008 and 2009 cash receipts.

  • All of this translates into an excellent outlook at John Deere, not only for tractors and combines, but also for products like sprayers and seeding equipment and strongly supports our outlook for industry sales of agricultural equipment in the US and Canada as shown on slide 13, which is now up 20 to 25% from last year.

  • In addition, our 2008 industry outlook for south America is now up about 40%.

  • One of the previous uncertainties has been eliminated with the resolution to the Ritenzione situation in Argentina.

  • Slide 14 compliments the increased industry forecast for South America, demonstrating solid farm income in Argentina with a dramatic increase in Brazil.

  • Slide 15 highlights the strength in the European agricultural market as well.

  • And shown on slide 16, our 2008 industry outlook for western Europe is now up about 5% for the fiscal year.

  • Demand continues to grow rapidly in central Europe and the commonwealth of independent states countries including Russia and Australia is recovering from its severe draught with Deere sales there up nicely.

  • So putting this all together, slide 17 depicts a stronger world wide outlook for the sale of John Deere farm machinery and services.

  • Net sales are now projected to be up about 38% with currency translation accounting for about 8 points of the increase.

  • Just as currency translation will affect net sales, it will also affect forecasted operating profits adding about 150 million for the full year.

  • While we will not have our 2009 outlook for you until the November call, early indications from the field are very encouraging, retail requests in the US and Canada for many products including 8000 and 9000 series tractors, combines, sprayers and seeding equipment are up dramatically from year ago levels.

  • For example, retail requests for 8,000 series tractors effectively put availability into July of next year, and into September of next year for 9000.

  • For combines, about 70% of expected 2009 retail sales have orders.

  • Though we do not have similar early order programs outside the US and Canada, order positions in the rest of the world show the considerable strength of the global agricultural equipment market.

  • Now, it is early, but these results are exciting and confirm to us the great promise of our agricultural business into 2009.

  • Turning to our commercial and consumer equipment business on slide 18, recorded net sales were down 1% in the quarter, with a 5 point contribution from LESCO.

  • Operating profit from $91 billion, even with production tonnage down 14%.

  • The division continues to manage costs and inventories carefully during these difficult economic times.

  • Moving to the commercial and consumer outlook on slide 19, for fiscal 2008, we continue to expect sales to be up about 4%, with LESCO contributing about 6 points.

  • Portions of the business remain affected by the housing slow down and general economic conditions.

  • Exciting new product offerings in the market this year, including the precision cut fairway mowers, premium homeowner models and utility vehicles continue to drive customer interests.

  • Let's now focus on construction and forestry on slide 20, where sales were down 7% in the quarter.

  • In this very demanding time, with production tonnage off 15%, operating profit was $93 million, or about 8% of sales, the 2008 net sales forecast is down 5% from 2007 as seen on slide 21.

  • Given the challenging market conditions, construction and forestry is aggressively executing its trough management plan, including carefully managing assets, producing closely to retail demand and controlling expenses such as R&D and SA&G.

  • Based on our present outlook, we expect construction and forestry to remain solidly profitable for the year.

  • Moving now to our credit operations, as you see on slide 22, credit losses continue to remain low, with the current provision running well below its ten year average, demonstrating the quality of John Deere credit portfolio.

  • Credit third quarter net income was about $80 million as seen on slide 23.

  • Our forecasted credit net income for fiscal 2008 is now about $335 million, versus the previous forecast of about $350 million, with the two primary reasons being a modest impact on crop insurance income from the floods in the Midwestern US, and a slightly higher loan loss provision reflecting market conditions in C&CE and C&F.

  • Before moving on to retail sales, let's review receivables and inventory.

  • Looking at the quarter, on slide 24, consolidated trade receivables and inventory ended higher than a year ago.

  • Construction and forestry had a benefit of about $50 million due to the sale of Nortrack south.

  • However, the company increase was basically accounted for by the ag division.

  • Currency comprised about a quarter of the ag division's change year-over-year.

  • Other items include the two acquisitions of John Deere Water Technologies, adding about $150 million, the production start up in Brazil, and the significant growth in markets like central Europe and the CIS, including Russia, which require longer shipping times for finished goods.

  • The majority however is supporting our growing level of sales in Deere's global agricultural business.

  • Although you have seen trade receivables in inventories increase year-over-year, slide 25 clearly demonstrates that the increase continues to be driven by the growing level of sales.

  • Slide 26 shows that our 2008 year end forecast calls for relatively flat inventories and trade receivables in C&CE and C&F.

  • The increase in the ag division is consistent with our larger global footprint and accelerating global business conditions.

  • The division again plans on increasing stocks of raw materials and parts toward the end of 2008, just as we did in 2007, For the higher level of production expected early next year.

  • There also is a forecasted increase of about $150 million due to the John Deere Water Technologies acquisition.

  • Finally, currency accounts for about $160 million of the total year-over-year increase.

  • Now let's discuss the latest on retail sales.

  • Slide 27 presents the product category detail for the month of July, expressed in units.

  • Utility tractor industry sales were down 7%.

  • Deere was down single digit, but more than the industry.

  • Growth crop industry sales were up 38%.

  • Deere was up more than the industry.

  • Four wheel drive tractor industry sales were up 49%.

  • Deere was up more than the industry.

  • Combine industry sales were up 31%.

  • Deere was up double digits but less than the industry.

  • On slide 28, you see that for row-crop tractors, Deere ended July with inventories at 14% of trailing 12 month sales, combine inventories were at 15% of sales, turning to slide 29, in western Europe, sales of John Deere tractors were up single digits with combines up triple digits in July and on slide 30, Deere's retail sales commercial and consumer equipment in the US and Canada were down a single digit in the month.

  • Construction and forestry sales in the US and Canada were down double digits on both the first in the dirt and a settlement basis.

  • Before we touch on a few housekeeping items let turn to raw material and logistic cost increases as well as pricing actions.

  • Slide 31 shows our raw material and logistics cost increases of about $140 million in the third quarter, bringing our year-to-date to about $250 million.

  • For 2008, the forecast ranges from $425 million to $475 million.

  • For the whole company, since we anticipate about 2 points of price realization for the entire year, in round numbers, we should cover our expected cost increases in 2008.

  • However, the price realization occurs over the course of the year.

  • While approximately one-half of the raw material and logistics cost increases come in the fourth quarter.

  • So our margins will be under pressure as reflected in our fourth quarter 2008 forecast.

  • Of course, we are aggressively pursuing cost reduction activities to mitigate the affects of rising costs as well.

  • But this is a near-term issue as we have taken several pricing actions locally.

  • Here are a few examples from the US.

  • On large tractors we took a 3% increase in April of this year, and earlier this week, we announced another 7% increase on large wheel tractors.

  • On 2009 combines, we took a 9 to 10.5% increase.

  • In commercial and consumer, prices increased from 0 to 6% in late May.

  • In construction and forestry, we raised prices 0 to 5% in July and yesterday, announced increases from 4% to 9% effective 1 November 2008.

  • The bottom line is our back order position limited the revenue impact of price increases in 2008.

  • However, with the pricing actions we have taken and our cost reduction efforts, it is our intention to restore our cost price ratio, and you should begin to see evidence of this in the first quarter of 2009.

  • Now let's turn to a few housekeeping items.

  • Looking at R&D expense on slide 32, R&D is now expected to increase about 16% in 2008, with continuing investment in new products across the enterprise.

  • Moving now to slide 33, SA&G expense for the equipment operations was up about 16% in the third quarter.

  • With about 7 points of that increase coming from global growth initiatives and currency translation.

  • Our fiscal year 2008 forecast includes SA&G expense increases of about 16% over 2007 with about 10 points of the expected increase coming from global growth initiatives and currency translation.

  • Regarding the tax rate on slide 34, during the third quarter, the effective tax rate was approximately 36%, the same as the rate projected for the full year.

  • Turning to slide 35, in May, the board of directors approved repurchase of an additional $5 billion of Deere & Company stock, demonstrating their confidence in our ability to continue to generate strong cash flows.

  • At the same time, investors received the sixth dividend increase since 2004, bringing the cumulative increase to 155%.

  • As can be seen on slide 36, we have returned about $5.3 billion to shareholders in the form of share repurchase since 2004, 18.5 million shares remain under the current 40 million share repurchase program.

  • This is in addition to the $5 billion authorization approved in May.

  • Actual shares outstanding at the end of the quarter were 427 million.

  • You can also see the history of share repurchases since 2004.

  • Slide 37 provides some additional information related to fiscal year, 2008.

  • For equipment operations, capital expenditures are forecasted at about $775 million.

  • Depreciation and amortization is expected to be about $475 million and we continue to anticipate funding about $425 million in pension and OPEB contributions over the year.

  • For financial services, the forecast for capital expenditures relating to wind is about $275 million in 2008.

  • Looking ahead, John Deere is on the home stretch of another good year.

  • Based on the guidance provided today we expect 2008 to be our fifth consecutive year of record sales and earnings.

  • Results like these, along with our focus on asset management are helping generate strong cash flow.

  • Cash flow being returned directly to our shareholders and used for longer range investments in growth.

  • At the same time, the broader global economic environment remains quite favorable for a company like ours.

  • All in all, we are confident John Deere is well-positioned to continue delivering strong financial performance and high levels of value for both customers and investors well into the future.

  • - VP IR

  • Thank you, Susan.

  • We are now ready to begin with the Q&A portion of the call.

  • The operator will instruct us on the polling procedure, but as a reminder, in consideration of others, please limit yourself to one question and a related follow-up.

  • If you have additional questions, we ask that you rejoin the queue.

  • Wendy, we're ready for the instructions.

  • Operator

  • Thank you.

  • (OPERATOR INSTRUCTIONS).

  • Our first question today is from Terry Darling.

  • You may ask your question and please state your company name.

  • - Analyst

  • Thanks, good morning.

  • Goldman Sachs.

  • - VP IR

  • Good morning, Terry.

  • - Analyst

  • Good morning.

  • You guys were pretty explicit about your expectation for ag equipment at least production for '09 and acknowledging you are not giving guidance and very clear on that at this point, wondering if you can take us through your initial thoughts for the construction equipment and forestry business as well as the credit business.

  • - VP IR

  • For 2009?

  • - Analyst

  • Right.

  • - VP IR

  • I'm sorry, Terry, we would not have comments available at this time for those businesses.

  • - Analyst

  • Okay.

  • - VP IR

  • It is just premature.

  • - Analyst

  • Okay.

  • If we just focus then on what's going on in the construction equipment business, looks like you have lowered your production forecast, can you talk about how you are feeling about end markets and inventory position, assuming that you take production down here in the fourth quarter, looks like pretty significantly, how do you feel about inventories relative to where kind of retail is heading into 2009?

  • - VP IR

  • We have actually feel very well positioned with our inventory position as a result, in part of the, the reduction in receivables and inventories we made last year for those of you who may not recall we took $250 million out of our inventories over the course of 2007.

  • So we went into 2008 with our inventories fairly well positioned and as evidence by our guidance with our ending inventories and receivables estimated to just go up about $25 million and candidly that reflects currency movement more than anything else, we continue to feel well positioned.

  • As we head into 2009.

  • - Analyst

  • Okay.

  • - CFO

  • I would just add, on construction and forestry, they're executing according to where our strategy has been all along, and that is fundamentally to produce close to retail demand.

  • We have seen adjustments on the retail side we have tried to get the working capital in line.

  • I think the polling on the levers of our trough management so that we get the SAG and other expenses in line so to maintain our margins, I think they're doing a pretty good job given the external.

  • - Analyst

  • Just to be clear on that, is the lower production forecast now a result of weaker retail in '08 or a combination of that and a more temperate outlook for '09?

  • - VP IR

  • Again we are not going to comment specifically on '09.

  • It is no secret certainly a view of what's happened in the United States that the markets have continued to soften.

  • So I think you could attribute our reaction more in line with what we are seeing in the markets today.

  • - Analyst

  • Lastly, R&D expense revised up, can you talk about where that number is headed and why that revision was made?

  • - VP IR

  • Again a little of that would really reflect what is happening with currency, but as we are continuing to see growth opportunities in the markets and a lot of this candidly is occurring outside the US and Canada.

  • We have a lot of opportunities there.

  • We are investing resources.

  • That's why you see some of the increases.

  • - Analyst

  • We should expect that to grow at similar rates here?

  • - VP IR

  • That would get into guidance for 2009 which I am not able to do at this time.

  • - Analyst

  • Thanks very much.

  • Operator

  • Eli Lustgarten, you may ask your question and please state your company name.

  • - Analyst

  • Longbow Securities, and congratulations, Marie on your daughter.

  • - VP IR

  • Thank you very much.

  • - Analyst

  • Let me -- one clarification, tax rate went up to 36% for the year, what caused that and a tax rate for '09 be the same or go back to 35?

  • - VP IR

  • The reason the tax rate went from 35 which is our previous guidance to 36 really Eli is that old word discrete items.

  • It doesn't attribute to any one particular factor.

  • For the outlook for 2009, we are actually ourselves still working on our forecast.

  • So I wouldn't be able to give you anymore precise guidance.

  • - Analyst

  • Okay.

  • A couple of questions on the ag business in particular, you talk about a very big shipments in the fourth quarter, I mean were some shipments delayed in the third because of bridges being out and flooding given the big fourth quarter.

  • And tied to that, you indicated very strong down to 9,000 the combines, how much more production can you get in 2009 versus '08 in each of these products and with the price increases that you have announced are the early order plans under the old prices or the new prices?

  • - VP IR

  • There are many questions in there.

  • In terms of the fourth quarter shipments we did actually up our tonnage estimates a bit for the full year for the ag division.

  • So in the fourth quarter you are seeing more of the impact, not of delayed shipments but rather some higher production.

  • In terms of pricing, all of the orders that we have for 2009 will have some price increases in them.

  • And it would vary depending on the time of when the order was placed.

  • We did take an interim increase.

  • So you can, on many of those orders, you would be looking for at least a 5% or more kind of increase.

  • And again we are specifically talking ag here.

  • And the combines, as Susan mentioned, those are nine to 10.5%.

  • I think there was one other item but I'm not recalling it --

  • - Analyst

  • Incremental production in '09.

  • - VP IR

  • I'm sorry.

  • Yes.

  • Well we have talked about the fact that at the end of May we made a, approved a capital investment and it was announced and that will take our Harvester works which is our factory where we make our large combines up about 30% and we expect to have most of that capacity available for the year not for the full year, but most of it.

  • - CFO

  • We announced in February a tractor --

  • - VP IR

  • That is correct.

  • - CFO

  • As well.

  • - VP IR

  • And although, a lot of that benefit will hit more in 2010, we do anticipate to get some.

  • - Analyst

  • Feathered in over that.

  • - VP IR

  • A little bit in 2009.

  • - Analyst

  • So --

  • - VP IR

  • And then, and then several of your units although neither one on the same scale would be making adjustments in there.

  • It is not only capital but just in their operating processes to accommodate our farm customers.

  • - Analyst

  • So you are indicating a double digit increase is possible in both tractors and combines with combines being more than tractor at this point.

  • - VP IR

  • We are just giving you specific examples, Eli and it is premature for me to try to nail that down more specifically.

  • We ourselves do not have that answer.

  • - Analyst

  • All right.

  • Thank you.

  • - VP IR

  • Next analyst, please.

  • Operator

  • Our next question is from Andrew Obin, you may ask your question and please state your company name.

  • - Analyst

  • Merrill Lynch.

  • - VP IR

  • Good morning, Andrew.

  • - Analyst

  • Just a question, just to follow up on Eli's question on pricing, given sort of this highly inflationary environment that we are in, are you guys contemplating any structural changes to your pricing policy just beyond price increases?

  • - VP IR

  • Structural changes?

  • I'm not sure what you would be getting at.

  • - Analyst

  • Incorporating surcharges, being able to reprice backlog, just being more aggressive on pricing than we have been historically.

  • - VP IR

  • I would say that our customers would tell you 9 to 10.5% is probably a meaningful increase but certainly required in the current environment.

  • But, we have made some adjustments in our acceptance of some orders.

  • We use the term effectively place our back order to July, position not all of the orders that we have have been assigned a retail date.

  • That does give us the ability then for those price increases to apply to those orders.

  • We have, we are, we have some available production, yet that would if we would need to make additional changes in pricing, that would be affected by that.

  • It is not been our intention for many, many years or our practice to put surcharges on, a deal is a deal and Deere has thought strongly about at that.

  • - Analyst

  • And just, this is not meant to be as a question for '09 but going about just structural operating leverage for the ag business, early in the cycle we talked about operating leverage maybe 30, if everything works out well, 40.

  • Now we are in the teens.

  • Is it reasonable to assume that in the long run operating leverage in the ag division could return to what we sort of high 20s, low 30s?

  • - VP IR

  • Well, 30% would be our guidance on an average over a long period of time.

  • That assumes you are not making any investments for growth.

  • And we are seeing opportunities in the ag division globally and that is reflected in higher capital expenditures but also in higher R&D and SA&G as we are making investments and you have seen frankly some of the very early pay offs of that as we look at our net sales, we talk about the tremendous growth outside our traditional markets.

  • So, we will have guidance again in another quarter, and we will be making the decision in terms of how we are going to continue to invest for 2009.

  • So I don't have a definitive answer for you at this time, Mike.

  • - CFO

  • I think the other thing that is going to depend upon in addition to investments which Marie hit on is probably the most important aspect but it is a function of mix in terms of where the growth is occurring, so that's another variable that does play into the incremental margin calculation.

  • - Analyst

  • But between pricing and mix, you are building out eastern Europe and North America, I mean all of these things sort of sound positive and I understand that even if we continue with incremental investments, it shall not be worse than this year; right?

  • - VP IR

  • We are -- I think you are trying to pin us on our guidance.

  • I think --

  • - Analyst

  • Okay.

  • - VP IR

  • I'm not going to answer that.

  • - Analyst

  • Thanks a lot.

  • - VP IR

  • Thank you, Andrew.

  • Next.

  • Operator

  • Thank you.

  • David Raso, you may state your question and please state your company name.

  • - Analyst

  • Thank you.

  • Citigroup.

  • - VP IR

  • Morning.

  • - Analyst

  • Regarding price versus cost, this year, you are thinking largely of costs, can I extrapolate the price increases you are out lining for '09, you are thinking price is ahead of cost in '09?

  • - VP IR

  • It is our intention to restore our cost/price ratio.

  • - Analyst

  • What does restore mean at Deere.

  • - VP IR

  • Put them back to where they would have been say at the start of the year.

  • - Analyst

  • Put them back to where they start the year.

  • - VP IR

  • Started the year.

  • So we are trying to not, trying to get back to where we were, not trying necessarily to get even better.

  • We are trying to restore parity, if you will.

  • - Analyst

  • Aren't we at parity this year with price versus cost?

  • - VP IR

  • In incremental margin, yes.

  • - CFO

  • Go back the last couple of years, say '07 price was substantially usually better than cost.

  • That's what we're trying to return to.

  • - Analyst

  • Okay.

  • So and that same idea, the raw material contracts that maybe have come up recently you have signed for next year, can we think through on that cost assumption, which is obviously what's driving your targeted pricing, how much of your '09 costs are part of contracts you have already signed in that a minimum maybe describe it as at this point last year versus this point this year, you have more visibility into your next year cost than you say you did a year ago.

  • Like contracts signed in last say month or so into 2009.

  • - VP IR

  • We have spent a consider able amount of time as you might imagine with metric modeling working with our suppliers and we are also looking at cost reduction activities.

  • I think you are looking for some guarantees that we are probably not in a position to provide, but I can assure you that we have been very, very active in, in taking a look at the market fundamentals.

  • - Analyst

  • I guess maybe ask it this way.

  • Philosophically did we try to lock in more next year costs this summer than we did last summer?

  • - VP IR

  • That really gets into specifically how we are contracting which we have in the past declined to comment on.

  • And I am not prepared to provide any specifics on our contracting, David.

  • - Analyst

  • Okay.

  • We will talk off line.

  • Thank you very much.

  • Operator

  • Thank you.

  • Henry Kirn, you may ask your question and please state your company name.

  • - Analyst

  • Good morning.

  • It is UBS.

  • - VP IR

  • Good morning.

  • - Analyst

  • With corn prices pulling back, is it possible to chat a little bit about the price of corn that you think would continue to support the strong levels of demand?

  • - VP IR

  • Well, if you look at the, you know we talk about them pulling back but the reason we included the particular price chart in slide number 10 was to demonstrate that although they have pulled back a bit from the highs, they're still by any historic measure extremely good.

  • Even with the fact that our customers are experiencing higher costs, these current prices in the market are still very attractive and profitable for them.

  • - CFO

  • I think it is important to recognize, farm cash receipts are really the product of the volume times the price and so when you look at this, our estimates are substantially higher than they were just a quarter ago, and I think you can make an argument that there's actually a real benefit to some moderation in the corn price in the short term in terms of demonstrating the productivity of farmer customers and the ability to produce crops for both the food and fuel, and I think that helps in the policy debates occurring right now.

  • - Analyst

  • Okay.

  • And on the CapEx budget for when you tweak that back by about 100 million, what was the rational behind that?

  • Is there a change in philosophy here?

  • - VP IR

  • There is no change in philosophy, actually last quarter we discussed that we have a supplier who has a problem that has been on the, in the Wall Street Journal with cracking blades and in view of the situation there, we are simply not doing some of the projects, putting down payments on some of the projects we otherwise would have.

  • They are in the process of working through a resolution,we are working very closely with them.

  • And this is just a timing issue.

  • - Analyst

  • Okay.

  • Thanks a lot.

  • - VP IR

  • Thank you, Henry.

  • Operator

  • Thank you.

  • Jamie Cook you may ask your question, please state your company name.

  • - Analyst

  • Hi.

  • It is actually Chase Becker in for Jamie, Credit Suisse.

  • - VP IR

  • Hi.

  • - Analyst

  • Referring to specifically, wondering if you can give a little more color on what you are seeing in the Brazilian market, you pick up your sales forecast but in terms of your overall capacity, relative to demand, how are you feeling at this stage of the game and not getting into guidance for longer term but I mean what are the opportunities in Brazil or in South America that you think you can incrementally improve that business?

  • - VP IR

  • We are less than a year into full operation of the new tractor facility in Brazil.

  • And so we are reaping the benefits of having that additional capacity as well as having broadened our product line.

  • We've added five new tractor models last year, some higher horsepowers and lower horsepower ranges.

  • So we are much better positioned to provide product to our Brazilian customers than we ever have historically.

  • Ramp up at this facility occurred much earlier in the year so we are really reaping the year-over-year benefits of having that facility fully operational, having moved tractor production out of our factory, which produced combines will also over time as that factory goes through adjustments provide for additional opportunities there as well.

  • So we are feeling very good about our ability on the manufacturing side, we have a very strong dealer network, very solid, and our traditionally our issues have been that we were capacity constrained we cannot provide them with enough product so we have got the product in place, we have got the distribution, and the market conditions and fundamentals in Brazil and throughout South America look very promising.

  • - Analyst

  • Referring to the pricing in that region, obviously there has been a lot of talk about pricing with some of your competitors, what are you seeing specifically in Brazil from a pricing standpoint?

  • Can you give, you know, if not number wise, can you give granularity, is pricing, I guess trending the way you want it to, or is it ahead of expectations or how would you describe the environment right now?

  • - VP IR

  • I, we are seeing the same kinds of raw material costs inflations in Brazil as we are seeing really throughout the world, and we have taken a number of pricing actions there just like the amounts maybe vary a little bit by model, but similar to what we discussed earlier in the call, and I don't have a comment you know about what's happening competitively but we have taken some price increases.

  • - Analyst

  • Okay.

  • Thank you.

  • - VP IR

  • Thank you, Chase.

  • Operator

  • Thank you.

  • Andrew Casey you may ask your question and state your company name.

  • - Analyst

  • Wachovia Securities, good morning everyone.

  • - VP IR

  • Morning, Andy.

  • - Analyst

  • A lot of the questions have been asked but on the non US and Canada operations.

  • If I look at Q3 revenue increased 6% and operating profit dropped 3% last year, and then at Q2, 5% revenue growth and 21% operating income growth from that area.

  • What were the reasons for the change on a sequential basis, was that all input transfer cost or was there some seasonality in mix.

  • - VP IR

  • Well, there's no question that there are some issues in terms of, of now I would say transfers but maybe more of where we are building versus where we are selling as you know with the tremendous growth we have seen in the former Soviet Union a lot of that product does come out with the US and so the US operation gets the benefit of building it, and you have the overseas operations and get the benefit of the marketing margin, but having the full sales that can change things.

  • That's why frankly, when we report our operating profit and our sales for the ag division we are looking on a world wide basis because it is relevant there.

  • The other thing that can distort it is we've had a fair amount of growth in our non-ag businesses, the commercial and consumer and construction business.

  • So actually, people in the past have I think kind of ignored those, or said there wasn't a, the year-over-year changes they tried to calibrate and those do have an impact.

  • Mike I think you wanted to add something.

  • - CFO

  • The fundamental point is we look at the business, you need to add both the nonUS and US to go to get a true picture because of the distortions that are going to occur with the absorption and some of the factories versus where the products are being sold.

  • And what we tend to do in terms of management, we look at the very narrow granularity on a profit by product approach.

  • We look at all of the processes each of the product categories and each of them has the same high standard we are trying to maintain on a return on assets.

  • - VP IR

  • One other observation and that is we talked earlier about SA&G and R&D and the investments that we are making for growth and a lot of that is occurring outside the US and Canada and so of course that's maybe a little disproportionate as you are growing those operations right now.

  • Thanks for the question.

  • Do you have a follow up?

  • - Analyst

  • Just yeah, on a separate issue.

  • With the share price weakness on the last few months, given the concern various factors, is there any thought internally to accelerate in any one period, not this period but any one period where you see share repurchase, share weakness and take advantage of what you see differently than what investors may?

  • - VP IR

  • I think our CFO would like to comment on that.

  • - CFO

  • Well, Andy we have kind of set said in the past we are not going have a specific rate at which we are going to buy back shares that we are going to have out there we adhere to.

  • In this particular quarter, Q3, I would comment with some times we have to be out of the market for various things.

  • This quarter, because we are going for the authorization for the new share repurchase and we were going for the authorization for the dividend, it took us out of the market and we had to have black out days we wouldn't ordinarily have.

  • That impacted the share repurchase in the third quarter, but not going to be able to provide much more guidance on future activity.

  • - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Thank you.

  • Ann Duignan, you may ask your question, and please state your company name.

  • - Analyst

  • Hi.

  • JPMorgan.

  • - VP IR

  • Morning.

  • - Analyst

  • My question is around the fourth quarter net income guidance, I am struggling to get down to the $425 million that you have forecast.

  • Can you talk me through a little bit what you are anticipating in terms of incremental on the ag side and detrimentals on construction and forestry, and consumer, I know you said you said construction and forestry would be solidly profitable.

  • Can you just help me understand where you know where my margins may be wrong?

  • - VP IR

  • Well, the first place I would take a look is the raw material costs which we were pretty blunt about half of them hit in the fourth quarter.

  • - Analyst

  • Okay.

  • I presume those will hit the ag since volume is stronger there.

  • - VP IR

  • it affects all three equipment divisions but ag is probably not -- given the relative strength in the ag market that's probably a fairly fair observation.

  • I think that's the single biggest area I can think of.

  • You do in an earlier question, someone observed the fact that our construction equipment division would have a lower production volume and although they do remain, we would forecast contemplate remaining profitable, they do have lower production in the fourth quarter and that would have an impact on our margins and then actually is a factor in why we would have revised our guidance.

  • - CFO

  • Two other factors come to mind.

  • One is tax rate which is certainly one of these discrete items that Marie was alluding to earlier.

  • Another one I think is lower credit company income really reflecting two things, one is crop insurance commissions.

  • We have talked about crop insurance income, I guess I should say.

  • We have talked about the very good diversification that if they use in risk mitigation but nevertheless, it is down about I think 5 million.

  • - VP IR

  • For the year.

  • - CFO

  • For the full year yes.

  • - VP IR

  • Still profitable, nicely profitable just down a little bit from what previous.

  • - CFO

  • Right.

  • That's a modest increase in provision for losses as well on credit so the fourth quarter.

  • - Analyst

  • Yeah.

  • Taking those in I was struggling.

  • Okay.

  • That's very helpful.

  • Can we talk a little bit about your, you are talking about adding capacity for combines.

  • You know when you talk about I think you said something like sold to or booked to 70% of next year's expectations, when you look at your next year's expectations are you baking in the 30% capacity expansion or, you kind of talked about your 70% of where you were at this time last year.

  • Help me again I want to try to understand next year's capacity additions.

  • - VP IR

  • That would be fair.

  • Again the 30% is not available for the entire year.

  • But it will be available for a good portion of the year.

  • When we talk about 70% and that is of what we expect to retail, that is the US and Canadian number, so we are not looking at what we are expecting to see in the rest of the world, We threw that out though just as an indication, the fact that we were still seeing very, very good market activity, extremely strong market activity.

  • - Analyst

  • Okay.

  • So I shouldn't think that you are 70% sold out of 130% capacity?

  • Is that correct.

  • - VP IR

  • I think that's exactly right.

  • - Analyst

  • Okay.

  • Okay.

  • I will follow up off line.

  • - VP IR

  • Thank you, Ann.

  • Operator

  • Thank you.

  • Robert Wertheimer, you may ask your question and please state your company name.

  • - Analyst

  • It is Morgan Stanley.

  • Good morning, everybody.

  • - VP IR

  • Morning, Rob.

  • - Analyst

  • I had a question sort of on the credits of detail.

  • I wonder if you can comment on past due experience sort of month to month or quarter to quarter and the construction and forestry side, whether that is stable or getting worse.

  • - VP IR

  • You know, it really continues to be maybe up just a little bit.

  • We had been running, it would have rounded to 3 in terms of our write offs as a percentage of the portfolio and we may be bumped up just a little bit to 0.35% I think I meant to say 0.3 early so maybe 0.35.

  • Your provisioning is based on what you think.

  • - Analyst

  • Yes.

  • - VP IR

  • You need.

  • As you look at the fundamentals and the commercial and consumer and the construction and forestry equipment markets it seems prudent to us to slightly increase that loss provision given the difficult fundamentals and that's really what you see reflecting here.

  • And this slight increase in provision, is that in line with the increase in past dues or do you assume past due doesn't translate into a loss and you provision a little less as a competitor does.

  • Well, the way the account as I understand the accounting rules say at that your provisioning is based on your, what you expect you will be in losses.

  • So that's what that is reflecting.

  • Our past dues, continue to be, if you look year-over-year, are virtually unchanged at it is 0.26%.

  • - CFO

  • And so.

  • - VP IR

  • In aggregate.

  • - CFO

  • In aggregate.

  • - Analyst

  • Yeah.

  • Okay.

  • I will stop there and maybe I are will ask an opposite question to one that was asked earlier.

  • In the current environment you are seeing a slowdown in global economies and some asset prices may be getting cheaper.

  • Is there any thought on your part to favor asset purchases over buy backs?

  • Conserve powder in other words.

  • - VP IR

  • To save powder?

  • - Analyst

  • For acquisitions.

  • - VP IR

  • Well, Mike, do you want to?

  • - CFO

  • I think we are actively looking for business development opportunities all of the time.

  • These things have a long gestation period and we are continuing to have an interest in growth.

  • To the extent we can find this business belt opportunities where there's a good fit and we can create value we have an interest.

  • I don't think that fluctuates so much as a view of the transient prices as something we are looking for all the time.

  • Two good examples this quarter that came to fruition were the water space.

  • But these take a long time to build a platform like we are going to do.

  • If we are going to make these small acquisitions and hopefully invest around them and build up a platform that's a multiyear activity.

  • I would think we are going to create some value.

  • - Analyst

  • Thanks very much.

  • - VP IR

  • Thank you, Rob.

  • Next.

  • Operator

  • Thank you.

  • Your next question is from Daniel Dowd.

  • You may ask your question and please state your company name.

  • - Analyst

  • Bernstein.

  • - VP IR

  • Good morning.

  • - Analyst

  • Morning, Marie.

  • How are you?

  • - VP IR

  • Just great.

  • - Analyst

  • If I heard your comments correctly, you are among other places that you are planning to take price increases you are taking them in construction and forestry.

  • - VP IR

  • That is correct.

  • - Analyst

  • They sounded pretty significant.

  • On the one hand this is addressing the input cost issue.

  • On the other hand, when you talk to other construction vehicle manufacturers, the one place that they site pricing power weakness is in small and medium size vehicles in North America.

  • Are you seeing something different in the marketplace that makes you comfortable you can push this through or is it heavily weighted toward specific vehicles?

  • - VP IR

  • We have not announced any specifics other than to say that they range from 4 to 9%, this announcement was just made yesterday and we are, but we have not really assigned it to a specific product.

  • So I am not able to comment any further.

  • - Analyst

  • But the announcement, in North America are that you are going to be able to successfully push them through without losing a lot of volume, is that correct in preference?

  • - VP IR

  • I think that's a fair inference.

  • - Analyst

  • Okay.

  • Now, let me just come back to bottlenecks in agricultural for a minute.

  • So the way, the way I read the release was 30% increase in combines next year but I think what I heard you say was that by the end of the year your capacity will be 30% higher.

  • So a good chunk of at that benefit sort of arrives in 2010.

  • - VP IR

  • No, actually, the, we will, we will have a good portion of that 30% available to us, we anticipate over, for fiscal 2009.

  • I am stopping short of telling you exactly how it waits out because things happen in any kind of a building or machine tool or a redo project.

  • But we, we do anticipate to have a good chunk of that available to us for the bulk of the year.

  • Okay.

  • - CFO

  • Then similarly for the Waterloo facility, that really comes available in 2010.

  • We shouldn't expect much incremental out of that.

  • - VP IR

  • There is some.

  • Waterloo is working very hard to rearrange its processes to accommodate our customers in this period of strong demand and so they, they are working as hard as they can to implement what they can.

  • Where we are limited is where we have machine tools and a lot of those do not arrive until late in 2009.

  • There are some things that can be done to in terms of process flow and things like that to better accommodate and we are working on that.

  • But the bulk of that increase does hit 2010.

  • - Analyst

  • Okay.

  • One last thing, in Waterloo, you I believe I don't know maybe almost two years ago now you talked about the order delivery time was down to eleven days.

  • - VP IR

  • That's cycle time.

  • Through the factory.

  • - Analyst

  • Okay.

  • And what is it down to now?

  • Do you have any idea?

  • - VP IR

  • I have an idea, you know I did not ask the question.

  • Their ultimate goal was seven days and I would, -- I don't know where they are between the 11 and 7 days.

  • - CFO

  • They may have made some progress because the last thing we will to do to make the progress was heat treat equipment there in the drive train area which was subsequent to when we had that discussion they had in place but I don't have a specific number but I believe it has improved.

  • - VP IR

  • Thank you, Dan.

  • - Analyst

  • Thank you.

  • - VP IR

  • Next.

  • Operator

  • Thank you.

  • Seth Weber, you may ask your question and please state your company name.

  • - Analyst

  • Hi.

  • Good morning, it is Banc of America.

  • - VP IR

  • Good morning.

  • - Analyst

  • I squeaked in here at the end.

  • I guess first just a clarification, Marie do you feel like you could have kept the $2.2 billion net income guidance without the higher tax rate and the credit lower income at the credit business?

  • - VP IR

  • Well, there are four factors that affected the overall guidance.

  • The first you are correct is the tax rate, the credit income, it is lower volume in construction and forestry, and then a lesser factor but where the just note is the fact that we did complete these two acquisitions in the water and we have a little integration cost that hits this year.

  • That was not in the forecast originally because we didn't know that we would close on these acquisitions for sure.

  • - Analyst

  • Okay.

  • - VP IR

  • So four factors.

  • - Analyst

  • Okay.

  • Thanks for that.

  • And then just can you characterize you said 70% of your combines at this point are booked, are sold for '09, can you give us an idea where that number stood at this point last year?

  • - VP IR

  • Actually we wouldn't have been able to quote a number last year because the program didn't open until the first of September.

  • So it would be zero.

  • - Analyst

  • Okay.

  • - VP IR

  • So we just opened the program earlier.

  • - Analyst

  • Okay.

  • Can you on the eastern European and CIS business for the ag side can you characterize how big is that market today, really what type of growth rates are you see there can and are you investing Mr.

  • the distribution channel there?

  • Is that part of your growth initiative?

  • - VP IR

  • Well, absolute we are investing in distribution.

  • In fact, about a quarter ago we announced that we were investing in the distribution center in Russia, that would help us in parts side and training.

  • We have a dealer network we are investing in dealer developments in that part of the world.

  • In terms of specific sales numbers, we will provide that for you, but geographically, on an annual basis, but you saw in 2007, that our sales were over 1 billion in that specific part of the world.

  • Central Europe and former Soviet Union and independent states I should say and the growth rate was I think about 60%.

  • So, I mean most definitely it seems a growth and we are investing in infrastructure to continue to support that part of the world.

  • - Analyst

  • Okay.

  • Thanks.

  • And --

  • - VP IR

  • Actually I need to get to the next person.

  • Thank you so much.

  • We have got time for just one more question.

  • Operator

  • Thank you.

  • Our final question is from Barry Bannister.

  • You may ask your question and please state your company name.

  • - Analyst

  • Stifel Nicolaus.

  • How are you?

  • - VP IR

  • Good morning, Barry, just fine.

  • - Analyst

  • The C&F margin was the lowest margin in that segment in 20 quarters.

  • When I look at the historical relationship, there's a good linear regression relationship between C&F profit and sales in that division but using that equation for the first half, and applying it to the third quarter there was about a $50 million profit short fall.

  • It is pretty significant.

  • It was also odd that in the third quarter you actually lowered the material and freight detriment estimate.

  • - VP IR

  • That is correct.

  • It applies for the full year.

  • But we went from guidance of what had been 100 to 75.

  • But they the cut production in the quarter.

  • They produced a less than what they had anticipated and then they have taken their guidance for the full year down.

  • - Analyst

  • Right.

  • So what I needed to do was what would be the breakout between the production impacting the profitability in the third quarter and the, and the short fall of pricing versus materials and freight in the third quarter?

  • A break out between the two as to why that margin was so low?

  • I don't have a comment.

  • More specifically than what we have already provided.

  • Actually, we would look very candidly we look at their profitability in light of the significant decline in the market and believe that they are performing extremely well.

  • But they have, they have certainly impacted by the increase in raw materials and this is one division although for the full company we will cover our cost this particular division will be unable to do that in the current environment.

  • They're big users of plates and that has, has been more difficult.

  • So you are correct, that is, that is an issue.

  • - CFO

  • But the overwhelming impact on the decline in the profitability, I think can be attributed to volume in the quarter.

  • - VP IR

  • Absolutely.

  • - Analyst

  • Thank you very much.

  • - VP IR

  • Thank you, Barry.

  • Thank you all for participating in today's call.

  • Operator

  • Thank you, this concludes today's conference.

  • Thank you for participating.

  • You may disconnect at this time.