強鹿 (DE) 2008 Q4 法說會逐字稿

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  • Operator

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

  • (OPERATOR INSTRUCTIONS)

  • I would now like to turn the call over to Miss Marie Ziegler, Vice President of Investor Relations.

  • Please go ahead

  • Marie Ziegler - VP of IR

  • Good morning.

  • Also on today's call are Mike Mack, our Chief Financial Officer, and Susan Karlix, [Justin Maravak], and [Karen Thompson] from Deere's Investor Relation staff.

  • Today we will take a closer look at Deere's fourth quarter earnings, and then spend a few minutes talking about our markets and our outlook for 2009.

  • After that we will open for your questions.

  • Please note that slides are available to compliment the call this morning, they can be accessed on our web site at www.john deere.com.

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

  • Participants in the call, including the Q&A session agree that their likeness in remarks in all media may be stored and used as part of this earnings call.

  • Today's 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 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 it's 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.

  • That would be accounting principals 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/financialreports under other information.

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

  • Now, for a closer look at our fourth quarter and our outlook, here is Susan.

  • Susan Karlix - Assistant Secretary

  • Thank you, Marie.

  • Today John Deere announced the fifth consecutive year of record net income and a sixth year of record sales.

  • Our agriculture equipment operations did especially well, showing particularly strong growth in emerging parts of the world such as South America and Russia.

  • For the first time, the Company saw more than 50% of its AG sales come from markets outside the US and Canada.

  • Equally important, all of our businesses remain solidly profitable for the year in spite of a slowing economy.

  • That in itself makes quite a statement about our success holding down costs and squeezing out assets.

  • We are looking for another good performance in 2009.

  • Although as noted in the earnings release, the volatility of today's global financial markets makes the forecasting process even more uncertain than usual.

  • Let's turn now to our review of the fourth quarter starting with slide three.

  • Net income for the quarter was $345 million, on record fourth quarter equipment sales of $6.7 billion.

  • The quarter included a charge for the closure of our factory in Welland, Ontario Canada as outlined in slide four.

  • The approximately $35 million after tax charge, was not included in the earnings guidance provided in last quarter's call on August 13th.

  • In the September release announcing the closing, we estimated the total after tax cost would be approximately $90 million, half in 2008 and the remainder in 2009.

  • Primarily because of translation -- currency translation, the charge in the quarter turned out to be about $10 million lower than the expected.

  • And the total cost is now projected to be less as well, approximately $65 million after tax.

  • The cost is shared on a 60/40 basis by the AG and Commercial and Consumer Equipment division.

  • Turning to slide five, total worldwide equipment operations net sales were up 24%, compared to the fourth quarter of 2007.

  • Currency translation was neutral, and there were about three points of price realization.

  • On slide six, worldwide production tonnage up 24% in the quarter, and 18% for the year.

  • Looking ahead to 2009, worldwide production tonnage is expected to increase 12% in the first quarter, and be down about 3% for the full year.

  • As we turn to slide seven, the global credit crisis has generated a historic amount of uncertainty and volatility.

  • The situation is rapidly evolving and affects our business.

  • The forecast we review today, represents our best assessment of the 2009 outlook.

  • But you should know, it also reflects an unprecedented amount of uncertainty.

  • With that being said, for the first quarter of 2009, we expect company-wide equipment operations net sales to be up about 7%.

  • Included is about six points of negative currency translation, and about five points of price realization.

  • Net income is expected to be approximately $275 million, in the quarter, reflecting difficult markets in construction and forestry and commercial and consumer equipment.

  • For the full year, net equipment sales are forecast to be flat compared with fiscal year 2008.

  • This includes about six points of negative currency translation, and about seven points of price realization.

  • We have taken several pricing actions over the past few months, aimed at restoring cost price ratios to levels of early 2008.

  • We believe the pricing being forecast will allow us to reach this goal over the course of 2009.

  • The current outlook for net income is approximately $1.9 billion for the full year.

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

  • Today's earnings announcement describes the major items affecting financial results.

  • Let's look at two of the factors.

  • First, AG did incur higher than forecast material costs in the quarter, approximately $80 million more than projected in August.

  • This reinforces the fact that the underlying commodity markets are volatile and extremely hard to predict.

  • The AG division operating profit also includes a charge of approximately $30 million, due to the factory closing that we talked about earlier.

  • Despite these factors operating profit increased 23% to $476 million, reflecting the very strong retail activity in most markets.

  • Let's take a look at some of the economic assumptions that underly our AG forecast.

  • Projected commodity prices are on slide nine.

  • You can see we have included our first look at commodity prices for the 2009-10 crop year.

  • Commodity prices remain very attractive.

  • You can see this more clearly on slide 10.

  • It shows that forecast prices, though down from recent levels, are higher than the past several years.

  • Further, they are at levels that permit our farm customers to earn a good return.

  • Slide 11 is provided by our consultant, Informa.

  • It highlights variable production costs for 2009 versus 2008.

  • In looking at the numbers, bear in mind that these estimates reflect current input costs.

  • They do not attempt to account for, where say, fertilizer prices might be in the spring.

  • Even so, current commodity levels permit farmers to remain comfortably profitable as illustrated in the lower table.

  • As shown on slide 12, US farm cash receipts for 2008 and 2009 are at good levels and up significantly from as recently as 2007.

  • This is an important point, since farm cash receipts are the single most important determinant of farm equipment purchases.

  • Our outlook for industry sales of agricultural equipment in the US and Canada, shown on slide 13, is up approximately 5% in fiscal 2009.

  • The increase is being led by higher sales in large tractors and combines, partially offset by lower industry sales for cotton equipment, small tractors, and equipment commonly used by livestock producers.

  • Small tractors tend to be popular with a general customer segment that has been hurt by the economic slump.

  • And livestock producers have taken a sizable hit to their profitability, largely because of higher feed costs.

  • Our outlook for large equipment remains strong as retail orders in the US and Canada, for many products, 8000 and 9000 series tractors, combines, sprayers, tillage and seeding equipment, continue to build and are running higher than year ago levels.

  • In the fourth quarter, retail orders for 8000 and 9000 series tractors grew by 25% and 15% respectively.

  • We added additional production and shifted build schedules to try to better meet customer requirements.

  • Still for 8000's effective availability is into July of next year, and into September for 9000's.

  • For combines, retail orders are over 50% higher than levels of a year ago, and now cover roughly 90% of expected 2009 retail sales.

  • Finally, in the US and Canada, we have not seen any unusual order cancellation activity.

  • Let's turn now to South America, where our out look is for the industry to be down 10% to 20% in fiscal 2009.

  • Major factors weighing on the region are access to credit in Brazil, and the drought conditions that plagued Argentina early in the planting season.

  • As shown on slide 14, there is a relatively large range in forecast farm net income for 2009, illustrating the extent of the market uncertainty in this part of the world.

  • Slide 15 gives you an indication of the difficult credit situation in Brazil.

  • Last year soybean farmers provided about 25% of their own crop input funding.

  • This year, it is twice as much at 50%.

  • Slide 16 outlines key variables we are watching in Europe.

  • The important message is that these markets are still at good levels.

  • Moving to slide 17, in western Europe, retail orders for tractors and combines are up double digits over levels of a year ago.

  • And we have seen no unusual cancellation activity.

  • In some key countries, however, the credit crisis has hurt customer confidence and could affect retail activity in the second half of the year.

  • Therefore, our initial industry outlook for western Europe is down 5% to 10%.

  • The outlook for central Europe, and the Commonwealth of Independent States countries, including Russia, is down moderately in 2009.

  • Demand in these areas remains good, but the level of sales we achieve will depend on the access to and the cost of credit.

  • So putting this all together, on slide 18, the outlook for the sale of John Deere farm machinery and services in 2009, is up about 5%.

  • Currency translation is negative by about eight points.

  • Turning to our Commercial and Consumer Equipment business on slide 19.

  • Reported net sales were down 11% in the quarter.

  • Operating profit was negative $16 million, reflecting about $20 million for the factory closing, and an additional approximately $20 million in higher material costs.

  • Production tonnage was up 14% in the quarter in comparison with relatively low production levels in the fourth quarter of 2007.

  • At that time, the division was in the process of an unusually large number of new product introductions, and was managing inventories and production accordingly.

  • Before leaving 2008, it is important to note, that although market conditions have been difficult, the division has benefited from several successful new product launches.

  • As a result, C&CE is well positioned to compete successfully in a number of important product categories.

  • Moving to the outlook on slide 20, for fiscal 2009 net sales are projected to be down about 6%.

  • The business continues to be affected by the housing slump and recessionary economic conditions.

  • But new products like the 3E Series compact utility tractor and a broader number of SKU's in the retail channel will soften the economic impact to a certain extent.

  • Let's focus now on Construction and Forestry on slide 21 where net sales were up 3% in the quarter.

  • Operating profit, though it was down $45 million, virtually all due to higher raw material costs of approximately $50 million.

  • Production tonnage was down 10%.

  • Slide 22, depicts the excellent job that Construction and Forestry has done running the business and managing assets in this extremely challenging market.

  • This is no accident.

  • The divisions well defined trough management plan is a benchmark in our Company.

  • Everyone of our businesses is on the lookout for ways to operate more efficiently and respond to any possible downturn in demand.

  • On slide 23, we see the impact of tough economic factors on C&F sales.

  • Negative factors include housing starts in the range of 600,000 to 700,000, the lowest level since 1945.

  • Nonresidential spending down 15%.

  • And GDP growth of negative 1%.

  • Also, forestry markets in Europe and Russia which have been strong to date, are weakening and forecast to be down 30% in the year ahead.

  • For the division as a whole we expect Construction Forestry net sales to be down about 12% in 2009.

  • One thing that will help the division is a number of exciting new products coming to market in 2009.

  • These include the E series harvesters and forwarders, K series loaders and G series graders.

  • Even though present market conditions are challenging, Construction Forestry has taken two important steps to grow its global footprint, and position the division for the long-term, as seen on slide 24.

  • Our excavator joint venture with XCG closed in June.

  • This is an important first step for Deere in one of the world's largest and fastest growing construction equipment markets.

  • What's more, the Chinese government's $500 billion plus stimulus plan, announced earlier this month, adds further support this the market.

  • The plan is aimed at highway, railroad and airport infrastructure spending.

  • Two months ago we announced a second move into the construction markets outside the US and Canada, with our intent to form a joint venture in India with Ashok Leyland.

  • India is the world's largest market for backhoes.

  • Initial production is planned for 2010.

  • Moving now to our credit operations beginning on slide 25.

  • Many of you aren't as familiar with our credit operations, so I'm going to spend a bit of time describing the business.

  • Just under 70% of the worldwide credit portfolio is AG-related, with 20% being Construction and Forestry, the remainder, C&CE.

  • On slide 26, 75% of the portfolio is US-based, 60% of the portfolio is installment financing, and close to 20% wholesale floor plan financing is extended to Deere dealers.

  • Slide 27, illustrates the low provision for credit losses we've experienced.

  • Even today, the current provision is running well below its 10-year average, this reflects strong farmer cash flows, AG and C&CE dealer reserves, rigorous underwriting standards, robust collection practices and strong used equipment values.

  • Now we are going to shift gears and look at the loss experience of John Deere Capital Corporation, the US funding arm of John Deere Credit.

  • We are focusing on JDCC on the next two slides, because of the organization's long credit experience and its own public financial filings.

  • What we are showing is John Deere Capital Corporations' experience with retail note, 60 days past due, and write-offs for the AG and the Construction portfolios.

  • We are including them to give you a picture of the excellent credit quality of the assets.

  • The AG portfolio on slide 28, has experienced very low write-offs, averaging about 12 basis points over the last 10 years.

  • Even during the very difficult 1980s, losses were quite low, reflecting the excellent credit quality of the portfolio over time.

  • On slide 29, in 2008, despite the tough market conditions, the C&F portfolio performed in line with historical averages.

  • The bottom line is that our loan portfolios are in really good shape.

  • Moving back to our worldwide credit operations now as seen on slide 30, fourth quarter net income was about $67 million.

  • That was roughly $10 million below the implied guidance for the quarter.

  • The difference was due to a slight compression in our spread, due to the current interest rate environment.

  • Our loss experience was in line with our projections.

  • Credit net income for fiscal 2009 is expected to be about $300 million.

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

  • On slide 31, consolidated trade receivables and inventory ended higher than a year ago, basically accounted for by the AG division.

  • AG ended the year with higher inventories and receivables reflecting three items, one, the strength of our market.

  • Two, a layer of additional inventories to support higher production schedules in the first quarter.

  • This is being driven by the strength of the retail order book, in places like the US, Canada, western Europe, and Australia.

  • And finally a layer of inventories to support emerging markets.

  • The 2009 year-end forecast calls for inventories and trade receivables to be down in C&CE and C&F and up $125 million in AG.

  • Although trade receivables and inventories have increased year-over-year, slide 32 clearly shows that they remain well aligned with the level of sales activity.

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

  • Slide 33 presents the product category detail for the month of October expressed in units.

  • Utility tractor industry sales were down 9%.

  • Deere was down a low double digit.

  • Row crop industry sales were up 19%.

  • Deere was up more than the industry.

  • Four wheel drive industry sales were down 9%.

  • Deere was down double digits.

  • Combine industry sales were up 38%.

  • Deere up was up triple digits.

  • On slide 34, you see that for row crop tractors Deere ended October with inventories at 11% of trailing 12 month sales.

  • Combine inventories were at 2% of sales.

  • Turning to slide 35, in western Europe sales of John Deere tractors were flat with combines down a single digit in October.

  • And on slide 36, Deere's retail sales of Commercial and Consumer Equipment in the US and Canada were down a low double digit in the month.

  • Construction and Forestry sales in the US and Canada were down a single digit on a First-in-the-Dirt basis and flat on a settlement basis.

  • Before moving to housekeeping, I would like to touch on specific actions Deere has taken to strengthen liquidity.

  • On slide 37, the Company has maintained access to the commercial paper market throughout these volatile past eight weeks.

  • Not only have we been in the market on a daily basis, we have been able to place approximately $700 million each week.

  • The average term of the portfolio is about 25 days, and the majority of the outstandings mature after December 31st.

  • Commercial paper outstandings are 100% backed by a $4.5 billion credit facility.

  • As of 21 November, we had approximately $1.7 billion in excess capacity and this facility has not been drawn upon.

  • Given the current global market and financial environment, to be prudent, we have taken two actions.

  • First, at the end of October, Deere and Company made a $400 million capital infusion to John Deere Capital Corporation, and second, we are currently not repurchasing shares.

  • Slide 38 shows our raw material and logistics cost increases of approximately $305 million in the fourth quarter, versus the implied guidance of approximately $200 million.

  • This brought the total increase for the full year to about $550 million.

  • This is well above our August 13th guidance of $425 million to $475 million.

  • It affirms how volatile the commodity markets have been in recent months and how difficult it is to project the impact of rapidly changing costs.

  • Looking ahead to 2009, our forecast calls for material price increases in the range of $500 million to $900 million.

  • That's a sizeable range, but we think it's warranted for a couple of reasons.

  • First, the extreme volatility swings in commodity prices that have occurred over the past year have made projecting costs very challenging.

  • Second, recaller material cost increases were back end loaded in 2008.

  • They significantly lagged the commodity market on the way up, and will do so again on the way down.

  • We continue to work with our suppliers, however, and if commodity prices remain down, we could see cost increases in the lower end of the range for the year.

  • As to how we are covering these higher costs, we've taken several pricing actions affecting virtually all of our products, in an effort to restore our cost price ratios.

  • As mentioned earlier we are projecting about seven points of price realization for 2009.

  • Now let's turn to housekeeping.

  • Looking at R&D expense on slide 40.

  • R&D increased 17% in the fourth quarter, and about 15% for the full year 2008.

  • For fiscal 2009, R&D expenses are expected to increase about 5% with continuing investment in new product and interim tier four across the enterprise.

  • SA&G expense for the equipment operations was flat in the fourth quarter, but about five points came from global growth initiatives primarily in AG.

  • Currency translation was negligible.

  • For fiscal 2008 SA&G expense increased about 13% over 2007, with about nine points of the increase coming from global growth initiative and currency translation.

  • In 2009, we project SA&G to be up about two points.

  • Of the increase growth initiatives, virtually all AG related, account for three points, currency is a negative two points.

  • We are working hard on containing costs throughout our traditional equipment operations.

  • Currency translation will have a negative impact on 2009 operating profit of about a $100 million to $150 million.

  • Regarding the tax rate on slide 42, during the fourth quarter the effective tax rate was approximately 41%.

  • The rate is higher than expected in the quarter due to three factors.

  • The geographic mix of income, distributions of non-US income, partially offset by the R&D tax credit passed in early October.

  • As can be seen on slide 43, capital expenditures for the equipment operations were approximately $773 million in 2008.

  • Depreciation and amortization was approximately $484 million, and we contributed about $430 million to pension and OPEB.

  • Financial services capital expenditures were approximately $339 million in the year mostly attributable to wind.

  • Turning to slide 44, for fiscal 2009, we anticipate capital expenditures running about $1 billion.

  • Depreciation and amortization, about $525 million, and we anticipate spending roughly about $170 million for benefit planned payments.

  • Financial services CapEx will be about $125 million in 2009, primarily wind.

  • As shown on slide 46 we repurchased about five million shares in the quarter, bringing the fiscal year 2008 total to about 21 million shares.

  • Actual shares outstanding at the end of the quarter were 422.3 million.

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

  • Looking ahead, we believe that John Deere is positioned for a solid year in 2009 in spite of present economic uncertainties.

  • The farm economy, especially in North America, remains strong and our performance will benefit from steps taken in recent years to keep our businesses on a more profitable footing in all types of market conditions.

  • Finally, the same positive fundamentals that helped drive the last five years of record financial performance haven't going away, they remain largely intact.

  • These encompass trends such as growing demand for grain and renewable fuels, and an increasing need over time for shelter and infrastructure.

  • The current economic slowdown may affect the rate at which these developments move ahead, but they remain valid, as valid today as they were a year ago at this time.

  • As a result, we have no doubt that Deere remains in a prime position to benefit from these factors and to compete successfully in today's volatile markets.

  • Marie?

  • Marie Ziegler - VP of IR

  • Thank you, Susan.

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

  • The operator will instruct you on the polling procedure.

  • But as a reminder, in consideration of others, we ask that you limit yourself to one question and a follow up.

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

  • With that, operator we are ready.

  • Operator

  • Thank you.

  • (OPERATOR INSTRUCTIONS)

  • Our first question is from Jamie Cook, and please state your company name.

  • Jamie Cook - Analyst

  • Hi, good morning.

  • Jamie Cook from Credit Suisse.

  • Marie Ziegler - VP of IR

  • Good morning, Jamie.

  • Jamie Cook - Analyst

  • Hey how are you.

  • Marie, my first question probably isn't going to surprise you.

  • I'm just trying to get a little more color on your assumptions behind material costs for 2009, the wide range of $500 to $900 million.

  • I guess -- just I would assume that material costs should be less for the head wind in 2009, and so given where material costs have gone.

  • So I'm trying to figure out why.

  • Are there major contracts that are locked in to 2009?

  • Is that hurting you and why aren't we going back and trying to renegotiate with suppliers I guess?

  • If you could just help me on that front.

  • Marie Ziegler - VP of IR

  • Certainly.

  • Recall as you're thinking about material costs, that last year our cost increases for 2008 have been very much back end loaded.

  • We were like $50 million in the first quarter, $50 million in the second, and then like a $140 million and then $306 million - $305 million in this quarter.

  • So what you are seeing is really the effects of pretty significant lag on the way up, and then a corresponding lag on the way down.

  • That is the primary driver.

  • We don't have a lot of activity specifically that would be locked in for 2009 yet.

  • In fact we are still negotiating our steel contracts and those would expire in January.

  • Jamie Cook - Analyst

  • This deal expires in January.?

  • Are there other major contracts you're renegotiating now, other than steel?

  • Marie Ziegler - VP of IR

  • I think it's fair to observe that again with the pretty significant lag, that the pricing on our contracts does move with the market, but it moves at a lagged pace, and again that really is what the effects of what you are seeing in 2009.

  • Mike Mack - SVP and CFO

  • And Marie, if I just might add.

  • If you look at the forecast, the coming year from the various experts, there is a tremendous range between people like the AMM on the one hand, and Global Insights on the other, as just examples, quite a big variance in expectations.

  • Marie Ziegler - VP of IR

  • In the second half of the year to build on what Mike said, depending on whose forecast you're looking at, sheet steel could be anywhere from $500 to $900 a ton.

  • Jamie Cook - Analyst

  • Okay.

  • So it's fair to assume you're taking a conservative approach to your material cost forecasts?

  • Marie Ziegler - VP of IR

  • I will let reach -- draw that conclusion.

  • But we would also tell you, that the wide range really does reflect a period of unusual volatility that we have been in.

  • Jamie Cook - Analyst

  • And just lastly the $500 million to $900 million.

  • Is there any way, does that, given the lag approach, should we see most of that hits in the first half of the year versus second half or any color you can help on that front --?

  • Marie Ziegler - VP of IR

  • Absolutely.

  • It would just -- like we were very low in terms of the rate of increase last year on the first part.

  • This year you would see --- expect to see pretty significant increases in the first and second quarters, and then tapering off.

  • Jamie Cook - Analyst

  • Thanks and I will get back in queue.

  • Marie Ziegler - VP of IR

  • Thank you, Jamie.

  • Operator

  • Thank you and our next question comes from Anne Duignan.

  • And please state your company name.

  • Anne Duignan - Analyst

  • Good morning.

  • JP Morgan.

  • Marie Ziegler - VP of IR

  • Hi Anne.

  • Anne Duignan - Analyst

  • Hi, guys, I'm kind of giggling here, because I just had an email from a client saying maybe will have -- we'll be eating deer tomorrow instead of turkey.

  • So hopefully not.

  • My questions somewhat similar but on the revenue outlook guidance, meaning AG revenues were up 43% in Q4, and yet for the full year '09 expecting about 5%.

  • Can you talk about the (inaudible) question -- revenues, particularly given the strength you're seeing, continuing to see in North America.

  • And then a bit more color on how you expect Brazil or South America to roll out, given that not only do you have crops down there, but you also have sugar cane.

  • And do you have government programs to help support equipment sales on the small farm side?

  • Marie Ziegler - VP of IR

  • Absolutely.

  • As you think about the AG division revenues, do bear in mind that there -- for 2009 -- is a currency impact of about 8 points.

  • So you might -- if you were going to try to neutralize for that, you would be looking at a sales guidance that would be up more like 13% right?

  • So you got the currency impact.

  • In terms of how the year plays out, clearly from what Susan said about the North American AG order book, big tractors sales look pretty good really, well into the year.

  • She did reference though, in western Europe where we have again, very solid order books in the first certainly part of the year.

  • We know that there are some countries where access to credit is developing, and there is less farmer confidence.

  • As we move in to next year, we are more cautious about that.

  • We talked about the former Soviet Union which has been certainly a market where we had seen a significant amount of growth.

  • There we are talking sales being down moderately, although there is a great demand for agriculture equipment.

  • Access to credit and the cost certainly had an impact on our farm customers there.

  • Then Brazil, again the guidance for the industry down 10% to 20% I'm sorry not Brazil, that would be for South America, heavily influenced by what's happening in Brazil.

  • And while there is certainly good government support, just access to credit for operating inputs is -- has taken its toll.

  • And in some crops, you're seeing a significant compression in margin.

  • And then Argentina, another key market in that part of the world.

  • We have seen that market slow as a result of dry weather activity early in the -- or dry weather in the early part of the planting season., and in pockets it's still quite dry there.

  • So we're really are pretty cautious.

  • Anne Duignan - Analyst

  • So, is it fair to say when you put all of that together, that you are, at this point at least, forecasting negative growth back half of the year in agriculture?

  • Marie Ziegler - VP of IR

  • I would say slightly.

  • Again you got to take into account currency, but yes.

  • Anne Duignan - Analyst

  • And just my follow up is on your comment on the fact that you're not repurchasing shares.

  • And I understand that.

  • And I think its a prudent thing to be doing in this environment.

  • However, Mike maybe you could give us some color in terms of, what would be the catalyst that you would need to see, in order to get back into the market and repurchase shares?

  • I mean how do we think about it from a forecasting standpoint for '09?

  • Mike Mack - SVP and CFO

  • Well Anne, we've talked about this a little bit before.

  • And we have been very reluctant in the past, to provide timetables or forecasts on share repurchase.

  • And I think we are going to continue that tradition.

  • We think it provides more flexibility.

  • So again, we can re-affirm that we are not currently repurchasing them, but I'm not going to be able to be provide you much more color about our intentions, the timetable, or the catalyst if we should change that in the future.

  • Anne Duignan - Analyst

  • Let me ask it another way then.

  • As you look at your capital allocation, are there any other projected or forecasted capital spending projects that you are considering revisiting given the current environment?

  • Mike Mack - SVP and CFO

  • What we talked about the capital investments on wind, are being reduced.

  • And I think that's probably the most important one that would stand out.

  • We are spending on the equipment side.

  • I think particularly on the -- in the AG division, reflecting investments for new products interim tier four.

  • And also I think reflecting our overall view of the prospects in the AG business.

  • I think they are pretty flat in the other divisions in terms of capital investments.

  • Anne Duignan - Analyst

  • Okay, I will get back in line and revisit that with you.

  • Marie Ziegler - VP of IR

  • Thank you, Anne.

  • Next?

  • Operator

  • Thank you .

  • Our next question comes from Robert Wertheimer, and please state your company

  • Robert Wertheimer - Analyst

  • It's Morgan Stanley and good morning everybody.

  • Marie Ziegler - VP of IR

  • Good morning.

  • Robert Wertheimer - Analyst

  • My first question I guess is on South America, and in particular in Brazil.

  • Do you see risk in the upcoming sort of harvester season?

  • Or is it only post the harvest, that farmers haven't gotten a good crop, that tractor sales could fall -- so its really a back end loaded risk and you have watch the harvest (inaudible)?

  • Marie Ziegler - VP of IR

  • I will answer for South America generally.

  • We are seeing already a slowing in the market.

  • So it's really not only a back half phenomena.

  • We are seeing some immediate slowing.

  • Robert Wertheimer - Analyst

  • Is that on combines, I would think would be ordered a long time ago or is that tractors, or both?

  • Marie Ziegler - VP of IR

  • I would say that we are -- on both products.

  • Robert Wertheimer - Analyst

  • Okay, thank you.

  • My follow up I guess -- on maybe the only thing that was a real surprise was North America up 5% for the industry in 2009.

  • You say large stuff is growing and small stuff is shrinking.

  • And your order books are obviously very, very strong in the larger equipment.

  • So the difference between your strong order books and the up five, which is not terrible, but not incredibly strong, is that simply the large small mixed?

  • Is that maybe capacity constraints for the industry?

  • Is that risk of a downturn late in the year?

  • Marie Ziegler - VP of IR

  • It really reflects mostly mix.

  • Again, you're seeing good levels of activity in the industry.

  • But frankly not the same rate of gain that certainly we would have seen last year.

  • I can't speak for industry capacity for Deere.

  • We do have additional capacity coming on line, in big combines, for example, but it's not available yet.

  • It will be available, as we move in to calendar 2009.

  • So you don't have a full year's availability of that capacity.

  • Then if you recall at Waterloo, although we are -- we actually ordered machine tools, shoot, almost a year ago, in some cases the capacity won't fully be available to us until we get in to 2010.

  • There is some -- a little bit of effect there.

  • But the bottom line is mostly just the mix, from the fact that the small stuff is very weak.

  • Robert Wertheimer - Analyst

  • That's helpful, thanks.

  • Marie Ziegler - VP of IR

  • Thank you Rob.

  • Next.

  • Operator

  • Thank you.

  • Our next question comes from Eli Lustgarten and please state your company name.

  • Eli Lustgarten - Analyst

  • Longbow Securities.

  • Good morning.

  • Marie Ziegler - VP of IR

  • Good morning Eli.

  • Eli Lustgarten - Analyst

  • Two --- clarification one, you did say you're not buying shares now, is that correct?

  • Marie Ziegler - VP of IR

  • Yes.

  • Mike Mack - SVP and CFO

  • Correct.

  • Eli Lustgarten - Analyst

  • Two, the forecast for Brazil, South America down 10% to 20%, that's a unit forecast?

  • Or is there currency involved in that?

  • Marie Ziegler - VP of IR

  • I'm glad you asked that question.

  • That gives me an opportunity to clarify.

  • When we give you our industry outlooks it is dollar weighted, but it strips out any effect of price, and it strips out any affect of currency.

  • We are looking strictly at volumes, but it is not in units.

  • Eli Lustgarten - Analyst

  • So it's volume but [not that].

  • Can you really talk about your 7% price assumption for the year.

  • And its hard to believe there is going to be much pricing in Construction and Forestry, or Lawn and Garden -- the CC&E business -- so it implies all the pricing is in AG, is that correct?

  • And you did announce 10% price increases I guess for both tractor and combines, are those holding, that's why we get 7% because it's related?

  • Marie Ziegler - VP of IR

  • So let me just first start, you're assumption is not correct.

  • We do have price increases in commercial and consumer and construction and forestry, but candidly, the rates of gain are probably not as high as they would be on the AG side.

  • When you think about pricing, remember that you're looking at pricing for the full Company, for the full division.

  • The prices you cited are for big products, big tractors, big combines, there's not very much price increase on the small side of the house, so small tractors, et cetera.

  • So you're looking at -- bear in mind -- you've got mix.

  • Eli Lustgarten - Analyst

  • So its fair to say that virtually the bulk of the pricing of 7% year is driven by the AG business?

  • Marie Ziegler - VP of IR

  • That's certainly fair.

  • Eli Lustgarten - Analyst

  • And I don't have to worry about that.

  • And then a quick follow up, your CCE volume is up -- sales forecast is up 6%.

  • but your tonnage is down --

  • Marie Ziegler - VP of IR

  • Our -- wait, [CC] is down 6 --.

  • Eli Lustgarten - Analyst

  • And tonnage is down 10.

  • Are we implying that we are liquidating a lot of inventory, with the tonnage numbers and pulling volumes, that the production would be below retail sales for quite a while?

  • Marie Ziegler - VP of IR

  • Well remember that -- oh roughly 30% of the division is landscapes.

  • And so obviously they have no tonnage, because they are not manufacturing equipment.

  • So you do get a bit little bit of mix there, And the tonnage numbers are very, -- they are a guide that helps you understand what is happening in our manufacturing.

  • But it's difficult to translate those numbers into sales.

  • And frankly, that's why we no longer provide you our forecast guidance just based on tonnage, why we switched to sales.

  • Eli Lustgarten - Analyst

  • Alright -- just one quick.

  • You are cutting your wind spending for this year versus last year?

  • Marie Ziegler - VP of IR

  • For 2009 that's correct.

  • Eli Lustgarten - Analyst

  • Thank you very much.

  • Marie Ziegler - VP of IR

  • Thank you Eli.

  • Next question, please.

  • Operator

  • Thank you.

  • Our next question is from Terry Darling.

  • And please state your company name.

  • Terry Darling - Analyst

  • Goldman Sachs.

  • Thank you.

  • Marie Ziegler - VP of IR

  • Good morning Terry..

  • Terry Darling - Analyst

  • Good morning.

  • Hey, wondering if you could talk a little about the guidance for the capital business.

  • And then kind of how you are thinking about leverage longer term.

  • And I guess if we look at the guidance down about 10% I think in earnings year-over-year, with a fourth quarter down 30%, which was below your expectations or implied guidance I think as Susan said on a tighter spread profile.

  • Why are we only down 10% next year, if the sort of the run rate going into the year is a lot worse than that, and obviously the credit market feel still pretty tough?

  • Marie Ziegler - VP of IR

  • Well there was a capital infusion that was made late in October of $400 million.

  • And so that will help -- candidly it helps reduce the expenses of the credit operation.

  • Mike Mack - SVP and CFO

  • I would say in terms of the run rate, I'd say some of these things are things that will not be recurring.

  • We had an impact of FX that was really related to the foreign exchange shock that occurred in October as a consequence of the credit crisis.

  • Which was -- I think we had some currencies -- it was pretty substantial.

  • So some of the things I think will not be recurring on the credit side.

  • In terms of --

  • Terry Darling - Analyst

  • Mike, are you implying on that FX comment, are you implying you had a hedge that worked against you?

  • Marie Ziegler - VP of IR

  • No, it actually has to do with revaluing payables.

  • Mike Mack - SVP and CFO

  • (inaudible)

  • Marie Ziegler - VP of IR

  • And -- actually it is a factor in the quarter -- but it's pretty small for the credit company.

  • Mike Mack - SVP and CFO

  • But most of that is equipment operations, that's right.

  • But going back to the leverage question, this takes our leverage back to where it was not very long ago actually.

  • Almost to where it was about a year ago.

  • I think we did that because we thought it was prudent, given the current environment and we may modify that as circumstances change in the future.

  • But we think this makes more sense.

  • In terms of what the leverage is then at October for the worldwide credit, it's I think it's about 7.9 to 1.

  • Terry Darling - Analyst

  • And I think if you go back to 2002, you're more like 5.5 to 1.

  • You're hearing across a lot of different companies, a sustained shift in leverage down, a lot lower than 8 to 1, Mike.

  • I mean is that not something that's kind of inevitable for you?

  • And if that is or isn't the case --

  • Mike Mack - SVP and CFO

  • I don't -- I don't think I would necessarily agree with that.

  • We did this on our own, first of all.

  • This was not something that anyone asked us to do.

  • Our losses are exceedingly low.

  • If you look at the losses on the portfolio we talked about, I think they are something -- that leverage makes a lot of sense, with given where the losses are in the portfolio.

  • Terry Darling - Analyst

  • You think 8 to 1 in the new credit world we're in, could be sustainable for you?

  • Mike Mack - SVP and CFO

  • Right now, we think that's a very appropriate level.

  • Terry Darling - Analyst

  • Okay.

  • Last question, can you just tell us what your loss assumptions are in the 2009 guidance?

  • Marie Ziegler - VP of IR

  • For on credit?

  • Terry Darling - Analyst

  • Yes.

  • Marie Ziegler - VP of IR

  • For credit, we this year ran about 0.35%.

  • And for next year we think we -- or in 2009 we think we will probably be around 0.5%.

  • Terry Darling - Analyst

  • Very good.

  • Thanks so much.

  • Operator

  • Thank you.

  • Our next question comes from Henry Kirn and please state your company name.

  • Henry Kirn - Analyst

  • Good morning.

  • It's UBS.

  • Marie Ziegler - VP of IR

  • Good morning, Henry.

  • Henry Kirn - Analyst

  • Hey, could you talk a little bit about how you view the age of the AG fleet in US, South America and Europe?

  • We just came off of a really good year.

  • How do you view replacement demand at this point?

  • And how much ability does the farmer customer have to age the fleet?

  • Is there any pressure from them needing to replace basically?

  • Marie Ziegler - VP of IR

  • Well the last -- I don't have good statistics out of other parts of the world.

  • In the United States a few years ago we were looking at an average age of about 17 years.

  • Survey ago, like two years ago, was like 19 years, and it's now 20 years.

  • So the average age has gone up.

  • Henry, we don't do our projections based on replacement demand.

  • We really project in parts of the world based on income.

  • And obviously in the current environment we got to take in to consideration access to credit, which is something we haven't had to be concerned about as much historically.

  • That's why like in the US, it is so significant that we see very good levels of farm cash receipts this year and next year, because we know that that drives next year's equipment purchases.

  • And again you know that for big equipment, the order books look extremely good.

  • The volatility you see in the potentially in the earnings of farmers for next year in Brazil and Argentina, and in addition to difficult access to credit in Brazil, influence our outlook and explain why we would be looking at more of like a down 10% to 20% there.

  • Henry Kirn - Analyst

  • Okay.

  • And globally, as we've seen pressure on the AG markets.

  • Have you seen your competitors follow your lead in holding the price increases, or have you started to see evidence of discounting?

  • Marie Ziegler - VP of IR

  • I would not be able to comment about our competitors.

  • Again, our forecast has for the company positive price realization of 7 points.

  • Henry Kirn - Analyst

  • One final one.

  • Some of the global construction equipment players have seen their share prices fall pretty strongly.

  • At this point, if you're looking to grow your global construction footprint would you consider doing that by acquisition?

  • Marie Ziegler - VP of IR

  • I -- do you want to?

  • Go ahead.

  • Mike Mack - SVP and CFO

  • No, I don't think we have too much to comment on today.

  • You are familiar with these, I call them relatively modest-size investments we made in China and India here this past year.

  • And I think that's kind of the thing that fits into our scheme.

  • Marie Ziegler - VP of IR

  • I think it is also important to end -- to note that as we look at our investment opportunities, bear in mind that we are looking for a 20% operating return on operating assets on average-over-time, and that's a pretty good benchmark.

  • With that, our next question please.

  • Operator

  • Thank you, our next question comes from Andrew Casey, please state your company name.

  • Andrew Casey - Analyst

  • Wachovia Securities.

  • Good morning everybody.

  • Marie Ziegler - VP of IR

  • Good morning Andy.

  • Andrew Casey - Analyst

  • Question on the outlook.

  • If I exclude pricing, currency incremental material costs, higher R&D and the lower credit, and then the remainder of the plant closure, I'm getting a fairly high head wind in cost per share, somewhere in the $0.75 to $1.40 range.

  • The math may be a little off, but it seems as if I'm missing something.

  • Is there somewhere where you're expecting extra costs to come from?

  • Marie Ziegler - VP of IR

  • Well, I'm going to be pretty blunt on the raw material costs.

  • We have a very large range, probably are -- would be biased to the upside of the range.

  • We do have some absorption, as we take down inventories -- in our -- inventories -- when we report to you, we are reporting a combination of inventories and receivables, but that hit, that absorption impact is projected at $130 million, so it would be significant.

  • The other thing is currency.

  • This is the translation of our operating profit from overseas units, and Susan had mentioned the impact on operating profit there as being $100 million to $150 million.

  • So that's fairly significant.

  • And maybe the other thing is, you heard the capacity expansion, we've got capital expenditures, still targeted at about a $1 billion in the equipment operations.

  • And as you add that capacity, you do encounter some inefficiencies in the near term.

  • And that does, because you got additional people working to get the product out, you got -- you are having to shift things around in the factory, so that's probably a bit of a factor too.

  • Andrew Casey - Analyst

  • Okay.

  • I mean it still seems a little bit conservative, but I will follow up offline.

  • Thank you.

  • Marie Ziegler - VP of IR

  • Thank you, Andy.

  • Next question.

  • Operator

  • Thank you.

  • Our next question comes from Charlie Rentschler and please state your company name.

  • Charlie Rentschler - Analyst

  • Wall Street Access.

  • Given the importance in your fiscal '09 outlook of AG, and particularly US AG, obviously government policies are crucial in your thinking.

  • And although you didn't state it, I wondered if you could just talk for a couple of moments about your thoughts about the new administration's attitude on first ethanol and secondly wind?

  • And how that's affecting your forecast?

  • Marie Ziegler - VP of IR

  • At least on the campaign trail, President-elect Obama certainly very supportive of renewable fuels, renewable energy.

  • And so that would be really all I can add at this point.

  • But it would -- he would appear to be very supportive of it.

  • Charlie Rentschler - Analyst

  • Obviously, that's a huge market for row crop farmers, particularly corn farmers at this point.

  • So you're -- I mean that's baked into your assumptions (inaudible) that there will be continuing strong support for ethanol?

  • Marie Ziegler - VP of IR

  • Well that certainly would appear to be the case.

  • And additionally baked into our assumptions, is the fact that we have still about 2 billion gallons of ethanol capacity that's under construction, and yet to come on.

  • And actually in the last quarter, we saw just nearly 2 billion gallons of capacity in ethanol in the US come online in production.

  • Charlie Rentschler - Analyst

  • And about the wind -- wind tax credit, can you comment?

  • Marie Ziegler - VP of IR

  • The wind -- the production tax credit was extended in early October, and it runs now through the end of December of 2009.

  • Our capital investments for wind in 2009, really do not reflect a pull back on our belief in the renewable wind business, but just simply that would be -- we are doing that to be prudent in use of our capital in the current environment.

  • Charlie Rentschler - Analyst

  • So you're not -- there is no re-thinking or reduction in your enthusiasm for wind?

  • Marie Ziegler - VP of IR

  • No, this really reflects being prudent in the current environment.

  • Thank you, Charlie.

  • Charlie Rentschler - Analyst

  • And just as an aside, I think Susan did a great job of taking us through the slides.

  • Marie Ziegler - VP of IR

  • Thank you, I think she did too, thank you for mentioning it.

  • Next please.

  • Operator

  • Thank you.

  • Our next question comes from Barry Bannister and please state your company name.

  • Barry Bannister - Analyst

  • Stifel Nicolaus.

  • Hi.

  • Marie Ziegler - VP of IR

  • Hi, Barry.

  • Barry Bannister - Analyst

  • You did a good job walking through past dues, and net charge offs in the credit division, going back through past cycles.

  • But could you give us some color on what sort of effect delays or cancellations had on your order book, as you descend into peaking period and decline in the cycle?

  • Marie Ziegler - VP of IR

  • Well, on the call Susan did mention that we had seen virtually, no, I mean it's just a handful of cancellations in the US and Canada, virtually nothing in Europe.

  • We have seen some in South America, and in eastern Europe in to the former Soviet Union and in that case it really is related to access to credit which is a significant issue there.

  • That's why we called it out actually in the press release.

  • So our historic experience, I can't predict the future, I know, but historically once a farmer has made a commitment to purchase, at least our experience in the US, has been that they continue through with that decision.

  • Many times the subsequent trade-ins are already lined up, so you've got the buying chain already pre-determined.

  • Mike Mack - SVP and CFO

  • And in the US, access to credit by farmers, in terms of the rural banks, as well as credit companies, very available for them, And so that hasn't had that negative impact here in the United States at all.

  • Marie Ziegler - VP of IR

  • and they certainly come in with the balance sheet in excellent condition.

  • Barry Bannister - Analyst

  • Then you had $550 million in material costs above plan in 2008, and to offset that you would have had to have had 2.1% of price.

  • You are saying pricing would be 7% in '09, which if fully realized on flat sales, would be $1.8 billion or 2 times the high end of your cost delta estimate.

  • So on the one hand, I'm surprised that the customers are bearing the brunt of these costs.

  • And in the other I'm just asking, have you assigned your toughest person to go after your suppliers?

  • Because it seems almost a travesty to me in a recession that you can't squeeze post January '09 steel contract, and others, more out of your suppliers and rely less on price in '09.

  • Marie Ziegler - VP of IR

  • First of all, again, our pricing bears in mind -- or you must bear in mind the fact that a lot of the costs were back end loaded.

  • We were not seeing the same kinds of ramp ups in costs in the early part of the spring, that you were seeing in the steel markets, for example.

  • Just like as those costs were back end loaded in 2008, we will see them come down on a back end loaded basis in 2009.

  • We are -- that is the way the business works, and that's how our contractors, our suppliers honored their commitments to us we will honor our commitments to them.

  • In terms of the pricing, again as you think about the pricing, recall that we do have some very significant new product introductions in the Construction and Equipment business, and in our Commercial and the Consumer Equipment business, and certainly in the AG business that helps support the value that we are delivering to our customers in addition to covering our costs.

  • The price realization that we are talking about, there is a cost associated with some of the additional features, better transmissions and caps and things like that that our customers are benefiting from.

  • I believe we have one more person in cue?

  • Operator

  • Thank you.

  • Our final question comes from Andrew Obin and please state your company name.

  • Andrew Obin - Analyst

  • Yes hi.

  • It's Merrill Lynch.

  • Marie Ziegler - VP of IR

  • Hi.

  • Andrew Obin - Analyst

  • Just sort of more of a simple question.

  • What happened in the quarter?

  • We've given guidance for the quarter in the mid-August, and why was it so hard to forecast costs in AG division for 4Q?

  • Marie Ziegler - VP of IR

  • Wait a minute.

  • When we look at really what drove the changes for the quarter, it's almost all below the line for operating profit.

  • Because although our raw material costs were a little higher, our price realization came in at three points for the company instead of two points.

  • Bear in mind, the impact of the tax rate was -- because it did come in higher in the quarter, than it did, than we had projected.

  • Our guidance had been 36 and affectively we were at 41%.

  • More importantly we had foreign exchange, and again that dealt with revaluing US dollar denominated payables, and that effect is about $22 million for us, after tax in the quarter.

  • So that explains the bulk of the miss, and then credits we've already talked bout which is the other 10th.

  • Andrew Obin - Analyst

  • Very fair.

  • And just another question, I'm just going back to the question on finance sub.

  • In terms of the amount of refinancing you guys have to go in to '09.

  • So is the idea that you will have to raise money probably at a higher cost if you will be able to maintain the spread to your customer, is that the fundamental thought behind your guidance for '09?

  • Marie Ziegler - VP of IR

  • There is a little bit of spread compression although we have increased our rates, candidly to our customers, that there is a little bit of spread compression.

  • The commercial paper markets have been -- have been good.

  • [OVERLAPPING SPEAKERS]

  • Mike Mack - SVP and CFO

  • -- have been good.

  • But this does reflect the prospective all-in cost across all of our funding sources.

  • Andrew Obin - Analyst

  • My only question is I guess as I think about potential refinancing costs for some of your peers in the industry, and also what I hear in terms of people being able to pass on to their customers.

  • This seems that there is a little bit of push back from the customers, and we are talking about cost of financing being up in excess of probably 300, 400, 500 basis points.

  • Am I looking at it correctly, in terms of increased cost of financing for medium term notes that you have in the finance sub or am I being too pessimistic.?

  • Marie Ziegler - VP of IR

  • Well the medium terms notes are one component of it, and they are up some, but the -- you have to blend in as well the commercial paper and ABF, so this forecast reflects the blended prospective all-in costs across all the funding sources.

  • Andrew Obin - Analyst

  • Okay.

  • I'll take it offline.

  • Thank you very much.

  • Marie Ziegler - VP of IR

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

  • At least to our US based listeners, Happy Thanksgiving.

  • Operator

  • Thank you.

  • This does conclude today's conference call.

  • We thank you for your participation.

  • You may now disconnect your lines