Deere & Company's Management Discusses F3Q12 Results - Earnings Call Transcript

Deere & Company (DE)

Q3 2012 Earnings Call

August 15, 2012, 10:00 am ET

Executives

Tony Huegel - Director, IR

Jim Field - SVP & CFO

Marie Ziegler - VP & Treasurer

Susan Karlix - Manager, Investor Communications

J.B. Penn - Chief Economist

Analysts

Jerry Revich - Goldman Sachs

Ashish Gupta - CLSA

Ann Duignan - JPMorgan

Andrew Casey - Wells Fargo Securities

Stephen Volkmann - Jefferies

David Raso - ISI Group

Eli Lustgarten - Longbow Securities

Vance Edelson - Morgan Stanley

Jamie Cook - Credit Suisse

Henry Kirn - UBS

Presentation

Operator

Good morning and welcome to 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. I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations. Thank you. You may begin.

Tony Huegel

Thank you. Hello, also on the call today are Jim Field, Raj Kalathur, Marie Ziegler, Susan Karlix and J.B. Penn, our Chief Economist. Today, we’ll take a closer look at Deere’s third quarter earnings. Then spend some time talking about our markets, the outlook for the fourth quarter and the current drought conditions. After that, we’ll respond to your questions.

Please note that slides are available to complement the call this morning. They can be accessed on our website at www.johndeere.com.

First, a reminder. This call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Thomson Reuters. Any other use, recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.

This call includes forward-looking comments concerning the company’s plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.

This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website at www.johndeere.com/financialreports under Other Financial Information.

Now, please turn to slide three and I’ll turn the call over to our Chief Financial Officer, Jim Field.

Jim Field

Good morning. Thank you for joining us as we discuss what was a great quarter on most fronts. John Deere reported record sales and profits in the quarter, operating margins in the Ag & Turf division were approximately 14%. We successfully launched new products while continuing the build-out of our global footprint, but our sales increased 16%, was short of our guidance by nine percentage points or about $700 million. This had a corresponding negative impact on the bottomline and it was lower than First Call estimates.

The miss was in Ag & Turf; half of the shortfall is due to softening market conditions outside the US; of note, China, India and the EU-27. Additionally, sales were negatively impacted as the granting of import licenses in Argentina continues at a slow pace; timing of and changes to finance programs as well as the weaker Reais affected sales in Brazil and Turf equipment sales in the US were hurt by weather conditions.

The other half of the shortfall is manufacturing execution. The good news is, we expect to make-up the bulk of the sales miss related to execution during the fourth quarter. In the third quarter, we had very aggressive production levels as we continue to ramp up our schedules and we experienced some hiccups.

The all new North American Combine line with significant product innovations and IT-4 compliant engines was most challenged and accounts for the bulk of the shortfall. The issue is not quality; in fact we are receiving positive customer views on the machines already in the field. We just had trouble ramping up production to meet the aggressive build schedules in the quarter. As a result, we experienced production delays of up to 14 calendar days.

In addition, we are seeing an unprecedented early harvest of up to four to five weeks in some areas. Consequently, some machines will be shipped too late for harvest and we have allowed dealers to cancel orders. This affects only about 3% of harvester’s 2012 production and as reflected in our updated guidance.

We know, we know less than stellar execution is not what you expect from John Deere. So what happened? There are 40% more unique part numbers in the new Combine’s than previous models; new parts, required new suppliers and new challenges for existing suppliers. We also had a significant number of new employees requiring extensive training, many of whom were hired as production schedules were sharply ramping up. To catch things off, we are running the factory at full speed so there was no downtime to get caught up once we felt behind. These issues have been addressed.

The key is that these are not are quality or customer satisfaction issues. They are execution issues; problems we at John Deere know how to fix. Of course, the sales shortfall is reflected in higher inventories in the third quarter and at year-end; actions have been taken to manage the inventories, but it will take longer than the end of the year to work them off.

Read the rest of this transcript for free on seekingalpha.com

More from Stocks

Coke's a Better Stock to Buy Than Pepsi on Surprising North America Sales
Amazon Crushes Quarterly Earnings Estimates, Raises the Price of Prime

Amazon Crushes Quarterly Earnings Estimates, Raises the Price of Prime

Barbie Flexes Her Muscle in Mattel's Q1 Earnings

Barbie Flexes Her Muscle in Mattel's Q1 Earnings

Amazon Crushes First-Quarter Profit Estimates -- Watch TheStreet's Live Analysis

Amazon Crushes First-Quarter Profit Estimates -- Watch TheStreet's Live Analysis

Dow Jumps 238 Points as S&P 500, Nasdaq Also Climb

Dow Jumps 238 Points as S&P 500, Nasdaq Also Climb