Good morning, and welcome to the Geron Company Investor Call. Your lines have been placed in listen only until the question and answer session of today's call. I will now turn the call over to Mr. Tony Eagle, Director of Investor Relations. Thank you.
You may begin.
Thank you. Also on the call today are Sam Allen, our Chairman and Chief Executive Officer Raj Kalathar, our Chief Financial Officer and Max Gwynn, President, Worldwide Construction and Forestry. On today's call, we'll discuss Deere's agreement to acquire the Wirtgen Group, which was announced this morning. 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/events and presentations. First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Company. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q and A session, agree that their likeness and remarks in all media may be stored and used as part of this call. This call contains forward looking information related to Deere, Eirtgen and the acquisition that is based on current expectations and involve substantial risks and uncertainties that could cause actual results, performance, events or transactions to differ materially from those expressed or implied by such statements.
In addition, actual results, performance, events and transactions are subject to other risks and uncertainties that relate more broadly to Deere's overall business, including those more fully described in Deere's filings with the United States Securities and Exchange Commission, including but not limited to the factors discussed in Item 1A, Risk Factors of Deere's most recent Annual Report on Form 10 ks and Quarterly Reports on Form 10 Q. In light of these risks, uncertainties and other factors, you are cautioned not to place undue reliance on the forward looking information. Now, I'd like to turn the call over to Sam Allen, Chairman and Chief Executive Officer.
Good morning. As you've heard, GEAER today announced plans to acquire the Wirtgen Group, the world's leading manufacturer of road construction equipment. Wirtgen is a private company based in Germany. It is well known, highly respected name in the road construction business whose reputation for customer service and high quality innovative products is second to none. Eirtgen is a premium asset with a leading global market position and a record of strong financial performance.
We believe it fits very well with the strengths of John Deere and our priorities for the future. It aligns closely with our strategic plan that calls for expanding our global presence in construction as well as agricultural equipment. And it certainly ties with our goal of helping meet the world's increasing need for infrastructure as well as for shelter and food. Deere and Wirtgen are a good cultural match too. Our 2 companies know each other well.
We share common values and have developed a great deal of mutual respect. More than a decade ago, we identified Wirtgen as an attractive strategic fit for our construction business. While head of the C and S division in the mid-two thousand, I met with the Wirtgen family to discuss the possibility of pursuing strategic opportunities such as this one. And we stayed in close touch ever since. Over this time, we've watched the company develop into a global leader, outpacing competitors with its superior product technology and exceptional customer relationships.
Over this time, Deere's interest in Wirtgen and our regard for its operations and way of doing business have only deepened. Then when Stefan and Joerggen Joerggen decided to sell their business and move on to other opportunities, they reached out to Deere and we were honored they did. Through the course of the subsequent negotiations and due diligence, we confirmed that Wirtgen indeed fits squarely with our strategic plan and its emphasis on expanding our global customer base. And what's more, we believe we've arrived at an agreement that is fair, balanced and provides solid value to all parties involved. For more detail on the Wirtgen transaction, here's Raj Kalatour, Deere's Senior Vice President and Chief Financial Officer.
Beginning on Slide 4,
as you have read this morning, Deer has acquired agreed to acquire substantially all of the Wirtgen business. Wirtgen, the world leader in road construction had €2,600,000,000 in sales in its fiscal year ending December 31, 2016, and is forecasting sales of about €3,000,000,000 in fiscal 2017. The estimated transaction value is about US5.2 billion dollars based on an exchange rate of $1.12 to €1. At 9.5x enterprise value to EBITDA based on Wirtgen's 2017 financial forecast, the multiple is clearly attractive. The transaction will be funded through a combination of cash and new debt and no new equity will be issued.
Another important point, we expect attractive EPS accretion beyond year 1. Regarding year 1, when considering GAAP EPS, which includes the impact of purchase accounting, the transaction is expected to be positive in year 1 based on current analysis and assumptions. However, keep in mind, there are many variables that will not be finalized until post closing. The transaction is clearly EPS accretive, excluding the impacts of purchase accounting. Lastly, we expect this deal to close in the Q1 of Deere's fiscal 2018.
I will now turn the call over to Max Gwynn, President of the Worldwide Construction and Forestry Division to discuss this opportunity in greater detail.
Good morning, everyone. I'd like to speak further about the strategic rationale for the transaction, and we're on Slide 5. I'll cover all of these topics in more detail, by the way, but we can start with some high points. First of all, the acquisition of the Wirtgen Group gives Deere far greater exposure to transportation infrastructure. This is a sector that's faster growing and less cyclical than the broader construction market today.
There's plenty of news out there today about interest in infrastructure investment, so we believe it's an attractive space for Deere and the timing is good. Wirtgen is the global leader in road construction equipment, and we know this industry may be a bit hard for you to study because both Wirtgen and the 2nd largest player, the Fiat Group, are private companies based in Europe. I'll give you much more information on Wirtgen in just a minute. Another important point, the deal enhances Deere's global presence with a complementary product line and no product overlap. It makes CNF a global top 3 player.
This deal also provides an opportunity to leverage the capabilities of our integrated enterprise. You should think about things like electronics, engines, ISG, John Deere Finance, etcetera. Lastly, the deal is financially attractive. As Raj said, it will be EPS accretive in the 1st year and a strong contributor in the future. So now let's hit those high points one at a time, starting with the transportation sector, and we're on Slide 6.
As mentioned, this transaction provides Deere far greater exposure to transportation. That industry is roads, bridges, airports and railways. As you can see in the chart, that sector has growth tailwinds. We expect an 8% CAGR in road construction going forward, and that is not a large increase over the performance of the overall transportation sector over the last decade. So the trend is not new, but we believe it's increasing.
It's also important to recognize that road construction consists of not just new roads, but also rehabilitation of existing roads. I'll show you an illustration in a few minutes that explains the road construction process and how it fits with our existing construction business. Moving on to Slide 7, we can talk about what we believe is a quite compelling case for making the acquisition. This deal represents a unique opportunity opportunity to acquire the market leader in a premier sector of the construction industry. 80% of Wirtgen's revenues come from market leading products.
Their market presence is very strong in all key markets, including Asia. The investments made to localize products have significantly enhanced their competitive position. There are 5 core manufacturing operations in Germany and significant operations in China, India and Brazil. Mercken's market position and financial performance stack up well against some of Deere's best performing equipment operations. The brands are very strong and we intend to keep those brands.
They have a truly global distribution network. 70% of that network is company owned, 30% goes through independent dealers. Now let's take a look at the Wirtgen Brands on Slide 8. The company has 2 main divisions, Road Technologies and Mineral Technologies. The 3 Road Technologies brands are Wirtgen, Vogel and Hamm.
The 2 Mineral Technology brands are Kleiman and Binninghoven. If you think about the Wirtgen brand, the most visible product in that product line are the milling machines that many of you see on the highways and streets in your neighborhoods. The other premier product is the concrete paving equipment. There are several other product forms that are derivations of the milling technology. There are road recyclers, there's a surface mining machine, other products that also have very strong market Hamm makes compaction equipment, and we'll see how those interact together in an illustration in just a moment.
Kleiman and Benninghoven are the 2 most recent acquisitions inside the group. Kleiman is in the crushing and screening business, producing aggregate in quarries and Benninghoven makes asphalt plants. Again, we'll look in a minute how everything fits together here. So let's move to Slide 9 and talk more about the Wirtgen Group. As mentioned earlier, it is a private company.
They're based in Windhagen, Germany with over 50 years of operating experience. Their global manufacturing footprint is highly aligned with that of Deere's own operations. Their 5 facilities in Germany basically encircle our headquarters in Mannheim, Germany. Their operation in India is in Pune, also our home in India. Their factory in Brazil is in Porto Alegre, very close to our tractor factory in Brazil.
And their Chinese operation is in Longfeng, China, which is in between Tianjin and Beijing. Tianjin is our manufacturing headquarters, so strong alignment there. I mentioned earlier that 70% of their sales flow through company owned retail locations. The rest of the market is covered by 150 independent dealers. As you can see on the right side of the slide, the company enjoys strong margin performance and has a track record of sales growth.
Product investments, IP investments and factory capacity investments have been and are being well executed. Mertgen sales are geographically diverse with over 70 percent coming from outside of the Americas. That brings some balance and some growth potential to our existing C and F business. Slide 10 touches on the complementary fit of the acquisition. As we said earlier, the transaction improves Deere's position to be a top 3 global player in the construction forestry equipment business.
The combined Deere and Wirtgen product portfolio was highly complementary, will allow us to offer products for each of the different stages of the road construction process. The deal does provide scale, provides a global distribution network. It also enhances our ability to serve key customers, many of which we already know and some of which we'd like to know. Slide 11 is the illustration I've mentioned a couple of times. It illustrates the key steps in the road construction process, and I think it's helpful in understanding how the various products offered by Deere and Perkin put together to serve the industry and customers.
If you look up at number 1 in the quarry business, you're all aware of the investments we've made in PCE, a production class equipment inside there over the last few years. So those big loaders and big trucks and big dozers we've introduced, a lot of those are in quarry operations. Quarries feed the crushing and screening business, and number 2, that's the Kleiman business. So they're producing aggregate that's consumed in asphalt plants. Moving over to number 3, you see the rehabilitation of roads that we mentioned earlier.
That's a Wirtgen milling machine, milling off the surface of an asphalt road and providing recycled asphalt product to an asphalt plant. So that recycled product and the aggregate goes to number 4 of the asphalt plant, where hot asphalt is produced and ready for application on a road. The actual roadside has been prepared again by the types of construction equipment we produce, in particular, the rough grading and finish grading operations have been areas of expertise for Deere for a long time. Then you go into the 1st initial soil compaction stage, number 8, that's a HOM product, the asphalt paver, number 9, a Fogula product and number 10, compaction equipment to compact the asphalt. Alternatively, for concrete roads, you see the ham paver in front of the concrete paver, so that's another alternative for how the roads are constructed.
We think all of that fits together very well and that illustrates the way things fit together with no product overlap. Slide 12 then indicates our integration plans. 1st and foremost, we intend to preserve customer relationships and all customer facing functions. Customers will not feel a difference as a result of this transaction. We are committed to continue the legacy of profitable growth, quality and innovation, which has been instilled by the Wirtgen family.
Those characteristics share much in common with the core values that Deere is known for. Focus will be placed on prioritizing synergies and selectively integrating where it makes sense, leveraging the strengths of Deere Integrated Enterprise initially in areas such as supply management. I want you to know that the people and the structure are in place and we're ready to go from an integration perspective. I'll hand it off to Raj now to discuss some additional aspects of the transaction.
Moving to Slide 13, let's focus on our plans for leveraging enterprise capabilities. Deere's capabilities provide meaningful long term opportunities to improve an already strong working business through supply based leveraging on direct and indirect materials, vertical integration including engines, cylinders, telematics and electronics, using our captive finance company, John Deere Financial and leveraging our worksite solutions capabilities in order to improve customer productivity through connected machines. Importantly, over 80% of the benefit of these synergies come from cost reduction, largely from direct and indirect materials. Slide 14 lays out the Wirtgen's acquisitions value adding opportunity for Deere shareholders. Synergies represent a conservative opportunity of about €100,000,000 faced in over 5 years.
We have conservatively assumed that less than 10% of the €100,000,000 estimates come from revenue synergies, although there is much higher potential that we will be pursuing. The transaction offers an attractive enterprise value to EBITDA multiple of 9.5, as I mentioned earlier. Applying the €100,000,000 of synergies to Workin's fiscal 2017 forecasted EBITDA makes the multiple an even more appealing 7.9 times. Operating cash flow generation is positive in year 1. Again, as previously discussed, year 1 GAAP EPS is expected to be positive.
However, keep in mind there are many variables that will not be finalized until post closing. Moving to Slide 15 to discuss the transaction details and funding. As mentioned, the current transaction value is estimated at about $5,200,000,000 based on May 25 exchange day of US1.12 dollars to the euro. The euro value is 4,600,000,000 dollars Transaction value includes the following: purchase price for equity of €4,357,000,000 assumption of debt net of cash at closing and a ticking fee representing an annualized rate of 5% of the purchase price prorated from the date of signing May 31, 2017 till the closing of the deal. This will be about €110,000,000 if we close at the end of November 2017.
On the right side of the slide, you see how the transaction is being funded. This consists of 1st, cash generated in fiscal 2017 from the equipment operations, including from the sale of SiteOne shares net of capital expenditures and dividends. This is expected to contribute roughly half of the transaction value. A second funding source is cash received from the repayment of intercompany loans from John Deere Financial. Note that in the last few years, we loaned some of the cash generated from the equipment operations to financial services that will now be repaid to the equipment operations.
The 3rd source will be new debt, up to $1,000,000,000 of new debt issued by the equipment operations. The financing structure will preserve the internal goal of 7.5:one debt to equity ratio at John Deere Financial. It is worth noting that with this financing structure, we expect to maintain a mid single A rating. By the way, as you may have seen this morning, S and P affirmed our mid single A rating. As we have consistently stated in the past, our cash use priorities stay the same.
Most important priority is to maintain a mid single A rating over the long term and through the cycles. 2nd priority is to invest in good long term growth opportunities, both organic and inorganic, examples such as working. 3rd, maintaining dividends at 25% to 35% of mid cycle earnings. And finally using any remaining cash for share repurchases when they add good value to our long term shareholders. As we see on Slide 16, this transaction grows the C and F division's overall contribution to net sales and as implied by the margins, it increases enterprise profitability as well.
Even so, the Ag and Turf division will continue to be the company's principal segment. Now, Max will touch on a few key points summarize this transaction on Slide 17.
Well, as you would expect, we're excited about the transaction and the opportunity. We're acquiring the best positioned company in the most attractive sector of the construction equipment industry today. The transaction positions Deere CNF as a top 3 global player, improving our competitive and our financial position. It also enables us to leverage the capabilities of Deere's integrated enterprise and enhance the company's strategy. Lastly, we believe the deal delivers value to our customers.
There's no overlap. It adds to the bottom line quickly. As I mentioned earlier, leadership and integration resources are in place, ready to go when the time is right, and their replacements are in place also, so we can make sure the existing construction business stays strong while we take on the important integration activities. I'll hand it over to Sam now for closing comments.
Thanks, Max. As a final thought, the acquisition of the Wirtgen Group makes good sense in any number of ways. It aligns with our long term strategy expand in both agricultural and construction equipment. And keep in mind, as Raj pointed out, that over 2 thirds of Deere sales will still come from agricultural and turf products. The transaction also enhances our ability serve customers across the globe with market leading products.
And it puts Deere in a strong position to participate in the fast growing road construction equipment industry and therefore to fully capitalize on the world's increasing need for good roads and other types of infrastructure. Wirtgen, in short, is an outstanding company, and we believe it will help us provide even greater value to our customers and investors in the years ahead.
Thank you, Sam. Now we're ready to begin the Q and A portion of
the call.
The operator will instruct you on the planned procedure. However, as is our custom, in consideration of others and our hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue. Operator?
Certainly. Thank you. We will now begin the question and answer session. The first question comes from the line of Mr. Timothy Fye from Citigroup.
Your line is now open.
Thank you. So the question relates to the return profile of the deal. And I think you've outlined a 20% OROA target historically, which I do I believe includes goodwill in that calculation. So the question is if you can help with any sort of kind of parameters in terms of your growth expectations you have for the business as well as timetable to reach that return target? Thank you.
Tim, thanks for the question. As you know, this EBIT margin for this entity is very good. In 2016, it was 13%. And if you look at 2017, right now they're running higher than the 13%. Their forecast is about 14%.
So with that type of a performance and the synergies we bring, we will see this acquisition return very well in the OR away, especially in the long term.
Thank you. Next caller.
Operator?
Thank you. The next question comes from the line of Mr. Stephen Goplin. Your line is now open.
Hi, good morning guys. I think, Raj, you started to talk a little bit about some sales synergies that you think could be bigger than obviously what you factored in there. And I'm curious if you could just expand on that a little bit. The sellers had seemed to me to be a business that was extremely specialized and paving contractors don't tend to buy a lot of general construction equipment, but please correct me if you disagree with that.
We've got some modest assumptions in there about revenue increases and synergies, and we'll see how that develops over time. Generally, the channel that sells road construction equipment also sells construction equipment. So we think, as we illustrated in the picture, we think there's an opportunity for growth over time. Yes, Raj is making the point that the customers are common, right? So the same people that are buying generally paving equipment and milling machines are also buying construction equipment.
Okay. Thanks. Thanks, Steve. Next caller?
Thank you. The next question comes from the line of Mr. David Raso from Evercore ISI. Your line is open.
Thank you. After the deal closes, it appears your equipment company net debt to capital will be about 25% to 30%. So in the context of maintaining that mid single A rating, moving past this deal, how should we think about the use of cash flow and balance sheet? I mean, if we're looking at this year, dollars 2,500,000,000 of free cash flow, dividends are at $800,000,000 Should we think of any future activity, be a repo, whatever it may be, is kind of solely out of cash flow? I'm just trying to get a feel for your comfort level with that net debt to cap post deal and your commitment to the mid single A rating?
Thanks, David. This is Zach. So our net debt to capital as we forecasted for Deere without the transaction is 18% in 2017, and okay. So with this, you're right. With this additional up to $1,000,000,000 in equipment company debt, it will be still about 25% net debt to capital.
So we still have a very strong balance sheet. And as I said before, this will allow us to follow our cash use priorities as we have stated repeatedly in the past. And then you see the EBIT margin of this entity and the cash flow generation ability of this entity is pretty strong. So if you add all this together, our cash use priorities stay the same. We'll do you should expect us to do the same as we have done in the last decade, in the next decade as well.
And just to be clear, Raj, so even if we add on the cash flow from the acquired company, just swag the numbers $3,000,000,000 dividend $800,000,000 Can we think of the excess cash as free to be put to use, so to speak? You're comfortable at this net debt to capital level, right? Cash after dividends is still for
some liquidity? Yes. 25 percent net debt to capital is something you're very comfortable with. And so you will see what the rating agency says later on, but S and P has affirmed our rating. So we are comfortable with where our balance sheet is with this transaction.
Great. Thank you
very much.
Thanks, David. Next caller.
Thank you. The next question comes from the line of Mr. Ross Gilardi of Bank of America. Your
Sam, I just wanted to ask you a bigger picture. I mean, clearly, Deere is coming off a couple of very strong quarters. You're guiding organically to a sharp acceleration in revenue in the second half. Deere hasn't done a deal, a big deal in a long time. So just your willingness to do a deal of this size and magnitude now, is it fair to view this partly as an expression of confidence that Ag and Turf has hit a definitive inflection point?
Or is it really just that the timing of the family sale worked and that you just knew the business well and just had always kind of desired this company that makes now the right time?
Yes. I would say it's certainly the latter. We've been pursuing this for a long period of time. As you suggested, it takes 2 parties to do a transaction like this and it's whenever the other party is really interested in doing it. It's just the good fortune that the timing of this now has aligned with what you said in the early part, and that is that the strength of our business and the prospects for it going forward would indicate we're better positioned right now to absorb this than we would have been a year ago or 2 years ago.
So, we're glad from a timing standpoint, but this is something that strategically we've had in mind for quite some time. And in the absence of a financial crisis, we would have gone ahead and pulled this trigger because of how attractive it is.
Got it. Thank you. Thank you. Next caller?
Thank you. The next one comes from the line of Mr. Joel Ottis from BMO Capital Markets. Your line is now open.
Hi, guys. Just a simple one. I wondered if the management is going to stay on and sort of just a little bit of a plan of how you plan to transition?
The Wirtgen Brothers will not stay on, but largely we expect the rest of the management team to stay in place. Okay.
Thank you. Thank you. Thanks, caller.
Thank you. The next question comes from Ms. Ann Duignan, JPMorgan Chase Securities. Your line is open.
Raj, could you just clarify what the IRR or how many years it's going to take to deliver greater than the cost of capital on the deal specifically?
Yes. IRR meets our hurdle rates internally, which is pretty good. So it's all I can say at this point, Ann. And our assumptions are hurdle rates internally. What
is your internal hurdle rate? Sorry.
For all the other organic projects we apply
at the same table. But what is your
internal hurdle rate? So we haven't talked about it in the past, but I think you will have a glimpse from the type of SBA, ROA and other things that we've talked about in the past. Okay.
Thank you. Next caller?
Thank you. The next one comes from the line of Mitch Dobre from Robert W. Baird. Your line is open.
Yes. Good morning, everyone, and congrats on this deal. This looks like a very attractive asset in our view. I guess what I'd like to hear a little bit more is what Deere is going to be bringing to the Wirtgen Group. And really maybe my question can be focused on the Benninghoven business, the asphalt plants.
I'd love to know a little bit more about how large that business is. And then when we're looking at an asphalt plant, I mean this is a high dollar purchase. We're talking $5,000,000 to sometimes $8,000,000 for one of these asphalt plants. How do you intend to build this business in the U. S.
And elsewhere? What can John Deere Financial Services contribute here in making it easier for customers to actually buy these plans? Any color here would be helpful because I think it frames a broader opportunity longer term.
Yes. If you take a look at their business overall, 80% of their business is in the road technology side and about actually 5% is in the Benninghoven today. You should think of that business as basically a startup. It was acquired by the brothers because they believed in the strategy that people that own asphalt plants also own pavers. So it makes sense from a strategic point of view.
They've made some significant investments in the business, redesigning the product to modernize it to make it more modular, building a new factory currently, but those plans are early. They have a very capable management team in place. We have confidence that they can execute their plan, but think of it as a startup. What do we bring to that business? I think we bring some manufacturing expertise.
And over time, I think we might be able to assist with their plan. But you should think of the Beninova business as a startup. This makes strategic sense. We've got some work to do.
Let me, if I may, follow-up here because when we're looking at this type of equipment, I want to sort of go back to this point that oftentimes it's high dollar pieces of equipment that we're talking about here. What did the folks at Wirtgen use in terms of financing or helping customers with the financing angle?
They have a relationship with Deutsche Leasing that encompasses roughly 20% of their business. Past that, I think they're independent transactions.
Hey, Mig. This is Raj. Clearly, we'll be looking at all the synergies we can get from the John Deere Financial side. As you know, it's something we do very well on the equipment side with both Construction Forestry and Ag and Turf, and we'll be looking to look at all those opportunities with this transaction as we move down the road. The other point is from the road technology side, we have even more we brag, right?
So in terms of capabilities that will apply as we talked about in terms of synergies, in terms of leveraging suppliers and such.
Thank you, Mig. Let's go ahead and move on to the next caller.
Thank you. The next question comes from the line of Steven Fisher from UBS Securities. Your line is open.
Hi, thanks. This is Clee Rickard on for Steve. Raj, just to follow-up on the synergies. I think you just you touched on it briefly, but could you give us some more detail on what buckets you're considering for, I guess, especially on the cost side? I think you made it pretty clear that you're making a commitment to Wirtgen and maintain the brands and the operations.
And I think the time horizon is fairly elongated to get to that target. So I mean, if maybe you could just lay that out for us more specifically.
When you think of the synergies, you should think of our strong history in being able to drive cost reduction inside the Construction and Forestry business. You should think of some of the vertical opportunities we have, such as electronics, cylinders and engines, I think Raj mentioned. You should think roughly 30% of the Wirtgen supply base, we believe is common with our supply base in Europe. So it's those kind of blocking and tackling synergies where we've made some conservative assumptions today, but we're quite confident in our ability to execute.
Thank you. Thanks, caller.
Thank you. The next call is coming from the line of Mr. Kohl, the place of Deutsche Bank. Your line is open. Yes, thanks.
Good morning.
Good morning.
So I just wanted to dig a
little bit into the longer term structure of dealer network within CNS. So the 70% company owned structure for Wirtgen is a bit unique. And I guess my first question is why did they pursue that and what's Deere's longer term plan with respect to the consolidated dealer network?
Yes. I think why they pursued that is because they place a lot of emphasis on expertise in the business and in many places as they've grown across the world, they've decided to deliver that expertise to the market themselves. We're not beginners in the company owned distribution business either. We actually own between 10% and fifteen percent of our own channel in the construction business in North America. We own the channel that we sell through in Northern Europe with forestry equipment.
So we have quite a lot of experience there with a company owned distribution.
Okay, thanks.
Thank you. Thanks, Collyn.
Thank you. The next one comes from the line of Jamie Twohy from Credit Suisse. Your line is open.
Hi, good morning. This is actually Themis on for Jamie. Just a question going back to the profitability of the business. The EBIT margins do look good and based on what you have on the slides, it looks like margins have improved in the past few years. So I'm curious as to what drove that?
Was it simply because of volumes? Or is there maybe a restructuring story under there as well? Then I guess on a normalized basis, how should we think about the margin profile of the company? Thank you.
You should think of the improving returns as a function of their growth and their success in localization of products in markets like China. They have a good formula for driving profitable growth and it's evidenced in their results.
So could we expect them to keep growing margins?
So if you just take what we have seen in 2017, they have very decent incremental margins they're getting. And from a capital standpoint, they've actually invested quite well in the facilities. May I want to talk about the facilities and what shape they are in?
Yes. The facilities are very impressive. If you look across all five of the core businesses, they're very strong. There's actually a 6th brand that I didn't mention. It's Seebur.
It's in Brazil. It's a very strong brand within the Brazilian market for asphalt pavers and also asphalt plants, but production operations are in good shape around the world, very good.
Thank you. Next caller.
Thank you. The next one comes from the line of Seth Weber of RBC Capital Markets. Your line is open.
Hey, good morning. You mentioned the large installed base of equipment. I'm wondering, can you give us the profile of the company? How much revenue comes from the aftermarket? And do you expect that to continue to be a significant driver of the business?
It's very similar to the construction business we have today. It's about 20% comes from the aftermarket. Most of that is parts and definitely we expect that to continue.
Can you size the installed base for us? Is there any way to give a number to that?
I'm afraid I wouldn't be able to do that off the top. No, sorry, we could work on that. Okay.
Thank you. Thank you. Next caller?
Thank you. The next one comes from the line of Joe O'Dea from Vertical Research Partners. Your line is open.
Hi, good morning. Could you just talk a little bit about timing and why the asset is available today, given the sort of medium term outlook for the growth that we see, some of the success on the margin side, just why the family might be walking away from it today?
That's the Wirtgen family business and we can talk about it a little bit here, but it's got to do with the brothers and the fact that they've been running the business for 20 years and invested most of their lives in the business and now they're looking at what their opportunities are in terms of family transition plans and how they choose to structure things for their families and they've decided to pursue some other alternatives. And because of that and because of the long relationship that Sam mentioned, the transaction was enabled.
The next one comes from the line of Sebastian Cooney from Berenberg.
I wonder on Page 9, you have the EBITDA and EBIT guidance 2017. I would like you to confirm that this is without any cost synergies that you have from the business. And also, I wonder that you have about 17% growth expected for 2017 or according to Wirtgen, what regions does that growth come from currently? Thank you.
There are no cost synergy assumptions in the 17 data. And the growth really is coming from around the world. Their business in Europe is very strong. Their business in Germany excuse me, in China is growing. The growth is fairly well balanced.
India is strong also.
And just to note, this is Tony. If you look at those charts on Slide 9, that is based on Wirtgen internal data, which is also Germantown as referenced in the slide. So it doesn't imply any changes or any of those synergies that we would anticipate going forward.
And your due diligence would confirm that number, yes, the growth number and the margin number? Yes, that's right. Okay.
Thank you. That's correct. Thank you. Next caller?
Thank you. The next one comes from the line of George Peaker from Wells Fargo Securities. Your line is open.
Hey, thank you. Exciting transaction. It appears to provide a lot of benefits to DE long term and near term, which is really exciting. Can you talk a little bit about margin mix between the two businesses, Road Technologies and Mineral Technologies? And is there what are the differences within the parts businesses between the two organizations?
I don't know that we've shared that detail in terms of margins by product line. If you wanted to stack them up in order, you could stack them in the order that I presented the brands, I think is a fair way to answer that question for today. And similar
to how we would present Deere data, in terms of parts, we would allocate out any further than sales, so on a high level.
And remember that 80% of the business is the road technology business.
Thank you. Thank you. Thanks, Collyn.
Thank you. The next one comes from the line of Mr. Stanley Elliott from Stifel, Nick Lowe and Company. Your line is open.
Good morning. Thank you for taking
the question. A question kind of going back to the distribution network. You mentioned that on the manufacturing side, everything was very well up to date. Is there any investments that you all will need to make to be able to kind of cross sell the brands between the Wirtgen and the Deere construction businesses internationally? And how we should think about that if that's the case?
For sure, you should expect that we are thinking about that, but we don't have firm plans for how we'll execute that and we're not anywhere near able to size that opportunity. So, but obviously, yes, we see their global distribution network as an opportunity for the C and F business, where we've been largely a North American business over history.
Okay, thanks. Thank you. Next caller?
Thank you. The next one comes from the line of Mr. Larry De Maria from William Blair and Company. Your line is open.
Thank you. Good morning and congratulations. Can you discuss a specific synergy bucket for vertical integration around the engine opportunity for Deere? I believe Orkin has some of their own engines. I'm not sure what percent are captive now and what are brought in through vendors and how quickly you can engineer your engines into there?
And just real quickly, do you do any co marketing or anything like that now with Wirtgen? Just curious because I want to see how familiar you are with the business now and how seamless it can be.
2nd question first, we don't do any co marketing today with the Wirtgen Group. With respect to synergies, they don't manufacture engines. They buy engines from several different manufacturers. Of course, since we manufacture engines, we do see that as an opportunity, but we do also recognize that's a very engineering based change, the very product oriented change that we'll need to execute very carefully and make sure that product performance matches customer expectations is good. So we see it as an opportunity, but we're going to pursue it with data and good execution plans.
I might add that we have some of our CNF dealers that currently represent Wirtgen as well. So we have insights into this side of the business through our dealer network that portion of it that carries the Wirtgen brand.
And would that be in Europe or the U. S. Or everywhere? 7,
7 in the U. S.
Perfect. Thanks very much.
Thank you.
All right. Next caller.
Thank you. And the last question comes from the line of Nick Tobey from Robert Baird. Your line is now open.
Yes. Thanks for taking my follow-up. Looking at your Slide 11, talking about the end road construction portfolio, I guess the one thing I'm noticing looking at this slide is that there are 2 elements missing maybe, the fixed crushers and screens that you have in pit on a quarry and maybe some cranes for bridge rehabilitation as well. I'm wondering if it's fair for us to assume that Deere down the line might be looking at those equipment categories as a possible add on?
Yes, that'd be a stretch for us. On the first part, the with crushers and screens, you're right. They have redesigned Kleiman business to focus on mobile crushers and screens and that's the portion of the business that they feel that they can be most successful in on a timely basis. So there's been a lot of work done, products are looking good and the business is improving.
And we do have one additional follow-up that we'll go ahead and take.
And then there's another question coming from Stephen Volkmann from Jefferies. Your line is open.
Hi. Thanks guys for taking the follow-up. I'm curious if you can just put the numbers you've given us for Wirtgen and kind of some historical perspective. How cyclical is this business? Are we sort of closer to peak or trough?
And maybe the same question on the margin front for those guys too. Thanks.
Steve, on the margin front, they've actually been steadily improving. Actually when I looked at it, almost one point of EBIT margin going back every year for the last 3, 4 years. On a sales front, their CAGR is pretty similar to what we have as BCG's CAGR in the future for this type of a business. And it is much less cyclical than our construction and forestry business today. So, milling machines for example, one of the few equipment in the construction equipment category that's secularly grown throughout the last 10 years or so, even during the 2000 and eight-nine crisis, it actually grew slightly.
So, road rebuilding is always there even when some of the new construction is not there. So this tends to be much less cyclical than our broader construction equipment. Great.
Thanks so much. Thank you. And
we do it looks like
we have one more question.
Thank you. The next question comes from the line of Mr. Seth Weber from RBC Capital Markets. Your line is open.
Hi, thanks. Thanks for extending again. Just real quickly, do you think there's any implications here for Deere's tax rate going forward? Do you think that this transaction can help lower the tax rate going forward?
Hey, Seth. There may be implications, but it's too early to talk about them. So we are going to actually look at it in-depth and understand what implications it may have. But at this point, I would just assume the normal tax rate that Deere has had and apply that broadly for the pro form a business as well.
Okay. Thanks, Raj. Appreciate it.
Thank you. And with that, we'll go ahead and conclude the call. We appreciate your
Thank you, everyone. And that concludes today's conference. Thank you all for participating. You may now disconnect.