Good morning and welcome to the Dearest 4th 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 Ms. Marie Zeigler, Vice President and Treasurer.
Thank you. You may begin.
Hello, everyone. Also on the call today are Jim Field, our Chief Financial Officer Susan Carlix and Justin Marovec. In addition, Tony Hiegl joins us today as the newly appointed Director of Investor Relations. Many of you know Tony based on his previous experience in our department. He has a strong familiarity with the practice of Investor Relations as well as a deep understanding a deep understanding of Deere.
Tony will be in transition between now and the end of January. Tony, Susan and Justin make up a strong
Marie. Today, we'll take a closer look at Deere's 4th quarter earnings, then spend some time talking about our markets and the outlook for 2011. 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 dot com.
First, a reminder that this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Thomson Reuters. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is 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 the earnings call. This call includes forward looking comments concerning the company's projections, plans and objectives for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8 ks 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 dotjohndeere.com/financialreports under other financial information. Now for a closer look at the Q4, here
Susan. Thanks, Tony. Today, John Deere wrapped up 2010 with the announcement of our 4th quarter results. All in all, it was an excellent quarter and an extremely good year. 4th quarter earnings were $457,000,000 the highest ever for the strong quarter.
Our other divisions, construction and forestry and credit reported dramatically higher profit as well. Our performance for both the quarter and full year reflected a disciplined approach to executing the company's business plans and a sharper strategic focus. It also reflected positive conditions in the U. S. Farm sector, which in whole, John Deere registered its 2nd highest ever level of sales, earnings and enterprise cash flow.
All that said, the ultimate measure of how well we did in 2010 may be found in the generation of economic profit or what we call SBA, shareholder value added. For the last decade, it has been one of our primary metrics in managing the may be the best yardstick of our success in delivering a high level of profit while managing costs and assets. It was in summary a great a 5 percent to $7,200,000,000 in the quarter. Net income attributable to Deere and Company was 4.50 $7,000,000 the highest ever income for the 4th quarter. Slide 4 outlines the expenses incurred in fiscal 2,009 for goodwill impairment related to the Jodger Landscapes reporting unit and voluntary employee separation associated with the formation of the Agricultural and Turf Division.
Net income in the Q4 of 2010 was up more than 3 folds excluding these two charges. Turning to Slide 5, total worldwide equipment operations net sales were up 39% to $6,600,000,000 the 2nd highest 4th quarter net sales total ever. Currency translation on net sales was positive adding 1 point and price realization in the quarter was positive by 3 points. On Slide 6, worldwide higher tonnage in the quarter as a result of continued strong demand for large ag equipment, strength in South America and construction forestry markets rebounding from the very low levels of 2,009. For the Q1 of fiscal year increased as we went through 2010.
In contrast, 2011 will start strong
half of the year to
facilitate the transition to interim Tier 4. In addition, 2011 will be a year of significant new model introductions due in large part to the engine conversions. Associated with this change, we will experience some production limits and transitional issues. In addition, construction and forestry's production levels will be front ended front end loaded due to their implementation of SAP. Both the Davenport and the Dubuque Works will be shut down for approximately 2 weeks in the year as they switch to the new system.
Let's turn to the company outlook on slide 8. 1st quarter sales are expected to be up approximately 34% compared with the Q1 of 2010. Currency translation on net sales has a negative impact by about 2 points. For the full year, net equipment sales are forecast to be up 10% to 12% compared with fiscal year 2010. This includes about 1 point of of negative currency translation and approximately 2 points of positive price realization.
Net income attributable to Deere and Company is forecast to be approximately $2,100,000,000 in fiscal 2011. Turning to a review of individual businesses, let's start with Agriculture and Turf on Slide 9. Production tonnage was up 50% in the quarter on easy comparisons and strong retail demand. Sales increased 33%. Operating profit was $662,000,000 The profit improvement was primarily due to higher shipment and production volumes and improved price realization, percent in the quarter and an incremental margin of approximately 24% when you strip out the goodwill impairment and voluntary employee separation expenses
taken in the Q4 of 2009.
Before we review the sales outlook, let's look at some of the fundamentals affecting the Ag business starting on Slide 10. Extreme weather conditions in many parts of the world have led to lower yields and concerns over tight supplies. That has sent the outlook up considerably for crop prices in the 20 ten-twenty eleven crop year. Our first look at the 'eleven-twelve crop year has prices remaining at strong levels. Corn prices are being helped by increased global demand.
We project that 20 10, 2011 corn stocks in the U. S. And Canada will end below 1,000,000,000 bushels and not significantly increase in 2011, 2012. Growing global consumption for soybeans is expected to keep exports from the U. S.
At strong levels, helping to maintain soybean prices at favorable levels. 20 ten-twenty eleven global wheat stocks are projected to be down about 12 percent from the 'nine, 'ten levels keeping prices strong. 2010, 2011 cotton prices remained strong driven by the recovery in global demand. Turning to Slide 11, 2010 U. S.
Farm cash receipts are now forecast 11 has farm cash receipts increasing to nearly 347,000,000,000. This would surpass the all time high at $330,500,000,000 recorded in 2,008 by almost 5%. Farm cash receipts both the current and prior year are an important driver of ag equipment sales. Deere's outlook for the EU 27 is shown on Slide 12. 1st, grain prices are at very attractive levels and milk and beef prices continue to rise.
European farmer sentiment is improving, but some fundamentals are weighing on producers' minds and they are outlined on the slide. Bottom line, however, is for the first time in the last 2 years, we are starting to see a turnaround in demand for agricultural equipment in Europe. Net farm income in Brazil and Argentina is on Slide 13. In Brazil, farm net income is expected to be up 180% in 2011 led by big increases in sugarcane and soybeans. These are the 2 crops that drive the bulk of equipment purchases in Brazil.
Contributing to strength in the region is strong global demand for Brazilian commodities, lower production and government sponsored low rate finance programs like tsunami PSI that has been extended through the end of March 2011. Although we highlighted our new or updated products in Brazil in the 2nd quarter call, Slide 14 does so again. These products were launched in May with full availability for fiscal 2011. And we'd be remiss if we didn't mention that October was Deere's biggest month ever for tractor and combine sales in Brazil. Further, we added about 25 dealer locations in 2010, enhancing our ability to meet product support and service needs of our growing customer base.
We currently have approximately 200 dealer locations in Brazil. Slide 15 highlights 2 exciting events that took place this quarter in India with the Ag and Turf and Construction Forestry divisions. In late September, Ag and Turf had a groundbreaking ceremony and in October began construction of a combine factory in India. This marks John Deere's entry into the harvesting business there. Full production is expected to begin in the first half of fiscal twenty twelve.
You've heard us talk about our joint venture with A. Schock Leland for some time. The inauguration of the 200,000 square foot facility took place on October 20 1. Hiring is underway and production initially of backhoes is expected to begin in the first half of twenty eleven. Our 2011 industry outlooks are on Slide 16.
Fundamentals in the U. S. And Canadian farm sectors remain robust, but reflecting the respect to Deere, we continue to see strength in our order books. The combine early order program is progressing well and as planned. In absolute numbers, orders are ahead of last year.
In the sprayer, planter and tillage equipment programs, we are seeing strong results even above last year and demand for large tractors remains strong. With its interim Tier 4 engine is being very well accepted. We have conducted aggressive training on the new radar in the areas of technology, capability and support. Also, customers are excited about performance of and the new telematics on the tractor. In fact, dealers report that some customers who had submitted orders early to receive 8R tractors with Tier 3 engines have changed their order to later in the year to receive an interim Tier 4 compliant machine.
Also, some customers who bought a new 8R tractor in 2010 are already discussing trades for the 2011 machine. We are encouraged by the initial orders of more than 2,500 8R units, all of which are retail sold. Effective availability for the 8R Series tractors is May 2011. Earlier, we touched on the conditions in Western Europe. As noted earlier, we are encouraged that demand is beginning to turn.
In 20 11, we expect ag sales to be up 5% to 10% in Western Europe. Sales in Central Europe and the CIF are expected to see moderate gains from the depressed levels of 20 10. Asia sales are expected to increase moderately from the the very strong levels of 2010. And industry sales in South America are expected to be flat in 2011 from the strong levels of 2010. Although the underlying economic fundamentals are positive, our industry retail forecast includes lower sales from Brazilian government programs that target small farmers and a return to higher interest rates if the tsunami TSI extension expires on March 31.
In summary, with Deere's lineup of new products, we excited about our prospects in South America. Turning to another product category, after rising almost 15% in 2010, we expect retail sales of turf and utility equipment in the U. S. And Canada to be about flat in 20 11. We have seen an uptick in the commercial mowing segment and our new utility vehicles have experienced an extremely successful launch.
Putting this all together on Slide 17, Deere sales for worldwide ag and turf are projected to be up 7% to 10, the ag and turf division's operating margins benefited by about 2 points due to the mix of large 2011 as small ag equipment sales recover from their fairly low levels of the past few years. The mix impact in 2011 will be about one point. Let's focus now on Construction and Forestry on Slide 18. Deere's net sales were up 75 percent in the quarter, while production tonnage was up 129%. The division's operating profit of 54,000,000 dollars was impacted by higher shipment and production volumes, incentive compensation expenses, raw material costs and postretirement benefit expenses.
On Slide 19, following a 41% increase in 20 10, net sales in construction and forestry are forecast to be up 25% to 30% in fiscal 2011. To put these numbers in perspective and to truly appreciate the severity of the decline in the CFS, CNF market, this year's about 25% for the full year. Growth is slower coming out of this recession than others, but we are encouraged by to see an improvement in rental utilization and used equipment markets. Meanwhile, global forestry markets were up significantly in 20 10 from the very low levels of 2,009 and are expected to be up further in 2011. Globally, the industry was up about 50% in 2010 and our current forecast calls for a further increase of 25% to 30% in 20 11.
The full year operating margin for Deere CNF division is forecast to be in the mid single digits. Move now to our credit operations. Slide 20 shows the worldwide credit operations provision for credit losses as a percent of the total average owned portfolio. For fiscal 2010, the provision was 48 basis points. Write offs in the construction and forestry portfolios continue to improve.
We are seeing fewer repossessions and increased pricing on the repossessions that are occurring as well as improving recovery rates. The 2011 full year provision for credit losses as a percent of the average owned portfolio is forecast to run around 45 basis points. On Slide 21, cash dues for the worldwide credit operations were lower than 2,009 overall. Moving to Slide 22, worldwide credit operations and net income attributable to Thierry and Company was $91,000,000 in the quarter versus a net loss of $22,000,000 last year. The losses, improved financing spreads and growth in the portfolio.
Speaking of wind, as previously announced, we have signed a definitive agreement to sell the wind energy business. Regulatory approval, the transaction is expected to close in December. A charge of about $20,000,000 after tax is included in the 4th quarter results. Looking ahead, we are projecting worldwide credit operations net income attributable to Deere and Company of about $360,000,000 in 2011. Now let's turn our focus back to the equipment ops and take a look at receivables and inventories on Slide 23.
For the company as a whole, receivables and inventories were up roughly $1,500,000,000 in 20.10 versus 2,009. Keep in mind, we ended fiscal 2,000 and 9 with receivables and inventories at extremely low levels. They were $1,300,000,000 lower than at the end of fiscal 2,008. Also, 2010 year end inventories were higher due to strong end markets and the timing of interim Tier 4 transitions. By the end of fiscal 2011, receivables and inventories are expected to be down about $675,000,000 Now let's discuss the latest on retail sales.
Slide 24 the product category detail in the U. S. And Canada for the month of October expressed in units. Utility tractor industry industry were up 18%. Again, Deere was up more than the end of the year.
Looking at Deere dealer inventories in the bottom chart for row prop tractors, Deere ended October with inventories at 16% of trailing 12 month sales. Combine inventories were at 2% of sales. Turning to Slide 25, in Western Europe sales of John Deere tractors and combines were up double digits in October. Deere's retail sales of selected turf and utility equipment in the U. S.
And Canada were up double digits in the month. And construction and forestry sales in the US and Canada on both the first in the dirt and settlement basis were up double digits for the month. Slide 20 6 shows raw material and logistics costs up about $80,000,000 in the quarter and down about $135,000,000 for fiscal 20 Our fiscal 2011 calls for raw material and logistics costs to be up about $250,000,000 compared with last year. By division, this includes about $175,000,000 increase for ag and turf and about $75,000,000 for construction and forestry. The significant material cost tailwind of about $230,000,000 in the first half of twenty ten is not forecast to be repeated in 14% in the 4th quarter with currency translation being negative by about 2 points.
For fiscal 2010, R and D expense was up about 8%. For fiscal 2011, R and D expense is expected to be up about 15%. As we stated last quarter, R and D spending is expected to remain at high levels as we approach significant product launches with interim Tier 4 engines and soon thereafter we respond to interim tier final Tier 4 emission standards. Also included in the increase is the ongoing new product development expense for our growing global customer base. Moving now to Slide 28.
Pension and OPEB expense in the 4th quarter was up about $70,000,000 bringing the full year increase to about $345,000,000 and OPEB expense is expected to be about flat in fiscal 2011. On Slide 29, SA and G expense for the equipment operations was up about 15% in the 4th quarter. Variable incentive compensation accounted for about 11 points of the increase, while pension and OPAD expense added about 2 points. For fiscal 2010, SING was
10, SING was up about 10 points.
Variable incentive compensation accounted for about 6 points of the change as the company's performance continued to improve. One factor was record setting SBA, reflecting our continued focus on execution and asset efficiency. Pension and OPEB accounted for about 2 points of the SING increase and currency translation about 2 points. SING is expected to be up about 6 points for fiscal 2011. In line with our growth objectives, growth will account for about 2 points of the change with variable incentive compensation accounting for about 1 point.
Moving to the tax rate on Slide 30, the 4th quarter effective tax rate for the equipment operations was about 42%. The full year twenty 10 effective tax rate was about 41%, including the tax expense of about 130,000,000 dollars related to U. S. Healthcare legislation recognized in the Q2. Excluding the charge, the effective tax rate for 20 10 would have been about 36%.
For 2011, our effective tax rate is forecast to be in the range of 35% to 37%. On Slide 31, you see our record of strong cash flow from Deere's equipment operations. We anticipate cash flow from equipment ops of about $3,000,000,000 in fiscal 2011. Such strong cash generation speaks to successful execution of our SVA model, emphasizes high returns from a lean slate of assets. In light of such strong cash flow, we thought it appropriate to review our use of cash priorities as outlined on Slide 32.
First is the importance of a single A rating. Deere's worldwide credit operation provides a strategic advantage in funding customer purchases, but this is true only so long as we can access credit markets on a cost effective basis. One of the key elements to this end is maintaining a single A rating, which is our top priority. The rating agencies expect 12 months of debt maturities to be covered by cash and or untapped credit facilities. This also implies appropriately funding our pension and OPEB benefits, which we have done proactively and prudently over the years.
In fact, at the end of fiscal 20 percent funded. Our second use of cash priority is funding value creating investments in our operations, such as the 2 facilities in India that we just referenced or our factory in Domodedovo, Russia that was opened earlier in the year. Third priority is to provide for the common stock dividend. Over time, we want to consistently deliver a series of moderately increased dividends, while targeting a 25% to 35% payout ratio on average. In this regard, we are mindful of the importance of maintaining the dividend and thus not growing it beyond a point that can be comfortably sustained our cash flow.
Share repurchase is our method of deploying excess cash once the previous requirements are met and as long as the share repurchase is viewed as value enhancing. Slide 33 addresses unsecured term debt maturities over the next 2 years, nearly $3,000,000,000 in 20 11 and approximately $5,000,000,000 in 2012. The relatively high level and timing of maturities in 2012 will affect the amount of cash we are targeting for year $5,000,000 Looking into 2011, given our projected cash flow and use of cash priorities, it is fair to say that our forecast contemplates additional share repurchases in the coming year. Finally, Slide 35 summarizes sources and uses of cash since we restarted the share repurchase program back in 2,004 and began a run of 7 dividend increases. You'll note that we have returned over $7,000,000,000 of cash to shareholders over this time, representing about 55 percent of the cash generated by operations.
This accomplishment the were about $840,000,000 in the year. Looking ahead to fiscal 20 11, as Slide 37 illustrates, capital expenditures are expected to be about $1,000,000,000 in the year. The increase is due to new product development in new markets such as our entry into the harvesting business in India as mentioned earlier. Depreciation and amortization for 2011 is expected to be about $550,000,000 with pension NOKEP contribution of about $300,000,000 In closing, John Deere enters 2011 on a strong pace. We are looking for further improvements in the year ahead as a result of some pickup in overall economic conditions and a farm sector that remains very sound in general and is gaining strength in some of our key markets.
At the same time, the company is aiming to capitalize on this positive environment by pursuing new markets, adding productive new models of equipment and extending its competitive position throughout the world. John Deere's plans for helping meet the world's growing need for food, shelter and infrastructure are well on track and moving ahead at an accelerated rate. That's one of the reasons we remain highly confident about the company's increasingly attractive future prospects and about our ability to deliver significant value to customers and investors well into the future.
Thank you, Susan. We are now ready to begin the Q and A portion of the call. The operator will instruct us on the polling procedure. But as a reminder, in consideration of others, please limit yourself to one question with a related follow-up. And if you have additional questions, we ask that you rejoin the queue.
Shirley?
Thank you. We will now begin
the question and answer session.
Kate. Hi. I'm trying to understand your guidance in a number of different ways, but I'll start first with your outlook for Construction and Forestry. I mean if we assume a 27.5% sales increase which is the midpoint of your guidance and you said mid single digit margins. I'm trying to figure out why margins would be that low, because I mean that gets you to about $2,700,000,000 I'm sorry about $4,700,000,000 in sales.
It's about a $100,000,000 lower than 2,008. And at that point, you had almost a 10% margin. So I'm just trying to figure out how you think about that and whether you feel that's sort of acceptable internally for your margins to be half of what they would on a similar sales level?
Okay. Deal with Construction and Forestry then. First of all, as Susan pointed out, this is about 70% of our average or typical volume. So even with that very significant increase, Jamie, that just puts us to the bottom of where we would normally be operating. The other thing I would point out, and this will certainly have an impact on the Ag and Turf division as well is that although we have good volume increases, we talked about raw material costs, we talked about R and D and SA and G.
We have some other expenses that I'm going to give the number for the company because I don't have them split by division, but they are important for the Construction and Forestry division as well. And that would include IT4 product costs. We have raw material costs that's inflation adjustments, if you will. But these new IT4 compliant machines cost more money, because there's more hardware on them. And the cost for the company is about $135,000,000 we estimate for next year.
And this actually we do have a little bit of a split. We think it's about $100,000,000 for the ag and turf and about $35,000,000 for the construction and forestry. We also have some higher overhead expenses due to just the fact that we will be in transition. Susan mentioned that Construction Forestry will have a 2 week shutdown as they transition to SAP. We've got some additional human resources assigned to help facilitate that.
And then additionally, just the mere transition to IT4, which causes some inefficiencies, if you will, in the factory. Then the third thing that again affects the company, less so construction, but nonetheless something to note is that absorption is about $100,000,000 hit in 20 11. So when you look at those you can see why we have the kinds of margins that we do. We will continue to work to improve our margins. Obviously, you've heard us talk about our aspirations, which are a 12% operating margin on average over time and a peak margin of about 14.5%.
And those are still very much in play. But in 20 11, we have some unique circumstances.
Well, and then just I guess my follow-up question is, I think you said, I mean, do you view just given your industry outlook for U. S. And Brazil, which comprise a big part of your farm equipment business, I understand Europe is getting better. But do you sort of view given the tougher comps in your guidance that you have in North America and South America and Europe coming up at a lesser percent that far margins have already sort of peaked? Or do you still think you can achieve that target of 14.5?
Or percent or you said your margins will increase 2 to 2 50 basis points above prior peak within farms specifically?
Go ahead, Sam. Well, yes, we do believe we can achieve the 14.5% and we're not walking away from that bogey at all on the Ag equipment business or on the construction business as well. So, when you look at the Ag business on a global basis, you have to realize that we're roughly at mid cycle volumes. I mean, we have some strength in North America, but we have some other markets that are very, very soft, namely Western Europe and the CIS.
So as a percentage of mid cycle, sorry, where do you think you are in farm?
Roughly mid cycle.
Mid cycle? On
a global basis.
On a global basis. And the other areas are big enough? I mean, areas that would pick up are Eastern Europe. You know what I mean? I mean, your biggest markets to me so you're suggesting your bigger markets are in peak?
Absolutely. And Western Europe is still very far below peak and is a bigger market than Brazil. Thanks, Jamie.
Thank you.
Thank you. Our next question comes from Jerry Revich. You may ask your question. Please state your company name.
Hi, good morning. It's Goldman Sachs. Marie and Tony, congratulations.
Thank you. Thank you. Marie,
should we interpret your outlook for rising construction and forestry working capital to
the coming
years as you transition additional that you described to continue in coming years as you transition additional products to IP4 or will it transition this year puts you in a better position to implement the remaining
2012 certainly. In terms of for the division, the bulk of the Construction and Forestry product line actually is affected by the emissions regulation starting in 20 12. For ag, obviously, as you know, everything above 175 is affected and that's a bigger percentage of the Ag and Turf divisions product line. So you're correct, there are some differences there.
Does that help? Absolutely. And you have a
pretty healthy capital budget increase for next year. Can you talk about how much of that is for new products versus capacity expansion plans and perhaps give us some more color on the latter?
Well, clearly, the lion's share of that increase is still very much surrounding the implementation of IT4 Stage 3B in Europe emission standards as well as emission standards in other parts of the world. There are some I would say they're more incremental capital that will be spent in places like we described in India. But the bulk really is still IT driven.
Thank you. And lastly, can
you say more about which countries in Europe you expect to lead the recovery and which countries do you think will remain weak for the next 6 to 12 months?
I don't have that color. I'm sorry, I only have a comment on the market overall.
Okay. Thank you.
Thank you. And the next question comes from Meredith Taylor. You may ask your question. Please your company
name. Hi, it's Barclays Capital. Good morning and congratulations. I'm hoping you could give a little bit more color on the production limits on a year over year basis in these transitional issues on the ag and turf side of the business. Maybe if you can dovetail that with how with the guidance you've given on a production tonnage basis, if you could talk specifically to ag and turf, how much these production limits will be a factor as we move through
the year?
The timing of the transition on the 8,000 Series tractor, as you know, begins production begins the 1st January. We have not introduced these products, but we can tell you that we'll be introducing or transitioning our 7,009 1,000 series products as we move through the middle of the year. So that maybe that will help you a little bit in terms of the timing. And then there are ongoing other products that are going to be introduced, but those are kind of the big ones. When we took a look and said what is our upside for production.
So you lose some period of production. So you lose some period of time as you're or some available capacity, if you will, as you're making these transitions. And for us, this is I mean, this is a normal part of the business. It's just that there are so many that happen in this compressed period of time. We've a record number of launches that will be coming out certainly in next year and a very impressive number the year after.
So anyway, with that as a preamble, as we took a look at specifically at Waterloo and at our harvester works, in total, we think we've got about 10% upside view of these limitations and balancing emissions credits.
So sorry, just in terms of 10% upside?
Out of specifically the 2 biggest ag factories that are affecting affected as we are transitioning IC4 this year.
Okay, got it. And then can you talk a little bit about what you're assuming in terms of the impact on incrementals for ag and turf given this transition? I mean, I know you had talked for the Q4 actually about, I think it was about $50,000,000 headwind associated with that. Can you talk about how 4th quarter trended relative to that expectation and then how that flows through in 2011?
Okay. For 2011, Meredith, that is 100,000,000 dollars of additional overhead and that we expect to incur. In the Q4 itself actually
Sorry, just to clarify that's all in ag and turf?
No. There's a little bit of impact in construction and forestry, but the bulk of it, the vast majority of it is for ag. And the reason is, of course, that ag has a greater number of new product introductions. So $100,000,000 there. And then in the Q4, we actually think we ended up around $20,000,000 We were more efficient than we had initially, I guess, feared.
And that efficiency is reflected in this $100,000,000 guidance that we're giving you into next year. Thank you, Meredith.
Thank you.
Thank you. Our next question comes from Henry Kern. Please state your company name.
It's UBS. Good morning.
Good morning.
Could you talk about the potential share impact of the broader product offerings in South America? How much bigger piece of the pie do you think the company can go after now?
Well, I certainly have some internal share objectives that I would not choose to publicize, but there's no question that we are doing a much better job of covering a broader product offerings. And you see from the slide, it's just not only tractors, it's combines and a whole host of products. I might also point out when you look at the industry guidance that we provide and Savia, as you know, provides industry information on tractors and combines. When we look at our own sales, our sales are made up of certainly tractors and combines, but they include a lot of other products, including sugarcane planters, just a variety of things. So when we give you industry guidance, we can only give you industry guidance on tractors and pillars or something that are included in there.
But there are other products that are sold in the market. And so as you think about the outlook, remember, we will benefit from the very strong sugarcane markets and cotton markets as well.
Thanks. And could you talk about some of the signs of life in Eastern Europe? Is credit becoming more readily available?
I think signs of life would be the description that I've heard applied. There is they are starting to see limited pockets of some financing activities, availability is still an enormous issue in that region of the world.
Thank you very much.
Thank you.
Thank you. Our next question comes from David Raso. You may ask your question. Please state your company name.
Hi, it's Sai. My question is on initially on pricing. Can you give us some indication of how you see pricing for 2011 for ag and turf?
We have price guidance for the full company of 2 points. Certainly, Ag and Turf is a strong participant in that guidance.
Okay. The reason I ask is doing that math, if you gave ag just 3%, which I believe would be more than that, it implies construction pricing down over 3% year over year?
It would be incorrect. Both divisions are looking for some positive price realization and David that's as much as we can comment on that.
But can you just correct the math? If I do 3% on ag revenues for 2011 to get to 2% for the total company construction?
Then the number must not be 3%.
So then the question would
be why would ag pricing be less than 3% given the 8000R and even some of the price increases in the channel we hear for the rollover from the Tier 3 in front of
the new
Tier 4s?
That's a very good question. And do recall that when you take a price increase that includes feature creep. When we give you our price realization, are stripping out anything that would involve higher horsepowers, new features, the IT4 compliant piece that is considered a feature and is put into volume. So when we give you our price numbers, we are looking strictly at trying to do an apples to apples as best we can comparison. So again, higher horsepower, IT4, all of that gets reclassed, if you will, into volume.
Okay. I appreciate that. If I look at the 7% to 9% then total ag and turf growth and strip out of pricing that's kind of apples to apples not features, the unit growth is implied probably sub 5% or something like that?
Well, our guidance in North America is for the industry to be flat. And that does reflect, as Susan talked about, the fact that on large ag, you are in a period of transition with some production limitations and some emissions credits management.
Well, that's been my question. The ag and turf receivables and inventory being down $750,000,000 for the year, a little bit of currency I know, but still under producing retail. Can you pinpoint exactly where the underproduction of retail will be? I suspect even though the combine new inventory is low, you might try to help out with some of the used sales by keeping new production low. But can you maybe highlight in particular where the underproduction will be versus retail and ag?
It really has to do more with the work in process that we have in the factory in the Q4 of this year compared to what we think we will have and require in the Q4 of next year. That is not at all prognostication on what the 2012 markets look like whatsoever. It really reflects the fact that this year as we're getting ready for this very significant emissions change, we are in very high production levels on Tier 3 machines in the Q4 of this year as well as November December. We do not expect to repeat that kind of production level. As you're aware, typically it's pretty quiet October, November December here, relatively speaking, because we're out of the use season.
So what you're really seeing in that number in ag and turf is the fact that you don't have a lot of work in process at a time of the year when we are typically seasonally weak.
And the Tier 4, 7 and 9
though. David, I think we've done our 2 questions. Thank you so much.
Thank you.
Thank you. Our next question comes from Robert Wertheimer. You may ask your question. Please state your company name.
Hey, good morning, everybody. It's Morgan Stanley. My question is on Tier 4. Marie, I think you mentioned the cost of the incremental cost of the Tier 4 componentry, which makes sense. I would assume part of the volumepricing is trying to recoup some of the 100 of 1,000,000 or 1,000,000 that you've spent on R and D.
So is it fair to assume that the the margin impact, in other words, the price volume is bigger than the cost you just said and it's a favorable margin trade in 2011? And then secondarily, the upped R and D expense, is that really getting ready for the models that launch in 2012 and final testing and such? Or is that more the Tier 4 final in 2014 spending curve is starting?
Well, let me start with the R and D. We have a significant launch in 2011. Some of the R and D is still for products that will be launched in 2011 certainly. There is a very large wave again coming in 2012. So that's affecting the number.
And then thirdly, we are doing we are hot and heavy into final Tier 4 design work. Final Tier 4 starts in 2014. And if you are one of our design engineers, that is tomorrow. So there's a lot of work being done there. On the margin, we have some incremental investments in some new product delivery.
And the example would be like this large number of new products that we just introduced in Brazil. We are continuing to develop product for customers in many markets. Now going back to your IT4 cost question and price, we over time expect that we will fully recover our IT4 costs. But it doesn't happen all on day 1. And so it is fair to say that in 2011, there will be some impact in our margin just on a product cost basis.
But because and it involves mix and timing and a whole variety of things. But over time, we will
spend and it might be negative. Got it. And then my follow-up question
is on the
I was actually, Rob,
I think we've done our 2.
I need
to keep moving. Thank you.
Okay. Thanks.
Bye.
Thank you. Our next question comes from Andy Casey. You may ask your question. Please state your company name.
Wells Fargo Securities. Good morning. Happy Thanksgiving to everybody and congrats Marie and Toni.
Thank you very much.
On the cash external viewpoint because kind of based on your cash flow outlook plus the current cash on the balance sheet for the equipment side, it would be $5,000,000,000 plus at the end of $11,000,000
It's depending on what we might do
with repurchase and things like that.
And then we've got a pretty significant amount of capital amount of liquidity to run the business. And as you and we've also talked about the requirement of the rating agencies to have and frankly, it's just good business to have a certain amount of our debt refunded. We deliberately included the chart on the debt maturities, which is I'm looking forward to Slide 33, that you would be aware of the fact that we have some pretty significant maturities in coming particularly in 2012. And so as you think about our year end cash, we're going to have some portion of that cash on hand to cover what is a very significant maturity.
And we have chosen not to give sort of precise cash targets because that analysis of course is very situational. And we look at some volatility indices that tell us what we're seeing in the underlying capital markets and the amount of cash will flex. Having said that, we have said that our forecast contemplates additional repurchases, which would certainly,
I think,
lead you to believe and appropriately so that the amount of cash that we have right now is we think more than we would need and we not committing to any timeline or amounts, as we said, our forecast contemplates repurchases in the next fiscal year.
Okay. Thank you. And then back the last one back to Henry's question. When you look at the performance that you had in October down in Brazil tractors in terms of market share, were there any one time benefits driving the share up for that particular month or should we expect low 20s is pretty
what we did in October. But we're very encouraged by the market's reception of the products and the fact that we will have full availability as we move through 2011.
Okay. Thank you very much.
Thank you. Our next question comes from Ann Duignan. You may ask your question please state your company name.
Good morning. It's Greg Williams sitting in for Ann Duignan at JPMorgan. Thanks for taking our questions.
Pleasure.
Just wanted to follow-up on the transition costs going into fiscal 2011. R and D specifically, it looks like you're going for 15% increase, about $1,200,000,000 a year and with the emission standards in Stage 3b 2012 and 2014, is
the $1,200,000,000 a good run rate to use as we look beyond 20
11? I think it's very fair to say that our R and D spend will stay at very high levels. I think there's certainly there could be some increase as you move forward. We don't have our crystal ball into what we'll be spending in 2012 and 2013 and 2014 out, but I certainly wouldn't look for that number to abate in the near future.
Okay, Thanks. And can you talk about the order board? I think, Marie or Susan, you mentioned that they're on plan. I was hoping we can get some numbers behind that. And what time frame is that?
Is that October? Or is that the fiscal quarter? And how much of that would you expect was pre buy activity? And what do you anticipate for pre buy in the next month? Thanks.
Well, I think maybe the most significant item here is that on the 8,000 or excuse me, the 8Rs now, we indicated that we had 2,500 retail orders, which is a lot for our machines that will be produced after the 1st of the year. So these are machines that are IC4 compliant. They do carry a price tag, they also have telematics and they have some additional features that we are having very good reception from the market. And their fuel I think maybe that's the most significant point away from that. In terms of I think maybe that's the most significant points away from that.
In terms of availability date for 8000s, we're talking May and for 9000s, we're talking March.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Eli Lusgaard. You may ask Please state your company name.
Good morning, Longbow Securities.
Good morning, Eli. Hi,
good morning. Can I get a clarification first? You said you're going to shut down construction for 2 weeks. When is that going to occur? And is there a new implied cost of it?
I mean, you told us what you're going to have,
and you just can tell us when.
Yes, midyear. So you're looking in April, May time frame. And it would be included in that overhead that we were looking at of about $100,000,000 But again, the bulk of it is ag. So I don't know maybe I'm guessing $10,000,000 to $15,000,000 here is construction.
Yes. But so now your guidance for the credit company is $360,000,000 up from $350,000,000 effectively. You're buying going up. Can you give us what something's going on there? And the 20 $1,000,000 charge for the wind that gets pulled out of that stuff, is there any more charges coming in the next year in wind?
No. We don't contemplate anything at all for wind. I think one of the things that I just would remind you is in the Q2 of I think it was the Q2 of this year, we had some mark to market gains that we don't and of course, very hard to predict when that happens. And that was about $20,000,000 after tax. And so we don't expect that that will be repeated in 20 11.
And they also have a little bit of higher overhead, SANG, as they are working to support our international growth. And then
a follow-up, I guess, we're also struggling with this guidance because if you strip out the health care charge, you still earn somewhere between $4.65 closer to $4.68 I guess if you take out the wind charge also. And the
implied guidance of less than $5 just sort of doesn't fly
with even with 100
and of margin in A and T and this is not a bad thing at all because it means our small tractor business is starting to recover. We've been in Europe, for example, but that's about 1% is about in round numbers $150,000,000 R and D, our guidance would tell you we're up about $150,000,000 S and G, our guidance Then we have the 3 items that I alluded to earlier, which is the product cost of IT4, which is CAD130 $5,000,000 overhead $100,000,000 and absorption $100,000,000 That's where it goes.
Product cost $135,000,000 absorption $100,000,000 Was this another $100,000,000 on top of that?
The overhead. That was the factory inefficiencies associated with this number of product line transitions and capital expenditures, etcetera, related to that.
Yes. The 2% pricing pretty much offsets most of that cost. So I mean, that's the hard thing. We're getting with such a double digit sales gain, you come into margins that just look awful or something. I mean something's wrong, doesn't hold unless it's very conservative guidance.
I have nothing else to add, Eli.
All right. Thank you.
Thank you. I have time for one last question.
Thank you. And our last question comes from Steven Volkmann. You may ask your question and please state your company name.
It's Jefferies. Just made it. Thanks. So I wanted to actually step back and look a little bit at the forecast, the industry forecast and I'm interested that you raised your farm cash income expectations in North America and in South America and certainly the underlying crop fundamentals fundamentals look pretty strong and yet we have kind of flattish forecast for those markets. And I'm wondering, do you think that we're just sort of saturated at this point and the cycles kind of flattening out?
Or is there some reason that you would expect farmers despite these strong fundamentals to have fairly flat purchases?
Let's go back again. Our guidance for North America is affected by the very significant product transitions in IT4 that will have some impact on our ability to respond to customers' requirements. We will do our very best. But because of the need to manage emissions credits and as we've talked a lot already about the transitions and the fact that you have some capacity that's taken out effectively because of those transitions. We think that the markets will be affected in 2011 by that.
So that's maybe in North America. In South America, again, the guidance specifically is looking at tractors and combines, which is certainly a very important part of the market. And it doesn't but it does not include what's happening in sugarcane and The other thing I want to point out is in the tractor market as we were as we look at it, we assume, because we don't know what will happen that the very attractive 5.5% rate that tsunami PSI has been offering will end and not be extended beyond the end of March, because we simply don't know. So and that's what's in our forecast. The other factors, there are 2 state government programs in Brazil that appear to be ending in December and not repeated.
Those are targeted at smaller farms farmers and small farms, excuse me, and lower horsepower equipment. So those two ends. And we think that there has been a very significant number of tractors sold under MDA, which
is the hot elementals, which
is the more food program, that's the federal program in Brazil. Sales in the last 2 years each have represented about 30% of the industry. And we think that based on the market dynamics, we think that we actually may see that segment slowing down, maybe off as much as a third next year. And so that's what's incorporated in our industry guidance. Again, that's the industry.
When you look at Deere, we have all of these new products. We've got a very exciting lineup ahead and we're very enthused about our prospects into about our prospects into 2011.
Okay, great. And then just a quick follow-up for Jim, if I could. We've talked, Jim, a little bit about the opportunity to maybe not have to pre finance a full year of rollovers of maturities as the kind of normalize a little bit more. But I guess the message you're giving us is that that's not going to happen in the next 12 months?
No. And our agencies are looking for
other very significant maturities that are ahead of us in 2012 and bear in mind that the Filatza of debt.
Yes. That metric is cash plus untapped credit facility. So what we were looking at before was actually keeping cash 12 months and we have backed off on that target.
Thank you.
Okay, great. That's helpful. Thanks.
Susan, Justin, Tony and I will be available to answer your questions. Thank
you. Thank
you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.