Q3 2020 Deere & Co Earnings Call
And how the question answer session of today's conference.
I would now like to turn the call over to Mr., Josh stepson director of Investor Relations. Thank you you may begin.
Good morning.
Also on the call today Orion Campbell, our Chief Financial Officer, Cory read President of production in precision AG and Britain Norwood manager of Investor Communications.
Today, we'll take a closer look at Deere's third quarter earnings and spend some time talking about our market than our current outlook for fiscal year 2020. After that we'll respond to your question. Please note slides are available for the call. This morning that can be accessed at our website at John Deere Dotcom SESH earnings for the reminder, this call Viom broadcast live on the Internet and recorded for future transmission and.
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This call includes forward looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent form 8-K, and periodic reports filed with the Securities and Exchange Commission.
This call May include financial measures that are non conformance with accounting principles generally accepted in United States are GAAP.
Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our web site at John Deere Dot Com Slash earnings under quarterly earnings and events I'll now turn the call over to Brent.
John Deere demonstrated strong execution and the third quarter, resulting in a 14.6% margin for the equipment operations and an increased net income forecast for the full year. Despite persistent uncertainty in large AG markets profitability increased year over year for the division and take rates for precision technology improved markedly.
Meanwhile, markets for our construction and Forestry division slowed year over year, but came in ahead of our forecast and showed progress towards rightsizing inventory levels.
Now.
Let's take a closer look at our third quarter results beginning on slide three.
Enterprise net sales and revenues were down 11% to 8.9 to 5 billion, while net sales for our equipment operations were down 12% to 7.859 billion.
Net income attributable to Deering company was down 10% to 811 million or $2.57 per diluted share.
In the quarter the company recorded impairments and closure costs totaling 37 million, both pre tax and after tax.
In addition, the quarters net income was unfavorably affected by discrete income tax adjustments, while the third quarter of 2019 had favorable discrete income tax adjustments.
At this time.
Changes to the recently announced operating model.
Thanks, Brian let's start with the worldwide AG and turf third quarter results on slide four.
Net sales were down 5% compared to last year, primarily driven by lower.
Some currency translation.
Partially offset by price realization.
Price realization in the quarter was possibly translation was negative by 3%.
Operating profit.
Was 942 million, 6% operating margin for the Division a.
The year over year increase is primarily due to price.
Angie and R&D as well as a decrease in warranty costs. These items were partially.
Offset by the unfavorable effects of lower shipment volumes and impairments and closure costs during the quarter the division incurred charges.
Closure of a small tractor facility in China.
Now in a sale of a European turf, let's turn to our 2020 AG.
In USA and Canada, we expect AG industry sales.
Sent for 2020.
During the quarter sales for small tractors have remained strong as the pending.
For home and property owners.
The strong retail environment combined have reduced our field inventory positions.
Entry point for 2021.
Meanwhile, demand for large AG relative to 2019.
Demand has remained relatively stable throughout the year as our law or programs now provide visibility through the end of 2020 and beyond.
Can use to be fluid due to the many uncertain variables impacting our customers headed into 2021.
Unresolved issues around global trade and continued government support phenolic during the early months of the locked down have kept grain stocks Ellen.
Ladies going into the harvest season.
At the same time, the farm equipment, and new and used inventory positions are.
Hello, especially as it relates to deer equipment relative to competitive machines. Additionally, precision AG advancements for new unlocked economic headroom for our customers.
The balance of these factors was reflected in the results of our.
Sam for planners, and sprayers, which both ended up realm.
Let's move to the previous years program by mid 2019 was adversely affected by the delayed planting season.
Nearly all of our advanced precision.
Jim features such as exact apply an exact emerge so higher take rates compared to the previous year.
Results give us confidence in our precision AG.
Thanks strategy and demonstrate customers willingness for sustained investment in technology in the face of uncertain market conditions, specifically, we see pack on improved customer economics.
The industrys outlook is forecast to be debt.
Down 5% to 10% over.
Over the quarter the outlook for arable farmers declined slightly amid lower grain prices and Lee.
Our next season.
Additionally, dairy margins continued to soften.
Albeit from recent peaks continue to enjoy favorable conditions as exports remain strong.
Headwinds this year, we continue to make prop.
Genetic.
Over the year.
150, plus horsepower tractor.
For category, while engage takers in our operations center has nearly doubled since the start of the year.
In South America industry sales of tractors and combines rent for the year.
Despite.
Thanks of Covance and the global trade uncertainty of weighed on farmers throughout the first half.
After the year.
While industry sales will be lower for the fiscal year, we've seen sales momentum building in recent months and our order books now extend well into the first quarter fiscal year 21 in the shifting to Asia industry.
As key growth markets like India are.
Of the country wide locked down.
Lastly, industry retail sales of turf and utility equipment in the us in Canada are projected to be down about 5%.
In 2020.
Moving onto our AG and turf forecast on slide six.
Fiscal year 2020 sales a worldwide AG and turf equipment are forecast to be down roughly 10%.
Which includes expectations of 2.5 points with Pos.
I will give price realization offset by a currency headwind of about two points for the division's operating margin our full year forecast is roughly 11.5%.
Which is inclusive of cost related to both employee separation programs as well as facility impairments in closures in total we estimate these costs to be roughly $260 million for the division in fiscal year 20.
Before moving onto the construction and Forestry Division I'd like to first offer a few remarks on the new operating model customers, helping them to become more profitable and sustainable while revolution.
Conniving agriculture through rapid introduction of new technologies to accomplish this we focused our strategy and organization around the three primary areas shown on slide seven production systems, our technology stack and lifecycle solutions over the last few years.
Years, we've integrated a production systems perspective into our product planning Roadmaps. However, our recent redesign roundys systems, which has important implications for how we plan our product portfolio.
And how we allocate capital it production system is illustrative of how our customers get work done and includes both the jobs. They perform in the decisions they make to produce an output in AG. For example, we contemplate every single job in decision required.
To prepare the soil to plant the seed to.
That crop throughout the growing season.
Ultimately informing the harvesting job this entire series of decisions and jobs, great the systems in which our customers operate.
Our solutions will empower customers to do their jobs more productively, while making better decisions that minimal.
Hi, guys inputs maximize outputs and create a complete cycle, where each step informs the next.
Also critical to unlocking value for customers is the accelerate.
Rated development and leverage of our technology stack across our suite of products.
Think of our technology stack is the full set of components required to deliver solutions to our customers.
Cements in computer vision machine.
Learning and data platforms today, we're better positioned than anyone to provide seamless enough.
Degraded solutions, where the some of our product suite in the production system is greater than each of these machines operating in isolation. Our technology stack is also the key enabler to extract data.
Yes from one step in the system in order to make the next step more effective the value creation is powered by our core technologies and provides us the greatest opportunity for differentiated solutions in the marketplace.
Bringing this altogether our production systems approach combined with the precision delivered through our technology stack will deliver a seamless cycle that unlocks the ability to utilize resources in the most precisely targeted manner to achieve optimum output, which means delivering our customers increased productivity greater profitability.
And enhanced environmental outcomes throughout the full production system.
Lastly, our strategy puts a renewed focus on lifecycle solutions to enhance our see significant opportunity to improve our penetration throughout the entire life of our products, while simultaneously improving customer experience and uptime for their equipment.
Our connected machines, the supporting tools and applications.
And our highly differentiated dealer organization are critical elements to our initiative. Furthermore, we will focus on enhancing our ecommerce tools, while leveraging a tiered offering through our all makes and re manufacturing segments.
Lastly will accelerate our performance upgrade or retrofit business with the intent to proliferate precision AG solutions deeper into our installed base at price points that enable owners of used equipment.
Some of our solutions.
Offered hard to prove benefits and face lower take rates in the marketplace journey, we foreign production says.
System teams to assess the agronomic and economic impact that our solutions plan, the jobs and decisions that farmers make each year produce key innovations over the last.
Few years, such as our exact emerged planners and exact apply sprayers in effect. We've spent the last several years, putting the building are differentiated solutions to our customer.
Mers in the production systems in which they operate in now is the time to accelerate our vision by formerly reorganizing the company around these targeted systems in our new organizational design. Each division President owns the end to end production system for our customer segments that means the entire suite of products for.
Any crop system is organized in reports to one leader.
We think this has important implications for how we allocate capital shifting more resources toward projects that unlock the most economic value and deliver the most sustainable outcomes for any given system.
And the AG and Turf Division for example, my team will lead and maintain end to end responsibility for the corn and soy small grains in cotton in sugar production systems, which includes all of the engineering manufacturing and marketing for large tractors combines crop care and crop harvesting. Meanwhile.
Hi, my colleague and partner Mark contents, and his team will oversee turf and utility very livestock and high value crop production systems. The new design will be key to bringing innovative integrated solutions to market faster than ever before.
The real power of our Mark model.
From our ability to scale solutions across geographies and across different production systems today. Many of our leading technologies are designed for and introduced in the us corn and soy production system, we see an enormous opportunity to adapt our solutions for different geographies and accelerate the pace of adoption for farmers.
Brazil is a great opportunity a great example of this opportunity over the last 18 months, we've introduced nearly all of our leading North American.
The option of our digital platform.
To date take rates in market acceptance has been very positive with many of our initial introduction selling out within days with respect to digital adoption engaged acres have tripled in the region in the last 18 months can have the John Deere Operation Center.
In addition to leveraging.
Technology into new geographies, we're also adapting our solutions to scale across different crop production systems as I mentioned, while technology has tended to be first developed for corn corn and soy customers.
We see significant potential to utilize these innovations for small grains production key technologies, such as section control or precise seed placement represent enormous near term opportunities for products like air Cedars, while the inclusion of customer vision and computer vision.
And machine learning hold long term potential for further automation of the small grains market.
Yes, ultimately our new operating model is essential to capturing the immense opportunities ahead of us and will help us accelerate and accelerate the pace of adoption for the industry. At this time I'd like to turn the call back over to Brent Norwood to cover the details on the quarter for construction and four.
A story Brent.
Now, let's focus on construction and forestry and.
Insulation, partially offset by price realization.
Operating profit moves low.
Or year over year to 204 shipment volumes and sales mix.
And lower SGN day.
Let's turn to our 2020 construction and forestry industry.
Outlook on slide 10.
Construction equipment industry sales in the U.S.
Rental capex as well as over.
For all moderation in general economic activity Global Forestry, we now expect the industry to decline between.
In 20, and 25% this year declining more than the rest of world.
Moving onto our Cnf division outlook on slide 11.
Deeres construction and forestry 2020 net.
Sales are now forecast to be down by about 25% compared to last year.
The incremental dense reflects plans to underproduce retail sales as we take further action to reduce field inventory.
By about 20% to 25% for Earth moving equipment.
The order book remains.
But at a much reduced production schedule relative to last year.
Our net sales guidance.
For the year includes expectations of about one point of positive price remained at about a point.
For the division to operating margin.
We are increasing our forecast percent due to modest interest.
And a strong third quarter performance and road building.
Our margin forecast is inclusive of cost related relating to both employee separation and impairments in total we estimate.
These cost to be about 130 million me.
Let's move now to our financial services op.
Worldwide financial services net income attributable to dairy company and the third quarter was 100.
From lower lower losses on operating.
And lease residual values.
Decreased SDMA.
Reduced provision for credit losses vision for income taxes related to him.
First quarter and favorable discrete Ajay.
For fiscal year 2020 net income.
Forecast is now 500 and.
10 million, which contemplates attach 26%.
Yeah.
In 2020 remains at 37 basis points, reflecting.
Last year.
Slide 13 outlines our guidance for net income our effective tax rate and operating cash flow.
Our full year outlook for net income is now forecast to be about.
Which includes the impact of our most recent employee separation program estimated to cost 175 million in the fourth quarter.
The guidance also contemplates and.
2027 and to 29%.
At which moved higher for.
For the year due to discrete.
Pre tax items, primarily in the third will from the equipment operations is now forecast to be about 2.8 billion I.
Ill now turn the call over to Brian Campbell for closing comments Brian.
Okay.
And first like to offer some perspective on.
Actions and our financial results for the quarter.
During our second quarter earnings call, we outlined the actions taken to enhance our.
John.
These actions involved raising over 4 billion total through two medium term note.
So these.
We also announced the indefinite suspension of our share repurchase plan.
The inbound.
Seemingly we expect to hold additional liquidity for an indefinite period.
However, given the strength of our operating results.
We are now comfortable restarting our share.
Repurchases to be clear, we will execute any repurchases in accordance with our use of cash priorities that start with maintaining our single a rating funding our capital.
Them and finally, using residual cash flow for repurchases as conditions warrant.
During our analyst day.
New priorities for the company.
First was a more focused capital allocation process, including both capital investments in R&D to reallocate our resources.
Situation and profitability with the specific intent to one intensify our precision AG investments.
To enhance our capabilities and our aftermarket and retrofit business and three actively address any lower performing.
We committed to adjust our cost structure, including both our organizational design and footprint to create a more agile company to respond faster to market dynamics and best capitalize on the immense opportunity in front of us.
During the first three quarters of this year, we've taken significant action towards achieving those priorities as Corey noted, we announced our new operating model in June which represented a critical step executing our vision.
As part of this new model, we've redesigned our organization around production systems, increasing our focus on accountability, while aligning our organization with how our customers work.
We created a chief technology officer role to better leverage our technology stack throughout the enterprise and sharpen our focus on the next generation of precision AG innovations.
Lastly, we redesigned our aftermarket and retrofit organization to better serve our customers.
These organizational changes have.
Significant implications for how we allocate capital and will ensure that we prioritize solutions that at the highest potential to unlock value for our customers.
With respect to our cost structure, we've announced to employee separation programs in 2020, costing 138 million and 175 million respectively.
In total these programs will incur estimated expenses of approximately 315 million and will provide for an annual run rate savings of around 260 million.
And we'll continue and we will provide updates during our quarterly earnings calls as additional decisions are made and executed.
As it relates to our third quarter performance. The operating results are directly attributable to the hard work and dedication of our employees and dealers who have worked diligently to implement our strategy, while sumwalt simultaneously adjusting operations and pulling cost levers in response to the global pandemic.
Looking forward there are many uncertainties spacing, both our operations and those of our customers in the near term given this uncertain environment. We are even more convinced that our strategy is the right one, allowing us to focus on what we can control and deliver differentiated products and services to our customers that drive profitable and sustainable outcomes.
More than ever our industry's requires solutions that reduce costs enhance productivity and deliver sustainable outcomes. We have spent the last several years, putting the building blocks in place to deliver differentiated and integrated solutions to our customers in the production systems in which they operate.
Now as the time to accelerate our vision through the new strategy and operating model.
Now we're ready to begin securing a portion of the call. The operator will instruct you on the pulling procedure in consideration of others and our hope to allow more of you to participate in the call. Please limit yourself to one question. We have additional questions. We ask the rejoin the queue Julie.
Thank you if you would like to ask your question. Please press Star one you will be positive quarter first and your last name. Please unmute your fallen regarding your name and to withdraw your question Press Star to.
Our first question comes from Robert Diner nucleus Research your line is open.
How did that was actually great overview of the lean operating model and the importance of it.
You touched a little bit more on the external features in the internal out I wonder what if you can just do a little bit more on nimbleness responsiveness are going to the internal cost the assorted C.
Potentially changing as a result of the wave organized ourselves. Thank you.
Yes, Thanks, Rob, maybe I'll start and Ns Corey or Ryan Tad in I mean, I think you guys. We as we think about this there's there's obviously the customer facing component and be more aligned to how they do their work and I think thats a critical component.
As we can buy internally what this does in addition to accountability.
And then fewer handoffs and those sorts of things. We also think it's going to create speed and internet speed is important because it's one two to react and make quicker decisions as market dynamic shift, but also in the way that we're able to implement and execute technology and.
Executed throughout the portfolio in and delivered to customers in a in a more rapid way.
Yes, Rob its Ryan we've talked about the cost and savings component.
And from the employee per related programs and as we said, we'll continue to look at the portfolio.
And we'll talk about any any decisions our actions that we have when we make those on our quarterly calls and so those those actions will still continue I think a testament to the new organization as what we've just been through it with Covance.
We've taken some layers out of the organization, we've been able to responds much quicker in this very very dynamic environment, that's given us a lot of confidence with the path we're going forward on.
And Rob adequately and of course. This is Corey I was just say if you think about how we were organized in the past around platforms and product lines. It served us very well, but it also required a lot of effort time energy spend on aligning the organization for what we're going to do next.
In the new model, we're operating by empowering teams closer to the business and creating less of those handoffs and the production system teams responsible we'll have the capital allocation responsibilities to make decisions faster and to bring those products to market more quickly to enable customer profitability and we see it starting already.
With although the models just just going in place right now.
Thanks, Rob will go and go to our next question.
Our next question comes from Andy Casey with Wells Fargo Securities. Your line is open.
Thanks, Good morning, everybody.
Wanted to ask a couple of questions about the updated kind of shorter term updated forecast implications for the fourth quarter.
Revenue guidance seems to imply.
Down around 18% in the quarter and then.
Now back at roughly mid teen percent decremental margin, if I exclude the 175 million charge you disclosed.
If I.
Look at it X charge and.
Accounts for the inventory actions in CNS what factors other factors are leading you to anticipate.
Both the weaker revenue and reduced ability to hold margins as well as you did in Q3, which is.
Greg extraordinary, but could you help with that.
Yes, Andy Thanks, I think you're right when one of the biggest pieces is just the continued inventory management. So we we do expect to see underproduction into construction equipment for North America as well as small tractors on the AG side. So that is that is one of the components as it relates to the topline I think things to consider when you think about.
Margin.
One is the employee separation costs.
That's in the fourth quarter, so $175 million across the company.
Thats one material, we've seen pretty positive material movements this year, but as we get into the fourth quarter, we start to lap.
Reduction that we saw in for the fourth quarter of 19, so while we see that improving nearly not to the extent that we have seen during the year because of lapping those.
Price in the fourth quarter, we don't expect to be as strong as we've seen year to date or particularly in the third quarter.
Then one other thing that I would I would point out is we still are in a pretty dynamic and fluid environment as it relates to co bid. So we have cost embedded in your in both of our divisions, whether its overhead disruptions in the factories or premium freight just because it's still a moving target in terms of use the environment.
With with the Corona virus and how that's impacting us so those would be the biggest drivers and puts and takes.
I think when we look at it and you go.
Kind of ex items ex the the voluntary separation costs decrementals from equip ops perspective, or when the twentyth. So I feel like pretty reasonable given given what we're seeing from a top line. So thank you Andy will go ahead and jumped to our next question.
Thank you. Our next question comes from Stephen Volkmann with Jefferies. Your line is open.
Hey, good morning, guys Im wondering if we could kind of go back I think both Korea and Brent tuck in the opening comments about early order programs being good and take rates for the precision AG being strong.
I'm wondering if we could perhaps put any bookends on in terms of numbers around those and then.
Did that help the margin in the quarter as well AG and turf because that was obviously very strong I'll leave it there. Thanks.
As it relates to the early order programs, Steve Yes, So we Cory referenced the orders were up and what we saw in the first phase planters were up about 10% on a unit basis.
For years were up a little bit more than that.
So that's that's clearly positive from a directional point of view I think maybe more importantly is what we're seeing from an adoption of technology. So the on planters.
The exact emerge in the low fortys, so up again compared to where we're a year ago exact apply on sprayers and the high Fortys, yes, a continuing to see strong adoption and I think you when you step back and look at the current environment. We're operating in nine our farmers are operating in I think the is a testament to the willingness to be able to in two to one to invest in technology.
And the the ability to deliver clear outcomes for those for those customers.
Yes, I would average.
This is the story I would add that the in addition in addition to the strong program I think the most important thing for US is to see that our customers continue to buy into those features and and we often referee reference exact emerge and we reference exact apply but it's across the board. So individual ROE hydraulic downforce ROE cleaner adjust closing we will.
Patrols electric drives on our planners all the way through what we're doing.
In air seating and what we're doing across sprayers.
In addition to a good program. What we have is a technology suite that is being adopted increasingly by our customers to drive profitability. It's Steve on your question relative to margin no impact on margin. We were taken those orders, we will start to build a little bit of that as we get into Fourq, you, but really.
I see more of that as we roll the fiscal year into into one Q and its does Ryan maybe just a point on that you know the margin performance that we've shown in the quarter is is reflective of all the work that we've done with respect to developing technology in delivering solutions to our customers.
As you think back what AG produced this quarter. It's it's the second highest operating return on sales that we've had yet to go back to 2013 in the third quarter to get a higher number and in that period. Our sales were about 2 billion higher. So if you take a step back and think your what's driven that margin performance. This time on on lower sales is really the technologies and solutions were offering our customers.
Thank you will go and go to our next question.
Thank you. Our next question comes from Stephen Chester would you be ask your line is open.
Great. Thanks, Good morning, just still want to ask a big picture question on margin and so with the good outcome that you had this quarter overall I'm wondering if there was anything in this particular quarters results that you would say is kind of serves as a proving 0.3 or 15% targets and I want.
During the construction contribution to that margin is more or less worrisome than it has been I know you thought that that areas needed a bit more work at it sounds like maybe more of the employee separation is focused on that side of it just curious about the kind of the bigger picture longer term comp.
In that margin now.
With deep I mean, certainly I think the performance in the quarter in what we see for the full year continues to give us confidence in the direction and the ability to deliver 15% and doing that at.
We think about where we're at from a large AG perspective relatively low low volumes.
You know is I think it speaks to the power of lower level, maybe able to do.
As you think about construction and forestry, we're with a significant destock.
Occurring through the year, we were able to ex items like I said, we're going to going to do margins kind of in the mid or excuse me decremental margins in the mid 20, 20% range. So.
In the quarter, we did about 15% margin on road building and that's with volume compared to a year ago down by about 20%. So we're seeing really strong performance there and I think that continues gives guidance to in just the power of the combination of our Earth earthmoving enforcer business with that rebuild.
In business and what that would that be able to deliver one of the big questions was.
How cyclical was that road building business and I think we've seen that come in as.
Less cyclical for full year, we expect that business to be down about 10% compared to much more significantly on the construction business. So I think that does give us continued confidence in what we can do there and then one another thing to add is when we start to think about the opportunity to further leverage technology and technology that.
Weve.
Put in place in AG and that we can leverage into both earthmoving Forestry and road building, we think theres a that that that's a considerable opportunity for us as we as we go forward.
Thanks, Steve will go ahead and go to our next question.
Thank you.
Your next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Good morning, everyone.
I'm wondering if you can expand on your comments on the market the industry data that we track it shows really big step down in EWP inventories for the industry. This year is that consistent with what you're seeing somewhere in the way Joe for tractors down 45% helpful Peak and is that decline in used as that's what.
Driving strong results in the early order program, while telemarketing Weiser, obviously pretty tight.
Yes, I think Jerry when you think about used it is we feel like use isn't really healthy place. We've done a lot of work our dealers have done a ton of work pulling that down and we're at you think about row crop, which has been the the one area that's been.
An area that we've needed to work on for quite a while we're at levels. We haven't seen since 2014 or below so it's it's it's come down inventories come down.
In the and on top of that we're seeing price stable to up you know on late model. So it's been really really supportive of the overall environment.
Yes, this quarter the only other thing I would add if you just look at late model used in you take a look at what's going on and auctions you look across the board. It's clear that the aging of the fleet has led to a need for new more new product to go into the market.
We've seen.
Very positive results not only in the levels of use that we have the values that those used products are bringing in the marketplace.
Thanks, Jerry I could go ahead and go to our next question.
Your next question comes from Joel Tiss BMO. Your line is open.
Hey, guys another Don.
Joel.
And can you just give us any any more color on your sort of your product line, the adoption and and I know youre going to update us quarter by quarter, but you know I'm sure. There is a bigger picture plan there and can you give us an idea like what any year in or how far the way through you just beginning or you're halfway through or just any sense there.
Thank you.
Yes, Joe I'd say I mean, I think from a where are we I think where it's early I think we're trying to take a methodical approach to this and really thinking about as we look what are what are the products, where we can differentiate most increase the most value that includes how do we leverage technology.
That kind of differs first first component of that and then just where do we have strategic fit with with our overall business. So I think those are kind of to the lenses are using I'd say, we're continuing to work through that.
Yes, and you'll see us Ryan you'll see us take action throughout probably 2021 on this.
And as we said well, we'll update as we make decisions, but just said kind of the areas that we can focus on.
The financial potential.
Ability for us to unlock value for our customers, though the areas that we're going to refocus it's not that we're going to turn our back on a lot of things that will will take a look at those things and see how we can serve those customers and just a different way so thats how were thinking about it.
Okay. Thank you.
Our next question comes from and diagnosed with Jpmorgan. Your line is open.
Hi, good morning.
At.
Good morning, and can you just talk a little bit.
Fundamentals and Thats agriculture in particular, and the growing competition from South America and is there any risk that Dan as you make us farmers more and more productive and.
That we end up with that just a continuation of the supply outstripping gel demand such as fair. We are today. The on most of the tops and just how do you think about that and.
We are in at a point clear way, we have excess supply of all crops and just making farmers more productive and means that continue to grow the supply as oppose to focusing on growing demand.
As we as we think about that we look the fundamentals.
And I think.
It's important to kind of step back and look at what's happening Big picture from a consumption perspective, what are the some of the macro events driving activity I think what one thing that we've we've looked at and new as China rebuild their hoggard for example, we're seeing.
Consumption of soybeans, and really consumption of other commodities to like corn growing and growing at a faster rate.
As that heard rebuilds that is further commercialized so I think fundamental backdrop, what is happening from consumption perspective.
It's really really important.
As it relates to production certainly we've we've seen.
Heavy crop.
Strong crop this year and as you think about.
Some of the Corona virus impacts as it relates to lower ethanol demand, which is which is pulled some consumption of corn out in the near term. There are there are some of those impacts.
Within within the year, but I think what I'd say, we're we continue to focus on its how can we.
Work on what we can control delivering technology that can.
Dr. outcomes for our customers, whether that's through tighter use of inputs and higher yield an increase sustainability and we think we increased continue to create value and it as it relates to U.S., Brazil soybeans in particular, those two countries produce about more than two thirds of of the of the.
World soybean. So there's those are the two two key places a grown we really like our position in both of those places to serve customers putting unit.
And this Korea, the only thing I would add is in little more detailed is that the technologies, we're delivering apply equally to whether we're trying to grow output, so productivity or efficiency, which is to grow the same.
With a lower cost and lower environmental footprint. The good news I think is that the long term fundamentals remain the same population growth and our overall.
Incomes over time being higher going to drive that demand were 25 going into 2006 years.
So while we're going to have short term issues on over an undersupply our technologies that we're delivering scale appropriately either for production or for the efficiency of the crop and I think thats, what our customers are buying into in a time when commodity markets are tight theres still buying the technology to lower their breakeven cost for producing the crop.
Thanks, and we'll go ahead and go to our next question.
Thank you. Our next question comes from Joe O'dea with vertical research. Your line is open.
Hi, Good morning, everyone could you expand a little bit on the pricing experience in the quarter the degree to which that came in better than you anticipated what the what the drivers where there, but we don't see a little bit more sustainability and I think and particular in cnf given more the demand challenges there and yet very strong pace mix.
Variance in the quarter.
As it relates to price Joe I mean, I think one thing and it is on both both divisions, we've really tried to maintain discipline and how we're managing price how're addressing our markets I think what we've seen is.
Really on both markets, we were able to runway with a little bit lower.
Discounts in the quarter, we had some benefits of just lower interest rates as it relates to low rate financing, which which has helped and also on both divisions, we saw stronger pricing from an overseas perspective, which contributed.
In the quarter. So those are those are the things that we saw in the third quarter that led to the push our price maybe a little bit higher.
And then what we would have expected.
And why that doesn't persists into Q4.
Yes, I think some of its timing.
As it relates to.
The overseas price and then the we've just got lower volume also when you think about the fourth quarter. So just we're expecting that not to be as strong as what we saw in the quarter.
Thanks, Joe Thanks for that go to our next question.
Thank you. Our next question comes from Ross Gilardi.
With Bank of America. Your line is open.
Hey, good morning, Thanks, guys.
Okay.
I just wonder if I was wondering to get a little more color on your rationale for.
Another round of employee separation in light of and the industry demand trends.
That seem to be accelerating and obviously very strong margins and AG and turf and the in the quarter.
Yes, I mean, I think as you think about what we're doing from an award perspective, I would be couple that a little bit from from the kind of current market conditions. I mean, I think that what we're doing from an organizational perspective is strategic in nature and really trying to align around the thing that core he talked about.
In kind of the key tenants are hallmarks of what we see on delivering the smart industrial strategy that weve that weve outlined.
And from a market conditions perspective, I'd say more of the work there has been really focused on inventory management and be positioned ourselves as best we can to exit this year given the uncertainty.
And that's I think those would be thats the way that I think we frame that up I think there theyre somewhat separate issues.
Thanks, Rob will go and jump to our next question.
Our next question comes from Adam Behlman Cleveland Research Your line is open.
Hi, guys good morning.
I was hoping with expand a little bit more on the construction equipment business.
This amount of upside this year as demand from what you're looking for.
Before could you just talk about so your thoughts on on housing.
Rental demand Nonresi construction and then just on board more broadly as I think about 2021 demand. How do you think about the average age of the fleet I would assume credits.
Our younger.
On average, but perhaps utilization has been stronger than I would've thought so maybe thats not the case can you just any unpack that a little bit more.
As a when you think about the construction and kind of the macro backdrop I mean, I think we have seen housing coming back somewhat obviously starts in July we're guiding surprise to the upside. So that's that's a good thing.
I think when we look at what's going on there rental has been slow as they pulled back we saw a little bit of that come back in the quarter.
So that's a that's a good thing.
Certainly something we're watching in the rental companies are managing that.
Tightly as our dealers that have their own rental fleets, they're they're managing those inventories as well.
When you think about.
The ages of the construction fleet, so relatively young given given the strong markets, we've been through and on top of that.
Weve, you said machines or through the course of.
The spring and summer that haven't been operatings, not putting hours on them can be a bit of a challenge as well, but yes, we think about that backdrop overall.
We.
Continued uncertainty as it relates to when do things really pick backup Nonres as you mentioned has been particularly weak.
So were so we're mindful of that and I think the best thing that we've we can do is really manage inventory or we're going to take 20% to 25% of of our field inventory out in North America, we think that puts us in a position to produce to retail.
In 2021.
So thanks Adam.
Our next question comes from Seth Weber with RBC capital markets. Your line is open.
Hey, guys good morning, after doing well.
So I wanted to circle back on the early order program for a second to eat you commented that.
Yes.
Its year over year, but 2019 was obviously.
You know kind of a squishy year at the weather and stuff can you just talk about where where you feel like it's at.
Relative to say to an 18 or more of a normal year. Thanks.
Yes, so if you're right I mean do we did see.
Last year was an odd year with weather I mean people are still planting well into due June timeframe.
I think you guys relates to 18 is probably closer to kind of flattish with that from a unit perspective, but it but maybe importantly, given the technology in some of the things Corey mentioned, we're seeing the average.
Kind of unit price of those machines is higher as a result of of greater adoption of technology, Yeah, I would say on a unit basis, it's pretty pretty similar but what we are seeing or larger machines were trending toward larger higher capacity machines and more.
More technology intensive offering so you think about a higher higher average per per machine going out the door.
Okay Thats helpful. Thank you guys appreciate it.
Thanks.
Our next question comes from Courtney Yakima with Morgan Stanley. Your line is open.
Hi, good morning, guys.
I mean im just curious about the build that tier 15% mid cycle margin target, yes, especially with something like the additional voluntary separation program sounding like gets more structurally related tier reorganization. So.
Do you see any upside to that and then maybe Josh you mentioned above headwinds maybe coming from the margin side in the fourth quarter as it relates to.
Lapping over material cost.
And pricing being a little bit lighter.
You also get help us think about maybe the puts and takes us margins in 2021, especially as they start to see many more of their work in synergies.
Some benefits.
International paper production. Thanks.
Currently I think when you when you think about 21 I think important if you think about some of the onetime costs. We've had this year as it relates to employee separations and leasing that that we expect to yield about to 60 run rate next year from savings perspective, it's worth noting we.
Expect you know in 2020, we see about 65 million of that in savings, but the full run rate on those would be about to 60 next year. So that's the biggest thing.
As you think about benefits that we would see in the upcoming year.
I think the other the other pieces some of the footprint into some of those things.
Will we should see some benefits as Ryan mentioned, we're continuing to work through that so it will rule.
Potentially have actions down in the fee in the future that could could impact that as well, but I think the biggest thing would be to think about that run rate on us from a savings perspective.
Thanks warning.
Our next question comes from David Raso with Evercore ISI. Your line is open.
On the puts and takes for the margin 21 versus 20 versus 20, you just highlighted the 195 incremental savings from the separation programs, but just so we have the list here.
Our separation costs this year of about 315 million.
Those don't repeat so that that's the largest year over year correct and if we just go through the $37 million of impairment in factory closure costs this quarter.
They also don't repeat if you can clarify that.
And the carryover of current pricing gains.
If nothing changed at all what's the carryover on the price is assuming theres a lot of Tailwinds there, but then the big headwind to ask is.
What was the number on discretionary cost savings this year.
That come back next year. So if he can help us with that on the tailwinds versus the discretionary savings that don't repeat that do come back and 21.
Yes, Thanks, David.
So if we if you step back and say what are what was the onetime costs that we incurred in 2020.
So in separation impairments exit closures dose, which things that's about 435 million.
So that's the number of all in cost that you saw in 2020 for the full year.
As you think about kind of levers or cost that may come back.
We've been we've been really thoughtful as as we pull levers.
And I'd taken actions to really focus on what can we do structurally but we certainly think there will be some discretionary costs are some cost that comes with whether its volume or other things that come back in.
But that's something we're going to try to manage really diligently to put a number on its way too early to try to project what that would be in 21.
But I think those are the two things as it relates to price I mean, I don't think theres a whole lot of.
Whole lot to tilt to read into price other than you were going to we expect to have strong price this year.
And as we think about price from delivering value perspective, we are confident and the ability to be able to get price as we go forward. So thank you David will go ahead and jumped to our next question.
Thank you. Our next question comes from Mig Dobre with Baird. Your line is open.
Yes. Thank you I want to go back to construction.
And then.
I'm trying to put the pieces together here on your on your revised outlook. It sounds like you haven't really changed your.
Destocking assumptions for the year correct me, if I'm wrong on that.
Berkeley, and or rather the road building business seems to be a lot better than what you expect that the last quarter. I mean, my recollection as you thought that business is going to be down 25, and it's now apparently only going to be down 10, So I'm curious as to what drove that this change and.
Youre in Europe kind of thing.
Moving business in North America, Im wondering how you're thinking about the end market demand because from what I could tell through the quarter incredibly teams that dramatically from open the end market demand standpoint, obviously, you're seeing something different so I'm trying to understand that dynamic again.
Mig yet that's a good question I mean, I think when you think about those two components.
Certainly on the road building side, we saw that come through stronger than we expected as activity picks back up kind of coming out of a lot of of lockdowns in different parts of the world.
Led probably bye bye markets like China.
And in Europe was a little bit mix, but we saw some strength in some western European markets.
So I think there is we just saw recovery happening faster and you're right and we thought that was down about 25 and ended up.
More more like down around 10.
I think on the under construction side.
North America in particular, as we think about that business, yes, it's our outlook there from revenue perspective, maybe has gotten a little bit better I.
I think some of that was the uncertainty that you're faced a quarter ago in terms of what exactly was that going to look like.
And in I think you've also seen some things like housing that that.
That was mentioned a little bit earlier has has been a little more stable or more positive than we would've expected a quarter ago. When we if you go back and we saw housing starts below a million.
So I think those are probably the biggest drivers that we've seen impacting that changed are you know our outlook there from a from a top line perspective.
Thanks, Mick will go and jump to our next question.
Thank you. Our next question comes from Jamie Good luck with credit Suisse. Your line is open.
Hi, good morning, most questions have been answered, but I guess just one question. Obviously you are seeing what gearing other industrial companies that the decremental margins. This year given the challenges are proving much better.
People would have expected say, we get a lot of questions on does that sort of limit incremental margins. You mean as we as as we come out of the downturn say are there any structural reasons or changes in your cost structure or how you're thinking about things that would prevent you know tier from putting up being at the same type of incrementals they've done historically.
While managing pretty good decrementals.
Assuming makes is there the volumes there thanks.
Jimmy I wouldn't expect to see significantly different incrementals I think we're we're confident in what we think we can do there as it relates to the margins you think about we're doing from a technology perspective, and as we as we make some of these.
Adjustments to our portfolio to those dosing certainly help as well.
When we think about overall margin.
Thanks, Jamie we go in and jumped to one more question.
Thank you our last question comes from Stanley Elliott with Stifel. Your line is open.
Hey, good morning, everyone. Thank you all for fitting me in.
The commentary on the housing market and the shrinks there can you help us with what's happening within the.
On the most forrester side of the business with that market looks like being revised down a touch just trying to see if thats. The stocking if there's something else going on there. Thanks.
Forestry you when you look at for sure yet, it's we've seen it week globally I think the markets, where we see more weakness has been us in Canada and Russia.
In Russia has really been driven by.
More Chinese and Asian demand.
In the U.S. lumber prices have we started to move up you're seeing futures move up.
But you know mills have still been either closed or working through inventory that they had so I think.
As we look at lumber price in the futures you moving out that's probably a positive sign but we havent seen that come through from a demand perspective.
As it relates to our customers yet.
Thanks for the question family.
The top of the hours that we appreciate your interest and will be in touch each have their own soon thanks, a lot have been weekend.
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