Q4 2020 Deere & Co Earnings Call
This conference I would now like to turn the call over to Josh Jepsen Director of Investor Relations. Thank you you may begin.
Thanks Robin.
Hello also on the call today are Ryan Campbell, our CFO, Jamie Heinzmann, our Chief Technology Officer, and Britain Norwood manager Investor Communications.
Today, we'll take a closer look at Deeres fourth quarter earnings then spend some time talking about our markets and our current outlook for fiscal 2021 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 and John Deere Dot Com Slash earnings.
First a reminder, this.
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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 also 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 John Deere Dotcom Slush earnings under quarterly earnings and events I will now turn the call over to Brent Norwood.
John Deere demonstrated strong execution and the fourth quarter, resulting in a 12% margin for the equipment operations and net income exceeding our full year forecast. Despite significant uncertainty early in the year for large AG markets fundamentals improved throughout the fourth quarter driving growth prospects for 2021.
Meanwhile, markets for our construction and Forestry Division also improved and the fourth quarter, leading to a solid finish to the year and modest levels of recovery projected for fiscal year 21.
Now.
Let's take a closer look at our year end results for 2020, beginning on slide three.
For the full year net sales and revenue were down 9% to 35.54 billion, while net sales for equipment operations for down 10% to $31.272 billion.
Net income attributable to gearing company.
Was $2.751 billion or $8.69 per diluted share.
Net income for the year was negatively affected by impairment charges losses on business disposals, and employee separation cost of $458 million after tax for the same periods in 2019, the similar charges were $82 million.
Slide four shows the results for the fourth quarter net.
Net sales and revenue were down 2% to 9.731 billion, while net sales for the equipment operations were down 1% to 8.659 billion net.
Net income attributable to Deere and company for the quarter was $757 million or $2.39 per diluted share fourth.
Fourth quarter net income was negatively affected by impairment charges and employee separation cost of 211 million after tax compared to $74 million for the same period and 2019.
Turning to review of our individual businesses, starting with agriculture and turf on slide five.
Net sales were up 8% compared to the fourth quarter last year, primarily due to price realization and higher shipment volumes, partially offset by the unfavorable effects of currency translation price.
Nice realization in the quarter was positive by five points, while currency translation was negative by one point.
Operating profit was $860 million, resulting in a 13.9% operating margin for the division.
The year over year increase was driven by price realization and lower R&D expenses, and reduce SGN day improved shipment volumes and mix and lower warranty expenses.
The items were partially offset by impairments and employee separation expenses, which totaled 164 million and the quarter. Please note that the $153 million shown on the waterfall is net of $11 million and separation cost from 2019.
For the full year, and the AG and turf division incurred $286 million and nonrecurring charges, including employee separation expenses impairments and a loss on the sale.
Before reviewing our industry outlook, we will first provide commentary on the regional dynamics impacting AG markets and Deere operations around the globe starting on slide six.
In the US farmer sentiment showed improvement over the quarter as the combination of government support and improved commodity prices boosted farm income prospects for the year. Meanwhile.
Meanwhile, concerns over market access temporarily subsided with exports to China rebounding compared to last year.
Stocks to use and carry on estimates for corn and soybeans are now forecast at multi year lows due to diminished production on account of some regionally dry weather and the directors storm in August as well as increased export activity.
The improvement and fundamentals and farmer sentiment is reflected in the progress of our early order programs.
At this time, we have concluded all three phases of our planter and sprayer programs, while our combined program recently finished phase two.
Sales for planters are up 10% compared to last year with sprayers and combines up even further.
Meanwhile, our large AG tractor order book.
Has strengthened over the last quarter with orders up nicely compared to the previous year.
Lastly, retail activity picked up in the fourth quarter, leaving new and used inventory positions at multi year lows.
Shifting to South America.
Record soybean production higher commodity prices and favorable exchange rates continue to drive positive producer margins in Brazil. This year.
As a result activity accelerated in the fourth quarter and far exceeded our forecast and making a very strong finish to 2020.
For fiscal year 2021, and the order book is quite strong, reflecting the positive fundamentals with order coverage now extending well into the first half of the year Sim.
Similar to North America, the strong finish to the year in Brazil depleted equipment inventory levels below historic averages keeping momentum for new equipment demand healthy as we began the year.
In Europe healthy prices for small grains, such as we have boosted sentiment for arable farmers and spur demand in the back half of 2020, okay.
Overall arable margins should see modest gains this year bill results vary throughout some regions experiencing lower production due to dry conditions.
Meanwhile, dairy and livestock producers may experience some pressure on fiscal year 21 from soft dairy margins and growing risk growing concerns with respect to African swine fever.
Importantly, deeres operations in Europe have benefited from a more focused strategy and demonstrated an uptick and large AG market share as well as much improved profitability for the region Luke.
Looking ahead, the tractor order book is up relative to last year, providing solid visibility into 2021.
Turning to Asia Pacific key markets, like India, and Australia rebounded nicely from the early pandemic locked locked down and are expected to resume growth in fiscal year 21 means.
Meanwhile, operations and other markets are benefiting from some of the disciplined portfolio actions, we've taken to date.
With that context, let's turn to our 2020 on AG and turf industry outlook on slide seven.
The U.S. and the U.S. and Canada, we expect AG industry sales to be up between 5% to 10% for the year.
The increase year over year reflects improved fundamentals and the AG sector as well as the historically low inventory levels at the start of the year may.
Moving on to Europe, the industry outlook is forecast to be flat to up 5% with strength and arable offsetting some weakness in dairy and livestock.
In South America, we expect an industry sales increase of about 5% with solid visibility into the first half of the year, especially in Brazil.
Industry sales and Asia are forecast to be down slightly though key markets for deere are performing slightly better.
Lastly, sales of turf and utility equipment are expected to be flat to up 5% following a solid year in 2020.
Moving on to our AG and turf forecast on slide eight fiscal.
Fiscal year 2021 sales of worldwide AG and turf equipment are forecast to be up between 10 and 15%.
The incremental increase relative to the industry guide guidance reflects plans to recover inventory levels in small AG, which ended the year, which ended the year at historic lows for inventories of sales ratios.
The forecast also includes expectations of three points of positive price realization as well as a currency tailwind of about one point.
For the for the divisions operating margin our full year forecast is ranged between 15.5% and 16.5%.
Now lets focus on construction and forestry on slide nine.
For the quarter net sales of $2.461 billion were down 16%, primarily due to lower shipment volumes, partially offset.
To $196 million due to lower sales volumes and mix impairments and employee separation expenses.
The decrease in profit was partially offset by price realization and lower R&D expenses and reduce SGN, a lower warranty expenses and improved production costs.
The total cost for impairments and employee separation charges were $76 million for the quarter, while the full year cost were $184 million.
Let's turn to our 2021 construction and forestry industry outlook on slide 10 co.
Construction equipment industry sales in the us and Canada are now forecast to be down about 5% with continued uncertainty expected in the oil and gas and nonresidential sectors.
Meanwhile, compact construction equipment industry sales are expected to increase about 5% as the housing market fundamentals continue to be positive through 2021.
Moving on to global Forestry, we now expect the industry to be flat to up 5% as a recovery and lumber demand, particularly in North America should lead to increased production throughout the year.
Moving to the Cnf division outlook on slide 11.
Deeres construction and forestry 2021, net sales are forecast to be up between 5% to 10% compared to last year.
Our net sales guidance for the year includes expectations and about one point of positive price realization and a currency tailwind of about one point.
We expect the division's operating margin to be ranged between 9% to 10% for the year benefiting from price volume and non res and non recurring expenses from 2020.
Let's move now to our financial services operations on Slide 12.
Worldwide financial services net income attributable to dairy company and the fourth quarter was 186 million benefiting from lower impairments and reduced losses on operating lease residual values and favorable financing spreads partially offset by a higher provision for credit losses and employee separation expenses.
For fiscal year 2021, the net income forecast is $630 million, which contemplates a tax rate between 24% to 26%.
The provision for credit loss forecast.
The provision for credit losses forecast for 2021 is 27 basis points.
Before moving on to the 2021 company outlook I'd like to welcome our Chief Technology Officer, Jamie Heinemann to the call. Jamie recently assumed the CTO position and played a pivotal role in shaping our smart industrial strategy and vision for Deere's technology stack Jamie Thank.
Thanks, Brent as noted on recently assumed the newly created Chief Technology Officer positions and I spent the last few months finalizing our organizational design and refining our technology strategy to best enable the smart industrial operating model.
And then with gear for over 20 years, and a variety of engineering roles and both the AG and turf and construction and forestry divisions and most recently led engineering for the global tracker product family.
Simply put the Chief Technology office is responsible for delivering deere's technology stack.
I think of our tech stack is the full set of components required to deliver technology solutions to our customers for nearly 25 years Deere has invested in core technologies and capabilities that can be leveraged across the enterprise.
These core competencies are primarily focused around machine guidance digital connectivity machine intelligence and more recently autonomy.
Historically deere operated within multiple disparate business units that were spread out throughout the energy price to pursue innovations and these core technologies as part of our redesign we've consolidated these units under the CTO organization. This drives a higher degree of focus and unlock significant efficiencies for our R&D investments.
Our approach to precision technology and as shown on slide 13 is distinct within the industry as Weve maintained end to end development responsibility for our tech stack developing unique solutions from the embedded hardware and software and our equipment to the digital platforms our customers utilize.
While we pursued a vertically integrated path for and core capabilities, we have chosen to partner with others for non core technologies things like graphical processing units and cameras and.
Additionally, Weve opened up our digital platform to include over 185 on partners.
Overtime, our philosophy has remained consistent and as depicted on slide 14.
We seek to develop or acquire and core technologies that add value and our unique to the jobs that are customers do while outsourcing non core technologies when partners can bring scale or after faster speed to market.
In any case, we maintain and development responsibility for the final solution to ensure seamless integration into our equipment.
This approach has served us well and the traces its genesis back to our acquisition of Navcom and 1999 and.
That time, we decided on certain technology competencies starting on satellite guidance the.
The acquisition delivered a foundational element to our tech stack and it enabled us to lead the industry and innovation from the early days of Autotrak to turn automation and now auto path, which is on our latest solution for path planning.
Furthermore, by owning this technology, we have been able to scale guidance innovation throughout our entire large AG fleet.
We followed similar blueprints with other core technologies from our acquisition of Phoenix International and 1999 to the organic development of the John Deere Operation Center and beginning in 2012.
Our acquisition and Blue River Technology, and 2017 reflects our view that machine learning and computer vision are essential competencies required for the next generation of machine intelligence and automation.
Similar to other core technologies, we see wide applicability of Blue rivers competencies across our large AG product portfolio and also intend to leverage the vision systems for obstacle detection and our construction and Forestry Division essentially this technology can be applied to optimize machine use and job outcomes anywhere and human operator controls or.
Adjusted machine settings.
Ultimately, we believe that a complete tech stack delivers the most value for our customers when it's paired with the underlying equipment and a dealer network that can support it.
The seamless integration is key to achieving the highest levels and productivity and sustainability and and the requirement for innovations like plant level management and autonomy.
Furthermore, our comprehensive system delivers the ability for equipment to become smarter throughout the course of a production system. While many industry players offer point solutions for a given technology or a specific production step we offer customers a system advantage, where the combined equipment and the information from the technology stack passes insights to each.
Proceeding and subsequent step and the production system for.
For example, our sprayers leverage the guidance volumes from planting for more efficiency and accuracy, resulting in less crop damage artillery operations are informed by the previous year's harvest data.
Slide 15 highlights the comprehensive systems, we are building the first component of our precision AG system is the most important and can't be overlooked.
Our precision AG strategy begins with the underlying equipment and executes a job and the field.
While our industry is attracting new players from non traditional.
Disciplines, such as software on robotics. These technologies must ultimately be paired with AG equipment to accomplish the tasks in the field.
As a result, Deeres primary advantage comes from a product offering and spans each step and the production system paired with the industry's largest installed base and coupled with complimentary technology applied to each product within that production system.
The last component required to deliver precision solutions and the dealer network that can sell service and support the latest technologies increasingly the last mile is becoming one of the most critical enablers for precision adoption and our channel has been leading the industry in terms of modernizing their capabilities and their staff.
In short our precision strategy is very much a system of AG equipment combined with core technologies and the dealer support network working in concert together to make farming more productive and more sustainable.
While we are immensely proud of the success. We've achieved so far we are even more enthusiastic about the runway of opportunities ahead of us.
Throughout our precision journey, we've experienced several inflection points, where technology advancements unlock new possibilities and extend our runway beyond our prior ambitions innovations and conductivity advanced onboard computing and artificial intelligence and reset the realm and possibilities.
Today, we see many years of runway for each of our existing core technologies individually. Furthermore, the opportunity set extend much further as we began stacking these core capabilities to create new functionality and our future product roadmaps.
Over the course of the year, we look forward and providing further details regarding the opportunity set in front of US and will also provide further color on some of the exciting product releases coming to market in the near term.
Before turning the call back over I'd like to offer a few comments on the acquisition and harvest profit and us.
Software platforms focused on farmer profitability.
We are striving to make our customers the most profitable and sustainable and our industry, we can accomplish that without being able to help customers measure profitability.
Harvests profit gives us a significant boost and ensuring we help customers make more profitable and sustainable decisions and the years to come.
Additionally, with the precision AG opportunity set growing substantially over the next decade, we see significant value and our ability to ascribe value of our precision tools to our customers and this acquisition provides us a path to attribute that value.
Thus further and the adoption and technology.
At this time I'll turn the call over to Ryan Campbell for year end guidance and closing thoughts Ryan.
Thanks, Jamie Slide 16 outlines our guidance for net income our effective tax rate and operating cash flow.
For fiscal year 21, our full year outlook for net income is forecast to be between $3.6 billion to $4 billion.
It's important to note that constraints on the supply base and Labor force availability due to co. The 19 remained key risk to our fiscal year 21 guide.
The guidance incorporates an effective tax rate projected to be 26% to 28%.
Lastly, cash flow from the equipment operations is expected to be in the range of $3.8 billion to $4.2 billion and contemplates the $700 million voluntary contribution to our OPEB plan.
Before we respond to your questions I'd like to offer some perspective on 2020, the prospects ahead of us and a few thoughts on our portfolio and capital allocation strategy.
As we look back on 2020, it's important to acknowledge the exceptional efforts taken by our employees suppliers and dealer channel. This year employees across our company log extra hours and adapted to an ever changing environment to create safe working conditions and ensure the supply of parts and equipment to our customers.
So that they could continue their essential work.
Similarly, our dealers quickly adjusted to the pandemic and played a critical role keeping our customers businesses operating.
This year served as a reminder of just how impressive our dealer group is and we are grateful for the tremendous performance they put forth.
And as a result of the effort put forth by employees suppliers and dealers, we posted one of the strongest fourth quarter performances in company history.
Excluding costs associated with employee separations and impairments, our construction and Forestry division achieved 11% margins the highest fourth quarter since 2014 similar.
Similarly, AG and turf fourth quarter margins, excluding special items were approximately 16.5%, which is the highest fourth quarter and the division's history eclipsing results from 2013, despite around 1 billion less and net sales.
While encouraged by our recent results we are even more excited by the opportunity ahead of us.
In the midst of addressing a global pandemic. We also instituted a new strategy for the company over the year in doing so we accomplished three primary objectives.
One we've reorganized the company around production systems to mere the way our customers do business.
Two we have taken significant strides towards optimizing our cost structure and three we've adapted our investment priorities to ensure a greater degree of focus on the products and solutions that are most differentiated and unlock the highest value to our customers.
A more focused R&D investment strategy is essential to realizing the value of the technology stack that Jamie just described.
While we spent decades investing in the core competencies that comprise our current technology stack, we see significant runway ahead to build on what we have done and advanced technology for our next generation of solutions.
And our new strategy plays a vital role and and locking the necessary capital to achieve the potential we believe is possible.
2020 has been a year of change at Deere and that has included some activity with respect to our portfolio in some cases, we've made decisions to exit businesses or reduce footprint to serve markets more efficiently, while and other areas weve added to our capabilities such as our recent purchases of unit mill and harvest profit.
As we contemplate 2021, we expect to continue our portfolio evaluation, which may result in additional activity throughout the duration of the year as such we intend to provide regular updates on subsequent earnings calls as we take actions in this area.
And while we've made efforts to better focus the internal investments we are making please note that our overall priorities related to our cash resources remain the same we.
We remain committed to our a rating and we'll continue to fund our operations at levels that support our strategic initiatives net.
Next we will pay a dividend within our targeted income range and with other priority secured we will return capital through our share repurchase program, we resumed the program and the fourth quarter and we'll continue to execute on our capital priorities in 2021.
Thanks, Ryan so ready to be in the Q and a portion of the call. The operator will instruct you on procedures and consideration of others in our hope to allow more review to participate please limit yourself to one question you have additional questions. We'd ask that you. Please rejoin the queue Robyn.
Robin.
And thank you at this time to ask a question and its star followed by the number one on me.
Airline recall chain clearly has prompted.
And our first question is from Jerry Retrofits with Goldman Sachs.
Yes, hi, good morning, and a happy Thanksgiving every on.
So gerry.
So I'm wondering if you could talk about adding turf incremental.
Hi, James from here, obviously, you got to really strong margins much earlier in the cycle and most of US expected how should we think about operating leverage from here and assuming we do get a multi year AG and turf recovery and you still off of these higher levels delivered 30% plus and grow margins.
As we think about what a multiyear recovery could look like.
Yes, thanks, Jerry as it relates to the margins and thinking about this net next year 2021.
15, and a half to succeed and have absolute margins.
We do expect that we can do to roughly 30 to 35 on from an incremental basis.
And kind of the underlying operations I mean, I think when you think about this this year a few things to consider as far as potential earn out potential headwinds and the forecast would be incentive comp has moved up and is a bit higher and 21 from from a companywide perspective, thats about a 160 million dollar headwind.
And then we are seeing a little bit higher.
Overhead costs, so thats related to volume, but certainly still have some of that related to just overall caution as it as it relates to co bid and the impacts as we are seeing.
Spread and contagion in a lot of our key geographies.
Yeah, Jerry its Ryan.
And what to think about it we structurally improved the profitability of the equipment operations, including AG and turf, but.
But we intend over the long runs and to still operate with that flexibility that gives us the ability to perform on an incremental basis and the 30% to 35% range.
Thank you. Our next question is seven Cheney and Cook with credit Suisse. Your line.
And.
Hi, good morning, happy Thanksgiving and and nice quarter.
I guess my question on if we get it in the high end of year guide on net sales and on the margin front and implied your margins are already on lets hitting.
And at a 15% mid cycle margin target that you guys have laid out so I'm just what's embedded in your view on this.
The cycle and your 2020 on guidance and I guess the longer term question and as are we further along than we thought we would we would be do we need to revisit that target I'm, just wondering and market and Eric appreciate that margin sorry forgive longer term. Thank you.
The if you think about where we're at in the cycle, you'll AG and turf. This year, we're projecting to be pretty close to mid cycle.
That said you know mix is still not normal we think large AG and North America is around 90% of mid cycle small AG overall, a little bit above mid cycle, so relatively close but not their debt.
Yes, I think what we've seen is significant.
Progress on the margin front and as Ryan mentioned, we feel like we've structurally improved our ability to perform and execute and drive that margin level. So we're we're continuing to work on that and as as as implied with our guide. This next year we.
Expecting above that 15% target for for AG and turf and 21.
But in total for the companies in the 15% to low now I guess I'm asking.
We're getting there on a combined basis and we're not even at net cycle.
Yeah, Jamie the goal was for 2022 kind of at mid cycle, we will continue to execute and deliver on that and then 2022 will take a step back and reflect on what we want to drive into the future, particularly focusing on making the investments that really can change the game for our customers and create value for them, so paying hang with us and weighted.
Until we execute and deliver and 2022, but we've got a long runway of things that we can do to to make our customers better.
Okay. Thank you have a great Thanksgiving.
And thank you. Our next question is Steven Fisher with UBS.
Thanks, Good morning, and just curious to ask you about how you are factoring in raw materials costs for fiscal 2001, where we're seeing some steel price increases by no share your Cogs percentage assumed is lower and the forecast. So just curious what you kind of.
Hi, just thought about that and.
Front half versus back half thanks.
Yes.
Steve and we look at material we've.
We've we've had a tailwind in 2020 from a material point of view and particular on on.
Steel.
Thats after we saw increases and 18 and into 19. So it's been favorable at this point as we look forward.
In 2021 your contracts, we tend to cover a quarter a little bit more in terms of the lag time between price movements and when we see those come through so we have some some coverage there so to to your point.
Net to the extent you see some of that inflation and probably more impactful later in the year.
That said as we kind of step back and look at material overall parsing and some of those trends in terms of prices moving up but we're also pretty confident in some cost reduction projects and things we have going on that we think about material kind of coming in relatively stable.
Year over year.
Thanks, Steve.
Thanks, Gary.
Thank you. Our next question is and Stephen Volkmann with Jefferies. Your line is open.
Hi, Good morning, everybody I wonder if we can spend a moment on the pricing question you guys. Obviously had very good pricing, especially on the AMC and the fourth quarter and and I guess.
Yes outlook is pretty good as well can you just kind of describe what you're seeing there and why it's as positive as it is.
Pricing and Steve you are right was was better than expected in the fourth quarter.
I think may be backing up you know what hasn't changed is our philosophy on on pricing and continuing to focus on value and the upside that we can create for our customers I think when you look specifically at what we saw on fourth quarter for AG and turf and there are a few things that drove that debt level of pricing, one and and we noted Brent kind of mentioned this in his comments.
We had tighter inventory positions.
A kind of across.
Most of our geographies and and models and in particular on small tractors and turf.
That drove less spend as a result of of tighter and levels of inventory that's one component.
The other piece and we talk a little bit about this last quarter. We saw more of that this quarter was the cost for low rate programs. So buying down interest rates its offer low rate programs to our customers, which are pretty pretty prevalent and small tractors and turf.
That cost was was was lower as a result of just lower interest rates and in the market. So that that was impactful and then lastly.
We saw pricing overseas, we had continued strength and number of overseas markets that debt benefited price in the quarter. So that we ended the year strong obviously and and are forecasting you about three points next year. So.
So we'll continue to manage that I think a part of that to think about as we go into the year tighter inventories and we think that lends itself to a little bit a little bit.
Lighter incentive spending as we work to recover some of that inventory.
In 21, Thanks, Steve go ahead and on to our next question.
And thank you and next question is from and Degen with JP Morgan Your line is up and.
Hi, good morning, its and diagnose and.
Hi, and.
Okay and I just wanted to ask and then to answer your comment that Dan.
To add to 90% mid cycle and large AG going into fiscal 21, and only and that seems a little income taking those may given that farmers are sitting there with 50 billion and in excess income and payments that share and on top of 24 billion net they received last year.
And so he and on the notion that if they're not spending now and on getting the fundamentals and given the extra money and they had and like seven and payments are expected to revert to normal going forward and.
And while it will 21 and represents a new peak now learnt and 90% of normal.
Yes, so maybe as we think about that I mean, you made a little bit of a journey and last year 20, Tony we were around 80% of mid cycle for large AG and North America. So we're seeing that step up to about 90.
So we are seeing that.
May be maybe taking a few of those pieces of your comments there as it relates to what's going on.
Government support obviously has been very strong I think from a customer perspective, the preference would be access to markets over over eight I think thats underlying and as we've seen some of this some of the export markets open up I think youre seeing more more sentiment on improved but the aid his has on large part in our view and been used.
To pay down debt and and really manage and short on balance sheets. So I think thats been.
Positive and underlying that also youre seeing strong land values and Midwest seen some some upward movement in land values. So I think underpinning there are really strong balance sheet for for farmers per ticket as we exit the year.
And fundamentals have moved in and move really over the last six weeks. So it's been pretty recent on the back of kind of revision down of ending inventories of commodities, China purchases and and obviously the debt you mentioned like all of those we've we've seen impact sentiment. So those things have been positive so I think as it.
Relates to looking forward, we don't expect aid to recur, but we do believe higher commodity prices are going to benefit cash receipts. As we go forward. Soon we don't expect a huge downward movement and cash received for principal crops in Canadian and 21 sales.
And all of that I think we sit back and say we are seeing demand pickup we're seeing that in early order programs.
And the large tractor order book that Brent mentioned, so I think we're really kind of at an inflection point right now we're seeing it being demand move so and we would say there's still along a long runway of replacement demand as you look at the age of the fleet and those sorts of things. So we think we're a ways off mid.
Mid cycle, let alone a peak.
Thanks, and we'll go ahead and jump to our next question.
And thank you. Our next question is from Robert Rick Hymer with Netlist research.
Hey, good morning, everyone and thanks.
And just I mean, obviously it had a very dynamic here with a lot going on I Wonder if you have any updated thoughts on either the buckets of margin I think any year structural goal.
Theres, a bench and you're pretty far advanced on that path and may be if it's not that I mean, you see the same sort of long term potential rising up and construction margins.
There is a little bit less strength, there I guess versus AG and then just a little maybe a little bit less potential on the tax side I'm not sure. So just your thoughts on margin buckets and or construction structural margin. Thanks.
Yeah, Rob I think our overall bucket wise not on a change as we think about the path of 15, certainly cost we've done a lot of work on the cost side as it relates to structure as well as you know we've begun working on on footprint and those sorts of things So I think that.
We feel good about the progress there aftermarket continues to be something we're focused on that's not something that changes immediately, but but we like the organizational structure and the priorities that we've laid out there for the team and making making good initial progress and and precision AG as Jamie you outlined continues to be opportunity for us and.
I think you know.
As we continue to develop technologies, and we see more and more opportunity to leverage and Thats really where John.
These new award.
Stepson as it relates to construction and certainly I think continuing to operate efficiently. There. We've tried to be really disciplined on price and you've seen that over the course of 2020, which is aided margins there.
The road building side of the business, we think is going to be it's a substantial contributor as we think about the overall on delivering 15% margin.
And this year the road building side work through a really choppy year.
And and performed very very well and proved out your part of the hypothesis there that they are going to be less cyclical and that was that was certainly the case. They ended the year down about 8% compared to construction, which was down much more significantly.
And maybe last thing on the construction side, where we do think we have an opportunity to drive margin and differentiation is on technology. So maybe ill as James you talk a little bit about how we think we can leverage technology and in Cnf and and road building.
Yes, Thanks, Rob for the question and I do think if you if you look at precision and generally right. Many of the technologies that we're developing on the AG side have applicability at the comp on a level and within our construction and and road building products as well and the benefits and precision extend to that business also this does need to be more precise with.
And then reduce the amount of time the equipment spends on a job site to do the job those sorts of things all factor into our ability to take technology that we're developing within the enterprise and apply it to the construction and road building products as well.
Okay, Thanks, Rob that cash.
We'll go and go to our next question.
And thank you and next question asked and Chad Dillard with Bernstein. Your line is open.
Hi, good morning, everyone.
And yet so well.
You talked about your interest in AG take rates and then on water program.
How are the rates for exact and ours and apply how to compare versus last year and have you started off RC and spray as opposed apart and other programs.
And call take care.
And then just lastly, just maybe talk about the world lot focusing on will be on quality facility ecosystem, and we will acquire the technology and the core offerings on.
Thank you.
Okay.
Yes, I'll start there I mean from an early order program. We saw on take rates kind of in line with what we talked about a quarter ago. So in the on the low fortys on exact emerge high Fortys and your 50 on exact apply and then come and advisor actually in the Seventys. So those those specific solutions now we've got a few years.
And on or Bill, we're seeing continued strong adoption, there, which has been which has been positive and I think just clearly demonstrating the value of what those can do when you think about executing the jobs those customers are performing.
Maybe from a seems very perspective, and Jamie and we'll talk a little bit just about what we've seen from a technology perspective, having it on the field.
And so we've had machine with customers over the last and prototype machines over the last 12 months and especially the summer learned a lot we will have on machines with customers and next summer as well.
And the feedback and largely been outstanding right people on a gravitate to the value proposition they get it they understand it.
And it's easily demonstrable the.
May be take us a different direction pass and brand just talk maybe about the question on how applicable is technology outside of corn and soy from a production system perspective, and tell you. What we're really doing is we're giving machines vision and intelligence right and that extends well past this as sort of a multi dimensional runway extends well past Cory.
On and so I and.
And the other AG production systems and also extends past the AG production systems into into several of our construction Forestry and road building segments, and so theres a lot of opportunity out there just with making machines.
More capable from a vision and intelligence perspective, and and there is another dimension of that that's the data thread that that creates that links all of these steps those on a production system together, so really exciting stuff to come and.
And definitely applicable outside of corn and soy.
And maybe one last thing debt on touch at is we're also seeing the opportunity on geographic growth from a precision AG perspective, we've seen really strong upward movement and engage acres globally, but in particular in South America and in Europe. So as we think about you got this opportunity geography on geographic basis across AG.
And turf and Cnf and then on because essentially every job that the customers are doing.
Thanks, Chad will go head go to our next question.
Thank you and next question is Joel Tiss with.
CMO.
Hi, guys I just wondered if you could talk a little more deeply about cnf from from like a structural standpoint, and the ability to get to 15% operating margins and may be also just the touching on the ability to get paid for for putting precision software into.
On machines. Thank you.
Yes, I think on the on the margin side, we're seeing.
We've seen and I think the division performed pretty resilient leads through a year and which sales were down pretty significantly and we we north American construction equipment, we took out about 30% of field inventory, so pretty significant and.
Action this year to put us in position to build in line with with retail next year.
So I think the actions were taken overall as a company as it relates to cost structure are beneficial here Jamie's organization from CTO perspective pulling.
The technology together to be able to leverage across we think thats, a big opportunity and.
And he just mentioned a few examples of where we think we can do that the road building side continues to be one where we see the opportunity to.
Growth continue to grow there and grow margin.
We execute.
Both integration plans and and everything else. There. So I think we feel like we've got a runway there to improve on yet.
Continuing to focus on.
On on markets and products, where we can differentiate.
To to deliver deliver margin performance.
Thanks, Joel will go ahead and jump to our next question.
Thank you and next question is from David Wrestle.
With Evercore.
Good morning.
The a and C sales midpoint guide on the 12, and a half but 4% of that.
It is price and currency.
Definitely about policy and half percentage implied volume. So if my math is right. The the way you destock small lag this year and 2020.
A small business alone just returning back.
Back in line with retail with their production and.
Almost accounts for almost all that 8.5% volume growth.
So is on make sure that those numbers are correct are you indeed, implying a large AG sales and 21 are really not growing much at all and and if so given the order book commentary the inventory commentary what why is that.
Yes, so when you think about the kind of the sales and in Lincoln net up within the outlooks and may be the biggest.
Components that are from a large and perspective North America, we expect to build in line with retail.
Small small AG, roughly we expect to be flat and North America.
To your point, we will produce above retail on.
On on small tractors and we expect.
To to build and inventory were coming off historic lows last year I think we ended at 55% inventories to sales. This year, we ended at 20.
So we will see some recovery there, but again, we expect that market to be relatively flat, but we will build and inventory there.
In South America, and Brazil in particular.
We will probably recover we expect to recover a little bit of inventory that got depleted in fourq you as the market turned pretty pretty strongly in the fourth quarter.
So so you're right I mean, I think when you combine price and FX.
With that kind of North America.
And up some South America being up some and then overproduction.
Action to.
To to recover replenishing inventory on on small tractors, that's that's kind of the math to get to those numbers.
But on vacation and you said large AG and North America in line with the retail is that not up and then up retail forecast meetings and do not these destock and all in 2020, So where you will actually produce lower than retail.
It is up and I don't understand the flat coming off a year of some destock and you think retail club.
Yes, we were we produced in line with retail margin AG in 2020 and will we intend to do the same and 21.
No up a little bit okay.
Okay. Thanks, David well go and jump to our next question.
Thank you next question and and Nicole Deblase with Deutsche Bank.
Yes, Thanks, good morning day.
Hi, Nicole.
Hey, there and just wanted to make sure you can hear me and said I guess.
Maybe looking at the October retail sales trend.
And I think you know and and all the category and act four wheel drive tractors and looks like Deere came in below the industry could you just maybe explain a bit about what's going on there.
Yes, I think you therapeutics and play there I think given our order fulfillment model focused on inventory management and and obviously some some of this demand is lumpy throughout the year, we will and times, you'll lose a little bit of short term market share at inflection points and I think thats some of what we saw this.
We are particularly as we got towards the end of the year.
Where we were tighter on inventory and as we as we work through 2020 with the uncertainty kind of broad broad ranged across agriculture, and even on the small tractor and turf side, we were pretty tried to pretty diligently manage those inventories and we were lighter at the end of the year and we saw the inflection historically, what we've seen.
And as we've been able to recover that has as were as as we build bill by backup. So I think that's our that's our expectation that debt you see us recover that as we go forward.
It's Ryan as John said, sometimes and inflection points given on order fulfillment strategy.
We may on the margin Miss a few tractor or combine shares but history would tell us that we recover that back very quickly and over the longer on.
Our heads down focused on creating sustainable market share growth through creating differentiated value for our customers. So thats really what were focused on.
Thanks Nicole.
We'll go and go to our next question.
Thank you.
Question on his Larry de Maria with William Blair.
Thanks, Good morning, everybody on.
Appreciate the AD Tech stack discussion.
We don't see on areas, obviously deere prescribed aggregate on agronomy, but obviously climate and everywhere, but net you bought a software company, we are developing and bullets and AI capabilities seems logical for the roadmap that may be deemed position and recommend seed and do you have the data and getting down to individual plant level Some day.
Okay and curious if this roadmap plays out can you get into the prescription CD recommendation game, because it seems like it's going that way or alternatively, maybe more about making sure you can attribute value deere seeking greater pricing and greater loss share for customers. So just trying to think and see how this plays out over the next few years and.
As you may be committed and more conflict with the company.
And thanks for the question I'll take it the I think the weighted to think about that right now is were.
Really focused on creating the data and collecting the data that any individual grow on needs in order to make decisions exactly like though on that you're talking about what.
And.
Hybrid they may plant in any given year and and at some point in the future I think we'll have.
The growers have enough information and.
Because of the data they collected over the previous production system steps over the over the previous years to optimize that see choice, but India and thats their choice to make they have.
A responsibility or they have a relationship with their trusted advisors whoever that might be on their their agronomic community and and they're the ones that are going to end up making that decision as they see it as best for their farm on any given year given on operations.
Thanks, Larry Okay, we'll go and jump to our next question.
And our next question is.
Adam Old Allman with Cleveland Research.
Hi, guys good morning, and.
That's on the on the quarter Rhinos I was wondering if you could provide us a little bit more color on the guidance for the year.
And because of how you see the cadence playing out some may be first half the second half and in terms of.
Sales and margin a important.
Moving pieces that we should keep in mind and then can you confirm that theres any material restructuring charges left and the and the guidance for this year. Thanks.
And Josh I'll start I mean, I think as you think about kind of cadence of the year I don't think we we expect to see much abnormal from a from a seasonality perspective, so I think we'd expect both both both.
Both divisions kind of play out.
Relatively normally no nothing major kind of bill would that would disrupt debt.
I think as it relates to one time charges those sorts of things the on the employee separation actions.
We don't we don't have expect.
Anything and 21 and the guide.
Got that all all and 2020.
To the extent, we continue to work on portfolio optimization, those sorts of things we could see.
Charges, there, but you know as as we would would execute on those we bill will provide updates and.
As Josh said nothing unique and next year's cadence and then you know as we we don't have forecasted charges and the guide for next year, we are still assessing and kind of operations and footprint globally as we make those decisions will obviously identify any.
Any any cost associated with those during our quarterly calls.
Thanks, Adam will go ahead and go to our next question.
And is temporary with Baird. Your line is open.
Thank you good morning, everyone and.
Wanted to go back to construction and forestry the margin discussion there and.
Recognizing that you've had a lot of.
Sort of discrete call that debt impact the focal point of that now on coal going away.
On the side I'm on the map right here at that one.
Incremental margin that you're guiding to is.
Somewhere in the low twentys low to mid points here. So I guess my question.
First where are we in terms of growth and or road building margin and.
Is the path to 13, 14% operating margin for that business still there and how do you see that and sort of what what's being embedded in terms of.
Incremental margins longer term.
Yes, I think when you win for Incrementals on on the business and 21, we are in that range of.
No of 20 to 25, which is traditionally we know where where we'd expect to be.
You know as as you think about road building, we had a really really strong quarter and.
And and road building and for Q.
And as we look forward, we think that that continues to improve even ex items, where we were this year. We expect next year with you know.
Topline moving up call it roughly 10%, we think that that margin.
Steps up again, so I think we feel we feel really good about the the performance there and maybe just to reiterate a comment I made earlier as we think about the 15% and how do we get there.
We think the road building pieces is a substantial contributor to to net margin margin story as we go forward.
Thanks Mig.
We'll go ahead and go to and next question.
Thank you.
Let me Echo bonus with Morgan Stanley Your line is up and.
Hey, good morning, guys and.
Just wondering maybe following on the road building discussion and I think on Cnf, you gave us and outlet for and.
North America, construction and contact and forestry, but.
And Ken can you may be just share with us what your thoughts on the outlook for growth Bill being wise and and.
It was fair substantial underproduction, yes.
How did those inventory levels and us finish this year and and what we should be thinking and for next year.
And also as it relates to North America versus treatment.
Yes, so we expect it's a little bit hard on the industry. So we tend to talk about really more just on what we expect from our business there and from a we think thats up about 10% next year after being down about eight in 2020, so seeing some some nice recovery, there and that business inventory wise I think we.
We feel like we're in good shape I think over the course of 19 and and a little bit of 20, we took some more targeted actions on some of the different brands to to adjust inventories, we integrated order fulfillment philosophies, but now I feel like we feel like going into 21 were in good shape in and across across.
Those those brands.
Thanks Courtney.
Our next question is from Ross Gilardi with Bank of America.
Thanks, guys. Good morning can you clarify that debt that 90% of net cycle for large AG and its projected 2021 way youre, where you'll finish or was that actual 2020, and then historically how far above our mid cycle at the peak for for AG and.
Some of the concern out there seems to be that 21 is somehow peak and AG and turf, which seems very hard to contemplate when revenue growth hasn't even turned positive yet and you only have 21 AG and turf up 10% to 15%.
Yes, so the 90% is our is our forecast as we stand now for 2021. So we think we've moved from basically call. It 80 to 90.
As we as we look forward now I mean importantly, we've really seen kind of activity turn in the last four to six weeks. So.
Obviously, we've had early order programs going on but as you think about kind of underlying fundamentals for farmers things have improved from a commodity price perspective lower stock levels. That's.
Thats all really happened very very recently, so I think I wouldnt overly interpret what's happened and four weeks and that that's that's everything.
Everything that that's that's possible there so and we're still we're still managing that working through with our dealers and customers, where we're at we feel like we're pretty well positioned and having managed new inventories tightly may be more importantly used is in really good shape use.
Used inventory levels are down in places, we have been sensing and called before 2014 used prices on the large AG side are are seeing upward pressure. So I think the the backdrop and all of those things that we've we've thought would drive replacement demand and support replacement demand that have been stalled over the last year or two we've seen some of those things.
Turn and to be more favorable for for farmers.
Yes, Thanks Ross.
On on that.
And what are you sort of normal peak, the 20% to 25% above mid cycle for AG and turf I mean, if that's the case is strictly the trough.
At peak mobile day, something like 30% type number and not not at 10% to 15% number that's been on just what was trying to clarify and my question, Yes, sorry, I forgot that part of your question. Yes, We would we would consider 120, 20% above and as peak and that's as we planned.
And certainly if you go back to 2013 large AG in North America was a 130% so debt that.
That was we so we have been much higher and higher than even 120, but that's the way we plan. So thanks Ross we'll go ahead and try to get one more question.
Thank you and next question this and Seth Weber RBC capital markets.
Great guys. Thanks, and good morning, Happy Thanksgiving just just a question on your South American and industry and outlook up 5% scenes.
Kind of conservative it sounds like your messaging that your order book is up materially.
Here at the end of the and the year. So can you just.
You know frame that are you expecting something to really sort of drop off in the back half of the year in South America is it.
Just some uncertainty around financing programs or any color you talked to the 5% growth first half price.
Yes, so I mean, yes, five for all South America, and I think your question, maybe a little more targeted on on Brazil, specifically fundamentals have been really strong and we saw fourth quarter demand was from a from a retail perspective was strong.
And strong enough that you actually saw the year swing from and have a negative industry two to positive.
So so thats best move quickly Brent mentioned, our order books were ordered out there you through March.
One thing that does when you think about the comparison and the strong fourth quarter is now and our comp. So we'll we'll anniversary that strong strong industry in in and 21, So I think thats part of it.
But I think overall, we're seeing day.
The dynamics there have been have been favorable.
Maybe a little bit of caution as it relates to China buying them more grains from from us and what is what exactly does that mean for them, but but overall I think very very positive outlook on on Brazil.
Thanks, Seth that well with that the growth is half of the hour. So we'll wrap it up but I appreciate all the interest I hope everyone has a good Thanksgiving and we'll we'll talk soon thank you.
And thank you. This does conclude today's conference call you may disconnect your lines and thank you for your participation.