Apr 1, 2011 - No longer âbusiness as usualâ. 6 ... and key businesses, such as construction equipment. 12%. 20% ....
John Deere
Committed to Those Linked to the Land
Deere & Company April 2011
Safe Harbor Statement & Disclosures This presentation includes forward-looking comments subject to important risks and uncertainties. It may also contain financial measures that are not in conformance with accounting principles generally accepted in the United States of America (GAAP). Refer to Deere’s reports filed on Forms 8-K (current), 10-Q (quarterly), and 10-K (annual) for information on factors that could cause actual results to differ materially from information in this presentation and for information reconciling financial measures to GAAP. Guidance noted in the following slides was effective as of the company’s most recent earnings release and conference call (16 February 2011). Nothing in this presentation should be construed as reaffirming or disaffirming such guidance. This presentation is not an offer to sell or a solicitation of offers to buy any of Deere’s securities.
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Table of Contents Slide # John Deere Strategy
3
4
Macro-economic Tailwinds
25
Foundational Success Factors
35
Global Markets and Opportunities
43
John Deere Financial Services
50
John Deere Power Systems
55
Farm Fundamentals
58
Market and Currency Volatility
67
Appendix
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John Deere Strategy
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Why is the John Deere Strategy evolving? No longer “business as usual” – Global macro-trends present
significant opportunities for John Deere
– Global population and income growth – Global infrastructure needs – New customer segments – Technology advances
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We will help our customers – who cultivate, harvest, transform, enrich or build upon the land – meet the world’s dramatically increasing need for food, fuel, shelter and infrastructure In so doing, we are supporting a higher quality of life around the world
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Sustainable SVA Growth is delivered by distinctively serving our customers, employees and investors – In this way, we can extend and enhance our financial and operating achievements of recent years – Our challenge: to capture anticipated tailwinds by attracting more customers to the John Deere Experience across our six key geographies (US-Canada, EU-27, Brazil, CIS/Russia, India, China) in a manner that meets local needs while leveraging our global scale
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Integrated portfolio of businesses each with a vital and specific role Global Growth Businesses – Invest in global expansion for profitable growth by capitalizing on macro-trends Complementary Businesses – Defend and grow share, enhance SVA, strengthen the channel of the Global Growth Businesses Supporting Businesses – Strengthen and further differentiate our Global Growth and Complementary Businesses
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Global Growth Businesses
Agricultural Equipment Solutions
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Construction Equipment Solutions
Complementary Businesses
Turf Equipment Solutions
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Forestry Equipment Solutions
Supporting Businesses
John Deere Financial Services
Worldwide Parts Services
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John Deere Power Systems
Intelligent Solutions Group
Exceptional Operating Performance - Equipment Operations 27.7% OROA in 2010, despite weakness in key regions such as Europe, and key businesses, such as construction equipment 30% 2010
2007
25%
2006 20%
10%
2004
28%
2005
20%
2009, adjusted* 15%
2008
2009
12%
2003
12% OROA (SVA Neutral)
2002
5% 2001
0% 80% Low
100% Normal % of Normal Volume
120% High
*Excludes fiscal 2009 expenses related to goodwill impairment and voluntary employee-separation, for reconciliation to GAAP see “2009 OROA Reconciliation to GAAP” slide in Appendix.
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Net Cash Provided by Operating Activities - Equipment Operations SVA Model: Higher Cash Flow, More Consistently 3,000
Adoption of SVA Model
Sale of Trade Receivables to Credit
2,500
$ Millions
2,000
1,500
1,000
500
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Over $7 billion in Pension/OPEB contributions, 2001-2010
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SVA Journey - Equipment Operations, 1991 - 2010 1,800
SVA ($ millions)
1,400 1,000 600 200 -200 -600 -1,000 -1,400 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Note: For reconciliation of SVA to GAAP, please see “Equipment Ops SVA Reconciliation to GAAP” slide in Appendix
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SVA Journey - Enterprise, 2002 – 2010 SVA in 2010 was $1.714 billion - the highest in company history 1,800
SVA ($ millions)
1,400 1,000 600 200 -200 -600 2002
2003
2004
2005
2006
2007
2008
Note: For reconciliation of SVA to GAAP, please see “Enterprise SVA Reconciliation to GAAP” slide in Appendix
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2009
2010
Aligned High-Performance Teamwork Integral part of strategy, reinforced with compensation Short-Term Incentive (STI) Bonus Calculation
2010
2011
Based on individual Division’s performance
Based on Enterprise performance
2010 Divisional Metric
2011 Enterprise Metric
Equipment Operations:
Metric Weighting
A&T or C&F OROA
70%
Corporate Composite Divisional performance
30%
Credit Operations:
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Credit ROE
30%
Corporate Composite
70%
Equipment Ops OROA
50%
Ag & Turf OROA
25%
C&F OROA
15%
Credit ROE
10%
Aligned High-Performance Teamwork Integral part of strategy, reinforced with compensation Global Performance Management reinforces alignment Base pay changes linked to achieving goals
STI: Short-Term Incentive – Bonus focuses on OROA/ROE Covers most worldwide salaried employees
MTI: Mid-Term Incentive – Bonus driven by sustained SVA creation About 8,000 management employees eligible
LTI: Long-Term Incentive – Primarily stock options Top 830 employees eligible Minimum stock holding requirements for senior management (~ top 125)
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Critical to meeting our aspirations of realizing sustainable SVA growth through global expansion Needed to serve a diverse set of global customers more effectively Deep Customer Understanding (DCU) - Understanding our customers’ most important local needs, and translating these into winning products and services better than any competitor Deliver Customer Value (DCV) - Profitably translating our customers’ needs into products and services at prices our customers are willing to pay World-Class Distribution System - Enabling our customers around the world to participate in the unique John Deere Experience by developing world-class channels of dealers that are professional, profitable and sustainable businesses, oriented to the customer, aligned with John Deere and achieving market preeminence Grow Extraordinary Global Talent - Enabling preeminent customer value and business results through extraordinary leaders and engaged employees delivering aligned high-performance teamwork globally
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Commitment to execute and monitor all initiatives critical to our success Performance metrics – Traditional financial measures based on what we are delivering today to our stakeholders Health metrics – Based on the company’s Success Factors, are the qualities, attributes and actions being introduced to ensure the sustainability of our performance over time
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Performance Measures
Metric
Target
Sales
Net Sales Growth Target
$50B* (2018, at mid-cycle)
Profitability
Return on Sales (Operating Margin)
12% (2014, at mid-cycle)
Asset Efficiency
Asset Turns
2.5x (2018, at mid-cycle)
*Implies a CAGR of ~ 9% (2010 – 2018) vs. historical CAGR of 7-8%
Health Measures
Metric
Target
Exceptional Operating Performance
Quality
% JDQPS certification
Disciplined SVA Growth
Sales/SVA Mix by Geography
% Non-US/Canada
Aligned HighPerformance Teamwork
Employee Engagement
Employee Survey’s Engagement Index
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Since 1837, the company has delivered innovative products of superior quality built on a tradition of commitment and integrity – How we do business is critical to our continued success
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What does this all mean to John Deere?
Sufficient “head room” for global growth in Agricultural Equipment Solutions and Construction Equipment Solutions John Deere is well-positioned to create solutions that help our customers feed the world, grow alternative fuel stocks, and build major infrastructure
We need to maintain our strength in developed markets and grow in developing markets Our current success factors (Exceptional Operating Performance, Disciplined SVA Growth, Aligned High Performance Teamwork) are foundational, and necessary but not sufficient, to meet our growth aspirations
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The John Deere Strategy – In Summary Accelerated emphasis on global growth –$50 B mid-cycle sales by 2018 –>50% outside of U.S./Canada –Capitalize on increased global demand for food, shelter and infrastructure
Focus on improved profitability –12% mid-cycle margin by 2014
Continued adherence to OROA/SVA model –30% OROA at mid-cycle sales (12% at trough) with improved asset turns
Focus on two growth platforms –Global pre-eminence in agricultural-equipment solutions –Global construction-equipment operations (with presence in China) –Complementary/supporting businesses to help drive performance of global growth platforms
Revised metrics reflect strategic direction –“Performance” metrics align compensation to strategy –“Health” metrics introduced to monitor underlying factors (e.g., market share, quality) to ensure performance is sustainable
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Macro-economic Tailwinds Support John Deere’s Global Growth Businesses
Population and Income Growth
Most of population growth through 2050 in Asia and Africa • By 2050, world population will reach 9 billion, increasing from 6.3 billion today • Aging population in North America, modest growth • Shrinking and aging population in Europe
Large middle-class developing in China and India • 200 million households expected to join the middle class
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Challenges Created by Population Growth
Feeding the world – agricultural output must double by 2050 • Gross output must increase @ 3.4% annually in next 10 years vs. 2.4% annual growth in past 10 years • Natural resources under strain, especially water
Massive urbanization – migration from rural areas creates need for roads, power grids, water containment and distribution systems • 2010 milestone: For first time, more than half the world population lives in cities
• 2050: More than 70 percent will live in cities
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Strong Global Tailwinds in Ag & Construction; Most Growth from Developing Economies Agriculture and Construction amongst the Top 10 industry sectors in the G-20 countries . . . Absolute increase in real value added 2008-20, $ Billions
Sector Public Admin, Sanitary & Personal Srvs
1,324
CAGR 2008-20 Percent
. . . Most of the growth in Agriculture and Construction between 2008-2020 will happen in the BRIIC countries
Sector
3.2
Agriculture, Hunting, Forestry, Fishing
2.9
Energy Mining and Quarrying
Real Estate & Dwellings
1,060
2.1
Construction
Wholesale Trade
1,058
3.2
Processed Food
2.9
Electricity, Gas, and Water
3.4
Transportation & Storage
Other Business Activities
1,136
Medical, Dental, Veterinary, Other Health
826
Transportation & Storage
762
Educational Services
692
2.9
Wholesale Trade
Financial Institutions
657
2.8
Motor Vehicle and Motorcycle Sales, Repair, Maint.
Construction
621
2.4
Communications
Share of growth from BRIIC1 Percent
80 70 66 59 56 52 46 44 39
Agriculture, Hunting, Forestry, Fishing
588
2.9
Restaurants and Hotels
38
Communications
583
3.6
Financial Institutions
Retail Trade except Motor Vehicle, and Motorcycle
543
2.6
Public Admin, Sanitary & Personal Srvs
36 35
Radio, TV, and Communications Equipment
34
Restaurants and Hotels
373
2.8
Electricity, Gas, and Water
370
3.1
Educational Services
Energy Mining and Quarrying
318
2.9
Insurance
32 28
Computer and Related Activities
318
3.5
Real Estate & Dwellings
28
Radio, TV, and Communications Equipment
313
4.5
Retail Trade except Motor Vehicle, and Motorcycle
27 23 23
Processed Food
231
3.7
Computer and Related Activities
Insurance
222
2.4
Other Business Activities
Motor Vehicle and Motorcycle Sales, Repair, Maint.
218
2.3
Medical, Dental, Veterinary, Other Health
Note: G20 countries account for 70% and 73% of agriculture and construction segments respectively.
1Brazil,
Total global growth for agriculture is $840B and construction is $850B
Source: Global Insight World Industry Monitor
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Russia, India, Indonesia, China
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Real value-added 2005 USD
Developing Economies Growing Faster While developed economies have always accounted for a larger share of GDP . . . CAGR, 1970-2008 46.6 Percent
Real GDP1 $ Trillions
3.8
12.0
28.1 5.2 11.3 1.3
Developing 1
3.3
22.9
2008
Developed
Real GDP (expenditure method) base year 2005
Developed countries include OECD. Developing countries include all developing markets (Regions as defined by Global Insight) SOURCE: Global Insight World Market Monitor
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3.0
1.9x 34.6
1990
Real GDP1 $ Trillions
6.1
10.0
1970
their growth will slow significantly, relative to that of developing economies ...
65.5 46.6 12.0
22.5
34.6
43.0
2008
2020
CAGR, 2008-2039 115.3 Percent 53.3
4.9 2.6x
62.0
2039
1.9
Dynamics of Food Demand Per Capita Income Services
>$10 per day
Processed Products
$2.50-10 per day
Livestock Products
Commodities
Source: World Bank 2008
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27% of world’s population (Most hunger problems solved at $2.50 threshold)
20% of world’s population (2/3rds experience hunger & malnutrition)
$1.25-2.50 per day
