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2015 Speeches

Samuel R. Allen     Samuel R. Allen 2015 Annual Meeting of Shareholders
Moline, Illinois
Remarks by Samuel R. Allen
Chairman & Chief Executive Officer
Deere & Company
February 25, 2015


John Deere continued its record of strong performance in 2014.

  • We posted our second-highest-ever level of earnings.
  • We moved ahead with our plans to bring the power and value of the John Deere brand to a growing customer base.
  • And, consistent with our commitment to shareholder value, we made record expenditures in total dividends and share repurchases.


Our results – in 2014 and other recent years – are proof of the effective execution of our business plans.


They stress attracting new customers throughout the world while running our everyday operations in a safe, efficient and consistently profitable way.


As a result, we believe today's John Deere is well-positioned to earn solid profits even in a soft agricultural environment, such as we see today.


Longer term, the story is still a good one.


That is, John Deere fully expects to benefit from trends of great power and promise, based on a growing, more affluent global population, which could drive our performance for years to come.


With respect to 2014, Deere reported income of $3.16 billion on net sales and revenues of $36.1 billion. This represented a 5 percent decline in sales and revenues and 11 percent less income.


Earnings per share went down as well, but by only 5 percent. This reflected the impact of continued share repurchases and a lower share count.


As for 2015, it is shaping up to be a challenging year. Our forecast calls for sales to be down 17 percent, or close to $6 billion, with earnings of $1.8 billion.


We could be facing the largest single-year sales decline in the company's history with income at barely half of its 2013 peak.


The reductions are due to sharply lower demand for agricultural equipment, especially for larger, more profitable models. Sales of this class of machinery are expected to be down by about 50 percent this year versus 2013 – more than in any downturn since the 1980s.


In spite of this situation, it should be stressed that the farm economy remains fundamentally healthy. Top-line farm revenue remains close to its all-time high and farm balance sheets are in good shape.


What's going on today, we believe, is that the farm sector is taking one of its periodic breathers after a long stretch of exceptional performance and profitability. And though we can't say for sure, nothing at this point suggests the downturn will be long in duration.


Deere's financial outlook for the year ahead may seem disappointing. But it is far from discouraging.


The fact that John Deere expects to remain solidly profitable in the face of such a slowdown speaks to the success of our actions to control costs and assets, and keep production in line with demand.

It also shows the value of having a well-rounded business lineup that serves a broad and growing range of customers and markets – from row-crop farmers in the U.S., to dairy and livestock producers in Europe, construction and forestry contractors as far away as Brazil, and large property owners in the U.S. and other nations.


That's not to mention the reliable, and often overlooked, contributions of our financial services division. It adds some $600 million a year to our income.


Or what about our worldwide parts business? It generates around $5 billion a year of highly profitable sales.


It was Winston Churchill who once lamented the endless repetition of history.


Not long ago a sharp downturn in the U.S. farm sector would have meant little, if any, profit for John Deere and inventories piling up in our factories and on dealer lots.


That is a part of our history we're determined not to repeat and one, which I'm proud to say, we've made a good deal of progress changing.


Over the last 15 years, Deere has reduced the asset intensity of its equipment businesses (trade receivables plus inventories as a percent of sales) by close to half. Dealer inventories (trade receivables) today are roughly the same as they were in the late 1990s, yet annual sales are some $20 billion higher.


In the same way, we have established a more responsive cost structure and improved our return on sales throughout the business cycle.


As a result of these steps, we're confident Deere can cover its cost of capital, earning at least a 12 percent operating return on operating assets, even in trough-like conditions.


In our view, that's quite an achievement.


Nothing has done more to drive these improvements than the adoption of what we call SVA, or Shareholder Value Added, as a guiding metric.


SVA, as you may know, is a form of economic profit that represents the difference between operating profit and an implied cost of capital.


SVA matters. With its focus on asset management and cost discipline, it is a key driver of cash flow.


Last year, enterprise SVA hit $2.7 billion while cash flow from operating activities totaled $3.5 billion. This provided the means for funding a healthy level of capital projects, while making continued share repurchases, and paying out a record amount in dividends.


Over the last decade, the company has raised the quarterly dividend rate on 12 occasions – increasing the rate more than five-fold – and repurchased more than 200 million shares of stock.


All told, more than half of our cash flow from operations over the period has been returned to investors in this manner.


We believe our focus on SVA helps Deere compete in a wide range of markets and market conditions.


And, it provides a sturdy foundation for the company to pursue growth plans designed to capitalize on an encouraging set of long-range prospects.


Deere's optimism about the future is based on powerful trends, such as a growing global population and an emerging middle class in many parts of the world.


The world's population continues to add thousands of mouths to feed, and bodies to clothe and shelter, every hour and is expected to reach some 9.6 billion by 2050.


That's roughly 30 percent, or 2 billion people, more than today.


It is widely believed that global agricultural output may have to double over the first half of this century to meet demand. And it will need to happen with no more land and even less labor and water.


Demand growth lies at the heart of our plans.


Crop supplies, and certainly crop prices, may swing widely from one year to the next.

Yet demand follows a more consistent path. Global corn consumption has risen every year since 1995, by more than 80 percent in total, while soybean demand has doubled. Overall, world demand for key farm commodities such as corn, wheat and soybeans has increased by about 40 percent over the last 15 years.


At the same time, people in developing nations are leaving the countryside, where farming is a way of life, and migrating to cities in a big way.


By some accounts, more will live in urban areas by 2050 than inhabited the entire planet in the year 2000. City dwellers by that time will make up about 70 percent of the total population.


This means a greater need for roads, bridges, buildings and all manner of major construction projects.


We believe these trends are good news for John Deere and all with a stake in its well-being.


We're confident they will support demand for productive machinery – productive John Deere machinery and other products – well into the future.


John Deere fully intends to seize these trends.


That's why we're pursuing a far-reaching operating strategy, whose aim is to convert these tailwinds into meaningful value for our customers and investors.


"Feet on the Ground, Eyes on the Horizon": It's the phrase that captures the spirit of our plans.


It means focusing on safe, efficient operations and responsive customer service while looking ahead and making investments to expand our competitive position throughout the world.


Our record of solid execution shows how we've kept our feet planted firmly on the ground.


Last year, we successfully brought to market dozens of new products while continuing to manage an extensive engine-development program.


At the same time, our agricultural-equipment factories scaled back production in line with moderating demand, helping keep inventories in check.


Meanwhile, operating return on operating assets (OROA), a yardstick of effective execution, was an impressive 28 percent.


We've kept our eyes trained on the horizon, too, building new factories and augmenting our worldwide financing and after-market support capabilities.


Since the strategy was launched in 2010, we've laid the groundwork to move toward our goals of $50 billion in sales and 2.5 asset turns at mid-level volumes by 2018.


Last year, we met one of our most aggressive goals by establishing a 12 percent mid-cycle operating margin.


Our job now is to continue restraining costs and making sure the improvement can be sustained.


Deere reinforced its strategy in 2014 by placing more focus on quality and innovation. We did so because products of exceptional quality earn higher marks from our customers and have superior market shares.


Similarly, when innovative products come to market that transform an industry category – such as Deere has done in recent years with cotton pickers, sprayers and planters – a strong customer response often follows.


The company has a long record of success in quality and innovation.


But it's essential we take our performance to the next level in order to set ourselves clearly apart from the competition.


Along these same lines, Deere is making a major push to capitalize on its unrivaled reputation with farmers to become their preferred provider of intelligent solutions.


It's a field that includes auto tracking, yield monitors, and remote equipment monitoring, as well as agronomic data management.


Intelligent solutions are a big deal – an area almost certain to shape, if not define, the future of our industry.


Rest assured, John Deere has every intention of being the unrivaled leader in intelligent, data-based products.

Wherever we do business, John Deere is known as a progressive employer and caring neighbor.


We take to heart the words of a previous Deere leader, Hans Becherer, who said great companies must embrace a sense of purpose that goes deeper than the bottom line.


What's more, we've found that good citizenship is good business. It inspires employees, motivates customers, and extends our competitive advantage.


Thus we are committed to operating ethically, safely, and in an environmentally responsible manner.


Today, these priorities are expressed in our higher purpose as an enterprise. It is to support a better way of life for people everywhere through our commitment to those linked to the land.


The way we see it, our new construction-equipment factories near Sao Paulo, Brazil, do more than produce backhoes, loaders and excavators.


They construct the roadways and bridges needed to modernize Brazil's infrastructure and achieve its economic potential. That, in turn, will make a positive impact on the lives of 200 million Brazilians.


In the same way, tractors from our factory in Pune, India, help people in that part of the world improve their diets and living standards.


The same kinds of things can be said about our new construction-equipment and engine factories near Tianjin, China.


And it certainly applies, as it has for generations, to our flagship production facilities in the United States.


John Deere touches lives in other ways, too.


Our company and its foundation are generous supporters of worthy organizations and causes, with a focus on solutions for world hunger, community development and education.


Deere's volunteerism policy encourages employees to share their time and talent for the benefit of others. In 2014, U.S. employees alone recorded over 80,000 hours of volunteer time.


In all, our global philanthropic efforts are estimated to have benefited over 9 million people worldwide last year.


Responsible citizenship also is reflected in the ways we protect the well-being of our employees and to safeguard the environment.


Deere had its best employee safety year ever in 2014, with on-the-job injury rates declining to all-time lows.


On the environmental side, we made additional progress meeting our aggressive eco-efficiency goals. They call for further reductions in water and energy use and more emphasis on recycling.


Last year, we nearly met our goal for recycling 75 percent of the waste produced by our facilities – and did so well ahead of the 2018 target date.


John Deere is known for carrying a sharp pencil and managing successful businesses.


We have no plans to do otherwise.


By the same token, we take pride that our operations reflect the light of a higher purpose.


They generate prosperity, enable human flourishing, and contribute to a higher quality of life.


John Deere faces challenging conditions in 2015. Yet we firmly believe the company is on track for long-term growth and success.


Indeed, our plans for helping meet the world's need for advanced equipment and solutions are making steady gains. They are providing value to customers around the world each and every day.


At the same time, we're confident our actions to cultivate a wider range of revenue sources and build a more durable business model will help us achieve solid results under a wide range of conditions, even in a less vigorous farm economy.


For these reasons, we are proud to reaffirm our faith in the company's present course and in its ability to deliver strong, sustainable performance well into the future.


To all who share our optimism for the future, and our passion for seizing the great opportunities that lie ahead, we say thanks for your encouragement and support.