Speeches February 28, 2018
2018 Annual Meeting of Shareholders
Samuel R. Allen
Chairman & Chief Executive Officer, Deere & Company
Report to Stockholders (As Prepared)
Last year's annual meeting was a positive and hopeful occasion. But a time of celebration it was not.
The main topics of discussion were the challenges we faced in the midst of a wrenching agricultural downturn, easily the worst in a generation. True, the company was continuing to earn solid profits. Yet we also were coming off three rugged years in which our sales had fallen by one-third – or over $10 billion. Then, as the year progressed, the tables started to turn. Orders picked up. Our outlook brightened. Our stock price strengthened. And, when the books were closed, the company had delivered one of its best years ever.
The real story of 2017, however, was not so much that the markets rebounded as that our actions to remake our business model and create a more resilient, robust company showed their colors. Over the last many years, in good times and bad, John Deere has found more and better ways to run the company and meet the needs of our customers with a flexible cost structure and a lean slate of assets.
At the same time, we've kept our eyes on the horizon. We've made investments – in new products, new businesses, new technologies, and new markets – that set the stage for growth and a future that we feel holds a great deal of promise and possibility.
Our performance in 2017, in short, validates the work we've done developing a wider range of revenue sources and a more durable business model.
Let's review Deere's recent performance, look at the broad trends that will drive business opportunities in the future, then see how we're planning to convert those opportunities into value for our customers and investors.
Deere continued its record of sound achievement in 2017.
- We posted our fifth-highest-ever level of sales and earnings.
- We brought the power and value of the John Deere brand to a growing global customer base.
- And we provided impressive returns to our investors through both stock-price appreciation and dividends.
Perhaps the biggest milestone of all was our purchase of the Wirtgen Group, the world's leading manufacturer of road construction equipment. The deal was announced last spring and completed in December. The $5 billion-plus acquisition – by far, the largest in our history – is closely aligned with the John Deere Strategy and its aim for achieving more global scale in construction equipment.
Wirtgen is like John Deere in many ways. It is a global leader. And it has a proud tradition in quality, innovation and staying close to the customer. It is a premium asset in every sense of the word. From a financial standpoint, Wirtgen looks like a real powerhouse, offering attractive margins and a strong growth profile. Wirtgen is forecast to add over $3 billion to Deere's sales this year and will make a meaningful contribution to our cash flow right away.
As for 2018, John Deere expects further improvement in sales and demand for its products. Reported profits are likely to be about the same as last year due to upfront charges associated with recent changes to the U.S. tax code. This was largely reflected in our first-quarter results announced earlier in the month. On an adjusted basis, earnings are forecast to be substantially higher for the year.
Much of Deere's recent success has to do with our formidable lineup of well-rounded, profitable, geographically diverse businesses. Today, John Deere serves a broad 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.
To that list, we're now adding road-building contractors throughout the world.
We also provide the means for customers to purchase our equipment and the after-market support through our dealers and parts business to keep them up and running. Deere's financial-services unit finances about half of the machinery we sell and is a reliable contributor to the company's earnings. Meanwhile, our worldwide parts organization last year generated more than $5 billion of profitable sales. Both these businesses more than hold their own in soft markets.
We're also achieving a good deal of geographic balance serving customers throughout the world. Last year, sales outside of North America rose strongly and operating profit reached $1.3 billion, a new record.
Deere's ability to operate profitably across the business cycle reflects the steady advances we've made managing assets and holding down costs. On the asset side, Deere today needs about one-third less working capital – items such as inventory -- for each dollar of sales than was the case 20 or so years ago. That frees up billions of dollars that can be used for other purposes such as capital projects or dividends. In the same way, the company has established a more responsive cost structure and raised implied operating margins by 2 to 3 points across the cycle since just 2010. That's another way of saying we can earn more money from a given level of sales.
One thing we haven't done is improve margins at the expense of growth, especially with regard to the development of innovative products and technologies. We have maintained healthy research and development budgets year after year, typically equal to around 5 percent of sales.
The investment community has given a strong endorsement to the success we've had remaking our business model. Deere stock, in fact, has seen quite a run-up during the last year or so, rising more than 50 percent in fiscal 2017 alone. Counting dividends that comes to around $15 billion in additional value for stockholders last year – not to mention another $10 billion or so of further gains in the current fiscal year.
Deere's record of performance provides a sturdy foundation for the company to capitalize on trends of great power and promise. These trends, or tailwinds, include a growing global population and development of an emerging middle class in many parts of the world.
Indeed, farm cycles come and go. Crop supplies and, certainly, crop prices may experience wide variation over short periods of time. Demand, however, marches to a steadier beat. Since 1960, annual global consumption of grain and oilseeds has declined on exactly three occasions. It has risen without interruption for the last 22 years. Agricultural production will have to increase strongly – some say it may have to double over the first half of the century -- to keep pace with demand. Clearly, it's something that will require a greater reliance on productive equipment to achieve.
While on the subject of bullish trends, let's not overlook urbanization. People in developing markets are leaving the countryside, where farming is a way of life, and migrating to cities in a big way. Around two-thirds of the world's population may live in cities by 2050, compared with less than one-third in 1950, and just over half today. In absolute terms, that means an eight-fold increase in the number of urban dwellers in 100 years.
Urbanization brings a greater need for roads, bridges, buildings, and other types of infrastructure. It also spurs development of an economic middle class in much of the world – a group with a taste for meat and livestock products that require grain, and lots of it, to produce.
These tailwinds hold exciting potential for John Deere. And we've created a far-reaching strategy to make sure our customers and investors benefit from them. Our goals include achieving worldwide preeminence in agricultural equipment and a broader global presence in construction machinery.
The John Deere Strategy puts a sharper focus on after-market products and services. And it intensifies our commitment to advanced technology and emerging fields such as precision agriculture, in which Deere aims to be the undisputed leader.
Our strategy stresses quality and innovation as well, both of which are essential to gaining market share and winning new customers. During the year, we made further progress toward targeted levels of product quality. And Deere's innovative equipment continued to set new standards of performance, earning a half-dozen medals at major agricultural trade shows in Germany and France. We also picked up 10 innovation awards from a leading U.S. engineering society.
Customers will be the ultimate judges of our ability to innovate. However, professional recognition of this sort is an important, and very public, proxy for our advances in innovation.
Finally, our strategy spells out aggressive financial goals – namely, increasing sales faster than our competitors, earning our cost of capital on a consistent basis, and achieving a return on assets (OROA) of at least 30 percent at mid-cycle sales.
Wherever we do business, and whatever businesses we take part in, John Deere works hard to be a good corporate citizen. As a matter of fact, civic and environmental stewardship is cited in our strategic plan as one of the factors critical to Deere's success.
Our company and its foundation are committed to building vibrant communities, with a focus on world hunger, local economic development and education. In 2017, Deere and its foundation made charitable contributions of over $33 million, with most of it devoted to these areas.
Along these lines, our volunteerism policy encourages employees to share their time and talent for the benefit of others. Deere's U.S. employees recorded more than 160,000 hours of volunteer service last year and are well on their way to meeting the goal of one-million cumulative volunteer hours through 2022.
Responsible citizenship also is reflected in the ways we safeguard the environment. Last year, the company made headway meeting its aggressive goals for limiting greenhouse-gas emissions, reducing water use, and recycling waste.
We're also committed to making equipment that runs efficiently and disrupts the environment as little as possible. A case in point is our flagship 8400R row-crop tractor, which has rewritten the record book in areas from power to fuel economy and has lower emissions than other tractors of comparable size.
Speaking of environmental stewardship, I can't think of a better example than the smart-spraying technology being developed by another company acquired by Deere in 2017, Blue River Technology. The technology relies on cameras and artificial intelligence to help farmers apply chemicals with great accuracy, resulting in very little waste or overspray. Blue River's technology is still in the early phases of development. But we believe it has potential to greatly reduce the use of chemicals in the farm field and make a positive impact on the surrounding environment.
In addition, our company's commitment to doing the right things in the right way has continued to receive widespread recognition. In 2017, Deere was included in a prominent listing of the world's most-ethical enterprises for the twelfth straight year, named one of Fortune magazine's most-admired companies, and recognized for having one of the 100 most-valuable brands.
John Deere is also known as a good place to work – and has been honored as such. Last year, we were named a top employer in a number of the countries where we operate, including Brazil, Germany, Mexico, Spain and the United States. As an employer, we offer competitive pay and benefits and provide tools and opportunities to help our 60,000 employees reach their personal and professional potential.
And, by the way, we don't forget about people once they leave the rolls of active employment. Deere continues to offer attractive defined-benefit pension programs and last year paid over $700 million in pension benefits to some 45,000 retirees and surviving spouses.
John Deere is known for carrying a sharp pencil and managing successful businesses. But our operations also reflect the light of a higher purpose. They contribute to prosperity. They promote a better way of life. And, frankly, they reinforce the very principles that have made John Deere a successful company for such a long time.
As the recent agricultural downturn unfolded, we committed ourselves to taking whatever steps were needed to stay profitable and emerge from the slump in an even stronger condition.
And you know what? We did just that. We shaved costs; we shed assets; we made disciplined investments. And though our results declined from their highs of earlier in the decade, we still posted some pretty good numbers. Just as important, we kept our balance sheet in sound shape.
Today, John Deere finds itself well-positioned to capitalize on improving market conditions and respond to the world's increasing need for advanced machinery and services. What's more, we believe we've found ways – proven ways -- to do so in a manner that delivers value to customers and investors for the long term.
All of which leads me to express my belief – one I share widely and without reservation – that there has never been a better time to be associated with John Deere. For all the success our company has enjoyed for the last 180 years, there is no doubt in my mind that our best days are still to come!