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Operator
Good morning and thank you all for holding. I would like to remind all parties today that you will be on listen-only until the question and answer portion of today's call. I would also like to remind all parties today's call is being recorded at the request of Deere and company. If you have any objections, do please disconnect at this time. I will now turn the call over to your moderator, Ms. Marie Ziegler. Thank you, madam you may begin.
MARIE ZIEGLER
Good morning. Tony Heagle and Greg Derrick are joining me on the call today. This call is being broadcast live on the Internet and recorded for future transmission and use by Deere, CCD, and third parties. Participants in the call including the Q&A section agree that their likeness and remarks in all mediums may be stored and used as part of the earnings call. Comments made during this conference call that state management expect, our outlook, we project, or otherwise state the companies predictions for the future are forward-looking statements subject to important risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially is contained in the companies SEC failings including the most recent form-10Q and in the press release being filed today on Form-8K. Obviously, the environment in 2001 entered up being much more difficult than we had anticipated a year ago. However, despite this we had great success in two key areas of focus. First is reduced acid intensity. In the fourth quarter, we made dramatic production cuts in all three equipment divisions to lower inventories and receivable. Our goal was to end the year with inventories and receivables flat to down 200 million, excluding acquisitions and adding back receivables sold to John Deere Capital Corp otherwise on a comparable basis. Thus we achieved a $400 million reduction. By division this reduction is egg down 100 million, ECE down $350 million, and construction and forestry up $50 million.
Low receivable numbers do translate into low field inventories. For sample, in North American agriculture we ended October with low tractor inventory at 23% of trailing 12 months sales and combined at 11%. The second area of focus was new product. The market environment did not change our results to introduce a record number of new products and you know this is the key that leads to our future success. In [_____] poultry for the North America egg market we introduced 52 new models. In civil stain, for the European market, a market where we do not enjoy the same share as we do in the United States and Candida, and that is a resort we see tremendous growth opportunity by broadening our product offering. In civil, we introduce 63 new products. Now there is, of course, considerable overlap with North America but there were several models targeted specifically at European applications, in construction and forestry, 31 new products and commercial and consumer equipment 49. In addition, we have taken in the last few months a number of steps to built value over the long term. First, we are reducing our North American salaried work force by 8%. We actually had about 1600 employees who elected to early retirement. We will replace some of these employees but we are on track to exceed, we believe our 1250 originally planned. Second, we have exited Homelite. We announced in August that we would be selling or shutting down this division and last Friday, we announced that we had actually sold the entire portion of the business. Third, we have restructured the construction and forestry equipment division, North American marketing and manufacturing activities. We are closing our forestry equipment factory in Western Alabama.
We are selling or shutting down not clear yet, which will happen our fabrication operation and with stock on trial. We had a reorganization of our marketing activity. In total, we are eliminating about 300 additional positions on the Salaried Workforce Reduction Program. A fourth action we have taken was to sell about $2 billion of trade receivables from the equipment operations to the credit company and this obviously provides a more efficient asset structure. Fifth, we are integrating the Hitachi in Deere marketing operation for constructions, forestry, and mining equipment in the Americas. This will improve our efficiency, speed, and cost and we alternatively think it will let us deliver better customer support. Sixth, we are announcing today the closure of our skid steer operation from Louden, Tennessee; we will be transferring production to the Dubuque, Iowa. The cost of this is about $30 million pretax and the majority of the charge will hit in the first quarter of 2002. The charge has about a two-year payback. You should note also that this will mean a change in the way the financial results are recorded instead of being included with commercial and consumer they will now be consolidated with construction. Final action, we are reducing corporate overhead. We announced about 10% of corporate staff will be redeployed for separating from Deere. So many actions taken that will position us better not only as we go through the current market environment, but also as our market return. Now, lets talk about our quarter. I would refer you to the table in the press release that shows operating profits for the three main equipment divisions with and without special item.
First, worldwide agriculture; operating profit in the quarter without special items is $19 million this compares to $68 million a year ago. The story here is volume. It is huge. North America was shut down 24% of available days. Waterloo alone was down five weeks and of course these are high dollar high absorption machines with our tractor manufacturing there. Reduced discounting interestingly actually contributed one point of margin to this quarter's result. Retail activity in October in North America in units, EMC equipment manufacture institute reported that utility tractor sales for the industry were down 4%, Deere was down double digit. For row-crop, the industry was up 13% and Deere was in line with this increase. Before we will drive tractors, the industry was down 6% and Deere was down double digit. In Combine, the industry was down 6% and Deere was again down double digit, but coming off of a very, very strong year. Our retail activity in Western Europe in the month of October saw those tractors and Combine sales up double digits. Moving now to the outlook, starting with the United States and Canada, bottom line is that the fundamentals remain about the same though our initial outlook as industry sales flat to down 5%, but this is of a higher phase, certainly than we expected as 2001 industry sales in dollars were up in estimated 11%. In our own outlook I would comment on the first quarter North American agriculture division tonnage is expected to be down about 20% versus a year ago; it was shut down primarily at Harvester and began at Waterloo.
A loss of margin overhead absorption on these products will significantly impact agriculture margins. Also a comment on near term retail activity and production, we are in the process of transitioning now to production of the new 6000, 8000, and 9000 series models and so in the first quarter, we really wont to see much impact on retail sales as this will be ramping up production just starting to deliver them to the market. The outlook in Europe first in 2001, industry sales actually ended up slightly better than expected with.... these are preliminary numbers set, industry are sales tractors down about 5% we would have thought it would have been more like 10% and Combines down about a 11%. For 2002, then aided by our significant product introductions for this market, we actually expect industry sales will be flat to up slightly in Western Europe. Let's look now our commercial and consumer equipment. Well, the story here too is production and its huge impact. The division was down about 40% in tonnes produced. Sugarcane, which is our largest factory in this division and it home to the premium line product which of course have a attractive margins for us. Reduction is down 56% from year ago level and this really explains the operating loss in this division again without the special items of a 107 million to a loss of an 11 million in the fourth quarter. You may recall too that the fourth quarter is typically seen as peak. In retail activity in the month of October in North America, we actually had flat sales. The outlook down, though consumer confidence is at its lowest levels in seven years. Those people project that the US economy will weaken during the first half of 2002. This is on a calendar basis that puts you through June that happens to hit most of our main selling season in this business, which would be April, May, June, and then July. We think that this weakness in the economy will more than offset our benefit of some 49 new products introduced. So, the division backs that the sales from the continuing business without acquisitions could be down 5 to 10% in 2002.
Moving now to construction and forestry. Sales here were down 12% as recorded, but again shut down played a major role as the division was shut down 23% of available days of production, this is equivalent number to actually available days. Growth volume again is the major factor here in a $ 20 million loss again without the special charges versus an operating profit of $40 million a year ago. But in this division higher discounting also played a role in cost in the quarter about 3 points of margins. Retail activity in the month of October was down double digits for this division on both the percentage and settlement basis. Turning now out to construction and forestry's outlook. Well, the weak economy that we talked about in commercial and consumer equipment in the first half of 2002 will also effect this division as their main selling season in spring and early summer. Also, they are being impacted by the rental channel. Industry sales this year we estimate are down over 60 % and as you many of you who follow the rental channels will know there is tremendous uncertainty over what the outlook is for 2002. Our estimate is that this business will be down another 70% in 2002 and it's significant, because it typically represents a large percentage of construction and forestry sales 15 to 20 % typical. Paper and pulp markets are weak and it continued to be so and expected to be weak until next year and North American contractors remain very concerned about backlog and housing, which is a primary driver of our construction oriented business is expected to decline in 2002; our forecast shows stocks going to a 1.45 million. All of this then contributes to our estimate of North America industry sales in 2002 in down 10 to 15%. Moving now to our credit operations.
We are now going to talk about net income since that is how most you view the financial credit. Here, including special items you will see $44 million of income versus 37 a year ago without special items, it is $46 million in the fourth quarter of this year. We benefited from higher average owned portfolio about 13% increase and from spread. The variable rate assets in this portfolio are price off of prime we run a matched book, but prime tends to be a little sticky on the way down and so falling interest rate environment tend to be slightly favorable and we saw that benefit in the quarter. As mentioned in the press release, this was partially offset by higher reserves to credit losses; again, I want to comment that accounts due on the managed portfolio remain in very good shape at 6 times of the portfolio versus 5 times of a percent a year ago. So very low level of active. The forecast for 2002, income next year will include for the credit company and our company payments and additional finance income because of the trade receivables that was sold from the equipment operations to the credit operations. This is only an estimate for what we believe that based on a current forecast of receivables and current interest rates, the net income impact for the credit company will be about $80 million. Again, that is net income. On the traditional portfolio, income will grow about 15 to 20% benefiting from portfolio growth reduced credit losses and higher gains on asset-backed sales. So in total this puts income in a range of 280 to 300 million. Now let's move on to the usual housekeeping items.
I am going to start by telling you that in the quarter we adopted on emerging issues task force bulletin on the reclassification of shipping and handling delivers freight that will be billed to us. In the past we have treated this contra-item on our cost of sales; instead the proposal says you account for that as net sales and then is an offset in the cost of sales on area, and so in the first nine months of 2001, we actually had about $90 million that will end up being reclassified from cost of sales as a contra account into sales. All this means, for those of you who are running a model and there is absolute no impact on income, but if you were to take net sales for the quarter and compare it to the 12 months sales, minus the 9 month sales that reported, you would come up with a $91 million difference; other than that, really again neutral to our income and operating profit. Okay, pricing and exchange, first quarter consolidated net sales was down 8%, physical volume was down 9%, price was a positive point and the impact was neutral. Year-to-date consolidated net sales were down 1%, physical volume less. Price again is a positive one point I think that's really encouraging despite that very difficult environmentally managed to be one point of price realization. Exchange however accounts for the difference, that year to date exchange being negative two points. Fourth quarter overseas sales as reported up 3% and at constant exchange rate up 6%. Here today up 2% and at constant rate up 8%. Special charges that you can see in the press release totalled pretax about $344 million; by line items, this breaks out cost of sales in the equipment operations 255 million and SG&A, again in the equipment operations, 86 million.
Credits in SG&A picked up $3 million total. By program, the work force separations and in other words, the early retirement program was a 189 million and Homelite and the restructuring and the construction and forestry division with a total of $155 million. We have been talking this year about lower pension and post employment benefit expense. In the fourth quarter, pretax there was an additional $19 million of benefit before the year, 66 million. However starting in 2002 we expect that these expenses will increase, primarily higher medical installations, lower discount rate, and of course, the stock market. We think the impact will be about 95% million pretax line income. Tax rate for the year is 27% did apply a 37% rate to this special charges but the reason the remaining rate on that appears too low is just due to the low level of income. We have a number of permanent differences including goodwill and then a change in mix of business with a higher proportion of the income coming from overseas and percentage of tax structured out. Looking ahead to 2002, 37% is the rate that we are using. I will detail now on the other category of operating profit and this does include the special charges. For John Deere Special Technologies, endpoint 7 million and compared to last year, 13.9 million and the special charges for John Deere special technologies would have been about a million dollars. For the health care, it is 7.4 million this quarter versus a year ago 4 million. Obviously, we are in a very uncertain environment. It is always somewhat uncertain as you look in to the next year, but with the events in the ramifications of the events of September 11, increased uncertainty and so we have made some changes to help you better understand our outlook. We are actually providing some additional information in the section of the press release. You will notice that we talked about projected net sales in the past. We have been giving you physical volumes. These are actually out projected net sales. We have also added commentary on operating margins. This is for the equipment operations only, again, we gave you a comment on net income for the credit company. We are in the spirit of providing some additional help in understanding our outlook. I would like to comment on three other items to help those of you who are trying to run models. The first item has to do is a trade receivable to credit. It affected balance sheets for both equipment and financial services on 31st October but no income statement in fact because the transaction occurred at the end of October.
For 2002, for the Deere enterprise there is virtually no impact in net earning. But the composition of earnings for the enterprise changes and I already mentioned about $80 million of credit. The operating income impact on the equipment operations in the press release talks about 2 points of margins, I will tell you that the exact amount that we are forecasting is $220 million and total for the company. Now, this implies the level of positions, understand that, simply is not there, this is our guide based on the current forecast of receivables and interest rate. But again we hope it helps. If we look at this 220 spreads by division, agriculture 130 million, commercial and consumer 63 million, and construction and forestry 27 million. In the first quarter, in total, you are looking at an impact in operating profit of about $60 million. You may have noticed, we are talking 220 million operating profits pretax in tractor equipment and only 80 million in credits. What's the difference? While the 80 million is an after tax number, 220 is pretax, and then also the changes or the impact on interest income and expense for the equipment operations as a result of this transaction are actually below the line for operating profit. So that's why there is difference. In commercial and consumer equipment, we told you that our expectations of division sales from continuing business at acquisitions could be down 5 to 10%. I will be calculating this for 2001 sales worth 2 billion and 667 million as reported. This year, I am going to move the construction forestry division that we will be restating sales in 2001 further and the change is estimated to be in a range of 120-140 million, we will use a mid-point sales of 130.
So the restated net sales for the commercial and consumer equipment division for 2001 than would be approximately 2 billion 537 million. From this number in order to calculate the change we have to deduct out the acquisitions, which were about $145 million addition to sales in 2001 and you also have to subtract our Homelite, the portion of the hand-held business that was sold had about $150 million sales in 2001. So, this means basically you are applying 5 to 10% decline to about 2.2 million in sales. In 2002, obviously we start with the restated, you are going to subtract your albeit sales adjustments of 5 to 10% down, subtract that Homelite 150 and then acquisition in 2002 will add an incremental $325 to 350 million. As you will contemplate operating profits couple of items to think about here; if Deere had an operating loss in 2001 of about 30 million in outlook and that will be transferred over in the restatement to the construction and forestry equipment division results for 2001. Also, the absence of the hand-held losses excluding restructuring hand-held loss on an operating basis of about $70 million in 2001, partially offsetting this, there will be about 10 million in restructuring charges that actually hit in 2002, as there are some charges that we are not able to book this year.
Moving finally then to construction and forestry, again net sales 2 billion 86 million; we expect that industry sales will be down in the 10 to 15% range, Deere is likely to be down closely to 15%, again because of the impact of rental. To this we will add the Skid Steer sales of 130 million and operating impact of Skid Steer to their bottom line and into sales, you also want to consider the consolidation of Hitachi and marketing efforts. That begins the first of January, so there is no impact on our finance significant in the first quarter. But over the course of the year, this will add about 225 to 200 million in additional sales and that is because the accounting rules require that we consolidate the sales of that. On an operating profit basis going forward, Hitachi has both no impact on net income in 2002, which means basically they are neutral, but then going forward, we will be deducting Hitachi share of the profits on these sales before we calculate operating margins. So the apparent margin in that business will be a little lower deduction of the minority interest. While we talked about Skid Steers and then final factor would be the annual savings from the marketing in timber jack restructuring which are about 50 million pretax. So, long list of housekeeping items to go through this time, but hopefully it will help you as you write a model of the company. In summary then, an uncertain environment, there is no question about it, and this is why we enter the coming year with a much more cautious outlook and production level than we did a year ago. We will continue to focus on asset intensity in 2002.
We are targeting a similar reduction in receivable inventories this year. So, in other words take us about another $400 million. This will be particularly evident in the low production volumes of Q1 and that will be true for all three equipment divisions. We have further efficiency improvements ahead in 2002 that will benefit cash flow including the lower cooperate overheads, [_____] year relocation and all the other activities that we talked about and we are also trimming our capital expenditure this year. They are round numbers, around 500 million; next year, we expect them to be about 400 million in equivalent operations. We are bringing to market the record number of products launched for the 2002 model year and then we will be able to build on the enhanced competitive division that new products bring to our business. So, again taken together, all of these actions will improve not only the returns we generate in this very difficult market environment. We believe they will be particularly rewarding when our markets return. And, with that we are ready for the Q&A. Operator. Can you give us the phone instructions?
Operator
Thank you. At this time, if you would like to ask a question, please press *1 on your touchtone phone. We will take all questions in the order that we receive them and we will announce your name prior to asking a question. If you would like to withdraw your question, you may press *2, again *1 to ask a question. Our first question is from Steve Vokman with Morgan Stanley.
STEVE VOKMAN
Hi Marie.
MARIE ZIEGLER
Hi Steve.
STEVE VOKMAN
We have got a lot of numbers here this morning.
MARIE ZIEGLER
[_____].
STEVE VOKMAN
To make sure somehow it is still somewhere near correct. As we do this in the back and below, I seem to be coming out with something in my model around $0.50 a share or something for 2002, and way off. Are you willing to comment on that?
MARIE ZIEGLER
Probably we know we typically don't comment on numbers that certainly is the implication from the operating margins, as oppose that it would not be very big number.
STEVE VOKMAN
Okay, would you clearly say whether you think it might be up or down versus this [yearend]?
MARIE ZIEGLER
I think the implication would be that down a little bit extra restructuring.
STEVE VOKMAN
Okay, that's what I guessed. I guess I am little bit just wondering, you guys have done a lot of work to try to get the cost under control generating cash etc, I guess I would have expected in somewhat less volatile production environment which has just similar to some sort of planning for in the coming year that margins would have been a little better, it might give any thoughts on that?
MARIE ZIEGLER
Well, remember that we are not only very cautious on outlook for the retail markets but [Ross] can be taking another $400 million out of receivables and inventories. We are really looking at the low levels of production.
STEVE VOKMAN
Okay, that's fair, thanks.
Operator
Our next question comes from Mark Tisnaric. Sir, please state your company name.
MARK TISNARIC
Hi, it is Mark Tisnaric at Midwest Research. Hi Marie.
MARIE ZIEGLER
Hi Mark.
MARK TISNARIC
Hi, obviously you are making lot of assumptions given that you know projecting out 12 months here, but in particular in North America you are supposed to get a new farm bill and you have had some thoughts about that as you are projecting what the North American demand might be, can you share with us what your thoughts are with regard to the farm bill and then the level of farm receipts expected this year and government payments.
MARIE ZIEGLER
Certainly, let me actually start with those numbers. This year we think total cash receipts will be $225 billion, this compares to $216 billion in 2000. This includes government payments of $20.7 billion in 2001 and $22.9 billion in 2000. So we are on track for a record year in terms of cash received. Terms of the farm bill and the outlook for it, we really don't have much in the way of an impact in out forecast simply because we don't know what the timings of that bill will be there is wide array of speculation as to one it will be past. We have very low probability that it will be passed in 2001. Certainly, a tremendous amount of [_____] 01:02:47 suggesting that it could be passed until 2002 for cautious. However, as we look to the past, in recent history [anyway] bills are ultimately have been passed until right before the new crop year which was suggestive that it could be something in the spring of 2003. So, the answer is we just don't know clearly what has been discussed in both the House of Senate versions of the bill will be very positive to farm income and farmer frankly just [put] into your confidence going forward and so it will be a positive, but the timing is very hard.
MARK TISNARIC
Okay, on the receipts in the government payments you gave us last year and then current year, but you did not talk about the 2002 would be?
MARIE ZIEGLER
I will be happy to give you that. We have cash received rising slightly in 2002. We have them at $227.1 billion and government payments are down just slightly at $19.3 billion and that's simply because [_____] benefit from the markets.
MARK TISNARIC
Okay, thanks very much.
Operator
Our next question comes from John Anns. Sir, your line is open and please state your company name.
JOHN ANNS
Thanks. Bear Sterns. Good morning Marie.
MARIE ZIEGLER
Good morning John.
JOHN ANNS
Your performance in the quarter relative to industry in North America is a contrast that with so, how you did in agriculture overall it might suggest that in Latin America and Europe and very strong in this quarter in agriculture. Could you comment on that please?
MARIE ZIEGLER
That's a fair comment and actually they were in the quarter, I mean without they were not. John I have to get into the right page. Actually, they perform of course much better. You would have to say that there was still a small operating loss, but certainly is [efficiently] better than what we have in our North American operation and that has to do with the fact that they did not experience the same level with shut downs they actually had. A little higher retail sales activity than what they had.
JOHN ANNS
Is there any thing specific to your knowledge or market specific that happen in the quarter that might have caused an [_____] or the continuation of a trend.
MARIE ZIEGLER
Well, it has to do with the timing of our sales. We had very, very strong sales on a retail basis in the first six months of this year and then things slowdown. Actually, if you look at our year-to-date activity, in combines basically we are up about 20% there and broke up tractors are basically flat for the year. So, you are really just seeing the results that it is having very, very strong production schedules in early part of the year and then happy to make some adjustments.
JOHN ANNS
Last question for you. See the forecast that you have given us for the three segments in the industry and then should we essentially be as we build our models out on the sales front, should we be taking that and then ultimately subtracting the $400 million to try and impute what Deere sales are going to be or Deere company sales?
MARIE ZIEGLER
That's a good question. When I was actually walking through for example on the construction and forestry, we would have actually used that in our own shipments.
JOHN ANNS
When you give us the outlook for the industries in the three segments, which you had, how does that it translate it into your sales. That's what I am trying to figure out and what are your [applications/expectations]? You are in line, you are a little bit better, little bit worse.
MARIE ZIEGLER
We would actually be a little bit; the outlook in commercial and consumer for example is the outlook. In construction, we said the industry will be down 10-15% rental and construction will have a little bit of inventory, but that would not be a major factor. When it comes to agriculture though you are correct, the agriculture outlook you would need the factor and some reduction in the inventory.
JOHN ANNS
We will take that down 0-5 and then take out the inventory.
MARIE ZIEGLER
We are going to make these adjustments.
JOHN ANNS
Okay, thank you.
MARIE ZIEGLER
Although not all the adjustments occur in agriculture. Personally consumer also has [_____].
JOHN ANNS
Understood. Thank you.
Operator
Our next question comes from Joel Pes. Sir, your line is open, and please state your company name.
JOEL PES
I am from Lehman Brothers. Marie, can you just followup on John, is the cash receipts are up when you introducing new products in agriculture in 2001. Why do you expect the farm to be so weak [to] you guys in 2002?
MARIE ZIEGLER
One of the factors is that, actually we are seeing frankly a stable market from a market that was in the end of the year a little better than what we had expected. But, there is a tremendous amount of uncertainty hanging over the US economy in general, obviously this is our principle market for agriculture. We don't know how much of that will translate into may be some farm and [nervousness] and you also have tremendous amount of [_____]about the farm bill, now quite clearly, what you are seeing coming outlook is positive what is encouraging, but in the past when there has been a lot of debate about a farm bill, we tend to hear back from the field that create some caution and that is reflected in our outlook.
JOEL PES
And just a follow up. Can you just give a little bit of detail on the construction weakness that you are seeing more in the larger projects or in the smaller projects or can you just speak into that a little bit? Please.
MARIE ZIEGLER
We would actually recurred more caution from the larger contractors than we have for the smaller contractors as if you try to look at the change may be in the last six months. The smaller contractors have been concerned for some time about the backlogs, and so that's not incrementally that was not new for where you are hearing more concerned is from the larger contractors. So just to say it is very difficult to predict what 2002 will bring and then you through into that for us the impact of the [_____] companies and my understanding is one of the [_____] company and their conference call was slight warranted about the range of potential capital expenditures and the uncertainty and so that is reflected in our outlook.
JOEL PES
Okay, thank you.
MARIE ZIEGLER
Thank you Joel.
Operator
Our next question is from John McKenzie your line is open. And please state your company name.
JOHN MCKENZIE
Credit Suisse First Boston, Marie. Could I just start with the clarification that $29 million loss in overseas, you gave us, you know a kind of a before and after, you know with and without the special charges for everything else. Could you tell us what if any of the special charges in that overseas $29 million?
MARIE ZIEGLER
I don't have a break number John, but it is very, very little. There might be a little bit of resection and that would ...
JOHN MCKENZIE
Essentially, we use zeros in starting.
MARIE ZIEGLER
Yeah.
JOHN MCKENZIE
Okay. I am surprised at the fact that you gave us a lot of numbers, but it's a mind [_____], but you gave us you know your broke up tractors at the end of October or you know 20 something percent at whatever was and combines....
MARIE ZIEGLER
23 and 11%.
JOHN MCKENZIE
Yeah. I mean essentially zero is a hard number. But I mean way down to [what] think possibly be and then you also said that there is another $400 million coming out of receivables and inventories, but the bulk of it in the agriculture side. Could you be more specific as you gave us you know exactly where your $400 million came out in 2001. Where is this$ 400 million coming by piece in 2002?
MARIE ZIEGLER
You are not going to see a big change in the construction equipment because there are already, you know fairly low [_____] all comes from the other two divisions and the change I have to say the change, if you are going to skew it I throw a little bit of that into construction forestry and then I probably being inclined to look the difference.
JOHN MCKENZIE
Okay so 50 in the CE and then split the 350 between the other two?
MARIE ZIEGLER
May be I skewed a little more to see may be 60/40; [_____] 60 and agriculture 40.
JOHN MCKENZIE
And I guess the, where is coming out of on agriculture, is it, are you going to actually take them down lower or do you have the buildup that has occurred either overseas or in the smaller equipment. It just does seem that you can bring the roll crops in the combined down much further and yet the bulk of what it is?
MARIE ZIEGLER
Actually, we have a lot of other products that as well and so we would be looking at where we can cut those inventories in many of the product areas John. It would not be exclusively roll crops.
JOHN MCKENZIE
Okay. Thank you very much.
Operator
Our next is from the line of Mary Jagatheesan your line is open and please state your company name.
MARY JAGATHEESAN
Hi, this is Mary Jagatheesan from Goldman Sachs.
MARIE ZIEGLER
Hi.
MARY JAGATHEESAN
Hi, just a question on your shutdown for the fourth quarter. You mentioned that you're shut down for about a quarter of your available days. Was this is inline with what you expected going in to the quarter?
MARIE ZIEGLER
Yes, actually it was. Just to clarify that 24% specifically refers to North American agriculture.
MARY JAGATHEESAN
Okay, just a separate question. Your additional headcount reduction at headquarters, what kind of charge you are for taking for that, and what kind of pay back [_____]?
MARIE ZIEGLER
We hope that the charge will actually be pretty minimal because we are actively working to redeploy some of those people. We talked about the [surf] and the fact that we have 1600 elections to be expected and with the net reductions initially of 1250 will probably be a little higher than that. Some of these people from corporate are going to get redeployed and to some of those openings because of the [surf], but we hope that the charge would be fairly minimal from a human standpoint, obviously as well as financial. The savings are going forward with about the $18-20 million pre-tax on a full year basis.
MARY JAGATHEESAN
Okay, and then finally, can you just comment on the amount of discounting in the company in the CNCE side it is up and can you just comment on kind of recent months trends in relation to that?
MARIE ZIEGLER
There has been some 0% financing on some selected products. If you look at the pricing in the quarter for CNCE, it was a little bit negative, but not hugely. The issue in CNCE more has been that they jut have not had price increase. And actually that's part of the strategy to deliver more to the customer without taking price increases. There has been very aggressive in cost reductions.
MARY JAGATHEESAN
Thank you.
MARIE ZIEGLER
You are welcome.
Operator
Our next question is from the line of David Bluestein. Your line is open and please states your company name.
DAVID BLUESTEIN
Good morning. This is David Bluestein with UBS Warburg. Let me followup on John McKenzie's question. How much of that $400 million reduction relates to used equipment?
MARIE ZIEGLER
At this point, I don't have a break down between the two. I would not expect that there would be a tremendous change in the equipment markets because [our] used equipment inventories are fairly low.
DAVID BLUESTEIN
Okay. And then related follow...
MARIE ZIEGLER
That is a good question David... follow-up on the used equipment...
DAVID BLUESTEIN
Thanks Marie. Do you generate cash from both inventory reduction and asset sales? What are your thoughts on cash deployment next year? Where should we expecting you to spend money?
MARIE ZIEGLER
I think, I don't think next year will be as I think that spending is really our issue next year, its more generating. We are going to reduce our capital expenditures, but we are still spending $400 million on capital expenditures and you are starting from a pretty low-income base. So, when you throw on your yearend dividends that will be probably a tremendous amount of expense. That will be tremendous amount spend. But that should be better.
DAVID BLUESTEIN
Okay. Fair enough, thank you.
Operator
Robert McKenzie your line is open and please state your company name.
ROBERT MCKENZIE
Robert W. Baird. Good morning Marie.
MARIE ZIEGLER
Good morning Rob.
ROBERT MCKENZIE
Could you tell us what your underlying assumption is in each of the three segments for next year for price versus volume?
MARIE ZIEGLER
I will talk a little bit about the pricing and then you can adjust the volume based on what we had already said about that.
ROBERT MCKENZIE
That's really what I am looking for anyway so.
MARIE ZIEGLER
We think the pricing in commercial consumer again their is one of major price increases. So, they are targeting positive, but [your] less than something less than a percent. In construction forestry, their net realization is expected to be down next year. What happened is in the first part of the year, the discounting was not quite as aggressive, frankly as it has been in the last six months and so, they are going into, we are assuming that given their outlook for the business they see no reason why that would improve and so what they have done is they taken the rates they had in the six months and extended that into next year which means that the price realization will be done in a point or two.
ROBERT MCKENZIE
Okay.
MARIE ZIEGLER
But again, I want to emphasize, it is not because there has been further acceleration of this counting it is just reflecting the trends.
ROBERT MCKENZIE
By the same token you would expect to see most of the impact on year-over-year comparisons in the first half of the year then?
MARIE ZIEGLER
That is correct.
ROBERT MCKENZIE
Okay.
MARIE ZIEGLER
And then in agriculture, we are hoping for a couple of points of price realizations here aided by new products and by the fact that although we are going to make some adjustments in inventories, our inventory levels are pretty good.
ROBERT MCKENZIE
When you say here, you mean, for the segment in total or in North America?
MARIE ZIEGLER
I actually mean the segment in total. Inventory levels in Europe are also very low. They have been aggressively managing their inventories as they also prepare to transition to new product line in addition to the increasing emphasis on asset intensity.
ROBERT MCKENZIE
Can I also get you to clarify something. I think you misspoke in your prepared remarks when you are talking about the consolidation of Hitachi, I thought I heard you say that they would add $2250-200 million?
MARIE ZIEGLER
No, I would have said $225-250 million.
ROBERT MCKENZIE
$250 million?
MARIE ZIEGLER
Right.
ROBERT MCKENZIE
And then the minority interest is going to come out of the operating income line?
MARIE ZIEGLER
Yes. It does and actually, yeah $225-250 million in the minority interest, as this is true for everything else, all other areas we have minority interest and those charges from minority interest are taken before you get it to operating profit. So, it does not affect [lower] the apparent margin.
ROBERT MCKENZIE
Okay, that's for reporting purpose, you don't do that internally. Do you?
MARIE ZIEGLER
I am not sure what were you coming from on that?
ROBERT MCKENZIE
Well, in other words if you are going to have an inflated, I mean, just basically to normalize away the penalty on margin that you are describing, you know, in other words, the division picks up a couple of $100 million in sales, but they don't get all of the earnings associated with that revenue and production level. Do you follow me?
MARIE ZIEGLER
Well, your is do we calculate things in a variety of ways?
ROBERT MCKENZIE
We can talk about it later.
MARIE ZIEGLER
You can find it any number of ways.
ROBERT MCKENZIE
Sure. Okay. Thanks Marie.
Operator
Chuck Harris your line is open and please states your company name.
CHUCK HARRIS
Solomon Brothers Asset Management. Hi, Marie.
MARIE ZIEGLER
Hi, Chuck.
CHUCK HARRIS
Lets [_____]question around a little bit for a moment, rather than the movement. Are you changing in agriculture with the new people running the division, the way in which agriculture interfaces with the dealers, so that if and when business improves, you can really hold the line at inventories, but we are witnessing the fine end of the material change where inventories are not going to get back at the line again or do we end up with the usual [_____] ramifications business gets better and then gets worse on the downside. Can you talk about that a little bit?
MARIE ZIEGLER
Certainly asset intensity has been a focus for some period of time. Actually, all way back to 1994, we changed to compensation when return on asset base. I think the fact the receivables have been sold to the credit operation and now there is an explicit carrying cost [_____] you that there is increased focus on these receivables and not letting that happen. Also, there have been a number of operational changes; one of the things for example is waterloo last year we announced three developments, plans that was in place over round numbers of five year period of time and one of the outcome with the better ability to produce to retail so the intent very definitely and it comes from the very tough to manage the line in asset intensity.
CHUCK HARRIS
Has there been any change in terms of the dealer and also being more strict in terms in what you are offered?
MARIE ZIEGLER
Both terms actually occurred last year and they continue with order performance, but the real issue is to future inventories and your ability to respond production such that the terms become less significant. That's really where the effort is.
CHUCK HARRIS
Okay. Thanks.
MARIE ZIEGLER
Thank you, Chuck.
Operator
Hallow Forward your line is open and please state your company name.
HALLOW FORWARD
This is Barry Banister. Hi, Marie. How are you?
MARIE ZIEGLER
Hi, Barry.
BARRY BANISTER
You know when I look at all these changes including the seven items you laid out in the beginning, I think there has to be an end game beyond just cutbacks and cutting of inventory receivables you have to be going for a higher margin at the next cyclical strong point or peak?
MARIE ZIEGLER
I think that is pretty obvious from some of the restructuring actions we would agree with you and that has been taken.
BARRY BANISTER
And when I look back at the last peak, it was 12.7 on the equipment side in October 1997 yearend, and it was at high 20s in finance. I mean we are looking at the potential of exceeding that by several hundred basis points on your own internal sensitivity analyses based on the cost cutting that you have done?
MARIE ZIEGLER
Certainly, we would aspire to that. You [_____]. I am not prepared to give you any kind of a comment on how much.
BARRY BANISTER
Is that something that nadir anyone has been you know explicitly talking about in meeting saying that this is the goal we are going to exceed past margin peaks or you just simply doing this sort of a running to stand still mode?
MARIE ZIEGLER
Very last thing. The answer is that you know while have not published explicit numbers externally and internally and that is clearly the objective that is first is to know that we need to generate higher returns from our businesses that something we are talking about very aggressively to the last year and a half really Rob Lane became our chairman with the focus that you know we needed to improve shareholder returns. So, you are seeing really a large number of actions that are being taken in order to...
BARRY BANISTER
So this is really more of a fixed mode now, but clearly internally you have been talking about the margin impact of these things rather than just what you needed to do to fix things.
MARIE ZIEGLER
I think we are trying to make things better again.
BARRY BANISTER
We will talk more later. Thanks a lot.
MARIE ZIEGLER
Thank you Barry.
Operator
David Russell, your line is open and please state your company name.
DAVID RUSSELL
Solomon Smith Barney. Marie. Just looking at 2002 ... is there a number may be I missed the savings you expect in 2002? I think you have given some pieces of it ...
MARIE ZIEGLER
I have given you pieces of it.
DAVID RUSSELL
What is the aggregate savings amount you expect in 2002?
MARIE ZIEGLER
I think we have deliberately not given you a total ... the numbers have changed so much. You have got 15 million that comes from the CNF on restructuring, you have got [_____], which right now lost about $30 million ... there is going to be a process of doing the restructuring this year, but one would expect that loss would shrink this year and then obviously place us in a much better position in 2003. The savings from the [_____] were estimated at about $90 million pretax and that did not get a full years benefit, because you know a lot of people are retiring in the first quarter and actually some of them will stand through March, through transitions, so you will get about 50-60 million of that. Lets see what else we have ...
DAVID RUSSELL
Homelite?
MARIE ZIEGLER
Homelite ... we talked about being about in it $60 million against operating profit.
DAVID RUSSELL
Okay. What would stop with that and then next as this is the best business next year and the largest tractors, largest equipment's have the lowest inventories. That what the new models coming out next year with the start up cost principally in 2001 story. So, if your cost structures lower next year, your mix is better next year, your sales are flat to up next, can you explain how your operating profits are down?
MARIE ZIEGLER
Again, we had some pretty significant volume impact in the first quarter. You know there are some restructuring charges that we talked about and then the big item is the receivable charge, which is just 220 million on operating profit. It is a huge impact.
DAVID RUSSELL
If you add that 200 basis points impact from that, you still taking about 1-3% operating profit which is basically flat to down. Given the scenario, we just ran through I am just trying to understand this, whether it is mixed, you have a lower cost structure or better mix ...
MARIE ZIEGLER
We will be in the process of implementing that lower cost structure over the course of the time David, because it is certainly not here today. It will be in place by the time we reach the end of the year. You know we have a lot of activities underway especially in the first quarter that has not yet reached resolutions like people leaving the corporate restructuring, you know, we just concluded the sale of the Homesites ...
DAVID RUSSELL
But the savings numbers we just went through ... are they are not 2002 impact numbers?
MARIE ZIEGLER
They are.
DAVID RUSSELL
Okay, we will talk off line. I appreciate it. Thank you.
Operator
Gary McNanus, your line is open ans please state your company name.
GARY MCNANUS
JP Morgan. Hi Marie.
MARIE ZIEGLER
Hi.
GARY MCNANUS
You talked about the first quarter, you said sales are to be down about 3-7% that's about $2 billion, you said you know the equipment business is going to have a operating margins minus 7 or minus 9 ... let us take the margin as 8 that is like a $160 million loss roughly and $60 million is the change related to receivables throughout ... so you adjust around $100 million, can you break down your ... will all three businesses be profitable ... can you kind of compare versus the fourth quarter which areas will be weaker or better?
MARIE ZIEGLER
I don't have any comparison when we look at the fourth quarter [Gary] versus the first quarter, but the facts are that all three businesses based on the current outlook would be on an operating profits on profitable just because of low volumes in the first quarter.
GARY MCNANUS
But you really came really breakout the magnitude between the three.
MARIE ZIEGLER
No, I think that would be going beyond what where we would think we have held ...
GARY MCNANUS
It is kind of same way on a full year basis, the flat sales, the flat equipment margins, and I know you have got that $220 million difference in impact this year. But it acts still profitable in the other two unprofitable. Can you give me a sense on how that break-even profitability with breakdown by the three regions?
MARIE ZIEGLER
I think your comment will be accurate that we would anticipate that agriculture would have positive operative margins and the other two likely not.
GARY MCNANUS
One other quick question. You mentioned capital expenditure, how about R&D and SG&A, I mean, some of that has been in investments standing for new products. What does that get you on flat sales next year ... where do those two numbers go?
MARIE ZIEGLER
Well, we are going to continue to invest in our products, but certainly the needs of the [_____] is over, I would say that R&D would be flattish ... SA&G without the restructuring charges would likely be least in the current forecast flattish to may be even up slightly, what I will tell you there is there is a lot of activity underway to further lower that number. With this I am going to save time for one more question. I will talk to you later Gary.
GARY MCNANUS
Okay.
Operator
John McCanty your line is open and please state your company name.
JOHN MCCANTY
Credit Suisse First Boston. Marie on an overall basis, we are looking at the agricultural market is horrible and you know that is kind of a net picture, construction is horrible, if you look at CNCE what you see is the situation where it is basically breakeven and yet, you know, we come out here and we keep getting hit by things ... Homelite turned out to be big loss, you said okay our strategy and [_____] did not work. So that's $30 million we are going to get rid of that. Where are we structurally in terms of CNCE, in other words, are there still more shoes to drop, do you think that business has finally got rid of all of the bad things that were hidden in there or they are still buried in there ... things that we have to worry about problems, you know, can there just be economics in there.
MARIE ZIEGLER
No I think those were our two issues hence they have been held.
JOHN MCCANTY
Okay, and just a followup question. The farm equipment market share you know, you raised schedules earlier in the year ... you though you gained share you did not, you have been losing share, because you had tough comparisons, what do you expect your share to do in large tractors and combines in 2002 ... remain flat or do you still have some negative comparisons based on the first part of last year, or where are we there?
MARIE ZIEGLER
John for the whole year, we are expecting to gain a market share.
JOHN MCCANTY
That got you into trouble this year.
MARIE ZIEGLER
In row-crop tractors actually you are correct we did come down just a little bit off of pretty strong gains in 2000. In combines we did gain share. Again a lot of the activity was and we got a lot of new products coming out in 2002, which should help us and that is thing that we are looking forward to seeing other compete in the market place.
JOHN MCCANTY
But are your schedules being set to increase the share in 2002?
MARIE ZIEGLER
I think John the answer to that would be no, but certainly we would like to do that.
JOHN MCCANTY
Thank you.
MARIE ZIEGLER
Thank you all for participating. Good day.