強鹿 (DE) 2002 Q2 法說會逐字稿

Good morning and thank you all for holding. At this time your lines have been placed in a listen-only mode until the question-and-answer session of the conference. Today's call is being recorded. If you should have any objections to please disconnect at this time. I would now like to turn the call over to Miss Marie Ziegler, Vice President of Investor Relations. Thank you, ma'am. You may begin.

Good morning and welcome to our conference call.

and

join me this morning. This call is being broadcast live on the Internet and recorded for future transmission and use by Deere, CCBN, and third parties. Participants in the call, including the Q&A session, 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 states management expects, our outlook, we project, or otherwise states the company's predictions for the future are forward-looking statements subject to important risks and uncertainties. Actual results might 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 company's SEC's filings, including the most recent Form 10Q and in the press release being filed today on Form 8K.

With this quarter's results, we are starting to see some of the impact of our drive to improve operating return on assets in our Equipment Division. You see lower R&D and SA&G. You see good market acceptance of our new products. It's most evident in the European Ag Operations where sales are up strongly. You see solid price realization in Ag.

Perhaps these results are even more notable when you consider that included in our results for the quarter are $17 million pre-tax of charges related to business improvement actions. We'll go over the details later. Year to date we have taken a total of $34 million of charges related to our business improvement initiative.

Finally in the quarter, you continue to see our strong emphasis on managing assets. We have lower trade receivables and inventories than we did a year ago. In fact, $850 million lower, and this is assuming, of course -- looking at the trade receivables in total as if they had not been sold through the credit operations.

By division it breaks down to $375 million lower receivables and inventories in our Ag Divisions. In Commercial and Consumer Equipment, $425 million lower, and in Construction and Forestry, $50 million lower. So again, we present a quarter where you are starting to see some of the impact of our drive to improve operating return on assets.

Now let's take a look at the results by division and we'll start with Worldwide Ag. For operating profit, it's $173 million this quarter versus $131 million a year ago. The big story here is the improved price realization. It contradicted over three points of margins to the Worldwide Ag results this quarter. Worldwide Ag also has lower R&D and SA&G. And again, to put some of their quarterly results into perspective, they generated these higher operating profits even with the $24 million of compensation that they're paying for the credit on the dealer receivables and with higher pension expense.

April retails in North America continues to reflect a sluggish market. The Association of Equipment Manufacturers, previously known as the Equipment Manufacturers Institute or EMI, released industry sales results yesterday. In the United States and Canada, sales in units of utility tractors for the industry were up 3 percent. There it was flat. In row crops I want to preface this with a little bit of background. We have a tough comparison in April for Deere and Company and then, of course, that influences the industry compare.

Typically for us, April would represent about 15 percent of one year's sales, but last year April represented 21 percent. So it's probably no surprise that the sales are down a bit versus these very, very difficult comparisons. The industry was down 23 percent and Deere was down a bit more than that.

However, we are well on our way in our transition to our new 8000 Series. Although it's not obvious from these numbers, since mid April, we've been seeing our weekly sales comparisons up over year-ago levels. So the transition is occurring on the new 8020 Series products. But again, we had a very difficult comparison in the month of April.

The four-wheel drives, there again you have a very unusually strong April that you're comparing against, April 2001. So industry is down 23 percent; Deere is down double digits but less than the industry. And in combines, the industry is up 16 percent but Deere is down a single digit in the month of April.

At this point we are pretty much through the transition to the huge number of new products that the Ag Division introduced in 2001 for the 2002 model year. Most specifically, this has impacted tractors, but again, we're through the production transitions. The products are getting out into the marketplace and you should see as we move through the year the impact of those products.

Inventories in all four categories that we just reported for Deere are below year-ago levels. In North America Ag we ended April with row crop tractor inventories at 30 percent of trailing 12 months' sales and combines at 12 percent. These are very low levels of inventories.

We intend to keep tight control over them. As a result, you'll see that Ag has almost twice the extra shut-down days in the second half of the year as it did in the first. Days it will be shut down, approximately 13 percent of available days versus 7 percent in the first half.

Moving on now to the outlook for Ag. Our outlook for North America sales continues to be flat. Sales flat against the weak levels of 2001. Yesterday there was new farm legislation the United States signed into law. But it will take the USDA time to implement it. Every estimate I've read says it will be at least four months. That puts it well into the fall.

This time, plus the fact that the U.S. is already so far into spring planting, means that we expect the bill will have little impact on equipment purchases by farmers during our fiscal 2002. But certainly the elimination of the uncertainty surrounding the level of government support will improve farmer confidence, and we expect that we should see some benefits starting next year.

There is one nuance of the farm bill that you may not be aware of. It has to do with the timing of cash pay-outs under the countercyclical payments portion. As you may recall, countercyclical payments really replace what had been disaster payments. The disaster payment had been made usually in the fall of the current crop year; so in other words, for crops grown in 2001, the disaster payments were paid out in October 2001.

Under the new farm bill with the countercyclical payments, payments are really spread out over three payment dates. About a third of the payment would be made this year in October of 2002. But then the remaining 70 percent really gets paid out in 2003. So you're going to see a little bit of timing impact on cash

. Our estimates for 2002 is now 17.9 billion. This is the government payments made to farmers. Our previous estimate had been 19.2. It's not a big deal but we did want you to be aware that there was a slight change related to the timing of payments.

Another factor that we think is positive for us in 2003 but not much impact on 2002 is the accelerated depreciation that is available under the Job Creation and Workers Assistance Act that was passed earlier this year. This is a tax issue. Farmers will look at their taxes as we get close to the end of the calendar

so we're seeing our core commercial past-dues and write-offs -- and remember, this primarily came out of Forestry -- starting to stabilize which is very encouraging for us.

Credits income also benefits from the financing of the Deere wholesale receivables. That was, in the Operating Divisions, the compensation paid to credit that we referred to earlier. Credit in the quarter has a $14 million after-tax benefit to their income.

Now, there are three other items I want to comment on that did affect the quarter, but first higher gains on receivables sales had actually generated $22 million incremental after-tax income second quarter. Argentina was a factor. You all understand the situation there. And in the quarter, this cost an additional $8 million after tax. There's a third item reference a loan loss provision for potential losses on two international trade finance customers who are affiliates of each other. This was a $28 million after-tax provision that was

.

We have obtained a judgment against one of the parties, Allied Deals, Inc. Because this matter is in litigation, we have really no further comments on the relationship or details of the transactions.

Forecast as a result of some of the second quarter activities has changed. We previously had guidance that would suggest net income in the range of 250 to $270 million. We're going to lower that guidance down to a range of 210, $230 million. Some of the major drivers are, of course, the higher loan loss provision booked this quarter, the higher loss related to the events in Argentina. We have slightly higher interest expense that relates to a downgrade by Moody's. And we have a little bit of lower income earned on Deere dealer receivables. You'll see in the press release we reference $60 million for the full year. After tax we had been projecting $70 million. And that, not surprisingly, has to do with the fact that the Equipment Operations receivable balances continue to

lower than they were a year ago and under very tight control.

Partially offsetting items that I just went through are higher gains from receivable sales. And again, just to summarize then, credit income is now in the range of 210 to

.

Now, let's go on to our usual list of housekeeping items. I think it's important to start by pointing out that price realization is significant for the company in this quarter. It contributed positive 1.5 points of margin, and of course it came out -- it was driven by the strong improvement in

. It's the first time you've seen improved price realization overall for the company worth noting.

The press release talks a lot about lower or tighter expense controls. We are seeing declines in R&D and SA&G, and this is an important step along the road to improved operating return on assets. R&D in the quarter was down $21 million. SA&G as reported was down 8 million but if you exclude the impact of the acquisition of landscapes netted from the divestiture of HomeLite, we actually would see that SG&A for core businesses was down $20 million for the quarter. So again, seeing evidence of the restructuring actions that were taken in 2001 and certainly ongoing expense control.

The press release references higher pension and post-employment benefits expense. This is something we've been talking about all year. In the second quarter the impact pre-tax was $30 million. It primarily affects our Ag, Equipments, and Operations. For the year, the forecast is $110 million pre-tax from the previous forecast of $95 million. By the time the second quarter comes, we have final numbers from last year and a better estimate for the full year, and so we made a modest revision in the forecast.

Drivers of this increased cost for the full year are higher medical inflation, a lower discount rate, and the stock market. So in 2002, this higher pension and post-employment benefits expense really offsets most of the savings we're getting overall from the company from the salaried employment reduction program, corporate staff reductions, etc. But nonetheless, in the fundamentals, you can still start to see some of the improvements in our Operations from these actions.

I mentioned earlier business improvement activities, and the press release talks about this. They're all small items. They principally hit cost of sales, but in the quarter, it's $17 million pre-tax. Some examples of what's happening, we are exiting our joint venture on hand-forged equipment. We're closing an electronics controllers factory in Springfield, Illinois. As you know, we are closing our factory in Knoxville, Tennessee, and relocating production of

up to Dubuque, Iowa. And we're relocating engine manufacturing out of Dubuque, Iowa, into another factory.

The bottom line on all these is this again somewhat muffles the impact of our business improvements, the results, if you will, of the actions taken earlier in the year. But nonetheless, they remain very important indicators, I think, of management's determination to drive better results.

Maybe one other point before I leave that, and that is we talked about $17 million for the quarter. For the full year we're looking at a total of 34 million. And the difference is the $16 million booked in the first quarter for commercial works.

Just for clarification on the other category of operating profit, technology is a loss of 12.9 million in the second quarter. That does include $6 million of costs related to closing the electronic controller factory in Springfield that I had just mentioned. Also, versus a year ago, this would really represent an improvement because a year ago their performance was an operating loss of 13.8 million.

Health care had an improvement in their results. Their operating profit was 6.2 million this year versus 4.3 million in the second quarter of last year. Before I close, I want to just comment on our forecast for 2002. We've already talked about lower credit income. But the Equipment Operations usually increase their operating margin guidance for the full year and basically no sales change. In the press release you'll notice that operating margin guidance grew to .5 to 1.5 -- that's the range -- from flat to -- from 0 to 1 percent, from our previous outlook. This is really driven by, first of all, strong second quarter performance in our businesses.

There is a little bit of shift in the seasonality of sales. We did pull some activity that had earlier in the year been scheduled for the fourth quarter into the second quarter. But you do see some seasonality, which is why we are expecting a little softer performance as you move into the second half of the year. But nonetheless, in summary, you are starting to see, with this quarter's results -- and frankly, in the slightly higher guidance for operating margins for the full year, some early signs of progress in our journey towards our 20 percent operating return on assets goal in the Equipment Operations.

We're doing this in market conditions that are weaker than we were a year ago for Commercial and Consumer, Construction and Forestry. And we're doing this considering the fact that we have another reduction in receivables in inventories $400 million planned for 2002. Besides this, we still expect to produce a higher level of income than we did a year ago. And let me tell you, our journey is just in the initial stages.

In terms of our outlook, there is no question we remain cautious for the balance of 2002 in all three of our Equipment markets. But there are some developments that should positively impact our markets in 2003.

In summary, through our operating return on assets for business improvement journey, we look forward to delivering better returns to you our shareholders, especially when our markets recover. We're now ready for the Q&A. The operator will give us instructions on the polling procedure. To give everyone an equal opportunity to participate, we will ask that you limit yourself to one question with related follow-ups and then of course you are welcome to get back into the queue after further questions as time permits. Laura?

Thank you. And at this time if you would like to ask a question, please press star followed by one on your touchtone phone. You will be announced by name prior to asking your question. Once again, to ask a question, please press star followed by one. Your first question comes from

, and please state your company name.

Hi, it's Morgan Stanley. Good morning, Marie. Just real quick on the outlook. It sounds to me like this overall for the company, we have a little bit better outlook in machinery, a little bit worse in finance. Should we look at this as about flat overall?

Versus our guidance from the previous quarter?

Right.

Yes. Absolutely.

That's what I thought. Okay. And then can you just -- you listed a couple of things for '03 which look like they kind of go away in terms of one-time issues that we've had in '02. Not including anything to do with markets or whatever, can you just go through the things that are hitting us this year which are going to go away next year?

You're referring to our -- the structuring activities. And year to date, that would be about $34 million pre-tax. The principal item is the loss of relocating production out of -- on skids Deeres out of Knoxville, Tennessee, closing that factory. That's 20 million of the cost and another 6

. So anyway, you're referring to

.

Yeah, I'm sorry. I'm losing you a little bit here. But there's some other things here, too. You had some stuff in the credit company which looked like it was kind of one-time; it wouldn't happen next year?

Absolutely. You're talking about the loan loss provision of $28 million that was taken in the second quarter, and that's an after-tax number. We also, as we move into next year -- recall that we expected a benefit from our salaried employment reduction program of about $90. We're only getting about $60 million of that this year because we still have people on staff through December and some of them worked on a contingent basis through the end of March. So we'll get another $30 million just from that alone in 2003.

Okay. And then in terms of the 400 million receivables reduction, have you sort of quantified at all what that cost you this year that might not cost you next year?

I think that's a fair point, too. I can't guarantee that we won't take further actions in 2003, but no decisions have been made on that. About half of that reduction really comes out of the Commercial and Consumer Equipment Division. They estimate to cost to them is about 50 to $60 million pre-tax this year. It would probably be fair to say maybe it's $100 million for the company.

Okay. So it looks like we could be sort of 150 million or so if you just add all that stuff up that might not happen next year?

Certainly.

Good, thank you.

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Excuse me. JP Morgan. Hi, Marie.

Hi,

.

In your February conference call the outlook for the second quarter was flat up slightly in sales and 4 to 5 percent margin, and you beat those numbers considerably. I know you talked about better pricing and seasonality. Can you just talk a little bit on what -- you know, what -- you know, reconcile your forecast versus the actual results.

In terms of the sales, the biggest change was moving some production out of the fourth quarter into the second quarter. And that would have happened both in Ag and in Commercial and Consumer Equipment. In terms of what change, I guess, in terms of our outlook, we're seeing a little better expense control than we had anticipated. That would be in the form of the R&D and SA&G. Certainly the price realization in Ag was positive for us.

And you give a third quarter forecast and a full year forecast so I can kind of back into the fourth quarter. It sounds like you're seeing about -- you're expecting the fourth quarter to have maybe 4 percent revenue growth and about 0 percent margins? Is that, you know, the rough order of magnitude in which you're anticipating in the fourth quarter?

I'm really not prepared to give a comment on specifics on the fourth quarter, but suffice it to say we would expect that could be a weak quarter -- I mean, we would expect it would be a weak quarter, again, because of the seasonality of production and sales.

And that is in all three segments?

It's really all three segments. The big shifts have already occurred in the Construction and Forestry. You're seeing shifts ongoing in Commercial and Consumer and in Ag.

Okay. And just a follow-up, is, you know, your expectations of flat industry demand in North America, what would that imply for the second half of -- I assume you're talking your fiscal year. So that would imply for the second half of the year, and would you expect with new products coming, to outperform the industry?

We certainly have some easier comparisons ahead.

, I haven't actually run the math, but year to date I could tell you that on row crop tractors, the industry's down a single digit. Where do we have that? On row crops the industry is down 7 percent year to date. So that would imply, in order, you know -- although the flat guidance was taking a look at the industry overall. That would certainly imply some upside in the second half of the year.

So you expect the second half to be up modestly, whatever?

Yes.

Okay. Great. Thank you.

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Good morning, UBS Warburg. Marie, can you walk through the price competition you're seeing in Construction and Ag? And the question is, Do you have pricing power in Ag due to new products? Is it just industry discipline? Why -- why is it better?

Certainly new products help but I also think that we have made a conscious decision in this division that we have lower discounts in the marketplace. And our inventory positions are -- I think this was one of the positive outcomes of the very tight inventory management that we've had both in terms of field inventories and our own. And I think that's what you're seeing there. In the Construction Equipment Division, there I can only cite market conditions. Although we have very low levels of inventory, so it doesn't appear to be driven by inventories, at least on our end. But it is a highly competitive market. bluestein: Okay. I guess the follow-up question is, it sounds like the Ag guys are actually being rational and the Construction guys aren't, as much. Who is the primary problem on the Construction side, and then in Europe, it seems like you're gaining some share. Who's on the other side of that? Who's on the losing side of that equation?

Well, let's see. You had two questions there. Going into Europe, I really cannot comment or I won't comment on who's on the losing side of that. I can only comment on our own activities and our activities have to do with the market's reception to new products, some of which were specifically tailored to provide features that are important in the European markets. And I think it reflects the fact that although we are globalizing our platforms in terms of tractors and combines, so our product platforms are globalized, we are continuing to work to introduce features that are important in unique markets. And I'm sorry, the first part of that follow-up was?

Which countries in Europe do you think you're gaining the most share?

I don't have that detail.

All right. Thanks, Marie.

Thank you.

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Salomon Smith Barney. Hi, Marie.

Hi,

.

A question on the second half of farmer equipment production. You had mentioned the shut-downs given seasonality and so forth. There'll be more shut-downs in the second half than the first half.

Than there were a year ago, yes.

But on a year-over-year basis?

Yes. There would be less.

Because last year's third quarter you had 7 percent of available days shut down. And in the fourth quarter you had 24 days.

That's right.

24 percent of days shut down.

That's absolutely right.

Can you give us the comparisons?

I don't have the calculation of what it would have been in the second half of last year, but interestingly, if you look at the total shut-down days for 2002 versus 2001, they are the same. And that of course is consistent with the flattish outlook in the market.

So the second half shut-down days will be less than last year's second half?

That is correct.

Any feel between third and fourth quarter, which one gets the best year-over-year comp, year-over-year benefit?

Oh, no question. The third quarter will have more production in it than will the fourth quarter.

No, on the year-over-year comparison.

Oh. I guess the better comp would have to be in the fourth quarter. Because the fourth quarter, we were shut down 24 percent of days and that's not anticipated to be that high, although it will be a significant number.

Great. And the last question on the credit. Sorry, it's not too related. But on the credit, the loan loss, the big loan loss increase this quarter, how does that drag out with -- it seems very specific to a couple of customers given the core business's past dues are basically flat year over year.

That is correct.

Then is it one time in nature for the quarter or one time in nature for the year with those two customers?

With these two customers we have fully provisioned our exposure to them and that results in the $28 million after-tax charge.

So in the third and fourth quarter, it should be more of what we're seeing of core business. Past dues are basically flat?

Basically flat. That is correct.

I'll get back in queue. Thank you.

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Hey, Marie, from Lehman Brothers. I'm wondering if you can give us a little bit of help, some of the outlook for 2003 in the Construction business, if the rental guys need to start coming back with their spending or not and what you're seeing.

You know, it's very early for 2003. Really, the market commentary,

, that I've heard is focused on 2002. If you look at certainly what's happening in the economy, it seems to indicate that the economy is turning around. Business investment, however, which is the category in which we compete, seems to have been lagging. I don't -- it would be our hope certainly that that would start to turn around in 2003, but I -- at this point I just can't point to any signs that say it will.

And also I noticed you guys have more than a billion and a half in cash on your balance sheet. Can you give us a sense of what you might be thinking there? What would that be used for or are you just going to pile it up?

Basically, given the current market conditions and to be very blunt, the fact that we have had this downgrade by Moody's, we felt it was appropriate to increase our liquidity somewhat and that's what we've done.

All right. Thank you.

Thank you.

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Hi, just --

Hi, Mario.

How are you doing? Marie, can you just step back? There's a farm

bill is in the pipeline. You know, you touched briefly on the farm bill with the enlarged depreciation allowances. Walk through the pluses and what you see for the minuses in the bill.

You know, overall I think the most important factor in the bill is some confidence or a sense of knowing what the future holds for the next six years. We think the biggest detriment to sales in the last few years has been the fact that although the government has been very generous in the United States with farmers in terms of providing disaster relief, farmers lived year to year not knowing whether that disaster relief would be available or not. By including countercyclical payments in the new farm bill, farmers, if you will, kind of know the rules of engagement for their next six crop years. And we think that will translate into positive equipment sales, because they'll again have more certainty as to what the cash flows are. If they don't get out of the market, they know that countercyclical payment is available.

And the cap for farm is not a major structural problem for you?

I'm sorry, the what for farm?

The amount of per -- limitation per farmer.

It doesn't appear to be an issue based on what we have read. I'm not really qualified to comment on anything due to the farmers' situation.

All right. Marie, that's fair. The -- if we step back and look at your issue about the use of cash flows in terms of acquisition strategy, can you update us on where the first -- talk

--

The priorities are? The first priority is to maintain a strong balance sheet. And you can see that with -- and to maintain our liquidity and you see that. With our new 20 percent operating return on goals that we have for the Equipment Divisions, frankly it makes it more difficult to find acquisitions that will meet that test. We do expect that we will investigation in our businesses as we have, you know, through new products, to continue to develop market opportunities that way. And then of course, to

that there is additional cash above and beyond that requirement, we would intend to return it to shareholders.

Yeah. Okay. Thanks.

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Midwest Research. Morning, Marie. I have a question on the Commercial and Consumer because that was surprisingly strong relative to the drought conditions that we're hearing about, you know, that impact the East Coast where, you know, a lot of the lawn activity takes place. And, you know, I guess when you account for the fact you're taking skids to your loaders out of that business and reallocating it, it was really up, like, 10 percent. So can you talk to, you know, whether that was building ahead of retail sales or is demand actually strong? Give a little more color, please.

First of all, we have done some shifting in terms of production. And that is very candidly the most important factor in the second quarter's change, is the fact that you have less production in the first and fourth quarters and more in the second and third quarters. It is true that we have had very good acceptance of our new products. They haven't had a tremendous amount of impact yet. We've only really completed one month of the key selling season, although we remain certainly hopeful in terms of the market's reaction to them.

Dryness in the Southeast -- really, it's not only the Southeast; it's the whole East Coast -- is an issue for us. It's a factor cited. It hasn't been mentioned at the overwhelming factor, but it's certainly something we're keeping our eyes on. You know, we reflected not only in April but now it continues to be dry. And most of that region in May. So we are keeping an eye on it.

Okay. You know, I got on the call a little late and this issue of carving out production from the fourth and moving it into the second and third, did you quantify it? Or if you didn't, can you quantify how much you're taking out of CC&E and how much out of Ag?

We have not commented on specific divisions. Really, I guess, the impact would be the fact that we kept the forecast flat for the full year in terms of our sales. But you saw us with sales up about 5 percent in the quarter instead of the flattish that we had originally projected. That's probably the impact. Really, most of the activity was shifted into the second quarter. There might be a little bit in the third, but not a lot.

Okay. And then just related back to this CC&E thing, are you getting positive pricing there?

Yes, we are. It is slightly positive, yes.

Okay. Thank you.

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Good morning, Goldman Sachs. I wanted to just talk to you about your production versus retail sales, and if you can go through each of the different businesses for the quarter.

For the quarter our production -- I don't think I have anything that would help me there. I could -- for the year,

I could tell you more definitively.

You had moved some stuff from the fourth quarter into the second quarter. And, you know, if you try to mesh your sales numbers with what we're seeing in the retail sales statistics, it just isn't -- it just makes it tough to figure out how we're going to get out of a 19 percent decline in the first couple of months of the year. Are you expecting the seasonality of the farm equipment sales numbers to really be a little bit different this time around?

On a retail basis, you mean?

Yeah.

Oh, yes. Yes, we are. And that is implied. I think that goes back to the first or second question we had on the call. You're correct. We are expecting a stronger second half. And to be very, very candid with you, in the early part of 2001 in Ag North America we had incentives that you can see are not available this year simply by virtue of the price realizations we got going for us in the second quarter. We do expect, therefore, to have a little more normal seasonal selling pattern as we move through the year.

Okay. So the second half can be better than it was last year.

Yes.

SG&A and R&D expenses, you've highlighted how they were lower year over year. Can you just talk about what we should expect to see for the rest of this year, how sustainable this trend is?

For R&D we expect to be down modestly. I think probably the biggest dollar declines did occur in the second quarter, but for the full year down modestly. And so that's, you know, 5 percent-ish plus or minus. SG&A, down slightly. You know, it's down 8 million in the second quarter. It -- the reason it doesn't look like it's down any more than that has to do in part with the acquisition of John Deere Landscapes which would be adding some additional SG&A because we're consolidating them.

So if we take out John Deere Landscapes how much would it be down for the year?

Well, you probably could get closer to 5 percent. I don't have that detail at my finger tips at this moment, but you could probably get closer to 5 percent.

Of a decline?

Uh-huh.

Okay. Thanks.

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Yes, it's Deutsche Bank. Hi, Marie,

,

.

Hi.

I've got to do a better job of getting in earlier. I think most of the good questions have been taken. But if you could, can you give me an update of what's going on in Waterloo?

In terms of completing the transition to the new models and the manufacturing?

Right.

That is done. They are producing basically at normal pace. If you were to walk into a John Deere dealer today, you would find that backlog, if you will, or you would have to wait somewhere from mid June to mid July, depending on which model you were looking at.

But Marie, did you say done?

Done as in there are no start -- we don't consider ourselves in start-up anymore. If you're talking about the major restructuring --

Yeah. The big project that you announced from last year.

Okay. I'm sorry. The big major project, the first phases of it, if you will, really were to get the new line available for the 8020 Series that's now big built on. They're in the process of doing some machinery location. As part of this you may recall we have several multi-story buildings that are going to be abandoned, and we'll move into and consolidate into single-story manufacturing. When I say abandoned, some of them will be torn down or some of them will be donated for other uses.

So restructuring there continuing to be on plan. And in fact, let's see, let me grab my notes. We just had a presentation from them and they're actually signing their -- I'm sorry. Let me get to my notes here. Actually, I think that they're going to use slightly less capital, by about $7 million. The original ASE, as you'll recall, was about $127 million. And they've lowered their capital estimates as they're finding ways to do things in smaller spaces and more effectively. So a good piece of news on that. So anyway, progress continues on track and a little below cost estimate.

Okay. What about in terms of benefits? Anything change there? Still looking for the same benefits that you --

Yes. And the benefit we were looking for, a 21/2 percent cost reduction per machine coming out of there on average. And we are still on track for that.

Okay. Thanks a lot.

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Hi, Marie.

Hi,

.

I noticed that the pre-tax margin in Deere Financial contracted and you also lost money on higher sales in CE. And I'm wondering if there's a tie-in there whereby you're using the Financial subsidiary as a pricing weapon, and could you give some detail on what sort of financing terms you're offering in CE and CF.

In the Construction Equipment Division,

, you're referring to specifically. First of all, let me say that when there are special incentives provided, the parent company, the Equipment operations, make the credit operation whole. So the credit operation bears no additional expense, say if there were, you know, low-rate financing or something like that. But again, the Equipment operations make the credit operation whole.

I really can't give you a lot of specifics on programs out of the Construction Equipment Division because the dealers have the option to take funds and tailor different programs for different customers depending on what the customer needs. So it's not like we have blanket programs out and available.

Yeah. On a related follow-up, you know, when I look at C&F, you made a bet on the volatile rental channel. It's been unsuccessful. It looks like Nortrax is a problem. Forestry's been a black hole. The discounting seems to be rampant. And there's little success in penetrating the large contractors. So I'm trying to figure out why is Deere in the Construction and Forestry business at all?

Well, first of all, let's start with Nortrax. Nortrax really reflects the underlying market conditions which are admittedly cyclical. This is a more cyclical business than either our Construction or Ag business. But it also has higher -- the peaks are higher, as well. So Nortrax is a reflection of the market conditions.

Timber Jack is also a reflection of the market conditions. Again, that's in the Forestry segment, and we knew when we purchased it that it would have highs and lows. Strategically, Timber Jack was of great interest to us because, first of all, the fact that about half of their sales are outside the United States and Canada. The fact that they had technology that is becoming more important globally, including the United States, that we did not have, and that refers to specific

. In terms of pricing, that one I -- the market is what it is. I cannot answer or say anything beyond that. So when we look at the business, it is true that they are in a very difficult market condition right now. But they're also a business that has restructured themselves. And you were seeing before the markets turned down that this was our highest return on asset business. And so we feel good about the activities that they had in place to improve the markets -- or to improve their returns before the market turned down. And we will see the benefits of that as the markets recover.

And the large contractor focus lack of success?

Actually, I don't know why you think there's a lack of success, because our sales into that segment are up year over year again.

Okay. We'll follow up later. Thanks.

Thank you. Your next question comes from

, and please state your company name.

Credit Suisse First Boston. Hi, Marie.

Hi,

.

Marie, I just want to clarify this. The $400 million in receivable reduction, in other words, producing $400 million below sales, it seems to be half of it in C&CE and half of it -- did you say where the other half was?

Half of it's basically Ag. Yeah. And I want to clarify, though, it's receivables and inventory.

Okay. I'm sorry. Receivables and inventory. And I guess what wasn't clear to me is, has that been done? Is that being spread? Or how much of it -- could you give us some idea of how much that 400 million was in, you know, the first half to date or when most of it occurs?

That's always an interesting issue, because you know, we have seasonality in our receivables and our inventory patterns, as well. But I would say that the -- in terms of the big year-over-year decline, certainly that was evident in the first quarter. And so I would tell you that most of that impact hits the first quarter.

So that has essentially been done, if you will?

Yes. If you ignore the seasonality of our --

If you ignore the seasonality or you make the seasonality -- and the fact that you're shifting seasonality?

Yes. It would be basically the first quarter. And that you saw in the first quarter we were down, you know, year over year 1.1 billion and now we're down 850 million year over year in receivables and inventories.

Right. And I guess the other question, if I come back to the pricing issue for a second on the Ag side, to what extent are we getting price -- you can get price realizations two ways: You can get price realizations by you raise prices, you get more aggressive; or you can simply take away programs, incentives, and so on. Where did we get the -- I think you said there were three --

Three points, uh-huh.

-- three points in Ag, which is a healthy little number, overall.

I'd have to say in round numbers -- you're getting it from both. Probably I'd give it a point in pricing and -- in this quarter anyway, two points in reduced -- or discounting.

And as the follow-up, in the CE side, is the three -- are the three points -- I think there's a three-point penalty there, although it's only $18 million because it's just a lower sales space. But is that all -- is that all more aggressive programs? Are we seeing any kind of movement backing away from that aggressiveness which really, one argues, anyway, that's not really doing anything other than lowering the profitability?

I can only say that the market continues to remain very competitive. We haven't seen any evidence, at least that discounting seems to be abating in that market.

And these three points are programs that you have in place?

Basically, yes. There are -- there was very little in the way of price increases in this division.

Great. Thanks very much.

Thank you. Your next question comes from

, and please state your company name.

Robert W. Baird. Morning, Marie. A follow-up on

question on pricing. Three points in Worldwide Ag in the second quarter, but unless I'm mistaken, discounting became a more significant issue in the second half of last fiscal year.

For Ag?

Yeah.

No. That would not be the case.

That's not the case. So if current --

That would be in Construction. That might be what you're thinking of.

Okay. Probably. If current trends held, would you expect to see a positive contribution to price in both of the next quarters, as well?

Certainly that would be our plan. I don't know that it will --

You're saying smaller but --

Yeah. The gains may not be quite as significant. But we anticipate in Ag to see an improvement. That's their business plan.

Right. And even if the release didn't say it, you know, obviously you have start-up issues wi