強鹿 (DE) 2006 Q4 法說會逐字稿

Good morning and welcome to the Deere fourth quarter earnings conference call.

Your lines have been placed on listen only until the question and answer session of today's conference.

I would now like to turn the call over to Ms. Marie Ziegler, Vice President Investor Relations.

Please go ahead.

Good morning.

Also on today's call our Mike Mack, our Chief Financial Officer, as well as Tony Huegel and [Susan Karlig] from our Investor Relations staff.

Today we'll take a closer look at Deere's fourth quarter earnings and then spend a few minutes talking about our markets and where things are heading into 2007.

After that, we'll open for questions.

Please note that slides are available to complement the call this morning.

They are available on our web site at www.deere.com.

First, though, a reminder.

This call is being broadcast live on the Internet and recorded for future transmission and use by Deere, Thomson, and third parties.

Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.

This call includes forward-looking comments concerning the Company's projections, plans, and objectives for the future that are 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 most recent Form 8K and periodic reports filed with the Securities and Exchange Commission.

And now for a closer look at the quarter, Tony Huegel.

Thanks, Marie.

This morning, Deere reported fourth quarter net income of $277 million on equipment operations net sales of 4.5 [billion] as shown on slide 3 of the presentation.

This represents a 19% increase in income and a 25% increase in earnings per share versus the fourth quarter of 2005 on flat sales.

On slide 4, we've provided additional supplemental data regarding the impact in the quarter from certain items of interest we have highlighted throughout fiscal year 2006.

A similar presentation for the full fiscal year is available in the appendix on slide 38.

Let's turn now to a review of our individual businesses, starting with agricultural equipment on slide 5.

For the quarter, Deere's worldwide Ag sales were down 1% as reported, with worldwide Ag production off 17%, reflecting current market conditions and our continued focus on asset management.

However, net price realization was a strong contributor in the quarter, about $80 million, and warranty costs were about 30 million lower in the quarter due to abnormally high level of warranty costs in the fourth quarter of 2005.

SG&A expenses rose in the quarter, as well, with over half of this increase attributable to growth initiatives.

The resulting operating profit was $143 million versus [TECHNICAL DIFFICULTIES] last year.

Global Ag fundamental [INAUDIBLE] to be encouraging.

Renewable fuels are driving increased demand for corn as well as oil seeds, such as soybeans and rapeseed.

As you can see on slide 6, projected corn usage for ethanol in the U.S. continues to rise.

As [are consulted] Informa economics now project ethanol usage of 2.2 billion bushels for the 2006/07 corn crop and climbing to 3.1 billion bushels.

For the 2007/08 crop.

And as slide 7 shows, worldwide stocks-to-use ratios remain at very low levels for corn and wheat.

In fact, current USDA projections for the 2006/07 crop year are at levels not seen since the early 1970s for corn.

And wheat is projected to be at the lowest level in the 36-year USDA history.

These factors support crop prices, which we have seen rise dramatically in the U.S. over the last six to eight weeks, as slide 8 depicts.

Keep in mind that this run has been a fairly recent and will take some time before this translates into cash for farmers and potential sales of farm equipment.

Slide 9 shows the current Deere estimates for U.S. commodity prices, with corn rising $0.45 a bushel to $2.95 for the 2006/07 crop versus our previous forecast of $2.50 and remains at strong levels for the 2007/08 crop at $3.05 per bushel.

Similarly, our estimated soybean prices rose to a very healthy $5.90 for the 2006/07 crop with a further increase to $6 for 2007/08.

This increase is reflected in our estimates of U.S.

Farm Cash receipts, as shown on slide 10.

Our forecast now calls for cash receipts from crops to be $117.5 billion in 2006, rising to $125.2 billion in 2007.

Overall cash receipts are also expected to be at strong levels.

Our model now includes total U.S.

Farm Receipts of [TECHNICAL DIFFICULTIES] for 2005, 254 billion for 2006, and 256 billion for 2007.

While the total cash receipts increase is just $2 billion from 2006 to 2007, notable is the shift to much stronger cash receipts from products, offset somewhat by lower government payments.

Details of our previous forecast of U.S.

Farm Cash receipts are provided on slide 39 in the appendix.

In Brazil, conditions continue to be very difficult for many farmers.

As slide 11 shows, incomes declined sharply in 2005 and 2006 primarily due to the strength in [INAUDIBLE].

However, there are some signs of recovery beginning in 2007 due mostly to the expected strength in the commodity markets.

While this is certainly a positive development, any the corresponding strength in equipment sales is not likely to be seen in fiscal year 2007.

Let's turn now to our outlook for industry sales [INAUDIBLE] agricultural equipment, starting with the U.S. and Canada on slide 12. [INAUDIBLE] initial outlook is for sales to be flat for fiscal year 2007 versus fiscal year 2006.

While commodity prices are strong, this will take time to translate into equipment sales, as previously discussed. [TECHNICAL DIFFICULTIES] Deere dealers, these inventory we have this ability to was about $200 million higher at 31 October versus the same time last year.

While this gap has narrowed from a quarter ago, used inventories remain at higher than desired levels and our dealers have indicated they will continue to work them down.

In addition, our outlook is impacted by farmer uncertainty around the U.S.

Farm Bill.

As such, we anticipate weaker industry sales in the first half of 2007, with some recovery in the second half.

For the retail sales, about 40% of our forecasted fiscal year 2000 sales are anticipated in the first half followed by roughly 60% in the second half.

Normally, the split would be closer to 50/50.

Turning to the rest of the world on slide 13.

In Western Europe, our initial outlook is for industry sales to be flat to down slightly for the fiscal year.

While the value-added tax increase in Germany will benefit our first quarter, some sales were pulled forward in fiscal year 2006 and ongoing farm consolidation continues to weigh on industry sales.

Offsetting this somewhat is expected recovery in France and Spain.

In South America, our initial outlook calls for sales to be down about 10% in fiscal year 2007, driven primarily by continued weakness in Brazil, where farm net income has been under pressure for the past two years, as previously discussed.

In addition, uncertainty over [INAUDIBLE] programs always on our 2007 outlook.

In Australia, industry retail sales are projected to decline about 25% for the year as serious drought continues in the country.

In fact, the USDA now projects the 2006/07 wheat crop to be down 57% in Australia versus 2005/06 levels.

So what does all this mean for worldwide sales of John Deere farm machinery?

As shown on slide 14, we project Deere sales to be up about [TECHNICAL DIFFICULTIES] 4% for the year with about 3% lower production tonnage.

For the first quarter 2007 we're forecasting Deere's sales to be up about 10%, driven primarily by strength in Europe, as the previously discussed increase in the German value added tax, though a negative impact on the fiscal year, should drive additional sales in November and December.

Also, we anticipate higher shipments related to new products, like our 6000 series tractors.

Let's go now to our Commercial and Consumer Equipment business on slide 15. [TECHNICAL DIFFICULTIES] 1% in the quarter with a $3 million operating loss versus $10 million dollar loss a year ago.

In the seasonally weak quarter, price realization was a primary factor leading to improved results, somewhat offset by lower shipments.

Regarding the outlook on slide 16, we anticipate sales to be up by about 4% for 2007 with continued strength in our landscapes operations.

New products are also expected to benefit the year, like our residential zero turn mower and the [XUV daily utility vehicle]. [TECHNICAL DIFFICULTIES]

Let focus now on Construction and Forestry on slide 17. [TECHNICAL DIFFICULTIES] With an operating profit of $136 million, versus $177 million a year ago.

While price realization was good in the quarter, it was fully offset by raw [TECHNICAL DIFFICULTIES] Also, pretax charges related to the previously announced closing of our factory in Canada were about $22 million in the quarter.

Turning to the outlook on slide 18, we anticipate the effects of a weaker housing market to more than offset continued strength in nonresidential spending, leading to forecasted net sales to be down about 5% for the year.

Production tonnage is currently projected to be down about 11% for the year, [TECHNICAL DIFFICULTIES] more than a $100 million impact on operating profit versus 2006 due to lower shipping and manufacturing volume.

Moving now to our credit operations on slide 19, where reported net income in the quarter was $88 million, up from 81.4 million a year ago, driven primarily by strong growth in the credit portfolio.

Regarding 2007, our forecasted credit net income is around $345 million, up slightly from fiscal year 2006 income of $343 million.

Growth in the credit portfolio is again expected [TECHNICAL DIFFICULTIES] Throughout fiscal year 2006, we've talked about the impact of higher credit losses.

Slide 20 shows the historical chart of our provision for [TECHNICAL DIFFICULTIES]

As noted in our press release, this marks the [26th] consecutive quarter where we have reduced [trade and receivables] as a percent of sales when compared to the same quarter in the prior year.

Last quarter, we indicated our fiscal year 2006 goal was a $425 million reduction in inventories and receivables and we obtained reductions of $258 million.

By division, Ag cut inventory and receivables by $425 million.

Commercial and Consumer Equipment was down about $61 million [TECHNICAL DIFFICULTIES] up 228 million at year end.

The [CNS] increase is approximately a hundred million dollars higher than we projected on our last call; however, most of this difference relates to a timing issue on inventories that are in the process of being settled for.

Regarding our aspirations for fiscal year 2007, let's move to slide 22.

Our current forecast targets a $225 million reduction in inventories and receivables.

By division, Ag anticipates a reduction of about $100 million, Commercial and Consumer Equipment is looking for about $25 million in reductions, and Construction and Forestry expects to reduce receivables and inventory by about $100 million.

Before turning to housekeeping, let's look at the latest on retail sales.

We'll start with Agricultural equipment in the U.S. and Canada, where retail activity for the [INAUDIBLE] utility tractors, the industry was up 5%.

Deere was down a single digit.

Row-crop tractors, the industry was down 10%, Deere was down a single digit.

For four-wheel-drive tractors, the industry was down 15%, and Deere was down in line with the industry.

On combines, the industry was up 13% and Deere was down a single digit.

Our field inventories in the U.S. and Canada remain in very good shape, as Deere inventories at the end of September remained below industry levels in each of the categories just cited.

On slide 24, you see that for row-crop tractors, Deere ended October with inventories at 19% of trailing 12-month sales versus 24% a year ago, and combine inventories remain at rock-bottom levels, just 2% of sales versus 3% at the same time last year.

Turning to slide 25, in Western Europe, sales of John Deere tractors were down low double digits in October, while combines were down double digits.

Moving to slide 26 Deere's retail sales of commercial and consumer equipment in the U.S. and Canada were up a single digit in October, [TECHNICAL DIFFICULTIES] in the U.S. and Canada were flat on a first-in-the-dirt basis and down a single-digit on a settlement basis.

Now let's touch on a few housekeeping items.

First, regarding the income statement on slide 27.

Fourth quarter total worldwide equipment sales were flat compared to the prior-year quarter. [TECHNICAL DIFFICULTIES] Price revision was roughly three points and currency translations was a positive one.

Actual shares outstanding at the end of the quarter were $227.2 million, and average diluted shares outstanding for the quarter were $231 million.

Regarding raw material and freight, let's move to slide 28.

In the fourth quarter, these costs rose from approximately [$50 million] versus last year.

And rose about $180 million for the full fiscal year.

Our fiscal year 2007 forecast includes an increase in raw material and freight of 200 to $250 million.

By division, the breakdown is about $100 million for Ag, approximately $75 million for Commercial and Consumer Equipment and roughly $50 million for Construction and Forestry.

Slide 29, pension and OPEB expense in the equipment operation.

Our forecast anticipates these costs to be down about $20 million for fiscal year 2007 versus 2006.

And as a reminder, the 2006 pension and OPEB costs include about $20 million related to the closing of the factory in Woodstock.

In the first quarter 2007, we expect pension and OPEB costs to the down about $10 million.

Looking at Research and Development expense on slide 30, we're forecasting an increase of around 9% for 2007, related to our continued emphasis on new products and technology.

Moving now to slide 31, SA&G expenses.

SA&G for the equipment operations was up 6% in the fourth quarter, including about five points related to the impact of stock options and growth initiatives.

Our fiscal year 2007 forecast includes SA&G increases of about 7% versus fiscal year 2006, including about three points related to our global growth initiative.

Regarding the tax rate on slide 32, the full-year 2006 rate ended at 34.1% versus our previous guidance of about 35%.

This reduction was due in part to a fourth quarter reorganization of two foreign subsidiaries to provide a better flow of foreign tax credit.

As a result of the lower full-year rate, the effective tax rate is 27.5% in the fourth quarter.

For fiscal year 2007, our forecast assumes a tax rate of 34 to 35%.

Slide 33 highlights the share repurchases as part of our publicly announced plan, by quarter, for fiscal year 2006 and fiscal year 2005.

During the fourth quarter 2006, we repurchased 4.5 million shares with an expenditure of about $0.3 billion, bringing our full-year total to 17 million shares repurchased.

Approximately 10 million shares remain on our current authorization of up to 26 million.

On slide 34, you can see that forecasted production tonnage for first quarter 2007 is expected to be down 4% worldwide.

In the U.S. and Canada, a 16% reduction in Construction and Forestry and an 8% in Ag equipment is anticipated.

For the full fiscal year, worldwide production tonnage is forecast to be down 4%.

Putting these factors together on slide 35, for the first quarter 2007, we expect company wide net equipment sales to be up about 5% with net income of about 150 to $175 million.

For the year, we're forecasting net equipment sales to be roughly flat with fiscal year 2006, including about one to two points of price realization.

The estimated net income is around $1.325 billion for the year.

In summary, Deere has completed another year of strong financial and operating performance with record earning as we continue to demonstrate the strength of our shareholder value-added model, and our focus on rigorous asset management should enable us to take full advantage of the positive prospects that await us.

And please note on slide 36, we indicate our first quarter 2007 earnings release and related conference call is scheduled for Wednesday, February, 14.

This is a change from our previous practice of a Tuesday release, and going forward, we plan to maintain a Wednesday release date.

Marie?

Thank you, Tony.

We are now ready for the Q&A session and the operator will give us instructions on the polling procedure.

As usual -- and I really do ask that you follow this -- please limit yourself to two questions and you are welcome to get back into the queue as time permits.

With that, Laura, would you please give us instructions?

Thank you.

We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Andrew Casey and please state your company name.

Wachovia Securities.

Good morning everybody.

Good morning.

And happy Thanksgiving.

Quick couple of questions [TECHNICAL DIFFICULTIES]

There are a couple of factors at work here.

One is that we sell products that we do not produce.

The tonnage numbers that you see reflect only the weights of our actual production because that's what affects our absorption.

So you have a difference, as a result of that.

And in addition, you have mix issue because of course we see weakness in housing related sectors, so that would tend to be a little smaller equipment and that doesn't have necessarily the same dollar value.

Secondly, in terms of the tonnage numbers, for the full year, for the worldwide division, construction is down 11%.

North American Ag construction is down 16% in the first quarter.

Excuse me, C and F. I'm sorry.

Sorry about that.

C and F. The way we see production shaping up for the full year is that we would expect it to be light in the first and second [TECHNICAL DIFFICULTIES] that unfortunately happens sometimes at year-end, so that's just one of those things that will clear in the first quarter.

If that's your question.

It is.

Thank you.

Thank you very much.

Next.

Thank you.

Our next question comes from Ann Duignan and please stay your company.

Hi, good morning.

It's Ann Duignan, Bear Stearns.

Good morning, Ann.

[TECHNICAL DIFFICULTIES] talk for a few moments about your outlook for commodity prices.

Your 06/07 outlook for corn is $2.95, and yet the USDA November raised their midpoint to $3.00.

And then you 07/08 is $3.05, which looks quite conservative versus the futures prices outlook.

Could you give me a little bit of color on your logic for corn prices?

Are you expecting a big pickup in production or how should I think about that?

No, actually, we are not looking for huge pickup in production.

One thing you need to bear in mind is that those futures prices do not translate always into what the farmers get.

There is at minimum a $0.20 difference between what's in the futures price and what they're going to bring to the farm.

There obviously is some room, it's very early in the year.

We are looking -- we prepare our own estimates of commodity prices in conjunction with a consultant, so it's not only a Deere view; there is some external factors that that is, at this moment, our best estimate.

So you're saying there's more likely upside to these numbers than downside?

I certainly can't say that, but based on the future prices, obviously that would look interesting, but again, that's not within the base case.

And I do appreciate the base. [INAUDIBLE] That's fine.

My second question then is on your share repurchase program.

You've only got about 10 million shares remaining in your current program, yet you repurchased about 17 million this year.

Can you tell us when the next opportunity will be for the board to maybe approve another program or do you anticipate requesting further approval for more share repurchases?

We probably won't comment on that right now.

Obviously our board meets every quarter and we do have some left from the prior authorization, but we're not going to be giving any kind of a time frame with respect to the share repurchase now, just as we have not in the past.

But given your cash position, would it be directionally correct for us to think that you will continue to repurchase shares at somewhere at the same pace as you have been for the last two years?

I would comment that we do have still a significant cash position and we do continue to demonstrate an ability to generate cash from the operations and that really is truly our aspiration. [TECHNICAL DIFFICULTIES]

Thank you.

Marie: Next.

Thank you.

Our next question comes from Mark Koznarek.

Please state your company name.

Cleveland Research.

Good morning.

Good morning, Mark.

Hey, question about the working capital reduction next year, kind of two dimensions of it.

One is that on the construction side of the business, you say you're going to try and reduce receivables by a hundred million dollars, and then also in a separate slide, you have $100 million negative impact on operating income, so can you square those two for me?

They're kind of separate factors.

First of all, maybe to help you as you're doing some of your modeling, when you're thinking about those reductions in receivables and inventories, right now -- again, this is our first look at fiscal 2007.

We're just looking for all that to come out of receivables at this point.

The $100 million, in terms of the impact on operating profit, really relates to the fact that you have tonnage down 11% for the full year in a division that has been performing at a very high level and so there's a meaningful impact as you take that production down.

But they are somewhat related?

I mean, the $100 million is more or less a measurement of the under production, is it not?

The $100 million again --

In receivables and inventories?

No, that's really -- the $100 million in receivables -- if you think of it coming out of receivables, that's really an opportunity cost of not producing.

They're kind of different things.

Go ahead, Mike.

With margins and absorption, is how I would say it.

Margins on the incremental sales and also on the inventory it's the absorption; it's the sum of the two.

If you're looking at the opportunity cost.

But the $100 million in operating profit just looks at the impact -- the difference between '06 and '07.

OK.

And because in Ag we're going to be under producing retail, as well, can you offer a similar kind of estimate for the opportunity cost impact on operating income?

You know, it's not a very large number this particular year.

I don't actually have the calculation.

We were focused on Construction and Forestry, but it would not -- it would be maybe 10, 15 million.

It's not very big.

Maybe I should follow-up offline because I'm still kind of puzzled as to why, with a similar reduction and under production that's going to help to drive that inventory reduction, there's so much of a difference than between --

But remember that Ag, Mark -- to help and for the sake of the audience -- remember that construction tonnage -- or excuse me, Ag tonnage this year was down 11%.

In contrast, Construction tonnage was actually up 19, so you're working from one division at a relatively lower level verses the Construction division, which has been very high.

Oh, I see.

OK, yeah, that makes it --

So you're really looking at very different bases.

Yeah.

OK, now I understand.

Mark, this is Tony.

Just to clarify, too, that Construction and Forestry number includes impact from [TECHNICAL DIFFICULTIES] lower shipments, as well, so keep in mind, we're forecasting lower shipments for next year.

OK.

Great.

Thanks very much for that.

Thank you.

Our next question comes from Barry Bannister and please state your company name.

It's Barry Bannister, Stifel Nicolaus.

How are you?

Very good, but probably better than you sound.

[TECHNICAL DIFFICULTIES] Given this incredibly system wide focus of the organization on reducing inventory and under producing if volume surprises you on the upside?

Well, we've actually had a test case of that.

In 2004, if you recall, the industry was up sharply.

It happened starting in the month of January.

And if you recall, Deere performed extremely well and we credit that, frankly, to the flexibility we have now in our operations, as we work to flex up and flex down.

We have the flexibility [TECHNICAL DIFFICULTIES]

To be more nimble and able to respond has been a huge focus across the entire organization.

I remember the call and I remember -- I think thing John asked the question -- and I think what came up in the answer was that your incremental margins were huge that year on high horsepower because you were coming off a low point in CS, huge incrementals on that sales delta if I recall.

Was that correct?

Intuitively, that would be correct, yes.

OK.

And then related to that question about turning on a dime, I looked at your EBIT ROIC on a consolidated basis since '01 and compared it to CAT's and you've both done an average of 11%, which is good, but you're already getting a 14.5 multiple on EBITDA EBIT and CAT's at 13.2 so you're already getting credit for return on capital focus.

I know this is heretical inside Deere, but why are you continuing with such a rampant focus on [TECHNICAL DIFFICULTIES] ROIC when you're already getting market credit for it and now it may be time to start talking about growth rather than shrinkage?

Well, if you listen to our commentary as we described the SG&A, we talked about -- and our R&D -- we talked about the impact really, throughout 2006 and into 2007, of the cost of some of that growth, which shows up in higher R&D and SA&G.

So we are most definitely looking to the future.

And in Waterloo, again, we did discuss -- and those slides are out on the Internet for those who may have missed that -- we did talk about our growth opportunities, our growth process, our desire to enhance the entire process.

Mike, do you want to add?

I think that would be one of the key takeaways from the meeting in Waterloo was the focus we have, in addition to the excellence and the operating performance, is having sustainable disciplined [SBA] growth.

And we have more focus on it and more resources devoted to it throughout the Company right now.

But having said that, we still are very focused on asset management because we are still fairly new at the game, in terms of how we can better manage our businesses to run with lower levels of inventory and inventories out in the field, as well.

And that's actually an our customers' best then customers get product that is designed to their specifications and get did it when they want it, so we think that it's a win for our customers.

It improves our returns and obviously a win then for our shareholders, as well.

OK, Marie and Mike.

Thanks.

Thank you.

Next question please.

Thank you.

Our next question comes from Alex Blanton and please state your company name.

Yes, Ingalls and Snyder.

Good morning.

Hi, Alex.

Is this the first time you've used these sites?

Yes, this is the first time we've had slides on the call.

OK, that's a great advance.

These are great slides.

We thank you.

And please continue.

We will.

It keeps us from doing a lot of excess writing.

Now, I wanted to ask you about some incrementals quarter over quarter in the Construction and Forestry.

Did you say that there was a $22 million closing cost in the quarter?

Yes, on operating profit.

OK, that's about $0.07, right? something like that?

That's a pretax number.

Operating profit is pre-tax.

Yeah, so that would be about $0.07 a share on a net basis, I think.

In the quarter --

There's that additional supplement on slide 4, it has the after-tax impact.

Roughly $0.06.

$0.06, OK.

All right, so even subtracting that from -- [TECHNICAL DIFFICULTIES] or adding it back to the results on page 9 -- or the first page of your tables, you have a negative incremental margin of 39% quarter over quarter in Construction and Forestry on a sales decline of 249, you've got about $98 million lower operating profit.

So that seems a little excessive.

Can you comment on that?

Why was that?

Was that an inventory reduction taking place that hurt your absorption or what?

One thing that did happen in the quarter in that division is that they continue to see higher [INAUDIBLE] prices because they are big users of [INAUDIBLE] And so in the quarter, their price realization was basically [TECHNICAL DIFFICULTIES]

OK.

Now, the second question is relating to these high crop prices that you [Barry] about.

I mean, historically, your stock has done very well when crop prices have gone up and there's a direct correlation there because it's assumed that your sales will do well, yet you're not forecasting any sales increase to speak of.

What leads you to think that there's going to be a lag between the prices going up and farmers spending the money?

Well, first of all, farmers really haven't realized very much of that money yet.

They will be selling their crops over the course of this year and they will benefit from those higher prices over the course of this year. [TECHNICAL DIFFICULTIES] On our econometric modeling that cash receipts affect current-year purchases, as well as the next year purchases, so it's really sort of a lagging variable.

So while it looks very encouraging as you move into future, it doesn't help you in the very immediate term.

Also, we know from talking to our dealers, that they are focused right now on clearing some of those used goods inventories.

We talked about the fact that we had $200 million more in used inventories - this is in North America -- than we did a year ago.

That is down from the 250 it had been earlier in the year, but it's still higher than desired and so we know anecdotally they're focused on that.

The other factor that we continue to hear is higher input costs, concerns over that, and then of course we also cited a little bit of uncertainty over the farm bills.

We think with the run in commodity prices being so recent, it will take some time for our farm customers to feel comfortable that these prices are sustainable.

As you move into the summer, we see a good growing pattern, you see these prices holding, I think you might see a different tone in the market, but it's just premature at this point to anticipate that.

So our forecast does call for a little bit of improvement in the second half versus a fairly quiet first half and we'll see how things go from there.

They don't lock in -- don't they sell into the futures market and lock in their profit?

Only about 15 to 20% -- the least historically -- of the crop is sold forward in the U.S. and we have, again, worked with our consultant and we don't really have better numbers.

You would expect that there is some forward selling going on, but we have no way of quantifying it, and again, we're not picking it up in our conversations with our customers.

Mike, I think you want to add something.

I think you've said it very well, but I think the other factor, from an individual farmer perspective, is a lot of times they like to get some confidence that they had a reasonable chance of a good crop to sell, in addition to the price.

So I think that, to some degree, accounts for the lag.

OK, thank you.

Thank you, Alex.

Next question please.

Thank you.

Our next question comes from Joel Tiss and please state your company name.

Hi, I'm still at Lehman Brothers.

How are you doing?

Hi, Joel.

Two sort of cleanups and then a question.

Can you give us a little bit of detail between the mix in the finance business between Ag and Construction?

And also on the inventory receivable reduction, can you give us a mix -- a breakdown between inventories and receivables?

For fiscal 2007, the reduction in inventories and receivables for now in our forecast has it all coming out of receivables.

Is that what you wanted to know about 2007?

Yes [TECHNICAL DIFFICULTIES]

OK.

And I'm sorry, the first question was?

Finance.

Finance mix.

I don't know that I have anything with me.

Let's see if I've got the portfolio.

While Tony is looking, Joel, why don't you ask your other question and we'll get back to you.

OK, the last question is can you give us your free cash flow estimate, or just sort of a ballpark for 2007?

I can tell you a couple of the factors that we'll be thinking about.

Depreciation this year -- depreciation and amortization was more like 400 in equipment operations and for next year [INAUDIBLE] new facilities it's maybe 425, 450. [TECHNICAL DIFFICULTIES]

Hi, good morning credit [INAUDIBLE] .

Hi, Jamie.

Hey, quick question, Marie.

First, on your outlook for the Commercial and Consumer Equipment division.

You know, you're talking sales up I think about 4% or so.

Can you just give me a little background on what you're thinking about consumer spend for 2007 and how much is increased primarily new products in the landscape area?

That's a very good question.

Of that 4% sales gain, we see about half that coming out of landscape and then the other half, actually, driven by new products that will be launched -- or that have been launched.

We've got some new products going into Europe; our Select Series, which has been available in the U.S.

We've got a Rear Discharge that will be coming out for that market in the U.S..

We have a zero-turn radius machine for residential customers, and then a heavy duty utility vehicle and we think those products will help mitigate, if you will, a weaker residential market.

OK, and I'm assuming those products would create a more favorable mix, as well, in terms of profitability?

You know, their profitability doesn't call for a huge change; just something that would be more in line with what you'd be seeing for sales.

Just a comment, on the residential zero turning radius mower, this has kind of been a product we've been needing in our lineup for a little while for really addressing what has been a hole in our lineup and we think we'll get incremental sales with that product.

OK, and then just my follow-up question, Marie, you spoke a little bit -- or you commented on the 2000 Farm Bill up for renewal and that could create some uncertainty in the farmers' mind.

I guess any thoughts on that we have a Democrat-controlled Congress, how you think that impacts the Farm Bill for '07?

Deere would not --

I'm sorry.

Deere, not you, Marie. [LAUGHTER] You are the face of Deere.

Deere would not have a lot of commentary about this.

There is a lot at play here, whether the Doha gets resumed.

You are looking at a pretty good financial situation for farmers.

You've looked at a farm legislation that's been pretty successful, the past farm legislation.

So there's a confluence of events that make it just very hard for us to estimate what any potential outcome might be.

One thing I should point out is that in our farm cash receipts estimates, bear in mind that the current farm legislation does run through this crop year, so we have not had to make any heroic assumptions about what might happen in future years because we're still operating under the current Farm Bill.

Okay, great.

Thank you.

Thank you, Jamie.

Next questioner?

Thank you.

Our next question comes from David Bleustein and please state your company name.

Good morning, it's UBS.

Let me start with a comment.

Wow!

OK, now the question.

The net pricing -- is the net pricing that net of discounts or net of raw materials?

That's a fair question.

Our net pricing is net of discount.

So it's list price and any changes in discounts.

Raw materials is treated separately.

OK, terrific.

Can you talk about your expectations for 2007 planted acres for corn, wheat, and soybeans?

Yes I can.

In our base case for corn, just for comparison, in '06 we had 79.4 million acres.

Our forecast has 84.5 million acres planted.

Wheat, for the '06 crop year, 58.7; next year 58.5.

Beans, 74.9 and for next year, 71.5.

OK, how about acres coming out of the [CR[]?

Do you have a forecast?

Pardon?

How about -- how much acreage --

You know what?

Tony just pointed out I read the wrong number.

It only matters for wheat.

Let me start over again.

Sorry about that.

We have our previous forecast column and that's what I read.

Acres planted: corn -- again let's start with -- in '06, 78.6 and for next year, 84.4.

Wheat, 57.3 and 62.1.

Soybean, 75.6 and 70.

That makes a lot more sense.

We don't have anything coming out of the CRP at this moment and it's very unclear whether anything really will end up coming out or not.

And your next opportunity would really not be in 2007 anyway; it would be in 2008 because those are the contracts that are up for renewal and you haven't gotten a strong signal one way or the other whether there will be any movement to allow farmers to break contracts early.

One other thing that you need to bear in mind as you think about what might come out of the Conservation Reserve acreage -- and this is a Keith Collins comment, who's the chief economist for the USDA -- a lot of that land that's in there is highly rotable.

It's in there really for a very sound reason, so if you look at what potentially could come out, you're going to really be talking about land maybe like up to 7 million acres.

If we see major increases in planting of corn, it's likely to come at the expense of soybeans.

Farmers typically are in a crop rotation that would be every other year beans and corn, and what they may choose to do is have a corn/corn/bean rotation, so you would free up some acres at the expense of soy beans and put them into corn.

OK, and then the final one is the combine order board, what does that look like right now?

You know, it's very early in the early order program, because that'll run through the end of January.

It is consistent, at this stage of the game, with an outlook that is flattish.

Consistent with --

It's a very early.

Consistent with weak first half, but big second half.

So in theory, you are seeing some strength in the combine order board already?

No, the order book, again, is really more consistent with a flattish outlook, but it's very early and in the past, we've tended to get a lot of our orders in the month of January, so stay tuned for further developments.

Terrific.

Thank you.

Thank you.

Next question.

Thank you.

Our next question comes from David Raso and please state your company name.

CitiGroup.

Just one quick question.

Tony made a comment about Brazil.

The retail guidance seems still pretty soft, but a comment about seeing some signs.

And you also now gave a bean acreage number in the U.S. that will make the Brazilian soybean farmers happy if that comes to fruition.

To me, the real decision's going to be when you're really comfortable that the market is going to turn, you are going to finally start up the new plant in Brazil?

Can you give an update on your thoughts on that plant; when you're going to start it up?

That plant is scheduled to start pilot production this summer and then start gradually moving into regular production in the second half of the calendar year, so sometime in the fall we'll get moving on that.

While we always have the flexibility to make another decision, right now that is our base case, assuming a market that stays relatively weak.

The farmers are right now planting their crops in Brazil, so if you do end up seeing prices holding firm into the future, you really do get a better feeling as you move into, like, 2008.

Our outlook is based -- or our caution, if you will, that down 10% -- is really based on the fact of uncertainty over what will happen with [INAUDIBLE] program and payments that are due in 2007 following two years of payment deferrals, and that's why we're cautious on the market.

OK, and one quickie one.

Construction, trying to figure out the margin issues in the fourth quarter.

You said essentially price versus input costs, the raw material costs were pretty much a push.

The mix [INAUDIBLE] plays a big role, the product that you are sourcing from [INAUDIBLE] and so forth I guess carry lower margins than what you produce.

Sure, because we don't get the manufacturing margin on that.

Exactly.

Can you help us understand, looking at '07, the comment about operating income down 100 million -- that's not really that helpful; obviously it will be down a least 100 million.

Just trying to think through the production cuts in some of your plants verses a source product.

Can you help us -- a little bit and describe it as you wish -- on the mix issues for '07, trying to better grasp your profit hit on construction?

If the tonnage helped, should we expect the source products --

The source product will also be down in 2007, but it does tend -- the source product tends to be a little bigger unit, because of the fact that those don't tend to be used as heavily in the housing market; they tend to have a more diverse market.

So that would be at the margin, maybe a little positive.

But again, we thought it was important that you understand that with the tonnage down 11%, you are looking at a hit of about 100 million.

I don't really have anything more to add, David.

And pricing versus cost then, within construction next year?

Push.

Push?

OK.

Thank you very much.

Thank you.

We have time for one more question.

Thank you.

Our next question is a follow-up from Ann Duignan.

Please go ahead.

Yeah, just a follow-up on your anticipated corn [INAUDIBLE] forecast for '07/'08.

What are you anticipating in terms of acres planted in '07/'08 or do you have that fine of detail yet?

Well, the acres planted for 2007/2008 for corn would be the 84.4 million.

For wheat, 62.1.

Soybean, 70 million acres.

Isn't that '06/'07?

No, that's '07/'08. '06/'07 for corn was 78.6.

OK.

But if we plan for 84 million acres, we will be effectively out of corn given the acceleration in [ethanols]?

In our forecast, we have the U.S. ending next year at 787 million bushels.

That's again, in our forecast.

OK, and the following year --

Assuming that yields for next year, in our forecast, for corn, are 158.

OK, I've got 155 in mine, so you're assuming a continuation of yield improvement.

Yes, we are.

But Ann, I think your point is directionally correct.

This draw down -- draw down this year almost one-half of what we had a year ago and this will be yet another draw down.

Yes, because we're looking at, by the time we get to '08/'09, we would have to plant 90 million acres in order to break even; to have zero carryover.

I've certainly seen estimates that suggest that, absolutely.

So either you're planted acreage will likely go up or the price will have to go up in the out years.

Is that directionally what you're thinking, also?

If we need 90 million acres, then you would expect to see price moving up to attract those acres in to help offset from the higher production costs from producing corn versus beans.

OK, and then just one real quick follow-up.

SG&A expected to be up 7% in '07, 3% of that is growth related?

Yes.

What's the remaining?

Should we start worrying that you're getting layers of bureaucracy?

Well, some of us would actually kind of like to get a raise and it does reflect a little bit higher health care -- not hugely higher -- so it's those kind of things.

Ann, your point is a good one.

We do have a lot of focus on trying to make sure that we have good cost control and SA&G and it's an ongoing area of focus for us.

OK.

Because I always get concerned when volume starts to grow, non operating line items grow faster.

OK, thank you very much.

I'll leave it at that.

Thank you.

Goodbye.

And to all, thank you for participating in today's conference call.

Tony, Susan, and I will be around the rest of the day to answer your follow-up questions.

Thank you.

This does conclude today's conference call.

We thank you for your participation.