強鹿 (DE) 2007 Q2 法說會逐字稿

Welcome to the second quarter earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms.

Marie Ziegler, Vice President of Investor Relations.

Please go ahead.

Good morning.

Also joining on the call today are Mike Mack, our Chief Financial Officer; Tony Huegel, and Susan Carlix, both from our Deere Investor Relations staff.

Today we'll take a closer look at Deere's second quarter earnings and then spend a few minutes talking about our markets and where things are headed for the rest of the year.

After that we'll respond to your questions.

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

They can be accessed on our website 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 and 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 these forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent form 8-K and periodic report filed with the Securities and Exchange Commission.

The Company, except as required by law, undertakes no obligation to update or revise its forward-looking information.

This call also may include financial measures that are not in conformance with Generally Accepted Accounting Principles.

Additional information concerning these measures, including reconciliations to comparable GAAP measures are posted on our website at www.deere.com/financialreports under second quarter 2007 reports.

Call participants should consider the other information on risks and uncertainties and non-GAAP measures in addition to the information presented on this call.

Now before we talk about our second quarter 2007, let's look back at the second quarter of 2006.

On slide 3 of the presentation, you'll find supplemental data related to fiscal year 2006.

Our second quarter results last year included three items of interest.

First, we completed the sale of our managed care subsidiary, John Deere Healthcare Inc.

This discontinued operation added $228 million of net income to the quarter last year.

Second, also in the second quarter, we redeemed about $500 million in outstanding debt at a pretax cost of about $70 million and this was reported in other operating expense or on an after-tax basis this would be $44 million.

Finally, we had minor charges in the second quarter related to the closure of our factory operation in Woodstock, Canada.

Now for a closer look at the second quarter of 2007, here's Tony.

Thanks, Marie.

This morning Deere reported second quarter net income of $624 million on equipment operations net sales of $6.3 billion.

As shown on slide 4 of the presentation.

On a continuing operations basis, income increased 21% and diluted earnings per share rose 25%.

On slide 5, second quarter total worldwide equipment sales were up 4% compared to the prior year quarter.

However, shipment volumes were flat in the quarter as price realization was about 2 points with about 2 points related to positive currency translation.

Sales in the U.S.

and Canada were down $140 million in the quarter as higher sales of agricultural equipment were more than offset by lower construction and forestry equipment sales.

Outside the U.S.

and Canada, sales were up $377 million in the quarter as reported, roughly a third of this increase relates to currency.

Also, Agricultural Equipment sales were higher in Western Europe as well as in the emerging markets of Eastern Europe and the commonwealth of independent states countries, including Russia.

Sales of the forestry equipment were also higher in Europe and we're beginning to see recovery in the sales of Agricultural equipment in South America.

On slide 6, we've provided a table with production tonnage data, both actual and forecast.

You'll note that third quarter 2007 tonnage for the worldwide equipment operations is expected to be up 5%.

In the U.S.

and Canada, ag tonnage is forecast to increase 16%, while C&F tonnage is anticipated to decrease 23%.

For the full fiscal year, worldwide production tonnage is now forecast to be up 2% versus our previous forecast of down 2%.

Regarding our company outlook, let's turn to slide 7.

For the third quarter 2007, we expect company-wide net equipment sales to be up about 5%, with net income of 400 to $425 million.

For the full year, we are now forecasting net equipment sales to be up about 6% compared with fiscal year 2006 versus our previous guidance of up slightly.

This includes 1 to 2 points of price realization and about 2 points of positive currency translation.

The estimated net income is around $1.55 billion for the year compared to our previous guidance of around $1.4 billion.

Let's turn now to a review of our individual businesses, starting with Agricultural equipment on slide 8.

For the second quarter, Deere's worldwide ag sales were up 14%, including approximately 3 points of positive currency translation.

Operating profit improved 26% in the quarter to $487 million.

As the division continues to benefit from positive price realization, improved operating efficiencies with worldwide tonnage up 7% in the quarter, and improved product mix with strength in large tractors.

Somewhat offsetting these factors was higher SA&G expense in the quarter with over $15 million of this increase attributable to growth initiatives and currency transition.

Looking forward global ag fundamentals are encouraging.

Worldwide stocks to use ratios remain at very low levels for corn and wheat.

In fact, with the initial 2007, '08 USDA projections released last Friday, worldwide demand for corn is expected to outstrip production in seven out of the last eight years, and six out of the last eight years for wheat.

These factors support crop prices, which remain at strong levels.

The current Deere estimates for U.S.

commodity prices are on slide 9 with corn increasing to $3.40 for 2007, '08 and $3.55 for our initial 2008, '09 estimate.

Our estimate for soybean prices was adjusted to $6.65 for 2007, '08 and is $6.85 in 2008, '09.

For wheat we've increased our estimated prices to $4.40 for 2006, '07 and $4.25 for 2007, '08.

The initial 2008, '09 estimate is $4.30.

As expected based on strong demand and related prices, planted corn acreage in the U.S.

is expected to rise for the 2007, '08 crop.

On slide 10 Deere estimates 89 million planted corn acres for 2007 '08, an increase of over $10 million acres from 2006, '07.

You'll note this is lower than the USDA estimate of 91 million acres released last Friday.

However, our yield estimate of 152 bushels per acre is higher than the USDA with production about the same.

As a result of the increased corn acreage, soybean plantings are expected to drop to 69.5 million acres for both 2007, '08 and 2008, '09.

These factors are reflected in our estimates of U.S.

farm cash receipts, as shown on slide 11.

With total cash receipts for 2007 at $272.4 million, a $12 million increase over 2006, driven mostly by higher cash receipts from crops.

Our outlook for industry sales of agricultural equipment in the U.S.

and Canada as shown on slide 12 is now up about 5% for fiscal year 2007 versus fiscal year 2006, an increase over our previous outlook of flat to up 5%, reflecting continued strength in large tractors.

And our outlook continues to anticipate strengthening in the overall agricultural equipment market throughout the second half of '07 and into fiscal year 2008.

In Western Europe, shown on slide 13, our current outlook is for industry sales to be flat to up 2% for the fiscal year, compared to our previous outlook of about flat with strength in the overall farm sector primarily due to higher commodity prices.

The press release indicates concern over potential drought in France, Germany, and Italy.

While this region has recently received some rainfall, it has been very dry in the early spring and weather issues, as always, bear continued watching.

Sales are expected to be higher in Eastern Europe and the commonwealth of independent states countries, including Russia, due to continued market growth in that region.

Slide 14.

In Brazil where retail activity is clearly improving, farm income is now expected to increase to $5.8 billion in 2007 compared to a break-even 2006, due mostly to the expected strength in the commodity markets.

In particular soybeans and corn as well as continued strength in sugar cane.

Slide 15.

Driven primarily by these improved conditions in Brazil, our outlook for South America now calls for sales to be up about 20% in fiscal year 2007 versus our previous outlook of flat to up 5%.

How does all this impact our outlook for worldwide sales of John Deere farm machinery?

As shown on slide 16, we now project Deere sales to be up about 13% for the year, including approximately 3 points of currency translation versus our previous outlook of up about 8%.

Production tonnage is expected to be about 11% higher in the year versus our previous projection of up about 4%.

Our global agricultural equipment markets are clearly beginning to gain momentum and the strength in economic fundamentals should help carry this momentum well beyond fiscal year 2007.

Let's move now to our commercial and consumer equipment business on slide 17 where reported sales were flat in the quarter with positive price realization offset by lower shipment volumes.

However, operating profit rose 18% to $150 million.

In addition to positive price realization, the quarter benefited from favorable product mix, including strong sales from our new residential zero turn radius mowers.

As indicated on slide 18, we closed on our acquisition of LESCO Incorporated on May 7.

LESCO, with a customer base in excess of 130,000 landscape and golf course professionals will be consolidated into our current John Deere landscapes business and will provide significant synergistic opportunities, including increased consumable sales through our existing John Deere landscapes outlets.

The anticipated financial impact on the second half of 2007 from the LESCO acquisition includes additional net sales of about $350 million, approximately $120 million of which will be in the third quarter and around $230 million in the fourth quarter.

The operating loss is expected to be about 5 to $10 million, mostly impacting the fourth quarter.

Forecasted SA&G expense is about $70 million and trade receivables and inventories at 31, October are anticipated to be around $150 million.

Turning to the full-year commercial and consumer equipment outlook on slide 19, we now anticipate sales up about 11% for 2007, including the impact of LESCO.

Contributions from new products, like our residential zero turn mowers and the XUV Gator utility vehicles are also contributing to improved sales in an otherwise slower market.

Let's focus now on construction and forestry on slide 20, where sales were down 12% to $1.45 billion in the quarter, with weakness in the U.S.

and Canada being offset somewhat by strength in sales outside the region.

Operating profit was negatively impacted by lower sales volume and raw material cost increases.

The resulting operating profit was $192 million versus $274 million a year ago.

Turning to the outlook on slide 21, our net sales of CNS equipment are now forecast to be down about 11% for the year versus our previous outlook of down about 9%.

While the forestry equipment market is anticipated to be strong in Europe, as are sales of construction equipment in Mexico and South America, lower U.S.

and Canada sales will more than offset this strength.

As the construction and forestry equipment markets in this region continue to be weaker than a year ago, both still at good levels.

This is due in part to the weaker residential construction market.

Our forecasted 2007 U.S.

housing starts are now anticipated to be around 1.4 million versus our previous estimate of about 1.5 million.

Also, spending from independent rental companies on our types of equipment is down significantly this year.

Note the detrimental margins on reduced sales year-to-date is about 45%.

Our forecast anticipates similar detrimental margins for the full year.

Moving now to our credit operations.

The press release again talked about the impact of higher credit losses on credit net income for the quarter.

Slide 22 shows a historical chart of our provision for credit losses as a percent of our average-owned portfolio.

As you can see, while our provision for losses is higher, it remains at a very low rate.

As you see on slide 23, credit reported net income in the quarter of $86.6 million up from $81.4 million a year ago.

Our forecasted credit net income for the year remains at about $355 million.

Slide 24.

On our statement of cash flows for the equipment operations, you'll note a significant change in the undistributed earnings of unconsolidated subsidiaries and affiliates between 2007 and 2006.

This change is largely due to higher dividends of about $320 million paid by credit during the first half of 2007.

This includes a $230 million special dividend paid during the second quarter of 2007.

This special dividend is a result of increasing the leverage of our U.S.

retail portfolios to a ratio of 10 to 1 versus our previous 8.5 to 1 bringing our overall target leverage to 8.5 to 1 debt to equity.

At our current rating, the rating agencies have indicated this higher level -- higher leverage is supportable, reflecting the low, historical losses and overall performance of our credit operations.

Before moving on to retail sales and housekeeping, let's look at receivables and inventory.

This marks the 28th consecutive quarter where we have reduced trade receivables and inventories as a percent of sales when compared to the same quarter in the prior year.

This data is shown graphically on slide 25.

Slide 26 lists the change in receivables and inventory at the end of second quarter 2007 versus the second quarter 2006 by division.

You'll note that reported trade receivables in inventory at 30, April were $140 million lower than a year ago.

On a constant exchange basis, this reduction is an impressive $300 million.

Our fiscal year 2007 goal on slide 27 now calls for a $150 million increase in inventories and receivables versus our previous goal of a $100 million reduction.

By division ag anticipates an increase of about $175 million, reflecting anticipated improvement in agricultural equipment markets beyond financial year 2007.

C&CE is now forecasting an increase of about $100 million, reflecting anticipated improvement in agriculture equipment markets beyond fiscal year 2007.

C&CE is now forecasting an increase of about $100 million, a change in our previous guidance of flat due to the estimated $150 million in inventory and receivables from LESCO, and C&F expects to reduce receivables and inventory by about $125 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 quarter was up a seasonal digit on a current dollar basis.

Slide 28 shows the product category detail for the month of April expressed in units.

For utility tractors, the industry was up 7%.

Deere was down a single digit.

Row-Crop tractors, the industry was up 14% Deere was up double digits, but less than the industry.

Four-wheel drive tractors, the industry was up 40%, Deere was you believe double digits but less than the industry.

For Combines, the industry was down 24.

Deere was down more than the industry.

Our field inventories in the U.S.

and Canada remain in very good shape as Deere inventories at the end of March remain below industry levels in each of the categories just cited, except for four-wheel drive tractors, where Deere inventories were in-line with the industry.

On slide 29 you see that for row crop tractors, Deere ended April with inventories at 23% of trailing 12-month sales versus 22% a year ago.

Combine inventories remain at extremely low levels, just 8% of sales versus 10% at the same time last year.

Turning to slide 30, in Western Europe, sales of John Deere tractors were up a single digit in April while Combines were down double digits.

Moving to slide 31, Deere's retail sales of commercial and consumer equipment in the U.S.

and Canada were flat in April.

Construction and forestry sales in the U.S.

and Canada were down double digits on both the first on the dirt and settlement basis.

Now let's touch on a few housekeeping items.

Regarding raw material and freight, let's move to slide 32.

In the second quarter these costs rose approximately $70 million versus last year.

Our fiscal year year 2007 now includes an increase in raw material and freight of about $200 million, basically unchanged from our previous forecast of 175 to $225 million.

By division the breakdown is now about $75 million for ag, $25 million for C&CE, and around $100 million for construction and forestry.

Looking at R&D expense on slide 33, spending was up 9% in the quarter and we're still forecasting an increase of around 11% for 2007.

This increased spending relates to our continued emphasis on new products and technology.

Moving now to slide 34.

SA&G expenses for the equipment operations was up 8% in the second quarter, including about 4 points related to growth initiatives and currency translation.

Our fiscal year 2007 forecast now includes SA&G increases of about 13%, including about 10 points related to our global growth initiative and currency.

Again, LESCO is included in the growth initiative, about $70 million.

Regarding the tax rate on slide 35, the effective tax rate for the second quarter was 31%.

For fiscal year 2007, our forecast now assumes a tax rate of about 33%.

Actual shares outstanding at the end of the quarter were $225 million, and average diluted shares outstanding for the quarter were $229.3 million, as shown on slide 36.

Slide 37 highlights the share repurchases as part of our publicly announced plans by quarter for fiscal year 2007 and fiscal year 2006.

During the second quarter 2007, we repurchased 3.6 million shares with an expenditure of about $0.4 billion.

At 30, April, approximately 4.6 million shares remained on our current authorization of up to 26 million.

Slide 38 provides some additional information related to our fiscal year 2007 forecast.

Capital expenditures are currently forecast to be about $600 million for the equipment operations.

Note that for financial services, forecasted capital expenditures includes roughly $550 million related to investments in wind energy generation.

Depreciation and amortization for equipment operations is expected to be 400 to $450 million and we now anticipate about $375 million in pension and OPEB contributions during the year versus our previous guidance of about $325 million.

Looking ahead, Deere is on track for another year of outstanding financial performance while our manufacturing and order fulfillment systems are helping us keep a right grip on asset levels.

All in all, we're confident Deere is positioned to benefit from powerful global economic trends.

Marie?

Thank you, Tony.

We are now ready to begin the Q&A portion of the call.

The operator will instruct us on the polling procedures, but as a reminder so that everyone has an opportunity to at least ask one question on the call, please limit yourself to one question and a related follow-up.

If you have additional topics you would like to cover, we ask that you rejoin the queue.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Ann Duignan and please state your company name.

Hi, good morning.

Bear Stearns.

Good morning, Ann.

Good morning.

I guess my first question is, the operating leverage in the ag sector was a little bit lower -- significantly lower than we had forecasted.

Can you talk a little bit about what might be going on in agricultural that caused the margins to be a little bit lower than we had anticipated?

Is the pace of the investment in Brazil picking up or is a disproportionate amount of the $15 million spent on growth initiatives in ag?

Could you just give us some color on that?

I would be happy to.

I can't comment specifically, certainly, on your specific forecast, but I can tell you that it is true that we are spending some more on growth.

You correctly cited Brazil as a factor.

We've talked about technology, you've seen some of our AMS -- autotrack I think you saw at our last dealer meeting in water -- or analyst meeting in Waterloo.

So there's a lot of investment in those areas.

We've got expansion opportunities in other parts of the world as well.

Okay, as my follow-up, why did you feel the need to issue a special dividend from the credit organization to the parent?

Should we be concerned with the amount of cash on your balance sheet that -- not concerned but -- are you looking at acquisitions or any large investments?

No.

Got nothing to do with that.

Really it relates to how we look at all of the businesses relative to an SCA model.

This permits us to have a higher leverage at the credit company reflecting the low level of losses we had over time and also very clean portfolio.

So now we dig into the parent, of course, it permits us to do the things we've been doing with the cash, which is to continue to invest for long-term growth or return cash to shareholders or both.

But this frees up capital from the credit company and it's something we've been working on with the rating agencies for quite some time, so we're actually quite pleased with this ability to do this.

Okay, yes.

You were kind of underleveraged in that business.

Okay, thank you.

I'll get back in line or talk to you offline.

Thank you.

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

(Inaudible - audio difficulties)

Operator, we cannot hear David.

Sir, are you on a speaker phone?

Please pick up the handset if possible.

It's not any better.

Can you call right back in, sir?

I will, thank you.

Thank you.

Okay, we'll go to another questioner and then we'll bring David back.

Thank you.

Our next question comes from Andrew Casey.

Please state your company name.

Wachovia Securities, good morning.

Good morning.

Maybe this has to deal with what David was trying to ask.

On the Q3 guidance, are you expecting any nonrecurring or purchase accounting issues related to the LESCO acquisition?

In the third quarter, no.

Actually, LESCO does bring in about $120 million of revenue and we talked about the fact that basically it's actually break-even in the third quarter and it's a slight negative in the fourth.

Probably the one thing that we ought to bear in mind is that our raw material costs guidance for the full year remains basically unchanged at about $200 million and in the third quarter, at least as our forecast is currently construed, that basically offsets positive price realization in that particular quarter.

For the full year, we expect positive price realization.

We've achieved that in the first and second quarters, but in the third quarter we do expect that that would be a neutral.

Okay.

So basically 3Q you have net price realization, if you will, effectively zero and then summer shutdowns and then some weakness in U.S.

construction that might be dragging net income below last year?

And don't forget that our guidance on both R&D and SA&G would also call for higher expenditures as we've seen in the first part of the year as well.

Okay.

So just basically a temporary issue?

Yes.

Thank you.

Thank you.

We'll go back to David Raso.

Sir, your line is now open.

Yes, I apologize if I missed some of the earlier question getting back in queue, but my question was about the net income.

Trying to understand why the guidance in the back half is implying net income down 4, 5% year over year after you just put up growth of 11% in this quarter excluding the one-time items from a year ago?

Okay, first of all, David, Andy actually asked the question ahead of you regarding the third quarter specifically and in that question we talked about the fact that price realization in the third quarter, positive price realization is basically fully offset by raw material cost.

That's probably the piece you may not have fully factored on.

The other thing that does affect us really in both the third and fourth quarters is that R&D and SA&G are both up in both quarters and that does affect income.

Then I would point out, although construction continues to be very profitable, we have -- Tony talked about detrimental margins really for the full year and that would impact the third and fourth quarters of about 45%.

LESCO, further, if you're looking at sales, LESCO brings about $350 million of additional sales and it comes in in the back half of the year with 5 to $10 million operating profit impact cost which was expected at the time we made the acquisition.

I would add on the C&F, is we did make quite a lot of progress relative to managing the working capital in the second quarter.

So while we're stepping on the brakes hard in response to the softer retail demand, it's working and we're getting the assets back in-line where we want to have them.

What I think seems challenging is that worldwide the ag tonnage, the first half of the year it was up 3, 4%.

The full year, I believe you're looking for tonnage to be up 11.

So the back half tonnage will be up 18, 19% and I suspect the tonnage is improving in some relatively high-margin businesses.

Even your growth in the back half for ag on the top line is only 13 to 14%.

Why would tonnage be up 18, 19% and ag revenue only be up 13 to 14?

That's a fair point.

You may have noticed that we did increase our guidance for ending receivables and inventories.

Our previous guidance was flat and we are now saying up about $175 million.

And basically that's a result of looking ahead to what we at least at this point believe will be favorable market conditions in 2008 and it reflects some higher inventories.

That's the change.

The $175 million, essentially?

Yes.

Okay, thank you very much.

Thank you.

Thank you.

Our next question comes from Andrew Obin and please state your company name.

Merrill Lynch.

I got on the call just a little bit late.

I was just wondering if you guys made any specific comments about the order book going into the full selling season, particularly in North America?

I could certainly talk about availability for Combines in North America.

It is very difficult to get a Combine ahead of 1, September, which would be the fall harvest date and that's as a result of the way we run our early order programs.

If you look at large tractors, 8,000s availability is the end of July, 9,000s, which would be the big four-wheel drive tractors end of August, and then the smaller Row-Crops would be mid-August.

So are we setting up for the way we look at the order book right now?

Once again, I apologize if I missed it.

Are we setting up for a significant ramp-up in North America on ag equipment?

I guess we are, right?

Well, I think--.

The tonnage increase in the second half of the year should attribute most of it to North America, right?

Well, I think certainly North America is the larger market, but we've seen improvement certainly in all of our markets, South America.

We've made a significant improvement in our outlook in Brazil and then in Europe, in traditional Western Europe, we tweaked that outlook up.

We talked about we're seeing some good activity in emerging markets for us.

So it's really coming across the globe.

Just a follow-up question on construction and forestry, why are detrimentals so high on construction and forestry.

I thought we took a lot of fixed costs out of that business.

Is that a surprise to you?

I think it is -- no, it is absolutely not a surprise.

We are stepping on the brakes and stepping on them hard and that does make this look different than other times, but the key thing is that we are managing our field inventories and receivables or company-owned receivables very very appropriately for the weaker market conditions.

So if in a more normalized environment -- I mean, I guess I'm just sort of a little bit -- this reflects the fact that you're stepping on brakes pretty hard and that's where inefficiencies in C&F are coming from in terms of detrimentals, right?

That's absolutely true.

Over the long-term we would still look for a 30% incremental margin contribution over a period of time, but you're seeing the initial rapid response.

Thank you very much.

And to be fair, a tougher price environment in terms of their raw material costs up.

That is probably another change worthy of note is that in our previous guidance, we had talked about raw material costs for the construction equipment division being up about $75 million.

We've tweaked that up now, it's about $100 million, and in -- given current market conditions, it's going to be tough to offset.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Jamie Cook and please state your company name.

Hi, good morning.

Credit Suisse.

Good morning, Jamie.

Hey, Marie.

Just a follow-up on the comment you made about raw material prices and pricing just in the construction and forestry division.

You mentioned positive price realization on the other segments on C&C and ag, but you don't mention it in the construction and forestry whereas I think you got actual pricing in the first quarter.

Can you talk about that?

I understand the rising material cost, but are you able to offset -- I mean are you able to -- while you can't pass through all of it, are you able to get pricing in C&F, or has that market gotten worse?

Well, again, what's happened is we've seen our -- it's not that pricing has -- we've seen our estimates for raw material costs go up a little bit and at the margin for the full year, this division will not be able to offset that $100 million cost up.

Plate steel and freight costs, I think, are particularly challenging in this division and so as Marie mentioned, for this division we're going to see the material costs rise faster than the pricing.

Okay, but you are still able to get pricing?

There's a little bit of positive price realization, yes.

Okay, great.

Then just my second question on the ag side, can you talk a little bit, in North America anyway, on the used equipment market.

Where you're seeing in terms of availability and pricing on used tractors?

Pricing has stabilized.

You may recall that it had softened a little bit when we were having this conversation a year ago.

It's stabilized, we have seen a tremendous increase in the last 60 days in terms of people coming in and getting quotes and a lot of activity, so we're seeing turnovers starting to improve and the situation looks pretty good.

Thanks, I'll get back in queue.

Thank you, Jamie.

Next?

Operator?

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

It's David Bleustein with UBS.

You mentioned that the detrimental margins in construction equipment would be about 45%.

What should we expect for incremental margins in 2007 in the ag business?

Really, if you've got a target incremental for the balance of the cycle, however long that is, what should we expect on the way up in the ag business?

All things being equal, we would tell you 30%.

We have cited now the higher R&D as we are investing in new products for growth and higher SA&G coming from start-up of places like our factory in Brazil, our new factory in China, developing markets in other places of the world.

So they're incremental margins for the full year -- I think year-to-date, they're probably in round numbers, maybe around 20% and that's probably not a bad assumption going forward for this year.

Okay, terrific.

Then the other question, can you just -- can you talk a little bit about Deere's global aspirations with respect to its construction equipment businesses, touch on where you are in the relationship with Hitachi, and exactly how are you planning on looking at that business three to five years down the road?

I don't know that I have anything new to add to that business.

We continue to look at opportunities in that business as we do frankly in the other two businesses as well that will create positive return on our invested capital.

Again, our nomenclature for that is shareholder value-added.

That doesn't preclude us from doing many things in terms of where we are looking, but again, the bottom line is you have to generate a positive return on that.

I don't really have anything else to add.

We have a chance to highlight this business at the analyst meeting and you all had a chance to talk to senior management and they articulated the strategy there in quite some detail.

It's basically what Marie mentioned there.

Terrific, thank you.

Next question.

Thank you.

Our next question comes from [Robert Wurthiemer] and please state your company name.

Hi, it's Morgan Stanley.

And good morning, everyone.

Very quickly on the C&F side, you mentioned sales to independent retail channels expected to decline significantly.

Are you able to say, is that one or two customers or across the board and do you have a sense of whether the reason it's passed over by like a cycle or a declining use of the equipment?

Actually, their utilization remains very good and it is not just one customer, it's really across a broad specter of customers.

They had in the past few years updated their fleets and again, I'm speaking specifically of equipment in our sizes.

I'm not talking about other platforms or things that they might be buying.

So they have the opportunity with a little bit of market uncertainty to sit on the sidelines and we have seen our estimate when we last had our -- when we last had, we were talking about their purchases from -- again, this is an industry outlook, but being down about 25% and we're saying now down maybe more like 65%, because we're in the selling season and we are not seeing those orders come through.

That particular segment of the business is weak.

Perfect, thank you.

Just a quick one.

Do you have an estimate of the currency impact on operating profit in the quarter?

It was round numbers, about $30 million.

Thank you.

Thank you.

Thank you.

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

Good morning, it's Ingalls & Snyder.

Good morning.

Marie, the sales estimate for the year is up about $1 billion; is that correct from the last time?

About -- the sales estimate?

Yes.

In other words, instead of a slight increase in sales, you're now talking 6%, that's about $1 billion?

I had about 800, but that may be rounded numbers.

And the net income guidance is up about $150 million?

Well, now the sale -- before we go any further, though, remember that sales, $350 million of that increase comes in--.

Well, that was my next question.

Was LESCO in your prior guidance?

I know it was announced--.

No.

It was announced five days after you reported the last quarter, but that doesn't mean it wasn't in the guidance.

No, it was not in the guidance.

Until we actually closed on it, we would have not included in that our guidance.

So the sales, you're saying, is up 800, that includes 350 from LESCO, so that's 550 without that.

And you've raised the net income by 150 which is -- what?

That's 450.

450, right.

450 and you've raised net income by 150, which only includes a small amount from the acquisition.

So that's a--.

A decline.

The other thing is that the currency is a factor, our outlook for currency has changed some.

And of that sales increase versus our previous guidance, currency is probably another 125 million of that sales increase, so you might choose to back that out as well.

Well, I'm just looking at the incremental.

Taking the guidance figures for the two quarters, the incremental change is quite big on the net income line.

What's driving that?

What's driving that big change?

You mean the improvement?

Yes, the improvement.

Because incrementally it's very large as a percent of the sales improvement.

Well, some of that improvement would be coming from a slight change in the income tax rate, to be fair.

And then it does reflect a better product mix coming out of ag.

Okay.

In terms of larger equipment?

Specifically, we're seeing strength in large tractors.

Okay.

Versus our previous guidance.

Okay.

And so at the margin that would be a bit of an improvement, and that's really in a very brief fashion what--.

All right, but what is driving that?

That's what I'm really getting at.

What's driving that increase in the large tractor business over what you had expected?

What do you think?

Well, I believe it would be a reflection of farmers' confidence as they're seeing these good corn prices and bean prices and wheat prices holding and the prospects of good equipment usage and good farm income for them, good farm revenue, not only this year, not being a flash in the pan, but really going forward.

You look at global commodities, carryover stocks are very, very low and as Tony reported, we've just had another USDA report that says those things will be drawn down even further.

So I think that's really behind it.

So the farmers are more confident than you had expected?

Yes, I would say at the margin, that's translating into increased business and that's allowed to us improve our sales forecast.

Thank you.

Thank.

Thank you.

Our next question comes from Terry Darling and please state your company name.

Goldman Sachs.

Hey, Terry.

Hey.

Wanted to just square up the raw material discussion from a different perspective.

If we look at the guidance on ag, no change in raw material costs with a big increase in production versus previous, and yet we are seeing the increase in raw material assumptions on the C&F side with sales going down, but production up a little bit --

Okay, Terry.

You need to understand one thing that we are doing, we do attempt to neutralize for volume changes, so that if you have -- if you have additional production, just because you're buying additional product, that doesn't go into that number.

Okay, that is helpful.

Is there a -- what is -- if we get beyond the volume adjustment, the increase in C&F, there's some component or some raw material that's impacting you there that's not impacting on the ag side.

Plate steel.

It's plate steel is what is having an impact.

Scrap prices have skyrocketed in the last few months and that has had -- that is really at the margin where you're seeing construction get hit.

Okay.

Then a question on how you're feeling about your ag market share broadly, but specifically in the U.S., because that's where you're giving us some numbers there.

It looks like versus industry, you've picked up a little bit share year-to-date in the higher horsepower Row-Crop and you're a little bit behind in industry in some of the other areas.

Just give us an update as to how you're thinking about about your market share position in U.S.

right now.

Looks like you're getting a little bit more price in some as well.

Generally, when we look at market shares, you need to look at them over a long period of time, and what drives sustainable market share growth is when we're able to deliver productivity to our customers.

We've introduced some new tools for our customers over the last few years that have aided this greatly.

Things like our new fuel-efficient generation of 8000 Series tractor, as we've talked about Autotracks.

We've just introduced a new line of 6000 Series tractors.

We have more products to come and over time that ultimately is what helps drive sustainable market share and supports price utilization.

So we feel pretty good about where we are and certainly about our longer-term prospects.

Okay, then just lastly.

Wondering if I could get you to answer David Bleustein's earlier question about the Hitachi joint venture.

Does that impact your ability -- are there any restrictions on your ability to grow in Asia based on the nature of that joint venture?

I wouldn't comment at all on our terms of our relationship with Hitachi.

We have many growth opportunities, no restrictions broadly speaking, and again, without commenting specifically on the terms of the Hitachi arrangement, but our main interest is making sure we make money.

Thank you very much.

Thank you.

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

Lehman Brothers.

Hi, Joel.

How are you?

I wonder if -- one thing I just want to try to square up.

Is there any linkage between you guys underperforming a little bit in the months in the ag business?

You're up less than the industry and you're increasing the -- by $175 million the amount of inventories you want to have out there.

Oh, man, that $175 is a function of the entire globe and you're looking specifically at one market.

No.

We are very comfortable with our ability to meet customer demand.

By adding a little bit of inventory as we look to the end of the year, we want to make sure that we continue to appropriately meet customer demand.

By adding a little bit of inventory as we look to the end of the year we want to make sure that we continue to appropriately meet customer demand.

So you shouldn't read anything into it other than we're feeling pretty good as we look at the opportunities towards the end of the year and beyond.

Okay.

Could you talk a little bit about the supply chain?

Are you seeing any tightness on the ag side and just what's happening behind the scenes there?

Thank you.

I'm happy to report that we don't have any areas of significant deficiency.

You always have some fits and starts, but things are going along fairly well, especially considering in some products a fairly rapid ramp-up in demand.

Mike, do you have anything else you want to add?

I don't know of any challenges there.

It's probably a better situation we've had for quite some time relative to availability of parts.

No issues.

Great.

Thank you very much.

Thank you.

Our next question comes from Seth Weber and please state your company name.

B of A.

Thanks, good morning.

Good morning, Seth.

Your comment about the Combine business being roughly flat this year seemed a little bit more subdued to me than I would have thought.

Is there anything going on there, is that just a function of production, or has there been a change in demand?

Actually, there has not been a change in demand.

We started the year with an outlook that frankly thought the business would be down.

And as we saw very strong last-minute, last two weeks of our early orders program, all those strong orders come in, that actually enabled us to raise our outlook for the market to one that is flat.

Again, we have for years run that business to an early order program.

We say that we expect to end the month of January with 85 -- excuse me, 95% of our production covered and that allows, frankly, for very limited availability as you move through the year.

But we've got to have some time obviously to get it built.

So there is availability as you move beyond the 1st of September and we have plenty of opportunity to increase production as we move into 2008 to meet market demand as it materializes.

Okay.

Just a follow-up.

Down in Brazil, can you remind us of the status of the new facility down there and if what you're seeing on the debt holiday repayment?

That's like sneaking three questions in.

Okay, first, the new factory is still on track for start-up of a pilot production.

There'll be a very limited run rate in the summer and then they'll start ramping up to a more normal level of production as you move into the fall.

In terms of the tsunami financing, the government has not made any statements.

Our financial forecast assume that farmers make their payments and business goes forward and I'm happy to report that yesterday was payment due date, and so we're still gathering information, but it looks like we had a substantial amount of cash come in from our customers.

So we're -- despite some uncertainty over the government's posture on tsunami financing, it appears that our customers are making their payments and I would take that to be a very positive sign in terms of the market.

The market strength and this recovery in cash that you're seeing reflected in the farm income.

Okay.

Thanks very much.

We've got time for one more question.

Thank you.

Our final question comes from Robert Wurthiemer.

Please go ahead.

Hi, thanks for taking the follow-up.

It was just on Brazil.

I think if I read the industry data right, your sales were up 90 or 100% in the quarter on a very strong April.

My question was, is there anything related to reshuffling production or sales ahead of opening the plant ending one off about April and do you expect any disruption as you open the plant?

I'm not aware of anything that would be unusual in April.

Other than -- you need to be very careful with some of these monthly comparisons because you're looking at such low numbers.

You have an industry down 70% two years ago and down another 30% or so in 2006, so bear that in mind.

In terms of how we do our production start-up, I will just add that we have -- because of current market conditions in Brazil, we've spent a very nominal amount on some additional tooling that will actually let us produce out of both plants for a limited period of time to make sure that we meet our customers' demand.

Okay, thanks.

Thank you all very much for participating.

Tony, Susan, and I will be around the rest of the day to answer any follow-up questions you may have.

Thank you.

This does conclude today's conference call.

We thank you for your participation.