強鹿 (DE) 2008 Q1 法說會逐字稿

Good morning and welcome to the Deere & Company first 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 Miss Marie Ziegler, Vice President, Investor Relations.

Please, go ahead.

Good morning.

Also on today's call are Mike Mack, our Chief Financial Officer, and Susan Karlix and Bill Ratzburg from our Investor Relations staff.

Today we'll take a closer look at out first quarter earnings and then spend a few minutes talking about Deere's markets and where things are headed next year.

After that, we'll respond to your questions.

Please note that slides are available to complement the call this morning and can be accessed on our website at www.Deere.com.

First, though, some reminders.

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

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 reports 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 GAAP, that would be the accounting principles generally accepted in the United States of America.

Additional information concerning these measures, including reconciliations to comparable GAAP measures, are posted on our web site at www.Deere.com/financial reports.

This would be listed under the first quarter 2008 reports.

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

And now for a closer look at our first quarter, here's Bill.

Thank you, Marie.

Turning to Slide 3, this morning Deere reported first quarter net income of $369 million on first quarter equipment operations net sales of $4.5 [billion].

Net income increased 54% and diluted earnings per share rose 60%.

On Slide 4, first quarter total worldwide equipment operations net sales were up 19% compared to the prior year quarter.

About 4 points related to positive currency translation.

There were about 2 points of price realization and LESCO added about another 2 pointsand the remainder is primarily from increased volume.

On Slide 5, you can see our first quarter production tonnage was up 21%.

For the second quarter, world tonnage is expected to increase about 19%.

For the full fiscal year, 2008 worldwide production tonnage is now forecasted to be up 15% versus our previous forecast of up 7%.

Both are driven by a strong global ag market.

Regarding our company outlook, let's turn to Slide 6.

For the second quarter of 2008, we expect company-wide equipment operations net sales to be up about 23%, with ag contributing the bulk of this increase.

Currency is expected to account for about 3 points, with sales from LESCO adding about another $200 million.

Net income is expected to be about 700 to $725 million in the quarter.

For the full year, we are now forecasting net equipment sales to be up about 17% compared with fiscal year 2007.

This includes about 3 points of currency and about 2 points of net price realization.

The 2008 net income forecast is increased to approximately $2.2 billion.

Let's turn now to a review of our individual businesses, starting with agricultural equipment on Slide 7.

While the press release describes the major items effecting financial results, let me mention a few others.

On the -- of the 33% net sales increase in the first quarter, currency translation accounted for about 6 points and Ningbo Benye, our newest acquisition in China, added about 1 point.

Operating profit increased to 332 million, with currency translation contributing about 25 million.

Inventories rose as the division ramped up to meet increasing global demand.

The resulting additional absorption contributed about 7 of the 29 points of incremental margin in the quarter.

Looking ahead, global ag fundamentals are very encouraging.

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

In fact, on Slide 8, you'll note that for wheat, corn and soybeans, on a global basis, use is projected to exceed demand in the crop year 2007, 2008.

Slide 9 highlights the exceptional strength of the futures markets for these important commodities.

All of this affords Deere's meaningful changes in forecasted commodity prices as seen on Slide 10.

Turning to Slide 11.

In December, the United States enacted the Energy Independence and Security Act of 2007, which significantly expanded mandatory levels of renewable fuels, providing support for the continuing investments being made in ethanol and defining target levels and time frames for more advanced biofuels as well.

This may support significant and exciting new opportunities for Deere equipment and services related to the planting, cultivating, harvesting, and handling of other cellulosic materials.

Slide 12 portrays the near tripling of annual usage of U.S.

corn needed for conversion to ethanol mandated by the energy bill.

This all certainly provides strong support for good levels of farm income globally, and, as shown for the United States on Slide 13, the current estimate for 2007 total cash receipts approaches $300 billion, a more than $40 billion increase over 2006.

Just as importantly, total U.S.

cash receipts are expected to be above the $300 billion level for the subsequent two years.

All of this translates into a stronger order book at John Deere, not only for tractors and combines, but also for products like sprayers and seeding equipment.

Providing solid support for our outlook for industry sales of agricultural equipment in the United States and Canada, as shown on Slide 14, which is now up 15 to 20% from 2007.

In addition, our industry outlook for South America is up 15% or more.

The increased industry forecast for South America is supported by Slide 15, which demonstrates that farm incomes continue to accelerate in Brazil and Argentina.

In particular, note the substantial 2008 increase from our previous forecast just three months ago.

Slide 16 highlights the strength of the European ag market as well.

As shown on Slide 17, our 2008 outlook for Western Europe is now for industry sales to be up 3 to 5% for the fiscal year, and strong growth is expected to continue in central Europe and the commonwealth of independent states countries, including Russia.

So putting this all together, Slide 18 depicts a stronger world-wide outlook for the sale of John Deere farm machinery.

Net sales are now projected to be up about 28%, with currency accounting for about 4 points of the increase.

Just as currency will affect net sales, it will also affect forecasted operating profit, adding about $90 million for the full year.

As we discussed last quarter, growth, tier 3 product costs, and tier 4 engineering costs will effect the 2008 incremental margin.

We continue to identify good opportunities for growth and we have the financial strength to make the required investments.

Consistent with our strategy, just as we tighten our belts when business conditions get more difficult, we also intend to invest in growth both when times are good and when exciting opportunities are discovered.

Therefore, this year we have elected to further accelerate new product and geographic development.

The ag division now anticipates spending an additional $50 million in R&D, and an additional $120 million in SA&G compared to our previous guidance.

About half of the SA&G increase is a result of currency translation.

The increase at constant exchange rates is about $60 million.

In addition, the forecast calls for a modest increase in inventory ex-currency.

So although the first quarter benefited from increased overhead absorption, due to the inventory build, for the full year the forecast has no absorption benefit.

Reflecting this increased investment in our future, the forecast anticipates the 2008 Ag incremental margin to be 20 -- 25% compared to our previous guidance of about 25%.

Let's move now to our commercial and consumer equipment business on Slide 19, where reported net sales were up 16% in the quarter, with about 14 points of that increase coming from LESCO.

Last year's new product introductions continue to drive excellent customer interest, helping to offset challenging market conditions.

Operating profit declined.

As expected, the consolidation of LESCO accounted for most of the decline as shown on Slide 20.

The first quarter is a seasonally weak quarter for this business.

Not surprisingly, in the United States, not much fertilizer is applied in the November to January time period.

For the full year we expect LESCO results to be much closer to breakeven.

Turning to the commercial and consumer equipment outlook, on Slide 21, for fiscal 2008, we now anticipate sales to be up about 8%, about 7 points of which are related to LESCO.

Portions of the business continue to be effected by the housing slowdown and general economic conditions.

Our forecast reflects slightly lower incremental sales of LESCO from our previous guidance, as the rise in fertilizer prices is expected to reduce applications demand by consumers.

But our forecast also reflects the exciting new product offerings coming to market this year, including the Z-Trak pro and estate mowing lines, select series homeowner models and utility vehicles.

Let's focus now on construction and forestry on Slide 22, where sales were down 6% for the quarter.

Despite very challenging economic conditions in the U.S., production tonnage increased 2% over the first quarter of 2007, and quarterly operating profit was relatively strong at $117 million, or over 11% of net sales, and up 23% from 2007.

The division benefited from producing closer to retail demand made possible by exceptional inventory management in 2007, and some positive price realization in the quarter.

Full year forecast still has pricing remaining relatively flat with 2007, unchanged from our previous expectation.

Turning to Slide 23, the net sales outlook for the full year of 2008 continues to be approximately flat, in spite of challenging conditions in the United States, with construction spending declining by 10%, new housing starts declining further to 1 million for the year, and GDP growth slowing to 1.9%.

This flat net sales forecast is due to producing closer to retail demand, reflecting our disciplined inventory management, consistent with our SVA strategy, and new products, including the H-series skidders, J-series backhoes, and ready alarm skid steer loaders.

Moving now to our credit operations, as you see on Slide 24, credit losses continue to remain low, with the provision running well below it's 10-year average.

And as further evidence of John Deere credit's superior credit quality, turn to Slide 25.

We recently received support from rating agencies to increase the Company's leverage from the current 8.5 to 1 to 10 to 1.

The actual change, which will occur in the form of a dividend to Deer & Company, is expected to happen during the second quarter.

While this does result in higher interest expense, expected to be about $10 million after-tax, this certainly represents a more efficient use of capital for the enterprise.

Very importantly, SVA for both John Deere credit and the enterprise will increase due to the change in leverage, again, reflecting the quality of our credit portfolio.

Turning to operating results on Slide 26, credit reported net income in the quarter of about 96 million, up from about $87 million a year ago, among other things, on the strength of a larger credit portfolio and higher crop insurance income.

Our forecasted credit net income for fiscal 2008 is now about $365 million versus the previous forecast of $375 million, with the approximate $10 million decrease explained by the change resulting from higher leverage.

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

Slide 27 lists by division the change in receivables and inventory at the end of the first quarter of 2008 versus the end of the first quarter of 2007.

You'll note that reported trade receivables and inventory at 31 January, were a little over $800 million higher than a year ago, though on a constant exchange rate basis they are up only $476 million.

The ag division came in $891 million higher.

Currency translation accounted for about $235 million of the ag division increase.

The majority of the inventory increase, however, is supporting current business conditions.

For C&CE, excluding LESCO, trade receivables and inventory declined over $90 million.

As seen on Slide 28, our 2008 year end forecast calls for flat inventories and trade receivables and C&CE and C&F, at higher levels for the ag division, again supporting strong global market conditions.

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

Industry data for January retail sales for the United States and Canada is not yet available, so there is no slide.

Our commentary is expected to be released separately this coming Friday on our investor website at www.JohnDeere.com, and can also be accessed at that time by dialing 309-765-5149.

Deere dealer inventories in the U.S.

and Canada remain in very good shape.

On Slide 29, you see that for row-crop tractors, Deere ended January with inventories at 23% of trailing 12-month sales.

Combine inventories were at low levels, 8% of trailing 12-month sales.

Turning to Slide 30 in Western Europe, sales of John Deere tractors were up double-digits in January and sales of combines were down double digits.

Moving to slide 31, Deer's retail sales of commercial and consumer equipment in the United States and Canada were up a single digit in January.

Construction and forestry sales in the U.S.

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

Now let's touch on a few housekeeping items.

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

In the first quarter, these costs rose approximately $50 million versus last year.

For the full year, we now expect these costs to increase by about $250 million compared to our previous forecast of up 150 to $175 million, driven by increases in items like tires, steel, diesel fuel, resins and currency.

Looking at R&D expense on Slide 33, spending was up about 16% in the first quarter.

For the full year, R&D expenses now expected to increase about 12% compared to our previous guidance of up 5%, with virtually all of the increase coming in the ag division as previously discussed.

Moving now to Slide 34, SA&G expense for the equipment operations was up 20% in the first quarter, with about 14 points of that increase coming from global growth initiatives and currency translation.

Our fiscal year 2008 forecast now includes SA&G expense increases of about 11% over 2007, with about 8 points of that increase coming from global growth initiatives and currency translations.

As with R&D, the ag division accounts for all of the increase from previous guidance.

Regarding the tax rate on Slide 35, during the first quarter, the effective tax rate was 33% due to -- about 33% due to discreet items.

The fiscal year 2008 forecast full year tax rate remains at about 35%.

Actual shares outstanding at the end of the quarter were about 436 million, as shown on Slide 36.

You can also see the history of share repurchases since 2004.

Approximately 29 million shares remain under the current 40 million share repurchase program approved by the board of directors in May of 2007.

Slide 37 provides some additional information related to fiscal year 2008.

For equipment operations, capital expenditures are now forecast to be about 750 million with the change driven primarily by the ag division.

Depreciation and amortization is still expected to be about 450 million, and we now anticipate funding of about 425 million in pension and OPEB contributions over the year.

For financial services, capital expenditures relating to wind are now expected to total about 450 million in 2008, as they build their portfolio.

Looking ahead, 2008 is starting out very strongly.

Deere is expecting another year of exceptional financial performance, with excellent cash generation.

SVA continues to prove to be a powerful force at managing and guiding the company.

At the same time, we are well positioned to continue benefiting from powerful global economic trends involving growing affluence, increasing demand for food, and rising use of biofuels.

We continue to drive to build, grow and sustain a great business, and we are looking forward to delivering superior results in 2008.

Thank you, Bill.

We are now ready to begin with our Q&A.

The operator will instruct us on polling procedures.

And as a reminder, consideration of others, please limit yourself to one question with one follow-up.

If you have additional questions, we ask that you rejoin the queue.

Laura, would you give us those instructions?

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Andy Casey.

Please state your company name.

Wachovia Securities.

Good morning.

Good morning, Andy.

On construction and forestry margin performance, can you talk a little bit more about what drove the year to year improvement, despite the revenue decline?

Was that primarily the improved pricing that you talked about, or was there something within the 2% tonnage increase, as in less production shutdown days or mix shift or something else that drove the improvement?

Yes, that would actually be the most significant item and it accounts for, in round numbers, 15 to $20 million of the improvement in the quarter.

And again, it has to do -- you are absolutely correct, with just more efficient factory operations.

For those who may not recall, during the first quarter of 2007, we stepped on the gas, or stepped on the brakes pretty hard for that division and ended the full year taking receivables down about $250 million.

So that's, that's it.

Pricing, though, no question, pricing was positive and also some expense control.

But the majority of the benefit is really from producing closer to retail.

Okay, thanks.

And then on ag equipment, can you talk about what, if any, drag the ramp up of the new tractor production facility in Brazil had on the quarter?

Actually it wouldn't have had a material meaningful impact.

They are in production now and by the end of the second quarter, we would expect that they will be clicking along very well.

All the production actually was transferred out of [Bores Latina] in the first quarter.

Mike, I don't know if you have anything.

I would just say if you look compared to a year ago, it would be a positive because you're starting to get some factory absorption, no as much as you're going to get in subsequent quarters, but compared to a year ago, I think it would be a positive.

Okay.

Thank you very much.

Thank you, Andy.

Next question?

Thank you.

Our next question comes from David Raso.

Please state your company name.

Citigroup.

Question on the ag incremental margins.

It looks like if you back out the incremental cost that you're accelerating on R&D and the SG&A part, even just the SG&A part that's not currency, looks like you actually raised your core incremental margin for ag about 300 to 400 basis points.

And given the raw material comment, can you help us understand the incremental margin improvement for the year?

Is that something still in the [com], maybe in the Brazil comment you just made, or overall, why are we seeing an incremental margin outlook improve?

I'm not sure, David, our incremental margin improvement, the calculation or the guidance from last time was about 25% incremental margins.

25 again, but--

It's 20 to 25.

So we've taken it down just a little bit and that little bit really reflects the bit of acceleration as Bill talked about, of R&D and then some SA&G.

In the third.

And a little bit of material.

Okay, so the core is still generally being held steady?

Yes.

Okay.

And then given the higher CapEx, the accelerated R&D, can you flesh out a little bit more for us where these growth opportunities -- what I'm trying to think through is, if I'm taking more R&D and CapEx on this year and so forth, trying to think through '09 incrementals and so forth, can you help us flesh out where these opportunities are?

And are these things that really should be concluded in '08?

No.

In a word, in terms of the incremental change in our cap expenditures guidance, and just for those that may not recall, our previous guidance was 600 to 700 million now we're looking at about 750.

That change is really all driven by the ag division.

It really would reflect several geographies.

We are contemplating, candidly, some additional capacity, and no final decisions have been made on that.

And then as we are ramping up some of our capital, or our R&D, there's too many things that go along with that.

So -- and then there's some of the increases, candidly, due to currency, too, just but you know the dollars continued to devalue a bit.

Just to be clear though, these activities, the idea of '08 into '09, I'm just trying to think through if, again, maybe if you can flush out a little more besides the CapEx capacity addition, the growth opportunities, just how should I think through the incremental in '08?

Is it something that then is a benefit on a year-over-year comp situation in '09, or have you now laid out growth opportunities where I should think of this as a 24-month activity, so to speak, on higher R&D and CapEx?

Well, we're really not prepared to comment on 2009 for this time.

I think as we have talked about, we've got product opportunities really throughout the world, including the U.S., but certainly market expansion and we've talked for a long time, Brazil, Russia, India, China, even Western Europe, we have opportunities.

So we're really looking at product line development, if you will, that will benefit us in all areas.

If the business continues to stay very good, if we continue to find additional opportunities to further step up our investment in our business, David, I can't say that the spending might not continue at an even increased level in 2009, but we're just not prepared to address that yet.

Okay.

Thank you very much.

Thank you.

Our next question comes from Robert McCarthy.

Please state your company name.

It's Robert W.

Baird.

Good morning.

Good morning, Rob.

Two questions related to the ag segment outlook.

One, to what extent is the improvement in your industry outlook accounted for by better than expected first quarter conditions and how much of it is, obviously then dependent on improved outlook for the balance of the year?

It's--

And then I have a follow-up.

It's in -- I don't think I can differentiate what, between the first quarter and what, what change in first quarter versus the rest of the year.

But I can tell you that obviously our outlook for cash receipts improved, not only for this year, but obviously for 2007, and 2007 cash receipts clearly have an impact on 2008, and then our order books have continued to develop very nicely, and so that adds good support.

And that's true not only in the U.S., but candidly really throughout the globe, so when we look at those market outlooks that we have, they are really supported by retail activity.

And if that's the -- if those are the drivers of the revised outlook, doesn't that -- I mean shouldn't I infer from that, that that's more forward-looking?

I -- in what way?

I mean in terms of--

The improved outlook for industry activity is more a function of better outlook for the remainder of the year.

I think it's both.

I think retail activities were better than expected in the first quarter and the order book, which relates to the rest of the year, also looks quite good and then finally the fundamentals as reflected in the commodity prices are improving as we go on through the year as well.

Okay, and then my related question is within that improved forecast, my sense is that your outlook improved particularly at the high end of the product range.

Is that the case, and wouldn't that be a positive indicator for profitability?

Oh, we, we have certainly seen strength at the larger end of the horsepower range, there's no question, big combines and big tractors are doing well in a lot of geographies.

So that would be true.

And again, that improvement, though, Rob, is reflected in our margin guidance, which does, by the way, for 2008 imply an improved operating margin out of our ag division.

Of course, right.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Steve Volkmann, and please state your company name.

Hi, good morning.

It's JPMorgan.

Good morning, Steve.

I have a question just kind of I guess taking a step back.

I'm amazed at the construction equipment margin and I think it's interesting that there's, basically kind of less than a point difference between construction and ag, given what's going on in the end markets, that's surprising to me.

And so, I wonder if there's things that you're doing in construction that can be migrated into the ag over time that can potentially widen that out or whether you think there's something specific to those businesses, which are just fundamentally different?

Well, actually we're very gratified that you observed the good performance in our construction and forestry division, and this really relates to the fundamental changes in the way we are managing our businesses.

When times are good, we have much higher targets and when times are difficult, we step on the gas.

I talked about some expense control, pulling in some of our spending programs, for example, and no question, that you're seeing the benefits of keeping those inventories in close alignment, as close as possible, with retail.

And most definitely that would positively effect our ag division, as we move forward.

Ag right now is being somewhat penalized, if you will, by future investments for growth.

We have been pretty candid in the last conference call and this conference call talking about some additional investments that we're making as we see opportunities globally.

Mike?

I would like to just maybe expand.

You may recall our presentations in [Waterloo] back in September of 2006.

We talked about trough management and back at that time, construction forestry was working on this.

They really put in place very detailed plans.

What they would do if they [had down] environment, in terms of the external demand and the levers they would pull, so they could reduce their variable costs as quickly as they could to respond to the environment, and we actually do have studies across all of our businesses on this particular topic, and the whole idea here is to be able to have reduced volatility in our earnings through the cycle, which we believe will ultimately result in multiple expansion for our company.

But just to tie that up, at some point in the ag cycle, we should expect margins to be higher than they were historically, is that right?

Well, actually, we would be on track to be delivering that this year, with that improved incremental margin that we're talking about.

If you'll recall, our previous peak margin in ag was about 14%, but that was when the receivables were actually held in the parent company operations and interest expense was below the line.

And now as you may -- as I think you're all aware, the receivables, the bulk of the receivables anyway, are held by the credit company and the -- there's an inner company charge and we show it on our financial statements, that makes that reimburses the credit company for those, that carrying cost and a margin.

And that actually impacted our ag equipment margins on average by about 2 points.

And of course last year, the ag division had in round numbers, a 12% margin.

So we've actually duplicated that peak margin and so this year we would be on track to improve that.

At least that's what is implied in our financial forecast.

Okay, great.

And then just real quick, how big is the dividend that's going to come out of this finance co as a result of the higher leverage?

Anticipated about 320 million.

Thanks very much.

Thank you.

Next question?

Thank you.

Our next question comes from Eli Lustgarten.

Please state your company name.

This is Mark Douglas for Eli, Longbow Research.

Hi, Mark.

Good morning.

A question about your outlook in the second half of '08, with revenues anticipated for the full year at 17%, or net sales, I should say.

And net sales being so strong this quarter and your 23% next quarter.

Help me view the back half of '08, because it looks like it would be pretty weak, or am I missing something?

I mean the comp on Q3 is--

Well, there's no question that as we move through the year, our comps get more difficult because of course we were ramping up business pretty significantly throughout 2007.

And so your observation would be correct that the year-over-year change is -- does narrow, but it's not because the business is declining, but rather because you're moving, coming up against a much more difficult compare -- I shouldn't say difficult, but a time when business was improving pretty significantly.

Right, right, certainly in the fourth quarter.

And then on the tax rate, can you talk a little bit more about the impacts to the 33%, and why you might expect 35% for the rest of the year?

The -- it's really discreet items, which is a whole host of items, and in the -- our statutory guidance would be 35%, and right now based on our, based on what we know, the -- any other items in the, or that are coming would not be enough to -- there's not enough of an offset in subsequent quarters to keep that rate below 35%.

That is what it weights out to.

I don't have that -- there's just a host of things on the equipment operations.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Terry Darling.

Please state your company name.

Thanks.

Goldman Sachs.

Hi, Terry.

Question on the Brazilian ag outlook.

I'm struck by the magnitude of the increase in the farmer income projections relative to a more modest increase in your outlook for sales there.

Could you update us on where you see the credit situation there?

And why -- it's a nice increase, but it's a relatively muted increase in your outlook for South America ag retail sales, relative to a very strong uptick in your forecast for farmer income.

That's an astute observation in terms of Brazil.

We continue to be cautious because of the status of [Tsunami] the situation has changed several times.

As you know, over the course of the year, and for those who may not recall, the -- there has been a deferral of payments that were due in May of 2007.

Now, 70% of the payments that Deere was due have been made on that, so we are, still have about 30% of our customers have not paid.

At this time, we actually expect that those 2007 payments are due on the 15th of February, which would be in two days.

The government has indicated there would be no further extensions.

And that January, February and March 2008 payments will be due the 31st of March and then there will be no more extensions on the remainder of 2008 payments.

But we just remain cautious, because the situation has been changing on an ongoing basis there, and so we're -- that caution is reflected in that guidance for the year.

And that's 30% still outstanding is as of today essentially, I mean that's--

As of the, it would be as of the end of January.

Okay, and the related follow-up question is, I'm wondering if you can differentiate for us on your forecast for construction forestry would the sales be flat, if you can provide some color differentiating the construction piece versus the forestry piece?

Actually, we -- for the full year expect that our forestry sales will be up slightly, that the strength in overseas markets will offset weakness that we're seeing in the United States and Canada.

That would imply, then, that you would have -- if you're up very slightly in forestry, and forestry is 20 to 25% of the business.

You're down just a little bit on the construction side.

Thanks very much.

Thank you.

Next question, please?

Thank you.

Our next question comes from Ann Duignan.

Please state your company name.

Hi, good morning.

Bear Stearns.

I'm just laughing here because it's probably the first time I've ever heard Deere say on a conference call that their outlook was very encouraging, it's like farmers telling me that they are cautiously optimistic.

Things must be pretty good.

My question is around 2008 economic stimulus bill, which we expect President Bush to sign today.

And obviously, when signed, that would allow for accelerated depreciation and section 179 expensing, which back in 2004 we saw a significant pickup in demand as farmers took advantage of that.

It wouldn't only be farmers.

It would potentially benefit contractors, our commercial landscapers, et cetera.

Yes, no, I agree.

I guess on the agricultural side, one, would you expect -- I think you're saying that you would expect that it will be stimulative.

My real question is, if demand did pick up for tech spending, particularly in agriculture, would you be able to meet greater demand?

Do we have additional capacity through the end of the calendar year?

Yes, we do.

Okay.

And my second question is around the increase in raw material and freight costs.

Can you explain -- I'm a little -- struggling a little bit to understand why freight costs will be going up--

Oh, it's diesel fuel.

Fuel prices are higher than what we had in our base assumptions, and that is driven higher inbound freight.

And it's one of five factors.

I mean it's, it's a little bit collectively from all those five factors, a small percentage increase in freight, a little higher steel costs, a little higher tire, a little higher resins that's effecting even landscapes, costs of their pipes that they put in.

It's, it's just a host of things.

Okay, and are there other, any supply constraints on your horizon that you're trying to work through, bottlenecks in the supply chain that have accelerated?

Accelerated, no.

On any given day, there are always issues somewhere, but we actually went out and just checked with our supply management and our factory production folks, and we are very -- based on what we know of our current material availability, we will meet our production forecast.

Okay, thank you.

I'll get back in line.

Thank you, Ann.

Thank you.

Our next question comes from Alex Blanton.

Please state your company name.

It's Ingalls & Snyder.

Marie, going back again to worldwide construction forestry and the operating profit increase, you said the producing closer to retail demand was the main factor.

What exactly did you mean?

Do you mean then, that last year you reduced inventory, so this year you, you might have actually increased production in that division, even though sales were down, is that right?

We had a little bit of a higher tonnage, but we also were able to operate a little more efficiently in terms of our factories.

And the change last year that cost us, in terms of incremental margin around $20 million, or -- and this year, it turns around that it's more of a benefit and we talked earlier of 15 to 20.

Yes, but what was that exactly?

The 15 to 20 million?

That is -- it's, it's the benefit of not having to be reducing your inventories.

I'm not, I'm not sure.

Last year we were underproducing, so underabsorption.

Underabsorption of inventory, so this year we didn't have that, so that added 15 to 20 million to the profit?

In the quarter.

In the quarter, right.

The first quarter was most significantly impacted last year.

So I do want to make that clear, that this is the quarter that will have the biggest benefit.

And the inventory increase quarter over quarter was $950-some million.

Are you looking year-over-year?

I'm, I'm looking quarter over quarter.

952 million, up from October 31.

Yes.

And last year was only 527 million during the quarter that it increased.

So you, you had basically a lot bigger absorption benefit this year than last year.

But you still had, even if you adjust for that, you had very good incremental margins around 27%, even after adjusting for the, for the difference in absorption year-over-year.

But are you going to have to reduce that inventory sometime in the year, so there's going to be--

But we--

-- one-year margins are going to be hurt by that.

Which quarter would that be, the fourth quarter?

Again, it's usually the fourth quarter--

Our guidance for the full year is that receivables and inventories are flat.

Right.

So the net -- so the construction and equipment division for the full year will have about -- we'll say round numbers, about a $15 million benefit again, just from being able to produce at retail.

Right.

As you move out into the later in the year, because we stepped on the gas very hard in the first quarter, and there was some impact in the second quarter, a little less as you moved through the year, you would expect that benefit will diminish as you get into the third and fourth quarters.

Right.

You're going to have to take 800 million out of inventory to get back to where it was.

First, of that amount, 339 is foreign exchange.

No, he's looking strictly at construction.

No, I'm actually looking at total inventory is what I'm talking about.

Oh.

I'm sorry.

I thought you were talking about construction.

I first started talking about construction, then I shifted over to total.

I'm sorry.

I misunderstood.

You've got 3288 minus 2337, so you're up 950 million.

You got to take that out to get it flat for the year.

That's what I'm saying, so you're going to lose -- some quarters are going to be hurt by underabsorption in order to get that inventory back down again, and that's usually the fourth quarter is that what you anticipate?

Incrementally this year -- I'm sorry, Alex, I didn't realize you had switched away from construction.

Incrementally for the overall company, again, the third and the fourth quarters would not have the same degree of incremental benefit because last year we were ramping up so significantly in the ag division.

Actually you will be reducing inventory, so it will be a detriment, won't it?

Incrementally--

Bring it back down--

Incrementally, you do not get the same benefit, that is correct, in the third and fourth quarter.

Sequentially, okay, thank you.

Thank you.

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

Merrill Lynch.

Hi, Andrew.

Hi, how are you?

Just a question on pricing by region in ag.

What can you tell us about, I guess, relative ranking of regions in terms of how good the pricing is?

Actually, I'm not going to be able to comment on that.

Our practice is to comment strictly on price realization for the overall company, which was 2 points in the quarter, and that's -- and I really don't have too much more to add to that.

I thought I would try.

Nice try.

The second question is, the second question, you are talking about declining farm cash receipts in the U.S.

in '09, granted off a very, very high base.

Oh, and it's a very small change and a lot of it -- it's really like3 or $4 billion and 2 billion, or almost 3 billion is explained by the absence of a disaster payment running through government payments that is being made this year.

It was a $3 billion government disaster payment voted on last year, about 500 million of it is, we think, was paid in '07 and the remainder is being paid this year.

So that's really a primary explanation for that change.

Just--

Actually--

-- relationship directionally between the direction of farm cash receipts and direction of unit sales in the U.S.

Do you expect, just taking a 30,000-foot view, that retail sales can continue to grow in the U.S.

in '09 off '08 levels?

Well, do recall that cash -- that equipment sales are affected by cash receipts from the previous year, as well as the current year, and you have had a very significant increase in, in cash receipts really for 2007.

You've got another step up in 2008 and cash receipts from crops, I would point out, will increase, in our forecast anyway, on 2009.

So we'll stay tuned but I'm going to certainly stop short of speculating on 2009 equipment demand.

We won't be talking about that until November.

Doesn't sound like you're thinking it's going down or staying flat, right?

Is that a fair statement?

I'm going to have to stop short of providing 2009 guidance.

Thank you very much.

Thank you.

Next question?

Thank you.

Our next question comes from Mark Koznarek.

Please state your company name.

Hi, it's Cleveland Research.

Good morning.

Good morning, Mark.

I have a question on construction forestry, given that you've lowered housing starts outlook and a slight tick off of the GDP forecast, what would your industry retail sales outlook be now relative to what it was before?

It would be down a bit in terms of the U.S.

and Canada.

Actually what is helping Deere & Company specifically is we are seeing better sales growth outside the U.S.

and Canada, and you understand that that's off of a relatively low base, but we're seeing some good levels of activity there.

And currency has a little bit of benefit in terms of that sales guidance as well.

So the retail sales--

In the U.S.

and Canada would be down from our previous guidance.

That would be true.

Yes, I'm just wondering, can you give me an idea what it was and what it is now?

Is it down like 10 and it was down 5 or something like that?

Our -- I don't have a Deere [retail], but I can tell you that industry we probably would have been down in the 6 to 8 range in the U.S.

and Canada and we're probably now in the 14 or so range, 14, 15 range.

Okay, and so--

That's in our sizes, et cetera.

Right, yes.

So therefore, if you're keeping your revenue expectations flat, you've -- you're expecting to outperform pretty considerably and just a little piece of that is that international forestry.

So what's going on domestically?

There's also construction equipment sales that are occurring outside the U.S.

and Canada as well.

And then again, I just would cite there's some currency benefit.

Okay, so it's just a little here and there.

Okay.

Then a couple, just a couple little detail things.

The overall revenue outlook went from 12 to 17 and you called out the currency impact in the 17% that you're looking for now.

What was the currency embedded in original 12% outlook?

It would have been less than that, for the full company, less than a point.

Okay.

1%.

And then finally, the operating income impact from foreign currency you commented earlier would be roughly 90 million for the year, and would there be an offset to that, somewhere below the line, or could I take that 90 million and just tax effect it and that's your earnings impact?

Basically, yes.

Okay so.

There's no offset.

There might be a little below the line, but not very much.

Okay, very good, thanks.

Thank you.

Next question?

Thank you.

Our next question comes from Seth Weber.

Please state your company name.

Hi, good morning.

It's Banc of America.

Good morning, Seth.

Good morning.

Marie, sorry if I missed this, but relative to the first quarter sales guidance you gave last quarter, you were looking for up, I think 25% for the first quarter, and it came in, I think, up 19.

Is there any -- is that just a timing issue, or can you give us any color of where things were perhaps a little bit slower than you thought?

It's more, really more of a timing issue than anything.

All three equipment divisions would have been off just a little bit from what their original sales guidance was.

But it's more a timing.

And you can tell that again by our sales guidance.

Right, okay.

And then, last quarter you were kind enough to give us tractor availability for the 9000s and the 8000s out, kind of where you saw them, out through the calendar year.

Can you give us an update on that data?

Certainly, for the fiscal year.

For small, small, large -- small -- excuse me.

That would be like mid July.

Larger frames would be, the higher horsepowers and that, that would be early August.

8000s mid September, 9000s, there is no factory availability, really, through the end of the fiscal year, which for us would be 31 October.

But there's certainly -- we have dealer inventory available and we are certainly doing everything we can to meet customer demand.

For combines, we would find ourselves in a similar position in terms of the 2008 harvest, which would basically be about the first of September.

There is definitely availability after the first of September on combines as well.

Great, thanks very much.

Thank you.

Next question?

Thank you.

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

Hi, good morning, Credit Suisse.

Hi, Jamie.

Hi, Marie.

My first question, most of them have been answered, but I think you said, in one of the responses, excuse me, that you could be potentially adding capacity, and without getting into too much color, I guess, when would you make a decision on that, and were thinking about adding capacity, would that be in sort of markets you're already in heavily, whether it be the U.S.

or South America, or could we be looking at other markets, Asia-Pacific or eastern Europe?

I think -- I'm not going to be able to give you any more definitive guidance.

Okay.

We're just not prepared to make any comments.

And then can you comment on pricing, I guess you said 2% overall.

Would it be fair to assume that farm was much stronger than that?

And, of course, you're still getting pricing in construction and forestry.

We are still getting price realization in construction and forestry.

I would say that in the quarter you couldn't probably say that ag was significantly -- you couldn't infer that ag was significantly stronger.

I would say overall for the full year, as you think about our guidance, which Bill said that in construction, in view of the difficult market and other, we're still looking for basically sort of a neutral year on pricing.

That probably implies a little bit more in ag.

Okay, and then just my last question as a follow-up to pricing.

I guess as I think about pricing longer-term and the fact that you're investing so much in the ag division, whether it's R&D or growth in new products, et cetera, theoretically, given all this investment that you're doing, we should get it back and we should see pricing rising over time, especially when you're in one of the strongest farm markets we've ever seen?

I think that would clearly be our objective.

I can't put that into a forecast, but that would certainly be the intent.

Okay, thank you.

Thank you.

Next question?

Thank you.

Your next question comes from Charlie Rentschler.

Please state your company name.

Wall Street Access.

Hi, Charlie.

Glad to see you're finally jacking up the CapEx in the ag like I told you to a year and a half ago.

(laughter) My question is, CapEx with wind, you're making a big bet on wind.

Can you tell us, tell me first, where is Uncle Sam with the tax credit and how is that effecting you?

And can you give us a little bit of an understanding of when, is this all domestic, your investment?

And that's 400 million, that's over half of your regular CapEx investment, and can you tell us, is this going to be ongoing at this level beyond this year, please?

Well, first of all, the tax credits, tax credits expire at the end of this year.

They are widely anticipated that they will be renewed after the, after -- or effective after the 31st of December of this year, but we don't know that at this time.

So that's why you're going giddy up here, huh?

Well, we -- we -- I can't really say that's why we're going giddy up, but certainly well hope that those -- the effects of those tax credits will be renewed.

We are in the process of looking at turbine orders for the, for 2009 and to the extent that there would be a delay in the legislation, there are other markets that can take those turbines.

Right now our business is all based in the U.S.

When you look at the capital expenditures, however, Charlie, that 450 is separate and apart from the guidance in the equipment operations is 750.

No, no, I understand that.

Okay.

Thank you.

Thank you.

Next question?

Thank you.

Our next question comes from Robert Wertheimer.

Please state your company name.

It's Morgan Stanley.

Good morning, everyone.

Good morning.

I want to ask also about pricing, specifically can you talk about the materials costs that you characterize in dollars and the percentage change terms from last year?

Let me start there actually.

Percentage change.

Raw material costs, I think we puts that in here, didn't we?

Raw material costs, I don't have the percentages, but raw material costs for the full company were up 183 million, so this year we're looking at 250.

I guess the real question, is pricing going to be higher than raw material or lower--

Absolutely, absolutely--

-- cycle on ag, what is the constraint?

For the full company, our pricing will be better than our costs.

As you think again about the guidance for the full year, again, we've talked about the fact that we're looking for flattish pricing in construction and that certainly implies that ag would be something north of 2, and I really can't comment any further on that.

Does that help?

Yes, yes, it does help a little.

And I guess maybe a follow-up.

As you've seen materials costs come up I guess recently, do you see the pricing environment in the market firming up along with that?

In other words, are competitors taking pricing up or discounting less?

I am not going to be able to comment about our competitors pricing actions, but Rob, I do want to make one other point clear.

When we talk about pricing, do bear in mind that any kind of feature improvement, we do not consider that to be pricing.

We actually strip that out and call that volume.

So our actual price increases are higher than this 2 points that we're talking about, but that's because we are talking about, like horsepower increases or different kind of transmission option, and we would call that volume.

I remember that, okay.

Great.

Thank you so much.

Thank you so much.

This is our last question.

Thank you.

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

Sir, your line is open.

Please check your mute feature or lift your handset.

Okay.

Can you hear me?

Hi, Joel.

Hi.

I'm still at Lehman Brothers.

Okay.

I wonder if you can just talk a little bit about the underlying end market in construction equipment?

You've done a great job of talking about how your business is performing and it's really doing great.

Can you just talk a little more about what's happening in the end market and some of the anecdotes you're getting from your dealers?

We continue to see activity on the non-residential side.

There's a lot of activity still.

People are concerned, certainly, about what will happen going forward, but, but a fair amount of activity there, some activity on the housing oriented, but obviously that depends on where you are in the market.

On the dealer side, we are probably most gratified by the fact that we see our dealers continuing to replenish their inventories at about the level as they sell a machine, they are replacing on average.

So that tells us that their inventories are in pretty good shape and that they are comfortable with their positions.

Inventories, if you look at our inventories in terms of days of sales, and look at them this year versus last year, they are down, and that's, that's also another positive sign in terms of what's happening in the market.

Does that address your question?

Yes, it helps a little bit.

And then can you update us also on what's going on in India?

Are you pretty much done with your factory, or where are we with that?

In India, we did talk about some expansion and that expansion is, capacity is in place in India, and we're continuing to benefit from the export opportunities of that product, as well as continued development of our business in India.

And additionally, we have an IT center and we do some engineering analysis in India as well, which has grown and exceeded our expectations and it's providing analysis really across the globe for our operations and we're quite pleased with how it's working out.

All right.

Thank you very much.

Thank you all for participating in today's call.

Susan, Bill, and I will be available all day to return any subsequent calls you may have.

Thank you.

Thank you.

This does conclude today's conference call.

We thank you for your participation, and you may now disconnect your lines.