強鹿 (DE) 2009 Q2 法說會逐字稿

Good morning and welcome to the Deere second 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, as well as Susan Karlix and Justin [Maravek] from Deere's IR staff.

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

After that, we'll respond to your questions.

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

First, though, a reminder.

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

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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 may 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 8K 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.

The call and accompanying materials are not an offer to sell or a solicitation of offers to buy any of the Company's securities.

This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP.

Additional information concerning these measures, including reconciliations to comparable GAAP measures, is posted on our website at www.johndeere.com/financialreports, under other financial information.

Call participants should consider 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 the second quarter, here is Susan.

Thank you, Marie.

John Deere today reported another quarter of solidly profitable performance, and did so in the face of market conditions that are extremely difficult, to say the least.

Nevertheless, our agricultural equipment operations in the United States and Canada continued to perform on a strong pace.

Our credit operation maintained competitive access to the credit markets, and the Company overall further strengthened its liquidity position.

Also, Deere continued to show real discipline on costs and assets, reducing general and administrative expenses and slashing factory production by more than 50% in some cases, in response to a weakening retail environment.

Finally, volatile exchange rates had a significant negative impact on our results as well.

Beginning on slide three, last month we announced the combination of the Agricultural and Commercial and Consumer Equipment divisions into one, the new Agriculture & Turf division.

The anticipated annual savings related to this new organizational structure is in the range of about $50 million, beginning in 2010.

While that number is meaningful, the most powerful impact will be in the scale advantage and cost reduction opportunities this combination provides.

The Ag and Turf division will leverage common processes, standards, and resources, not only to save money, but also to respond more quickly to competitive challenges and bring solutions to market in a more timely manner.

The division will align sales channels and the global footprint to ensure John Deere is distinctively customer focused and globally competitive.

Today's second quarter results are presented as they traditionally have been for each of the three equipment divisions.

Starting in the third quarter, however, equipment results will be reported for the new combined Agriculture and Turf division, and as in the past, for the Construction & Forestry division.

Also beginning with today's announcement, our financial forecast for the remainder of the year reflects the new divisional lineup.

Now on slide four, let's take a more detailed look at the quarter.

This morning, Deere reported net income for the quarter of $472 million, on second quarter equipment net sales of $6.2 billion.

Turning to slide five, total worldwide equipment operations net sales were down 17% in the quarter, versus second quarter 2008.

Currency translation on net sales was negative by approximately six points, and there were about six points of positive price realization.

In fact, all three divisions achieved positive price realization in the quarter.

On slide six, worldwide production tonnage was down 19% in the quarter, reflecting weak market conditions in smaller and medium sized Ag equipment, as well as in the other equipment divisions.

It is also evidence of strong inventory management, as both C&CE and C&F have further drawn down inventories in response to sluggish market conditions.

Worldwide production tonnage is expected to decrease about 28% in the third quarter of 2009, and be down about 22% for the full year.

As we turn to slide seven, while today's forecast represents our best assessment of the 2009 outlook, markets remain extremely uncertain, which makes it difficult to project sales and earnings with a high degree of competence.

Third quarter net sales are expected to be down about 26%, compared to the third quarter of 2008.

Currency translation on net sales is about a negative six points, with about five points of positive price realization.

For the full year, net equipment sales are now forecast to be down about 19%, compared with fiscal year 2008.

This includes about five points of negative currency translation on net sales, and about six points of price realization.

Net income is forecast to be about $1.1 billion for the full year, with more risk on the down side.

Turning to a review of our individual businesses, let's start with Agricultural equipment on slide eight.

In the quarter, net sales of Ag were down about 4%, due to negative currency translation and lower shipments.

Operating profit was $635 million, down 19% for the quarter, resulting in a decremental margin of about 73%.

One of the biggest factors behind these results was this year's reduction in inventories, versus last year's inventory build over the same period.

In fact, about $60 million of the quarter-over-quarter operating profit change was due to these changes in inventory levels.

Tonnage in the quarter was down about 6%.

This number, however, does not capture the variability of the tonnage change.

Some of our factories saw double digit production increases for the quarter, while others experienced declines of 20% to 40%, or more.

Cutting inventories and slamming the brakes on production tends to reduce overhead absorption and creates near term inefficiencies.

Ag's raw material costs were higher for the quarter, but were more than offset by price.

As was the case last quarter, currency, both translation and transaction, affected the incremental margin.

We will address this in more detail later in house keeping.

Before we review the sales outlook, let's look at some of the fundamentals affecting the Ag business, starting on slide nine.

Last week, the USDA released its first in-season look at the 2009, 2010 crop.

Note, the global stocks use levels remain relatively low, with corn stocks use forecast to decline in 2009, 2010.

Moving now to slide ten, let's take a look at commodity prices.

As we enter the planting season, wet weather in Eastern parts of the corn belt has slowed planting and prompted recent reactions in price and prospective planting estimates.

It is still very early, and a lot can happen in the next few weeks.

That said, this is our current look at commodity prices.

2009, 2010 projections for both corn and beans are up from the previous quarter, with lower planting, strong ethanol demand and an improved export outlook supporting corn prices.

For a visual perspective, turn to slide 11.

Forecast prices, as you can see, are below last year, but remain at historically strong levels.

On slide 10 -- 12, I'm sorry, US farm cash receipts are forecast to be down in 2009.

We have improved our outlook for crop receipts, which are more closely tied to our business.

While the livestock forecast reflects further weakness in beef, dairy and pork.

We introduced our 2010 forecast this quarter, and as you see, 2010 US farm cash receipts are expected to increase about 4% from 2009 levels.

Slide 13 shows the Deere forecast of US net farm cash income, which is about 15% higher in 2010.

We are including this since many of you have asked for our outlook.

Remember, Deere does not use US net farm cash income as a basis for our forecast.

We continue to use farm cash receipts, which historically has been a better predictor of equipment sales.

On slide 14, as in the US, there are better net income prospects for both Brazil and Argentina in 2010, after fairly low levels of income in 2009.

Turning to slide 15, you can see the cancellation activity in the second quarter.

We continue to see very few cancellations in the United States, Canada and Western Europe.

South America experienced somewhat higher than normal cancellations in the second quarter, primarily due to ongoing drought conditions, mainly in Argentina.

Central Europe and the CIS countries experienced a moderation in cancellations this quarter.

Realistically, though, there weren't a lot of remaining orders to cancel, given the deterioration in those markets.

Before turning to our sales outlook for the new Agriculture and Turf division, let's discuss second quarter results for the Commercial and Consumer Equipment division on slide 16.

Net sales were down 24% for the quarter, reflecting weakness in the US economy.

Production tonnage was down about 36%, as the division continued to adjust production schedules in light of the weak demand environment.

Operating profit was $68 million, reflecting lower shipment and production volumes and unfavorable effects of foreign exchange.

Higher raw material costs were more than offset by improved price realization, while SA&G was lower as a result of limited discretionary spending.

Now let's turn to slide 17 and the outlook for the newly created Ag and Turf division.

Net sales are expected to be down about 14% this year, with negative currency translation of about six points.

This implies the production will be down meaningfully in the second half of the year.

As a result of this guidance, the division's operating margin for the year is forecast to be in the high single digits.

More positively, our outlook for the rest of the year reflects lower raw material costs and an easing of the factory inefficiencies experienced in the second quarter.

It also assumes solid pricing.

As a result of all these factors, we expect the division to have a decremental margin in the range of 25% to 30% for the full year.

On slide 18, industry sales of Ag equipment in the US and Canada are now projected to be flat to down slightly.

We continue to see strength in four-wheel drive tractors, combines, sprayers and planters.

Sales of tractors from row crops on down, are expected to decline and the smaller the tractor, the larger the decline.

Finally, sales of products commonly used by livestock, dairy and cotton producers are weak.

We continue to expect Western European Ag to be down 10% to 15%, and Central Europe and the CIS countries to be down sharply.

Moving to South America, on slide 19.

The outlook now is for the Ag equipment industry to be down 20% to 30% in fiscal 2009.

The change from last quarter is primarily due to ongoing drought conditions, and we expect North American turf equipment and compact utility tractors to be down about 20% for the year on an industry basis.

Let's focus now on Construction and Forestry on slide 20.

Reflecting very weak markets in the United States and abroad, net sales were down 55% in the quarter, production tonnage was down even more, about 62%, leading to an operating loss of $75 million.

Although production levels and sales were extremely low, C&F is aggressively managing inventories.

At the end of April, in the US and Canada, Deere construction dealers were carrying half the level of inventories than the rest of the industry, as a percent of days on hand.

Also, the division had positive price realization in the quarter, which offset the impact of higher material costs.

It should be noted that while no business likes to see negative results, C&F's performance in one of the worst construction downturns in history, reflects the success of our efforts to align production with demand, and achieve a more variable cost structure.

On slide 21, we expect Construction and Forestry's net sales to be down about 42% in 2009.

Global forestry markets have continued to weaken, and we now expect industry sales to be roughly half of what they were last year.

On the construction side, as you can see from the chart, economic indicators for 2009 remain bleak.

Among other things, government spending shows little impact from the stimulus package.

While the indicators do show some recovery beginning in 2010, note the very modest improvement in government spending.

This reflects cutbacks in state and local government budgets, which offset the positive, but slow flow of stimulus money.

Slide 22 is a graphical representation of key US economic indicators.

Housing starts are forecast to be extremely low in 2009, with a slight recovery in 2010, while GDP contracts sharply in 2009.

Let's move now to our credit operations.

Slide 23 shows the provision for credit losses as a percent of the total portfolio.

On slide 24, write-offs in Ag, which represents about 70% of the portfolio, are still extremely low, while the levels in C&F and C&CE reflect current economic conditions.

Slide 25 illustrates our credit operations' continued good access to global credit markets.

This quarter John Deere Capital Corporation began offering a new source of funding, core notes, a retail note program that allows individual investors to participate in the original issue market for JDCC securities.

The program has had a good response so far, with more demand than anticipated.

The program also is attractive to the Company, as it provides good match funding for our assets.

In the quarter, JDCC issued a 3.5 year medium term note, a maturity range not eligible for the FDIC guarantee.

We have been very successful funding our credit operations, which is critical to helping customers purchase our equipment, but as you can see on slide 26, this also comes at a price.

Prefunding and healthy cash balances assure we can provide financing to our customers, but they also involve a penalty in the form of a negative cost of carry.

These increased costs are reflected in our second quarter results and in our full year forecast.

A higher provision for credit losses also played a factor.

In addition, results were negatively affected by lower commissions from crop insurance.

Helping credit's results were investment tax credits, associated with our wind energy projects.

These were part of the federal stimulus package, which also extended the production tax credit.

The net tax benefit in the second quarter was about $25 million, with a total net tax benefit for the year projected to be about $50 million.

This is included in the net income guidance for the year.

Looking now at receivables and inventory on slide 27, you will note they are down from last year as reported, but up on a constant exchange basis.

Ag accounts for the increase to date, though by year-end the newly formed Ag and Turf division is projected to be down year over year, by about $375 million.

For the company as a whole, receivables and inventories are forecast to be down about $700 million.

This, of course, will have implication on production levels during the second half of the year, as is reflected in our guidance.

Slide 28 shows that receivables and inventories remain well aligned with sales.

This reflects our ongoing commitment to Deere's operating model and disciplined asset management.

Now let's discuss the latest on retail sales.

Slide 29 presents the product category detail for the month of April, expressed in units.

Utility tractor industry sales were down 26%, Deere was down low double digits.

Row crop industry sales were down 12%.

Deere was down a single digit.

Four-wheel drive tractor industry sales were flat, Deere was up a single digit.

Combine industry sales were up 17%, and Deere was up more than the industry.

On slide 30, you see that for row crop tractors, Deere ended April with inventories at 25% of trailing 12-month sales.

Combine inventories were at 15% of sales.

Turning to slide 31, in Western Europe, sales of John Deere tractors were down double digits, with combines up double digits in April.

And on slide 32, Deere's retail sales of Commercial and Consumer Equipment in the US and Canada were down double digits in the month.

Construction and Forestry sales in the US and Canada, on both the first in the dirt and settlement basis, were down double digits for the month.

Let's turn to raw materials and logistics.

Slide 33 shows raw material and logistics cost increases of about $180 million in the quarter.

Looking ahead, our forecast for the year now calls for material cost increases to be approximately $300 million, less than the $400 million to $500 million increase forecast in February.

With third quarter expected to be flat, this implies material costs will be down in the fourth quarter compared with 2008.

Now let's look at a few house keeping items.

Looking at R&D expense on slide 34, R&D increased about 11% in the second quarter, all attributable to Ag, including new product platforms and interim Tier 4 spending.

For the year, total company R&D expense is forecast to increase by about 2%.

Moving to slide 35, SA&G expense for the equipment operations was down about 14% in the quarter.

The three point increase associated with global growth initiatives, is virtually all due to two water acquisitions made in the latter half of 2008.

This was more than offset by a decrease in variable incentive compensation expense of about eight points, consistent with our incentive performance plan.

Currency translation accounted for another five points or so of the reduction.

The balance of the decline is the result of a general clamp down on expenses throughout the Company.

For the year, we project SA&G to be down about 10 points, with the water acquisitions accounting for the increases shown.

Slide 36 illustrates the year-over-year strengthening of the US dollar, relative to most foreign currencies.

As we have discussed previously, Deere's trade flows are relatively well balanced.

But this may or may not be the case in any reporting period.

Where there tend to be annual imbalances, we may hedge our exposure using currency forward contracts or currency risk sharing agreements.

The dramatic strengthening of the dollar, the extraordinary volatility of exchange rates, and the timing of our trade flows increased our exposure to currency movements in the second quarter.

Currency movements, both translation and transaction or trade flows, reduced operating profit by about $150 million in the second quarter, $100 million Ag and $50 million C&CE.

Moving to the tax rate on slide 37, during the second quarter, the effective tax rate was approximately 27%, due to discrete items.

The effective tax rate for third and fourth quarter is expected to be about 36%, putting the full year rate at about 31%.

Turning to slide 38, for fiscal 2009, we anticipate capital expenditures running about $800 million, consistent with the previous forecast.

The depreciation and amortization forecast is unchanged at around $500 million.

Included in our net income forecast is a pretax charge of about $50 million, related to the Ag and C&CE division combination.

The Company anticipates approximately 400 salaried employees will elect to participate in the voluntary separation program.

When the program was first announced in mid-April, the pretax charge was estimated at about $25 million and about 200 employees.

Also included is a pretax charge of about $60 million, associated with the closure of our Welland, Canada, facility.

Financial services forecast CapEx is also unchanged at about $100 million in 2009, primarily for wind.

Slides 40 and 41 in the appendix provide more color on the credit portfolio.

Actual shares outstanding at 30 April, 2009 were 422.8 million, and can be found in the appendix on slide 42.

As you see, there were no repurchase activity in the second quarter.

In closing, 2009 is shaping up as a tough year.

And yet we are not shying away from taking the kind of aggressive actions that reflect our commitment to the Company's operating model.

In the second half of the year, we will be curbing production, slashing inventories and receivables, and trimming costs in response to today's fierce economic downturn.

But we'll be looking ahead, too, maintaining a relentless focus on innovation, in order to bring advanced new products to our growing global customer base and making selective investments in new projects, which are designed to produce strong returns for our investors well into the future.

Thank you, Susan.

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

The Operator will instruct us on the polling procedure.

As a reminder, as usual, in consideration of others, please limit yourself to one question and a related follow-up.

If you have additional questions, you are welcome to get back into the queue and we will get to you as time permits.

Operator?

Thank you.

(Operator Instructions).

Our first question comes from Andrew Casey.

And, please state your company name.

Good morning, Wachovia Securities.

Good morning, Andy.

Question on the back half guidance.

How many production shut down days are you anticipating?

In our North -- I don't have a combined corporate number.

In our North American Ag manufacturing in the third and fourth quarters, we'd be looking at probably a combination of somewhere around 20% of available days, that's what the forecast anticipates.

In Europe, it would be a number in the 30s and it's -- construction doesn't have a very high number.

It's a little misleading there, so I'm not going to share, but they would obviously have a fair number of low or slow production.

Okay.

And, Marie, could you remind me, for North American Ag and Europe, what were the comparables for second half last year?

In North America, it would have been a very low single digit and, I'm just eye balling it here, but probably not even 20% in Europe and then, again, there would have been a higher number in Construction & Forestry, but the numbers are not really comparable to what we've gone over with Ag.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question comes from Robert Wertheimer and please state your company name.

It's Morgan Stanley.

Good morning, everybody.

Good morning.

I wanted to ask about Construction & Forestry, whether you think you've got, the margin was obviously kind of strong.

Have you got the structural cost where you want it and you just need to wait for a market recovery?

It's obviously been a very steep down cycle, and I am wondering whether that cost position is where you want it to be?

Well, we have executed according to our plan throughout this downturn, but clearly with the sales outlook we've got, we're operating at very, very low levels, and operating, frankly, below what we would have anticipated as we were doing our financial planning.

I think they have executed quite well, responded very rapidly, and followed the plan, which I should point out at this time, we've done similar things in the other division in terms of planning.

Mike, you want to chime in?

I want to just comment, you know, think about it, sales are down 55% in the quarter, production down 62%, I think incremental margins of 32% in that environment actually are pretty good.

Remember Susan's comment at the outset, that the field inventories for Deere, excuse me for the industry ex-Deere, are twice what Deere's are.

We've had, I think, very good execution there, they're maintaining their quality in their factories, safety numbers are as good as they've ever been, I was just in one of these factories for review, I thought the morale was very good, I think they're managing it, given these circumstances, as well as they can.

I'm actually not critiquing the performance at all.

It's more a question of, your goal has been to cover cost to capital in the down cycle, do you have to sort of let go of that goal given how this down cycle is, I guess we would argue abnormally steep, so you're just willing to ride out lower margin than you might have expected a couple of years ago, or do you want to, I know this is a tricky question, take further costs out?

I think the cost structure is appropriate.

We have sized this, we talk about trough and peak, but probably are anticipating a trough more that wasn't as severe as this.

I don't think this is the kind of thing that we would anticipate on a recurring basis, and it's such an extraordinary level right now, and I think we're at an appropriate level with regard to cost structure and capacity.

That was helpful.

Thank you.

Thank you, Rob.

Thank you.

Our next question comes from Henry Kirn, and please state your company name.

Good morning, guys, it's UBS.

Good morning.

How much pricing discipline are you seeing in the Ag markets globally?

Is anybody cutting prices to start to unload some of the excess inventories?

You know, what I can cite is that our price guidance has not changed from what it was for the full year last quarter, which is six points.

So I would say that I can only speak on behalf of Deere, that you see really no change in direction there.

Okay.

And for some of the credit head winds in Central Europe and the CIS, would you consider using Deere credit to, or are you using Deere credit to fill in the gap, and how much more appetite for risk do you have to put on your own balance sheet?

Do you want me to --

Go ahead, Marie, take the first shot.

We have used a variety of techniques in those parts of the world.

We have worked with local banks, we've used Exim financing and at this point we would not anticipate making any changes.

Yeah, I think that's right.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Eli Lustgarten.

Please state your company name.

Good morning, Longbow Securities.

Good morning, Eli.

Two quick questions, one, can you talk about what's going on in large tractor demand?

I guess we sold out through the summer or the beginning of the year for the 8000 and 9000 tractor series, now we've got row crops going down.

It sounds like most of the back log has been shipped, or there are just no new orders, and that could leave somewhat of a void as we go into the first part of 2010, is that what we're seeing at this point?

Well, I don't want to address 2010.

It's way too early for us to be looking there, but it is true that we have seen a little bit of softening in large tractors.

Now, not so much on the four-wheel drives, but as Susan commented, the smaller the tractor, frankly, the softer the market, but even in the upper end of the 8000s, we've seen a little bit of weakness.

What was difficult for us to measure, Eli, is that we, ourselves, are in the middle of a product transition, and that will affect our fourth quarter.

So for us, it is somewhat hard to judge how much of it is just the natural results of a product transition.

We haven't officially introduced the product yet and we won't until the summer.

We've had good early order indications, and we would have fairly light shipping schedules anyway in the fourth quarter, as we're making the transition to this new product.

So it's hard for us to really assess that upper end of the market.

But it feels maybe just a little weaker than it did a quarter ago, and that's reflected in our guidance.

And as a follow-up, can we talk a little bit more about the Construction & Forestry business.

I guess right now the expectation is to keep production levels about where they are for at least the rest of the year.

A two-part question.

One, what would it take for you to begin to raise production schedules, or are we going to go into 2010 at similar levels, at least for the first part?

Really a more important question, we knew in February, if you listened to the (inaudible) New Holland's forecast of shutting down (inaudible) the first half of the year and capital, that market was a lot weaker, what finally hit that you brought it down that much?

Probably a big surprise how far you brought it down in the second quarter, were you just late to realizing how weak this market was or was it a surprise to you?

Can you give us some idea what happened there?

Eli, I guess I would challenge your assumption that we were late to recognize it.

We've been running with much lower levels of inventory than our competition, which we've talked about really ad nauseum for the last couple of years and that continues.

Our guidance for the year last quarter was down 24, which was pretty significant.

What has changed at the margin really is not the North American outlook, per se, but what we're seeing from our forestry business, which has just really softened even further, or we saw further softening yet in this quarter.

So I think that we're following right along with what we're seeing in the market.

Yeah, I would comment as well that I think this division has been anything but late to recognize that.

I track this and we do as a group of course, on the inventory and receivables every month, and this division has a very close grip on that.

What's happened, I think, in the last few months is expectations in the market have continuously shifted in terms of retail sales estimates in a negative direction, but I think they've been extremely responsive with regard to setting production schedules and managing the asset side of it.

These are the schedule levels that we see now will go through the rest of the year and into 2010, is that the expectation at this point?

Well, first of all, this is our best estimate of the market as we see it right now and that's reflecting our production schedules and our inventory, our further inventory reductions, you recall that we're going to target the end of the year with $325 million less in the field inventory and company owned inventories.

The other observation I would make is because you are lowering inventories this year, if the market stays flat, and the retail environment stays flat, and we choose not to make further reductions in inventories, that actually would allow us to see an increase of production in 2010.

Again, I want to stay away from a forecast of 2010, it's really premature, but all other things being equal, you would have that ability for a little bit of an upside in production, but time will tell.

Thank you.

Thank you, Eli.

Next question.

Thank you.

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

Isi.

Good morning, David.

Good morning.

I wanted to discuss the balance sheet.

The net debt to cap on the equipment company obviously turns down sequential and it's fairly low.

Thinking about the inventory reduction and the production schedules for the rest of the year, you could very well end the year in a net cash position, you temporarily are holding off on share repo.

I guess the question is when do you expect to return to the share repurchase program?

Hi, David, this is Mike.

Well, as in the past, you know, we really haven't indicated when we would repurchase shares ahead of time and probably will stick with that as the methodology right now.

First of all, I'm going to agree that as the year progresses and we reduce inventories, we're likely to generate more cash in equipment operations, and I think in this current environment actually that's a very favorable thing, but I probably won't be able to give you more illumination with regard to share repurchase today.

Has anything especially changed to how you view the balance sheet?

Is the discussion initially about holding off on share repo was related to the credit markets.

If you assume.

(multiple speakers)

Yes.

I think it's early for anybody in this economy to declare victory relative to the global recession and so, we tend to be relatively conservative with managing those risks.

So it's really the environment more than anything else.

At a minimum, if you look at the last three years before this year, you were doing 1 billion to 1.7 billion of share repo.

If you do get more comfortable and go back into the share repurchase program, are those type of range how I should be thinking about it at least in your appetite for share repurchase, if you get more comfortable?

Well, again, I'm just not going to be able to help you very much on this particular question today.

Okay.

Thank you, David.

Next.

Thank you.

Our next question comes from Alex Blanton.

Please state your company name.

Ingalls & Snyder.

Marie --

Good morning, Alex.

Good morning.

You mentioned that the impact of inventory reduction versus last year's inventory increase was $60 million.

Yes.

Is that the figure?

Yes.

In the Ag business.

In the Ag business.

Only in the Ag business?

That's the only number that we actually have calculated out, yes.

Okay.

Because if you look at the inventory as a whole, the change this year was a reduction of $286 million, and last year was an increase of $282 million, so?

Alex, let me anticipate your question.

That is more than you're looking at with the $60 million, right?

Yes.

For the full company, the impact would be about $80 million.

Okay.

That still seems a little bit light when you look at the total inventory change year-over-year, adding the increase this year, the increase last year and the reduction this year is $568 million, so $80 million is something like 15% of that.

That's exactly how we value an inventory change, at a 15% incremental margin.

15%, okay.

Good to have that figure.

And we can look for that same effect in the second half as you reduce inventories even more, is that correct?

That would be fair.

Okay.

Thank you very much.

Thank you, Alex.

Next.

Our next question comes from Meredith Taylor.

Please state your company name.

Barclays Capital.

Good morning.

Hi, Meredith.

What I have is really a follow-up on Eli's question.

I'm hoping we can dig into your outlook for North American Ag flat to down 5%.

This is a somewhat different view of the market than your peers, and I certainly understand you're not going to comment on your competitors' outlook, but I'm hoping you can give us some detail if possible on how you're looking at the market for combines, large tractors, and under 100-horsepower tractors.

Combines we actually see up, so we probably have a more positive view than I believe our competitors do.

That may have something to do, again, with our difference in fiscal year cut off, versus they are on a calendar year.

But we would see combines actually up a low, for the industry, a low double digit.

Big tractors for the industry, we would see up a little bit, a low single digit, and then again row crop tractors on down, down single digit all the way to, you could look at declines almost up to 25% in some of the smaller horsepower categories.

That's our view of the industry on a fiscal Deere basis.

Okay.

That's helpful.

And then, you've indicated that the risk remains to the down side with this $1.1 billion of guidance.

Is there any additional color that you might be able to give around where the areas of vulnerability are that would potentially imply this down side risk?

The $1.1 billion is our best estimate as of this time, however, obviously, our previous estimate was $1.5 billion.

There is a lot of uncertainty, we feel, in terms of how things develop for the economy over the course of the year.

The economic fundamentals do seem to slide, just even yesterday, housing came in a little lighter I think than was expected.

So we just felt it was prudent to give our guidance with that caveat.

Okay.

That's helpful.

Thank you.

Thank you, Meredith.

Next.

Thank you.

Our next question comes from Jerry Revich.

Please state your company name.

Good morning, Goldman Sachs.

Good morning.

Marie, can you please help us reconcile your comments on a few cancellations in US and Canada with rising dealer inventories and declining retail sales for row crop tractors.

Are your dealers taking deliveries of tractors despite customer cancellations or is there another dynamic there?

No.

You're looking at a very marginal change in the upper end of the row crop market, first of all.

We have had no cancellations to speak of, you get in any period, a handful here and there, so we continue to see very normal levels of activity.

We are a little quieter in terms of getting some new retail activity.

If you'll recall last time, although we had been ordered out, really, effectively through July, we ran a quiet period, we had stopped taking orders on the old product.

We were making the transition to the new models.

People haven't yet seen the new models.

So I think we're just a little more cautious in that upper end, but there's been no cancellation activity to speak of.

Let me add a little color there, on the used equipment pricing on the tractor side, it's still holding up quite well at this stage.

Yes.

Turns on both tractors and combines are the highest they've been at this time of the year in five years.

So they're very good.

.

Okay.

And I'm wondering if you can talk about ag equipment orders in the quarter, Marie, you alluded to it, I'm wondering if perhaps you could comment on where book to bill this quarter stacked up, versus the prior year quarter?

Well, again, there's really no change on the row crop tractor side, because we had closed on the old model.

In terms of combines, we continue to look at about a 95% coverage ratio on retail orders.

Which is consistent with last year?

I don't know where we -- I don't recall where we would have been last year.

We hadn't opened our -- I'm sure it would be very similar.

We hadn't opened the early order book until July, so I can't imagine it's significantly different.

Much better than typical.

Okay.

Between the two years.

The other thing is, remember, we have additional capacity available to us this year that we didn't last year and it's approximately 30% came into play for us in the month -- of March, the second quarter.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Andrew Obin.

Please state your company name.

Yes, Merrill Lynch.

Hi, Andrew.

Hi.

In terms of the pricing outlook, I'm just a little bit confused because you kept it at 6%, but I would imagine that, A, the mix has changed and, B, Construction & Forestry pricing is perhaps weaker than it was, so does it mean that Ag pricing has actually gotten better, or is it just the methodology?

Well, I would say that we had anticipated the market conditions fairly well in the construction side of the business, and in the Commercial and Consumer, so we have not had to make significant changes in the outlook.

I'm just talking about the math, given the tonnage that you've taken down in construction, right?

The tonnage would not relate to the price realization.

The price realization is done taking a look comparing prices this year versus last year and it's done on the sales basis of 2008.

It's how we apply the math.

Okay.

So it's just a methodology.

The second question is what are you hearing about dealers' ability to carry inventory, and particularly used equipment inventory, given the higher cost of floor financing, because we've been hearing that it's been a constraint for the distribution channel?

Well, you know, we do provide floor plan terms for our dealers to help them with their used inventories, in some cases, in other cases they have pool funds that they can apply to it and then, of course, they can always get a line of credit from our credit operations.

Our inventories, we again have managed very, very well.

We're quite pleased with the turnover that we've seen on the used side.

Inventories on the construction side have been more problematic, generally speaking and the used side, but again, for Deere, our dealers are doing a very good job of managing those inventories, they're very proactive with them.

So, Mike, go ahead.

This, I think, is a good example of the advantage of having John Deere Credit as part of our enterprise.

The access we've had to the capital markets for funding have allowed us to continue to provide good wholesale credit funding capability for our dealers.

So, I think our experience in the channel in this regard might be different than some others.

I appreciate the comment.

Thank you very much.

Thank you, Andrew.

Next.

Thank you.

Our next question comes from Charles Rentschler and please state your company name.

Wall Street Access.

Good morning, Charlie.

My first question has to do with the forecast of prices up six points.

Could you kind of parse that for us?

You've got the new line of tractors coming out, which I assume bears on that as tractors probably have more emissions control kind of stuff on it, and would have higher prices.

Charlie, we have not made announcements on the new products, new price realization, obviously that would factor into what we've got in our guidance, but we have not made any public commentary on it.

My other question had to do with merging Consumer & Commercial into the Ag equipment, the new Ag and Turf, and I don't understand the rationale for that, you've got almost 90% of the sales of the three equipment businesses now into that one reporting segment.

I mean why not just go to a single reporting segment?

One other issue, I was wondering how you take, you motivate your employees on SVA and you take a negative SVA business and merge it with a positive, and how do you work that out with the people's pay and the morale?

Well, first of all, Charlie, when you talk about them being different businesses.

In the Commercial and Consumer Equipment business, if you strip out landscapes, 70% of their sales were going through the Ag dealer.

So they're really -- the distribution channel is very similar.

As we merge the divisions, you'll recall that we are offering voluntary separations.

This will allow us to change the cost structure as we eliminate some redundancies that are unique in the division.

We feel very positively about that.

That is an ancillary benefit.

We feel that as we effectively work together and merge this market together, we have a better opportunity at serving customer needs that really span the Ag and the C&CE product line.

Mike?

Well, I think, first of all, your 90% number is overshoot, it's not anywhere near that large.

Yes.

But I think there have been changes in the dealer consolidation that's occurred over the last 10 or 15 years.

It didn't always have this large of a mix of the C&CE products going through Ag combination dealers.

Back 12 years ago or so, it was probably closer to 50/50, but the consolidations that have occurred resulted in this large part of the volume now going through the Ag combination dealers.

So it's just a tremendous benefit on the marketing and sales side in terms of leveraging dealer development and order fulfillment, and basically to help us get economies of scale and reduce cost and make this is a pretty attractive thing to do.

Thank you, Charlie.

Next -- Charlie, we need to move on to the next question.

Thank you.

Our next question comes from Ann Duignan.

Please state your company name.

Good morning.

JPMorgan.

Good morning, Ann.

Hi.

I want to take a step back and talk a little bit about your outlook for farm cash receipts, particularly for 2010.

I note that you have a significant recovery forecast for the livestock sector, and I'm wondering if you could just walk me through the logic there.

I mean the livestock sector as you noted is just devastated right now, and very long cycles there and I'm not sure that I would be forecasting quite a significant recovery going forward.

So I'm just curious what you had embedded in your 2010 outlook there?

Generally speaking we expect that this will be a year of, at least in the first part of the year, of reduction in herd sizes.

We expect pricing that will clearly help the pricing outlook.

We do see the producers.

We actually thought, we use an outside service as you know for a lot of our economic insight, but they actually thought pork producers would turn profitable even in the very near term.

Obviously, that's been delayed a bit as we've seen pork prices adjust because of the concerns related to H1N1, although there's, as you know, no relation.

So we see pork producers returning to profitability as we move later into the year, and with the adjustments that have been made in the beef herd size, the potential for people to improve profitability.

That's our view at this time.

I'm not actually --

And that will help support prices.

Right.

And that leads me to my second question, if that indeed is the case, then it will put downward pressure on consumption of crops for the livestock sector next year and also, ethanol is in a pretty precarious situation, so I'm curious on your crop side, how do you reconcile the fact that we're going to consume less crops from both the feed sector, and maybe even the ethanol sector?

Our assumption, which is that the 2009 - 2010 crop will use 4.1 billion bushels of corn to meet the renewable fuel standards and that's up from the 3.65 billion bushels this year.

That's in the assumptions.

We actually would see, you also have some improvement in the pricing environment in the market, which also helps support that cash receipts number.

Okay.

You didn't really answer how much you're expecting to be consumed by feed, but I can go through that off line.

That's a plus number, too.

I would have to dig it out for you.

Okay.

That's fine.

I'll take it offline.

Thanks.

Thank you.

Thank you.

Our next question comes from Mark Koznarek.

Please state your company name.

Hi, Cleveland Research.

Good morning.

Good morning, Mark.

Question.

Would you guys be able to step back and review for us across the entire company what has been done in total with regard to cost reduction actions, where do we stand in staffing today relative to peak levels that might have been whenever that was in 2008, and other cost reductions like Welland, I don't know if there's other fixed cost reductions going out, but help us understand how much that's down and then how much of that is fixed cost reduction that is likely to be permanent rather than volume related reductions that will recover when volumes recover someday?

I think the place to start would be Welland, which we said is an ongoing benefit of about $50 million, in terms of cost savings from that and right now our current estimate would be another $50 million as a result of the merger of the Ag and C&CE division.

In terms of flexibility, probably the most significant thing that we've done in head count is that as we were ramping up in 2006, 2007, 2008, as we used temporary workers to a much larger fashion on the salary side, and so we have the ability as we move down to move those, to reduce those costs, that's partly what you see flowing through our SA&G numbers, as you see that, that flowing down.

In addition, I think you're aware, painful though they are, we've had layoff announcements at several factories.

I don't have an actual head count number for you at my fingertips.

Well, I think as I recall, Welland was about 800 people, and I think the sum of the layoffs, if you put them all together, it's about a thousand.

A thousand across the entire corporation, is that what you mean?

That's what I'm looking at North America.

I'm not sure about what we have overseas.

I don't have a number.

I'm sorry.

Okay.

With volume down 19% this year, I'm just wondering whether overall for the company we have reductions of anywhere close to that or are the reductions much more modest than that?

The head count.

I'm sorry, again, we have had broad use of contingent employees that gives us flexibility and that does not get picked up in the head count numbers and I do not have a way of helping you on that.

Okay.

I'll follow-up offline.

Thank you.

Thank you, Mark.

Next.

Thank you.

Jamie Cook, your line is open and please state your company name.

Good morning.

First question, just a follow-up on the FX side, I don't know if I missed this, but what are we forecasting the impact of FX translation on operating income for 2009?

And then I guess just my second question, sort of longer, sort of bigger picture here, as I look at your cash receipt forecast for 2010, and your commodity price forecast, and I guess I look at that and you are one of the few companies that I would say within my group that aren't honing in materially on CapEx, we're still I think assuming we're spending more than G&A, so I'm trying to think about, one, has there been any changes in where we're spending CapEx relative to where we were last time?

If you can just help me out there.

Okay.

First of all, your first question had to do with currency and translation, transaction.

No, actually, we did not provide you with a forecast for the full year, and we actually did not do this in the first quarter either because of the variability that we had encountered early in the year, we have elected not to provide specific guidance.

You do know that in the first quarter it was approximately $150 million and in the second quarter it was $150 million, and then it remains to be seen ultimately what happens with the exchange rates as we move through the year.

Regarding your second question, the $800 million spend, you do recall, of course, that we are going to be subject to Tier 4 emissions regulations, which impact off road industries starting in 2011, and actually last year we were ramping up our engineering resources to make sure that we are able to meet.

We have the technologies, we're doing very well as we are moving closer to the launch date, but the spend you're seeing is directly and indirectly related to interim Tier 4.

We are also tying all of our new product developments, new features that will roll out with those machines, and so it's all happening at the same time as the interim Tier 4 engine emission launch occurs.

So you've got really sort of a double whammy so to speak.

Okay.

Thanks.

I'll get back in queue.

Thank you, Jamie.

I have time for one more question.

Thank you.

Our last question comes from Bill Selesky.

Your line is open and please state your company name.

Yes, Argus Research.

Good morning and thank you.

Good morning, Bill.

Just had a quick question, Marie, on stimulus spending and its effect in the Construction and Forestry business.

I know little is going to be spent in 2009, but do you have any anecdotal evidence from any dealers as to whether they're more positive, less positive, on this potential benefit going forward?

In terms of our view of the rate of spend on the stimulus, we actually have a fairly cautious outlook, which I believe is similar to many others in terms of how fast that money could actually flow into the marketplace.

Really what's changed, if you will, in the last few months, is because many states and local governments are hitting spending caps, some of them have mandatory balanced budget requirements, we are seeing pull back where state and local governments have some discretion to slow that spending.

So that has made, if you will, for a little bit more cautious outlook in terms of the rate of spend.

Time will tell as we move into 2010.

Okay.

Great.

That's helpful.

Thank you.

Actually, we have time for one more.

Do we have anyone left in queue?

Thank you.

Daniel [Dowd], your line is open and please state your company name.

Bernstein, glad to get in under the wire.

Okay.

So you've guided for your Ag and Turf revenue to be down 14%.

Can you break out what the actual Ag revenue you think is now going to be down?

Actually, that will not be possible.

We have already converted our forecasting for the combined division.

So I do not actually have separate forecasts.

We do not as a company have separate forecasts.

Okay.

So as I look at the way in which you've adjusted your end market agriculture forecast down, it seems like, as do I the back of the envelope math, that that didn't come down as much as your Ag revenue adjustment likely was, is that correct or not?

I'm really not going to be, I would only be able to speculate, so I'm not going to be able to because I do not have an Ag forecast.

I just have a combined division forecast.

Okay.

Well, then let me turn to one other issue.

So, obviously the 73% decrementals in the Ag business, pretty shocking.

I mean clearly you mentioned, that big chunks of it were due to fixed cost absorption and yet you're also saying that the decremental for the Ag and Turf business is going to be 25% to 30%.

What is going to be so very different about the manufacturing operations in the back half of the year, compared to the kinds of things that happened in Q2?

As you start to rapidly adjust your production schedules, you just get some inefficiencies as you slam on the brakes, and those inefficiencies will diminish as you adjust to the new operating levels, as we move forward through the second half of the year.

You also will get some relief on the raw material side, the implied guidance is flat in the third quarter and then down in the fourth quarter, so you'll get some help there as well.

Were there any specific manufacturing hiccups at particular locations or anything that caused such an extraordinary decremental?

No, it is not that.

Susan, in her opening comments, talked about the fact that we had a lot of, the tonnage is only down 6% in the quarter, but while you had one unit in particular up double digits, you had a lot of units that were down 20% to 40%, and a couple of that were down even more than that.

So when you adjust to that kind of a production outlook, and we're doing it very rapidly, in that initial period, you just get some inefficiencies as you are slamming on the brakes that you're able to better manage as you go through the rest of the year.

Okay.

Thank you.

Thanks to all of you for participating in today's call.

Susan, Justin and I will be available the rest of the day to answer your calls afterwards.

So thank you.

Thank you.

That concludes today's conference.

You may disconnect at this time.