強鹿 (DE) 2009 Q3 法說會逐字稿

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

(Operator Instructions) I would now like to turn the call over to Ms.

Marie Ziegler, Vice President Investor Relations.

Good morning.

Also on today's call are Jim Field, our new Chief Financial Officer; as well as Susan Karlix and Justin Marovecfrom the Deere Investor Relations staff.

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

After that, we'll respond to your questions.

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

They can be accessed on our Website at www.johndeere.com.

First, a reminder.

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

Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is prohibited.

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

This call includes forward-looking comments concerning the Company's projections, plans and objectives for the future that are subject to important risks and uncertainties.

Actual results might differ materially from those projected in 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 this 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/financial reports and the information is under the "other financial information." 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 the quarter, here is Susan.

Thanks, Marie.

All things considered, John Deere's third quarter was good one.

The Company reported another solidly profitable performance at a time when overall global market conditions remained challenging.

That being said, the market for large farm machinery in the US and Canada has held up reasonably well, to the benefit of our ag & turf operations.

Our construction & forestry business, despite a small loss, showed impressive resilience in one of the worst market environment in memory.

Our credit operation had good results.

While maintaining sound portfolio quality and access to the credit markets.

In addition, Deere continued to demonstrate sound execution and real discipline throughout the Company.

Curbing expenses, curtailing factory production and shrinking inventories and trade receivables in response to conditions in the retail marketplace.

As a result of these factors, beginning with slide three, Deere reported net income for the quarter of $420 million on third quarter net sales and revenues of $5.9 billion.

On slide four, total worldwide equipment operations net sales were $5.3 billion, down 25% in the quarter versus third quarter 2008.

Currency translation on net sales was negative by approximately 4 points, with about 6 points of positive price realization.

Both divisions had positive price realization in the quarter.

Our disciplined approach to asset management has helped support pricing in some extremely tough markets.

Turning to slide five, worldwide production tonnage was down 24% in the quarter, reflecting continuing weak conditions in many of our markets and our focus on managing inventories and trade receivables.

Worldwide production tonnage is expected to decrease about 43% in the fourth quarter of 2009, and be down about 22% for the full year.

As you'll note on slide five, we have provided fourth quarter tonnage by division and region due to the magnitude of the projected decreases.

In absolute terms, we haven't seen such a low level of tonnage produced since the fourth quarter of 2002.

The fourth quarter reductions in tonnage will allow us to keep inventories in line with retail markets and provide the necessary flexibility to rapidly respond to customer requirements when markets recover.

Let's turn to the Company outlook on slide six.

Fourth quarter net sales are expected to be down about 34% compared with the fourth quarter of 2008.

Currency translation on net sales is negative by about 1 point, with about 3 points of positive price realization.

The 3 points of price realization is against a very tough comparison.

In the fourth quarter of 2008, we reported about 3 points for the Company worldwide and even more for US and Canada ag & turf, as a result of some interim price increases.

For the full year, net equipment sales are now forecast to be down about 21% compared with fiscal year 2008.

This includes about 4 points of negative currency translation on net sales, and about 5 points of positive price realization.

The change in price realization since our last forecast is accounted for by lower price realization in landscapes, now a part of the ag & turf division, as fertilizer prices have declined in the range of 50% and market conditions in construction & forestry.

Net income for the year is forecast to be about $1.1 billion, unchanged from our previous forecast, despite lowering our sales guidance by 3 points, excluding currency, or approximately $775 million.

Our net income guidance implies break-even performance in the fourth quarter, which will see extensive production cutbacks as well as some reorganizational charges.

Those charges are spelled out on slide seven.

They include a pretax charge of about $100 million related to the ag & turf combination.

This reflects the approximately 800 salaried employees who elected to participate in the voluntary separation program.

The charge in the fourth quarter is about $85 million.

Also included for the full year is a pretax charge of about $44 million associated with the closure of our Welland, Ontario, Canada facility.

The fourth quarter charge for Welland is about $27 million.

Since these charges are occurring over multiple reporting periods, I'd like to point out that the total projected pretax costs of the Welland closure is approximately $97 million.

Going forward, in 2010, projected annual savings due to the ag & turf voluntary separations are $50 million to $60 million.

In subsequent years, projected savings are about $75 million.

The projected savings from the factory closure in Canada is about $40 million annually, beginning in 2010.

Turning to review of our individual businesses, let's start with agricultural & turf on slide eight.

In the quarter, net sales were down 21%, mostly attributable to lower volume.

Operating profit was $480 million, down 34% for the quarter, resulting in a decremental margin of about 20%.

Tonnage in the quarter was down 19%.

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

Relative to consumption, corn and wheat stocks have increased in the current marketing year but global commodities stocks to use remain relatively low by historical standards.

The 2009/2010 crop year should see a slight recovery in wheat and soybean stocks.

While corn stocks will draw down.

Moving now to slide 10, let's take a look at commodity prices.

Corn prices have moderated in recent weeks, as concerns over the impact of the difficult spring planting season have abated.

With corn yields expected at about 160 million bushels per harvested acre, supplies are adequate, keeping prices at moderate levels.

For soybeans, tight stocks will keep stocks relatively high.

Exports from the US are expected to remain strong due to low South American production and robust Chinese demand.

Turning to slide 11, forecast prices, as you can see, are below the very high levels of last year but they remain at historically very strong levels.

On slide 12, US farm cash receipts are forecast to be down in 2009 but 2010 US farm cash receipts are expected to increase about 4% from 2009 levels.

Slide 13 highlights the step changes that have taken place in US farm cash receipts.

2009 receipts, although down from the historically high level of 2008, are at extremely attractive levels.

On slide 14, ethanol margins have improved since May, being driven by lower corn prices.

Even including interest, tax, depreciation and amortization, margins are comfortably positive.

Our forecast currently calls for ethanol to consume 4.15 billion bushels or about 33% of this year's anticipated corn production.

Let's move to slide 15, where net income prospects for 2010 are improving for both Brazil and Argentina.

Positive factors include above-average commodity price projections, lower production costs, currency rates and a forecast for normal weather in Argentina.

An El Nino weather pattern, already in place, should bring better weather conditions for the upcoming summer crops there.

Turning to slide 16, we have outlined the encouraging agricultural support programs put in place by the Brazilian government.

China, incidentally, has also significantly increased its support of agriculture.

We have included a slide in the appendix, slide 43, summarizing its programs.

Both are exciting developments and will support our growing business in those regions.

Now let's turn to slide 17 and the outlook for the ag & turf division.

Net sales are expected to be down about 15% this year, with negative currency translation of about 5 points.

Implied in this full-year guidance is an operating margin in the high single digits for the division.

We expect A&T to have a decremental margin of about 30% for the year.

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

We continue to expect western European ag to be down 10% to 15%, with the central Europe and the CIS countries down sharply.

Moving to South America on slide 19.

The outlook for the ag equipment industry continues to be down 20% to 30% in fiscal 2009.

Finally, we expect industry turf equipment and compact utility tractors in the US and Canada to be down about 20% for the full year.

Let's focus now on construction & forestry on slide 20.

With continuing weak markets in the US and abroad, net sales were down 47% in the quarter.

Production tonnage was down even more, 52%, leading to an operating loss of $28 million.

That resulted in a decremental margin of about 22%, which is pretty impressive in one of the worst construction downturns in history.

Although production levels and sales were extremely low, C&F has continued to aggressively manage inventories.

At the end of July, Deere construction dealers in the US and Canada were carrying less than 50% as much inventory as the rest of the industry based on percent of days on hand.

This further highlights the success of our efforts to align production with demand.

On slide 21, Construction & Forestry markets have further deteriorated since our last forecast.

We now expect construction & forestry net sales to be down about 47% in 2009.

On an industry basis, construction sales in the US and Canada are now expected to be down 45% to 50% and global forestry sales to be down about 55% from last year.

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

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

Implied in the full year guidance, is a negative operating margin for C&F in the mid single digits, and we expect the division to have a decremental margin in the range of 25% to 30% for the year.

Let's move now to our credit operations.

Slide 22 shows the provision for credit losses as a percent of the total portfolio.

As you can see in the footnote, the current annualized percentage is about same as we anticipated in April.

On slide 23, past dues and write-offs in ag & turf, which represent the majority of the portfolio, are still extremely low.

What you see in the C&F and revolving charge portfolios is reflective of current economic conditions.

The table on slide 24 illustrates the non-performing receivables for our worldwide credit operations.

Although the A&T portfolio, overall, continues to be in excellent health, you will notice a large increase in this number, year-over-year, relating to a timing issue in Brazil.

Much of the borrowing in Brazil is done under a government program called [Panami].

Most of the annual principal payments under Panami are due on the 15 of May.

You may recall that last year's payment was postponed, resulting in the 2008 and 2009 payments both due on May 15 of this year.

In Brazil, when a payment becomes 60 days past due, we classify the receivable as non-performing.

At the end of the quarter, July 31, some of the payments due on May 15 had not yet been collected.

That resulted in the 1.59% nonperforming receivables in ag & turf.

To put this into perspective, at the end of July, Brazil's non-performing receivables accounted for 1.25% of the total worldwide ag & turf portfolio and represented 0.65% of the worldwide credit operations portfolio.

80% of the customers accounting for 77% of the dollars due have paid their Panami installments.

The credit Company has recently updated its ongoing analysis of our customer base in Brazil.

Although we do have some customers experiencing financial difficulty, many have the ability to make their payments.

We are optimistic about our ability to collect the majority of the outstanding payments, since, customers who are behind on their payments are ineligible to receive additional Panami funding.

Additionally, we continue to believe that we are adequately reserved for potential credit losses.

As further evidence of the excellent condition of the ag & turf portfolio, slide 25 shows non-performing receivables for John Deere Capital Corporation only.

As you can see, non-performing receivables for the entire portfolio are very low.

Turning to slide 26.

This slide illustrates our credit operations' continued access to global credit markets.

In the quarter, we completed several funding transactions, one of which was an approximately $700 million TALF eligible, term ABS deal.

We have been very successful funding our credit operations and now have all maturities funded through the third quarter 2010.

Moving to slide 27.

The credit operations had net income in the quarter of about $99 million versus about $80 million in the third quarter of 2008.

In the quarter, investment tax credits associated with our wind energy projects helped results.

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

The net tax benefit in the quarter was about $30 million, with a total net tax benefit for the year projected to be about $75 million.

This is included in the net income guidance for the year, which is forecast to be about $270 million.

Looking now at receivables and inventory on slide 28.

For the Company as a whole, receivables and inventories are forecast to be down about [$875] (corrected by Company) million for the year, in line with the cuts in production discussed earlier.

Slide 29 shows that receivables and inventories remain well aligned with sales.

This reflects our ongoing commitment to Deere's operating model, which includes disciplined asset management.

Now, let's discuss the latest on retail sales.

Slide 30 presents the product category detail for the month of July expressed in units.

Utility tractor industry sales were down 29%.

Deere was down in line with the industry.

Row-crop industry sales were up 8%.

Deere was up double digits.

Four-wheel-drive tractor industry sales were up 29%.

Deere was up strong double digits, more than the industry.

Combine industry sales were up 25%.

Deere was up more than the industry.

On slide 31, you see that for row-crop tractors, Deere ended July with inventories at 22% of trailing 12-month sales.

Combine inventories were at 17% of sales.

Turning to slide 32.

In western Europe, sales of John Deere tractors and combines were down double digits in July.

And on slide 33, Deere's retail sales of selected turf & utility equipment in the US and Canada were down double digits in the month.

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

Slide 34 shows raw material and logistics costs were flat in the quarter for both divisions.

Consistent with last quarter's forecast, we expect material cost increases to be approximately $300 million for the year.

This implies a benefit of about $150 million in the fourth quarter of the year versus 2008.

Now, let's look at a few housekeeping items.

Slide 35 illustrates the year-over-year strengthening of the US dollar relative to most foreign currencies.

Currency movements, both translation and transaction or trade flows, reduced operating profit by about $75 million in the third quarter.

Looking at R&D expense on slide 36.

R&D increased about 2% in the third quarter and is expected to be up about 5% for the year, with the increase coming from Tier 4 emissions spending.

Moving now to slide 37.

SA&G for the equipment operations was down about 18% in the quarter.

The 2 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 9 points, consistent with our incentive performance plans.

Currency translation accounted for another 3 points or so of the reduction.

The balance of the decline, about 8 points, is the result of expense reductions throughout the Company.

For the year, we project SA&G to be down about 9 points.

Moving to the tax rate on slide 38.

During the third quarter, the effective tax rate was approximately 22% due to discrete items.

The full year effective tax rate is now expected to be about 27%.

Turning to slide 39.

For fiscal 2009, we anticipate capital expenditures running about $800 million, consistent with the previous forecasts.

The depreciation and amortization forecast is about $525 million.

Our forecast currently includes about $150 million for pension and OPEB contributions in the fourth quarter.

Capital spending for financial services is forecast around $80 million in 2009, primarily for wind projects.

Slide 41 in the appendix provides supplemental information on net sales and operating profit for the newly formed A&T division.

Slide 42 outlines our current projections for US net farm cash income.

The China government support of agriculture, referred to earlier, is highlighted on slide 43.

Finally, on slide 44, you see that actual shares outstanding on July 31 were 422.9 million.

In closing, John Deere is in the home stretch of another solid year.

The Company, as we just saw, is projected to earn over $1 billion, in spite of what is likely to be its largest single year sales decline in at least 50 years.

What's more, we've shown real progress creating a more flexible cost and asset structure that can adjust to changes in the retail marketplace.

For the rest of the year, we'll keep on curbing production and inventories in response to today's weak conditions.

But as we do, we'll also be setting the stage to fully capitalize on any future upturn.

And we'll be preparing for a very promising future, based on the world's prospects for population and economic growth over time.

To that end, we're continuing to bring advanced new products to a growing customer base and making selective investments designed to produce strong returns for 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.

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

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

Laura.

Thank you.

(Operator Instructions) Our first question comes from Steve Volkmann and please state your company name.

(Operator Instructions) We'll move to the next question.

Meredith Taylor, please state your company name.

Hi, good morning.

It's Barclays Capital.

I'm hoping that you can talk a little bit about how we should think about margins in the fourth quarter in the ag & turf business?

You talked a little about the 30% decremental for the year, which suggests about 25% in the fourth quarter.

Clearly, the costs associated with the consolidation is a drag there but then, how should we think about the drag from underproduction in that business?

And then, from the boost of pension guidance, what the split is between ag & turf and construction & forestry?

First of all, let me address your second question.

Pension guidance is a funding issue.

It does not affect our accruals, which are basically unchanged in our guidance.

So, that's a funding decision.

Regarding the drag from the change in inventories, it is fairly significant in the fourth quarter.

But maybe a better way just to help everyone kind of cut to the chase here, we are expecting our ag division will remain profitable but that that operating margin, and it's implied in our guidance, is something around 1%.

So, it's fairly low.

But are there other issues, other than the underproduction, that I should be thinking about in terms of drag there?

Is there a mix issue at stake as well?

There's always lots of this and thats but the most significant item is, very clearly, the production changes versus last year when we were really in a very strong production mode.

And then, you correctly cited earlier the restructuring -- repositioning charges.

I might just add to Marie, when you think about the production for the ag division in the fourth quarter of the year, they're going to be shut down basically about 1/3 of the available production days.

Just to give you sort of an order of magnitude.

These are some pretty significant shutdowns.

Okay.

Maybe if you could talk -- I appreciated the color that you gave in terms of US and Canada versus rest of world.

But maybe if you could just give a little bit more color specific to the US, what -- how much of a factor the transition to the new 8000 Series tractor is, in terms of the under production in the US?

And then, globally, I'd appreciate it if you could give a little bit more color on how we should think about Latin America versus Russia versus Europe and just how to think about some of the geographies?

Regarding the change in production to the new 8000 R, we actually are already in production.

It's a very limited factor, frankly, in the fourth quarter.

We actually did a -- went back and double-checked on that.

So basically, no factor.

Regarding the outlook for some of our newer emerging markets, you may have noted that our outlook for production tonnage outside the US and Canada actually increased, if you will, from being down 28% to being down 24%.

And that really reflects strength in markets in India and in China.

Which admittedly, are a smaller part of our business, but are very encouraging.

And a little bit of improvement at the margin in Brazil.

And so, we were actually able to improve our tonnage there.

Our market outlook for Russia, as we talked about, continues to be very cautious and it's down significantly from what was last year.

Okay.

I'll get back in queue.

Thanks so much.

Thank you.

Our next question comes from Joel Tiss.

Hi, Buckingham Research.

I wondered if could you clarify just on the slides 30, 32 and 33, double digits.

It covers everything from 10% to 99%.

Can you just give us a little -- teens or 20's or something to help clarify that a little bit?

That's not typically been our practice and so, I'm going to not be able to respond any more definitively than what we've already said.

I think though it's pretty implicit when you're talking about construction & forestry, given where our sales guidance is for the year, that those are still looking at pretty significant year over year declines.

Okay.

And then, just one other question.

The inventories, where you expect to be at the end of the year, is that pretty much going to be where you need to be for 2010, or do you feel like it's more of an ongoing process, or are you going to need to rebuild a little bit as we're working through 2010?

Can you just give us a sense of where you feel like you are?

Well, I'll start with construction equipment.

And I'm going to preface it with obviously we don't have our guidance for 2010 yet and we're not being cute externally.

We're still obviously developing that picture ourselves inside as well.

But in construction, given where our inventories are ending, we believe that we will be able to increase our production next year, even if the retail market does not change because we believe we will be in very good position.

At this time, we would say the same for our agricultural & turf division, although it covers many, many countries.

But it is our intention to end the year with our inventories positioned where we think they need to be.

As you think about ending inventory, do remember, that we had a very different set of circumstances this time a year ago regarding the former Soviet Union.

And that did have an impact on what we felt we needed to have in terms of work in process and raw material inventories, specifically in the US and to some degree even in western Europe.

Because we sold in 2008 approximately $1.9 billion into central Europe and the former Soviet Union.

We were expecting to see fairly significant gains in 2009.

In order to get those units into the region in time for the spring planting season, you really have to be in production in the late fall and over the early part of the winter.

So, we had our inventories and production plans accordingly.

Now, as you know, the liquidity crisis hit, we had very strong demand out of the US and Canadian markets and Australia, for example.

So, we were able to reposition some of that planned productions into other markets.

So we're looking at very different set of factors.

So, bear that in mind as you're thinking about that change.

A lot of it really relates to the former Soviet Union.

And one other thing, Joel, as we look at where we're planning to end the inventories, the other issue that we've got, we've brought on capacity in 2009 at Waterloo.

We've brought on capacity at Harvester.

And we've brought on capacity in Brazil.

Which gives us some sort of optionality because we can turn up the production and react to upticks in the demand quicker than we could before.

Okay, great, thank you very much.

Thank you.

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

ISI.

Good morning.

On the -- the fourth quarter production, I believe, correct me if I'm wrong, The guidance used to be 28% of available production days will be shut down.

Now, it's 33%.

Can you please help us understand where the increase is coming?

Is it the larger equipment, East Moline, Waterloo?

And maybe dove tail that into any comments you may have on the quarter book for ag, particularly the big tractors and combine.

Actually, David, there is no single factory that would stand out in terms of a dramatic change one way or the other.

And in fact, versus our previous expectation, we increased production for our big tractors, both for the 8R and for the 9000.

The 8R introduction has gone very well.

So, that has actually had a little bit of positive benefit in the fourth quarter but it's really just a series of adjustments.

And did I hear correctly when -- you mentioned construction, if retail was flat, do you believe they can increase their production?

And then, you made a comment about ag & turf in the same regard.

Obviously the assumption about retail flatness --?

I didn't suggest that they could necessarily increase production.

I'm sorry for interrupting.

But rather, we believe that our inventories will be correctly positioned there.

The markets are so diverse, it's hard to make that general observation.

And the ag division has benefited a lot this year from pricing, some of the carry-over from last year.

What's the early indication on pricing being put out in the field for '10?

We have actually announced for two products.

The early order program on combines, in the US, we took price increases in the range of about 3.5%.

On the new 8R series, the indicated increases and admittedly, that's one tractor family but that's 4% to 6%.

Now, as you think about that 4% to 6%, do bear in mind that there are feature improvements, a new cab that's phenomenal, better suspension systems on our track models, some higher horsepower.

So some of that 4% to 6%, when we actually do our price realization calculation, will end up reclassified into volume because we try to account for that as volume.

And that's a price increase that's out there already, that you're also saying that, so far, the introduction of the 8000 has gone relatively well versus your expectations?

It's gone -- absolutely, the 8R.

Thank you, David.

Next question.

Thank you.

Our next question comes from Jerry Revich.

And please state your company name.

Good morning, it's Goldman Sachs.

Jim, I'm wondering if you can discuss some of the initiatives that you and Sam plan to focus on over your first year at the helm here?

Sure.

I think one thing that's important to note is that very early on, as Sam took the reigns, he sent out a message about what was not going to change.

And what's not going to change is our commitment to the SVA model and our commitment to the OROA model.

And so, in that regard, one of the big initiatives really that we're focused on right now is basically running this Company and producing SVA in this environment.

The other thing that Sam mentioned is not going to change, is our commitment to how we do business in terms of the integrity and the ethics.

Okay.

And Jim, can you talk about, now that you have construction joint ventures in China and India, have you reached your targeted scale the business or are you still looking for additional opportunities?

Also, can you talk about if you see potential for increased consolidation among your competitors at this point in the cycle?

This is Marie.

Actually, we would not talk about any of our competitors' prospects for consolidation.

We would tell you that we see global infrastructure as an opportunity for us.

And to that end, you are aware that we made an investment in a joint venture in China in excavators and we just, about a month ago, announced that we had formed a joint venture in --.

With Ashok Leyland in India.

But clearly, the prospects for the global infrastructure growth are very, very encouraging and a very powerful macro economic tail wind that we have our eyes on.

Thank you.

Thank you, Jerry.

Next question.

Thank you.

Our next question comes from Andy Casey.

And please state your company name.

Wells Fargo securities.

Good morning.

Good morning.

If I could go back to the comment about market conditions and construction weighing on pricing relative to the prior forecast, does that mean they're less positive or is there likely going to be a negative going forward?

I want to emphasize that we had positive price realization in the fourth -- in the third quarter that our forecast contemplates positive price realization in the fourth quarter and obviously, for the year.

Okay.

Thanks for that, Marie.

The second thing, on the charges, could you clarify how much of the Welland closure falls into Q4?

About had $27 million pretax.

Okay.

Thank you very much.

Thank you.

I should maybe just clarify that last year, in the fourth quarter, we also had had charges for Welland and they were roughly it was actually, I think, $49 million exactly, pretax.

So bear that in mind as you look at your numbers.

Next question, please.

Thank you.

Our next question comes from Alex Blanton.

Please state your company name.

Ingalls & Snyder .

Just a clarification, first, Marie.

When you talk about decremental margins throughout the call on the slides, is that on the gross margin line or the

Operating margin line.

That's the operating margin line.

Okay.

And secondly, on those fourth quarter charges, do you have the per share amounts?

Because obviously, it depends on the tax rate you're assuming for the quarter.

Yes, we actually, we have -- we don't even give our guidance based on per share amounts.

So no, I don't have it calculated that way, Alex.

Okay, so what tax rate then should we assume for the fourth quarter?

I did not calculate the math.

Our tax rate for the full year works out to 27%.

That's what you said, yes, in the slides but you don't have the fourth quarter number?

We can run the math.

We'll run the math and get back to you in -- we can calculate that.

We'll get back to you before the call ends.

Okay, fine, thank you.

Thank you.

Our next question comes from Jamie Cook.

And please state your company name.

Good morning.

Credit Suisse.

Two questions.

One, Marie, I don't think you ever answered David's question, unless I missed it, on just the order book this year.

I don't think we ever got the granularity.

And can you remind us how that compares to last year?

And then, my follow-up question is on capital allocation.

How do you think about capital allocation going forward?

The way I look at it, your inventory levels are pretty good.

Even in a flat market, I would assume next year your earnings should be up.

So that should mean -- and you should probably generate some pretty good cash flow.

How should we think about that and would you think about re-initiating a share repurchase?

I'll take your first question and then have Jim answer the second one.

In terms of early order programs, if you look at it on an absolute basis, yes, our numbers would be down versus last year, which was an extraordinary year.

On combines, in particular, last year we would have been about 70%.

That is very atypical.

We would normally be 1% or 2% at this time.

And typically, the bulk of the orders come in actually in the month of January.

This year we're at about 20%.

So we're actually comfortably ahead of where we would have expected to be and certainly, any time in the previous five years.

That would be true for early order programs that we have on spring tillage, planters, air seeding, et cetera.

So we're in very good shape there.

In terms of the tractors, I mentioned the fact that we had actually added some additional production in the fourth quarter for both the new 8R's and the 9000 Series tractors.

Effective availability on 9000 Series is now into February 2010.

And for the 8R's, it would be -- again, now, this is a product that you understand we are not even done introducing into the market, so you can still get a product yet in this fiscal year, like in the last week of October.

But that one is harder to call because, again, the product transition.

in terms of capital allocation and that general question, I'm not going to get into the business of providing any sort of forecast as to when we might do repurchases or anything like that.

But clearly, providing a stream of steady cash returns to our shareholders is something that's very, very important to us.

And clearly, share repurchase is a tool to do that and one that we've looked at in the past and will continue to look at as a tool in future.

Our accountants have gotten back to us, correctly pointing out that our guidance is implying a break-even fourth quarter.

So tax rate would be not meaningful to calculate in the quarter.

Alex, that gets back to your question.

Thanks, Jamie.

Thanks.

Thank you.

Our next question comes from Henry Kirn.

And please state your company name.

Hi, good morning, guys.

It's UBS.

I'm wondering if you could chat a little about price discipline in the rest of the world ag market?

So are your competitors remaining disciplined and not cutting prices?

Our practice has long been not to comment about our customers' pricing practices.

I would observe that we did not change our price guidance for the Company for the full year as a result of anything in the farm equipment markets.

Specifically, we talked about tougher conditions in our landscapes operation because of what's happened with fertilizer prices and then the construction & forestry.

So, we did not make any changes in guidance because of that.

But Henry, that's as far as I will go.

That's helpful.

And how much more runway is there to take out of SA&G?

Could you do more still or are you at the end of the line?

In terms of SA&G, everything that we know that we can do we have implemented or we are in the process of implementing.

Some actions that you do today take maybe six months to pull the trigger on.

So, we believe we are in pretty good position in terms of the way we're running our businesses.

However, that's not to say that as we get further into things that we continue to improve our processes and look for new ways to do things more efficiently.

Yes, we're very much focused on continuing to look at our cost structure and the opportunities that are available to us.

And clearly, there's always opportunities and we're committed to getting after those.

Okay, thanks a lot.

Thank you, Henry.

Next.

Thank you.

Our next question comes from Ann Duignan.

And please state your company name.

Hi, good morning.

JPMorgan.

Maria, just a line item that people don't often focus on but your income from equity and affiliates has turned significantly negative.

Correct.

Relative to last year.

Can you just give us some color on what's going on there and how we should think about forecasting that line item?

A lot of that income is picked up from some primarily construction related activities that we would have.

And as you know, market is very difficult in construction.

And so, I would be very cautious, as you go forward and look at that line item.

Okay.

That's helpful.

And then, my follow-up is on Brazil.

You did a nice job of presenting all of the positives down there with government funding, et cetera but do you expect repossessions of ag equipment in Brazil to accelerate given next month, given that the court injunction preventing repossessions is set to expire at the end of August?

Well, first of all, that injunction only related to one province.

And with regard to our activity, in many cases, we have collateral other than just the underlying equipment.

So, we've taken other collateral beyond the equipment.

We think we'll continue with our normal collection procedures.

And in any event, we do not anticipate any significant movement in our reserves one way or the other right now because we think we're adequately reserved.

And our reserve calculations contemplate being able to get our hands on collateral and recovery of collateral.

Okay.

But that one stated Mato Grosso, which is one of the most important states --

That's correct.

We might note that we actually have had very good collection experiences in Mato Grosso, similar to what we would have seen.

In fact, slightly better than we saw overall in Brazil.

Thanks, Ann.

Next question.

Okay.

Thank you.

Our next question comes from Charlie Rentschler.

And please state your company name.

Wall Street Access.

My first question, you've touched on new product introductions but can you give us some more color on the 8R's and the 9000, say relative to other large new rollouts that you've seen in the past?

Do we need a drum roll here?

Is this really exciting stuff?

The 8R is very exciting.

The 9000, just to be clear, Charlie, are not a new product.

That is an existing product.

But on the 8R's, we are very excited about the products, with a brand-new cab, much better visibility, lots more glass, a much improved suspension system.

Jim has actually got the list pulled up.

Jim, go ahead.

Well, we have basically, the smoothest ride in the industry with our linked suspension, our independent suspension.

We've had a great transmission in there with power shift and IVT.

Got the 9-liter PowerTech engine in there.

We're very, very excited about this product.

And we're in the middle of a product show in Omaha and we're having about, I thin, 4,500 or so professionals from our dealerships are getting to look at this tractor.

And the feedback is extremely encouraging.

Okay.

And my follow-up question, you've said that you saw very modest improvement in government spending in 2010.

But could that change and what could bring about a change there?

We all read about Congress passing all this stuff but what would it take?

Is there any hope that funds will really start to flow at some point?

Well, we really need to differentiate.

The funds are flowing from the federal stimulus package.

In fact, we were reviewing yesterday with our Government Affairs Spokesmen and they were talking about the fact that the actual spend rate is starting to accelerate, as had been anticipated.

And so, as you look into 2010, we had originally said that we expected of the infrastructure portion of the bill, that you would have about $10 billion in appropriations in 2009 and then maybe $25 billion in 2010.

The challenge, Charlie, is that while the states are benefiting from the federal money that is starting to flow and expected to increase in 2010, their own rather precarious financial situations is causing them to pull back on their expenditures.

And so, what you have is that the -- basically the two are a wash.

We would note that the spending has helped slow the decline or the loss of jobs in the construction industry and so there is some benefit from that, although there are still job losses occurring.

If you go over the winter months and really into the spring, we were losing jobs at a rate of about 117,000 a month.

That rate seems to be slowing over the last three months to more like 73,000.

And again, that is an indication that you are starting to see the benefits of some of the stimulus money.

It's just unfortunate that because of the state and local budget situations, they're not able to -- you're not able to see bigger pop from the moneys that are being spent on the government level.

Can I sneak in another quick question?

Only this once.

Okay.

I wondered how the integration of the ag and consumer and commercial businesses is going?

We know about the headcount reduction but how's that transition happening?

That transition also occurred concurrently with the rollout of something that we call the new global operating model, which allows to us provide -- or is designed to enable to us provide a much crisper focus on the customers and the products.

And I would say in general, that integration of the former commercial and consumer equipment division, as well as the rollout of the global operating model, is occurring in line with our expectations.

Thank you.

Thank you, Charlie.

Next question.

Our next question comes from Mark Koznarek.

Please state your company name.

Hi, Cleveland Research.

Good morning.

Good morning, Mark.

A question on some of the upcoming off-highway emission standards Tier 4A due in 2011.

So, I know you're not offering anything regarding 2010 but should we be expecting any kind of material pickup in R&D or new product development costs or SG&A or anything like that?

We had a pretty significant increase in R&D last year and so, I think you saw pretty much the major step function really occurred last year.

We saw some increase even in our guidance yet this year on R&D.

Regarding capital expenditures, again, the big increase is really already behind us, where our run rate is about $800 million.

So, we think we're pretty much where we need to be there.

So, we're kind of at a run rate, is what we're saying?

Yes.

And then, question with regard to pension outlook.

If you were to run the test today, what would be any kind of change to your accrual?

We have not really completed the full actuarial analyses.

So we wouldn't necessarily be in a position to answer that question.

Having said that, I would offer that last year we closed at October 31 and interest rates had spiked.

And the discount rate is a big factor in the calculation of both the pension and the OPEB expense.

And we would anticipate, if interest rates hold where they are today, that we would see a pretty significant decline in the discount rate.

Which intuitively, would tell you you would have some sort of increase in our benefit costs going into next year.

But we do not have any sort of finite number that would be willing to share at this point.

Thank you, Mark.

That's helpful.

Thank you.

Next question, please.

Thank you.

Our next question comes from Daniel Dowd.

And please state your company name.

Bernstein.

Good morning.

I wanted to talk about the decrementals that you're guiding to for Q4.

So your volume decline is bigger in Q4 than you have for Q3 and that's not surprising, then, that your decrementals are supposed to be higher than they are in Q3.

At that time same time, you have about $150 million material input cost benefit.

Is that $150 million included in your calculation of the decrementals or not?

Yes, it is.

Again, the fact that we have very low levels of production has just a very significant impact on our ability to absorb overhead.

And it's important, when you think about those decremental margins, those are all-in decremental margins.

So those also include the impact of these reorganizational costs.

So to the extent we have $150 million material good guy, we have a significant amount of reorganizational costs that are going the opposite way.

Do you think your plant managers think the risk to the decremental margins is to the upside or the downside?

We would not be able to speculate on that.

That's -- our forecast is our best estimate, our best judgment at this time.

All right.

Is there anything other than the charges -- and obviously, there's a lot of complexity going on.

Is there anything specific that you're doing in the plants that is different this quarter compared to last quarter or recently?

I would just say that you're looking at much bigger swing year-over-year.

Remember, last year you had pretty high levels of production.

And so you really -- the issue is overhead absorption and that's just profoundly different in terms of the environment, fourth quarter versus where we were a year ago.

I don't have anything else to add.

All right, thanks.

Thank you, Dan.

Next question.

Thank you.

Our next question comes from Robert Wertheimer.

Please state your company name.

It's Morgan Stanley.

And good morning, everybody.

Good morning.

First question is on the C&F margin, which was better sequentially this quarter versus last and you had a little bit more volume but I don't think that was it.

So, I'm wondering if you can explain whether that was price, materials cost or structural cuts that you're continuing to do in that division?

There, it would be a little bit of benefit, certainly, from material costs that they had.

I would also observe that we were starting to pull in some in the third quarter of last year, so you've got a little bit of compare there.

Pricing, you do get a benefit from pricing in the third quarter as we talked about.

But we're also seeing the effects, clearly, of our reductions -- our efforts to restrain costs in both the SA&G line and in the cost of sales line as we go after the factory overheads.

Okay.

And as a follow-up, Marie, you've actually talked a lot about production tonnage but I just want to make sure I understand it.

You cut a little bit less than you expected in this quarter and that was on demand in India and a couple of other areas.

In the full year, your production tonnage is down about same.

And does that mean that basically the upside from those markets is offset by the downside in C&F, basically?

That's probably -- in a nutshell, yes, that's fair.

Okay.

Thanks very much.

Thank you.

Next question.

Thank you.

Our next question comes from Barry Bannister.

And please state your company name.

It's Barry Bannister, Stifel Nicolaus.

How are you?

Very fine.

And you, Barry?

Good.

Am I to understand there was actually an improvement to your annual net charge-offs in second quarter were about 0.67% and they fell in the third quarter to 0.58?

And as well, there was really no deterioration in provisions for credit losses as a percent of the average owned portfolio?

In the second quarter it was 0.75% and now it's only 0.73.

Well, I think you're far enough into the year you probably get a little bit of rounding making noise.

And no, we really have not seen further deterioration.

And I heard that your TLGP application was denied and you do have a $4 billion funding shortfall in fourth quarter '10.

Are you going to do some sort of large TALF eligible ABS or something to plug that gap?

I'll defer to Jim.

We're certainly looking at alternatives.

And as you know, the TALF program was extended through March but we are looking at alternatives.

And when we might come to market with a transaction and that's likely a vehicle we would take advantage of.

I would observe, though, that the -- we have not had had -- or not issued any money or done any of our funding with the effectively the FDIC guarantee since the transaction in December.

We've raised a very significant amount of money and so, we anticipate this will have absolutely no effect on our funding or our ability to raise money.

And it's important to note, too, that the note that we have out there retains the guarantee.

Okay.

So the $2 billion TLGP MTN in Q1 '09 was really just because it was advantageous at the time.

It's not something that you had counted on to continue?

Well, we had applied for it, so I don't want to put that -- say that we hadn't counted on it.

But we've been able to fund ourselves, you seen that.

We've got a host of transactions on that liquidity slide that indicate we've been very successful in funding ourselves.

I think the bottom line, we've been able to tap into the market in many, many different ways throughout the course of the crisis.

And actually, we've found the results to be very, very encouraging.

Yes, it seems that way.

Thanks.

We've got time for one more question.

Thank you.

Our final question comes from Andrew Obin.

Please state your company name.

Bank of America-Merrill Lynch.

Good morning.

Just a question.

And I apologize if you've answered that already, but as I look at SG&A expense and if I look at R&D, you seem to have taken guidance up for those expenses for the full year.

What drove the decision to increase these expenses in the second half of the year versus your previous guidance?

Well, as we -- in the case of SA&G, it's really just a change in the currency.

So actually, the absolute amount is not increasing.

In the case of R&D, R&D is also affected by the currency, so that inflated it a little bit.

And then at the margin, a little bit higher spending on IT4, which, as you know, you really have no choice about if you choose to be in the engine business in 2011.

Okay.

And how discretionary was the increase in the G&A expense for the year?

In the what?

The G&A going up, that's not discretionary, right?

That's just the result of the property, plant and equipment that's gone on.

And I suspect currency has a little bit of play here as well.

Okay, thank you very much.

Thank you all so very much for participating in the call.

And as usual, Susan, Justin and I will be around the rest of the day to answer your questions.

Thank you.

This does conclude today's conference call.

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