強鹿 (DE) 2009 Q4 法說會逐字稿

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

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

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

Marie Ziegler, Vice President Investor Relations.

Good morning.

Also on today's call are Jim Field, our Chief Financial Officer, Susan Karlix and Justin Marovec, from the Deere Investor Relations staff.

Today, we'll take a closer look at Deere's fourth quarter earnings and then spend some time talking about our markets and provide our first look at how things may shape up in 2010.

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 strictly 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 the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 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 solicitation of offers to buy any of the Company's securities.

This call will also include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, otherwise referred to as GAAP.

Additional information regarding these measures, including reconciliations to comparable GAAP measures, is posted on our website at www.JohnDeere.com/financialreports, under other financial information, and under conference call information slides.

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

And now, for a closer look at our fourth quarter, here's Susan.

Thank you, Marie.

John Deere today announced the completion of a solidly profitable year.

We did so in the face of challenging market conditions, affecting virtually every one of the Company's major businesses and major markets.

Earnings alone, though, tell only part of the story and the fact is, 2009 was a year of significant achievement in many ways.

2009, for example, saw the biggest single year sales decline in Company history, over $5 billion.

Yet our net income of just under $900 million, was the eighth highest ever.

What's more, John Deere generated a good deal of cash last year, $1.4 billion from the equipment operations.

That was more than enough to cover capital expenditures and dividends, both of which continued at healthy rates.

And it leads to another impressive statistic.

Company and dealer inventories came down by well over $1 billion last year.

As a result, these inventories, in relation to sales, finished the year right where they started, at 24%.

That's quite an accomplishment in light of the magnitude of the sales downturn.

What about economic profit or SVA, one of the primary metrics used to manage the Company.

SVA was obviously much lower for the year, but it actually remained in positive territory for our equipment businesses.

Liquidity was another success story.

In spite of the worst financial crisis in memory, the Company maintained competitive access to the credit markets.

We issued over $9 billion in new debt, and have the cash in hand to fund virtually all the maturities coming up through 2010.

Partly as a result, our customers were able to experience uninterrupted access to financing from John Deere.

No doubt, 2009 was one tough year.

But the Company remained on a profitable footing, reinforced its financial position, continued to fund important projects, maintained its dividend rate, and made further progress on a number of other fronts.

Let's now look at the fourth quarter in more detail, starting with slide three.

For the quarter, Deere reported a net loss of $223 million on net sales and revenues of $5.3 billion.

On slide four, if you look beyond the headline numbers and exclude the two items called out in our press release this morning, the goodwill impairment charge for John Deere Landscapes and the charge for the voluntary employee separation program, net income, as adjusted was $99 million, or $0.23 per share for the quarter.

Slide five includes the charges for the closure of our factory in Welland, Ontario, Canada in the fourth quarter of 2009 and for the full year.

Although this number is negligible in the year-over-year comparison, we are providing it for those who are tracking the Welland closure expenses.

Last year at this time, we provided the fourth quarter 2008 charge for Welland, which is found in the appendix on slide 38.

Taking a look at slide six, total worldwide equipment operations net sales were down 30% in the fourth quarter, versus fourth quarter 2008.

Currency translation on net sales was positive by about one point, with about three points of positive price realization.

Both of our equipment divisions had positive price realization in the quarter.

Turning to slide seven, worldwide production tonnage was down 38% in the quarter.

This is a bit better than our fourth quarter forecast provided in August.

The single biggest factor behind the improvement was the successful startup of, and better than expected demand for, the new 8R series tractors produced at our factory in Waterloo, Iowa.

Looking at the bottom chart on this slide, worldwide production tonnage is expected to decrease about 17% in the first quarter.

With the second and third quarters being approximately flat, and a double-digit upturn in production tonnage in the fourth quarter.

We thought it would be helpful to provide total worldwide tonnage by quarter for fiscal 2010, so you can get a feel for how the year shapes up.

Clearly, it implies a difficult first quarter with improvement as the year progresses.

For the full year, projected production is down only about 3%.

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

First quarter net sales are expected to be down about 10% compared with the first quarter of 2009.

Currency translation on net sales is positive by about three points, with about two points of positive price realization.

Price realization in each of the first three quarters of 2009 was about six points, meaning in 2010, we'll be up against stiff comparisons.

For the full year, net equipment sales are forecast to be down about 1% compared with fiscal year 2009.

This includes about one point of positive currency translation on net sales, and one to two points of positive price realization.

Net income for the year is forecast to be about $900 million.

Turning to a review of our individual businesses, let's start with Agriculture & Turf on slide nine.

In the quarter, net sales were down 26%, and production tonnage was down 36%.

The division had an operating loss of $24 million in the quarter with the largest factor being lower production and the related loss absorption.

Also having a negative impact on operating profit were charges of $365 million for goodwill impairment and voluntary employee separation.

Lower raw material costs and positive price realization helped offset these charges, all of which resulted in a reported decremental margin of about 34%.

Excluding the goodwill impairment and voluntary employee separation charges, the division delivered an 8% decremental margin on a 26% sales reduction.

This is a non-GAAP financial measure, the reconciliation to GAAP is on slide 37 in the appendix.

Finally, in an extremely difficult year, the division reduced receivables and inventories by approximately $900 million.

Before we review the sales outlook, let's look at some of the fundamentals affecting the ag business in 2010, starting on slide 10.

As everyone is aware, due to very cool weather and wet field conditions, this year's US corn harvest is one of the slowest on record.

The size and quality of the corn crop is in question.

Our consultants inform us estimates that about 250 million bushels of corn have been lost.

Mold and fungus have been found in some of the harvested corn, which could affect the crop's nutritional value.

Poor corn quality could mean more grain needed to deliver the proper level of nutrition.

Projected commodity prices are on slide 11, where you can see we have included our first look at commodity prices for the 2010-2011 crop year.

Strong demand, the late harvest and a weaker dollar, which helps support exports, are keeping corn prices at attractive levels.

For soybeans, tight stocks will keep prices relatively high in the near term.

Exports from the US are expected to remain strong, due to last year's low South American production and robust Chinese demand.

Turning to slide 12, forecast prices, as you can see, are below the very high levels of last year but remain strong on an historical basis.

On slide 13, US farm cash receipts are forecast to be down in 2009, but 2010 cash receipts are expected to show a slight increase.

Slide 14 highlights the big changes that have taken place in US farm cash receipts over the years.

As you can see, the 2009 receipts are down, but remain at extremely attractive levels.

As you've just seen, commodity prices and cash receipts are expected to remain at good levels.

Although the livestock and dairy sectors are under stress, the balance sheet and income statements of the US agriculture sector are strong.

Despite positive fundamentals, farmers follow the daily news, and are as concerned as anyone about the general economy.

It is one reason farmers are expected to be somewhat cautious in their purchasing decisions in the year ahead.

Also keep in mind that most farm equipment purchases are driven by cash receipts in the current year and in the year immediately before.

While 2010 receipts are attractive, they also are an additional year removed from the record high of 2008.

Putting all that together, as you can see on slide 15, our outlook for industry sales of agriculture equipment in the US and Canada is down about 10% in 2010.

Western Europe ag sales are expected to be down 10 to 15% in the year, mainly due to lower incomes in the key sectors of livestock, dairy and grain.

That's one of the reasons that Western European farmer confidence is low, and purchases there are being made cautiously.

Another factor is rising used equipment inventories in Western Europe.

Prior to the liquidity crisis, Eastern Europe, including the CIS countries, were important markets for the sale of used equipment from Western Europe.

In 2009, these markets were effectively closed off.

We expect sales in Central Europe and the CIS to remain under pressure as well, due to weak general economic conditions and tight credit.

Although the near term outlook is somewhat bleak, we believe Russia offers enormous long-term market potential for our ag, forestry and construction equipment.

In the appendix on slide 43 is a picture of our new assembly and parts center in Domodedovo, Russia, where we plan to begin operations in the spring of 2010.

This strategic investment reflects Deere's confidence in the long-term potential of the Russian market.

South America sales are projected to increase 10 to 15%, as parts of the region recover from last year's drought.

Brazil farm income is expected to receive support from attractive prices for sugar cane and soybeans, which are main drivers of ag machinery purchases in that country.

The forecast assumes the Brazilian currency does not appreciate further against the US dollar.

It also assumes that producers continue receiving help from government supported financing, and that federal and state programs remain in effect for the purchase of small tractors.

Turning to another product category, we expect retail sales of turf equipment and compact utility tractors in the US and Canada to be flat for the year after a sharp drop in 2009.

Deere sales for worldwide Ag & Turf are projected to be down about 4% in the year.

Currency translation on net sales is projected to be positive, about two points.

Product mix, referring to the sales of different categories of equipment, is key to understanding the 2010 outlook.

Slide 39 in the appendix illustrates the approximate breakdown of sales by equipment category in 2009.

Sales of large ag products, such as large tractors, combines and sprayers, account for nearly half of the division sales and absorb a lot of overhead.

In 2010, sales of large ag products will be down almost 10%.

This will have a negative impact on margins.

Mix will cost the division about one point of operating margin for full year 2010.

In the first quarter, lower absorption will cost about two points of margin, reflecting the significant drop in production tonnage.

It will also offset the amounts charged for goodwill impairment and voluntary employee separation in 2009, and the savings from lower material costs.

In addition, about $300 million of the increase in pension and OPEB expense will be charged to Ag & Turf.

Finally, the division will see higher R&D expense, primarily for interim tier four, the regulatory engine emission standards in the US and Europe.

Bottom line is, the division's margins are forecast to remain similar to those in 2009.

Let's focus now on Construction & Forestry on slide 17.

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

Production tonnage was down 50%.

Even under these conditions, the division had operating profit of $2 million again this quarter.

C&F demonstrated commitment to its trough management plan through tight expense control.

The result was a decremental margin of 15%, which is quite respectable, considering the state of the Construction & Forestry markets.

Although production levels and sales have been extremely low, C&F has continued to address aggressively manage inventories, helping to support positive price realization in the quarter and the year.

At the end of October, Deere construction dealers in the US and Canada were carrying less than half 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 and sets the stage for our 2010 outlook.

On slide 18, Construction & Forestry sales are expected to be up about 18% in 2010, from the very low levels of 2009.

The focus on inventory management the last few years will now enable us to produce near retail demand.

Construction & Forestry production tonnage is expected to be up by double digits in the last three quarters of the year, which is quite a change after being down 50% in 2009.

Turning to forestry, we expect a bit of a recovery as a result of improving global economic conditions, better pulp prices and low field inventories.

Again, this is in comparison with very low levels of 2009.

Although the division will benefit from these positive factors, they will be offset with a higher charge of about $100 million of the increase in pension and OPEB expense, and by higher R&D expenses, primarily for interim tier four.

As a result, the C&F division's operating margins are expected to be similar to 2009.

On the construction side as you can see from the chart, US economic indicators for 2010 indicate the retail market will remain weak.

Let's move now to our credit operations.

Traditionally at this time, we present only the worldwide credit operations.

Today, though, we will discuss the worldwide credit operations and John Deere Capital Corporation.

To keep it simple, the capital corporation primarily finances the US, European and Australian portfolios, and issues publicly traded debt.

The worldwide credit operations include John Deere Capital Corporation, as well as credit companies in Canada, Brazil, Finland, and also includes John Deere renewables.

Slide 19 shows the worldwide credit operations provisions for credit losses as a percent of the total average portfolio.

The 0.89% reflects higher losses and an increase in the allowance for credit losses.

On slide 20, still in the worldwide credit operations, past dues representing customer payments 60 days past due and full year write-offs for Ag & Turf retail notes which represent more than half of the total portfolio are still extremely low.

Performance like this is testimony to the high quality of the notes in the portfolio.

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

Slide 21 breaks down the owned portfolio at 31 October 2009 by market for the worldwide credit operations.

Moving to slide 22, the worldwide credit operations had a net loss of $22 million in the quarter, versus net income of $67 million in the fourth quarter of 2008.

We will discuss the two biggest factors accounting for this loss.

First is a $57 million reversal of the wind energy Investment Tax Credit that were taken in the second and third quarters of 2009.

The American Recovery and Reinvestment Act of 2009 included two new incentive options available on qualifying renewable energy projects.

The election to claim the Investment Tax Credit in lieu of the production tax credit, or the option to elect a government cash grant in lieu of the Investment Tax Credit.

The application and administration guidelines for cash grants were not available until the summer of 2009.

After evaluating these two incentive options, the Company determined the use of cash grants allows for more operational flexibility than Investment Tax Credits, with about the same economic return.

However, the accounting is different on each option.

Tax credits were recognized immediately in income, while cash grants are recognized as income over the life of the project.

In summary, the election of a cash grant in lieu of investment tax credits had a $45 million impact on the tax provision in the fourth quarter for the worldwide credit operations.

The second item was a $25 million charge after tax for higher write-offs and an increase to the allowance for credit losses.

In 2009, the higher provisions brought the year-end allowance as a percent of the total portfolio to 116 basis points, versus 86 basis points in 2008.

Looking ahead, we are projecting net income of about $240 million for the worldwide credit operations in 2010.

The forecast assumes the provision for credit loss rates in dollar terms stabilizes at near 2009 levels.

Now we're going to shift gears and look at John Deere Capital Corporation's results for the quarter on slide 23.

Importantly, the capital corporation had net income of $21 million in the quarter versus net income of $58 million in the fourth quarter of 2008.

Among other things, this reflects the higher write-offs in the C&F and revolving charge portfolios as we just saw.

Slide 24 provides detail on John Deere Capital Corporation's portfolio, 60 days past due and write-offs, as a percent of the portfolio.

Now let's turn our focus back to the equipment operations and take a look at receivables and inventory on slide 25.

For the Company as a whole, receivables and inventories were down nearly $1.3 billion for the year, as we aligned production and inventories with retail demand.

We anticipate receivables and inventories to be roughly flat in 2010.

Now let's discuss the latest on retail sales.

Slide 26 presents the product category details for the month of October, expressed in units.

Utility tractor industry sales were down 35%.

Deere was down double digits but less than the industry.

Row- Crop tractor industry sales were down 22% and Deere was down slightly less than the industry.

Four wheel drive tractor industry sales were down 6%, Deere was up a single digit.

Combine industry sales were up 6%.

Deere was down double digits.

If you look at the bottom chart for row crop tractors, Deere ended October with inventories at 23% of trailing 12 month sales, up from the unsustainably low 11% at the end of 2008.

Combine inventories were at 2% of sales.

Turning to slide 27, in Western Europe, sales of John Deere tractors were down double digits, and combines were up a single digit in October.

Deere's retail sales of selective turf and utility equipment in the US and Canada were down double digits in the month.

While 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 28 shows raw material and logistics costs were down $235 million in the quarter, versus the implied guidance of down about $150 million.

We ended fiscal 2009 with a year-over-year increase in raw materials and logistics costs of $215 million.

Looking ahead to 2010, we expect material cost decreases of approximately $150 million to $200 million for the year, all Ag & Turf.

The financial forecast incorporates all the decrease in the first half of the fiscal year, and assumes that things will be flat for the second half.

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

Looking at R&D expense on slide 29, R&D decreased 4% in the fourth quarter, but was up 4% for the year.

R&D expense is expected to be up about 11% in fiscal 2010.

The bulk of the increase is accounted for by interim tier four emission spending.

Moving now to slide 30, the 2010 forecast calls for an increase of about $400 million in pension and OPEB expense, primarily due to a change in the discount rate.

As you can see on this slide, of the $400 million change, about $325 million will hit cost of sales, leaving about $75 million in SA&G.

As mentioned earlier, Ag & Turf has responsibility for about $300 million of the additional expense, while the increase for C&F will be about $100 million.

Approximately $125 million of the increase is expected to occur in the first quarter.

On slide 31, equipment operations SA&G expense was down about 2% in the quarter.

Lower variable incentive compensation accounted for about three points of the reduction but currency had an unfavorable impact of about one point.

In 2010, we project SA&G to be up about six points.

Currency will account for about four points of the change and pension and OPEB adds another three points.

Moving to the tax rate on slide 32.

The fourth quarter and full year tax rate look odd because most of the goodwill impairment is nondeductible.

For 2010, the full year effective tax rate is expected to be about 35%.

One important observation about 2009, turning to slide 33, is the strong cash flow we have continued to experience from our equipment operations, even in some tough market conditions.

This reflects in large part our success managing assets and controlling working capital levels.

As you can see, we anticipate very strong cash flow from operations in 2010, which is further testament to the success of the SVA model.

On slide 34, capital expenditures, primarily driven by interim tier four spending were $788 million for the equipment operations in 2009.

Depreciation and amortization was $516 million, and we contributed $358 million to pension and OPEB.

Financial services capital expenditures, primarily reflecting wind projects, were $119 million.

Finally, slide 35 highlights the forecast numbers for fiscal 2010.

Capital expenditures are expected to be between $850 million and $900 million, primarily driven by interim tier four.

Depreciation and amortization is projected to be about $550 million.

Our forecast currently includes about $400 million pension and OPEB contributions in the year, and capital spending for financial services is forecast around $200 million in 2010, primarily for wind projects.

In closing, John Deere has wrapped up a solid year in a difficult market environment.

Looking ahead, we're forecasting a performance along similar lines in 2010.

The first quarter of 2010 will hold its share of challenge, as we keep a tight rein on production and run our factories at low levels.

Production will pick up some later in the year, but remember, the conditions overall are expected to remain fairly restrained.

As we position our operations to keep pace with customer demand, however, we will be setting the stage to fully capitalize on any future upturn in our markets.

And we'll be making further preparation for a promising future, based on the world's prospect for population and economic growth over time.

The global economic slump has taken a toll on the financial results of many companies, including John Deere.

But the recession has not changed the fact that the world's population still needs food to eat, clothes to wear, shelter to live in, and infrastructure to support its lifestyle and it hasn't changed our belief that no other Company is in a better position to respond to these needs day in and day out than John Deere.

Thank you, Susan.

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

The operator will instruct you on the polling procedure, but as a reminder, in consideration of others, please limit yourself to one question with a related follow-up, and if you have additional questions, we ask that you rejoin the queue.

Operator?

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

Our first question comes from Steve Volkmann and please state your Company name, sir.

Good morning.

It's Jefferies & Company.

Good morning, Steve.

I was hoping we could talk a little bit about cash in 2010 and I'll put my question and follow-up together.

Should we be expecting I guess, working capital to start to become a use as things kind of stabilize here and you rebuild a little bit and give us your thoughts with respect to that.

And then obviously you have basically no net debt on the equipment balance sheet here.

What's your thinking with respect to how much cash you need to keep on the balance sheet as we go through 2010?

Let me start with working capital.

Our forecast currently has trade receivables and inventories for the enterprise, that includes the equipment operations piece that is funded by Capital Corp., staying about flat in 2010, so wouldn't expect a big change.

Flat in dollar terms?

Sorry.

Yes.

Okay.

In absolute dollar terms.

Regarding the second portion of your question, I think we'll turn it over to Jim.

I think as we've said before, that we decided in this environment to maintain a relatively conservative financial position with a sufficient amount of liquidity, given the choppy nature of was we saw over the last year.

And I can -- I think you can anticipate that we will continue with that posture throughout 2010.

Okay.

Sorry, but you've also said that over time you would expect to draw down that liquidity as market conditions allowed and I guess what you're saying is that you see no signs that they're allowing that so far.

Yes, we're not ready to say that we've seen the signs that we would draw down some of that liquidity.

Great.

Thanks very much.

Next question, please.

Next question comes from Robert Wertheimer and please state your Company name.

Mr.

Wertheimer, your line is open.

Please check your mute feature.

We'll move on to the next question.

Can you hear me?

Your line is open now, sir, we can hear you.

Sorry about everybody.

One quick cleanup question.

I thought your separation charges were going to be $85 million in 4Q.

It was $47 million.

What was the reason for the forecast versus the actual.

I think maybe we got pretax or full year or something mixed in here.

The separation for the full year is on an after tax basis is about -- well, it's exactly $57.6 million in the quarter, $47.6 million, and then on a pretax basis the voluntary separation in the quarter is $76 million, and I don't have it for the full year.

Full year --

91.

So pretax in the quarter it was 76, I think you were expecting 85 so it's not such a big gap.

Okay.

Second question would be, and this is just a bigger question, when you're talking to farmers especially in the US and Canada, are you hearing caution because they don't know how they're going to end up the year or are you hearing just we just flat don't want to buy or are you hearing we don't know yet because we haven't finished?

Second part of that would be are you seeing a big split between tractors and combines because combines have been stronger this year.

As Susan alluded to earlier, the harvest has been running very late.

We've seen our farm customers very much focused on trying to get that crop in.

Interestingly, in the month of October we saw a big decline in our used combine inventories that our dealers are financing as customers were getting additional equipment to help support their requirements in the harvest.

As we moved out of October and into November, we have seen actually a pickup in the pace of retail activity and it actually influenced our outlook a bit, so we're maybe a little more positive than we would have been a few weeks ago so we have seen some better than expected retail activity.

I can't really differentiate between the combines and the tractors in terms of retail activity, in part because the combines have an early order program on them, as is our custom, and tractors don't.

I wouldn't note that there's any dramatic difference.

Okay.

That's perfect.

My last one.

Used equipment pricing?

Used equipment prices in the United States are down, I'm speaking on the ag side, are down 7 to 10% from the very high levels of a year ago.

We continue to see very good levels of turns in both tractors and combines.

Great.

Thanks very much.

Thank you, Rob.

Next question, please.

Thank you.

Our next question comes from David Raso.

Please state your Company name.

ISI.

My question's about price versus cost.

The spread you're forecasting for 2010, using the midpoint it's about $486 million.

That more than offsets the post retirement increase.

Given the comment you just made on used equipment pricing, I'm just trying to think through what percent of your raw material cost, component cost for 2010 do you already feel you have locked in, hedged, however you want to describe it, that makes you feel comfortable that raw materials will be down year-over-year, as well as maybe what percent of your sales for 2010 are already in backlog with a pretty set selling price?

Regarding the selling price, we -- after the events of 2008, I think you're aware that we changed the way we lock our customers in and that is we don't lock the price until we actually provide the shipping or we lock in on an availability date and until that time there's a possibility of up to another 4% price increase and obviously the customer would have the ability to make another decision at that point.

Regarding our hedging, as you well know, there's no ability in the steel market for example to go out, no practical ability to do hedging.

We have used various contracting strategies with our steel vendors and actually with many vendors, some of which involve indexing, so you have the ability to take advantage of moves up and down.

But we actually do use a variety of techniques and maybe I'll just conclude by saying that there is a lag effect on this.

You certainly saw it very pronounced in 2008 and 2009 it for us is in round numbers about a six month lag up and down.

The bulk of our production as you know, we really start to ramp up in the latter part of the first quarter, heavy production typically in a typical year in the second quarter, and then as you move into the end of the third quarter we're starting to ramp down a bit.

You can assume that we're probably contracting for materials in a few months ahead of that.

So that kind of gives that plus the index probably gives rise to the price.

Jim, is there anything else you want to add?

I think that covers it.

In the channel you hear about the 4% combine increase, the 3 on the tractors, the 5 plus on the new 8000s.

You're already starting to hear about some discounting, on the 7s, some of the 6s and so forth.

Obviously the 1 to 2% price increase, maybe you can split it between ag and construction, that might be of some help.

Looks like the initial ag increases are above that.

The initial ag increases, David, are on average the price increase is about 3%.

And we have not told our -- or not published anything to our dealers on the construction side, but we have told them in dealer meetings that they should look for things that are flattish and that really explains the price increase.

The other thing is, as you're quoting some of those price increases, remember that when we do our price calculation, we strip out any kind of feature upgrade and so -- and we reclass that into volume.

With when you're hearing a list price quote on, say, the new AR tractors which is in that 4 to 6% range, some of that is going to be reclassed into volumes because it reflects higher horsepower and new features in the cab and things like that.

Thank you.

I would also add to that, that those prices that you're talking about is pricing in the North American market.

Thank you.

And so we have some very different dynamics in other parts of the world as well.

Our next question comes from Eli Lustgarten and please state your Company name.

Longbow Security.

Good morning and happy turkey.

Happy Turkey, Eli.

I have a clarification, two clarifications I want to make sure.

On charts 34 and 35 you show pension OPEB contribution $358 million in 2009 and $400 million in 2010.

That's different from the incremental $400 million that will hit the P&L statement that you're talking about; correct?

That's a very good question.

One is a cash number.

That's actual funding.

The hundred $400 million that when we talk about the income charge, that's an accrual expense.

Is the incremental $400 million hitting the P&L but that's not the cash impact.

It's just coincident that they're the same number.

The other clarification, you said margins effectively in fiscal 2010 in both divisions are going to be similar to 2009.

Is that adjusted margins or as reported margins?

As reported.

Didn't construction equipment lose money for the year?

That's correct.

And are you forecasting it's going to lose money for the year in 2010?

That is exactly what that would imply.

Just want to make sure I didn't --

Basically, although -- again, I applaud their performance given the extremely difficult market conditions they're in, they do benefit from some increase in production tonnage but basically their $100 million higher pension and OPEB, each.

Most of that, there's a little more R&D as Susan talked about earlier.

Okay.

Question, two part.

In your statement, 2011 you get 2011 prices or preliminary prices for the ag market.

The implication that farm cash received in 2011 you're assuming will be relatively flat to down.

Eli, you're going way over the number of questions.

Let's stop with the cash receipts.

Okay.

We do not yet have our forecast for 2011 cash receipts.

I think we typically provide that I can't remember if it's February or May, when we forecast that so I don't know, because remember that as we look at cash receipts, it is a function of quantity and price.

So at this point we're not prepared to -- we don't have the detail to provide you with any more comments on 2011.

Thank you.

Thank you.

Next question, please.

Thank you, our next question comes from Meredith Taylor and please state your Company name.

Good morning.

It's Barclays Capital.

Good morning.

I'm hoping that just to start out you can talk about the extent to which revenues by segment trailed dealer retail sales this year, and what you're assuming therefore for the contribution from the catchup in 2010?

Well, if you look at the -- I wouldn't have a better way to describe it than to tell you to look at the change in receivables and inventories, that's probably the best way to characterize it.

Does that -- did I not understand what you're looking for?

Well, I was talking more from a revenue standpoint, how much your revenues trailed your dealer retail sales.

I don't -- our dealer retails would have been down I'm sure a little bit less than what our own revenues were because, again, we -- I'm not sure.

Go ahead, Jim.

I would say, Meredith, probably the easiest way to look at that is look at the change in the receivables.

That's the difference between what we shipped and really what's going on in the retail marketplace for sort of a gross approximation of that difference.

Okay.

Fair enough.

And then thanks for giving the color on the large ag versus the small ag.

When you talked about the down 10%, were you talking about production down 10% or were you talking about revenues down 10%?

And then as we net out price, price, et cetera, how should we think about what volumes are down in that business for 2010?

That would have been a -- it's a proxy, that down 10%, it's a sales but it's a proxy because our inventories are again, our receivables and outlook is flat, we were thinking that our sales would be so this time it's both the same.

Okay.

And then maybe if you can just kind of follow along those lines around the large ag, give us an update on how your order book is trending.

Then, Meredith, we're also over on the number of questions.

Going forward I'm going to ask that all analysts do respect the one plus one because we have several people in queue and we need to make sure we get through them.

In terms of the order book, the combine order activity, we're about 75% covered for model year 2010.

As I mentioned earlier, we've actually seen retail activity jump, so we've seen a pretty good increase in that over the last few weeks.

In terms of the effective availability dates for ARs, it would be April.

and it's the same for our 9000 series tractors.

This is last year for ARs or well would have been the 8030 then.

The effective availability would have been July.

but remember that at this point last year we still had the expectation that we were going to send a lot of product into Russia and we were not.

Thanks.

Thank you, Meredith and thanks to the rest of you, again, for watching the two question rule.

Next.

Thank you.

Our next question comes from Ann Duignan.

Please state your Company name.

Hi.

Good morning.

JPMorgan.

Good morning, Ann.

Hi.

Talking about Russia, could you comment, Marie or somebody on when we were over at, there was a lot of talk about the Russian government considering a bill that would effectively mean that even if a Company was assembling in Russia, they would have to use 90% local components.

Can you comment on what you're hearing on that?

This came from the VDMA.

And then would that cause you to maybe postpone or slow down your investment in Russia?

I think that it would be fair to say that we are working very closely with Russian government to make sure that we understand any rules that are being proposed.

Our investment in Russia is limited.

We're going into a leased facility and basically it's -- the lease and the tooling combined are about a $50 million investment so we have quite a bit of flexibility and I think I'm going to stop at that.

If you are thinking about the risks in terms of the 2010 forecast from any impact in Russia, bear in mind that we've said all along that we would start production in the spring of 2010 and we are online for that but we're going to do one model, get it right, go to a second model.

So the bottom line is there is not a lot of sales -- production and sales activity effectively that occur over the course of the year.

because we will be very much in a ramp-up mode.

That's great color.

I appreciate it.

My follow-up is on Western Europe.

How much confidence do you have in the 10 to 15%?

Given the lack of visibility in that region right now and how bad things are currently in the ag equipment market.

I would agree with you that there is a lot of concern.

There are a few glimmers of positive things happening with dairy.

The prices have stabilized to the point that we've seen a -- they are not slaughtering their herds so you've seen some stabilization profitability so breakeven may be a little bit better.

One of the factors at play is certainly lower levels of income.

Again, we think that as people take a look at their income positions over the course of the year, benefiting from some of the lower input costs, you might see a little bit of improvement as you move through the year there.

On the other hand, we would tell you that -- and what we talked about this before, used equipment.

There was very, very little used equipment in Western Europe, really up until the liquidity crisis in the world.

That affected the ability for used equipment in Western Europe to move east and it went all the way into Russia.

That has had a pretty pronounced effect I think over time on values.

We're not at a price crisis stage by any means on used equipment in Western Europe but that does -- we did very much temper our outlook for the market and take that into consideration.

I think Jim's got another point.

In terms of how confident we are, that is our forecast and -- but I'd offer a couple other points.

That's on top of of course the pretty significant decrease this year that we saw in that Western European markets.

I would tell you that our folks that are in the Western European theater have been pretty good in their feel for the market and we called the softness and basically we're pretty accurate with our projections in 2009 in this marketplace.

So I think the team there is very close to the market and of course it always is a forecast but we think it's very reasonable forecast.

Okay.

I'll take my follow-ups offline.

I appreciate it.

But it was good color.

Thanks.

Thanks, Ann.

Next.

Next question comes from Jamie Cook at please state your Company name.

Hi.

Good morning.

Credit Suisse.

Good morning, Jamie.

Good morning.

Two quick follow-up questions.

Marie, when we think about the pension expense I think you mentioned Q1 we were going to have 115.

I guess how --

125.

I'm sorry.

125.

125.

The remaining three quarters, do we split it about evenly or how are you thinking about that?

100, 100 then 75.

Those are very round numbers.

My last follow-up question, back to Eli's question on Construction & Forestry, I know we have to add back the $100 million or so in pension.

Given your sales increase I thought you would do a little better than just slightly breakeven or so so I'm just trying to -- R&D, is there anything else sort of that I'm missing there.

That still seems a little disappointing relative to what I thought even if I adjust for pension.

When we talk about being up 18%, you are off an incredibly low base.

So you're not -- it's not like you're adding production at the sweet spot of the cycle.

I think that's what you need -- you all need to bear in mind.

You're off a very, very low base.

Okay.

Thank you.

I'll get back in queue.

Thank you.

Thank you.

Our next question comes from Andrew Casey.

Please state your Company name.

Wells Fargo Securities.

Good morning.

Good morning.

Just returning to the outlook, trying to understand the quarterly progression and the tonnage.

Is that all related to very weak comparisons this year and then the 8000 series startup or are you expecting some of this November trend that you've highlighted earlier to continue?

I think it has, frankly, more to do with the way tonnage played out last year and the back order positions that we had than really what you can read into the market for this year.

If you'll recall last year in the ag division, we were expecting a very good level of retail sales.

Frankly, in many parts of the world, and as events played out, we still had extremely good retail sales in the early part of the year in the US and Canada, but in redirecting production that had been intended for other markets into the US and Canada.

So I think that you need to bear that in mind.

In construction, they have been jamming on the brakes for a very long period of time and so -- and last year as a result of the liquidity crisis and the extreme difficulties in the US housing market, they really took their pain early in the -- very early in the year and -- or they went into the year, excuse me, thinking that it was going to be better and then jammed on the brakes even harder and so I think it really has to do more with the comparisons.

Thank you.

I might also -- go ahead.

Next questioner.

Next question comes from Henry Kirn.

Please state your Company name.

It's UBS.

Happy Thanksgiving, guys.

Happy Thanksgiving.

Could you detail the breakdown between res and non-res demand for construction equipment as you see it today and what are you looking for that equipment demand could start to improve again.

We're six to nine months away from a slight uptick in overall construction equipment demand in 2010.

In fact, we have industry retail activity this year down about 5 to 10%.

We still have rental companies defleeting, although we think that the pace is slowing and at left in our equipment sizes, but we have as you know a very cautious outlook on the non-res side and although the government money is flowing, this would be the federal stimulus money and it is pretty much going as planned, you still have significant budget issues in states and local governments that is restraining the overall impact of that stimulus money and so, again, we have a fairly pragmatic view of the construction markets in the US.

Does that help?

That's helpful.

As my final follow-up --

Thank you.

You highlighted the real-dollar exchange rate as a risk to Latin sales.

Could you give a little color on how you're thinking about that and what you're watching for to see if that could go the wrong way on you.

We don't take a view on the future direction of the real but we would note that it has been strengthening at a pretty good clip against the US dollar.

And we know that farmers in Brazil sell their crops in dollars, their expenses are real based.

We're keeping a close eye on that.

I can't tell you that there is a specific trigger point.

Thanks a lot.

Next question.

Next question comes from Seth Weber.

Please state your Company name.

Hey, good morning.

It's RBC.

Good morning.

Just following up on the production question, the ramp through the year.

At what point do you think that you'll be needing to add employees back and start restaffing to meet that ramp-up?

I would not be able to answer that question.

That would not be something we would be able to do in this forum.

Okay.

Well maybe asked differently, I mean, how much can you maybe try and handicap what percentage of your cost savings over the past year you think are permanent versus temporary?

Oh, you bet.

For next year, we are looking at savings from the voluntary separation program, again, this is 2010, in the 50 to $60 million range.

That's a pretax number.

And then in 2011, beyond, about $75 million, that includes the 50 to 60 we'll get in 2010.

We have savings from Welland in the $40 million range.

We've got that raw material, just recite that, because that's in the 150 to $200 million range.

In our landscapes operations, they have closed 15% of their store locations.

They've done a lot of store mergers from the -- with fertilizer and irrigation so we're not really pulling out of markets but we're realigning our organizational structure.

I don't remember off the top of my head the number of employees but we have restructured those operations and we think that next year the savings from that would be in the 50 to possibly $75 million range.

Okay.

And thanks.

Just a quick follow-up.

Can you talk about the credit situation in Brazil, please?

I know last quarter there was some timing issue with some of the payments coming back online.

Can you just give us any color there on Brazil?

That's fair.

If you look at the non-performing you'll still see that it is higher in ag and we cite in the appendix, 70, 75% of that is due to Brazil.

We are working our way through the normal credit collection processes, have collected a little bit more cash and do have some customers that are stressed but the most important thing is that we believe that our reserves are adequate.

We are stress testing that portfolio every two months.

We do a thorough customer analysis.

So we feel that we are adequately provisioned.

Okay.

Thanks very much.

Next question, please.

Our final question comes from Andrew Obin and please state your Company name.

Hi.

It's BofA/Merrill Lynch.

Just to follow up and I apologize if I missed it.

So for Construction & Forestry, we are explicitly guiding for margin that is very much in line with 2009 in 2010, am I correct?

That's exactly what we're saying.

Just to follow up on that question, so taking a top down view and, you know, revenue's going to be down 1% next year and we've taken out a lot of costs over the past couple of years and I understand the pension issue, but if you look at pricing, if you look at tax rate, if you look at the finance, that offsets most of it.

So how should I be thinking about a Company, an industrial Company that has revenue decline of 1% and profitability decline of 25%, what am I missing?

Pension and OPEB.

No, but -- I mean, a lot of it is -- you have pricing.

You've been cutting costs.

You've done a fantastic job cutting costs in the downturn.

I mean, should I just be thinking is that really pension and OPEB?

Pension -- it's pension, OPEB and I have to say that the mix in North American ag is not trivial.

This is a big deal.

Susan gave you a number of points of margin for the full year.

That's mix.

There's also absorption issues as we take tonnage down in North America and that is also very significant and that might be the missing link in understanding the outlook.

Got you.

I'll follow up, thank you very much.

Thank you all very much for listening.

We will be available today to respond to your questions and have a safe and happy Thanksgiving, those of you who will be celebrating it.

Thank you.

This does conclude today's conference call.

We do thank you for your participation and you may now disconnect your line.

Thank you.