強鹿 (DE) 2010 Q1 法說會逐字稿

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

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

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

Marie Ziegler, Vice President, Investor Relations.

Good morning.

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

Today we will take a closer look at Deere's first quarter earnings and then spend some time talking about our markets and provide you an update on how we see 2010 shaping up.

After that we will open for questions.

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

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

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

Today's 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 material are not an offer to sell or 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 principals generally accepted in the United States of America, otherwise known as GAAP.

Additional information concerning these measures including reconciliations to comparable GAAP measures is posted on our website at www.johndeere.com/financial reports under Other Financial information.

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

And now for a closer look at our first quarter.

Here's Suzanne.

Thank you, Marie.

This morning John Deere reported results for the first quarter of 2010 and what a quarter it was.

In spite of a decline in sales, earnings were up 19% from a year ago.

The improvement was led by our Ag and Turf and Credit businesses, both of which are experiencing improved conditions.

Disciplined cost and asset management were again major stories with SA&G expense little changed and trade receivables and inventory down by $1.4 billion.

Finally, our full-year forecast for earnings has been increased significantly to $1.3 billion.

All in all it was an impressive performance.

Now let's look at the quarter in more detail starting with slide three.

First quarter net income attributable to Deere & Company was $243 million, or $0.57 per share on net sales and revenues of $4.8 billion.

It was the second-highest earnings total for any first quarter in the Company's history, trailing only the first quarter of 2008.

As shown on slide four, total worldwide equipment operations net sales were down 7% in the first quarter, versus first quarter 2009.

Currency-translation on net sales was positive by about 5 points with about 2 points of positive price realization.

Turning to slide five, worldwide production tonnage was down 20% in the quarter.

However demand has been better than expected for large AG and international forestry products accounting for the improvement in our tonnage forecast.

For the full year, projected production tonnage is now forecast to be up about 5%.

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

Second quarter sales are expected to be up 4% to 6% compared with the second quarter of 2009.

Currency-translation is expected to be positive by about 5 points, with about 2 points of positive price realization, with a full year net equipment sales are forecast to be up 6% to 8% compared with fiscal year 2009.

This includes about 3 points of positive currency-translation and 1 to 2 points of positive price realization.

Net income attributable to Deere & Company is now forecast to be about $1.3 billion for the year.

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

In the quarter, net sales were down 6% with production tonnage down 20%.

Operating profit was $352 million in the quarter.

Lower raw material costs, positive price realizations and the favorable effect of foreign currency-translation and product mix offset lower sales volumes and higher post-retirement benefit costs.

A&T is starting to see benefits from last year's organizational realignment resulting in the creation of the Ag and Turf Division.

Ongoing rationalization of processes, facilities and resources is allowing the division to more efficiently meet customer needs and reduce overall costs.

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

Commodity prices for the 2009/2010 crops have risen modestly since our last forecast.

Corn acreage is expected to increase 1.5 million acres in 2010 to meet growing demand for feed, exports and ethanol.

What's more, corn is expected to be more profitable this year.

According to Informa, profit from corn will be $77 an acre more than soy beans in 2010.

This is an additional $15 an acre above the 2009 level.

For soybeans, continued robust export demand will keep prices relatively high in the near term.

Finally, cotton prices remain well above year ago levels, driven by lower production in Asia and the rapidly recovering Asian economy.

Turning to slide nine.

Forecast prices as you can see are below the very high levels of 2008, but remain strong on a historical basis.

On slide 10, 2010 US farm cash receipts are now forecast to be up about 4% from 2009 levels.

The biggest change is in the livestock sector where milk prices have continued to climb and things are generally headed in the right direction.

Slide 11 highlights farm net income in Brazil and Argentina.

Argentina is recovering from the 2009 drought, driving increased demand for tractors, combines, sprayers and forage equipment.

In Brazil, 2010 farm net income is expected to double from last years level.

Normally when we talk about Brazil, we talk about soybeans.

However, the primary driver if increased farm net income in 2010 is the large improvement in sugar.

International sugar prices are extremely strong, demand is higher than production due to a drastic drought-driven reduction in sugar output from India and China.

Strong demand for sugar is only part of the story in Brazil.

Other positive factors include demand for Brazilian commodities globally, as well as government-sponsored low-rate finance programs, like [Tsunami] and [Moss Elementos].

These are all contributing to positive producer attitudes which translate into higher spending on farm equipment.

Putting all of that together as you can see on slide 12, our outlook for industry sales of agricultural equipment in US and Canada is comparable to 2009.

This is up significantly from our previous forecast of down about 10%.

The strength we have seen in our order books is driving this increase.

For example, the combine early-order program ended in January with a significantly higher than expected response rate.

Demand for large tractors have been higher than expected as well.

On the 8-R Series tractor we have added schedule as orders have come in, effective availability is September 2010.

The story is the same on the 9000 Series tractors with effective availability in May 2010.

Conditions in Western Europe are weak with Ag sales there expected to be down 10% to 15% in the year.

Farmer sentiment is low and used equipment inventories remain high due to the lack of product going to Central Europe.

We expect sales in Central Europe and the CIS to remain under pressure as well.

Things look better in South America where sales are projected to increase 10% to 15%.

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.

On slide 13, Deere sales for worldwide Ag and Turf are projected to be up 4% to 6% in the year versus our previous forecast of down about 4%.

Currency-translation is projected to be positive, about 4 points.

As just discussed demand for large Ag equipment is much stronger than anticipated.

Product mix has shifted in our favor as well.

In November we talked about product mix referring to sales of different categories of equipment being a factor in our lower 2010 outlook.

At the time, we expected sales of large Ag products to be down almost 10% with the large absorption of these products negatively affecting operating margins.

In our current forecast, the anticipated improvement in large Ag will change the mix.

We now expect mix to be neutral in 2010.

The Division will benefit from operating improvements made in 2009 as well as from positive price realization, a lower material cost and the positive effects of currency.

Conversely about $300 million of the increase in pension OPEB expense will be charged to Ag and Turf.

Also, the Division will see higher R&D expense primarily for Interim Tier 4, the regulatory engine emission standards in the US and Stage IIIB in Europe.

In Turf, we are encouraged by strong retail demand in commercial mowing and golf and turf equipment in January.

For the year, the A&T Division operating margin is forecast to be around 10%.

Let's focus now on Construction and Forestry on slide 14.

With continuing weak markets in the US and abroad, net sales were down 15% in the quarter, production tonnage was down 22%.

The Division reported an operating loss of $37 million.

Again, this quarter, C&F demonstrated commitment to its' trough management plans through tight expense control.

But higher pension and OPEB expense as well as higher R&D expense, mainly associated with Interim Tier 4 spending, resulted in a detrimental margin of about 50%.

Without these two items, C&F detrimental margins would have been in the mid-20s.

Through the aggressive management of production level the Division has continued to successfully manage inventory.

At the end of January based on inventory levels reported to the Association of Equipment Manufactures, Deere Construction dealers in the US and Canada were carrying about one-third less inventories than the rest of the industry, based on percent-of-days on hand.

On slide 15, Construction and Forestry sales are now expected to be up about 21% in 2010.

Up from the very low levels of 2009 and from our previous forecast of up about 18%.

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

Nonresidential spending is forecast to be down again in 2010, due to ripple effects from the depressed housing sector, coupled with tight credit conditions.

Overall, we believe the retail market for Construction Equipment will be down 5% to 10% in 2010.

Things are looking a little better, however, for global Forestry markets.

Improving global economic conditions, better pulp prices and low field inventories will benefit the Forestry segment in 2010.

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

Deere's C&F Division will benefit from higher production and sales.

However, these will be offset by a higher charge of about $100 million per pension and OPEB expense.

Other headwinds include higher R&D expenses, primarily for Interim Tier 4, as well as a possible material cost increase and roughly flat pricing.

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

Let's move now to our Credit operations.

Slide 16 shows the worldwide Credit operations provision for credit losses as a percent of the total average portfolio.

In the first quarter, the provision on an annualized basis ran 52 basis points.

Write-offs in the Construction and Forestry portfolios were lower than expected and lower than a year ago in absolute dollars.

While this is encouraging, we aren't prepared to say we have turned the corner.

The full-year provision is still forecast to run around 89 basis points, roughly the same as last year.

On slide 17, past dues for the worldwide Credit operation are about flat with last year.

Annualized write-offs continue to reflect the excellent performance of our Ag portfolio.

The Construction and Forestry rate has increased.

But as noted a few moments ago, write-offs in dollars are lower than a year ago.

The percentage is higher because the portfolio, the denominator, is lower.

This reflects the steep decline in US Construction equipment sales since 2006.

Moving to slide 18, worldwide Credit operations net income attributable to Deere & Company was $81 million in the quarter, versus $45 million last year.

The biggest factor was an improvement in financing spread.

This resulted from interest rates returning to more historical spreads following the interest rate volatility in late 2008 and early 2009.

Looking ahead, we are projecting worldwide Credit operations net income attributable to Deere & Company at about $260 million in 2010.

Now lets turn our focus back to the equipment operations and take a look at receivables and inventory on slide 19.

Where the Company as a whole, receivables and inventories were down roughly $1.4 billion in the quarter.

Since our last outlook, in light of the higher than anticipated production levels expected in the fourth quarter, we are forecasting receivables and inventory to be up about $450 million in 2010.

Now let's discuss the latest on retail sales.

Slide 20 presents the product category details for the month of January expressed in units; utility tractor industry sales were down 7%, Deere was down less than the industry.

Row crop tractor industry sales were up 32%; Deere was up more than the industry.

Four-wheel drive tractor industry sales were up 5%; Deere was up a single digit but more than the industry.

Combine industry sales were up 14%; Deere was up more than the industry.

Looking at Deere dealer inventories in the bottom chart for row crop tractors; Deere into January with inventories at 21% of trailing 12-month sales.

Combine inventories were at 6% of sales.

The January percentage to trailing 12-months retail sales has seen a slight uptick for row crop tractors year-over-year.

At the end of January, the absolute number of units in inventory for both row crop tractors and combines as a percent of trailing 12-month sales was lower than a year ago.

Turning to slide 21, in Western Europe, sales of John Deere tractors were down double-digits and combines were up double-digits in January.

Deere's retail sales of selected Turf and utility equipment in the US and Canada were up a single-digit in the month.

Construction and Forestry sales in the US and Canada and growth of First-in-the-Dirt and settlement basis were down double-digits for the month.

Slide 22 shows raw material and logistics costs down about 160 million in the quarter.

We now forecast material cost decreases of approximately $150 million for the year.

This is slightly lower than our previous forecast reflecting higher commodity price projections for inputs, like steel.

This estimate could deteriorate further if commodity prices rise more than anticipated and the dollar weakens from it's present level.

The Ag and Turf division savings is forecasted at about $150 million.

For Construction and Forestry, due to the currency impact on partner products, we are now forecasting C&F material costs too be flat to up $25 million.

Looking at R&D expense on slide 23.

R&D was up about 7% in the first quarter, with currency-translation accounting for about 2 points.

R&D expense is expected to be up about 12% in fiscal 2010, with currency accounting for about 1 point.

The bulk of the increase is accounted for by Interim Tier 4 emission spending.

Moving now to slide 24, pension expense in the first quarter was about $110 million.

As discussed last quarter, the 2010 forecast calls for an increase of about $400 million in pension OPEB expense, primarily due to a change in the discount rates.

Of the $400 million change, about $325 million will hit costs of sales, leaving about $75 million in SA&G.

Ag and Turf has responsibility for about $300 million of the additional expense, while the increase for C&F is about $100 million.

On slide 25, equipment operations SA&G expense was up about 1% in the quarter.

Currency-translation accounted for about 4 points, pension and OPEB added about 3 points.

Excluding these two items, SA&G expense would have been down about 6 points in the quarter.

For fiscal 2010, we now project SA&G to be up about 8 points.

Pension and OPEB accounts for about 3 points.

Variable incentive compensation contributes about 3 points of the change, and currency about 2 points.

Moving to the tax rate on slide 26.

The implied first quarter tax rate for the Equipment operations was about 36%.

For 2010, the full-year, effective tax rate is expected to be in the range of 34% to 35%.

Before touching on cash flow, currency movements both translation and transactions, or trade flows, increased operating profit by about $75 million in the first quarter.

On slide 27, you see the strong cash flow from our equipment operations, even in years of tough market conditions.

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

We anticipate strong cash flow from the equipment operations in 2010, $1.9 billion, up from last year's $1.4 billion.

Such strong cash flow is further testament to the execution and success of the SVA model.

On slide 28, capital expenditures are now expected to be about $900 million, primarily driven by Interim Tier 4.

Depreciation and amortization is projected to be about $600 million.

Our forecast currently includes about $600 million of pension and OPEB contributions in the year, and capital spending for financial services if forecasted around $200 million in 2010, primarily for wind projects.

In closing, John Deere has started 2010 on a strongly positive note and is looking for further improvement in the year ahead.

Our performance in the face of stubbornly weak global economic conditions reflects the solid execution of our operating and marketing plans, and our success in taking costs and asset discipline to a new level.

We have remained squarely focused on our customers as well expanding our global customer base and extending our competitive position.

As a result of these factors, we continue to believe that our Company is well prepared to capitalize on an eventual upturn in the economy and well positioned to meet the worlds growing need for food, fuel, shelter and infrastructure in the years to come.

Thank you, Suzanne.

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

And Laura, our operator, will instruct us on the polling procedures.

But as a reminder, and I do very firmly remind you, that we are asking for you no more than two questions.

And a multi-part question does count as multiple questions.

With that, Laura.

Thank you.

(Operator Instructions).

Your first question comes from Jamie Cook and please state your company name.

Hi.

Good morning.

Credit Suisse.

Congratulations on a nice quarter.

Just two, two questions.

One, Marie, can you give anymore color in the first quarter.

How much can you quantify what the material cost benefit was in the first quarter when we think about the Ag margins and just how that plays out throughout the year?

I am perplexed by your flat margin comment for Ag for the full year?

And then the other, the other question, would just be on just a little more color on what you are seeing on Western European trends within farm?

You didn't change your top line forecast but - - how you are thinking about your inventory levels and production relative to the industry?

And any color you can give by country.

With why don't we start with Western Europe first?

Farmer mood there continues to be pretty somber, and as a result you will note that we have not changed our guidance which is the industry will be down 10% to 15%.

We do see some, some differences in some countries because of the currency relationships.

You do see some - - a little bit more strength in places like the UK and Poland because their currencies are, their farm subsidies are paid in Euros and their currencies are relatively stronger.

But generally speaking, livestock is maybe stabilizing some but stabilizing at pretty low levels and you continue to see a back-up of used equipment.

We have sighted this a couple of times, in calls before, it is not yet at worrisome levels but it does act as a precautionary note in the market.

Okay.

Moving on to margins.

In the - - our raw material guidance is $150 million for the year, and basically we got it all in the first quarter.

Okay.

Generally speaking flat through the rest of the year.

You will note, too that when we talked about things like R&D and SA&G were relatively light in the first quarter.

Those costs will increase, at least that's what the forecast has them doing as you move through year.

And of course Ag is the bigger piece of both of those, both of those numbers.

Okay.

That explains a lot of the margin, the margin story, for the year and for the quarter.

Thanks.

I will get back in queue.

Thank you, Jamie.

Next.

Thank you.

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

Operating point of view.

Thank you.

Longbow Securities.

Good morning and brilliant quarter from an operating point of view.

Good morning, and thank you.

Can I get one clarification, did you say the foreign currency benefit, including hedging gains, was $75 million in the quarter?

Is that what you said?

Yes, that it's not, it's really the impact of the trade flows, but it is $75 million in the quarter.

That's an operating profit.

An operating profit?

And that's all the currency benefit.

Was there any - - no LIFO or anything like that?

No.

Can we talk about construction equipment and I guess I am sort of surprised it is going to lose money for the year.

And just how you expect to make money in any of the quarters, given the scenario?

What's going on, is it all because of the Interim Tier 4 investment?

Or what's going on that - - you're expecting any sort of operational improvement?

There's really three factors.

Even though their sales are up, basically that incremental margin is absorbed by about $100 million pension and OPEB increase which we had talked about last quarter.

So that is still in play.

They too have higher R&D, and it's actually for the divisions for full year, it is about $40 million, so it is not insignificant.

And they have - - and there is one other factor.

This is why we have notes.

There is material costs.

We have a headwind of flat to up about $25 million.

So, the midpoint of that would be - - what $10 to $15?

And that's just wiping out all the profitability?

Basically that absorbs it all.

Final question, you talked about - - having increased Ag production was up significantly.

I think that you referenced that the fourth quarter is going to be much higher.

Can you give us inside as to how the Ag market will look if rest of the year?

Second quarter, obviously, probably will still be the strongest of the year?

But much stronger fourth quarter than was indicated?

I think that really was referencing that than what we anticipated, but basically versus a year ago.

Because a year ago we were - - we had significant shut downs, and so this year we will be in production, at a higher level, and that of course goes on to effect our trade receivables.

So the second quarter will still be the strongest of the year?

But you do comparisons for the second half of the year, doesn't - -

That's really more of the issue, absolutely.

All right.

Thank you.

Thank you, Eli.

Next.

Thank you.

Our next question comes from Robert Wertheimer.

Please state your company name.

It is Morgan Stanley.

Good morning, everybody.

Morning.

I'm going to have two questions on production schedule.

The first is just how you think about it, we have been hearing and we believe underlying demand is fairly strong.

Have you raised the combine production, and is that done?

Pretty much going produce what you are going to produce?

And similar on the large tractor side.

Would you potentially if demand continues to be strong, bump that up again, or are you aiming to hit a certain schedule?

We certainly would do everything that we could to meet our customers demand requirements.

And to go back to one of our earlier point, yes, we have pretty significantly increased our projected productions for our combines and actually for large tractors.

As we talked about that, it is really the single biggest factor driving the change in top line and income guidance.

Okay.

And the follow-up is, we have heard a couple of farmers.

not a lot but a couple, talking about nervousness about the Tier 4 engine.

Not so much the price but wanting somebody else to take the risk on the first year of the engine.

Are you concerned about a pre-buy?

Does that effect your production decision for this year?

And what's your strategy for showing farmers that the engine is going to work.

How are you going to roll that out?

We have already been at farm shows starting to introduce the product.

We are starting to get new, a magazine articles, talking about the production.

I would liken this anytime you have a major change in a machine, there's always - - some customers who want the first in technology.

There will be some interesting product benefits in some of the products that comes along with it.

And there's a tremendous need to continue to improve productivity.

Over the long term we need to increase food for the world.

So I would say that this is something that we have managed through before.

We will be doing - - we have a very significant roll out plan in terms of training and education for dealers and technicians and of course for customers.

We will have plenty of opportunities.

Let me just add to that a little bit - - Marie hit on this training and this is a huge undertaking.

We have got 20 different courses we are rolling out, in 14 different languages.

We have already touched more than 8,000 dealer personnel.

So all of that is really about educating the folks that are the front line interaction with the customers to help the customers get the level of confidence that they need and make sure that we can deliver the John Deere experience.

So it's a huge undertaking.

Thanks.

Next question.

Thank you.

Our next question comes from Ann Duignan.

Please state your company name.

Hi.

Good morning.

JPMorgan.

Good morning, Ann.

I am sitting here because I am laughing because I think for the first time in the history of my covering John Deere I have no objections to your (inaudible) for agriculture either.

In North America (inaudible).

I don't know but I'm going to ask my question about.

So let's take it a different way.

Marie, it is kind of a double-edged sword that - - or whomever wants to address this, but currency is a positive and that it probably impacting your outlook for equipment sales.

However, the double-edged sword is stronger dollar could impact both your equipment exports as well as south commodity exports.

Can you talk a little bit about what exactly is in your outlook for currency, particularly Euro dollar exchange rate, and what the upside versus the downside risk that you see with that forecast.

Well, specifically, we have a practice of not forecasting what the currency will do.

And so we look at the rate that we have experienced in the quarter, and use that to forecast going forward, and that would have been the Euro that was 140 - -

146

146 was the average.

Average rate for the quarter and that's what we used going forward.

Okay.

And for the Company, in terms of Europe, specifically, the primary tractor in Europe is a mid-size tractor.

And those are manufactured in Europe.

That's the primary source for it.

So we do a fairly good job of trying to match production to where the markets are.

You did benefit last cycle though from significant exports of combines out of North America into places like Eastern Europe.

Well Eastern Europe and Russia, that's a whole different set of circumstances.

Go ahead, Jim.

And then a lot of those transactions would be denominated in dollars as well.

But - - and Ann, you're aware that those single biggest factor in our outlook there is the circumstances in Russia.

And we are working to get an assembly facility up and running.

We are on time for that.

We said in the spring and we are working with the Russian government to make sure we all understand the terms.

So we are on track there too.

Okay.

And then my follow-up question is a similar question but on interest rates.

Interest rates have helped support very aggressive pricing out there in the marketplace, not just from John Deere but from competitors at large, and have been a positive for your financial services business.

Can you talk a little bit about your outlook for interest rates going forward and how that might impact your financial services business?

We - - I don't think we really have been out front with an explicit forecast, but our financial services business is all about - - we don't really take positions on rate so much.

We try to lock in finance spread and be a match funded such that these swings unless they happen very quickly and are very violently that they don't impact the earning stream too much.

Having said that in general, our view would be for a increasing rate environment over the course of the year, and with - - that would be a very, very modest view though.

And we have factored that into some of our, our forecasts on the financial services side but also on the equipment side.

Because that generally results in higher interest waiver charges.

And a comment on your ability to be pretty aggressive.

That's two questions.

Okay.

Good try.

Next, please.

Thank you.

Our next question comes from Henry Kern.

Please state your company name.

Hi.

Good morning, guys.

Let me the thousandth person to congratulate you on a good quarter.

We like hearing it.

Thank you.

Question for you on how much could you flex capacity if we were to get a free buy for the large tractors and combines?

I - - I wouldn't site it so much as a pre-buy because we know that the primary drivers of customer demand are good levels of cash receipts because that's farm income.

And we certainly would agree, going back to Ann's comment, low interest rates certainly have also helped support that.

You are aware that we had put additional capacity on both Harvester and at Waterloo last year and actually at many, many of our factories globally.

So we have the ability to refine additional demand.

That said, for our combine program in the US and Canada - - round numbers, 95% of our orders are already in place, and we adjust production accordingly based on our, the results of our early order program.

So we could have some additional flexing there, but we are pretty well in position there.

Thank you.

That's helpful.

And for my follow-up.

You mentioned benefits from the Ag and Turf restructuring, are there any more benefits that could be had from restructuring the old commercial and consumer segment?

Well that is included in the benefits that we are citing because as we merge the two divisions together, there were - - people, redundancies and processes that were improved really out of both sides of the business.

We don't exist in two separate silos anymore, they are really fully emerged.

That's what is generating for this year a $50 million to $60 million charge.

I would just talk about our landscape business too where we - - a very difficult market conditions because they are very focused on housing and driven by housing.

And that business has unfortunately also had employee reductions to the tune of about 800 people, 800 to 1,000 and we closed, or merged, store locations.

So they are also looking for some improvement in their financial results and that is maybe an additional $25 million this year.

And finally, you're aware that we closed our facility in Welland and we are really in the final phase of that and so there are some operating savings this year to the tune of pretaxes of about $40 million.

Thank you very much you.

Thank you, Henry.

Next question.

Thank you.

Our next question comes from Steve Volkman.

Please state your company name.

Hi.

Good morning.

It's Jefferies & Company.

Good morning.

A couple of quick follow-ups I guess.

I'm just curious, what happened since your last forecast that you gave us that led to such better margin, I guess it was all in the margin?

But something must have really changed since the lens you were looking through in November was kind of, so far off.

How did the quarter evolve?

Really, we - - in terms of the sales outlook for the year, the single biggest driver was that our order book developed pretty dramatically over the course of the, over the first quarter and enabled us to improve our outlook for the industry from down ten to basically flat.

But the single biggest driver.

At a much different level than that.

Because that's the single thing that's business driver.

But we also experienced more favorable currency than we would have built into those original estimates.

In the quarter?

In the quarter.

To remind everyone, that was about a $75 million translation and transaction benefit in the first quarter.

All right.

And my follow-up I guess maybe this is for Jim, but whoever wants to take it.

We've talked a little bit about how you have a lot of liquidity on the balance sheet.

You're obviously continuing to generate a lot of cash.

At some point - - some of that cash I guess becomes available for things like share repurchases or dividends, or even acquisitions.

But I think you have said that you wanted to kind of wait to see how things evolve in the financial markets.

Has there been any evolution over the last few months?

I would say first of all you are right on.

That's what we've said, and the I would say - - we have this well articulated use of cash policy and one of the use of cash is that we talked about also is making sure that our pension plans are fully funded.

And then so we did increase funding to the pension plans by about $250 million in terms of the forecast.

In terms of how we view the world, I think we still think we are on a relatively fragile foundation.

On the fourth quarter of 2009 we were all shocked by the whole Dubai situation, and what the implications of that may have been for the capital markets and then of course then we move into the first quarter and we get to the Euro zone issue.

Having said that, we are targeting - - we had about a 12-month target of prefunding at the end of 2009 and we will be coming off that moving more into the six to nine-month range by 2010, by the end of this year.

Great.

Thank you very much.

Thanks, Steve.

Next question.

Thank you.

Our next question comes from Alex Blanton.

And please state your company name.

It's Ingalls and Snyder.

Good morning, Alex.

Good morning.

Marie, in the last conference call in November, you talked about the construction forestry thing would be up 18% in factory sales with the retail sales down 5% to 10%.

And you basically made the same forecast this time, except saying that the factory sales would be up 21% which - - and the retail sales again down 5% to 10%.

So that is primarily due to a lower inventory reduction year-over-year, maybe a flat inventory versus a huge inventory reduction last year at the dealer level.

Now, can we then take that concept and talk about the Ag business?

What's happening at the dealer level in Ag inventory?

And maybe you already mentioned this, but I didn't hear it.

How much of the change in sales of Ag equipment might be due to less inventory reduction at the dealer level than last year?

We aren't expecting any reduction in inventory in the Ag business year-over-year at 30 of October.

In fact at the dealer level, we will probably have, at least our forecast, has receivables and inventories up about $450 million as our guidance at year end.

And most of that will be in Ag receivables.

And it will simply be because we'll have a little bit more in the pipeline than we did a year ago.

No, but how much of your factory sales change is due to lower inventory reduction than last year?

There's no inventory reductions this - -

I know that.

You said that, but how - - what's the difference between this year and last year, in the deal inventory reduction?

I have to go back to my - -

We have to look at how much we reduced the receivables - -

No, no just inventory, not receivable.

The receivables is the best indication of what is going on with the field inventory.

Well, maybe but I am trying to determine how much of your change in your production forecast for this year is due to lower inventory reduction at the dealer level than the year before.

Alex, we don't - - I don't have that with me.

I would be happy to call you back afterwards and we will get your question addressed.

Terrific.

Thank you.

Next.

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

ISI.

Good morning.

Good morning, David.

My question relates to your Ag and Turf outlook.

What you report in the first quarter and what you're saying for the full year implies the next three quarters, the rest of the year, your Ag and Turf sales are up nearly 8%.

But your operating profit margins are down about 60 bips year-over-year.

And it looks like what you are implying about costs, generally neutral the rest of the year, on a year-over-year basis, pricing up for the whole Company, up about $220 million for the rest of the year, have to assume a lot of that is Ag, not construction.

That's fair.

What am I missing why your margins would be down the rest of the year, year-over-year?

The - - the increase in R&D which was up 7 in the first quarter is up 12, higher SA&G which was basically I think it was up like 1% in quarter and our guidance has it up for the full year - - SA&G for the year up 8%.

So basically, that's all back end loaded.

That would be powerful enough to offset obviously the mix sounds like it's improving.

It is neutral.

And price versus cost sounds like it is almost a 100 to 150 bips year-over-year improvement the rest of the year, as well.

Remember, it is - - the Ag division will eat about $300 million more of pension now.

Some of that just floats through SA&G, so I don't want to - -

Don't want to double count it.

- - about 60% of that increase actually goes into cost of sales.

So you wouldn't be picking up any SA&G, and that is - - there is nothing else.

It is very plain and straightforward.

Those are the items that eat up that additional.

Okay.

And I guess related then, the pricing on the products in backlog, in the order book.

Obviously, there have been no change since the price was set last fall, generally speaking, right?

So if I am getting better large equipment which is where you got the pricing, at least you tried to get the pricing, it looks like it's coming through with the order book the way it is.

Again, I am - - I am still a little bit surprised that you would think the offsets from SG&A and so forth would actually give you down margins, when Waterloo, Harvester works.

Well, no.

Our - - we increased our guidance for the overall Ag division.

Our previous guidance had been similar to what we have done last year and now we are saying about 10%.

So it is a bit of an improvement.

So they're coming to the bottom line there.

True.

True.

But, again, at the end of the day, the rest of the year sales are implied up 7.8% for Ag and Turf while your margins are at 10.1%.

And you did 10.7% the last three quarters of last year.

Well we didn't have the pension and the SA&G and the R&D.

It is as simple as that, David.

Okay.

I appreciate it.

Thank you very much.

Thank you.

Our next question comes from Barry Bannister, and please state your company name.

Hi.

I actually do want to follow-up on David Raso's question.

If as you forecast the 60 bip decline in operating margin against the 7.8% increase in sales.

When I look at the SAG guidance for last year versus fiscal 2010 previously.

The only real change is variable compensation is now seen up 3 whereas it was completely absent from your old forecast.

So wasn't variable compensation a major reason why Ag and Turf didn't get any margin left on the additional margin as well?

That would be a - - that would be a factor but that's really in the SA&G and (inaudible) there's some of it in cost of sales as well.

But the other thing is that it is somewhat of a timing.

Our SA&G came in last year a little more uniformly than what we are currently projecting this year.

Again, we had a - - we were basic almost flat in the first quarter, and yet you are looking for a gain in over the course of the year.

So you are going to have a bigger increase year-over-year in quarters two through four.

Yes, but even though you had a plus four prior forecast for FX, now it is plus 2.

So what you picked up there was 200 bips.

But your variable comp went from 0 to plus 3, which more than - -

It is about - - for the Company in whole, it is about $100 million.

And where does it lie in Ag and Turf?

What's their take since they're obviously doing better than anybody else?

They get the bulk of it.

Some of it goes into cost of sales and some of it goes into SA&G.

And there's a little bit in R&D, but basically it's cost of sales.

Okay.

Thanks.

Bye.

Thank you.

Thank you.

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

Buckingham Research.

I just wondered if you could spend a minute to break apart the Construction and the Forestry and talk about the different trends in those different end markets?

I would be happy to.

The actually, Forestry accounts for the improvement in the Construction and Forestry outlook.

We originally had said our sales would be up 18%, now we are saying up 21%, and really it's because we are starting to see better ordering activity, principally it is coming out of Europe.

But now we are talking about extremely low levels, really in Forestry across the globe last year.

You are starting to see a little bit of improvement.

On the - - on the Construction side, there was actually no change from our previous forecast.

So all of the incremental change occurred on the Forestry side.

Okay.

And then the sources of strength in farmer purchasing?

Is that all pre-buy related?

Or is there something else?

Oh, yes.

Anecdotally - - customers, I've actually looked through the comments even.

They're talking about good farm incomes, they're talking about the need - - to maintain their normal trading cycles.

We hypothesized, in fact, that maybe some of the very difficult conditions planting in the last two springs and then of course what happened this fall with very late harvest may also be supporting that.

We also know that low interest rates are are very supportive to the, to farmers purchasing decisions.

All right.

Thank you.

Thank you, Joel.

Thank you.

Our next question comes from Jerry Rubich, please state your company name.

Good morning.

It is Goldman Sachs.

Marie, you alluded to customer benefits from the new Tier 4 Interim products.

Can you talk about what kind of fuel efficiency gains you are targeting and any other cost-saving features that you are highlighting to customers?

Yes, we haven't rolled those out yet to our customers.

And our practice is not to run ahead of what we have talked about with our dealers and customers.

So, stay tune.

And timing of their roll out to customers?

Well, in compliance, they start in January of 2011, and then there will be a rolling product launches from there.

But I don't have any specific announcements on when we will be talking about products.

Okay.

And, Marie, can you step us through what part of your cost structure was lower than you expected in the first quarter?

I understand the point about increasing production at the balance of the year but your production in the first quarter was mostly in line with what you were looking for?

And it looks like margins were about, call it 300 to 500 basis points higher than you anticipated in your guidance last quarter.

Was it higher plan efficiency levels, your credit gains from the Ag and Turf, combination?

Can you give us some more color on the drivers?

We - - as you just to refresh your memory, actually we don't have guidance by quarter anymore.

So you are probably looking at us compared to other modeling.

But we would not have uttered any comments about what we thought our income would be in the first quarter.

That said, if you look at it year-over-year, the mix I think which we were thinking would be a, a bit of a drag for us in the Ag operations, it actually was a positive in quarter.

We are telling you for the full year it is neutral, but actually it was about a point positive in the quarter in the, in margins year-over-year.

So that would have been an improvement.

Material costs came in maybe a little stronger than expected.

And then the currency which had not been in the forecast, and that is about a $75 million operating benefit.

Thank you.

Thank you, Jerry.

Next question.

Thank you.

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

It is RBC.

Good morning, everybody.

Good morning.

Could you just talk about your confidence in the supply chain to meet your raised production outlook and do you see any potential bottlenecks out there?

We have worked for a long time very closely with our suppliers and I think our execution in the difficult markets if you go all the way back to 2004.

Certainly as we were ramping up in late 2007, 2008 sort of speaks for itself.

With do quarterly calls with our suppliers.

We are working with them to make sure that if they have bottlenecks we are working through them, through those processes with them in the near term.

We can maybe adjust some production - - to get things in early/late - - depending to help accommodate their production.

At this time, and we just checked with our supply management folks again, we don't see any bottlenecks.

Okay.

Just a quick separate follow-up.

The double-digit increase in Western Europe combine sales, retail sales in January.

Is there any color behind that?

It's off such a low base, there is no color.

I think it's just a question of timing of some delivery.

You're talking a handful of units.

Okay.

So we shouldn't read anything into that?

No.

Our guidance is still that that market is down in Western Europe 10% to 15% and nothing unfortunately we saw in the first quarter has shaken that outlook.

Okay.

Thanks very much.

Thank you.

Next question.

Our next question comes from Mark Koznarek, please state your company name.

Hi.

It's Cleveland Research.

Good morning.

Good morning.

I have a question on the South American outlook.

Just using Brazil as a proxy for overall South America, which - - probably is part of the answer to the question.

But it looks like - - unit shipments for the first three months of your fiscal year are up 35% for tractors and 70% for combines and the implication of even the top end of the guidance, 15% for the, the market for the year actually means combines would have to be down for the, for the final nine months of the year and tractors would be up kind of a high single-digit.

So, - - should we think about your South American outlook being conservative or is there something in the latter part of the year that you are expecting?

Well, I guess two things.

One is, that South American outlook is influenced by conditions in other markets.

And although we, we see Argentina coming back, it's coming back at pretty low levels.

And then you have various assorted circumstances in other markets.

So that's one factor.

The other thing is is that Tsunami, the current programs end at the end of June.

Our forecast anticipates that they will be renewed but probably not renewed at the same level.

You may recall Tsunami right now is 4.5% financing.

And of course time will tell, but since we don't know, we're I think a little more cautious on the fourth, in particular, it is the fourth quarter.

So even with an election coming up in October down there, you think they would have a less attractive [fanami] rate starting in July?

I think that we are probably seeing, being prudent.

I don't think - - we will wait to see what the government says.

That's what our forecast contemplates.

Correct.

Okay.

With that just to follow-up, with that contemplated - - less attractive finami rate, do you expect that, that drives the market down to sort of a flattish outlook in the second half?

I mean like real strong first half?

I wouldn't be at that prescriptive in terms of how it worked out.

But just some of the steam goes out of the, out of the situation is what you are contemplating?

Yes.

Very good.

Thanks.

Thank you, Mark.

Next question.

Thank you.

And at this time I am showing one final question.

Our last question comes from Daniel Dowd, and please state your company name.

Bernstein.

Good morning.

Morning.

Let me ask first about the facility in Russia.

You said it is continuing on plan.

I guess my question is even if the credit issues in Russia and Eastern Europe don't really start to ease in the next six months.

Do you - - are you - - when that facility starts to operate, are you still going to have to stock the dealers?

Or are those dealers actually already stocked and there's not really demand for tractors out of those facilities until retail demand actually picks up.

So, the - - it would probably depend by product.

There - - we do first of all, that we are talking about getting this, we are going full steam on this - - this facility will be open in the spring.

You are going to miss part of the season.

So this gives us the time to ramp up.

So we are not looking for high levels of sales candidly as we start to ramp up.

We're going to do one product and make sure we do it right, to the next one.

And financing is showing some signs of easing in Russia.

It is much more difficult in other countries.

But interest rates have come down and so there are a few glimmers.

Now we are talking at the margin.

So don't get too excited but there are some, some signs here.

Our dealers do have some products that was there before the liquidity crisis.

So there is some product in country to help facilitate activity in this period of transition if you will.

So - - Let me just make sure I am clear.

And this would still be my first question.

The way to think about this is there's some dealer restocking in the back half of 2010, probably creating positive year-on-year comps.

But the real gain is recovery in 2011 assuming their credit crisis continues.

That's a fair statement.

Okay.

One last quick one.

In Q1, your fiscal Q, in the Construction and Forestry business, did you produce to retail demand or did you underproduce retail demand in that quarter?

Let me see.

In the first quarter, we would have produced to retail demand.

Okay.

All right.

Thank you.

Thank you very much.

As usual we will be around to answer any follow-up questions you may have after the call.

Have a good day, everyone.

Bye, bye.

Thank you.

This does conclude today's conference call.

We do thank you for your participation.

You may now disconnect your lines.