強鹿 (DE) 2010 Q4 法說會逐字稿

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  • Operator

  • 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'd now like to turn the call over to Ms.

  • Marie Ziegler, Vice President and Treasurer.

  • Thank you.

  • You may begin.

  • Marie Ziegler - VP and Treasurer

  • Hello, everyone.

  • Also on the call today are Jim Field, our Chief Financial Officer, Susan Karlix, and Justin Marovec.

  • In addition, Tony Huegel joins us as the newly appointed Director of Investor Relations.

  • Many of you know Tony based on his previous experience in our department.

  • He has a strong familiarity with the practice of Investor Relations as well as a deep understanding of Deere.

  • Tony will be in transition between now and the end of January.

  • Tony, Susan, and Justin make up a strong Investor Relations team that, as in the past, will be available to respond to your questions and share information about the Company.

  • And now, Tony.

  • Tony Huegel - Director of IR

  • Thanks, Marie.

  • Today, we'll take a closer look at Deere's fourth quarter earnings and then spend some time talking about our markets and the outlook for 2011.

  • 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 that 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 in 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.

  • 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.

  • This call also may include financial measures that are not in conformance with Accounting Principles Generally Accepted in the United States of America or GAAP.

  • Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/financialreports under Other Financial Information.

  • Now, for a closer look at the fourth quarter, here is Susan.

  • Susan Karlix - Manager, Investor Communications

  • Thanks, Tony.

  • Today, John Deere wrapped up 2010 with the announcement of our fourth quarter results.

  • All in all, it was an excellent quarter and an extremely good year.

  • Fourth quarter earnings were $457 million, the highest ever for the final quarter of the year.

  • Total revenues climbed 35%.

  • The improvement was broad-based, but led by Ag and Turf which had another strong quarter.

  • Our other divisions, Construction and Forestry and Credit reported dramatically higher profit as well.

  • Our performance for both the quarter and full year reflected a disciplined approach to executing the Company's business plans and a sharper strategic focus.

  • It also reflected positive conditions in the US farm sector, which led to a highly favorable sales mix of larger equipment.

  • Even so, these results were achieved in spite of weakness in key regions such as Europe and key businesses, such as construction equipment.

  • For the year as a whole, John Deere registered its second highest ever level of sales, earnings, and enterprise cash flow.

  • All that said, the ultimate measure of how well we did in 2010 may be found in the generation of economic profit or what we call SVA, Shareholder Value-Added.

  • For the last decade, it has been one of our primary metrics in managing the Company.

  • SVA for the full year was $1.714 billion, the highest ever.

  • That may be the best yardstick of our success in delivering a high level of profit while managing costs and assets.

  • It was, in summary, a great quarter and a good year, and it puts the Company in position for what we see as an even stronger performance in 2011.

  • Let's look at the quarter in more detail starting with slide three.

  • As just previewed, net sales and revenues were up 35% to $7.2 billion in the quarter.

  • Net income attributable to Deere & Company was $457 million, the highest ever income for a fourth quarter.

  • Slide four outlines the expenses incurred in fiscal 2009 for goodwill impairment related to the John Deere Landscapes Reporting Unit and voluntary employee separation associated with the formation of the Agriculture and Turf Division.

  • Net income in the fourth quarter of 2010 was up more than threefold, excluding these two charges.

  • Turning to slide five, total worldwide equipment operations net sales were up 39% to $6.6 billion, the second highest fourth quarter net sales total ever.

  • Currency translation on net sales was positive adding one point and price realization in the quarter was positive by three points.

  • On slide six, worldwide production tonnage was up 59% in the quarter and up 15% in the fiscal year.

  • Both SBU's saw higher tonnage in the quarter as a result of continued strong demand for large Ag equipment, strength in South America, and Construction and Forestry markets rebounding from the very low levels of 2009.

  • For the first quarter of fiscal 2011, worldwide production tonnage is forecast to be up about 39%, and for the full year, up approximately 8%.

  • Slide seven illustrates the year-over-year change in tonnage by quarter.

  • As you see, the year-over-year pace of change increased as we went through 2010.

  • In contrast, 2011 will start strong and then decelerate in the second half.

  • Partly, this is because we're up against some tough comparisons, but also production will be strongest in the first half of the year to facilitate the transition to Interim Tier 4.

  • In addition, 2011 will be a year of significant new model introductions, due in large part to the engine conversions.

  • Associated with this change, we will experience some production limits and transitional issues.

  • In addition, Construction and Forestry levels will be front end loaded, due to their implementation of SAP.

  • Both the Davenport and Dubuque Works will be shut down for approximately two weeks in the year as they switch to the new system.

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

  • First quarter sales are expected to be up approximately 34% compared with the first quarter of 2010.

  • Currency translation on net sales has a negative impact by about two points.

  • For the full year, net equipment sales are forecast to be up 10% to 12% compared with fiscal year 2010.

  • This includes about one point of negative currency translation and approximately two points of positive price realization.

  • Net income attributable to Deere & Company is forecast to be approximately $2.1 billion in fiscal 2011.

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

  • Production tonnage was up 50% in the quarter on easy comparisons and strong retail demand.

  • Sales increased 33%.

  • Operating profit was $662 million.

  • The profit improvement was primarily due to higher shipment and production volumes and improved price realization, partially offset by higher incentive compensation expenses and increased raw material costs.

  • The division had an operating margin of about 12% in the quarter and an incremental margin of approximately 24% when you strip out the goodwill impairment and voluntary employee separation expenses taken in the fourth quarter of 2009.

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

  • Extreme weather conditions in many parts of the world have lead to lower yields and concerns over tight supplies.

  • That has sent the outlook up considerably for crop prices in the 2010-2011 crop year.

  • Our first look at the 2011/2012 crop year has prices remaining at strong levels.

  • Corn prices are being helped by increased global demand.

  • We project that 2010-2011 corn stocks in the US and Canada will end below one billion bushels and not significantly increase in 2011/2012.

  • Growing global consumption for soybeans is expected to keep exports from the US at strong levels, helping to maintain soybean prices at favorable levels.

  • 2010/2011 global wheat stocks are projected to be down about 12% from the 2009/2010 levels, keeping prices strong.

  • 2010/2011 cotton prices remain strong driven by the recovery in global demand.

  • Turning to slide 11, 2010 US farm cash receipts are now forecast to be up about 9% from 2009, rising to about $322 billion.

  • Our forecast for 2011 has farm cash receipts increasing to nearly $347 billion.

  • This would surpass the all-time high of $330.5 billion, recorded in 2008 by almost 5%.

  • Farm cash receipts for both the current and prior year are an important driver of Ag equipment sales.

  • Deere's outlook for the EU-27 is shown on slide 12.

  • First, grain prices are at very attractive levels, and milk and feed prices continue to rise.

  • European farmer sentiment is improving, but some fundamentals are weighing on producers minds and they are outlined on the slide.

  • Bottom line, however, is for the first time in the last two years, we are starting to see a turnaround in demand for agricultural equipment in Europe.

  • Net farm income in Brazil and Argentina is on slide 13.

  • In Brazil, farm net income is expected to be up 180% in 2011, lead by big increases in sugar cane and soybeans.

  • These are the two crops that drive the bulk of equipment purchases in Brazil.

  • Contributing to strength in the region is strong global demand for Brazilian commodities, lower production costs, and government sponsored low rate finance programs like Finame PSI that has been extended through the end of March 2011.

  • Although we highlighted our new or updated products in Brazil in the second quarter call, slide 14 does so again.

  • These products were launched in May with full availability for fiscal 2011, and we would be remiss if we didn't mention that October was Deere's biggest month ever for tractor and combine sales in Brazil.

  • Further, we added about 25 dealer locations in 2010 enhancing our ability to meet the product support and service needs of our growing customer base.

  • We currently have approximately 200 dealer locations in Brazil.

  • Slide 15 highlights two exciting events that took place this quarter in India for the Ag and Turf and Construction and Forestry divisions.

  • In late September, Ag and Turf had a groundbreaking ceremony, and in October began construction of a combine factory in India.

  • This marks John Deere's entry into the harvesting business there.

  • Full production is expected to begin in the first half of fiscal 2012.

  • You've heard us talk about our joint venture with Ashok Leyland for some time.

  • The inauguration of the 200,000 square foot facility took place on October 21.

  • Hiring is under way and production, initially of backhoes, is expected to begin in the first half of 2011.

  • Our 2011 industry outlooks are on slide 16.

  • Fundamentals in the US and Canadian farm sectors remain robust, but reflecting the transition to Interim Tier 4, industry sales of agricultural equipment in the region are forecast to be about flat in 2011.

  • With respect to Deere, we continue to see strength in our order books.

  • The combine early order program is progressing well and as planned; in absolute numbers, orders are ahead of last year.

  • In the sprayer, planter, and tillage equipment programs, we are seeing strong results, even above last year, and demand for large tractors remains strong.

  • The 8R series tractor with its Interim Tier 4 engine is being very well accepted.

  • We have conducted aggressive training on the new 8R in the areas of technology, capability, and support.

  • Also, customers are excited about the performance of and the new telematics on the tractor.

  • In fact, dealers report that some customers who had submitted orders early to receive 8R tractors with Tier 3 engines have changed their order to later in the year to receive an Interim Tier 4 compliant machine.

  • Also, some customers who bought a new 8R tractor in 2010 are already discussing trades for the 2011 machine.

  • We are encouraged by the initial orders of more than 2,500 8R units all of which are retail sold.

  • Effective availability for the 8R series tractors is May 2011.

  • Earlier we touched on the conditions in Western Europe.

  • As noted earlier, we are encouraged that demand is beginning to turn.

  • In 2011, we expect Ag sales to be up 5% to 10% in Western Europe.

  • Sales in Central Europe and the CIS are expected to see moderate gains from the depressed levels of 2010.

  • Asia sales are expected to increase moderately from the very strong levels of 2010 and industry sales in South America are expected to be about flat in 2011 from the strong levels of 2010.

  • Although the underlying economic fundamentals are positive, our industry retail forecast includes lower sales from Brazilian government programs that target small farmers and a return to higher interest rates if the Finame PSI extension expires on March 31.

  • In Summary, with Deere's line up of new products, we are excited about our prospects in South America.

  • Turning to another product category, after rising almost 15% in 2010, we expect retail sales of Turf and Utility equipment in the US and Canada to be about flat in 2011.

  • We have seen an uptick in the commercial mowing segment, and our new utility vehicles have experienced an extremely successful launch.

  • Putting this all together, on slide 17, Deere sales for worldwide Ag and Turf are projected to be up 7% to 9% for 2011, with an operating margin around 13%.

  • In 2010, the Ag and Turf division's operating margin benefited by about two points due to the mix of large Ag sales in comparison with a normal year.

  • That effect is expected to moderate somewhat in 2011 as small Ag equipment sales recover from their fairly low levels of the past few years.

  • The mix impact in 2011 will be about one point.

  • Let's focus now on Construction and Forestry on slide 18.

  • Deere's net sales were up 75% in the quarter, while production tonnage was up 129%.

  • The division's operating profit of $54 million was impacted by higher shipment and production volumes, incentive compensation expenses, raw material costs, and post retirement benefit expenses.

  • On slide 19, following a 41% increase in 2010, net sales in Construction and Forestry are forecast to be up 25% to 30% in fiscal 2011.

  • To put these numbers in perspective and to truly appreciate the severity of the decline in the C&F markets, this year's increase will put the division's sales at about what has historically been considered a trough level.

  • We are forecasting the US construction industry to be up about 25% for the full year.

  • Growth is slower coming out of this recession than others, but we are encouraged by the activity we have seen from the independent rental companies and in the governmental segment.

  • Also encouraging, Deere dealers continue to see an improvement in rental utilization and used equipment markets.

  • Meanwhile, global forestry markets were up significantly in 2010 from the very low levels of 2009 and are expected to be up further in 2011.

  • Globally, the industry was up about 50% in 2010 and our current forecast calls for a further increase of 25% to 30% in 2011.

  • The full year operating margin for Deere's C&F division is forecast to be in the mid-single digits.

  • Let's move now to our Credit operations.

  • Slide 20 shows the Worldwide Credit Operations' provision for credit losses as a percent of the total average owned portfolio.

  • For fiscal 2010, the provision was 48 basis points.

  • Write-offs in the Construction and Forestry portfolio continues to improve.

  • We are seeing fewer repossessions and increased pricing on the repossessions that are occurring as well as improving recovery rates.

  • The 2011 full year provision for Credit losses as a percent of the average owned portfolio is forecast to run around 45 basis points.

  • On slide 21, past dues for the Worldwide Credit Operations were lower than 2009 overall.

  • Moving to slide 22, Worldwide Credit Operations' net income attributable to Deere & Company was $91 million in the quarter versus a net loss of $22 million last year.

  • The biggest factors were the reversal and deferral of wind energy tax credits eligible for cash grants last year, a lower provision for credit losses, improved financing spreads, and growth in the portfolio.

  • Speaking of wind, as previously announced, we have signed a definitive agreement to sell the wind energy business.

  • Subject to regulatory approval the transaction is expected to close in December.

  • A charge of about $20 million after-tax is included in the fourth quarter results.

  • Looking ahead we are projecting Worldwide Credit Operations' net income attributable to Deere & Company of about $360 million in 2011.

  • Now, let's turn our focus back to the equipment ops and take a look at receivables and inventory on slide 23.

  • For the Company as a whole, receivables and inventories were up roughly $1.5 billion in 2010 versus 2009.

  • Keep in mind, we ended fiscal 2009 with receivables and inventory at extremely low levels.

  • They were about $1.3 billion lower than at the end of fiscal 2008.

  • Also, 2010 year-end inventories were higher due to strong end markets and the timing of Interim Tier 4 transitions.

  • By the end of fiscal 2011, receivables and inventories are expected to be down about $675 million.

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

  • Slide 24 presents the product category detail in the US and Canada for the month of October expressed in units.

  • Utility tractor industry sales were up 11%.

  • Deere was up more than the industry.

  • Row crop tractor industry sales were up 40%.

  • Deere was up more than the industry.

  • Four wheel drive industry sales were up 63%.

  • Deere was up more, and the combine industry sales were up 18%.

  • Again, Deere was up more than the industry.

  • Looking at Deere dealer inventories in the bottom chart for row crop tractors, Deere ended October with inventories at 16% of trailing 12 month sales.

  • Combine inventories were at 2% of sales.

  • Turning to slide 25, in Western Europe, sales of John Deere tractors and combines were up double digits in October.

  • Deere's retail sales of selected Turf and utility equipment in the US and Canada were up double digits in the month, and Construction and Forestry sales in the US and Canada on both a First In the Dirt and settlement basis were up double digits for the month.

  • Slide 26 shows raw material and logistics costs up about $80 million in the quarter and down about $135 million in fiscal 2010.

  • Our fiscal 2011 forecast calls for raw material and logistics costs to be up about $250 million, compared with last year.

  • By division, this includes about $175 million increase for Ag and Turf and about $75 million for Construction and Forestry.

  • The significant material cost tailwind of about $230 million in the first half of 2010 is not forecast to be repeated in 2011.

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

  • Looking at R&D expense on slide 27, R&D was up about 14% in the fourth quarter with currency translation being negative by about two points.

  • For fiscal 2010, R&D expense was up about 8%.

  • For fiscal 2011, R&D expense is expected to be up about 15%.

  • As we stated last quarter, R&D spending is expected to remain at high levels as we approach significant product launches with Interim Tier 4 engines and soon thereafter, we respond to Final Tier 4 emission standards.

  • Also included in the increase is the ongoing new product development expense for our growing global customer base.

  • Moving now to slide 28.

  • Pension and OPEB expense in the fourth quarter was up about $70 million bringing the full year increase to about $345 million.

  • Pension and OPEB expense is expected to be about flat in fiscal 2011.

  • On slide 29, SA&G expense for the equipment operations was up about 15% in the fourth quarter.

  • Variable incentive compensation accounted for about 11 points of the increase while pension and OPEB expense added about two points.

  • For fiscal 2010, SA&G was up about 10 points.

  • Variable incentive compensation accounted for about six points of the change as the Company's performance continued to improve.

  • One factor was record-setting SVA reflecting our continued focus on execution and asset efficiency.

  • Pension and OPEB accounted for about two points of the SA&G increase and currency translation about two points.

  • SA&G is expected to be up about six points in fiscal 2011, in line with our growth objectives, growth will account for about two points of the change with variable incentive compensation accounting for about one point.

  • Moving to the tax rate on slide 30.

  • The fourth quarter effective tax rate for the equipment operations was about 42%.

  • The full year 2010 effective tax rate was about 41%, including the tax expense of about $130 million related to US healthcare legislation recognized in the second quarter.

  • Excluding the charge, the effective tax rate for 2010 would have been about 36%.

  • For 2011, our effective tax rate is forecast to be in the range of 35% to 37%.

  • On slide 31, you see our record of strong cash flow from Deere's equipment operations.

  • We anticipate cash flow from equipment ops of about $3 billion in fiscal 2011.

  • Such strong cash generation speaks to successful execution of our SVA model, which emphasizes high returns from a lean slate of assets.

  • In light of such strong cash flow, we thought it appropriate to review our use of cash priorities as outlined on slide 32.

  • First is the importance of a single A rating.

  • Deere's Worldwide Credit Operation provides a strategic advantage in funding customer purchases, but this is true only so long as we can access the credit markets on a cost effective basis.

  • One of the key elements to this end is maintaining a single A rating, which is our top priority.

  • The rating agencies expect 12 months of debt maturities to be covered by cash and/or untapped credit facilities.

  • This also implies appropriately funding our pension and OPEB benefits which we have done proactively and prudently over the years.

  • In fact, at the end of fiscal 2010, the accumulated benefit obligation for Deere's US hourly and salary plans was 102% funded, while the projected benefit obligation was 98% funded.

  • Our second use of cash priority is funding value-creating investments in our operations, such as the two facilities in India that we just referenced or our factory in Domodedovo, Russia that was opened earlier in the year.

  • Our third priority is to provide for the common stock dividend.

  • Over time, we want to consistently deliver a series of moderately increased dividends, while targeting a 25% to 35% payout ratio, on average.

  • In this regard, we are mindful of the importance of maintaining the dividend and thus not growing it beyond a point that can be comfortably sustained by our cash flow.

  • Share repurchase is our method of deploying excess cash once the previous requirements are met and as long as the share repurchase is viewed as value-enhancing.

  • Slide 33 addresses unsecured term debt maturities over the next two years.

  • Nearly $3 billion in 2011 and approximately $5 billion in 2012.

  • The relatively high level and timing of maturities in 2012 will affect the amount of cash we are targeting for year-end 2011.

  • Slide 34 summarizes share repurchases by fiscal year.

  • During the fourth quarter, we repurchased 3.5 million shares for about $255 million bringing total shares repurchased this year to over 5 million.

  • Looking into 2011, given our projected cash flow and use of cash priorities, it is fair to say that our forecast contemplates additional share repurchases in the coming year.

  • Finally, slide 35 summarizes sources and uses of cash since we restarted the share repurchase program back in 2004 and began a run of seven dividend increases.

  • You'll note that we have returned over $7 billion of cash to shareholders over this time representing about 55% of the cash generated by operations.

  • This accomplishment demonstrates our focus on delivering value to investors.

  • Turning to slide 36, Capital Expenditures were $735 million in fiscal 2010 primarily driven by the Interim Tier 4 emission rules.

  • Depreciation and amortization was about $550 million.

  • Pension and OPEB contributions were about $840 million in the year.

  • Looking ahead to fiscal 2011, as slide 37 illustrates, Capital Expenditures are expected to be about $1 billion in the year.

  • The increase is due to new product development in new markets such as our entry into the harvesting business in India as mentioned earlier.

  • Depreciation and amortization for 2011 is expected to be about $550 million with pension and OPEB contributions of about $300 million.

  • In closing, John Deere enters 2011 on a strong pace.

  • We are looking for further improvement in the year ahead as a result of some pick up in overall economic conditions and a farm sector that remains very sound in general and is gaining strength in some of our key markets.

  • At the same time, the Company is aiming to capitalize on this positive environment by pursuing new markets, adding productive new models of equipment, and extending its competitive position throughout the world.

  • John Deere's plans for helping meet the world's growing need for food, shelter, and infrastructure are well on track and moving ahead at an accelerated rate.

  • That's one of the reasons we remain highly confident about the Company's increasingly attractive future prospects, and about our ability to deliver significant value to customers and investors well into the future.

  • Marie Ziegler - VP and Treasurer

  • Thank you, Susan.

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

  • The operator will instruct us on the polling procedure, but as a reminder, 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.

  • Shirley?

  • Operator

  • Thank you.

  • We will now begin the question and answer session.

  • (Operator Instructions)

  • Our first question comes from Jamie Cook.

  • You may ask your question and Please state your company name.

  • Jamie Cook - Analyst

  • Hi, good morning, Credit Suisse.

  • Marie Ziegler - VP and Treasurer

  • Good morning, Jamie.

  • Jamie Cook - Analyst

  • Hi.

  • I'm trying to understand your guidance in a number of different ways, but I'll start first with your outlook for Construction and Forestry.

  • If we assume a 27.5 sales increase, which is the mid-point of your guidance and you said mid-single digit margins, I'm trying to figure out why margins would be that low because that gets you to about 2.7, I'm sorry, about $4.7 billion in sales.

  • It's about $100 million lower than 2008, and at that point you had almost a 10% margin, so I'm trying to figure out how you think about that and whether you feel that's acceptable internally for your margins to be half of what they would on a similar sales level.

  • Marie Ziegler - VP and Treasurer

  • We'll deal with Construction and Forestry then.

  • First of all, as Susan pointed out, this is about 70% of our average or typical volume, so even with that very significant increase, Jamie, that just puts us at the bottom of where we would normally be operating.

  • The other thing I would point out and this will certainly have an impact on the Ag and Turf Division as well is that although we have good volume increases, we talked about raw material costs, we talked about R&D and SA&G.

  • We have some other expenses that I'm going to give the number for the Company because I don't have them split by division, but they are important for the Construction and Forestry Division as well, and that would include IT4 product costs.

  • We have raw material costs that's inflation adjustments, if you will, but these new IT4 compliant machines cost more money because there's more hardware on them, and the costs for the Company is about $135 million we estimate for next year.

  • Actually, we do have a little bit of a split, we think it's about $100 million for the Ag and Turf and about $35 million for the Construction and Forestry.

  • We also have some higher overhead expenses due to just the fact that we will be in transition.

  • Susan mentioned that Construction and Forestry will have two week shut down as they transition to SAP.

  • We've got some additional human resources assigned to help facilitate that, and then in addition, just the mere transition to IT4 which causes some inefficiencies if you will in the factory.

  • Then, the third thing that again affects the Company, less so Construction, but nonetheless something to note, is that absorption is about $100 million hit in 2011.

  • So when you look at those factors, you can see why we have the kinds of margins that we do.

  • We will continue to work to improve our margins.

  • Obviously, you've heard us talk about our aspirations, which are 12% operating margin on average over time and a peak margin of about 14.5%, and those are still very much in play, but in 2011 we have some unique circumstances.

  • Jamie Cook - Analyst

  • And then just my follow-up question is I think you've said -- do you view just given your industry outlook for US and Brazil which comprise a big part of your farm equipment business, I understand Europe is getting better, but do you view that given the tougher comps in your guidance that you have in North America and South America and Europe coming up, but a lesser percent, that farm margins have already peaked or do you think you can still achieve that target of 14.5% or you said your margins will increase 200 to 250 basis points above prior peak within farm, specifically?

  • Marie Ziegler - VP and Treasurer

  • Go ahead, Jim.

  • Jim Field - CFO, SVP

  • Well, yes, we do believe we can achieve the 14.5%, and we're not walking away from that bogey at all on the Ag equipment business or on the construction business as well.

  • So when you look at the Ag business on a global basis you have to realize that we're roughly at mid-cycle volumes.

  • We have some strength in North America, but we have some other markets that are very, very soft, namely Western Europe and the CIS.

  • Jamie Cook - Analyst

  • So as a percentage of mid-cycle, sorry, where do you think you are in farm?

  • Jim Field - CFO, SVP

  • Roughly mid-cycle.

  • On a global basis.

  • Jamie Cook - Analyst

  • And the other areas are big enough?

  • The areas that would pick up are Eastern Europe?

  • Your biggest markets to me -- so you're suggesting your bigger markets are at peak?

  • Marie Ziegler - VP and Treasurer

  • Absolutely.

  • And Western Europe is still very far below peak and is a bigger market than Brazil.

  • Thanks, Jamie.

  • Jamie Cook - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from Jerry Revich.

  • You may ask your question.

  • Please state your company name.

  • Jerry Revich - Analyst

  • Hi, good morning.

  • It's Goldman Sachs.

  • Marie and Tony, congratulations.

  • Marie Ziegler - VP and Treasurer

  • Thank you.

  • Tony Huegel - Director of IR

  • Thank you.

  • Jerry Revich - Analyst

  • Marie, should we interpret your outlook for rising Construction and Forestry working capital to mean that the IT4 transition impacts less of your product line-up in the business in 2011 than in Ag?

  • And should we look for the transition costs that you described to continue in coming years as you transition additional products to IT4 or will the transition this year put you in a better position to implement the remaining products?

  • Marie Ziegler - VP and Treasurer

  • There will be some additional transitional costs as we move into 2012, certainly.

  • In terms of, for the Division, the bulk of the Construction and Forestry product line actually is effected by the emissions regulations starting in 2012.

  • For Ag, obviously, as you know, everything above 175 is effected and that's a bigger percentage of the Ag and Turf divisions product line, so you're correct.

  • There are some differences there.

  • Does that help?

  • Jerry Revich - Analyst

  • Absolutely.

  • And you have a pretty healthy capital budget increase for next year.

  • Can you talk about how much of that is for new products versus capacity expansion plans and perhaps give us some more color on the latter?

  • Marie Ziegler - VP and Treasurer

  • Well clearly, the lions share of that increase is still very much surrounding the implementation of IT4, Stage 3B in Europe emissions standards as well as emission standards in other parts of the world.

  • There are some, I would say, incremental capital that would be spent in places like we described in India, but the bulk really is still IT4 driven.

  • Jerry Revich - Analyst

  • Thank you.

  • And lastly, can you say more about which countries in Europe you expect to lead the recovery and which countries do you think will remain weak for the next six to 12 months?

  • Marie Ziegler - VP and Treasurer

  • I don't have that color.

  • I'm sorry.

  • I only have a comment on the market overall.

  • Jerry Revich - Analyst

  • Okay, thank you.

  • Operator

  • Thank you.

  • The next question comes from Meredith Taylor.

  • You may ask your question.

  • Please state your company name.

  • Meredith Taylor - Analyst

  • Hi, it's Barclays Capital.

  • Good morning and congratulations.

  • I'm hoping you could give a little bit more color on the production limits on a year-over-year basis in these transition issues on the Ag and Turf side of the business?

  • If you can dove tail that with the guidance you've given on a production tonnage basis, if you could talk specifically to Ag and Turf, how much these production limits will be a factor as we move through the year?

  • Marie Ziegler - VP and Treasurer

  • The timing of the transition on the 8000 series tractor, as you know, production begins the first of January.

  • We have not introduced these products, but we can tell you that we'll be transitioning our 7000 and 9000 series products as we move to the middle of the year.

  • Maybe that will help you a little bit in terms of the timing and then there are ongoing other products that are going to be introduced, but those are kind of the big ones.

  • When we took a look and said what is our upside for 2011 as we looked at our capacity -- and when we talk about capacity here, this year, we're affected by the fact that as you launch new products, you shut down the line and then you have some transitions and then you ramp up production, so you lose some period of time, or some available capacity, if you will, as you're making these transitions.

  • For us, this is a normal part of the business.

  • It's just that there are so many that happen in this compressed period of time.

  • We've got a record number of launches that will be coming out, certainly, in the next year and very impressive number the year after.

  • So anyway, with that as the preamble as we took a look at specifically Waterloo and Harvester Works, in total we think we've got about 10% upside in view of these limitations and balancing emissions credits.

  • Meredith Taylor - Analyst

  • So sorry, just in terms of 10% upside?

  • Marie Ziegler - VP and Treasurer

  • Out of specifically the two biggest Ag factories that are, affected as we are transitioning IT4 this year.

  • Meredith Taylor - Analyst

  • Okay, got it.

  • And then can you talk a little bit about what you were assuming in terms of the impact on incrementals for Ag and Turf given this transition?

  • I know you'd talked for the fourth quarter, actually, about, I think it was, about $50 million headwind associated with that.

  • Can you talk about how fourth quarter trended relative to that expectation and then how that flows through in 2011?

  • Marie Ziegler - VP and Treasurer

  • Okay, for 2011, Meredith, that is $100 million of additional overhead that we expect to incur.

  • In the fourth quarter itself, actually --

  • Meredith Taylor - Analyst

  • Sorry, just to clarify that's all in Ag and Turf?

  • Marie Ziegler - VP and Treasurer

  • No, there's a little bit of impact in Construction and Forestry, but the bulk of it, the vast majority, is for Ag and the reason is, of course, that Ag has the greater number of new products introductions.

  • So $100 million there and then in the fourth quarter, we actually think we ended up around $20 million.

  • We were more efficient than we had initially feared, and that efficiency is reflected in this $100 million guidance that we're giving you into next year.

  • Thank you, Meredith.

  • Meredith Taylor - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from Henry Kirn.

  • You may ask your question.

  • Please state your company name.

  • Henry Kirn - Analyst

  • It's UBS.

  • Good morning.

  • Marie Ziegler - VP and Treasurer

  • Good morning.

  • Henry Kirn - Analyst

  • Could you talk about the potential share impact of the broader product offerings in South America?

  • How much bigger piece of the pie do you think the Company can go after now?

  • Marie Ziegler - VP and Treasurer

  • Well, I certainly have some internal share objectives that I would not choose to publicize, but there's no question that we are doing a much better job of covering a broader product offering, and you see from the slide, it's just not only tractors, it's combines and a whole host of products.

  • I might also point out when you look at the industry guidance that we provide -- ANFAVEA as you know provides industry information on tractors and combines.

  • When we look at our own sales, our sales are made up of certainly tractors and combines, but they include a lot of other products including sugar cane harvesting equipment; we've got cotton harvesting equipment, planters, a variety of things, so when we give you industry guidance, we can only give you industry guidance on tractors and combines, and I think there's some tillers or something that are included in there, but there are other products that are sold in the market, and so as you think about the outlook, remember we will benefit from the very strong sugar cane markets and cotton markets as well.

  • Henry Kirn - Analyst

  • Thanks and could you talk about some of the signs of life in Eastern Europe, is credit becoming more readily available?

  • Marie Ziegler - VP and Treasurer

  • I think signs of life would be the description that I've heard applied.

  • They are starting to see limited pockets of some financing activities, but there is no question that financing availability is still an enormous issue in that region of the world.

  • Henry Kirn - Analyst

  • Thank you very much.

  • Marie Ziegler - VP and Treasurer

  • Thank you.

  • Operator

  • Thank you.

  • The next question comes from David Raso.

  • You may ask your question.

  • Please state your company name.

  • David Raso - Analyst

  • ISI.

  • My question is on -- initially, on pricing.

  • Can you give us some indication of how you see pricing for 2011 for Ag and Turf?

  • Marie Ziegler - VP and Treasurer

  • We have price guidance for the full Company of two points, certainly Ag and Turf is a strong participant in that guidance.

  • David Raso - Analyst

  • Okay, the reason I ask is doing that math if you gave Ag just 3%, which I believe would be more than that, it implies Construction pricing down over 3% year-over-year.

  • Marie Ziegler - VP and Treasurer

  • It would be incorrect.

  • Both divisions are looking for some positive price utilization; and David that's as much as we can comment on that.

  • David Raso - Analyst

  • But can you just correct the math?

  • If I do 3% on Ag revenues for 2011 to get to 2% for the total Company?

  • Marie Ziegler - VP and Treasurer

  • Well, then the number must not be 3%.

  • David Raso - Analyst

  • So then the question would be why would Ag pricing be less than 3% given the 8R and even some of the price increases in the channel we hear for the rollover from the Tier 3 in front of the new Tier 4?

  • Marie Ziegler - VP and Treasurer

  • That's a very good question and do recall that when you take a price increase, that includes feature creep.

  • When we give you our price realization, we are stripping out anything that would involve higher horsepowers, new features, the IT 4 compliant piece.

  • That is considered a feature and is put into volume.

  • So when we give you our price numbers, we are looking at strictly doing an apples-to-apples as best we can comparison.

  • So again, higher horsepower, IT4, all of that gets reclassed, if you will, into volume.

  • David Raso - Analyst

  • Okay, I can appreciate that.

  • If I look at the 7% to 9% then total Ag and Turf growth and strip out pricing that's apples-to-apples not features, the unit growth is implied probably sub-five or something like that.

  • Marie Ziegler - VP and Treasurer

  • Well, our guidance in North America is for the industry to be flat and that does reflect, as Susan talked about, the fact that on large Ag you are in a period of transition with production limitations and some emissions credits management.

  • David Raso - Analyst

  • Well, that's not my question.

  • The Ag and Turf receivables and inventory being down 750 for the year, a little bit is currency I know, but still underproducing retail -- can you pinpoint exactly where the underproduction of retail will be?

  • I suspect even though the combine new inventories is low, you might try to help out with some of the used sales by keeping new production low, but can you highlight in particular where the underproduction will be versus retail in Ag?

  • Marie Ziegler - VP and Treasurer

  • It really has to do more with the work in process that we have in the factory in the fourth quarter of this year compared to what we think we will have and require in the fourth quarter of next year.

  • That is not at all a prognostication on what the 2012 markets look like whatsoever.

  • It's really reflective of the fact that this year, as we're getting ready for this very significant emissions change, we are in very high production levels on Tier-3 machines in the fourth quarter of this year as well as November and December.

  • We do not expect to repeat that kind of production level.

  • As you're aware typically it's pretty quiet, October, November and December, relatively speaking, because we're out of the use season, so what you're really seeing in that number in Ag and Turf is the fact you don't have a lot of work in process at a time of the year when we are typically seasonally weak.

  • David Raso - Analyst

  • And the Tier 4--

  • Marie Ziegler - VP and Treasurer

  • David, I think we've done our two questions.

  • Thank you so much.

  • David Raso - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from Robert Wertheimer.

  • You may ask your question and please state your company name.

  • Robert Wertheimer - Analyst

  • Good morning, everybody.

  • It's Morgan Stanley.

  • My question is on Tier 4.

  • Marie you mentioned the incremental cost of the Tier 4 componentry, which makes sense.

  • I would assume that part of the volume/pricing is trying to recoup some of the $100 million or millions that you've spent on R&D, so is it fair to assume that the margin impact, in other words, the price volume is bigger than the cost you just had and the favorable margin trade in '11?

  • And secondarily, the upped R&D expense, is that really getting ready for the models that launch in '12 and final testing, and such, or is that more the Tier 4 final in 2014 spending curve is starting?

  • Marie Ziegler - VP and Treasurer

  • Let me start with the R&D.

  • We have a significant launch in 2011.

  • Some of the R&D is still for products that will be launched in 2011, certainly.

  • There is very large wave, again, coming in 2012, so that's affecting the number.

  • Then, thirdly, we are doing, we are hot and heavy into Final Tier 4 design work.

  • Final Tier 4 starts in 2014 and if you are at one of our design engineers that is tomorrow, so there's a lot of work being done there.

  • On the margin, we have incremental investment in some new product delivery and the example would be like the large number of new products that we just have in Brazil we are continuing to develop product for customers in many markets.

  • Now, going back to your IT4 cost question and price, we over time, expect that we will fully recover our IT4 costs, but it doesn't happen all on Day 1 and so it is fair to say that in 2011, there will be some impact in our margin on a product cost basis because it involves mix and timing and a whole variety of things, but over time, we will recover that.

  • Robert Wertheimer - Analyst

  • Okay, perfect.

  • So that means in 11, you're not necessarily trying to recoup a big chunk of the R&D spend and it might be negative.

  • Got it.

  • Marie Ziegler - VP and Treasurer

  • Actually, Rob, sorry, we've done our two.

  • I need to keep moving, thank you.

  • Robert Wertheimer - Analyst

  • Okay, thanks.

  • Bye.

  • Operator

  • Thank you.

  • Our next question comes from Andy Casey.

  • You may ask your question.

  • Please state your company name.

  • Andy Casey - Analyst

  • Wells Fargo Securities.

  • Good morning.

  • Happy Thanksgiving to everybody and congrats Marie and Tony.

  • Marie Ziegler - VP and Treasurer

  • Thank you very much.

  • Andy Casey - Analyst

  • On the cash priority slide, can you help us understand how to define the term "excess" when you're talking about excess cash from an external viewpoint, because, based on your cash flow outlook plus the current cash on the balance sheet for the equipment side, it would be $5 billion plus at the end of '11?

  • Marie Ziegler - VP and Treasurer

  • Depending on what we might do with repurchase and things like that, and then we've got a pretty significant amount of capital expenditures ahead of us as you are aware, etc.

  • You need some amount of liquidity to run the business, and we've also talked about the requirement of the rating agencies to have -- and, frankly, it's just good business -- to have a certain amount of our debt pre-funded.

  • As we deliberately included the chart on the debt maturities which is I'm looking for it, it's slide 33, that you would be aware of the fact that we have some pretty significant maturities coming particularly in 2012 and so as you think about our year-end cash, we're going to have some portion of that cash on hand to cover what is a very significant maturity.

  • Go ahead, Jim.

  • Jim Field - CFO, SVP

  • And we have chosen not to give sort of precise cash targets because that analysis, of course, is very situational, and we look at some volatility indices that tell us what we're seeing in the underlying capital markets and the amount of cash will flex.

  • Having said that, we have said that our forecast contemplates additional repurchases, which would certainly, I think, lead you to believe, and appropriately so, that the amount of cash that we have right now is, we think, more than we would need, and we intend to, while not committing to any timeline or amount, as we said our forecast contemplates repurchases in the next fiscal year.

  • Andy Casey - Analyst

  • Okay, thank you.

  • And then back the last one back to Henry's question.

  • When you look at the performance that you had in October down in Brazil tractors in terms of market share, were there any one-time benefits driving the share up for that particular month or should we expect low 20s as pretty sustainable in the short-term?

  • Marie Ziegler - VP and Treasurer

  • Oh, I think market share you want to look at over a long period of time.

  • We had some new products that had been launched earlier in the year coming into it, but I think you want to look at it over a long view.

  • I can't promise that we'll repeat exactly what we did in October, but we're very encouraged by the markets reception of the products and the fact that we will have full availability as we move through 2011.

  • Andy Casey - Analyst

  • Okay, thank you very much.

  • Marie Ziegler - VP and Treasurer

  • Thank you, Andy.

  • Next?

  • Operator

  • Thank you.

  • Our next question comes from Ann Duignan.

  • You may ask your question.

  • Please state your company name.

  • Greg Williams - Analyst

  • Good morning.

  • It's Greg Williams sitting in for Ann Duignan at JPMorgan.

  • Thanks for taking our questions.

  • Marie Ziegler - VP and Treasurer

  • Our pleasure.

  • Greg Williams - Analyst

  • Just wanted to follow-up on the transition costs going into fiscal '11.

  • R&D specifically looks like you're going for a 15% increase.

  • Is that $1.2 billion a year?

  • And with the emission standards and Stage 3B, 2012 and 2014, is the $1.2 million a good run rate to use as we look beyond 2011?

  • Marie Ziegler - VP and Treasurer

  • I think it's very fair to say that our R&D spend will stay at very high levels.

  • I think there's certainly -- there could be some increase as you move forward.

  • We don't have our crystal ball into what we'll be spending in '12 and '13 and '14, but I certainly wouldn't look for that number to abate in the near future.

  • Greg Williams - Analyst

  • Okay, thanks.

  • And can you talk about the order board?

  • I think Marie or Susan, you mentioned they are on plan.

  • I was hoping we can get some numbers behind that and what time frame is that?

  • Is that October or the fiscal quarter?

  • How much of that would you expect was pre-buy activity and what do you anticipate for pre-buy in the next month?

  • Thanks.

  • Marie Ziegler - VP and Treasurer

  • Well, I think maybe the most significant item here is that on the 8000 or excuse me, the 8R's now, we indicated that we had 2,500 retail orders, which is a lot, for our machines that will be produced after the first of the year, so these are machines that are IT4 compliant.

  • They do carry a price tag, but they also have telematics and they have some additional features that we are having very good reception from the market; and their fuel economy is basically neutral with the Tier 3, so people are very pleased with what they're hearing about our new product.

  • I think that's the most significant point away from that.

  • In terms of availability date for 8000s, we're talking May and for 9000s we're talking March.

  • Okay, thank you.

  • Greg Williams - Analyst

  • Thank you.

  • Operator

  • Thank you.

  • The next question comes from Eli Lustgarten.

  • You may ask your question.

  • Please state your company name.

  • Eli Lustgarten - Analyst

  • Good morning.

  • Longbow Securities.

  • Marie Ziegler - VP and Treasurer

  • Good morning, Eli.

  • Eli Lustgarten - Analyst

  • Can I get a clarification first?

  • You said you're going to shut down construction for two weeks.

  • When is that going to occur and is there a new implied cost of it?

  • You told us it's going to happen, you just didn't tell us when.

  • Marie Ziegler - VP and Treasurer

  • Mid-year, so you're looking April-May time-frame; and it would be included in that overhead that we were looking at of about $100 million, but again, the bulk of it is Ag so I don't know, I'm guessing $10 to $15 million here is Construction.

  • Ballpark.

  • Eli Lustgarten - Analyst

  • Now your guidance for the Credit Company is $360 million up from $350 million, effectively.

  • Marie Ziegler - VP and Treasurer

  • Yes.

  • Eli Lustgarten - Analyst

  • Can you give us -- something's going on there and the $20 million charge for the wind, I guess, it pulled out of that stuff, is there anymore charges coming in the next year in wind?

  • Marie Ziegler - VP and Treasurer

  • No.

  • We don't contemplate anything at all for wind.

  • I think one of the things that I just would remind you is in the second quarter of -- I think it was the second quarter of this year -- we had some mark-to-market gains that we don't -- of course, they're very hard to predict when that happens and that was about $20 million after-tax, so we don't expect that that will be repeated in 2011, and they also have a little bit of higher overhead, SA&G, as they are working to support our international growth.

  • Eli Lustgarten - Analyst

  • Okay, and then follow-up, we're all struggling with this guidance, because if you strip out the healthcare charge, you still earn somewhere between $4.65 and $$4.68, if you take out the wind charge also, and the implied guidance of less than $5 doesn't fly with even $100 million going on.

  • There's got to be something else we're missing in costs or impact.

  • Marie Ziegler - VP and Treasurer

  • Let me summarize those again.

  • Raw material costs are up $250 million, mix is about 1 point of margins in A&T, and this is not a bad thing at all because it means our small tractor business is starting to recover like in Europe for example, but that's about 1% is about in round numbers $150 million.

  • R&D, our guidance would tell you we're up about $150 million.

  • SA&G, our guidance tells you you're up about $140 million.

  • Then we have the three items that I alluded to earlier, which is the product cost of IT4 which is $135 million overhead, $100 million, and absorption $100 million.

  • That's where it goes.

  • Eli Lustgarten - Analyst

  • Product was 135, absorption 100, was this another hundred on top of that?

  • Marie Ziegler - VP and Treasurer

  • The overhead.

  • That was the factory inefficiencies associated with the number of productline transitions, and capital expenditures, et cetera, related to that.

  • Eli Lustgarten - Analyst

  • The 2% pricing pretty much offsets most of that cost, so that's the hard thing we're getting with double digit sales gain.

  • The incremental margins will just look awful.

  • Something's wrong.

  • It doesn't hold unless it's very conservative guidance.

  • Marie Ziegler - VP and Treasurer

  • I have nothing else to add, Eli.

  • Eli Lustgarten - Analyst

  • Okay, thank you.

  • Marie Ziegler - VP and Treasurer

  • Thank you.

  • Time for one last question.

  • Operator

  • Thank you.

  • Our last question comes from Stephen Volkmann.

  • You may ask your question.

  • Please state your company name.

  • Stephen Volkmann - Analyst

  • Jefferies.

  • Just made it, thanks.

  • So I wanted to actually step back and look a little bit at the forecast, the industry forecast, and I'm interested that you raised your farm cash income expectations in North America and in South America; and, certainly, the underlying crop fundamentals look pretty strong and yet we have kind of flattish forecast for those markets.

  • I'm wondering, do you think that we're just saturated at this point and the cycles flattening out or is there some reason that you would expect farmers, despite these strong fundamentals, to have fairly flat purchases?

  • Marie Ziegler - VP and Treasurer

  • Well let's go back again.

  • Our guidance for North America is affected by these very significant product transitions in IT4 that will have some impact on our ability to respond to customers' requirements.

  • We will do our very best, but because of the need to manage emissions credits an as we've talked a lot already about the transitions and the fact that you have some capacity that's taken out effectively because of those transitions, we think that the markets will be affected in 2011 by that, so that's in North America.

  • In South America again the guidance specifically is looking at tractors and combines which is certainly very important part of the market, but it does not include what's happening in sugar cane and cotton.

  • The other thing I want to point out is in the tractor market is as we look at it, we assume, because we don't know what will happen, that the very attractive 5.5% rate that Finame PSI has been offering will end and not be extended beyond the end of March, because we simply don't know, so that's what's in our forecast.

  • The other factors, there are two state government programs in Brazil that appear to be ending in December and not repeated.

  • Those are targeted at smaller farmers and small farms, excuse me, and lower horsepower equipment, so those two end, and we think that there's been a very significant number of tractors sold under MDA, which is the Mas Alimentos which is the More Food Program, that's the federal program in Brazil.

  • Sales in the last two years each have represented about 30% of the industry, and we think that based on the market dynamics, we think that we actually may see that segment slowing down, off as much as a third next year, and so that's what's Incorporated in our industry guidance.

  • Again that's the industry.

  • When you look at Deere, we have all these new products, we've got a very exciting line up ahead and we're very enthused about our prospects into 2011.

  • Stephen Volkmann - Analyst

  • Okay, great.

  • And then just a quick follow-up for Jim if I could.

  • We've talked, Jim, a little bit about the opportunity to not have to pre-finance a full year of rollovers of maturities as the markets normalize a little bit more, but I guess the message you're giving us is that that's not going to happen in the next 12 months?

  • Jim Field - CFO, SVP

  • No, and the agencies are looking for about 12 months of coverage, today.

  • Stephen Volkmann - Analyst

  • Okay.

  • Marie Ziegler - VP and Treasurer

  • We've covered some of that with credit facilities as well, so we are not necessarily going to have 12 months worth of cash on the balance sheet.

  • On the other hand again we point to the very significant maturities that are ahead of us in 2012 and bear in mind that that's a lot of debt.

  • Jim Field - CFO, SVP

  • Yes, that metric is cash plus untapped credit facilities, so what we were looking at before was actually keeping cash 12 months and we have backed off on that target.

  • Marie Ziegler - VP and Treasurer

  • Thank you, all.

  • Stephen Volkmann - Analyst

  • Okay, great that's helpful.

  • Thanks.

  • Marie Ziegler - VP and Treasurer

  • Susan, Justin, Tony and I will be available to answer your questions.

  • Thank you.

  • Operator

  • Thank you.

  • This does conclude today's conference.

  • We thank you for your participation.

  • At this time you may disconnect your lines.