強鹿 (DE) 2013 Q1 法說會逐字稿

Good morning, and welcome to 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 Mr. Tony Huegel, Director of Investor Relations. Thank you. You may begin.

Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer; Marie Ziegler, Deputy Financial Officer; and Susan Karlix, our Manager of Investor Communications.

Today, we'll take a closer look at Deere's first-quarter earnings, then spend some time talking about our markets and the current outlook for 2013. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at www.JohnDeere.com.

First, a reminder. This call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Thomson Reuters. Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.

This call includes forward-looking comments concerning the Company's plans and projections 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. Susan.

Thank you, Tony.

With this morning's first-quarter earnings announcement, John Deere has started 2013 on a strong note. Income and sales both reached new records for the first quarter of the year, and this was our 11th consecutive quarter of record earnings.

Our results benefited from healthy farm conditions and the strong sales of agricultural equipment. Deere's performance also reflected success executing our ambitious marketing and operating plans. Such execution is especially important right now as we are adding new products and global capacity at unprecedented rates.

Finally, our full-year earnings forecast has been adjusted upward and now stands at about $3.3 billion. All in all, it was a solid start to what is expected to be another good year.

Now let's take a look at the first quarter in detail, beginning on slide three. Net sales and revenues were up 10% to $7.4 billion in the quarter. Net income attributable to Deere & Company was $650 million and earnings per share increased 27% to $1.65.

On slide four, total worldwide equipment operations net sales were $6.8 billion, up 11% quarter over quarter, including an unfavorable impact from currency translation of about one point. Price realization in the quarter was positive by three points.

Turning to a review of our individual businesses, let's start with Agriculture and Turf on slide five. Sales were up 16% in the quarter on continuing strength in the large Ag sector, especially tractors and combines. Recall, combine production and shipments were back-end loaded in 2012 to facilitate our transition to interim Tier 4. Operating profit was $766 million.

Before we review the industry sales outlook, let's look at some of the fundamentals affecting the Ag business. Slide six outlines US commodity price estimates that underlie our financial forecast. 2012/2013 corn, soybean, and wheat prices reflect the production shortfall caused by the weather-driven events that affected the 2011 and 2012 seasons and continue to support equipment sales.

At this time of the year, it is hard to determine what the 2013/2014 crop year will bring. Clearly, the upcoming growing season has a lot of questions around it. Among other things, it should be noted that existing moisture conditions show the US drought continues to be of significance. Research, however, shows that the moisture situation going into the growing season has virtually no impact on the final outcome.

The primary point is that temperature and moisture levels experienced during the key growing season are the most important factors in determining yield. As is our custom at this time of the year, our estimates for the 2013/2014 crop year assume normal weather and trend yields.

Slide seven shows planted acres and yields for the 2012/2013 crop year, compared to the corresponding forecasts for the 2013/2014 crop year. Again, assuming trend yields and normal weather conditions, corn yields are forecast to increase about 31%, while soybean yields are forecast to be up about 12%.

Slide eight highlights cash receipts. Driven by strong crop prices, 2012 forecast cash receipts are at a record, $389 billion. In 2013, strong crop prices, higher yields, and increased livestock receipts spur 2013 cash receipts even higher.

As a reminder, in our modeling, current and prior-year cash receipts are the primary driver of equipment purchases in the US market. With cash receipts at record levels, this bodes well for future farm prospects.

Slide nine illustrates US farm gross cash income, which is cash receipts plus other farm-related income. This slide highlights the relatively small percentage that government payments and crop insurance play in gross cash income, as represented by the green and black areas. Government payments, in green, are included in total cash receipt numbers on slide eight. For the three years shown, government payments are only about 3% of the total.

Crop insurance receipts are included in other farm-related income, the black area, and are at historic levels in 2011 and 2012, due to drought-related events. Total crop insurance payments for 2012 are expected to be in the $15 billion to $16 billion range. As of last week, crop insurance industry payouts totaled roughly $13.5 billion.

At the high range, this equates to about 4% of 2012 forecast gross cash income. For your reference, 2011 crop insurance payouts were approximately $10.8 billion.

Our economic outlook for the EU 27 is on slide 10. We are seeing offsetting trends in the EU. On one hand, strong crop prices are driving higher farm income. Conversely, in the UK, the poor harvest in 2012 and wet weather conditions during the 2013 crop sowing season are impacting equipment demand.

As well, the overall economic situation continues to weigh on farmer sentiment. Financial conditions in northern Europe continue to be more favorable than in southern Europe, with Portugal, Italy, Greece, and Spain all experiencing severe recession.

On slide 11, you'll see the economic fundamentals outlined for a few of our other targeted growth markets. Let's focus on the CIS, where our outlook has changed considerably from one quarter ago. Going into effect today, and running through July 5, an additional 27.5% import duty has been placed on all imported combines going to Russia, Kazakhstan, and Belarus, bringing the import duty to 32.5%. This will have a considerable negative impact on sales of imported combines in these countries.

Slide 12 illustrates the value of agricultural production, a good proxy for the health of agribusiness in Brazil. It encompasses over 20 different crops and has a high correlation to tractor sales over time. With forecasts for a record soybean season due to an increase in acres planted, higher yields, and sustained high crop prices, the 2013 value of ag production in Brazil is expected to increase about 9% over the 2012 level.

Our 2013 Ag and Turf industry outlooks are summarized on slide 13. Industry sales in the US and Canada are now expected to be flat to up 5% in relation to the healthy levels of 2012. We continue to see strength in demand, especially for high horsepower tractors and combines. However, our outlook is tempered by drought-related effects on the livestock sector.

The EU 27 industry outlook is now down about 5%. The number one driver in the decline to our outlook is last year's poor harvest and wet weather conditions that could affect the 2013 crop in the UK. Also weighing on the outlook are overall economic conditions in Europe and the potential for further weakening.

Industry sales of tractors and combines in South America are now expected to be up 10% to 15% in 2013. With strong commodity prices, forecasts call for an increase in planted acres, resulting in significantly higher crop production. In addition, current government programs in Brazil support higher amounts of equipment sales. Not only is the 2012-2013 subsidy amount allocated to agriculture higher, by about 7.5%, but interest rates are also extremely low. FINAME financing is at 3% until June 30, then it goes to 3.5% through the end of December.

Our 2013 industry outlook in the CIS countries is now down slightly, due to import duties that are expected to reduce demand, as previously discussed.

In Asia, we now expect industry demand to be slightly higher in 2013 versus 2012. In China, ag subsidies are expected to be higher and very supportive of equipment sales. In addition, Chinese grain output is expected to increase and farm modernization initiatives are continuing to move ahead. Although the India tractor market remains soft and industry sales aren't expected to improve from last year, it is encouraging that interest rates were recently lowered in order to support the economy.

Turning to another product category, we now expect industry retail sales of turf and utility equipment in the United States and Canada to be about flat in 2013, reflecting cautious consumer sentiment. Deere expects to outperform the industry with the launch of new turf and utility products, especially new utility vehicles.

Putting this all together on slide 14, fiscal-year 2013 Deere sales of worldwide ag and turf equipment are now forecast to be up about 6%, two points higher than our November outlook. 2013 operating margin for the ag and turf division is forecast at about 15%.

Let's focus now on construction and forestry, on slide 15. The division's results were affected by lower shipment volumes, higher production costs, including those associated with interim Tier 4, and unfavorable mix of product.

Quarter over quarter was a very tough compare for C&F. Normally, the first quarter has low production. In the first quarter last year, especially in November and December, the division had extremely high production volumes of high horsepower machines to facilitate the transition to interim Tier 4 engines. As a result, mix in the current quarter also shifted to more purchased products, like excavators and the smaller commercial worksite machines. Increased R&D and SA&G expenses in support of global growth also impacted the quarter's results.

On slide 16, looking at the economic indicators on the bottom part of the slide, Global Insight has slightly improved its outlook for housing starts and government spending growth. However, our outlook remains cautious as overall economic growth continues at a slow pace, awaiting resolution of the fiscal, economic, and trade issues that are undermining business confidence and restraining growth.

Global forestry markets are expected to be about flat in 2013 as weakness in Europe is being offset by improvement in the United States. Fiscal 2013 net sales in construction and forestry are now forecast to be up about 3%. Our previous outlook was up about 8%. The decline reflects lower dealer orders as we see emerging caution regarding inventory levels within our dealer group.

C&F's full-year operating margin is projected to be about 8%. While construction and forestry's full-year 2013 outlook is slightly stronger than 2012, the improvement is expected to occur in the second half of the year. In the second quarter, we expect lower manufactured volume compared with last year. Higher product costs associated with interim Tier 4 will have an impact in the quarter, as well as global growth expenses.

Let's move now to our financial services operations. Slide 17 shows the financial services provision for credit losses as a percent of the total average owned portfolio at 31 January, 2013, was one basis point, reflecting the excellent quality of our portfolios and recoveries from prior years' write-offs. Our 2013 financial forecast now contemplates the loss provision to be about 16 basis points as a percentage of the average owned portfolio. The 10-year average is about 27 basis points.

Moving to slide 18, worldwide financial services net income attributable to Deere & Company was $133 million in the first quarter versus $119 million last year. For the full year, net income attributable to Deere & Company is now forecast to be about $540 million.

Slide 19 outlines receivables and inventory. For the Company as a whole, receivables and inventories ended the quarter up about $1.2 billion, or approximately 30% of trailing 12-month sales, the same relative to one year ago. The increase year over year is predominantly ag, mainly reflective of higher sales volumes. The C&F increase is mostly related to Canadian consigned and Nortrax inventories. This occurred as dealers rebuilt their inventories prior to the current caution in the market.

We expect to end 2013 with receivables and inventory up about $500 million. The increase from our prior forecast relates to a stronger large ag market in the US and Canada, strong markets in South America, and better definition to our final Tier 4 engine transition plan.

Our guidance for cost of sales as a percent of net sales, shown on slide 20, remains at approximately 74% in 2013. Factors affecting cost of sales include price realization, production or manufacturing costs, raw material costs, engine emission product costs, absorption, and effects of foreign exchange.

For modeling purposes, keep in mind price realization. We are forecasting about three points in 2013; interim Tier 4 product costs that we've talked about the last two years; lower production than in 2012, reflecting a much lower inventory build than last year, which affects absorption; and the impact on cost of sales from new employees. In keeping with our growth plans, Deere hired an additional 5,000 people in 2012, with over 3,000 of them joining us in the last three quarters of the year. These additions are critical to support our growth, both domestically and internationally, and will impact Cost of Sales, R&D, and SA&G in 2013.

I want to quickly run through January retail sales. Unfortunately, the AEM numbers were released too late to incorporate into our slide deck.

For utility tractors, industry sales were up 12%. Deere's sales were flat in the month. Industry inventories of utility tractors for the month of December were 48% of the previous 12 months' sales. Deere inventories were lower.

Industry sales of row-crop tractors were up 27% in the month. Deere's sales were up double digits, but less than the industry. Industry row-crop inventories for December were 28% of the previous 12 months' sales. Deere inventories were lower than the industry.

Moving to four-wheel drive tractors, industry sales were up 89%, while Deere sales were up triple digits. December industry inventories were 21% of previous 12 months' sales. Deere inventories were slightly higher.

For combines, industry sales in the month were up 17%. Deere sales were up more than the industry. Industry inventories for December were 11% of the previous 12 months' sales. Deere inventories were slightly lower. Deere dealer inventories at 31 January, 2013, for row-crop tractors were 19% of previous 12 months' sales, compared to 12% in 2012. Comparable numbers for combines are 11% at 31 January, 2013, versus 5% in 2012.

The remaining industry sales for Ag and Turf, the EU 27, and C&F can still be found in the appendix of our slide deck.

Now back to the slides. Looking at R&D expense on slide 21, R&D was up 14% in the first quarter compared with the same period last year, consistent with our guidance that the increase in R&D spending for 2013 would occur in the first half of the year. Our 2013 forecast continues to call for R&D expense to be up about 3% for the full year.

Moving now to slide 22, SA&G expense for the equipment operations was up about 10% in the first quarter. Very much like R&D, the quarter-over-quarter increases for SA&G are heavily weighted to the first half of the year. In fact, about 70% of the SA&G increase will occur in the first two quarters. SA&G expense is forecast to be up about 7% in 2013, no change from our previous guidance.

The equipment operations tax rate was about 30% in the first quarter, with the rate affected by discrete items. While it is not our practice to provide specifics on discrete items, we would note the extension of the R&D tax credit for 2013 and its being retroactive to 2012. For full-year 2013, the effective tax rate is forecast to be in the range of 34% to 36%, representing no change from our previous forecast.

On slide 24, you see our equipment operations history of strong cash flow. We continue to forecast cash flow from equipment operations to be about $3.4 billion in 2013.

On slide 25, we outline our 2013 outlook for the second quarter and full year. Our net sales forecast for the second quarter is up about 4% compared with 2012. This includes about two points of price realization with unfavorable currency translation of about one point.

A couple other items to keep in mind as you model the second quarter. As we've stated previously, R&D and SA&G expense are front-end loaded, thus affecting our year-over-year second-quarter results. And in last year's second quarter, results were favorably impacted by a reduction in pension and OPEB expense of approximately $65 million.

The full-year forecast now calls for net sales to be up about 6%, compared with 2012. Price realization is expected to be positive by about three points. And we have increased our full-year 2013 net income forecast to about $3.3 billion.

In closing, John Deere has entered 2013 on a strong pace. Our key markets remain in good shape, for the most part, and we are looking for another solid year. True, our near-term outlook is tempered by uncertainties over fiscal, economic, and trade issues. This is hurting business confidence and restraining growth, but we continue to invest in the future as the longer-term picture continues to be extremely bright.

Our plans for helping meet the world's growing need for food, shelter, and infrastructure are well on track and moving ahead. All in all, we remain highly confident about the Company's future prospects and our ability to deliver value to customers and investors in the years to come. Tony.

Thank you, Susan. Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure, but as a reminder, in consideration of others, please limit yourself to one question and one related follow-up. If you have additional questions, we ask that you re-join the queue. Operator?

(Operator Instructions). Andy Kaplowitz.

Good morning, guys. It's Barclays. Nice quarter. (Multiple speakers). If we could talk about construction first, can you talk a little bit more about your comments around emerging caution from dealers? To me, it sounds a bit counterintuitive. Housing starts have been going the right way. Is this the rental market is slowing down for you? And you didn't mention energy and material handling as a strength, which you have in the past.

Yes, we would actually -- you know, in terms of strength, where we are seeing strength, we would continue to say that the three key areas -- rental continues to be stronger, energy related, as well as material handling. That really hasn't changed.

I think where the outlook has changed is we're seeing some caution around some of the uncertainties around fiscal policies, and it's particularly impacting our construction and forestry business, and dealers in particular, I think, also are cautious and, as a result, are beginning to pull down their inventory somewhat.

Okay. I'll let other people ask you about that. Tony, if I could ask you about your guidance, you maintained your guidance of 74% cost of sales. You did 74% in the quarter. We were modeling something worse. It seemed like you executed quite well in the context of all those extra employees that came in at the beginning of the year, or at the end of last year.

So why wouldn't margins go up toward the end of the year, that cost of sales number go down? Your production of combines should be going up, at least modestly, and you would better absorb those employees, especially considering price/cost should be relatively good this year.

Right. Actually, you touched on one of the reasons with combine shipments. Keep in mind that last year, we actually had the opposite phenomenon in the sense that we were producing and shipping a higher than normal percentage of combines in the back half of the year. And in 2013, we'll be moving to what would be a more typical shipping pattern on those combines.

So we're seeing a lot more being shipped in this first half, especially in the first quarter we saw more combines shipped versus last year. In fact, last year it was maybe around 10% of the combines that were of the annual shipments of combines went out first quarter, and you're up closer to 15% to 20% in the first quarter of this year, so it's a big shift.

Okay. Thanks, Tony.

Jamie Cook.

Hi. Good morning. Credit Suisse. And sorry, just to follow up to Andy's question on the C&F side, I guess two questions. One, I mean, Tony, you guys really aren't -- I mean, when you look at your forecast on housing, it's up a little, non-res is down a little. So your forecast -- your economic forecast really hasn't changed that much.

So I guess my question is, is this more Deere specific in that you had too much inventory in the channel and you're making some adjustments that other people made before? And if so, and just what's the level of dealer inventory out there that, I guess, needs to get cut?

And my second question is, I'm pretty sure you said margins are still 8% in C&F on a lower sales forecast. And I just want you to confirm that. And then, how were you able to achieve the same margins on a lower sales increase? Thanks.

Sorry. Tony and I are debating who's going to answer. So, Jamie, we're really tweaking inventories on the construction side. If you look at the ending guidance, it's down $100 million-some from our previous outlook, so it's really tweaking.

But again, in the field we are seeing a little slower rate in terms of inventory growth, and that's just what you're seeing in terms of inventory ordering. So you're seeing that reflected in a little bit of caution in our outlook, especially for the second quarter.

But, I guess, Marie, do you feel like you guys were a little late on the inventory reduction relative to some other guys, or are you just more -- you know, is it market or is it Deere? I guess I'm still not --

I think you're talking -- I think if you're comparing us to another company, we're talking $100 million, $200 million, not dramatic changes relative to others. So I think you're talking more tweaking. But nonetheless, that shows up in our sales guidance.

Okay. Fine. And then, just on the margin question, Marie. Thank you.

Hey, Jamie. This is Raj. Just on the C&F inventories, we are essentially up. C&F inventory plus receivables to about $200 million for Q1, primarily because of -- we have a stronger market in Canada for construction and we have consigned inventory in Canada, okay? That's what went up.

Now, we are taking it down. With the reduction in the C&F forecast, we are taking it down, and that's reflected in, as Marie said, inventory plus receivables going down almost to nothing by the end of the year.

Okay. Thank you (multiple speakers)

And remind us of your margin question. Could you just repeat (multiple speakers)

Just, I think, you said margins are the same and I think your sales forecast is lower. Maybe I'm cutting hairs (multiple speakers)

That is true. We did keep the C&F margins the same and I think (multiple speakers)

I mean, is your Tier 4 cost assumptions lower? Is there anything else driving that, or no? I mean, because I'm assuming mix isn't going to help you. Your sales forecast is lower. Maybe I'm splitting hairs, but.

There's no big story there, other than, I think, a good attention to the level of expenses.

Okay. Great. Thank you. I'll get back in queue.

Stephen Volkmann.

Hi. Good morning. It's Jeffries. (Multiple speakers). Hi, guys. I was hoping we could just have a bit of an update on sort of where the order books stand and for any programs you might want to highlight. And then, I'm curious about what you're seeing in the used markets, as well.

I assume you're referring on the order books in US and Canada on Ag.

Yes, please.

Okay. Yes. Basically, they continue to be very, very strong. I'm looking for the exact data here.

And while Tony is looking, and that's really reflected in the improved guidance for North American Ag where you see us taking that up flat to up 5% for the industry, where we had been flat before, and that is driven almost exclusively by large Ag. Tony?

Right, yes. And so, specifically, on the early order programs -- and these are for the order programs that were active during the quarter, so -- and it never -- excluding cotton and combines and sprayers ended during our fourth quarter.

So outside of that, we're still up double digits year over year on the early order programs. So that's things like self-propelled wind rowers, forage harvesters, as well as planting equipment for those.

Our combine early order program ended in January, mid-January, for the US and then first of February in Canada. But very, very strong, and we have virtually all of our production covered with the early order program.

On tractors, again, our order window is open out about seven months. And tractors in particular are very strong, both 8R and 9R track tractors are effectively sold out during that order -- or for that order window. And in both cases, keep in mind, that's with additional capacity for US production.

On the 8R wheel tractors, the effective availability is late June, again on additional capacity over 2012. And on the 9R wheels, there's availability in April of this year, which is similar to where we were last year.

So across the board, very comparable to where we were last year, but on higher capacity for the US and Canada.

And on the used equipment, what I can comment, Stephen, is the combines is one that everybody thinks of typically. I will tell you the price levels are holding very well, and inventories and turns are in decent shape, as well.

Now when it comes to tractors and row crops, they're very good shape in all those three parameters. In four-wheel drives, given the retail sales we have had, we are very comfortable with the inventory levels and the turns we have in four-wheel drives. Pricing is holding very well, as well.

That's great. And just quickly, the increased capacity that you spoke of, Tony, can I think of that as kind of 15%-ish?

It's in the 15% to 20% range on tractors.

Super. Thank you.

Ann Duignan.

Hi. Good morning. JP Morgan. (Multiple speakers). Can we talk about Ag and Turf for a little bit? I was surprised you kind of glossed over the unfavorable impact on margins this quarter. Can we get a little bit more detail, particularly on the warranty costs? Is that just accruals? Is it actual cost? Where are they coming from? And then, production costs and R&D also.

Let me start with warranty. Ann, as you know, Deere has extremely high product quality, and in fact, over the last decade we've taken our warranty rate actually down by about a third. So we are doing very good in that.

You are well aware, as I'm sure everyone is, that we have had, because of IT 4, a record number of product introductions in a compressed time. And as good as our products are, occasionally we have to make a few corrections, and so this really just relates to the fact that you've had this huge number of product introductions. And when you launch something new, you occasionally have to make a few fixes. So, no big story there.

Okay. So are we done with those warranty costs now or are they a headwind for the remainder of the year?

We would expect that you might see a little bit of an increase in the run rate as you move forward, again just reflecting the launch of products. In any other quarter, it wouldn't have even shown as a factor to explain the quarter's results. It's just that we have relatively low sales volumes in the first quarter, so it's a little more apparent.

That's a fair point. And just a little bit more philosophically, kind of around the warranty costs or around Tier 4 interim, you're the only company that really calls out the transition to Tier 4 engines quarter after quarter as being a head wind. Is there any case to be made that that's because you're doing EGR first and then going to SCR, whereas most of the rest of the industry, both construction and agriculture, went primarily to SCR? How should we as investors think about Deere's struggle with this transition relative to its peers?

Excuse me. Not a struggle. Actually, very, very good execution. We just want to help you understand that there are costs associated with this product cost, in addition to the R&D and the capital expense associated with it. And that's helpful in understanding our margin.

We've done a very good job on cost recovery, and we have added a significant amount of value to our customers because, as we've discussed in the past, the product introductions are around IT 4. So in addition to getting the emissions upgrades, they're getting a tremendous amount of features and values.

So let me reiterate something here, Ann. In terms of investments for emissions, we are making those and I think we're talking about those. Our competitors have costs as well, okay? So it's not cost that only Deere is seeing. Others are seeing it as well.

And like Marie said, our implementation has gone very well, and we are looking forward to keeping that momentum for the FT4 transitions as well, coming up in 2014 and 2015.

And I would also reiterate, compared to some of our competitors, if you look at our overall margins, I think we are doing fairly well.

Well, that's a fair point. I'll leave it there and get back in line. Thanks, guys.

Okay. Thank you.

Eric Crawford.

Hi. Good morning. UBS. Wanted to touch on the South American outlook. Clearly seeing some strength in Brazil, but I'm curious how the competitive dynamic is playing out. Are you seeing room to take up pricing more than you originally planned, and do you expect your share in combines, perhaps, to recover after it took a dip?

Yes. Certainly as we look at our pricing, again, in Brazil, we continued to have positive price realization year over year. Again in the first quarter, we had positive price realization.

I think for us, as you're aware, we've introduced a number of new products into that market and they have been very, very successful. We've talked for a number of years about the strength of our distribution, and I think, as you see these market shares shift, that that just further demonstrates what we've been saying regarding the strength of that distribution.

So again, we're very positive about that.

Regarding combines, certainly we would hope to see the recovery, and keep in mind, it's a pretty small drop in the year on combine market share. But we would certainly expect to continue to recover from that and perhaps even extend our share further.

That's fair. And if I could just ask a follow-up on CIS, you didn't cite credit being a factor. So is it safe to assume it's not having an impact or is it just that there's been no change there? And in light of the higher import duties, has your longer-term view on that market changed at all?

Certainly with credit, I would not say -- I wouldn't imply that by lack of discussing that it isn't an issue, because certainly there is some tightening of credit in CIS countries. We talked about it last quarter.

Really, just the more significant change would be around the import duties, specifically on combines that were added. Keep in mind, that's really -- it begins in mid-February and runs through June, currently.

July.

Is it July? I'm sorry. Then there will be a determination of whether that gets extended or not. So it's probably premature to talk about what kind of long-term impacts that may have.

Great. Thanks very much.

Eli Lustgarten.

Longbow Securities. Good morning, everyone. (Multiple speakers). Can we just go through a little bit more on construction equipment and a little more color? I think you indicated second-quarter production is going to probably trail last year numbers. And I guess Brazil has some tariffs on imports of construction equipment. Is part of the reduction in forecast due to some of the tariffs there, in Brazil, also? Can you talk about second-quarter production versus last year, and (multiple speakers) gain.

Really, the -- I'm sorry, Eli. I just cut you off. Go ahead.

No, I said, is the drop in production the first -- if all the 3% gain in C&F coming in the second half of the year?

So the drop in the second quarter is really exclusively related to North American construction, and then there's also some forestry activity.

In Brazil, indeed we are actually building our presence, so although there are tariffs, as you know, we are entering that market. We've got a dealer network that we are supporting with equipment sales -- imported equipment sales prior to the launch of production in our factories, which will really be a 2014 and 2015 event. So it's really not -- it has nothing to do with Brazil. And it's a tweaking in North America, as we talked about earlier.

Sort of as a follow-up, you mentioned nothing about material costs this year that are actually a tailwind versus last year. And we're approaching final Tier 4 next year in 2014 and 2015. Are we looking at some -- can you give us some insight on how it's going to affect Deere, but I guess some of the larger equipment in Ag, particularly, will probably have to introduce final Tier 4 next year? And so, how that incremental cost will be as we get closer to that date?

Sure. And I want to make sure that I'm separating the two because we talk about -- we've talked about in the past material costs and then we've talked about interim Tier 4 material costs.

And as we mentioned in the first quarter, material costs, excluding IT 4, is not a material impact, either positively or negative, in terms of driving any change in that cost of sales percentage. On interim Tier 4, certainly that is an impact. Emission cost, as you look at unfavorable factors impacting our cost of sales ratios, interim Tier 4 product costs would be the largest impact in this year.

As you mentioned, we'll move into final Tier 4 beginning in 2014, and so you'll start to see, in addition to -- you know, you have your interim Tier 4 costs will pretty much be completed, but you'll start seeing final Tier 4, and that should be fairly similar to what we saw in terms of the ramp up, not necessarily the total cost, to what we saw with interim Tier 4 in that large Ag, over 175 horsepower equipment, the effective date of that regulation is January 1. So you'll start seeing large Ag go and then below 175 horsepower in 2015.

Yes, will we see those costs beginning in the second half of this year -- this fiscal year, beginning to ramp up as we get closer to it?

Eli, in the fourth quarter you might see a little bit of impact, more as you get started with some demonstration models and things like that for farm shows. But no, it's really a 2014 -- fiscal 2014 for us.

You're also -- we talked about the inventories and receivables being a little higher on the Ag side than what our original guidance had been. We'll continue to refine our transition plans as we move through the year, so you could see some activity there.

In terms of cost up, Eli, the bigger cost up was really to go from Tier 3 to IT 4. Going to final Tier 4, while still a cost up, is not quite as significant. I do not have a precise estimate of the number, but if you said on a 10-point scale, if going from Tier 3 to IT 4 was a 10, then maybe you're looking at five, six, seven to go from IT 4 to final Tier 4. But we're still, as you might imagine, working on that.

Thank you very much.

Rob Wertheimer.

Hi. It's Vertical Research Partners. Good morning, everybody. So my first question is, did I understand right on the Russia tariff issue, that's only on the combine side, and did you build into your forecast that on tractors as well? Is that something you expect?

Yes, at this point, that import duty is only on combines, and we're not aware of any change at this point with tractors. So the outlook really is impacting combines alone.

Keep in mind, that impact, as Susan pointed out, it's not just Russia, but that affects Russia and Kazakhstan, as well as Belarus.

Okay. Thanks. And then, second, just as sort of a big-picture question. Obviously, the environment is quite strong in Brazil. I'm curious about what kind of customers are buying. The biggest, largest corporate farms there tend to buy stuff and use it, I think, until it runs all the way down. I don't know whether they're accelerating. I don't know whether there's the development of a used market in Brazil as they maybe accelerate or whether it's mid-tier farmers who are buying more or smaller. I'm just wondering if you can give just sort of a bit of color around how Brazil is evolving.

Sure. And certainly, there continues to be -- and it kind of depends on what industry you're referring to in terms of typical usage.

For example, the sugar industry tends to use both tractors and harvesters very heavily on an annual basis, and to your point with their holding patterns, they tend to be pretty much ready for scrap by the time they're ready to trade in.

The grain industry is a little bit different. There is -- probably best characterized maybe a bit of a developing used equipment market there. Typically, they're trading every five years or so, but they're putting -- a typical grain farmer is putting fewer hours on than what you would see in the sugar industry.

So our dealers do take trades there. In some cases, similar to the US, they'll have an in-house used equipment department to process those through. Some of them actually outsource it and have others take care of selling that used equipment. But again, I would characterize it more as a developing issue or market versus what you would have in the US.

And are you seeing strength amongst the very biggest -- the big corporate ones and large landholders and smaller as well, or is there anything that you can call out about your customer? Thanks, and I'll stop.

This is Raj. Let me broadly say that some time back, there was this Mais Alimentos program in Brazil that provided additional subsidies for smaller farmers, and we have seen that that's peaked off, and since then, the natural economics has determined essentially that the larger farmers are growing, okay?

And if you look at our own past experiences, these are very large farmers. In 2011, we had -- 2011, 2012, approximately 60 of these farmers would contribute almost $0.5 billion worth of our revenues in that market. We've said that in the past. And if you look at the first quarter, we have a slightly higher proportion of large Ag sales in Brazil than in the first quarter of last year.

So it is increasing, especially for us, towards large Ag, and our proportion of large customers is increasing.

That's great. Thank you.

Andy Casey.

Wells Fargo Securities. Good morning, everyone.

Good morning.

First, just a clarification on the revenue forecast change. Does that include any modified currency assumption?

No. It's the same 1%.

Okay. So all (multiple speakers)

No, it did not.

No.

Okay, so all volume, basically.

Correct.

And then, second, within Ag and Turf, are you redirecting any combine shipments to other regions due to this increased import duty issue? And then, is that removing some upside potential to margin, driven by the richer mix implied in the US and Canada outlook changes?

No. I think we've made -- there may have been some tweaking in terms of the timing of some shipments, but I don't think -- given the relative size of the market, you're not looking at a big -- a huge change on the combines.

Okay. Thanks. I'll follow up later on.

Joel Tiss.

Bank of Montreal. How are you doing, guys?

Great. How are you?

All right. So, just two things. One is, can you tell us if the profitability of the European Ag business was up or down in the quarter?

Unfortunately, we can't speak to profit margins in specific regions, so.

Yes. I wasn't -- well, whatever. All right. And why the big range on the tax rate? The 200 basis points.

That's typical.

Yes, we typically -- in fact, that's been consistent with our range that we started the year with, and throughout the year last year as well.

All right. And I guess as long as Raj is here, can you talk a little bit about the long-term attraction of the forestry equipment business? It seems to be just bouncing around for the last 10 years and not really going anywhere.

The forestry business is a very important portion of our business. If you know our long-term strategy, 2018 aspirations, they've articulated that we have the growth businesses, which are Ag and Construction, and we have complementary businesses, Turf or Ag and forestry or construction. So we think of it as an important contributor going forward in terms of being complementary to the construction equipment business.

In terms of longer-term growth, we are not expecting as much as from forestry as from construction. Tailwinds in construction is very critical for us. Tailwinds in forestry, we think are very modest. So we're looking to get good SVA and not great topline from forestry going forward.

All right. Thank you.

Okay. Thank you.

Jerry Revich.

Hi. Good morning. It's Goldman Sachs. Tony, in Eastern Europe, with your facilities or manufacturing footprint there, it sounds like you're better positioned than most for a potential change in the tariff regime. Can you just talk about what kind of local content requirements would be needed for combines to be considered local, and over what time period would you be able to configure your facilities there to do some assembly work in the region?

Yes. Certainly, not with -- unfortunately, not with any specifics. We are currently working with the Russian government specifically in terms of what those definitions are and trying to ensure that we can move that direction, if feasible, and qualify as local production. But that's something that we're working through at the moment.

And Tony, can you comment on around what time frame you'd be able to execute that if you did reach an agreement from the manufacturer's standpoint?

(Multiple speakers). It depends on how quickly you can reach an agreement and what that requirement would be. So it would be very premature to speculate on that.

Okay. And from a pricing standpoint, maybe the answer is mix or rounding, but I'm wondering if you could comment. Your pricing this quarter was 100 basis points lower than your guidance, and you're looking for two points of pricing in the fiscal second quarter, accelerating back to 3% in the back half of the year. And I'm wondering if you could just step us through what's driving the variance versus your expectations in the first quarter and the mix improvement in the back half versus Q2?

I believe we talked about three points of price realization.

For the full year.

For the full year.

It was four the quarter.

It was four for the quarter.

It was four the quarter. There is really not a story there, as you can see that we are unprepared to answer it, so nothing came up.

And part of that, Jerry, is a lot of rounding. Rounding, you need to be careful about how we do this, right? So most of the story you'll find there is actually rounding.

Okay. Thank you.

Thank you, Jerry.

Ashish Gupta.

Hi. Good morning. CLSA. (Multiple speakers). Maybe at the risk of asking you to rehash some things you already described, but it seems like guidance is implying something like 11% incremental margins for the equipment business for the second through fourth quarters year over year, and I realize you mentioned that combine production is more evenly balanced this year versus last year. But I was just wondering if there is anything else in there that would sort of point to the deceleration incremental profitability.

Okay. So now, Ashish, you need to -- now we provide guidance on the top line, as you know, in 1% increments. So it could be -- so there is a range that you need to be careful about in terms of rounding. It's 0.2 to 1.8, okay?

And again, on the other hand, we provide guidance on net income in $100 million increments, so you've got to be thinking about the range there as well could be anywhere between $20 million to $180 million. And if you look at our operating margins for Ag and C&F, we have said it's 15%, 8%. Those have not changed.

And we are also looking at it, in terms of effective tax rate, 34% to 36%. Now, Q1 was 30% because of a discrete item. Overall, we're saying it's going to be 34% to 36%.

And then, given the uncertain economic environment around the world, you will expect some caution from us, appropriately so, especially in our second-half outlook. So factoring these, I think you should be able to add up the numbers that we provided.

That's helpful, Raj. Thanks very much.

Adam Fleck.

Good morning. I wanted to turn back maybe to the Western European market. You know, as that market continues to weaken, are you seeing any competitive issues or pricing pressure you'd call out?

No. The biggest change that we're seeing is really coming out of the UK, which relates to the weather that we've talked already about. But it's a large -- one of the key markets in that part of the world and it is very, very weak.

We're actually seeing some stabilization in the South, which is gratifying, although stabilizing at very low levels. They actually had some strength in markets like France and even some growth in Germany.

So it's really the UK. It's a unique phenomenon related to the weather and crop -- resulting crop yields of last year, and then concern emerging over what's happened this winter.

But you're not seeing any increased attempts at marketing efforts or price cuts or anything like that in that particular weak market?

Nothing out of the ordinary.

Okay. Great. That's helpful. Thanks. And then, just one more from me, quickly, your share repurchase activity dropped pretty sharply in the quarter. Is that just because of a more cautious economic outlook that you described or is there anything else there?

Absolutely. I think you may recall that we ended the year with about $6 billion of cash, and we said we had pulled forward some funding because we were concerned about the outlook for the risks on fiscal cliff, et cetera. And consistent with that, we moderated our share repurchases.

And I do want to emphasize that share repurchase is a residual use of cash. This tends to be a high use of cash time for us, the first half of the year, as well. So no story (multiple speakers)

This is Raj. Let me reiterate that our cash use priorities are the same. They haven't changed, okay?

Okay. Thank you. Operator, I think we have time for one more call.

Ross Gilardi.

Yes, hi. Bank of America. Just on that cash flow prioritization, I mean, clearly you've had a big quarter in Ag. What signals are -- is Deere looking for to raise the dividend more substantially?

Well, we do not ever comment on dividend policy actions. You know that we convey that over a long time we desire to have a -- be known as a Company that consistently and moderately increased dividends and that we have a targeted payout, on average, over a long period of time of 25% to 35%.

If you look at the monies that we have returned to shareholders, really since we began our share repurchase program in 2004, you're looking at about 60%, and some of that has been in the form of dividends, some of it's been in the form of share repurchase.

Okay. Thanks. And then, just on Section 179, do you think that had a big impact on demand in December and is that borrowing from your first-half 2013 outlook at all? And just could you clarify, is this a one-year extension or has it been extended indefinitely?

It extends through 2013. And actually, at the margin we would view it very much so as additive because it is most significant in helping facilitate movement of used goods, and that's obviously important in a mature market, and so that was a favorable development for us, not (multiple speakers)

Keep in mind on new equipment, by the time -- in terms for a farmer customer, by the time they realize they want to extend some tax shelter or take advantage of that by -- quite often for us, our order book, especially on large Ag are extended beyond January 1 or December 31, and so they wouldn't be able to order and receive that equipment ahead of that December 31 cutoff to take a lot of advantage on new equipment.

And remember, the recent section 179 announcements came first week of January, so the previous number in December, this was after that number, December, when the announcement came in, so as Marie said, we're expecting an impact on the used equipment movement because -- through this year, not in 2012.

And then, just -- can I just ask one more question on the China subsidies?

We really -- we'll have to cover that in follow-up.

Okay, thanks very much.

Okay. Thank you very much.

In summary, I just wanted to reiterate, obviously while our near-term outlook is tempered by uncertainties over fiscal, economic, and trade issues, we have entered 2013 on a very strong pace and looking forward to another solid year.

With that, we thank you for your participation in the call. And as always, we'll be available the rest of the day to answer any additional questions you may have. Operator?

Thank you. This does conclude today's conference. We do thank you for your participation and you may now disconnect your lines.