強鹿 (DE) 2013 Q3 法說會逐字稿

Good morning and welcome to Deere's third-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, Manager, Investor Communications.

Today we will take a closer look at Deere's third-quarter earnings.

Then spend some time talking about our markets and how we expect to end the fiscal year.

After that we will 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 NASDAQ OMX.

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.

John Deere's strong performance continued in the third quarter of 2013.

Earnings jumped 26% on a sales increase of 4%.

Both earnings and sales were the highest for any third quarter in the Company's history and it marked our 13th quarter in a row of record profits.

The gain was led by Ag & Turf, which had another terrific quarter, with operating margins of about 17%.

Financial Services also made a major contribution, while Construction and Forestry kept profits in line with last year in spite of a slump in sales.

No doubt, John Deere is being helped by a strong market for large farm machinery in North and South America.

However, our results show disciplined execution of our business plans, too.

Plans focused on winning new customers around the world while keeping a close watch on costs and asset levels.

In all it was a productive quarter, putting John Deere well on the way to another very good year.

Now let's take a look at the third quarter in detail beginning on slide three.

Net sales and revenues were up 4% in the quarter to $10 billion.

Net income attributable to Deere & Company was $997 million.

As noted, both sales and income were the best-ever third-quarter results recorded by the Company.

On slide four total worldwide equipment operations net sales were $9.3 billion, up 4% quarter over quarter, including an unfavorable impact from currency translation of about 1 point.

Price realization in the quarter was positive by 3 points.

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

Sales were up 8% in the quarter on continuing strength in the global Ag economy, especially North and South America.

Operating profit was $1.3 billion, up 32%.

The division's results included an impairment charge for long-lived assets related to John Deere Water of approximately $50 million pre-tax, $44 million after-tax.

Before we review the industry sales outlook, let's look at some of the fundamentals affecting the Ag business.

Slide six outlines US farm cash receipts.

For the year ahead, crop yields are forecast to be higher than in 2012 and much closer to normal, but prices will be somewhat lower.

This reflects recovery from last year's drought conditions.

Conversely, livestock receipts are forecast to be higher in 2013 than 2012.

As a result of these factors, our forecast calls for 2013 cash receipts to be about $390 billion, the second highest on record and a solid level of income.

On slide seven, with forecasts of a bumper crop, lower crop prices, and an increase in stocks-to-use ratios our initial outlook for 2014's US farm cash receipts is down modestly but remains at a historically high level, approximately $380 billion.

2014 cash receipts, the number one predictor of farm equipment sales, are expected to remain at an excellent level helping keep farmers in a financially sound position.

Our economic outlook for the EU 28 is on slide eight.

We continue to see offsetting trends in the EU.

On the one hand, Ag fundamentals remain positive and production is expected to increase about 7%.

Above average commodity prices are driving supportive farm income.

Beef prices are leveling off at historic highs, while pork and milk prices are favorable.

On the other hand, farm machinery demand is expected to be lower in 2013 as the financial crisis continues to weigh on farmers' sentiment and softness in the UK continues.

On slide nine you will see the economic fundamentals outlined for a few of our other targeted growth markets.

Of note is the decline in our outlook for the CIS countries.

The market is softer than our previous forecast as import duties continue affecting combine demand in Russia, Kazakhstan, and Belarus.

Hot, dry weather has impacted crop prospects in southern Russia and Ukraine, and credit availability is also hurting equipment demand.

Slide 10 illustrates the value of agricultural production, a good proxy for the health of agribusiness in Brazil.

With expectations for strong soybean crop 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 6% over the 2012 level.

Our 2013 Ag & Turf industry outlooks are summarized on slide 11.

In the US and Canada we continue to see strength in demand, especially for high horsepower tractors and combines.

We continue to project industry sales to be up about 5% in relation to the healthy levels of 2012.

The EU 28 industry outlook is down about 5%, no change from our prior forecast.

Throughout fiscal 2013 we have each quarter raised the industry outlook for South America and we have done so again.

Based on a combination of positive farm fundamentals, plus supportive financing programs in Brazil, we now expect industry sales of tractors and combines in South America to be up about 20% in 2013.

South America continues to grow in importance for Deere.

Our tractor market share has grown considerably, but our strong presence in combines, sugar cane harvesters, and seeding equipment should not go unnoticed.

Shifting to the CIS, as we noted earlier, our 2013 industry outlook is now moderately lower, a decrease from a quarter ago.

In Asia, we continue to forecast little change in industry sales from 2012.

Turning to another product category, we now expect industry retail sales of turf and utility equipment in the US and Canada to be up about 5% in 2013 as favorable summer weather has driven much stronger demand.

Deere is seeing strength in commercial mowing equipment, utility vehicles, and zero track mowers.

Putting all of this together on slide 12, fiscal year 2013 Deere sales of worldwide Ag & Turf equipment continue to be forecast to be up about 7%, including about 1 point of negative currency translation.

2013 operating margin for the Ag & Turf division is forecast at about 16%, a point increase since our last forecast.

As we have discussed all year, last year's fourth-quarter sales were particularly strong.

Production schedules were higher to accommodate the interim Tier 4 transition at a time when the factories were running at very high rates to catch up with customer orders.

Consequently, sales for Ag in the fourth quarter of 2013 are expected to be lower than the fourth quarter a year ago.

This reflects a tough comparison.

It does not indicate any change in our outlook for demand or global Ag fundamentals.

Let's focus now on Construction and Forestry on slide 13.

Net sales were down 11% in the quarter and operating profit was down 5% due to lower shipment volumes.

The $190 million decline in sales with only a $6 million reduction in operating profit is a reflection of price realization, good execution, and lever pulling to control costs in response to slow demand.

On slide 14, looking at the economic indicators on the bottom part of the slide, the outlooks for GDP and government spending have softened since last quarter.

Although overall economic growth continues at a sluggish pace, we are beginning to see some positive indicators.

While moving very slowly, residential investment is growing.

Home sales and prices are increasing and there are reports that the number of build-ready lots are dwindling.

Global forestry markets are now expected to be up 5% to 10% in 2013 as weakness in Europe and Asia is more than offset by improvements in North America.

I am sorry -- Europe and Russia is more than offset by improvement in North America.

Forestry markets in the US are considerably higher due to the year-over-year increase in housing starts.

Fiscal 2013 net sales in Construction and Forestry are now forecast to be down about 8%.

Our previous outlook was down about 5%.

The year-over-year sales decline is reflected in lower inventory and receivable numbers, and it has had an impact on mix as we reduced shipments of high-margin equipment.

C&F's full-year operating margin is now projected to be about 6%, a 1 point improvement from last quarter, as the division is pulling levers and cutting costs to meet its operating goals.

Let's move now to our Financial Services operations.

Slide 15 shows the Financial Services provision for credit losses at 3 basis points based on a percentage of the total average owned portfolio at the end of the quarter.

This reflects the excellent quality of our portfolios and recoveries from prior year's write-offs.

Our 2013 financial forecast now contemplates a loss provision of about 5 basis points as a percentage of the average owned portfolio.

This is well below the 10-year average of about 28 basis points.

Moving to slide 16, Worldwide Financial Services net income attributable to Deere & Company was $150 million in the third quarter versus $110 million last year.

The increased provision for credit losses cited in the press release is a function of small reductions taken in the third quarter of 2012.

The loss experience on the portfolio remains at an extremely low level.

For the full year, net income attributable to Deere & Company is now forecast to be about $560 million.

Slide 17 outlines receivables and inventory.

For the Company as a whole, receivables and inventories ended the quarter up about $20 million or equal to approximately 30% of prior 12-month sales compared with 32.3% a year ago.

The year-over-year forecasted downward tweak in Ag is due to the impact of currency and reflects no real change in absolute inventory levels.

C&F is now projected to be down about $175 million as we respond to slowing demand and a reduction in Canadian consigned inventories.

We expect to end 2013 with receivables and inventory up about $50 million.

Our guidance for cost of sales as a percentage of net sales, shown on slide 18, remains at approximately 74% for the full year.

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.

When modeling the full year keep in mind the following -- price realization, we are forecasting about 3 points in 2013; favorable year-over-year raw material costs; the impact on cost of sales of new employees; interim Tier 4 product costs; absorption due to the lower build in inventory compared to 2012; and an unfavorable mix of product in C&F as we talked about earlier.

Looking at R&D expense on slide 19, R&D was down about 8% in the third quarter compared with the same period last year.

This is consistent with our earlier 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 20, SA&G expense for the Equipment Operations was up about 4% in the third quarter.

Very much like R&D, the quarter-over-quarter increases for SA&G were heavily weighted to the first half of the year.

SA&G expense is forecast to be up about 7% in 2013, no change from our previous guidance.

On slide 21, pension and OPEB expense was up about $15 million in the quarter compared with last year.

Turning to slide 22, the Equipment Operations tax rate was about 36% in the third quarter.

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 23 you see our Equipment Operations history of strong cash flow.

Our forecast for cash flow from Equipment Operations is now about $3.8 billion in 2013.

Of note is a $700 million Deere & Company debt maturity in April 2014.

On slide 24 we outline our 2013 outlook for the fourth quarter and full year.

Our net sales forecast for the fourth quarter is down about 5% compared with 2012 due to the extremely tough comparison discussed earlier.

This includes about 3 points of price realization.

The full-year forecast calls for net sales to be up about 5% with 1 point of unfavorable exchange.

Thus, the forecast at constant currency, up about 6%, represents no change from our last forecast.

Price realization is expected to be positive by about 3 points.

Finally, our full-year 2013 net income forecast has increased to about $3.45 billion.

In closing, John Deere is well on the road to another year of impressive performance.

Even with a difficult comparison in store for the fourth quarter, our financial guidance implies a healthy level of income, helping us wrap up a third consecutive year of record results.

Also, it is significant to note that Deere has been consistently setting new performance records despite facing some significant headwinds, including a sluggish global economy, political gridlock in Washington, and a host of major product changeovers associated with more stringent emissions rules.

As for the longer-term picture, it remains extremely bright.

Indeed the broad trends we have been talking about, based on a growing, richer, more urban population, appear to have plenty of staying power.

Staying power that we believe will help the Company deliver substantial value to its customers and investors for years to come.

Tony?

Thank you, Susan.

Now we are 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 rejoin the queue.

Operator?

(Operator Instructions) Ross Gilardi.

Bank of America.

Thank you.

I just want to ask about your cash receipt outlook.

If you look at your cash receipt outlook for 2014, if you are right, cash receipts will have essentially been flat for the last four years, from 2011 to 2014.

Yet Deere's top line has obviously grown substantially.

So is the relationship between cash receipts and equipment breaking down?

Is there risk that you have to give a lot of that sales increase back in coming years, even if cash receipts are kind of flattish next year or --?

Could you explain that?

Because clearly your sales have been growing at a much faster pace than cash receipts for the last several years.

Sure.

And I just want to clarify, you're speaking to the US farm cash receipt number, and as we have talked about in the past, that is probably the best indicator of equipment sales.

We have talked about in recent years, Ross, that at these very high levels of cash receipts when you see fluctuations plus or minus 5% we would view those really as relatively flattish.

And so to your point, longer term certainly we don't believe there is a breakdown in the correlation between cash receipts and equipment sales, but when you are at these very high levels it isn't necessarily as direct of a relationship as what you would see over a longer cycle.

Maybe just to add to what Tony said, first, we have had very good price realization and we have benefited from the array of new products that we have introduced over the last several years, including in Brazil, which has been a very strong growth market for us.

And we have significantly increased our presence in our sales in that market.

So you are really seeing the benefit of a number of investments.

Okay, thank you.

Then could you just clarify; you have increased our net income outlook but kept your sales outlook unchanged.

Why is that?

Better execution.

You are seeing good discipline in terms of our R&D, our SA&G, factory spend, and we have successfully gone through the balance of the IT4 transition.

So a number of positive trends and, again, kudos to our operating folks.

Got you.

Thanks very much.

Andrew Kaplowitz.

It is Barclays.

Nice quarter.

Thank you.

Tony or Marie, maybe you can give us a little more color on the early order book in the context of we know you had a combine program out there that was sort of early, early order program.

Then maybe if you can talk about has there been any impact from the recent drop in crop prices on that order book.

With combines in particular it is a little difficult to talk about year-over-year changes because it is different this year.

We did have a window in June really related to our final Tier 4 transition.

Typically, our early order program begins in August.

That program went very well, but keep in mind that it was a relatively short window and then we will open up the early order program again after our new product introduction for final Tier 4 production in 2014.

So it is fairly early.

On the other early order programs, though, the spring program -- that would be planters, seeding equipment, tillage in particular -- we had a very, very good year in 2012 with the early order program and we are running about flat with those programs last year.

And so, again, that bodes very well.

Again, it is early of course, but the early order programs today are doing very well.

I would point out to the extent that the combine early order program in June, all the slots did fill as expected.

Then the other thing while we are talking about order book into next year is -- that we tend to talk about at this point is on tractors.

As you know, we don't have an early order program because it is not seasonal, but, again, tractors are at or better than, in most cases, than what they were a year ago.

In fact, if you look at our 8R tractors, on the wheel tractors we are basically out into April/May on our availability, which takes us beyond our final Tier 4 transition.

Last year availability was January.

9R tractors are roughly in line as you look at -- I'm sorry, that is the 8R tracks are roughly in line with the year ago.

The 9R, the large four-wheel-drive tractors, wheel tractors are a little ahead.

This year is they are November; last year it was September.

Then the tracks are a little bit behind year over year.

But again, generally speaking, when you look at our order books we are in very strong positions against very high levels last year.

Okay, Tony, that is helpful.

Can I ask you about the US farm cash receipt forecast in a different way?

Specifically, you only have crop receipts dropping about 4% despite what corn prices have been lately over the summer.

You guys are usually pretty conservative with your forecasts, yet if I talked to the bears out there on Ag they would say that your forecast looks not conservative at all.

Can you talk about your confidence level in your forecast?

This is Marie.

At this stage of the game this is our best forecast.

And remember that cash receipts is a function of quantity, which will be very good this year, in addition to price and I think perhaps some aren't focusing as much on the quantity.

That is helpful, Marie.

Thank you, guys.

Thank you.

Jerry Revich.

It is Goldman Sachs.

Tony, Marie, can you just say more about the factory productivity improvement we saw in the quarter in Ag & Turf?

As you have finished the interim Tier 4 transition it sounds like you are starting to get significantly improved productivity.

Does that continue into the fourth quarter?

Then just help us get a sense for the wealth and complexity of now transitioning to Tier 4 final again compared to that transition that you have just went through on interim Tier 4.

As it relates to productivity, when you think about fourth quarter keep in mind, as we talked about in the opening comments, we do have a very tough compare.

Part of productivity, of course, is volumes as well and last year our factories were running at relatively high levels, especially as it relates to the combine factory.

We would be at more normal levels this year and so you will see a little bit of a change there in a year-over-year basis.

Of course, as we move into final Tier 4 that is largely going to impact certain quarters as we move into 2014.

Combines, for example, will begin transitioning in January.

I mentioned, or hinted at, at least, a little earlier that our 8R tractors will transition in the April time frame.

And so we will go through those transitions very similar to what we had in 2010 and so we will have some quarter-over-quarter disruptions as we go through the year.

Maybe just the other thing, in the fourth quarter in selected products we will start the transition or we will start the factory prep, so there will be a little bit of impact.

But nonetheless, there has been a real focus on the high-quality execution you have come to expect from Deere and you are seeing that in our results.

Okay.

In terms of the production schedule into the fourth quarter -- and maybe, Marie, part of it is what you mentioned a moment ago -- but the sequential decline is the biggest we have seen since it looks like 2006 in the fourth quarter versus the third quarter.

How much of that is Tier 4 final transition versus other factors?

Just help us understand the sequential movement.

Obviously you explained it on a year-over-year basis.

I'm just trying to understand the sequential drivers.

Maybe the most important thing is to remember that last year we shifted $350 million of shipments out of the third quarter into the fourth quarter.

Again, the long and probably over-talked about combines, and so that is probably the single biggest factor.

There will be some adjustments here and there, but that is really the biggest.

Thank you.

David Raso.

ISI.

I just needed some clarification on the order book commentary for what is in the order book in those time periods you gave us.

Those are largely all non-final Tier 4; they are interim Tier 4?

That would be correct.

We are announcing our final Tier 4 product actually this week.

The new product introduction shows begin and will be over the next couple weeks.

Then we will be announcing pricing and opening the order book for final Tier 4. So that is correct, it's interim Tier 4 products.

Just trying to think about the pricing on the final Tier 4, how it could be impacting the orders to get the remaining interim Tier 4. What has been communicated on the pricing?

What are built into your expectations on the pricing?

Really trying to get a read of some of the order book strength (multiple speakers).

We have made no final Tier 4 price announcements at this point, so we have taken some small -- on combines, for example, price increase related to the interim Tier 4 orders that we have early in fiscal 2014, but we have announced no final Tier 4 price increases.

Again, it would be a little premature to announce price increases before the actual product is announced, so those price increases will follow the introduction.

So would you characterize the order books as they stand, even with obviously some overtures out there, people speculating on the price increases, it is reflective of the current demand out there?

You would not characterize it as any pull forward getting in front of the final Tier 4 price increases?

Again, because we haven't announced them, I wouldn't speculate that direction.

All we can point to is where the demand is at this point.

What we are seeing in our order book is a continued, very strong demand level, again, comparable or in some cases slightly better than what we saw a year ago at very strong levels.

So that is about all we can say about that.

With that, thank you and we will need to move to the next caller.

Andy Casey.

Wells Fargo Securities.

Question on the Q3 Ag & Turf, if we could return to the margin performance; it was very good.

Could you give the relative weighting for impact from volume, productivity, and material cost tailwinds and stripping out the pricing impairment charge?

For Ag & Turf specifically, I don't know that I have that weighting, but as you look at the total cost of sales, obviously, we talked about in that ratio, price realization certainly helping benefit that ratio.

Raw material costs would be the other positive impacting the cost of sales in the quarter.

But then you have overhead spend, which largely due to the higher employment costs, emission costs, and some absorption as we had lower builds in inventory.

I'm sorry, and that is fiscal year numbers that I am giving you.

Sorry about that.

If you look at the third quarter, Andy, price realization was one of our biggest contributors to the operating profit improvement.

Next to that was essentially our costs.

This is the material costs and then there were contributions from mix as well, so those would be the three that stand out in that order.

Okay, thank you.

And just a reminder, that water impairment is $50 million.

On the negative side.

On the negative side.

Yes, the reason I asked is if I strip out the impairment charge and the pricing the incremental margin is still very strong, somewhere around 30%.

Last year's third quarter had inefficiencies, costs that we said for the Ag & Turf division were $50 million to $70 million, which is something you do need to bear in mind.

So to that extent it was an easier compare as well.

Okay, thank you.

That clears it up.

Then the second question just a question on Europe.

There is some mixed signals coming out of there as you reflect in your forecast.

You have recent confidence indices turned positive within the Ag side.

Are you seeing any farmer concern about the revisions to the CAP subsidy package that are expected for next year?

Not significant at all.

And if you look at what is being proposed for forecasts, if you look at it in nominal terms the subsidies really are basically flat in terms of what the proposal is.

So, so far, unlike other years where there has been talk ahead of CAP changes, this just has really been a -- I hate to say non-event, but been very quiet.

Very, very minor changes.

Okay, thank you very much.

Jamie Cook.

Credits Suisse.

Two questions and sorry to harp on the 2014 cash receipt forecast.

But I guess can you just give color; when you guys have conversations with your dealers or when the dealers are having conversations with the farmers, Marie, you point out that you have to look at the quantity and the crop price, but I think people are just concerned optically where, for example, corn prices are growing that that will trump quantity.

So can you talk about what they're saying about given just where prices are and do you think that could potentially have a bigger negative impact on demand in 2014 just because of how we get to the actual crop -- cash receipt number?

Then my second question can you just talk about -- some of your peers have talked about a more competitive environment in construction, particularly seeing more discounting.

I am just wondering if you can comment on what you are seeing in the industry, thanks.

Okay, let me start with the cash receipts number.

In our modeling we are, far and away, the biggest driver and the highest correlation is cash receipts and it doesn't discriminate between the commodity price and the quantity.

So I will stop there, that is the biggest driver.

In terms of the construction market, since the market has, candidly, been softer than I think all expected, I am not surprised to hear that there is some conversation about dynamics in the market.

But we certainly don't have any comments related to pricing.

Our Construction Equipment division is a solid contributor to the 3 points of price realization that we announced for the year and certainly for the quarter.

Okay, thanks.

I will get back in queue.

Thank you.

Rob Wertheimer.

Vertical Research Partners.

Good morning.

Wanted to ask about the Tier 4 final rollout.

I gather you said you sold out the stub year on the combines.

I guess you did not open up -- you didn't try to run the factories extra hard, because I think you are implying combines are down year over year in 4Q.

Have you talked about whether you intend to do any extra Tier 4 interim production as you roll on the various final things?

I'm not sure if you are able to give a rough guesstimate of what your interim versus final production might be next year.

Yes, we haven't discussed what the production levels would be in the kind of pre-final Tier 4 production for combines in early fiscal 2014.

I can tell you that we are beginning the transition of combines in January, so you are really talking about the November/December production levels.

I think if your question was is there further upside, the answer is no.

So you sold out what you wanted to sell out and you are done and it is probably not running the factory as hard as last year is what you have said?

The run rates in the fourth quarter of last year were really not sustainable.

That would be the bottom line; not a way we would choose to run a business.

Excellent.

Then second question, Tony, you mentioned the early order programs on the springtime product on tillage and planting.

It is not something you guys have talked a lot about.

Can you just go through mechanically how that works, whether that is a significant portion of the volume or just an indicator?

Obviously, I assume that would have no connection whatsoever to the Tier 4 final stuff so it would be an indicator of underlying strength I guess.

Yes, with the exception of sprayers, of course it would be final Tier 4 affected, but when you look at the tillage and seeding and so on really the importance there is -- and we have talked about this a little bit in the past -- tillage tends to be a fairly good leading indicator simply because it is a relatively discretionary item.

And so, for us internally, we view it as a good leading indicator.

So it is more indicative of the underlying strength more than the impact necessarily would have on the top line or bottom line.

Thanks.

Mig Dobre.

Robert W Baird.

Good morning, guys.

I guess I'm wondering maybe you can give us a little color on what you are hearing from dealers and what you are seeing as far as used equipment prices, especially some of the newer models out there.

We have heard that there has been a little bit of softness, and if that is so, I am wondering how you think that kind of impacts demand for equipment going forward.

As we look at pricing on used equipment what we would tell you is overall we are actually seeing pretty healthy levels of pricing on used equipment.

You see plus or minus a little bit, so large tractors pricing up a single digit, combines down a single digit, but again at very, very strong levels.

So we don't view that as an issue at this point.

Okay.

Then looking at the R&D expenses, obviously a much higher level than a couple years ago because of all the Tier 4-related items.

But I am wondering; as we are looking out, say, to 2014, given the higher base that you are currently operating on, should we continue to expect growth in this line item?

Or is it fair to say that this level can actually account for a lot of the Tier 4 final?

At this point I would not speculate on 2014 expenses.

As we have talked about, we don't provide guidance there.

Some things maybe to consider if we aren't finished with final Tier 4, so we still have a number of products to transition, both in the upcoming year and in the year following.

Keep in mind also that we are continuing to invest in growth and in some cases that is investing in new products in certain key markets.

So that is about all we can say really at this point related to R&D.

Thank you for your questions and next caller.

Steven Fisher.

UBS.

Good morning.

I am wondering if you can just give us your thoughts on how the special depreciation benefits might play out over the next several months, how any debate kind of might be impacting or might impact near-term sales.

Then just kind of remind us how that played out for you guys last year.

Sure.

As you look at the -- and you are really referring -- there is two separate items.

There is the Section 179 that can be utilized with used equipment as well as new and then, of course, the bonus depreciation.

Both are subject to the tax reform development.

As it looks at Section 179, it appears that there is much broader support for Section 179 in terms of speculation that it may or may not be extended.

It has been included in proposals even to make it permanent through some of the small business tax reforms proposals, those sorts of things.

Certainly as you move towards the end of the year, especially Section 179, we think has been helpful in moving used equipment in the past.

We would tell you, while bonus depreciation is certainly beneficial, we think it has had a marginal benefit on sales.

There is a number of other factors beyond tax considerations that farmers consider.

Last year would be a good example and you mentioned that.

As we approached the end of 2012 of course the expectation, both internally and by most externally, was that the bonus depreciation would not be extended.

Section 179 actually had already dropped -- the change at the end of the year made it retroactive -- and we did not see any impact in our order book once availability went beyond December 31.

Which, again, in our view, kind of lends credibility to our view that at least last year the expectation that the bonus depreciation would be eliminated did not impact our order volumes.

Okay, great.

Thank you.

Eli Lustgarten.

Longbow Securities.

Good morning, everyone.

Nice quarter.

We will come back to Ag in a minute, but can we talk a little about what is going on in the Construction Equipment sector?

You went from down 8 to down 11.

Is that because of weaker end-markets or more inventory liquidation that is required?

And are you expecting to complete all of the inventory liquidation that is part of it in this quarter so we can see more normalizing into next year and maybe quantify how much of the downturn is that?

We would say that it is both.

Clearly the market has been weaker than we had anticipated and we are attempting to reduce some of our inventories.

We would expect to have that completed by the end of this year, so that we would go into next year poised for what we hope will be a stronger market outlook based on at least the economic fundamentals.

The other clarification -- Eli, I want to make a clarification.

You said down 8 to down 11.

Our forecast today is down 8, it was previously down 5.

The down 8, how much of that is inventory liquidation?

I don't have that; I don't know.

Half and half?

Again, keep in mind they go hand and hand.

As we have gone through the year, as we have seen these sales expectations decrease, of course our dealers are seeing that as well and making the appropriate level of inventory reductions throughout the year.

So as sales expectations come down you are going to see an additional reduction in inventory, generally speaking, on our dealers.

The other thing I will add is as the lead times are getting lower dealers have an incentive for holding less inventories as well.

That is also contributing to lower inventory in the channel.

Maybe I could just cite one positive note that we are seeing is that rental utilization is really up and high.

And that can be a leading indicator.

We will see how that plays out, but it has been exceptionally high.

A quick follow on.

Can you talk about combine schedules?

I mean we are hearing from dealers a buildup of used inventories -- used goods at dealers, a 30% cut in allocations by Deere for combine in the fourth quarter for next year and you have to clear it.

Can you talk about what is going on in that market at this point in the fourth quarter as you look out?

So I will start with the early part of year, when you look at what allocations may or may not be, that is really not a good predictor of what the future holds.

We start very conservatively.

Recall that we are in the midst of a transition; as you think about 2014, fairly significant transition for our combine lines.

So things are going to be parsed out over the course of the year in contrast to a traditional early order program where you really have your full year's number of slots available.

Tony, do you want to add anything or Raj?

The only thing I would add is if look at -- certainly there are a high level of used combines in the marketplace, but it is really reflective of the high level of sales that we have had in the last really couple years.

As you look at the sales increase over the last several months, on news sales it's much higher than what we have seen increase on a percentage basis in used combine levels.

So, while high, we are moving into a very key period of sales for used equipment.

And our confidence with our dealer network as well as the pool fund strategy that we use that we are in a good position to be able to move those used combines and other used equipment as well out.

Thank you and we will move on to the next caller.

Larry De Maria.

Thank you, William Blair.

Not to harp on the crop receipts, but obviously you guys don't believe the USDA numbers the other day as well; that they were understated because you are forecasting bigger yields on similar harvested acres, which implies obviously much bigger production and a bigger carryout.

Similar in soybeans.

I think your carryout is over 10% versus 16% for corn going out for next year.

But you kept the price very similar to the USDA -- the same in corn, and slightly lower in soybeans -- so that is the delta that I think we are all worried about.

Can you just justify and explain why the price hasn't gone down that you are expecting but that production levels you guys put forward they are much higher?

Keep in mind there is a large number of factors that go into each of those and into the price.

I will also point out that our forecast did not change based on the USDA numbers that were recently reported.

That was put together prior to the release of that data and the basis for our forecast.

So, again, you have a lot of factors -- you have exports, so on and so forth in there.

The other thing I would point out there is a lot of conversation about the $4.90 corn.

If you look back historically that is still very strong pricing for corn.

It's certainly down from last year, but let's keep in mind that last year's price was very high coming off of very low production due to the drought.

And so the $4.90 corn from the information we get from Informa Economics is still very supportive for farmers.

We would tell you according to Informa that low $4 corn farmers are still making good money, so at $4.90 still profitable levels for most farmers.

Okay.

So it says August 14 on the slides, but this data is not encompassing --?

Those are a Deere estimate as of that date.

Okay.

Then separately, stick with the order books.

You mentioned the seasonal orders for planters, etc., were flat I think year over year and last year it was up 15%.

Have orders come in strongly over the last few weeks to get you there, because it seems like initially they were behind?

And then just more broadly, this slide in corn that we have seen, what kind of effect has that have on orders more recently, in the last four to six weeks?

What I would tell you is we look at this at a snapshot and don't get down into the details of the week-to-week changes.

But we can tell you is at this point we are relatively flat year over year, to your point, at very, very high levels last year.

Again, an early order program; it's early in the year, but those indicators are very strong.

As well, look at the tractor order book, which is equally as strong, that we are seeing out into 2014.

So with that we will move on to the next caller.

Adam Fleck.

Morningstar.

Good morning.

Thanks for taking my questions.

I had a couple of questions on Russia specifically.

You commented, I think, last quarter that you wanted to see what happened with the import duties.

It looks like they were extended, so that being the case can you just update us with your plans for the strategy there and localized content?

Adam, this is Raj.

Yes, it was extended and the indications are probably carry-on for at least a few more months, if not a couple more years.

One of the things we are doing is to look at how we can organize our operations in Russia to qualify for less of a tariff or avoid the tariffs.

So right now we do an SKD assembly some of the considerations we would have is for a CKD assembly.

Those are the types of changes we would be looking at and that varies by the product and the volumes that would justify for that particular product category.

So those should allow us to improve our volumes and our share, but as we said, directionally this is going to be an impact on us.

The only thing I would add is keep in mind these are -- it certainly creates some short-term challenges for us, but from a long-term perspective we remain very committed to that market.

We continue to see a lot of strong opportunity there.

Okay, great.

Thanks.

Then just one follow-up.

Something that maybe doesn't get discussed too much, but can you just disclose what your part sales are to date?

Are those up pretty substantially?

Yes, we don't disclose to date.

What we would tell you is in past years parts tends to run 15% to 20% of our total sales, but beyond that we can't go into more detail.

Ann Duignan.

JPMorgan.

I just wanted to go back the cash receipts discussion, not to beat a dead horse or anything.

But would you at least agree that we have probably passed the peak of cash receipts in that farmers are likely to grow more corn, not only this year but next year, and cash receipts probably -- we don't see corn at $7 again unless we get another significant weather event in the next few years?

Ann, this is our best estimate.

We are not soothsaying into the future, but I don't see anything that necessarily precludes prices from going up further.

We know we have very strong demand conditions.

You have the USDA increasing feed and residual use.

You do have a slight bump on ethanol.

We see good demand in the market and so I can't concede that.

On the other hand, I can't guarantee anything in the future other than the fundamental tailwinds for our business continue to look very strong.

If you look at the fundamental tailwinds of demand for Ag commodities it is very strong and it's continuing to be very strong and that is a primary driver.

So weather may impact it one year to the next, but the fundamental drivers of demand is still in place and that is going to drive our business here and throughout the world.

My second question, my follow-up question is back to the construction side.

You did say that build-ready lots are dwindling.

Could you explain what you mean by that and how (multiple speakers)?

Anecdotally, we are hearing that.

Actually we picked that up in our interviews with our senior officers on multiple fronts.

What that means for us specifically is that a lot of the usage of our equipment in residential is when you are moving land to prepare the lots to put in the street, to get the sewer into the division.

So the fact that you see lower number of build-ready lots, so to speak, may be a positive indicator as you move into the future that should be increased demand for the equipment in use.

Essentially you can think of this as vertical or horizontal constructions.

What uses more of our equipment is when you set up a completely new subdivision and have residential construction and commercial construction around it.

So right now early on after the downturn all the build-ready lots are being taken up.

Once there are no more of these build-ready lots, which is what we are hearing more of, there are going to be more constructions on complete new subdivisions.

That is what we meant by that.

I appreciate that.

We have written extensively about that, but I was just wondering how we get that data and figure out when we switch from brownfield to greenfield.

But you are just hearing it anecdotally; that is what I am reading.

Correct.

Ashish Gupta.

CLSA.

Congratulations on such a strong quarter.

Can you give us a sense of what levers you might be able to pull in a down market?

Maybe like what type of decremental margins you can manage towards?

I don't think we have been very specific.

Each single product line, each department within the Company has a specific set of activities that as we move up or down we either cease or add.

So it varies by product line, by department.

So, Ashish, if you look at our Construction Equipment business, lower end demands, lower market demands were the case in the third quarter.

But if you look at how we performed in terms of our -- whether it is R&D or SG&A, and the overall margin environment was impressive.

So regardless of the end-market environments, we are in a position to actually pull different levers or ramp up as necessary, if necessary to meet those conditions.

And that is what you saw in construction's case in the third quarter.

And are you still on the position where you are continuing to add headcount to facilitate future growth in the different global regions?

I would say the bulk of the headcount really occurred in the last couple of years.

I am not actually, candidly, sure where we are year-to-date, but I don't anticipate there would be a lot other than perhaps in Brazil where we have got some -- we are approaching the start-up of those factories there.

And maybe in China as well.

So the additions in 2010, 2011, and 2012 were higher than in 2013, so most of our investments have come in more towards our aspirations that we have expressed outside the 2018 aspirations.

Okay, great.

Thank you.

We have time for one more call.

Seth Weber.

RBC.

So on capital allocation, it looked like your share repurchase actually picked up here in the quarter.

Is that -- are you kind of moving that up in the pecking order?

How should we think about share repo going forward?

Or is it just you are being more opportunistic here in the quarter, something like that?

Well, our pecking order, per se, has not changed and we have long articulated maintain a strong balance sheet, invest in the business, return dividends, and then excess cash would be used for share repurchase.

We were very specific in the first and second quarters that we were conservative because of -- going into those because of the fiscal cliff the first quarter and then some residual shakiness, if you will, in the market as we went into the second quarter.

As our cash flow has proven out, as we are through our peak use of cash -- remember we are big users of cash in the first and second quarters -- as our stock has continued as our stock has continued to provide us with a very good buying opportunity we think we are well below, I mean significantly below our intrinsic value.

We were able to step up the share repurchase.

Okay.

So as we look to 2014 do you think your CapEx number, the $1.3 billion for this year, should come down and that gives you some more firepower?

Or would you expect --?

I think it is unlikely.

We don't have a forecast for 2014 yet.

Obviously we are working on some plans, but remember there is still a significant amount of work to be done with final Tier 4 ahead of us.

We won't see as much in the way of new plant investment, a lot of that is behind us, but there is a lot ahead of us in a concentrated period to meet final Tier 4.

We have said, Seth, that out beyond -- at least out through 2014 that that $1.3 billion is probably a good at least short or mid-term run rate to anticipate.

And then beyond that as a percent of sales we would expect to see CapEx start to come down.

But it would -- depending on where our sales are you may or may not see the absolute number come down at that point.

Okay, thank you.

In conclusion, our strong performance continued in the third quarter of 2013 with earnings up 26% on a 4% sales increase and we are well on our way to another year of impressive performance.

With that we thank you for your participation in the call and, as always, we will 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.