Deere Q4 Earnings Call Transcript

123jump.com Staff
22 Dec, 2008
New York City

The agricultural machinery revenues were $7.401 billion and net income of $345 million or $0.81 a share compared to $422.1 million or $0.94 a share a year ago. U.S. farm cash receipts for 2008 and 2009 are at good levels. The company estimated income for the first quarter 2009 of $275 million.

Deere & Co. ((DE))
Q4 2008 Earnings Call Transcript
November 26, 2008 10:00 a.m. ET

Executives

Marie Ziegler - Vice President, Investor Relations
Susan Karlix - Manager, Investor Communications
Michael Mack, Jr. - Chief Financial Officer

Analysts

Jamie Cook - Credit Suisse
Ann Duignan - JP Morgan
Robert Wertheimer - Morgan Stanley
Eli Lustgarten - Longbow Securities
Terry Darling - Goldman Sachs
Henry Kirn - UBS
Andrew Casey - Wachovia Securities
Charlie Rentschler - Wall Street Access
Barry Bannister - Stifel Nicolaus & Company
Andrew Obin - Merrill Lynch

Presentation

Operator

Good morning and welcome to the Deere’s fourth quarter earnings conference call. Your lines have been placed on listen-only until the question-and-answer session of today’s conference. I would now like to turn the call over to Ms. Marie Ziegler, Vice President, Investor Relations. Please go ahead.

Marie Ziegler

Good morning. Also on today''s call are Mike Mack, our Chief Financial Officer, and Susan Karlix, Justin Merrimac, and Karen Thompson from Deere’s Investor Relations staff. Today, we’ll take a closer look at Deere’s fourth quarter earnings and then spend a few minutes talking about our market and our outlook for 2009. After that we’ll open for 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, Thomson Reuters, and third parties. 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 this earnings call.

Today’s call includes forward-looking comments concerning the company’s projections, plans, and objectives for the future that are subject to important risks and uncertainties. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company’s most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission. The company, except as required by law, undertakes no obligation to update or revise this forward-looking information. The call and the accompanying materials are not an offer to sell or a solicitation of offers to buy any of the company’s securities.

This call also may include financial measures that are not in conformance with GAAP that would be accounting principles generally accepted in the United States of America. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is posted on our website at www.johndeere.com/financialreports under Other Information. Call participants should consider the other information on risks and uncertainties and non-GAAP measures in addition to the information presented on today’s call.

And now for a closer look at the fourth quarter and our outlook, here’s Susan.

Susan Karlix

Thank you Marie. Today John Deere announced a fifth consecutive year of record net income and a sixth year of record sales. Our agricultural equipment operations did especially well, showing particularly strong growth in emerging parts of the world, such as South America and Russia.

For the first time the company saw more than 50% of its AG sales come from markets outside the U.S. and Canada. Equally important, all of our businesses remain solidly profitable for the year in spite of a slowing economy. That, in itself, makes quite a statement about our success holding down costs and squeezing out assets.

We are looking for another good performance in 2009 although, as noted in the earnings release, the volatility of today’s global financial market makes the forecasting process even more uncertain than usual.

Let’s turn now to our review of the fourth quarter, starting with Slide 3. Net income for the quarter was $345 million on record fourth quarter equipment sales of $6.7 billion. The quarter included a charge for the closure of our factory in Welland, Ontario, Canada, as outlined in Slide 4. The approximately $35 million after-tax charge was not included in the earnings guidance provided in last quarter’s call on August 13th.

In the September release announcing the closing we estimated the total after-tax cost would be approximately $90 million, half in 2008 and the remainder in 2009. Primarily because of currency translation, the charge in the quarter turned out to be about $10 million lower than we expected and the total cost is now projected to be less as well, approximately $65 million after tax. The cost is shared on a 60/40 basis by the AG and Commercial & Consumer Equipment divisions.

Turning to Slide 5, total world-wide equipment operations net sales were up 24% compared to the fourth quarter of 2007. Currency translation was neutral and there were about 3 points of price realization.

On Slide 6, world-wide production tonnage was up 24% in the quarter and 18% for the year. Looking ahead to 2009, world-wide production tonnage is expected to increase 12% in the first quarter and be down about 3% for the full year.

As we turn to Slide 7, the global credit crisis has generated an historic amount of uncertainty and volatility. This situation is rapidly evolving and affects our business. The forecast we review today represents our best assessment of the 2009 outlook but you should know it also reflects an unprecedented amount of uncertainty.

With that being said, for the first quarter of 2009 we expect company-wide equipment operations net sales to be up about 7%. Included is about 6 points of negative currency translation and about 5 points of price realization.

Net income is expected to be approximately $275 million in the quarter, reflecting difficult markets in Construction & Forestry and Commercial &Consumer Equipment.

For the full year, net equipment sales are forecast to be flat, compared with fiscal year 2008. This includes about 6 points of negative currency translation and about 7 points of price realization.

We have taken several pricing actions over the past few months aimed at restoring cost/price ratios to levels of early 2008. We believe the pricing being forecast will allow us to reach this goal over the course of 2009.

The current outlook for net income is approximately $1.9 billion for the full year.

Turning to a review of our individual businesses, let’s start with Agricultural Equipment on Slide 8. Today’s earnings announcement describes the major items affecting financial results. Let’s look at two of the factors.

First, AG did incur higher than forecast material cost in the quarter, approximately $80 million more than projected in August. This simply reinforces the fact that the underlying commodity markets are volatile and extremely hard to predict. The AG division operating profit also includes a charge of approximately $30 million due to the factory closing that we talked about earlier. Despite these factors operating profit increased 23% to $476 million, reflecting the very strong retail activity in most markets.

Let’s take a look at some of the economic assumptions that underlie our AG forecast. Projected commodity prices are on Slide 9. You can see we have included our first look at commodity prices for the 2009/10 crop year. Commodity prices remain very attractive. You can see this more clearly on Slide 10. It shows that forecast prices, though down from recent levels, are higher than the past several years. Further, they are at levels that permit our farm customers to earn a good return.

Slide 11 is provided by our consultant, Informa. It highlights variable production costs for 2009 versus 2008. In looking at the numbers, bear in mind that these estimates reflect current input costs. They do not attempt to account for where, say, fertilizer prices might be in the spring. Even so, current commodity levels permit farmers to remain comfortably profitable, as illustrated in the lower table.

As shown on Slide 12, U.S. farm cash receipts for 2008 and 2009 are at good levels and up significantly from as recently as 2007. This is an important point since farm cash receipts are the single most important determinate of farm equipment purchases.

Our outlook for industry sales of agricultural equipment in the U.S. and Canada, as shown on Slide 13, is up approximately 5% in fiscal 2009. The increase is being led by higher sales in large tractors and combines, partially offset by lower industry sales for cotton equipment, small tractors, and equipment commonly used by livestock producers.

Small tractors tend to be popular with the general customer segment that has been hurt by the economic slump, and livestock producers have taken a sizeable hit to their profitability, largely because of higher feed costs.

Our outlook for large equipment remains strong as retail orders in the U.S. and Canada, for many products, 8000 and 9000 series tractors, combines, sprayers, pillage, and seeding equipment, continue to build and are running higher than year-ago levels.

In the fourth quarter retail orders for 8000 and 9000 series tractors grew by 25% and 15% respectively. We have added additional production and shifted build schedules to try to better meet customer requirements. Still, for 8000s, effective availability is into July of next year and into September for 9000s.

For combines, retail orders are over 50% higher than levels of a year ago and now cover roughly 90% of expected 2009 retail sales.

Finally, in the U.S. and Canada, we have not seen any unusual order cancellation activity.

Let’s turn now to South America where our outlook is for the industry to be down 10% to 20% in fiscal 2009. Major factors weighing on the region are access to credit in Brazil and the drought conditions that plagued Argentina early in the planting season. As shown on Slide 14, there is a relatively large range in forecast from net income for 2009, illustrating the extent of the market uncertainty in this part of the world.

Slide 15 gives you an indication of the difficult credit situation in Brazil. Last year soybean farmers provided about 25% of their own crop input funding. This year it is twice as much, at 50%.

Slide 16 outlines key variables we are watching in Europe. The important message is that these markets are still at good levels.

Moving to Slide 17, in Western Europe retail orders for tractors and combines are up double digits over levels of a year ago and we have seen no unusual cancellation activity. In some key countries, however, the credit crisis has hurt customer confidence and could affect retail activity in the second half of the year. Therefore, our initial industry outlook for Western Europe is down 5% to 10%.

The outlook for Central Europe and the Commonwealth of Independent States countries, including Russia, is down moderately in 2009. Demand in these areas remains good but the level of sales we achieve will depend on the access to, and the cost of, credit.

So putting this all together, on Slide 18, the outlook for the sale of John Deere farm machinery and services in 2009 is up about 5%. Currency translation is negative by about 8 points.

Turning to our Commercial & Consumer Equipment business on Slide 19, reported net sales were down 11% in the quarter. Operating profit was negative $16 million, reflecting about $20 million for the factory closing and an additional approximately $20 million in higher material costs.

Production tonnage was up 14% in the quarter in comparison with relatively low production levels in the fourth quarter of 2007. At that time, the division was in the process of an unusually large number of new product introductions and was managing inventories and production accordingly.

Before leaving 2008, it is important to note that although market conditions have been difficult, the division has benefited from several successful new product launches. As a result, C&CE is well position to compete successfully in a number of important product categories.

Moving to the outlook on Slide 20, for fiscal 2009 net sales are projected to be down about 6%. The business continues to be affected by the housing slump and recessionary economic conditions but new products, like the 3E Series Compact Utility Tractor, and a broader number of SKUs in the retail channel will soften the economic impact to a certain extent.

Let’s focus now on Construction & Forestry on Slide 21, where net sales were up 3% in the quarter. Operating profit, though, was down $45 million, virtually all due to higher raw material costs of approximately $50 million. Production tonnage was down 10%.

Slide 22 depicts the excellent job Construction & Forestry has done running the business and managing assets in this extremely challenging market. This is no accident. The division’s well-defined trough management plan is the benchmark in our company. Every one of our businesses is on the lookout for ways to operate more efficiently and respond to any possible downturn in demand.

On Slide 23, we see the impact of tough economic factors on C&F sales. Negative factors include housing starts in the range of $600,000 to $700,000, the lowest level since 1945, non-residential spending down 15% and GDP growth of negative 1%.

Also, forestry markets in Europe and Russia, which have been strong to date, are weakening and forecast to be down 30% in the year ahead.

For the division as a whole, we expect Construction & Forestry net sales to be down about 12% in 2009. One thing that will help the division is the number of exciting new products coming to market in 2009. These include the E-series harvesters and forwarders, K-series loaders, and G-series graders.

Even though present market conditions are challenging, Construction & Forestry has taken two important steps to grow its global footprint and position the division for the long term, as seen on Slide 24. Our excavator joint venture with XCG closed in June. This is an important first step for Deere in one of the world’s largest and fastest growing construction equipment market.

What’s more, the Chinese government’s $500 billion plus stimulus plan, announced earlier this month, adds further support to this market. The plan is aimed at highway, railroad, and airport infrastructure spending.

Two months ago we announced a second move into the construction markets outside the U.S. and Canada with our intent to form a joint venture in India with Ashok Leyland. India is the world’s largest market for backhoes. Initial production is planned for 2010.

Moving now to our credit operations beginning on Slide 25. Many of you aren’t as familiar with our credit operations so I am going to spend a bit of time describing the business.

Just under 70% of the world-wide credit portfolio is AG related, with 20% being Construction & Forestry, the remainder C&CE.

On Slide 26, 75% of the portfolio is U.S.-based, 60% of the portfolio is installment financing, and close to 20% wholesale floor path plan financing is extended to Deere dealers.

Slide 27 illustrates the low provision for credit losses we have experienced. Even today, the current provision is running well below its ten-year average. This reflects strong farmer cash flows, AG and C&CE dealer reserves, rigorous underwriting standards, robust collection practices, and strong used-equipment values.

Now we are going to shift gears and look at the loss experience of John Deere Capital Corporation, the U.S.-funding arm of John Deere Credit. We are focusing on JDCC on the next two slides, because of the organization’s long credit experience and its own public financial filings. What we are showing is John Deere Capital Corporation’s experience with retail notes, 60-days past due, and write-offs for the AG and the Construction portfolios. We are including them to give you a picture of the excellent credit quality of the assets.

The AG portfolio on Slide 28 has experienced very low write-offs, averaging about 12 basis points over the last 10 years. Even during the very difficult 1980s, losses were quite low, reflecting the excellent credit quality of the portfolio over time.

On Slide 29, in 2008, despite the tough market conditions, the C&F portfolio performed in line with historical averages. The bottom line is that our loan portfolios are in really good shape.

Moving back to our world-wide credit operations now, as seen on Slide 30, fourth quarter net income was about $67 million. That was roughly $10 million below the implied guidance for the quarter. The difference was due to a slight compression in our spread due to the current interest rate environment. Our loss experience was in line with our projections. Credit net income for fiscal 2009 is expected to be about $300 million.

Before moving to retail sales, let’s review receivables and inventory. On Slide 31, consolidated trade receivables and inventory ended higher than a year ago, basically accounted for by the AG division. AG ended the year with higher inventories and receivables, reflecting three items. One, the strength of our market. Two, a layer of additional inventories to support higher production schedules in the first quarter. This is being driven by the strength of the retail order book in places like the U.S., Canada, Western Europe, and Australia. And finally, a layer of inventories to support emerging markets.

The 2009 year-end forecast calls for inventories and trade receivables to be down in C&CE and C&F and up about $125 million in AG. Although trade receivables and inventories have increased year-over-year Slide 32 clearly shows that they remain well aligned with the level of sales activity.

Now let’s discuss the latest on retail sales. Slide 33 presents the product category detail for the month of October, expressed in units. Utility tractor industry sales were down 9 %. Deere was down a low double digit. Row-crop industry sales were up 19%. Deere was up more than the industry. Four-wheel drive industry sales were down 9%. Deere was down double digits. Combine industry sales were up 38%. Deere was up triple digits.

On Slide 34 you see that for row-crop tractors Deere ended October with inventories at 11% of trailing 12-month sales, combine inventories were at 2% of sales.

Turning to Slide 35, in Western Europe, sales of John Deere tractors were flat with combines down a single digit in October.

And on Slide 36, Deere’s retail sales of commercial and consumer equipment in the U.S. and Canada were down a low double digit in the month. Construction & Forestry sales in the U.S. and Canada were down a single digit on a first-in-the-dirt basis, and flat on a settlement basis.

Before moving to housekeeping, I would like to touch on some specific actions Deere has taken to strengthen liquidity. On Slide 37, the company has maintained access to the commercial paper market throughout these volatile past eight weeks. Not only have we been in the market on a daily basis, we have been able to place approximately $700 million each week. The average term of the portfolio is about 25 days and the majority of the outstandings mature after December 31st.

Commercial paper outstandings are 100% backed by a $4.5 billion credit facility. As of November 21, we had approximately $1.7 billion in excess capacity and this facility has not been drawn upon. Given the current global market and financial environment to be prudent we have taken two actions. First, at the end of October Deere & Co. made a $400 million capital infusion to John Deere Capital Corporation, and second, we are currently not repurchasing shares.

Slide 38 shows our raw material and logistics cost increases of approximately $305 million in the fourth quarter versus the implied guidance of approximately $200 million. This brought the total increase for the full year to about $550 million. This is well above our August 13 guidance of $425 million to $475 million. It affirms how volatile the commodity markets have been in recent months and how difficult it is to project the impact of rapidly changing costs.

Looking ahead to 2009, our forecast calls for material price increases in the range of $500 million to $900 million. That is a sizeable range but we think it is warranted for a couple of reasons. First, the extreme volatile swings in commodity prices that have occurred over the past year have made projecting costs very challenging. Second, recall or material cost increases were back-end loaded in 2008. They significantly lagged the commodity market on the way up and will do so again on the way down. We continue to work with our suppliers, however, and if commodity prices remain down we could see cost increases in the lower end of the range for the year.

As to how we are covering these higher costs, we have taken several pricing actions affecting virtually all of our products in an effort to restore our cost/price ratio. As mentioned earlier, we are projecting about 7 points of price realization for 2009.

Now let’s turn to housekeeping, looking at R&D expense on Slide 40, R&D increased 17% in the fourth quarter and about 15% for the full year of 2008. For fiscal 2009 R&D expenses are expected to increase about 5% with continuing investment in new products and interim tier-4 across the enterprise.

SA&G expense for the equipment operations was flat in the fourth quarter but about 5 points came from global growth initiatives, primarily in AG. Currency translation was negligible. For fiscal 2008 SA&G expense increased about 13% over 2007 with about 9 points of the increase coming from global growth initiatives and currency translation. In 2009 we project SA&G to be up about 2 points, of the increased growth initiative, virtually all AG related, account for 3 points. Currency is a negative 2 points.

We are working hard on containing costs throughout our traditional equipment operations. Currency translation will have a negative impact on 2009 operating profit of about $100 million to $150 million.

Regarding the tax rate, on Slide 42, during the fourth quarter the effective tax rate was approximately 41%. The rate is higher than expected in the quarter due to three factors, the geographic mix of income, distributions of non-U.S. income, partially offset by the R&D tax credit passed in early October.

As can be seen on Slide 43, capital expenditures for the equipment operation were approximately $773 million in 2008. Depreciation and amortization was approximately $484 million and we contributed about $430 million to pension and OPEB. Financial services capital expenditures were approximately $339 million in the year, mostly attributable to wind.

Turning to Slide 44, for fiscal 2009 we anticipate capital expenditures running about $1 billion, depreciation and amortization about $525 million, and we anticipate spending roughly about $170 million for benefit plan payments. Financial services CapEx will be about $125 million in 2009, primarily wind.

As shown on Slide 46, we repurchased about 5 million shares in the quarter bringing the fiscal year 2008 total to about 21 million shares. Actual shares outstanding at the end of the quarter were 422.3 million. You can also see the history of share repurchases since 2004.

Looking ahead, we believe that John Deere is positioned for a solid year in 2009 in spite of present economic uncertainties. The farm economy, especially in North America, remains strong and our performance will benefit from steps taken in recent years to keep our businesses on a more profitable footing in all types of market conditions.

Finally, the same positive fundamentals that helped drive the last five years of record financial performance haven’t gone away. They remain largely intact. These encompass trends such as growing demand for grain and renewable fuels and an increasing need over time for shelter and infrastructure.

The current economic slowdown may affect the rate at which these developments move ahead but they remain valid, as valid today as they were a year ago at this time. As a result, we have no doubt that Deere remains in a prime position to benefit from these factors and to compete successfully in today’s volatile market. Marie.

Marie Ziegler

Thank you Susan. We are now ready to begin the Q&A portion of the call. The Operator will instruct you on the polling procedure. As a reminder, in consideration of others, we ask that you limit yourself to one question and a follow-up. If you have additional questions we ask that you rejoin the queue. With that, Operator, we are ready.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press “*1” on your touchtone phone. To remove your request you may press “*2”. And once again to ask a question, please press “*1”. Our first question comes from Jamie Cook and please state your company name.

Jamie Cook - Credit Suisse

Hi. Good morning. Jamie Cook from Credit Suisse.

Marie Ziegler

Good morning Jamie.

Jamie Cook - Credit Suisse

Hey, how are you? Marie, my first question probably isn’t going to surprise you I’m just trying to get a little more color on your assumptions behind material costs for 2009 - the wide range of $500 million to $900 million. I guess just I would assume that material costs should be less of a headwind in 2009, given where material costs have gone, so I’m trying to figure out why. Are there any major contracts that are locked into 2009 and is that hurting you and why aren’t we going back and trying to renegotiate with the buyers I guess? Could you just help me on that front?

Marie Ziegler

Certainly. I recall as you are thinking about material costs, recall that last year our cost increases for 2008 have been very much back-end loaded. We were like $50 million in the first quarter, $50 million in the second quarter, and then like $140 million and then $305 million in this quarter. So what you are seeing is really the effect of a pretty significant lag on the way up and then a corresponding lag on the way down. That is the primary driver. We don’t have a lot of activity, specifically, that would be locked in for 2009 yet. In fact, we are still negotiating our steel contracts and those would expire in January. Is that okay?

Jamie Cook - Credit Suisse

So it expires in January. Are there any other major contracts that you are renegotiating now other than steel?

Marie Ziegler

I think it is fair to observe that, again, with the pretty significant lag, that the pricing on our contracts does move with the market but it moves at a lagged pace and again, that really is the effects of what you are seeing in 2009.

Michael Mack, Jr.

I might just say that if you look at the forecast for the coming year from the various experts, there is a tremendous range between people like the AMM on the one hand and global impact on the other. It’s just examples. Quite a big variance in expectations.

Marie Ziegler

In the second half of the year to build on what Mike said, depending on whose forecast you are looking at, sheet steel could be anywhere from $500 to $900 a ton.

Jamie Cook - Credit Suisse

Okay. So it’s fair to assume you are taking a conservative approach to your material costs forecast.

Marie Ziegler

I will let you draw that conclusion. But we also would tell you that the wide range really does reflect a period of unusual volatility that we have been in.

Jamie Cook - Credit Suisse

And just lastly the $500 million to $900 million, does that, given the lag approach, should we see most of that hit in the first half of the year versus second half? Or any color you can help on that front?

Marie Ziegler

Absolutely. Like we were very low in terms of the rate of increase last year in the first part, this year you would expect to see pretty significant increases in the first and second quarters and then tapering off.

Jamie Cook - Credit Suisse

Okay. Thanks. I will get back in queue.

Marie Ziegler

Thank you Jamie.

Operator

Thank you. Our next question comes from Ann Duignan and please state your company name.

Ann Duignan - JP Morgan

Good morning. Ann Duignan, JP Morgan.

Marie Ziegler

Hi Ann.

Ann Duignan - JP Morgan

Hi guys. My question is somewhat similar but on the revenue outlook guidance, AG revenues were up 43% in Q4 and yet for the full-year ’09 expecting about 5%. Can you talk about the Russian revenues particularly given the strength you are continuing to see in North America and then a bit more color on how you expect Brazil or South America to roll out, given not only do you have crops down there but you also have sugarcane and do you have government programs to help support equipment sales on the small farm size.

Marie Ziegler

Absolutely. As you think about the AG division revenues, do bear in mind that there is, for 2009, a currency impact of about 8 points. So you might, if you were going to try to neutralize for that, you would be looking at sales guidance that would be up more like 13%, right. So you got the currency impact.

In terms of how the year plays out, clearly from what Susan said about the North American AG order book, big tractor sales looks pretty good really, well into the year. Should you reference, though, in Western Europe, where we have again very, very solid order books in the first certainly part of the year, we know that there are some countries where access to credit is developing and there is less confidence and so as we move into next year we are more cautious about that.

We talked about the former Soviet Union, which has certainly been a market where we have seen a significant amount of growth, there we are talking sales being down moderately, although there is a great demand for agricultural equipment, access to credit and the cost has certainly had an impact on our farm customers there.

And then South America, again the guidance for the industry, down 10% to 20%, heavily influenced by what is happening in Brazil. And while there is certainly good government support, just access to credit for operating inputs has taken its toll, and in some crops you are seeing a significant compression in margin.

And then Argentina, another key market in that part of the world, we have seen that market slow as the result of dry weather in the early part of the planting season and in pockets it is still quite dry there, so we’re really pretty cautious.

Ann Duignan - JP Morgan

So is it fair to say when you put all of that together that you are, at this point at least, forecasting negative growth in the back half of the year in agriculture?

Marie Ziegler

I would say slightly. Again, you have got to take into account currency, but yes.

Ann Duignan - JP Morgan

Okay and then just my follow up is on your comment on the fact that you are not repurchasing shares, I understand that and I think that is the prudent thing to be doing in this environment, however, maybe you could give us some color in terms of what would be the catalyst that you would need to see in order to get back into the market and repurchase shares? How do we think about it from a forecasting standpoint for ’09?

Michael Mack, Jr.

We have talked about this a little bit before and we have been very reluctant in the past to provide time tables or forecasts on share repurchase and I think we are going to continue that tradition. We think it provides more flexibility. So again, we reaffirm that we are not currently repurchasing shares but I am not going to be able to provide you much more color about our intentions as to a time table or the catalyst that our position is going into the future.

Ann Duignan - JP Morgan

Let me ask it another way then. As you look at your capital allocation, are there any other projected or forecast capital spending projects that you are considering revisiting, given the current environment?

Michael Mack, Jr.

We talked about the capital investments on wind are being reduced and I think that’s probably the most important one that would stand out. We are spending on the equipment side, I think particularly in the AG division, reflecting investments for new products, interim tier-4, and also I think reflecting our overall view of the prospects in the AG business. I think they are pretty flat in the other divisions in terms of capital investments.

Ann Duignan - JP Morgan

Okay. I’ll get back in line.

Marie Ziegler

Thank you Ann. Next.

Operator

Thank you. Our next question comes from Robert Wertheimer and please state your company name.

Robert Wertheimer - Morgan Stanley

It’s Morgan Stanley and good morning everybody.

Marie Ziegler

Good morning.

Robert Wertheimer - Morgan Stanley

My first question I guess is on South America, and in particular in Brazil, do you see risks in the upcoming harvester season or is it only post the harvest that farmers haven’t got the good crop, that tractor sales could fall so it’s really a back-end loaded risk?

Marie Ziegler

I will answer for South America generally. We are seeing already a slowing in the market so it is really not only a back half phenomenon. We are seeing some immediate slowing.

Robert Wertheimer - Morgan Stanley

And is that on combines, that I would think had been ordered a long time ago, or is that tractors?

Marie Ziegler

I would say that on both products.

Robert Wertheimer - Morgan Stanley

Okay. Thank you. And my follow up I guess the only thing that was a real surprise was North America up 5% for the industry in 2009. You say large stuff is growing, small stuff is shrinking and your order books are obviously very, very strong in the larger equipment, so the difference between your strong order books and the up 5%, which is not terrible but not incredibly strong, is that simply the large/small mixed? Is that maybe capacity constraints for the industry? Is that risk of a downturn late in the year?

Marie Ziegler

It really reflects mostly mix. Again, you’re seeing good levels of activity in the industry. But frankly, not the same rate of gain that certainly we would have seen last year. I can’t speak for industry capacity, for Deere we do have additional capacity coming on line in big combines, for example, but it’s not available yet. It will be available as we move into calendar 2009, so you don’t have a full year’s availability of that capacity.

And then if you will recall, at Waterloo, although we actually ordered machine tools almost a year ago in some cases, the capacity won’t fully be available to us until we get into 2010. So there is a little bit of effect there, but the bottom line is mostly just the mix, from the fact that the small stuff is very weak.

Robert Wertheimer - Morgan Stanley

That’s helpful. Thanks.

Marie Ziegler

Thank you Rob. Next

Operator

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

Eli Lustgarten - Longbow Securities

Longbow Securities. Good morning.

Marie Ziegler

Good morning Eli.

Eli Lustgarten - Longbow Securities

Two questions. One, you did say you are not buying shares now, is that correct?

Michael Mack, Jr.

Correct.

Eli Lustgarten - Longbow Securities

Okay, and two, the forecast for Brazil, South America, down 10% to 20%, that’s a unit forecast or is there currency involved in that?

Marie Ziegler

I’m glad you asked that question. It gives me an opportunity to clarify. When we give you our industry outlook, it is dollar-weighted, but it strips out any effect of price and it strips out any effect of currency, so we are looking strictly at volumes, but it is not in units.

Eli Lustgarten - Longbow Securities

Can you talk a little bit about your 7% price assumption for the year? It’s hard to believe there is going to be much pricing in Construction & Forestry or the CCE business, so it implies that all the pricing is in AG. Is that correct? And you did announce 10% price increases for both tractor and combines. Are those holding and that’s why we get 7% for the weighted?

Marie Ziegler

Okay, let me first start, your assumption is not correct. We do have price increases in Commercial & Consumer and in Construction & Forestry, but candidly, the rates of gain are probably not as high as they would be on the AG side.

When you think about pricing, remember that you are looking at pricing for the full company, for the full division, the prices you cited are for big product, big tractors, big combines. There is not very much price increase on the small side of the house, small tractors, etc. So you are looking at mix.

Eli Lustgarten - Longbow Securities

But it’s fair to say that virtually the bulk of the pricing of the 7% for the year is driven by the AG business?

Marie Ziegler

That is certainly fair.

Eli Lustgarten - Longbow Securities

I don’t have to worry about that. And a quick follow up. Your CCE sales forecast is up 6% but your tonnage is down.

Marie Ziegler

Wait. CCE is down 6%.

Eli Lustgarten - Longbow Securities

And tonnage is down 10%. Are we implying that we are liquidating a lot of inventory; the production will be below retail sales quite as well?

Marie Ziegler

Well, remember that roughly 30% of the division is landscapes and obviously they have no tonnage because they are not manufacturing equipment. So you do get a little bit of mix there.

And the tonnage numbers are a guide that helps you understand what is happening on our manufacturing but it is difficult to translate those numbers into sales. And frankly, that’s why we no longer provide you our forecast guidance just based on tonnage, why we switched to sales.

Eli Lustgarten - Longbow Securities

Just one quick, you are cutting your wind spending for this year versus last year?

Marie Ziegler

For 2009, that is correct.

Eli Lustgarten - Longbow Securities

All right. Thank you very much.

Marie Ziegler

Thank you Eli. Next question please.

Operator

Thank you. Our next question comes from Terry Darling and please state your company name.

Terry Darling - Goldman Sachs

Goldman Sachs. Thank you.

Marie Ziegler

Good morning Terry.

Terry Darling - Goldman Sachs

Good morning. I wondered could you talk a little bit about the guidance for the capital business and then how you are thinking about leverage longer term. I guess if we look at the guidance down about 10% in earnings year-over-year, with the fourth quarter down 30%, which was below your expectations or implied guidance, I think as Susan said on a tighter spread profile, why are we only down 10% next year if the run rate going into the year is a lot worse than that and obviously the credit market is still pretty tough.

Marie Ziegler

There was a capital infusion that was made late in October of $400 million and so that will help – candidly it helps reduce the expenses of the credit operation.

Michael Mack, Jr.

In terms of the run rate I would say some of these things are things that will not be recurring. They had an impact of FX that was really related to the foreign exchange shock that occurred in October as a consequence of the credit crisis, which with some currencies it was pretty substantial. So some of these things, I think, will not be recurring on the credit side. In terms of --

Terry Darling - Goldman Sachs

Mike, are you implying on that FX comment that you had a hedge that worked against you?

Marie Ziegler

No, it actually has to do with re-valuing payables. And actually it is a factor in the quarter but it’s pretty small for the credit company.

Michael Mack, Jr.

Most of that equipment operates, that’s right. But going back to the leverage question, this takes our leverage back to what it was not very long ago, actually, almost to where it was about a year ago and I think we did that because we thought it was prudent given the current environment and we may modify that if circumstances change in the future but we think this makes more sense.

In terms of what the leverage is then at October for the world-wide credit, I think it’s about 7.9 to 1.

Terry Darling - Goldman Sachs

If you go back to 2002 you are more like 5.5 to 1. You are hearing across a lot of different companies’ sustained shift in leverage down a lot lower than 8 to 1 Mike. Is that not something that is kind of inevitable for you? And if that is or isn’t the case --

Michael Mack, Jr.

I don’t think I would necessarily agree with that. We did this on our own, first of all. This is not something that anyone asked us to do. Our losses are exceedingly low. If you look at the losses on the portfolio we talked about, I think that they are something that leverage makes a lot of sense with given where the losses are in the portfolio.

Terry Darling - Goldman Sachs

So you think 8 to 1 in the new credit world we are in could be sustainable for you?

Michael Mack, Jr.

Right now we think that is a very appropriate level.

Terry Darling - Goldman Sachs

Okay. Last question. Can you just tell us what your loss assumptions are for in the 2009 guidance?

Marie Ziegler

For credit?

Terry Darling - Goldman Sachs

Yes.

Marie Ziegler

For credit, this year we ran about 0.35% and for 2009 we think we will probably be around 0.5%.

Terry Darling - Goldman Sachs

Very good. Thanks so much.

Operator

Thank you. Our next question comes from Henry Kirn and please state your company name.

Henry Kirn – UBS

Good morning. It’s UBS.

Marie Ziegler

Good morning Henry.

Henry Kirn – UBS

Could you talk a little bit about how you view the age the AG fleet in the U.S., South America, and Europe? We just came off of a really good year, how do you view replacement demand at this point and how much ability does the farmer customer have to age the fleet? Is there any pressure from them needing to replace?

Marie Ziegler

I don’t have the statistics out of other parts of the world, but in the United States a few years ago we were looking at an average age of about 17 years. A survey ago, like two years ago, it was like 19 years and it’s now 20 years. So the average age has gone up.

But Henry, we don’t do our projections based on replacement demand. We really project in parts of the world based on income. And obviously in the current environment we have got to take into consideration access to credit, which is something we haven’t had to be concerned about as much historically. And that’s why, like in the U.S., it is so significant that we see very good levels of good farm cash receipts this year and next year because we know that that drives next year’s equipment purchases. And again, you know that for big equipment the order books look extremely good.

The volatility you see potentially in the earnings of farmers for next year in Brazil and Argentina, and in addition the difficult access to credit in Brazil influence our outlook and explain why we would be looking at it more of like a down 10% to 20% there.

Henry Kirn – UBS

Okay. And globally, as we have seen now some pressure on the AG markets, have you seen your competitors follow your lead in holding the price increases or have you started to see evidence of discount?

Marie Ziegler

I would not be able to comment about our competitors. Again, our forecast has for the company positive price realizations of 7 points.

Henry Kirn – UBS

Okay and one final one. Some of the global construction equipment players have seen their share prices fall pretty strongly. At this point, if you are looking to grow your global construction footprint, would you consider doing that by acquisition?

Michael Mack, Jr.

I don’t think we have too much to comment on today. You are familiar with these relatively modest size investments we’ve made in China and India here this past year and I think that’s the kind of thing that fits into our scheme.

Marie Ziegler

I think it also important to maybe note that as we look at our investment opportunities, bear in mind that we are looking for a 20% operating return on operating assets on average over time. And that’s a pretty good benchmark. With that our next question please.

Operator

Thank you. Our next question comes from Andrew Casey and please state your company name.

Andrew Casey - Wachovia Securities

Wachovia Securities. Good morning everybody.

Marie Ziegler

Good morning Andy.

Andrew Casey - Wachovia Securities

Question on the outlook, if I exclude pricing, currency, incremental material cost, higher R&D and lower credit, and then the remainder of the plant closure, I’m getting a fairly high headwind in cost per share, somewhere in the $0.75 to $1.40 range. The math may be a little off but it seems as if I’m missing something. Is there somewhere where you are expecting extra costs to come from?

Marie Ziegler

Well, I’m going to be pretty blunt on the raw material cost. We have a very large range and probably would be biased to the upside of the range. We do have some absorption as we take down inventories. When we report to you we are reporting a combination of inventories and receivables but that hit, that absorption impact, is projected at about $130 million so it would be significant.

The other thing is currency. And this is the translation of our operating profit from overseas units. And Susan had mentioned the impact on operating profit there being $100 million to $150 million and so that is fairly significant.

And maybe the other thing is you heard the capacity expansion, we have got capital expenditures still targeted at about $1 billion in the equipment operations. And as you add that capacity you do encounter some inefficiencies in the near term because you have got additional people working to get the product out, you happen to shift things around in the factory. So that is probably a bit of a factor, too.

Andrew Casey - Wachovia Securities

Okay. It still seems a little bit conservative but I’ll follow up offline. Thank you.

Marie Ziegler

Thank you Andy. Next question.

Operator

Thank you. Our next question comes from Charlie Rentschler and please state your company name.

Charlie Rentschler - Wall Street Access

Wall Street Access. Given the importance in your fiscal ’09 outlook of AG, and particularly U.S. AG, obviously government policies are crucial in your thinking and although you didn’t state it I wondered if you could just talk for a couple of moments about your thoughts about the new administration’s attitude on first ethanol and secondly wind and how that is affecting your forecast?

Marie Ziegler

At least on the campaign trail, President-Elect Obama certainly was very supportive of renewable fuels, renewable energy, and so that would be really all I can add at this point. But he would appear to be very supportive of it.

Charlie Rentschler - Wall Street Access

Obviously that is a huge market for row-crop farmers, particularly corn farmers at this point. So that is baked in your assumptions that there will be continuing strong support for ethanol?

Marie Ziegler

That certainly would appear to be case and additionally baked into our assumptions is the fact that we have still about 2 billion gallons of ethanol capacity that is under construction and yet to come on. And actually in the last quarter we saw just nearly 2 billion gallons of capacity in ethanol in the U.S. come on line in production.

Charlie Rentschler - Wall Street Access

And about the wind tax credit, can you comment?

Marie Ziegler

The production tax credit was extended in early October and it runs now through the end of December of 2009. Our capital investments for wind in 2009 really do not reflect a pull back on our belief in the renewable wind business, but just simply that we are doing that to be prudent in use of our capital in the current environment.

Charlie Rentschler - Wall Street Access

So there is no re-thinking or reduction in your enthusiasm for wind?

Marie Ziegler

No, this really reflects being prudent in the credit market. Thank you.

Charlie Rentschler - Wall Street Access

I thought Susan did a great job of taking us through the slides.

Susan Karlix

Thank you. I think she did too. Thank you for mentioning it.

Marie Ziegler

Next please.

Operator

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

Barry Bannister - Stifel Nicolaus & Company

Stifel Nicolaus. Hi.

Marie Ziegler

Hi Barry.

Barry Bannister - Stifel Nicolaus & Company

You did a good job walking through past dues and net charge-offs in the credit division, going back through past cycles, but could you give us some color on what sort of effect delays or cancellations have had on your order book as you descend into peaking period and decline in the cycle?

Marie Ziegler

Well, on the call Susan did mention that we had seen just a handful of cancellations in the U.S. and Canada, virtually nothing in Europe. We have seen some in South America and in Eastern Europe, into the former Soviet Union and in that case it really is related to access to credit, which is a very significant issue there. That’s why we called it out actually in the press release.

So our historic experience and I can’t predict the future, I know, but historically once a farmer has made a commitment to purchase, at least in the U.S. it has been that they continue through with that decision. Many times the subsequent trade-ins are already lined up so you have got that buying chain already predetermined.

Michael Mack, Jr.

And in the U.S. the access to credit by farmers, in terms of the world banks as well as their own credit companies, it’s very available for them and so it hasn’t had that negative impact here in the United States at all.

Marie Ziegler

And they certainly come into this with their balance sheets in excellent condition.

Barry Bannister - Stifel Nicolaus & Company

You had $550 million of material costs above plan in 2008 and to offset that you would have had to have had 2.1% of price. You are saying pricing would 7% in ’09, which if fully realized on flat sales would be $1.8 billion, or two times the high end of your costs delta estimate. So, on the one hand I am surprised that the customers are bearing the brunt of these costs and on the other I’m just asking have you assigned your toughest person to go after your suppliers. Because it seems almost a travesty to me in a recession that you can’t squeeze post-January ’09 steel contract and others more out of your suppliers and rely less on price in ’09.

Marie Ziegler

Well, first of all, again, our pricing, you must bear in mind the fact that a lot of these costs were back-end loaded. We were not seeing the same kinds of ramp ups in costs in the early part of the spring that you were seeing in the steel markets, for example. So just like those costs were back-end loaded in 2008, we will see them come down on a back-end loaded basis in 2009. That is the way the business works and that’s how our contractors, our suppliers honor their commitments to us, we will honor our commitments to them.

In terms of the pricing, again, as you think about the pricing, recall that we do have some very significant new product introductions in the Construction & Equipment business and in our Commercial & Consumer Equipment business and certainly in the AG business that helps support the value that we are delivering to our customers, in addition to covering our costs.

The price realization that we are talking about, there is a cost associated with some of the additional features. You have better transmissions and cabs and things like that that our customers are benefiting from.

Barry Bannister - Stifel Nicolaus & Company

Okay.

Marie Ziegler

I believe we have one more person in queue.

Operator

Thank you. Our final question comes from Andrew Obin and please state your company name.

Andrew Obin - Merrill Lynch

Yes, hi. It’s Merrill Lynch.

Marie Ziegler

Hi.

Andrew Obin - Merrill Lynch

Hi. How are you? Just sort of more of a simple question, what happened in the quarter, we were given guidance in mid-August, why was it so hard to forecast costs in AG division for 4Q?

Marie Ziegler

Wait a minute. When we look at really what drove the changes for the quarter, it is almost all below the line for operating profit because although our raw material costs were a little higher, our price realization came in at 3 points for the company instead of 2 points.

Bear in mind the impact of the tax rate, because it did come in higher in the quarter than we had projected, our guidance had been 36% and effectively we were at 41%. More importantly, we had foreign exchange, and again that dealt with re-valuing U.S.-dollar-denominated payables and that effect is about $22 million for us - after tax, in the quarter. So that explains the bulk of the miss. And then credit, which we have already talked about, which is the other tenth.

Andrew Obin - Merrill Lynch

Very fair. Just another question, I am just going back to the question on the finance side, in terms of the amount of refinancing you have to go into 2009, is the idea that you will have to raise money probably at a higher cost if you will be able to maintain the spread to your customer? Is that the fundamental thought behind your guidance for ’09?

Marie Ziegler

There is a little bit of spread compression, although we have increased our rates candidly to our customers, that there is a little bit of spread compression. The commercial paper markets have been good.

Michael Mack, Jr.

The paper markets have been good. This just reflects the perspective of all in costs across all of our funding sources.

Andrew Obin - Merrill Lynch

My other question is I guess as I think about potential refinancing costs for some of your peers in the industry and also what I hear in terms of people being able to pass on to their customers, it seems that there is a little bit of push back from the customers. And we’re talking about the cost of financing being up in excess of probably 3, 4, 500 basis points. Am I looking at it correctly in terms of increased cost of financing for medium term notes that you have in the finance side or am I being pessimistic?

Michael Mack, Jr.

Well, the medium term notes are one component of it and they are up some but you have to blend in, as well, the commercial paper and the ABF, and so this forecast reflects the blended perspective all in cost across all the funding sources.

Andrew Obin - Merrill Lynch

Okay. I will take it up, fine. Thank you very much.

Marie Ziegler

Thank you all for participating in today’s call and at least to our U.S.-based listeners, Happy Thanksgiving.

Operator

Thank you. This does conclude today’s conference call. We thank you for your participation. You may now disconnect your lines.