Good morning, and welcome to Deere's second quarter earnings conference call. [Operator Instructions] I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations. Thank you. You may begin.

Good morning. Also on the call today are Jim Field, our Chief Financial Officer; Marie Ziegler, Vice President and Treasurer; and Susan Karlix, our Manager of Investor Communications. As some of you may be aware, Justin Merrimac has moved on to other responsibilities within the company. And over the next several months, Josh Garrison will be transitioning to the IR staff to replace Justin as Manager of Investor Relations. Today, we'll take a closer look at Deere's second quarter earnings. Then spend some time talking about our markets and how we see the record half -- the second half of 2011 shaping up. 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 Thomson Reuters. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking comments concerning the company's projections, plans and objectives for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/financialreports under Other Financial Information. Now for a closer look at the quarter, here's Susan.

Thank you, Tony. Today, John Deere announced earnings for the second quarter of 2011, and what a quarter it was. Income jumped 65% on a 25% increase in sales and revenue. Sales and earnings both reached their highest point for any single quarter in the company's history. As we've been pointing out for some time, our performance reflects the skillful execution of our business plans plus strong demand for our innovative lines of equipment. In addition, the company's ongoing action to expand its global presence are showing good results, and helping drive new customers worldwide to the John Deere brand. We're also starting to see positive movement in some key markets that are in the early stages of recovery, namely, construction equipment in the United States and farm machinery in Europe and the CIS. We're looking forward to further improvement in these areas in the future. Finally, our full year earnings forecast has been raised and now stands at approximately $2.65 billion. All in all, it was an impressive quarter, unprecedented in many respects and the company seems well on its way to an equally impressive year. Now let's look at the quarter in more detail, starting with Slide 3. Net sales and revenues were up 25% to $8.9 billion in the quarter. Net income attributable to Deere & Company was $904 million. As you just heard, both were the highest for any quarter in the company's history. Slide 4 is a reminder as you compare the 2 quarters. It details the tax charge impact in the second quarter of 2010. On Slide 5, total worldwide equipment operations net sales were $8.3 billion, up 27% year-over-year and the first time quarterly sales have exceeded $8 billion. Price realization in the quarter was positive by 4 points, while currency translation was…

Thank you, Susan. Now we're ready to begin the Q&A portion of the call. [Operator Instructions] Operator?

[Operator Instructions] Our first question comes from Jamie Cook. Jamie Cook - Crédit Suisse AG: Crédit Suisse. A couple of questions. One, you mentioned in the beginning that the C&F business, and when you think about farm, Europe and CIS are still relatively at trough levels. Can you talk about how you're viewing the U.S. and Brazil relative to peak within the farm business? And then last, unless I missed it, you talked about the Japan income -- you talked about the Japan hit for the year. Can you just talk about how we should see that impacting the quarters? If one -- was there any in this quarter? And how we'll think about Q3 and Q4?

Sure. First of all, in terms of -- you were talk -- you asked first, I believe, about ag for South America. Jamie Cook - Crédit Suisse AG: And U.S.

In the U.S., certainly, from a large ag perspective, it's a very strong market. And within the smaller ag equipment, you would have some room yet to improve. I mean it's come back this year. And you'll see that -- we've talked about that in our margins. Last year, there were a couple of points of margin benefit on large ag. And this year, as small ag has also come back, we're closer to one point of margin benefit, so the negative one year-over-year. Certainly in South America, that's an interesting market because we're seeing weakness in the smaller ag sector in Brazil. Large ag is performing pretty well, and in cotton and especially sugar are at very strong levels there as well. So certainly pretty strong but good opportunities for us in both markets. Jamie Cook - Crédit Suisse AG: But just to be clear, you gave a cash receipt forecast for 2012. So it sounds like you would expect the strength in the U.S. and tractor sales to continue into 2012? You're not seeing any signs of weakness or -- at all within the U.S. farm equipment market?

Well of course, as you know, we wouldn't give a forecast for 2012 at this point. There's a lot yet to happen between now and then in terms of crops and so on. But certainly if you look at our forecast, and we said for years that the cash receipts are a good indicator of future equipment sales, that's our #1 indicator in terms of our internal modeling both in the current year as well as one year out. So certainly, that would bode well for sales in the U.S., and similarly in Brazil and Argentina. Sales are net income for farmers and those markets are very strong. Jamie Cook - Crédit Suisse AG: Okay. And the second question's just with Japan, sorry.

Yes. With Japan, certainly there would be a little bit in the second quarter. But that's going to mostly impact our third and fourth quarters. And again, keep in mind that just effectively as we look -- as we have our outlook, sales that effectively lost sales with the related margin on both.

Our next question comes from the Jerry Revich.

It's Goldman Sachs. Tony, can you say more about the impact of the tragedy in Japan on your business? Your excavator margins, they're significantly lower than the profit drag? You're estimating what other product lines are impacted? Or can you just help us with the high profit drag relative to the sales drag you're thinking about there?

Sure. And really, that -- I mean you're right, most of our impact is in our Hitachi-related product with our Hitachi relationship. And keep in mind on that product that we only recognize the marketing or distribution margin on that. We, as part of that relationship, do not have the manufacturing margins on our books. So that's why you'll see a little bit, maybe lighter margin impact than what you might otherwise see.

So the $80 million profit drag -- or $70 million profit drag on only a $300 million of sales drag implies much greater operational difficulties than what the distribution arrangement implies? So that's the bridge I'm trying to gap, Tony.

Well, those margins would actually be lighter than what you would normally see.

Yes, so the operating profit hit. I would have expected if it had been lower than the $70 million to your point because the margins on those sales are lower?

We're not following you. This is Marie, Jerry. We've got $300 million of sales impact. Again, as you are aware, Hitachi did lose several months of production in one of its northern factories. That would be the primary source for these large mining machines and excavators, and those factories are expected to be up and running, I believe it is, yes this week. So we think our supply base and Hitachi, in particular, to be commended for the work that they have put into recovering from this tragedy.

My question is the $70 million profit drag implies north of 20% margins on those Hitachi excavators. And for Tony's comment, that is a lower-margin business for you and it's not a drag on your production facility, so that's the part I'm...

Let me try to clarify, Jerry. You're right. I advised the 23% operating margin. What we have in there is we have Hitachi-branded mining machines and then we have the mid-sized and large excavators. A portion of that business has margins that are greater than 23%. And a portion of that has margins that are less than 23%. And this is the blended average of those margins. And yes, you're right, some of this is pure distribution margin, which would be less -- significantly less than the 23%. And some of it, we get -- we enjoy a little bit more margin. So I don't think you should read anything more than -- that's the weighted average margin of the equipment that's been disrupted.

That's a very helpful color. And on the ag equipment business, can you help us with the bridge for the Ag & Turf EBIT performance this quarter versus last year? And perhaps touch on what was the impact of Interim Tier 4 product rollout costs? I guess, considering how strong pricing was this quarter versus raw mats and SA&G? I guess I was looking for higher operating leverage in that. I'm wondering if you could just step us through the pieces there?

Again, we talked about the fact that we had very good operating margins at 17% for the second quarter. The factors that did weigh some on the incremental margin were things that we had discussed in advance, like raw material costs, higher SA&G, higher R&D in the quarter. There's a little bit of absorption impact as we had talked about for the full year as ag has a very significant number of product introductions and capital expenditure ahead of it and some behind. And that added -- had some impact in the second quarter as well. It's disrupted to the factories as their bringing some of this capital in.

And what order of magnitude can you...

No new information.

Okay. Can you quantify that last point, Marie, rough order of magnitude in the quarter?

We've talked about for the full year, full company, about $100 million. I don't have a breakdown by quarter, but there would be some impact in this quarter.

Our next question comes from Charlie Rentschler. [Boenning & Scattergood, Inc.]

First question is can you talk about what explains the $1.6 billion increase in inventory year-to-date since October? It's about one month's production, I figured, in the first 6 months?

Actually, Charlie, we ended October with our inventories in round numbers somewhere between $1 billion higher. That reflected the very high levels of production we had in the fourth quarter relative to a year ago, and the fact that the production would be somewhat heavier this year versus the typical seasonal patterns than it would traditionally be. That said, we still expect to end the year with our inventories in very round numbers, so it's essentially flat for the full company with last year. And this reflects very good business conditions in many parts of the world and the prospects of better conditions in places like Europe and the CIS.

Okay, and my second question has to do with the CIS. You mentioned if you're seeing strong -- stronger gains over there. Could you kind of benchmark that against the peak of 3, 4 years ago? And what are you seeing now? Do you think that this might accelerate over the next couple, 3 years?

This is Tony. Keep in mind while we're certainly looking at what we refer to it as notable improvements year-over-year, we're also off of very low levels. If you look at where we were in 2008, our sales in the CIS last year were less than half of those levels. So again, it's certainly low -- it's coming off of low levels but we're seeing some strong improvement there.

Our next question comes from Ann Duignan. Ann Duignan - JP Morgan Chase & Co: JPMorgan. Can you talk a little bit about North America ag equipment. We know the farmers will continue to trade the equipment into 2012 so long as, as you pointed out, cash receipts remain strong. But also they need the value of their used equipment to remain strong. Can you comment on the used equipment industry in North America, both used equipment values as well as the inventories of used equipment? And maybe any difference or similarities between combines and tractors?

Absolutely. And when you look at used equipment values, they're actually holding very strong. They are either flat to improved year-over-year, including combines. Combine used equipment values are actually slightly higher year-over-year in the U.S. so that certainly bodes well. When you look at inventory level, tractors or used equipment are at a very good levels. Combines, of course, are at relatively high levels year-over-year, but some of that is driven by the timing of our sales. As you look at a typical seasonal pattern of our sales with our -- again driven by our Interim Tier 4 transition, we've shipped quite a bit more combines, new combine in the first half of the year compared to what we normally would. And as you know, with a new combine comes, in almost all cases, a trade in, and used, so certainly, we're at higher levels. But also, we also track those within a band and they would still be -- our levels would still be in a reasonable band based on new equipment sales. So we feel comfortable with the levels that they’re at. But you're right, they are at high levels. Ann Duignan - JP Morgan Chase & Co: So would you agree that if cash receipts come in somewhere around where you're forecasting and used equipment values stay around where they're currently at, but there's no reason to think that the North American ag equipment sector will fall off a cliff next year?

As we look at what our dealer's response is and our dealers seem to be comfortable that they will be able to move those combines and they've been very aggressive at doing that both within the U.S. as well as with some export markets.

Certainly, Ann. This is Jim, certainly that would be consistent with history. As we've said, we modeled the business and sales, based on cash receipts, as being the largest driver. And so if you don't have -- if the used is still flowing through the channel and you have good cash receipts, history would suggest that you're going to have good retail activity. Ann Duignan - JP Morgan Chase & Co: Yes. I agree with that. And just to follow up a different topic. I'm just curious, you spent about $600 million buying back shares in the quarter. Can you tell us what the share count was, the diluted share count at the end of the quarter? Just for modeling.

We were about 420 million shares. Ann Duignan - JP Morgan Chase & Co: And that was at quarter end?

That's at quarter end.

Our next question comes from Henry Kirn.

It's UBS. If the North American ag demand conditions warrant, would you be able to ramp production above what's implied in guidance? Or are you bumping against where you could go for production at this point?

As you look at our order book -- I assume you're referring to in the U.S. with the large ag equipment?

That's exactly right.

Yes. If you look at our order book today on 8R tractors, our effective availability is really out into about the November time frame. And on the 9000 Series, we're out into October. Keep in mind, we have a significant number of Interim Tier 4 transitions on those large ag products in the year. And so as we've talked about in the past, we do have some capacity limitations this year with those transitions.

And could you talk about on the supply chain side, their ability to ramp and how much that might be holding you back? Sort of where are you seeing bottlenecks and where things...

We do not have at any -- I mean of course, on any given day, there are issues that we would be working through. But there are no supplier issues that are currently hampering our ability to produce products. Again, with the exception of Japan.

Let me just elaborate on that. I mean, first, I think kudos ought to go to our excellent supply management professionals around the world and our supply base. And as Tony said, at any point in time, there may be a particular issue somewhere that we're dealing with, besides Japan, we've managed through this pretty flawlessly. So and we have a lot of confidence in our supply management team and our suppliers around the world.

Our next question comes from David Raso.

ISI. Can you give us a little more quantification how you're thinking about the incremental in the next couple of quarters? I'm just trying to think through the price versus cost in the back half of the year. It looks like you're implying it's a positive. And if anything, if this is positive enough to offset those incremental costs you've cited for some of the new products? And the sales growth you're implying is higher than your SG&A growth this second half. I'm just trying to think through why the incremental margins look like you're almost implying will be lower than your operating margins. But if you maybe just flush out first to come from the bogey, how are you thinking about your incrementals the next 2 quarters?

As Susan had indicated, David, as we look in the back half of the year, especially in Ag, we do see that incremental margins, we expect, will be softer than what you've seen in the first and second quarters. Some of the factors for that, again, are alongside of the significant number of IT4 transitions that lie ahead of us. We won't tap the same pattern of year-over-year sales and tonnage, times and gains. We don't have some of the opportunities for incremental margin opportunities that you would have. We've talked about raw materials, we had very, very good sales, or excuse me, price realization in the quarter. We have improved our guidance for the year to 3 points. But it was -- our guidance was our actual price realization was 4 points in the quarter, so it will abate a little. We certainly expect that we will cover our product with raw material costs up in the second half of the year. But you won't have maybe the same kind of margin opportunity. And then finally, we do have higher product costs related to IT4 componentry. We've talked about that before. That's the catalytic converters and things like that, that are on these IT4-compliant engines. And for the full year, full company, that's about $170 million. We'll see more of that costs in the second half than we did in the first half as we ramp up production models.

This is Tony. The other thing I would add to that is keep in mind that we bring our inventory levels down in the second half of the year. We benefited from absorption in the first half. And that will flip and move the other direction here in the second half and will be a drag on margins as well.

Between the 2 segments, do you see one more than the other? I mean obviously ag, more new product rollout, I would argue. So is that where you expect to see more sequential degradation than incremental?

Well, keep in mind with C&F as well, right now they're in the midst of an SAP transition. And so they took some shutdown ahead of that, a couple of weeks. And of course we'll also have some pretty slow ramp-up. So effectively, they are at about 3 weeks of lower production and then if you look specifically at the third quarter for that particular division. So that will certainly have an impact on margins. As Marie cited some of the Interim Tier 4 costs, that certainly is more directed at the ag product line than C&F.

And then just for clarification, and Jim, if you want to tackle this, so we're implying incrementals below operating margins for the second half of the year?

I would just say that our forecast, we've been very candid in terms of what our incremental, or I mean our absolute margin guidance is for the 2 divisions. And I think we'll let the numbers speak for themselves.

The next question will come from Robert Wertheimer.

It's Morgan Stanley. Real quick follow-up on South America, just to confirm that the reduction of the market growth outlook does not involve any large equipment in your view. I think you said the word saturation for small equipment, not so much on just the financing with the actual market. So I wonder if you could comment on where you think large equipment is there?

Yes. If you look at South America, there's really 2 factors that Susan cited again. And you're correct, it's on the small ag side, there's -- we referred to it as MDA program. That's really targeted at small tractors and small farms. And that's been, in the past, a pretty high percent of the overall tractor sales and has sequentially reduced year-over-year. And we would expect a similar pattern again this year, as well as when you look at overall South America, Argentina, with some of the recent trade policies, would certainly have a dampening effect. But on large ag and especially, part of what's not included in that outlook will be cotton and sugar. And so -- and there is certainly strong markets there, so.

You didn’t take the large ag part down? Okay. And the second question would be on just a little one on tax rate guidance, you're sort of below where you've been for the year. Does the unchanged tax rate guidance imply a higher mix in the U.S. towards the second half of the year? And a Tier 4 aside, that would be a positive margin shift, I would think?

Yes. This is Jim. I don't know that -- I wouldn't necessarily jump to that conclusion. We've got a lot of discrete items that impact particular quarters depending on the timing of certain events. And so there is an element of lumpiness to the tax rate in the quarterly periods that sometimes defies a little bit of logical reasoning.

Okay. That's helpful.

I would not jump to the conclusion that, that is an income mix necessarily.

Our next question will come from Seth Weber.

It's RBC. I guess just first a clarification, did you raise your IT4 costs from 160 to 170 then? Is that what I heard?

Yes, we did.

Yes. That's correct.

Okay. And then there's -- on the Construction & Forestry business, you mentioned that with the 35% growth this year, you're basically kind of getting back to trough levels. But looking at your, I guess Slide 19, you're talking about another 3% decline next year in non-res [non-residential] construction. So I mean what -- I guess what I'm trying to understand is how much of this is just restocking or replacement? And what will we need to see growth in that business next -- going forward?

Right. This is Tony, Seth. And first of all, just to clarify that the trough levels are for the Construction side of that division only. And certainly, some of what we're seeing, obviously there is some restocking but also, as we've indicated previously, you tend to see some overshooting of the fundamentals, both on the high side and end on the low side. And we believe that part of the story as well is that some of this is really a correction of the retail environment back up to what the underlying fundamentals would support. But to your point, not at strong levels, I mean we're at -- and as we've indicated, we’re certainly still -- while, year-over-year percentages are high, still at basically trough levels.

Okay. And if I could just ask a follow-up. Can you give us some color on where you're at for Europe capacity on the Ag business? I mean it sounds like you're starting to get a little bit more comfortable with the dynamics in that market relative to North America? Do you still have excess capacity in Europe if you needed to expand that there?

Certainly, that market is coming back as we've indicated. We've bumped up our outlook again there, but would not have capacity issues in Europe.

Our next question will come from Andy Casey.

Wells Fargo Securities. On the cash flow outlook, I kind of get it, but can you walk us through the approximate $200 million reduction? Looks like $100 million is related to the adjusted receivable and inventory. Where's the other $100 million coming from?

Actually, the bulk of it really is receivable and inventory because we changed our guidance from down $250 million to up $100 million. So there's probably some exchange running through there with rates. But...

Timing and payables.

So there's a bunch of knick knacks. But that's really the biggest factor.

Okay. When you look at that receivable and inventory reduction, could you help us what portion is going to happen in Q3? Because you have the C&F shutdown, you've got some other stuff going on in Q4?

I don't -- Andy, I don't have a split between how it will go in the third quarter and the fourth quarter. Typically, I wouldn't have a comment there.

Okay. And then lastly, back on the Brazilian market, there has been some competitor comment about aggressive pricing directed primarily at you guys. And some of that may be related to your segmentation of the market. What are you seeing with respect to industry pricing?

From our perspective, what I can tell you is for Deere in Brazil, we have had positive price realization both in the second quarter, year-to-date, and in what we anticipate for the fiscal year. Certainly, we've done very well on that market with our market share. Really, we would cite 2 factors for why that's happening. We talked a lot in recent months about the new products we have in that market. So this is probably closer -- we would argue this is as it's expected. As well as we've invested quite a bit into our dealer network there. And so we have a very strong distribution network and good products with a great fit for that market, and I think you're seeing the results of that.

Our next question will come from Joel Tiss.

Buckingham Research. Just on this Brazilian -- a little bit of a disconnect between the farmer profitability increasing and sales flat to down for the year. Can you just give us a sense about -- I'm not asking for 2012 forecast, but do you think we're setting up some pent-up demand for 2012? Like is this more of a transitional issue? Or do you think there's something a little more structural beyond just the financing?

The government subsidies, Joel, is that small and were extremely attractive. And as that market segment has -- so they really weren’t dependent, if you will, on farm income. So there's a very much a disconnect in terms of what would happen with that small tractor segment versus the farm income. The prospects for farm income, as we've said, are good in Brazil that supports a broad array of implements, tractors, cotton equipment, sprayers, sugarcane harvesting equipment. So the prospects remain very good for the market.

Okay. And then just to try to cheat a little bit, I'm going to glue 2 questions together but they're both easy. The percentage of construction equipment that goes into rental? And also just philosophically, why keep more than $3 billion worth of debt on equipment operations when you have more than that in cash?

The rental, excuse me, is about 15% of our Construction business. And over time, structurally that probably could grow as given what has happened with the liquidity crisis you may see some contractors choosing to rent a little longer than they would typically. So that's item one. In terms of the debt level, the reason for keeping cash is in part for liquidity. We're going to -- prior to the liquidity crisis, we had talked about having about $1 billion of cash on our balance sheet for liquidity. As we continue to grow our business overseas, and quite candidly because of liquidity concerns, we're targeting into something more in the range of $2.5 billion to $3.5 billion in cash. And so you should expect that going forward. That said, don't forget, we have been buying back shares, so you're seeing us return cash that way. And additionally, we've had 8 dividend increases since 2004. So we're continuing to reward our shareholders directly with the return of cash in the form of dividends share repurchases, as well as continuing to make the necessary investments to grow our business platform.

Our next question comes from Mark Koznarek.

It's Cleveland Research. A question on the effective capacity impact of the Tier 4 launches in large ag equipment. All things held equal moving into 2012, those large ag Tier 4 problems will be behind us, the launch problems. So what kind of effective capacity increase are we looking at next year, everything else held equal?

Yes. We would say for large ag, specifically in Waterloo, our capacity year-over-year for 2012 would go up in the 10% to 15% range and that's not coming just from the Interim Tier 4 impact. We've also talked about adding capacity there through 2012. And so we'll get some benefit of that capacity increase throughout the year. So those 2 combined would add about 10% to 15%, 2012 over 2011.

And that's Waterloo and East Moline?

That's Waterloo large tractors.

And East Moline basically would be similar?

Well, they would have an Interim Tier 4 advantage. But we're not adding additional capacity there like we are in Waterloo. So I think it's less than...

Is it somewhat less. And then sort of the flip side of that, you're now 7000s and smaller stuff has to transition next year. Are we going to expect to see sort of a hit to effective capacity because of that transition similar to the numbers you just stated here for large ag?

Certainly, you'll have some capacity impact next year as those products transition, so.

Yes. So overall, it could wash. But at least large ag could have some effective increases.

Exactly.

Our final question is from Stephen Volkmann. Stephen Volkmann - Jefferies & Company, Inc.: It's Jefferies. So I think most of them have been answered. But I'll ask corollary to Mark’s, which is on the cost side, I guess, as we look into 2012, it would seem that there are a number of things that have kind of hit us here in 2011 that should go away in 2012. And I'm wondering if we should be thinking about incremental margins actually kind of go and back up again, as we get into 2012? Or do you see enough on the costs front that it's too early to kind of commit to that?

Steve, we're not going to get in to talking too much about 2012 margins. But there are a couple of issues that we have dealt with this year that we certainly wouldn't anticipate next year. R&D going up 17% again. I think we've said that, that we are going to stay at healthy levels but not -- we're not certainly anticipating those sorts of double-digit increases. And so I think it's fair to say, without commenting too much on 2012 that as you look through the analysis, there are some items here that we wouldn't expect to repeat. Stephen Volkmann - Jefferies & Company, Inc.: Just a quick follow-up if I could. You guys have talked a little bit lately about trying to better balance your shorter-term performance, which has been great, on the back of SVA with some longer-term growth opportunities. And I'm just wondering if there is a sort of a strategic shift that we should be thinking about? And if there's some bigger projects out there that we should be starting to think about you guys pursuing that kind of balance you better with longer-term growth?

Well, I would start the answer to that question that as what we've said in prior is we remain fundamentally committed to SVA and the SVA model. And we're going to focus on that, but at the same time, focus on our 2 global growth platforms, which is agricultural and construction equipment. And I think the announcements that you saw this morning is good evidence of our commitment to delivering growth for the future, but at the same time delivering some very, very solid operating results. And so I think that's the kind of performance you should expect from us going forward. We're going to be focused on both aspects of the business, solid performance and solid growth. So with that, we should sign off. Thank you very much.

Thank you all for your interest. And as always, we'll be available throughout today for any follow-up questions. Thank you.

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