Good morning, and welcome to Deere's First 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. Sir, you may begin.

Thank you. 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. Today, we'll take a closer look at Deere's first quarter earnings, then spend some time talking about our markets and the outlook for the remainder of 2012. After that, we'll respond to your questions. Please note that the 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. Additionally, 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 here's Susan.

Thank you, Tony. With this morning's first quarter earnings announcement, John Deere has started 2012 on a strong note. Income and sales both reached new records for the first quarter of the year. It was our seventh straight quarterly record. The improvement was broad-based. Ag and turf had another strong quarter and our other divisions, construction and forestry and financial services, contributed as well. Healthy demand for farm machinery continued to play a big role in our results, but our performance also reflected success executing our ambitious marketing and operating plans. Such execution is especially important right now as we are adding new products and global capacity at unprecedented rates. Finally, our full year earnings forecast has been adjusted upwards and now stands at about $3.275 billion. All in all, it was a solid start to what is expected to be another strong year. You may have noticed the slide deck looks a little different this quarter. We have moved slides we felt were only number updates to the appendix to allow more time for your questions. Now let's look at the first quarter in detail starting with Slide 3. Net sales and revenues were up 11% to $6.8 billion in the quarter. Net income attributable to Deere & Company was $533 million. As we noted earlier, this was the company's seventh consecutive quarterly earnings record. Total worldwide equipment operations net sales were $6.1 billion, up 11% quarter-over-quarter, shown on Slide 4. Price realization in the quarter was positive by 4 points, while currency translation was a negative 1 point. The company outlook is on Slide 5. Second quarter net sales are forecasted to be up about 15% compared with the second quarter of 2011. This includes about 4 points of positive price realization and about 3 points of negative…

Thank you, Susan. Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. [Operator Instructions] Operator?

[Operator Instructions] Our first question comes from Andrew Obin.

Bank of America Merrill Lynch. Just a question on your outlook. You guys guided first to a down Q1 versus last year. It also seems that production was a little bit lower in the Q1 than we were thinking, so more of it is being pushed back into the second half. And then you also guided to lower costs. Yet as I look at the increase, it sort of barely covers the beat and lower costs that you guided to. So why would incremental production in your outlook not result in more earnings?

Well, Andrew, this is Jim. I think one of the key pieces in that whole equation is this $80 million, or in round numbers, about $100 million of headwinds that we're facing on the currency side from a translation perspective. If you -- I think if you look at the increase in physical volume that we've added, after you strip out the FX and you put normalized incremental margin assumptions on that and consider the other headwinds we've talked about and then consider also this, in round numbers, $100 million of translation headwind, it gets -- it seems to be a pretty reasonable outcome where we ended up.

And a follow-up question on construction and forestry. If we go back in the prior cycles, construction and forestry was a much bigger percentage of your revenue and profit as well. Given sort of the ongoing mix change in the company, do you think in several years, construction and forestry can go back to its historic percent of revenue and profitability would be similar to what we saw in the middle of the past decade? Or has the mix changed sufficiently that we should just think about the company being different?

This is Jim again, Andrew. Absolutely it can, and the expectations is that it would. And as you've rightfully pointed out, when you look at the last construction cycle, construction recorded the highest operating margin of any of our divisions. And they would be shooting for operating margins that are very consistent with that going forward.

Our next question comes from Andy Kaplowitz.

It's Barclays Capital. Maybe I could follow up on Andrew's question about construction in one sense, and that is, I mean, you had almost 9% margins in the quarter in what usually is a seasonally weak 1Q, and you didn't change the guidance for the year. So I guess, I'm just trying to figure out why that is. And the incremental margins were also quite good versus what we thought. So any help you can give us as to -- maybe there's a little upside in your guidance now for the year.

This is Marie, Andy. As you think about construction, they will have a phase-in of the iT4-compliant machines over the course of the year. And so you will see the cost of product transitions and the product cost reflected in their cost as we move through 2012. And that's the difference.

Okay, Marie, that's helpful. So just shifting back to ag. You mentioned inefficiencies in the factory in the first quarter. And production was a lot less than you guided. So I'm just wondering how that improves over time. Why did -- 1Q production, why did it look weaker than you guys had expected it to be?

Right. Well, keep in mind, the inefficiencies in the quarter that we talked about with Interim Tier -- again, going back to Interim Tier 4 transition, certainly our combines we're transitioning as well as large tractors, our 9000 Series tractors, we're transitioning during that first quarter. So that's part of what's driving some of those inefficiencies.

In terms of the tonnage change, that's merely just shifts in a variety of products, a little bit less than the first quarter and a little bit more as you move through the year. And that's pretty typical for us. The tonnage numbers, as many of you are aware, are not terribly precise.

So Marie, it's really just timing, you're saying.

Yes, absolutely because we took our full tonnage up for the year.

Our next question comes from Jamie Cook.

Crédit Suisse. Two questions. One, just back to the Tier 4. I just want to make sure I understood you correctly, and it relates to Andy's question in construction. Is Tier 4 now $500 million but you said you'll cover all of it, relative to before you said $475 million and you'd cover a good portion? So I'm just trying to make sure I understand that relative to the comments you made about Andy's -- the margin impact on the C&F business. And then I guess, my other question is you talked about -- just on the combine issue, it sounds like you're taking production up. Is that all happening in the fourth quarter? And how should we think about combine production relative to retail in 2012 now?

Sure. On the first question, Interim Tier 4 costs, as we look -- you're right. We did bump that up a little bit to about $500 million for the year. And as you look at the 4 points of price realization, what we've said is that will more than cover the Interim Tier 4 as well as the material price increases that we're anticipating for the year.

But is that better than what you said last quarter? I didn't think last quarter you were covering it all, so that's a disconnect. I'm trying to -- -- unless I misinterpreted...

It's a little bit of a change but not much.

And so it is better?

It's a little better, yes.

Okay. So just with Andy's comments on why then it's going to -- if you're more than covering it, why is it going to hurt your C&F margins?

We are in production yet on a lot of the construction equipment. That has a phase-in over the course of the year, Jamie. So you're not seeing some of the Tier 4 product cost yet in the first quarter at the same level that you will in subsequent quarters, just simply because we're launching products over the course of the year.

Okay. And then just the last on the combines. Just if you're taking the production up in the fourth quarter and where we're going to produce relative to retail in 2012.

Jamie, we don't have specific fourth quarter public guidance, but it is true that we added combines. And I think you could say that some of those combines certainly would have been added in the latter half of the year.

This is Jim. I think relative to the combine issue, which was yesterday's headline, I think, though, the important thing is that we've reached closure on this issue. We've got the channel where we think it needs to be in terms of used goods, and I think it also shows the type of actions that we will take as a company to make sure that this is a long-term sustainable business. So I think that's the important thing as you look at the combines situation.

Our next question comes from Henry Kirn.

It's UBS. I'm wondering if you could chat a little bit about where you think we are versus normalized demand in South America and Europe.

Well, certainly in Europe from a normal or mid-cycle, while we're continuing to look at kind of a flat to up 5%, we would still be below mid-cycle levels within the company in Europe.

And in South America, as we look to South America, we see a very exciting opportunity as that market continues to grow and as we -- and as Deere individually continues to broaden its market coverage with product and with distribution.

And I think as you look at Europe, I mean, an important point there is, as was said by Tony, we are below mid-cycle. We have seen some strength in that market. As a matter of fact, if you look at tractors, the order book is up 12%; combines, 25%; self-propelled forage harvesters, 17%. And that's all happening in a market where there's still, in our view, a significant amount of headroom vis-à-vis mid-cycle.

And dovetailing with that, can you update your thoughts on the steps you're taking to improve the market share in both those regions?

He's asking about market share. We could not hear you, Henry, but I believe your question was what steps have we taken to improve market share in both those regions. Is that...

Yes, that's right. Update the thoughts on the steps you're taking to do that.

When we -- when you were in Lisbon in the summer, you saw the over 100 new products that have been introduced in Europe to broaden the market coverage in that market. We're continuing to add and strengthen our dealer capabilities. We've added parts capabilities throughout really Europe and far into the CIS. And really, the same is true in Brazil and South America, where we continue to add, again, additional dealer locations. And we've had a very significant broadening of the product line, and that's already been reflected if you look at market shares.

Right. And Marie mentioned the distribution network. And in addition to the product, certainly we've talked a lot about continuing to strengthen our distribution network in Brazil. We would say our distribution actually is very strong. And I think you've seen that reflected in the market share gains. As we brought that new product, we've seen those market share gains. And that's reflective of both sides of that equation, and we'll continue to work on those same concepts in Europe as we move forward.

Our next question comes from Rob Wertheimer.

It's Vertical Research Partners. Just wanted to circle back to inventory. I mean, you talked about inventory receivables. But if you look at inventory on a standalone, it looks to me like your turns were the worst in kind of 15 years, either forward-looking on sales or backward-looking. And I just wanted to make sure you're not having any production hiccups with Tier 4. Anything else that would explain that? Or maybe I've got the arithmetic wrong.

There is absolutely no production hiccups with Interim Tier 4. It has gone very smoothly. But that said, year-over-year, Rob, we have a very different look in the first -- where we ended the first quarter in terms of our production. So it is somewhat difficult to make a comparison because last year, you were in very high production. In the first 2 months of the quarter this year, relatively low levels of production because of the significant turnover that we had in our production on combines and on large tractors.

So a great example of that, Rob, is if you looked at the Harvester Works. Last year, the schedule was very heavy in the first quarter, which would have drawn down a lot of that inventory. This year, we're facing a schedule that's accelerating as you went into the quarter, which means you're building the inventories. And so obviously, when you look at the end point, you get a different equation. But I would definitely underscore what Marie is saying. As a matter of fact, we're not having any production difficulties. And as a matter of fact, we're very, very proud of what we've been able to accomplish with this major number of new products coming off the line and the efficiency levels of which we completed them with.

Okay. I mean, you guys have been great on inventory for a long, long time. It just seemed like an outlier, even relative to the sales ramp. But I hear you. Just one quick follow-up, if I may. Do you have -- I know you don't disclose this quarterly or anything, but the construction mix in geography, it looks like the volumes are back, at least on a quarterly basis, above peak. I know you've gained share and I know you're expanding geographically. I just don't quite know how to think about which of those is, yes, is predominant.

We are still -- we are not even back to mid-cycle volumes in that division.

In the U.S. Okay.

The forestry business, which is 20% to 25% of the business, as we have said, has been stronger and is taking a little bit of a pot. But the construction business, which the bulk of it is still in the U.S., that's been very weak. It's been recovering from an extremely low level, but they are nowhere near mid-cycle.

Okay. It's just a 1Q number, but I get it.

Our next question from Andy Casey.

Wells Fargo Securities. Question on the cadence of the outlook for the remaining 3 quarters in ag and turf incremental margin. You're looking for roughly 21% with the numbers that you gave. Is that more back half-loaded than what we'd normally see in Q2?

No, I think you'll see -- I mean, again, our seasonal shipping in ag and turf is returning to a much more traditional pattern this year versus what we would have seen last year.

Okay. And then on construction and forestry. I think in the last call, some of the muted margin expectations were talked about as being caused by production ramp-up. And I'm wondering if you're seeing an impact from the production capacity expansion in international markets this year or if that's more a '13 event.

Yes, most of that is going to be 2013 event when we look outside of the U.S. and Canada. Of course, we have talked about the factory in India is producing. But it's on relatively low levels at this point, but -- and will ramp up as we go through the year. But again, most of that is a 2013 event.

From a production standpoint. No, obviously, we're incurring costs related to that geographic expansion, which are in fact being reflected in the '12 numbers, and as I would say, vis-à-vis steady state has suppressed them somewhat.

Our next question is from Stephen Volkmann.

It's Jefferies & Company. Actually, I sort of -- I guess, maybe you just answered this, but I was thinking also about all the [indiscernible] that are coming online and some of the costs that are going to be ramping up before you get revenues and so forth. And I guess, I'm wondering, is the margin headwind from that bigger in '13 than it is in '12? And then does it sort of ramp down in '14? Am I thinking about that the right way sort of medium-term?

Well, we, of course, aren't going to get into giving a whole lot of guidance. And as it relates to '13, clearly, we have some of the iT4 cost behind us as you look out at '13. But on the other hand, we'll have still the development cost going forward. But our expectation, of course, would be as you bring these factories online, you're going to start generating revenues to cover some of these expenses. And of course, there are some expenses that are initial start-up expenses that do go away. But the aggregate picture of how that all fits together, I mean, I have to be perfectly honest with you. We don't have a good view of that today that we're willing to share.

Okay, fair enough. I'll ask it again in a couple of quarters maybe. How about -- and maybe a little -- just a little bit of a follow-up in Europe. I'm kind of stuck by -- thank you, Jim, for the color on the order book in Europe. And clearly, we've seen some strong retail numbers over there recently for the past few months, and your order book looks pretty good. So sort of the flat forecast there, I guess, I'm wondering, are you hearing something from the marketing folks that just makes you nervous about the second half, perhaps? Or is it more just we're not sure what's happening and we want to be conservative?

Well, first of all, the outlook is flat to up 5%.

Which has increased from the prior outlook.

And with that, keep in mind, and what Jim was talking to, is our order book. And as we mentioned earlier in the call, of course, with the new products and our drive there in Europe for market share, I think that's just reflecting some of those expectations in terms of our performance versus the overall market.

So you're not calling for a deceleration over there.

No, no, not at all. As a matter of fact, if you look around in the world, I mean, basically we've got all the markets accelerating, sans South America. And so -- and Europe is the same way.

Our next question comes from Robert McCarthy.

It's Robert W. Baird. I wanted to ask about your forecasting for the U.S. and Canada ag market in the context of the discussion about crop receipts, et cetera, and a reversion to more normal yields. But of course, we have an ongoing precipitation issue, particularly in the Upper Midwest but also in Southern Plains. You referred to West Texas cotton. What explicit -- how do you factor that into your forecast? Do you just accept that you can't be a weather forecaster, and so by default at this point in the year, you're going to assume normal yields? Or have you baked something specific into your forecast that could accommodate some pressure on yields because of the low moisture condition that we're looking at?

Rob, at this point, the only weather impact that we have put in the forecast is the shift down in some cotton acreage, and a little bit of increase in corn as a result because of the drought situation that we have talked about in Texas. But at this time of the year, our practice has been to go with the trend yield because there's a lot of variables yet in the weather that can affect that. So you're really looking at what we would consider to be trend yields.

Okay. And I just wanted to make sure that I understood. And just a point of clarification. The answer may be obvious, but as I look at your Slide 13 that details your ag and turf industry outlook by region, the first 5 of the 6 bullet points are the core agricultural business. Would it be fair to say that in your plan, you expect to outperform these industry growth numbers in each of those 5 regions?

Absolutely.

Our next question comes from Jerry Revich.

It's Goldman Sachs. Can you say more about the factors that drove 16% lower production than you expected outside U.S. and Canada this quarter? And I'm looking at Slide 27.

Slide 27, production tonnage...

Yes. Well, the first thing, of course, it's 16% on a seasonally weak quarter for our European operations. And the other issue is we had some production shift that's reflected in the overall tonnage that we moved into the second quarter that's affecting some of that as well. But beyond that, Marie...

There would be a little bit of impact probably from combines out of South America. I think that's well documented. But if you look at the full year forecast for outside U.S. and Canada, it's actually up a little bit.

And did you mention some of that is because of production shift in Europe? Can you say more about that point into the second quarter?

It was just that as we got into the schedule for the European operations, there were some units that were moved from late in the quarter to the following month.

So it's just minor -- so it's really minor timing changes within the production.

Okay. And your sales guidance in C&F implies a slower production increase in coming quarters and typical seasonality. Is that just room for upside? Or any specific drivers that you're looking at?

Again, that reflects iT4 conversions. And remember, you have to shut the line down, then you convert, and then you restart. So you've got some ramp-up through there.

And keep in mind, as compared to last year, in the first and second quarter, we had some increased production as we were moving to the SAP conversion that was right at the end of our second quarter. And so it's really as much a 2011 shift in production as 2012.

Our next question comes from Joel Tiss.

Buckingham Research. So I just wondered if you can give us a sense of what's happening to the farmers' break-even costs on corn and on beans. And I'm just trying to gauge how much of an impact a potential drop in crop prices in 2013 might have on volumes.

Sure. And actually, one thing I would cite is if you look at -- there was a University of Illinois study that was done last fall that kind of looked at expected crop price, our input costs and so on, and it was -- they looked at a 1,200-acre farm and the metric they used is in terms of not so much breakeven but making decent money. So at $50,000 net farm income, corn -- the pricing they had on corn was about $3.70 and soybeans would be about $8.50. And that's very consistent with what we would get from Informa Economics, who is our outside consultant. They would say corn in the $3.50 to $3.70 range, farmers still make good money. And soybeans in the $7.50 to $8 range.

So lots of headroom vis-à-vis where prices are today.

Right. Okay, good. And then is there any number you can share with us on the earnings impact from the lower provision for credit losses in the quarter? Is that material?

Yes. I mean, it was in the $4 million range.

Our next question comes from Ashish Gupta.

Credit Agricole Securities. If we just step back for a second and focus on the long-term, you have 7 new factories and are increasing production capacity at existing facilities. Can you just kind of give us an idea of what you're most excited about in terms of incremental contributions over a multiple-year period?

Well, we're excited about several different aspects of it. What we've said is near-term, one of our largest growth opportunities would be kind of Europe, from an SVA perspective. South America, we believe, has plenty of headroom. And we're seeing really pretty good activity starting to be restored in the CIS regions today. And the CIS is all about large ag for us, just in many respects very, very similar to the Upper Midwest. And generally, it's margins that are very, very consistent with the types of margins that we see in the large ag space in North America, so -- and then, we've, of course, announced these factories in Asia. These are large unit volume markets. I think you're looking at something north of 500,000 industry volume in India this year, but of course, a much, much lower ticket per unit. So there's 6 geographies we're focused on around the world, and each of them holds some very interesting and promising opportunities for us.

Great. And then just a follow-up on the balance sheet quickly. I'm just trying to think about how much incremental cash you guys will have this year to buy back stock. Can you kind of review your balance sheet management and your debt maturity schedule versus your liquidity for 2012?

Well, our cash flow that we expect to generate from operations is about $3.5 billion. We've talked about the fact that we do have some large debt maturities. That's in one of the schedules in the appendix. Our cash management, we will be positioning ourselves with some amount of cash to make sure that we have a fairly smooth transition as we have to repay those. We've got a very large maturity in the second, and then another one in the third quarter. And quite candidly, we have been doing some pre-funding. You see that reflected in our cash balances, so -- but I mean, we expect to manage very comfortably through it. And I have already demonstrated, by virtue of the amount of cash that we have on, that we will have a smooth transition.

Our next question is from Seth Weber.

It's RBC. Sorry if I missed this, but the $100 million of additional cost that you've absorbed in the quarter for start-up and overhead, I mean, did you -- can we talk about how that's going to trend through the year? Do expect that to trend down quarterly as we go through the year? Or is that kind of a steady state for the next couple of quarters?

Well, right now, the way we see it is that, that would be a heavier headwind in the first half of the year than in the second half of the year. So yes, it does trend down in the second half of the year.

Okay, great. And then just to follow up on Latin America. I mean, you guys have done really a nice job taking share there. Have you noticed any kind of competitive response with respect to pricing? Has pricing gotten more aggressive across the industry? Or can you comment on any of that?

I would -- it's not our practice really to get into talking too much about what's going on with the competition. But I would tell you that we had positive price realization in South America last year. We're forecasting positive price realization in South America this year. And so -- and we had it in the first quarter. So obviously, there's a lot of competitive dynamics around the globe. But for us, it's about getting market share and getting it in a sustainable way. And if it's through price, it's not sustainable. So I think the fact that we've gotten this price realization is good evidence that we're doing it the John Deere way and the right way and the sustainable way.

Our next question is from David Raso.

ISI. Really just one quick question. The costs you said in the first quarter for ag and turf, if I add those back, it implies an incremental margin of 33% and an operating margin at 14.3%. That 33% incremental would be the strongest incremental in a couple of years. So I'm just trying to get a feel for how you look at the underlying profitability of ag and turf. If I look at the full year guidance, you're roughly implying still the same idea of about a 15% ag and turf margin, maybe a tad higher. I'm just trying to get to the underlying business when these costs recede. Should I -- I'm just trying to get my arms around, x those costs, you had a core incremental margin of 33% for the quarter. It just doesn't seem that logical, given a tough comp against the combine production a year ago.

Well, I think, for starters, it certainly -- as we talked about with -- the combines were lower in the quarter, but we did have some strength last year. Our large tractor, the 8000 Series tractor, was lower than normal as we went through conversion in January of last year. And there are other products that have very strong margins as well that we're seeing some strength in this year.

But I think if you think about this from a macro perspective, David, I think you are thinking about it more right than wrong. What we've got here is a situation where we're investing a lot around the globe for the future growth of this company. We have these headwinds caused by regulatory requirements. And despite all of that, we're putting up first quarter operating margins on an absolute basis, forget about the incrementals, that are about as good as we've ever had. And so I think we are accomplishing what we wanted to accomplish, which was invest in the growth, invest in what we need to do to bring out a superb iT4 product and maintain very healthy levels of margins. And we've done that, so...

Our final question comes from Ann Duignan.

JPMorgan. One of the questions we get a lot from investors is just Deere's mix going forward. As you invest in the rest of the world and the North America high horsepower and combine market maybe matures, the mix going forward may be a negative. Could you just talk about what your expectations are for the mix of product, maybe the mix of margin? I know you won't get into margin in any way detailed. But any color you could give us in terms of what your expectations are from a mix perspective as you expand globally.

Right. Well, I think I'd start -- first of all, as part of that global expansion, we also -- and then our aspirations, we talk about an aspiration of growing our operating margins from roughly 10% at mid-cycle to 12%. So I think that's reflective of our expectation that mix aside, that we'll continue to improve our operating margins as we move forward. And again, as you look at mix, I think you can also look at, yes, we have growth in some regions where you might be more heavily weighted towards smaller ag. But we also have some good growth opportunities in places like Russia and the CIS, which will have certainly a significant large ag mix, not to mention South America and our growth opportunities there.

And just as a follow-up on your outlook for Asia. Asia is very large region. And within it, we have China and we also have Australia and New Zealand. Can you talk about the fundamentals in both of those regions, one versus the other?

In terms of Australia versus in Asia?

Australia/New Zealand versus China. When you give guidance, you just give Asia, which incorporates both.

Right. Well, primarily -- our Asia guidance is primarily being driven by India and China. And so -- and we talked about on the opening comments that India in the tractor industry this coming year, we're looking at about relatively flat tractor industry after 2 very strong growth years and still at very, very high levels. And then certainly, China continues to see some nice growth. In both cases, government is very supportive of the growth of agriculture. So with that, we thank you for call.

And maybe I'll just summarize quickly. Thank you for joining us today as we talked about an excellent first quarter, excellent prospects for the remainder of the year. And certainly, we've had the opportunity to talk about some of the things we're doing to position ourselves to take advantage of the very exciting tailwinds we have globally. Susan, Tony, I and Christian [ph] will be available for your questions as we move through the day. Thank you.

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