Good morning, and welcome to Deere's Fourth 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.

Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer; Marie Ziegler, Deputy Financial Officer; and Susan Karlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our market and our initial outlook for fiscal 2014. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at www.johndeere.com. First, a reminder: this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and NASDAQ OMX. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants on the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/financialreports, under Other Financial Information. Susan?

Thanks, Tony. Today, John Deere wrapped up 2013 with the announcement of our fourth quarter results. All in all, it was an excellent quarter and marked the end of what CEO Sam Allen called another year of impressive achievement. Fourth quarter earnings were $807 million, the highest ever for the final quarter of the year and our 14th straight quarterly record. The improvement was led by Ag and Turf, which had another strong performance; Financial Services had higher income as well; and Construction and Forestry profit held steady despite rocky conditions in some of its key markets. Results for both the quarter and full year reflected a disciplined approach to carrying out the company's business plans and a continuation of positive conditions in the North and South American farm sectors. For the year as a whole, John Deere had its highest-ever level of sales, earnings, shareholder value added and operating return on operating assets. That last metric, operating return on operating assets, doesn't get a lot of headline attention, but it may be the single-best indicator of our success, delivering profit while controlling cost and asset levels. In fiscal 2013, OROA, as it's known, reached a new high of just under 32%, with inventories at standard cost. It was, in summary, a terrific quarter and year, and it puts the company squarely in position for what we see as another solid performance in 2014. Now, let's take a look at the fourth quarter in detail beginning on Slide 3. Net sales and revenues were $9.5 billion in the quarter, down 3% from the very robust fourth quarter last year. Recall, last year, shipments were unusually high due to Interim Tier 4 transitions, especially in combines, and our factories were running at very high rates to catch up with customer orders.…

Yes, I'll take a minute to recognize Marie Ziegler. As many of you know, Marie Ziegler, Deere's longtime Head of Investor Relations and currently Deputy Financial -- Chief Financial Officer, will be retiring soon after 35 years with the company. Over this time, she has become well known to the investment community as Deere's primary face and voice. She initiated Deere's quarterly conference calls in 1990s and has been a knowledgeable and authoritative presence on them ever since. Indeed, Marie essentially created the Deere IR function and has developed quite a reputation in the field for her efforts to build strong relations with the company's investors. She's also developed employees and capabilities at Deere to sustain our reputation in this field for the long term. This is Marie's final call. She will be missed by all of us, but her many contributions to the company, its investors and to the practice of Investor Relations itself, will no doubt, be felt for years to come. I'm sure Marie's friends in the analyst community join those of us at Deere in wishing her much health and happiness as she enters the next chapter of her life. Thank you, Marie.

Okay. 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] The first question comes from Jamie Cook.

Crédit Suisse. And congratulations, Marie, we'll miss you a lot. I guess, just my question relates, if you could provide a little more color on what your assumptions are? You said within -- when we think about the ag business, we should think about Tier 4 and what the implications are. Can you just give us a little more color on what you assume the costs are sort of associated -- associated with that, as well as what you're assuming with material costs this year? I guess I'll start off with that.

Sure. And as you're aware last year, we did change our guidance some and we're giving an overall cost of sales number. And so, we're no longer giving the details of the moving pieces. I think as Susan went through the list of things to keep in mind in terms of those items that are creating a higher cost, mix would be the largest and then Tier 4 emissions cost would be the second largest. You'll note the absence of reference to material costs, which I think from there, you can, you can infer that the impact is not material enough to mention.

All right. I guess my second question, what struck me about your forecast in a down ag market, the earnings that you're going to be able to put up. So you talked about R&D being down, I think, 3% or something like that year-over-year. Can you just talk about sort of structurally, should R&D continue to come down as a percent of sales with some of the major spend and initiatives over and just your ability to hold up profits in, potentially, a much softer ag equipment market?

Sure. And I think with the R&D reduction, it's fair to note, first of all, Susan had mentioned the reduction in pension and OPEB expense and that does impact R&D to some degree. So that's part of the reduction. And so, I would argue we're really not flat. We're a little below flat, but closer to that if you take out the impact of the pension OPEB. But it does reflect our focus on continuing to maintain the cost, to your point, as we move through Final Tier 4 now and as we -- 2015, we have a significant number of products coming in as well. But as we continue to move through that, it would be fair to expect, all things being equal, to start to see some reduction in R&D. Of course, that's assuming there aren't other additional opportunities in -- in new products, those sorts of things.

Chime in to that, when we look at our R&D spend, Jamie, we're really looking at the long term and the opportunities and we're investing for growth. And while of course, depending on business conditions, you're going to be very mindful of that, we really have our eye on the long term when we consider that. You shouldn't really look at a near-term market condition per se and correlate that to the R&D spend because the lead times and the investment horizon is much longer.

Okay. And congrats, Marie.

Thank you.

The next question comes from Adam Uhlman.

It's Cleveland Research. I was wondering if we could start with the revenue forecast for the global ag markets with -- most of the market's forecast down 5% to 10% or so, but Deere's revenues down only a little bit less than that. The price realization outlook does look like that's going to be easing as the year progresses, with pricing 3% for the company going down to 2% for the year. So I was wondering if you could walk through some of those moving pieces.

Yes. Keep in mind that the industry guidance would not include, you pointed out pricing, so as we're forecasting 2 points of positive price realization for 2014, of course, ag would be contributing to that. So that wouldn't be included. Market share gains and expectations also would not be included in those industry outlooks. The other thing, and Susan highlighted that, is keep in mind South America's only focused, in terms of our outlook, only referring to combines and tractors. And so for Deere, there is significant opportunity, as we're a full product offer -- have a full product offering in South America, things like sugarcane harvesters, planters. Susan also mentioned the Deere-Bauer planter, which is localized in Brazil now, sprayers that we've recently localized. So we have a lot of opportunity beyond that there. And of course, CIS and Asia are not numerically represented. So those are a few items that cause some disparity between the industry outlook and the Deere guidance.

Okay, got you. And then, Tony, could you also address what the order book looks like right now in total and also for the large ag products, please?

Yes. Most of the commentary we would have would be around large ag, in particular. As we look at -- the one most -- or a couple that most are focused on are combines and large tractors. And the early order program for combines, keep in mind it's a little hard, because of some of the timing differences in our 2013 and 2014 early order programs. We had a much earlier start this year as part of our Final Tier 4 transition, but what we'll tell you is combines today are down year-over-year on orders. That's reflected in our outlook. If you look at large tractors, however, it's still a very, very strong order book. It is open through the end of May today. And so as you look at 8R tractors, our availability on 8R tractors is out to basically early June. This year on the wheel tractor, last year that would've been around April time frame. And then if you look at track tractors, our 9R tractors, again on the wheeled variety, availability is March this year of 2014. Last year, we would've been in the February time frame. So both of those are running a little ahead. Track tractors, conversely, are about a month or so lighter than where we were last year. So, 8R track availability in April versus May last year and then 9Rs are February versus May of last year. But still, overall, a pretty strong order book as we look out into, especially the first half of next year.

The next question comes from Rob Wertheimer.

It's Vertical Research Partners. So let me just see if I could follow up on that. So it seems as though your more cautious outlook on industry volumes next year is a little bit more driven by assumption than it is by orders on the ground, unless you've got production cuts embedded in those longer lead times year-over-year. Is that correct or is the combines down enough to offset that?

No, you would be correct. And as we talked about tractors, you would have -- if you looked at a numeric basis, you're more apples-to-apples, if anything, you have a little bit higher volume in terms of numbers of tractors in the 2014 order book versus the 2013. So it actually would be the opposite on tractors.

Yes, perfect. And then can you walk through a little bit, just the timing of pricing as you go from Tier 4 I to Tier 4 Final, especially in Europe, where over at Agritechnica, I believe some people have sort of engines stockpiled, both large public competitors and smaller ones. And then I think you've done a stub pricing on combines starting in November for the -- the old tier, but not -- can you kind of walk through when you started raising pricing? And then I assume as your volume outlook for unit sales fades throughout the year, what is offsetting is -- that is the pricing. So I just wanted to see if you could go market-by-market, when that pricing kicks in.

Yes, as you think about the pricing, certainly, you're right, we did. As we started our model here, we did have some stub price, some lighter price increases on the Interim Tier 4 product that we're producing ahead of the transitions. And then we will have...

That starts in November? Sorry.

Pardon me? Yes, that would have been effective in November, on combine. And then when we begin our transition in January and start shipping Final Tier 4, of course, there will be a bit of another bump in pricing with the Final Tier 4 product. Similar situation with the 8R tractors. You have a smaller price increase beginning in November on the IT4 product. Again, the 8R, as you might recall, transitions in April time frame. 7R is a little less impacted, because it's similar to combines, it's transitioning in January time frame.

But remember that the price increases that are associated with the Final Tier 4, that with the compliance, are not included in price, because we consider that volume, because you're getting something different or new with that. And so it is all stripped out and re-classed into volume. So you won't see that in that 2% number.

No, for sure, Marie. Are you able to say on Europe, I don't know whether you're going to go over the new emissions tier in January or more like on average, July or August, September?

Europe is a -- the primary market in Europe is a smaller horsepower. So that's really not the first phase of Final Tier 4. I think, I can't remember what it's called in Europe, Stage 4 or something like that, but that's really a 2015 now phenomena. Yes.

Yes, exactly. And to your point, though. Keep in mind, in Europe, it's based on when -- the effective date is based on when the engine is produced, not when -- in the U.S., where it's based on when the equipment begins final production. So there is a little bit different strategy in terms of how you plan for those transitions for Europe versus the U.S.

I probably should -- I think I said smaller market, I should've said lower horsepower tractor.

Lower horsepower.

The next question comes from Stephen Volkmann.

It's Jefferies. Marie, I think you're the first person I met in 1998 when I started covering this group, so I appreciate all of your insights.

Wow. Thank you.

So, on to business. I'm wondering if we could focus just a little bit on Brazil. I'm curious if you think that the market share gains in ag that you've had down there will continue or do you sort of reach a balancing point at some point? And then maybe on the construction side, how much do we think we'll actually get out of those plants down there in 2014?

Sure. And the answer to the first question is specifically related to tractors in terms of market share. Absolutely, we believe we'll continue to gain traction and gain market share in that market. We continue to localize product. We've talked about the 8R tractor will be localized by the end of 2015, but as we continue to leverage that dealer distribution, as we continue to leverage our full product offering that we have available in-country, we fully expect that, that market share trend will continue. As it relates to Construction and Forestry, of course, as with any new factory, it will ramp up a little slower. But in terms of importance for Deere, keep in mind that this is also the first full year that we'll have our distribution in place in Brazil. So as you look at the sales increase for Construction and Forestry, certainly you're beginning to see, and I think Susan mentioned in the opening comments, we're beginning to see some benefit from those investments like Brazil, of course, our China facility. We export a significant portion of that into the Russian market, so we'll see some benefit there. And then, of course, forestry starting to recover outside of the U.S. and Canada as well. But certainly, we'll begin to see some benefit from those operations.

Okay. And then, I guess, my related follow-up. There seems to be quite a bit of confusion about the availability of FINAME financing in various end markets down there in 2014. Do you guys have any intelligence on that?

Yes. At this point, we still feel that the FINAME program will continue to be very supportive to sales. I think there was some confusion or some concerns around a recent announcement that was made that's limiting a bit of the 2013, the remaining 2013 financing that's available. Really, as we look at that, it's -- our view is that it's really regulating kind of that year end process as they transition to the 2014. What's happened is that under the -- there's 2 ways you can apply for that financing. Under the conventional application process, which is a little bit longer term, but you also have longer lead time, that basically was suspended. You had until the end of November to deliver product. But there's still the opportunity to get that 3.5% interest rate through the simplified application process. So it's -- the funds are still available. As you look out into 2014, maybe more to your question, we fully expect that there will be a FINAME program in place at the beginning of 2014. While nothing specifically has been announced, most are expecting that, that interest rate will increase. Our best estimate is somewhere in the 4.5% to 5.5% interest rate versus the 3.5% this year, or in the back half of 2013. But again, continue to believe that it will be very supportive for equipment sales. And that is -- it's a good point. And that is all fully factored into our outlook.

The next question comes from Ross Gilardi.

Bank of America. I was just wondering, can you elaborate a little bit more on Europe, on the back of Agritechnica and sort of demand levels there? In your forecast, a little bit weaker outlook for 2014, and any color on the U.K. versus other parts of Europe or -- versus Scandinavia, for example?

Sure. I think generally speaking, again, you're -- we are looking for the market, the industry, to be a little softer and it's really reflective, I think, overall, as you look at lower farm income as a result of the lower commodity prices that certainly, that's still at very strong levels and very supportive levels, but year-over-year, it would be down somewhat. Livestock margins, of course, will benefit from those lower commodity prices. So you're seeing some strength there as well. As you look at some of the moving pieces. Certainly, the U.K. we would expect to see some recovery. As you might remember, 2013 was a down year on demand in the U.K. as a result of some of the weather impact. They had some very wet, both harvest of 2012 and into the planting season of 2013. Actually, seeing some recovery in Spain as well. Conversely, you're seeing France, one of our larger markets there, you're seeing a little bit of weakness there. Again, following a very strong 2013. So still a good level, but seeing a little bit of weakness as we go into 2014 year-over-year.

And just -- I'll just add that France actually is the largest agricultural equipment market in the EU 28. So as they go, that does have an impact on the overall.

Okay. And then just on Construction and Forestry, I mean, clearly you've managed your profitability very well and your working capital, but you seem to be going into 2014, as with others, on a somewhat weak note from a top line perspective. So aside from the different macro indicators and so forth, what gives you the confidence in the construction outlook to call for 10% growth at this point?

Well, I think as we mentioned before, certainly as you look at the U.S. markets, U.S. and Canada markets, and look at the underlying fundamentals, they are much improved as we go forward. You look at things like GDP forecasted at 2.5% versus the 1.5% in '13.

If you can call that much improvement. It's improved in the right direction.

Yes, but it's improved, in the right direction. Housing starts being up yet again in the forecast for 2014. You're starting to see some site development financing, while not picking up, you're not seeing that continuing to drop off. So you have the underlying fundamentals. But again, keep in mind, as we look at that up 10%, that also is reflecting some strength outside of the U.S. and Canada as well. As we continue to invest in those businesses, we're starting to see that pay off in sales.

And the fact that we're able to build some demand as opposed to reducing inventories, which we did do in 2013, so the combination collectively gives us an up 10%.

The next question comes from Eli Lustgarten.

Longbow Securities. And obviously, Marie, we've had a long relationship, I'm going to miss you an awful lot. I wish you the best.

Thank you. Likewise.

Can I get 1 clarification? With the sale of John D., the landscaping or the portion of ownership in the 2014, you took a $45 million impairment charge in the fourth quarter, so it's about $0.08. Is there is a gain that's going to be associated with the $300 million that you're going to get in your 2014 forecast? You've embedded -- you said it's a part of it, but is there a gain associated with that $300 million?

No.

No.

No, there would not be.

No, even though the fair value of it -- of what you own is $80 million, implying it's worth $120 million, which is the...

The $45 million would reflect what the fair value is based on the terms of the agreement.

Yes, so there would be no gain on the $300 million that you're getting?

Correct.

And now can we talk a little bit of the outlook, I mean, the biggest change that happened on Friday night was the ethanol ruling from the -- on the National Fuel Standard to reduce the amount of corn ethanol that's going to be likely for 2014. And that's going to raise the carryover somewhat materially, if it actually goes through. Have you embedded that into your forecast and your outlook for next year?

Absolutely. That was done as -- actually even though it was leaked in October, the rumors and the expectations had been in play long before that. So that is fully factored into our outlook.

So you expect this [indiscernible] -- can you talk about -- I mean, the profitability of Ag was far higher than the guidance we got initially. We were 15%, you came in at 16% with a very, very strong fourth quarter. Was that just strictly volume going -- volume and pricing going through and the difference and decline to 15%, the same thing is the changes that you gave us? Was there anything else happening in the quarter that gave us that strong profitability?

Again, I think as you look, certainly you had production costs, were, as you look at the fourth quarter, price realization was the biggest piece we did. SA&G was down year-over-year in the quarter as well. So I think, kind of the spending, price and spending were the biggest impacts.

We came in a whole point better on the price than what we would have originally projected.

Eli, on the John Deere Landscapes, you're right that there's no accounting gain. But I want you to understand that, economically, it was a good decision for us.

I know, absolutely. I just didn't know whether the accounting gain is embedded in the guidance that you gave us. And the 9% margin in construction is due to the higher volume, I assume?

Largely driven by better volumes, absolutely.

We have a little more favorable mix and an issue this year, so -- but a little better mix, it's primarily volume.

The next question comes from Nicole DeBlase.

Yes, it's Morgan Stanley. I was hoping you might be able to talk a little bit about the -- within the 5% to 10% decline forecast within U.S. and Canada ag, what is the outlook for large versus small and medium ag?

Yes, I think certainly as we've mentioned in the opening comments, you're looking at a greater decline closer to, again, lower double-digits in the large ag and some strength in small ag.

Okay. Okay, got it. And then can you just give a sense of how used equipment inventory is tracking on the ag side?

Sure. As you look at used, again, I think the 2 categories most are asking about would be large tractors and combines. As you look at used equipment levels in the quarter on combines, actually, inventories dropped very considerably during our fourth quarter, about a 25% drop from July to October. So that's been a very good sign. Used tractor inventory on the flip side is up and certainly, that's reflective of the higher demand level we've had on new equipment. But we are seeing higher levels of tractors and certainly are focused on that and monitoring that closely.

But pricing on used tractors is actually up single-digit and turnover continues to be very good. Combines are down a little from very high levels, but still at good levels in terms of price.

The next question comes from Mig Dobre.

Robert W. Baird & Company. Marie, first, congrats and good luck going forward. I guess, the first question for me was kind of a housekeeping question. Looking at JD Landscape, can you help us with the operating income impact on 2014? You helped us with the revenue.

There's not much of an impact. I would -- you can just consider it a neutral. They were profitable, but it's -- but you will -- the absence of the impairment is probably a more important item.

So it's -- just think of it as slightly accretive going forward.

Yes.

Okay?

Okay. Okay. And sort of in the same vein, looking at Financial Services, income is expected to increase slightly, about $35 million versus '13. But ag volumes, generally speaking, are challenged. I guess I'm wondering, what exactly is it to drive this growth next year in Financial Services?

The portfolio is up significantly. We're up about $5 billion this year. And so, you get the benefit of having that larger portfolio for the full year.

So you're not really expecting a contraction in the portfolio, given lower volumes as the year progresses?

Correct. Correct. But expect that there -- and next year, we're actually projecting further growth in the portfolio.

I see. Then the last question for me would be one on pricing.

Just a reminder as you think about portfolio...

I'm trying to sort of equate your expectations for pricing in '14, given that most ag end markets are expected to actually see decline in volumes.

Well, remember when we talk about a portfolio for credit? The notes are written with 5-year lives and I think our average life is in the range of 2 to 2.5 years. So, one year's activity in terms of sales will impact that portfolio for up to 5 years. Does that help?

It does. And I don't know if you caught my last one on pricing. I'm wondering what the dealer's perspective -- in your conversations with your dealers, how are they thinking about their ability to push through the price increases that you're talking about?

Well, certainly, that would be -- as we set our pricing and so on, that would be one of the factors we're considering. So it's all included in our outlook. And so that up to 2 points of price realization in the year is what we would anticipate being able to do.

And we just had a large number of new product introductions we believe will be adding significant value into the market and we think that will help. That certainly helps support our ability to get that price realization.

The next question comes from Seth Weber.

This is actually -- it's Daniel in for Seth, so RBC Capital Markets. So I guess my question is on pricing. This year it's up 2%. I guess it's a little lower than prior year. So I guess, is this kind of a function of mix, with less big equipment or are markets getting...

Yes, that would certainly have a -- play a very big role in it. As you see the large ag softening a little and small ag stepping up a bit, you don't necessarily have the same impact on pricing. And a lot of new product introductions over the last year really were targeted at large ag. And again, product introduction schedules have been driven by the compliance with Final Tier 4 emissions. So you'll see a round of activity in the coming year or 2, related to that smaller thing that will also -- smaller products that will help support pricing there as well. Tony, do you have anything to add?

I do not.

Are, have you -- have markets been getting more competitive at all as well or it's just really the mix?

I think it's mix. I wouldn't say that the markets are ever not competitive.

Okay. And I guess, one quick follow-up, just on the bonus depreciation. Is this kind of baked into your forecast or...

Yes. We certainly, as we're looking into next year, our base case would assume that the bonus depreciation does not get renewed. And on Section 179, just -- obviously, there's -- as you look at Section 179, we would believe there is a better potential that you'd see some extension there. Our base case, given the uncertainty in, at least in our outlook, is based on kind of in the middle ground, where it would be extended, but it would be at the 250,000 versus the 500 this year. Okay, next caller? And this will be our last question.

The final question comes from Andrew Kaplowitz.

It's Barclays. Marie, congratulations and enjoy.

Thank you, Andy.

So can you talk about your cash generation in the quarter? It was way higher than we modeled. I know there was some noise, I guess, from JD Landscape in the accounting, but is there anything you did differently in the quarter? Is it just lower inventory and just better working capital management when it comes down to it?

It's actually, we had better income, you have the impairments, which actually further helped, because those were noncash charges, accrued taxes came in a little lower and payables also were favorable. And those are really the big items affecting the cash flow generation in the quarter, that's versus our expectations.

Okay. So, Marie, I want to try and ask a share repurchase question. And I know Tony is going to not want to give me an answer, but I'm going to ask it anyway. Can we think at least that your recent share repurchase behavior is more representative of what we might expect going forward versus your cautiousness at the beginning of FY '13, despite what we've seen from corn prices lately and continued government uncertainty, like how do we look at what was a very strong 4Q, I thought, in repurchases?

I think as we got confidence and certainly saw the cash flow coming in better in the quarter, you saw us able to respond better. In any given quarter, it's very difficult to read anything into our future plans. I'm going to tell you, in the first quarter, you can expect that we're going to typically be fairly cautious, because remember, we are big users of cash in that first quarter. So you're going to want to look at our activities over the course of the year. This year, we returned 50% of our cash through dividends and share repurchase, and over the last decade, we've been running more at like 55% to 60%. We are very proud of that track record and we've always said that we're interested in being known as a company that has a long history of making dividend increases and we've kept our word on that. It's not necessarily every year at a fixed period, but consistently. And then secondly, we very much view share repurchase as a way to return our residual cash, and looking at the cash projections, there would be some hope for those of you cheering on share repurchase, that you'll continue to see that.

So Andy, I would add that the receipts from the sale of John Deere Landscapes, $300 million in cash, that is something that you should expect us to use for share repurchases over the next 12 months as well.

Yes, and that is not in our cash flow number because that's cash generated by investing activity, so that would be okay. And with that, we're going to need to wrap up. So I'm going to just sign off on my 83rd conference call. Thank you, all.

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