Tony Huegel - Director, IR J. B. Penn - Chief Economist Joshua Jepsen - Manager, Investor Communications Rajesh Kalathur - CFO.

Timothy Thein - Citigroup Global Markets Andy Casey - Wells Fargo Securities Jamie Cook - Credit Suisse Securities Eli Lustgarten - Longbow Research Jerry Revich - Goldman Sachs Lawrence De Maria - William Blair David Raso - International Strategy & Investment Group Joe O'Dea - Vertical Research Partners Ann Duignan - JPMorgan Seth Weber - RBC Capital Markets Robert Wertheimer - Barclays Capital Michael Shlisky - Seaport Global Securities Mircea Dobre - Robert W.

Baird Steven Fisher - UBS Securities Joel Tiss - BMO Capital Markets.

Good morning and welcome to Deere & Company's Third Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question and the answer session of today's conference. I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations. You may begin..

Thank you. Also on the call today are Raj Kalathur, our Chief Financial Officer; Dr. J. B. Penn, our Chief Economist; and Josh Jepsen, our Manager Investor Communications. Today, we'll take a closer look at Deere's third quarter earnings, then spend some time talking about our markets and our outlook for the remainder of the fiscal year.

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. As a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company.

Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.

This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties.

Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.

This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America or GAAP.

Additional information concerning these measures including reconciliations to comparable GAAP measures is included in the release and posted on our website at www.johndeere.com/earnings under other financial information.

Josh?.

Thanks Tony. John Deere today reported solid financial results for the third quarter and did so inspite of the continuing impact of the global farm recession and difficult conditions in the construction equipment sector. All of Deere's businesses remained profitable for the quarter and earnings per share was slightly higher than last year.

Operating profit for Ag and Turf division and for the equipment businesses overall was above last year's levels even though sales were down nearly $1 billion. Our results were helped by the sound execution of our operating plans, the impact of a broad product portfolio and our success keeping a tight rein on costs and assets.

Now let's take a closer look at the third quarter in detail beginning on Slide 3. Net sales and revenues were down 11% to about $6.7 billion. Net income attributable to Deere & Company was $489 million. EPS was $1.55 in the quarter. On Slide 4, we see that worldwide equipment operations net sales were down 14% to just under $5.9 billion.

Price realization in the quarter was positive by two points. Currency translation was negative by two points. Turning to our review of our individual businesses, let's start with agriculture and turf on Slide 5.

Net sales for the division were down 11% in the quarter-over-quarter comparison with the decrease primarily due to lower shipment volumes in the United States and Canada. Also affecting sales was the negative impact of foreign currency exchange. Operating profit was $571 million. Ag and turf operating margins were 12.1% in the quarter.

The gain on the sale of a partial interest in SiteOne landscape supply contributed nearly two points of operating margin in the quarter. Even excluding the SiteOne impact operating margins were above the levels of last year's third quarter. Before we review the industry sales outlook, we are pleased to welcome Deere's Chief Economist Dr. J. B. Penn.

He will spend a few minutes sharing his thoughts on the state of the global Ag economy.

J.B.?.

Thanks Josh. I would begin with a bit of context that might be useful as we ponder the outlook. Slide 6 shows the strong tailwinds that now drive the global agricultural economy.

Major changes in agriculture and food markets began occurring sometime around the turn of the century and that ushered in a dozen or so unparalleled years characterized by strong demand growth, record high prices in farm incomes, food price spikes, expanded investment and innovation and increased trade. A convergence of forces was responsible.

Global population growth, widespread global economic growth especially in emerging market and developing countries, rapid urbanization and biofuels. Now in 2000, the UN was projecting that the population would grow from 6.1 billion in that year to 9.3 billion by 2050.

Today that projection for 2050 is 9.7 billion, so that’s another 2.4 billion from today’s 7.3 billion people. Although having slowed somewhat, the global expansion continues especially across much of the developing world bringing millions more into the middle class and enabling ongoing improvements in diets.

On urbanization, we passed the 50% mark of population sometime around 2010 and that is now expected to approach 70% by 2050 with implications for food production and trade. Now Slide 7 reflects global Ag as a whole showing the production and consumption of all global grains.

Now perhaps the most noteworthy point of this slide and one often overlooked with all the focus on supply, acreage, and yields and that is the persistent consumption growth. Consumption remains very strong, still rising steadily year-after-year and it has risen without fail every year since 1994, 1995 even including the great recession of 2009.

Now fuelled by earlier high prices and after four consecutive great growing seasons worldwide, commodities supplies now are fully adequate to meet all needs. Prices of course have moved off the previously high levels and farmer margins have narrowed. Slide 8 provides more details showing global stockholdings and the supply to use ratio.

While carryover stocks have reached levels of 15 years ago and physical quantities it is important to remember that we are now consuming one third more grains, so the supply use ratio is the key indicator.

While it has moved above the average of recent years, it remains in a sensitive area and especially so when viewed with Chinese grain stocks excluded. Notably the Chinese are thought to hold about 45% of the global stocks and the supply use ratio actually has ticked down the last couple of years when the Chinese stocks are excluded.

Now Slide 9 illustrates that even with abundant supply the production consumption balance still can shift rather quickly. Any significant production disruption will tilt the supply use ratio downward and prices will immediately move higher.

The recent price movements in response to reports of relatively minor weather events certainly highlighted continued sensitivity. You will note from the slide that both corn and soy futures were trading in a rather narrow range in the first four months of this year.

Then we saw some reports of adverse weather in Brazil and Argentina in April prices quickly reflected the uncertainty brought. Corn moved almost $0.90 bushel higher, soy moved $3.25 a bushel higher that's an increase of 25% for corn, 36% for soy.

Then by late June, the South American weather conditions abated followed by the early July USDA WASDE report, indicating larger acreages of both corn and soy. The weather premium quickly disappeared from the corn price and it was reduced per soy. Now just for reference, the U.S.

drought in 2012 reduced corn yields 22% below trend pushing ending stocks to barely 800 million bushels and prices to new record high.

But this year a corn yield reduction of only 4% would have been sufficient to reduce ending stocks to $1 billion bushels and push prices to $5 per bushel or higher, a further illustration of the sensitive supply utilization balance.

Now there was some expectation that farmers would reduce acreage in response to the softer prices as we came into the Northern Hemisphere planting seasons. On Slide 10, we know that despite the softer prices farmers worldwide did not reduce acreage.

Now in the United States farmer supply response this year was influenced by market prices of course which provided a paired, but still positive margin, but they were also influenced by farm program subsidies, revenue insurance and production cost decline.

For example of the subsidy, the agricultural program ARC County forecast of 2015 payments for Illinois is $0.37 per bushel on corn-based acres and $0.98 per bushel on soybean based acres. So as a result of this combination, U.S.

farmers this year expanded planted area for all major crops except wheat illustrating continued profitability despite softer prices. Now we also expected a similar reduction in other parts of the world, but we noted there that farmers supply response was influenced largely by currency values and also some policy shifts notably in Argentina.

And this crop year major exporters expanded grain and oilseed area all around the world and grains and oilseeds were up 3.7% in South America. As an example Brazilian farmers saw corn prices in reais of $5.24 per bushel in September 2015 compared to $3.43 per bushel a year before indicating that it was still very profitable to continue to expand.

Now Slide 11 speaks to the financial condition of the U.S. farm sector. Overall the farm sector balance sheet remains strong. Farmer debt has been well managed. The financial indicators are still solid.

It was not until a 2000 that farm sector equity reached $1 trillion, but then it took only 10 more years to add second trillion dollars and five years later we have added another $0.5 trillion. Now a major part of that balance sheet of course is farm land and USDA forecasts land prices to decline in 2016, crop land to decline 1%.

This is the first time since 2009 and only the second time in almost three decades. Now Slide 12 summarizes the situation across the global Ag sector. As I noted, supplies are fully adequate, the risk premium have been erased from the grain market.

We saw very little reduction coming into the year in response to the lower prices and that was because of the aberrational forces at play, the subsidies, the risk measures and also currency values which boosted commodity prices and we're in the fourth consecutive favorable weather year.

So adding all of those things together barring adverse weather events, little near term improvement in Ag market conditions is anticipated but we would note that the long term drivers, population growth, income's growth and urbanization are still intact. Now Slide 13 pertains to the U.S.

Ag sector and we note that farming is still profitable despite softer prices as evidenced by the continued expansion of planted acres this year and financial conditions across the sector remain solid. There is some individual farmer stress to be sure but no widespread stress is yet evident.

And finally Slide 14 lists some key factors that are worth watching in the coming months. And in the short term of course weather is key. We know that demand is strong. We now know that supply depends upon the weather so it’s still weather is the major market disruptor and it's still one season at a time.

Attention now will turn from North America to the southern hemisphere as the planting growing season gets underway there in late September and October we’ll continue to watch that until next spring in the northern hemisphere when we will start focusing on planting and growing conditions here.

And over the longer term, I would just note that any of these geopolitical hotspots that could erupt and become a drag on global GDP would be a negative.

Lots of other things to watch include relative currency values and the political situation in several countries, central bank behavior all over the world and so I would just conclude by noting that after a dozen years of unprecedented prosperity planting, commodity price, food price and trading patterns are now stabilizing.

A new commodity price trading range with favorable weather is emerging and weather remains the major commodity market disruptor. The outlook is still one year at a time depending upon the weather. I will now turn the call back to Josh..

Thanks J.B. Our 2016 Ag and turf industry outlooks are summarized on Slide 15. You’ll note there are no changes from our previous forecast. Low commodity prices, weakening farming income and elevated used equipment levels in the U.S. and Canada are continuing to pressure demand for farm equipments especially high horsepower models.

We expect industry sales in the U.S. and Canada to be down about 15% to 20% for 2016 with sales of large Ag equipment down 25% to 30%. The EU 28 industry outlook remains flat to down 5% due to lower crop prices and farm incomes as well as persistent pressure on the dairy sector.

In South America industry sales of tractors and combines are expected to be down 15% to 20% in 2016. This is a reflection of the downturn in Brazil and other commodity driven markets in the regions. Shifting to Asia, the industry sales outlook continues to be flat to down slightly.

This is due in part to weakness in China partially offset by improving conditions in India where the monsoon rains have been higher than normal. Turning to another product category, industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat to up 5% in 2016, again no change from our prior forecast.

Putting this altogether on Slide 16, fiscal year 2016 Deere sales of worldwide Ag and turf equipment are forecast to be down about 8% including about 2 points to negative currency translation. This is unchanged from the previous forecast.

Our forecast for the Ag and turf division’s operating margin is now about 7.7% for the year with an implied decremental margin of about 15%. Now let focus on construction forestry on Slide 17. Net sales were down 24% in the quarter and operating profit was down 58% due mainly to lower shipment volumes and an unfavorable product mix.

The division’s decremental margin was 20%. Moving to Slide 18, the economic indicators noted at the bottom of the slide although down somewhat from the previous quarter remain positive. Notwithstanding these positive signals the market demand for construction equipment continues to soften.

Among the factors contributing to the weakness, conditions in the oil and gas sector continue to be slow with the impact most pronounced in the energy producing regions of the U.S. and Canada. Contractors are less apt to replenish or grow their machine fleets when faced with uncertain markets.

Rental utilization rates continue to decline leading to a reduction in fleet sizes and higher levels of used equipment. Also housing starts in the U.S. for single family homes which require more earth moving equipment remain well below the long-term average.

As a result Deere's construction and forestry sales are now forecast to be down about 18% in 2016. Currency translation is forecast to be negative by about 1 point. The global forestry market forecast remains down 5% to 10% primarily as a result of lower sales in the U.S. and Canada. C&F's full year operating margin is now projected to be about 4.1%.

The implied decremental margin for the year is about 31%. Let’s move now to our financial services. Slide 19 shows the annualized provision for credit losses as a percent of the average owned portfolio which was 24 basis points at the end of July. This reflects the continued excellent quality of our portfolios.

The financial forecast for 2016 contemplates a loss provision of about 23 basis points, unchanged from the previous forecast. The provision remains below the 10-year average of 26 basis points and well below the 15-year average of 39 basis points.

Moving to Slide 20 worldwide financial services net income attributable to Deere & Co was a $126 million in the third quarter versus a $153 million last year. Lower results for the quarter were primarily due to less favorable financing spreads, a higher provision for credit losses and higher losses on lease residual values.

The division’s forecast net income attributable to Deere & Co remains at $480 million for the year. Slide 21 outlines receivables and inventories. For a company as a whole receivables and inventories ended the quarter down $764 million.

We expect to end the year with total receivables and inventories down about $500 million with reductions coming from both divisions. Field inventory to sales ratios for new large Ag equipment are expected to end the year in line with 2015 year end levels which is consistent with our previous forecast.

C&F inventory and receivables to sales ratios are forecast to end the year roughly in line with last year’s levels as well. Our 2016 guidance for cost of sales as a percent of net sales shown on Slide 22 is about 78.7%. When modeling 2016, keep these unfavorable factors in mind, an unfavorable product mix and engine emission cost.

On the favorable side, we expect price realization of about 1 point, favorable raw material costs lower pension and OPEB expense and lower incentive compensation expense. Now let’s look at a few housekeeping items. With respect to R&D on Slide 23, R&D was down 2% in the third quarter.

Our forecast calls for R&D to be down about 1% for the full year including about 1 point of negative currency translation. This is consistent with our previous forecast. Moving now to Slide 24. SA&G expense for the equipment operations was down 10% in the third quarter.

Most of the decline was attributable to incentive compensation, commissions to dealers, pension and OPEB and currency translation. Turning to Slide 25, our 2016 forecast contemplates SA&G expense being down about 5% with incentive compensation, currency translation and pension OPEB accounting for about 6 points of the full year change.

On Slide 26, pension and OPEB expense was down $53 million in the quarter and is now forecast to be down about $210 million in 2016. On Slide 27, the equipment operations tax rate was 31% in the quarter and is now forecast to be in the range of 29% to 31% for the full year. Slide 28 shows our equipment operations history of strong cash flow.

Cash flow from the equipment operations is forecast to be about $2.1 billion in 2016. The company's fourth quarter financial outlook is on Slide 29. Net sales for the quarter are forecast to be down about 8% compared with 2015. This includes about one point of price realization and favorable currency translation of about one point.

Turning to Slide 30 and the full year outlook, the forecast now calls for net sales to be down about 10%. Price realization is expected to be positive by about one point, with negative currency translation of about two points. Finally our forecast now calls for net income attributable to Deere & Company to be about $1.35 billion for the full year.

In closing, Deere continues to perform well in the face of challenging market conditions and this is particularly true in relation to previous farm recessions. Our performance in the third quarter and for the year-to-date underscores our success developing a more durable business model into wider range of revenue sources.

At the same time, we are continuing to look for ways to make our operations more profitable and efficient by seeking out further structural cost reductions. All-in-all, we remain confident in the company's present direction and believe Deere is on the right track to deliver significant value to its customers and investors in the years ahead.

I will now turn the call back over to Tony..

Thanks Josh. Now we are ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. However as a reminder in consideration of others and our hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue.

Operator?.

[Operator Instructions] Our first question is from Timothy Thein from Citigroup Global Markets. Your line is open..

Thank you. So Tony, some pretty big moves during the quarter that you alluded to in both corn and soybeans, I guess, or grains in general.

But I'm curious, what you're hearing just in terms of overall sentiment from your dealers in North America, and how that's kind of influenced farmer decisions? And especially how that kind of carried through in terms of the early - the spring early order program, how that finished relative to last year. Thank you..

Thanks, Tim.

Yes, as you might imagine, and we talked last quarter and even the early part of the third quarter where sentiment was a bit more positive as those commodity prices were up, and as we mentioned there, that can change in a hurry, and it certainly with the commodity prices coming down, I think it's fair to say the overall mood would be less positive than it was a couple months ago even.

Related to the spring seasonal equipment, we just finished the first phase, remember these are multiphase early order programs, so I want to stress it's still quite early, but we did see on some of those key products like planters and sprayers as well as spring tillage equipment.

We are seeing those early order programs down year-over-year, but as you think about the magnitude of that decrease considerably less of a reduction versus where we were a year ago.

In fact if you look at just a plant or EOP in particular, which is often considered a good indicator for large Ag and its current environment, orders are down in the single-digit range. So just to give you an idea, again, I would stress that it is quite early..

Our next question is from Andy Casey from Wells Fargo Securities. Your line is open..

Thanks. Good morning, everybody. Ag and turf margin question. You mentioned the margin increased even without the SiteOne gain.

First, was that gain consistent with the 76 million identified in the 10-Q, and then axing the gain out, really it's the first positive year to year gross quarter of 14 but the implied Q4 guidance suggests a fairly deep year to year decline.

I’m just wondering what drove the improvement in Q3 and what's changing in Q4 to drive a continuation of the margin declines..

Yes, certainly, you know, the third quarter was a very strong quarter for Ag and turf, you know, on lower sales, the operating margins were higher. Obviously price realization continues to be very strong. You point out the SiteOne gain that was about 75 million. I think Josh indicated, just under two points of margin there.

So really a lot of it was cost management, and so we had lower production costs, things like obviously incentive comps, material costs continued to be a tailwind for us. Obviously it had a little higher Tier 4 emissions costs. SA&G was also lower. So those were some of the positives.

Obviously volume and FX continued to be drags on the profitability as well.

As you look out into fourth quarter, I think a couple of things to keep in mind, one is mix shifts, so as you think about the production, a couple of our key factories in particular, you think about Waterloo with large tractors as well as harvester works will see considerably lower production in the fourth quarter of '16 versus '15.

Just to put some context around that, harvester works for combines would be about a 60% reduction in output hours and Waterloo is about a 20% reduction in output hours, so a couple of, very profitable products for us. The production will be down pretty considerably. The other thing, I think that's worth noting is material costs.

That’s been a nice tailwind for us through the first three quarters of the year. That actually becomes more flattish. It's slightly negative, but really more flattish in the fourth quarter, so you lose the tailwind in the quarter would be the other item I'd point out. So those are probably the biggest differences as you move into the fourth quarter..

Our next question is from Jamie Cook from Credit Suisse Securities. Your line is open..

Hi, good morning, I guess Tony, the question I usually ask. Can you just talk about the progress that you've made, you know, in the U.S.

or North America on the used equipment issue, where we are relative to last year and relative to your expectations and what that implies for - do we think we have to take incremental inventory out on the used side in '17. Thanks..

Thanks Jamie. Used equipment, and I want to kind of parse that out again as we always do. When you think about large Ag used inventory, we continue to be down about 23% from the peak of kind of summer of 2014.

That's consistent with where we were at the end of last quarter, but keep in mind, seasonality does create a challenge in terms of even keeping things flat, so I would say that, that is kind of as expected, at least in line with what we would expect.

We would hope to see and certainly expect to see progress continue to resume in fourth quarter with that number continuing to move back down, but to your point, we still have a significant amount of work to do yet this year but even into 2017, so, that kind of talks to the inventory balance a bit, and I think when you look at the balance sheet of dealers and the pricing and the valuation of that equipment, generally what we're hearing is that dealers are feeling a little better about the income or the equipment that they do have and the value that it's at on their balance sheet.

We've seen some pricing stabilization on used equipment, so, again, I think things are stabilizing but I want to be clear we have a lot of work on the actual level of used inventory at our dealers that will continue into 2017..

Okay. Thank you, I'll get back in queue..

Next question is from Eli Lustgarten from Longbow Research. Your line is open..

Good morning everyone. Very nice quarter. One thing economists look at by the way is that the - big movements in commodity price particularly in corn were related to 252,000 money manager wrong contracts that unwound in 11 days to a negative 100. I mean it was really money managers drove it more than the free market. That's public data by the way.

My question really is looking at production levels that would go into the fourth quarter and actually into next year. You've indicated your inventory levels will be sort of that same place at '15 but we're talking about a U.S. market that's down 20%, 25% and almost 30% percent in big tractors and probably may have some minor fall next year.

So it's just suggested there's either plant shutdowns coming now or in early 17, and that has - will probably have some weight on the $0.35 that you sort of forget for projecting for the fourth quarter.

Can you give us some color on how production levels you started a little bit on, how far down the fourth quarter will be but the inventory levels aren't going to go away. The big shock for farmers….

I'm going to jump in here because, A, I think you're mistaken in what we've said. Okay, we're not saying that the field inventory levels are the same. We're saying are going to be in line as a percent of sales they'll be in line, so that's implying large Ag is down pretty considerably when you look at field inventories.

So, again, the reason we're clarifying that is as we talked earlier in the year, when you're looking at total Ag inventories and receivables, you have small Ag in there as well, and we've seen some increases there.

But if you look at just large Ag we have taken pretty comfortable reductions in the year to keep those inventory and receivable levels in line with the sales when we get to the end of October, so I think that that's probably the most important statement.

In regard to 2017 shutdowns and production schedule, we'll talk more about that next quarter when we have the 2017 outlook. So anyway, appreciate the question and we'll move on to the next caller. Thank you..

Thank you. Our next question is from Jerry Revich from Goldman Sachs. Your line is open..

Good morning, everyone.

Tony, can you please talk about your allocation of pool funds between used transactions versus new this year or the dealers use of pool funds I should say, and how we should think about as we enter 2017 where that balance of allocation of use of pool funds shakes out between new and used just put it into context versus history for us if you don't mind..

Sure, Yes, and I think there can often be confusion around pool funds. When we refer to pool funds, at least in the U.S. and Canada, those funds are only for used equipment. They earn them on the sale of new equipment, but it's really the funds that are available for them to provide incentives for the sale of used.

So we often talk about one way they can use those is for helping to subsidize the floor planning but they have of used equipment as well as actual retail, and so we do - we do tend to manage that.

There was a period of time where we were starting to see a shift towards more use of wholesale financing and floor planning, but that has shifted back to a very attractive use on actual retail, and pretty much in line with what we would expect.

So that's been a positive trend that we saw really early in the year, and it's continued through the year on pool fund. So another question around there that I'll throw in as a bonus is you look at pool funds in aggregate, we would say certainly as we look at that relative to used inventory, we would be comfortable in aggregate.

As we said before, there are clearly some dealers who we would look at and say their pool funds - you know, are too light relative to the used equipment that they have, and that's when we have those individual conversations with those specific dealers. But in aggregate still at healthy levels..

Appreciate the bonus. Thanks..

Our next question is from Lawrence De Maria from William Blair. Your line is open..

Thanks, good morning guys. I want to ask about - a little bit about the FINCO and some of the headwinds that are potentially going forward around residual values. I think if we look at the book they said around 64%. That's up significantly from a decade ago around 40%, 42%.

I guess I'm kind of wondering what kind of risk you guys see from that declining given the weaker market prices we're seeing over the last couple of years and what kind of headwinds to think from that over, the next, maybe year or two I guess..

If you think about the operating leases just kind of in general, hopefully the read through as you look at the quarter is things seem to stabilize, at least in the short-term in terms of the losses that were recognized, you know, no additional impairments, those sorts of things.

Obviously the forecasted income for financial services stayed the same, all positive signs, but to your point, you know, I would say in the near term, short to midterm, there's still certainly risk.

As we look at future maturities we continue to work hard to reduce the return rate on those maturities as well as finding more effective ways to dispose of those when they get returns so that the loss rates are not as significant, but as long as we stay at these lower levels, as long as, you know, used equipment prices continue to be at more depressed levels, I think that continues to bear watching and certainly has risks.

So while we take some comfort in the short-term with the stabilization we saw in the quarter, it's going to be a while before we're willing to say we're out of the woods there and so to your point, stay tuned and certainly we would be deciding that at some additional risk..

Right. So to that point, Tony if I could just follow up.

When would we expect some of the biggest returns to occur given the peak few years ago and the duration of some of the leases on there, would that kind of the returns for the peak in '17 or '18 or are we going through that kind of bell curve now?.

You're hitting some of that now. We'll hit some pretty strong maturities in the fourth quarter of this year, and then certainly as we move into spring, you know, next year is I think another kind of wave of maturity.

So think about timing of when you tend to see a fairly healthy level of retail activity that's when you're going to see some of those - some of those peak. So let's go ahead and mover. I appreciate the question. Let's move on to the next caller thank you..

Thank you. Our next question is from David Raso from International Strategy & Investment Group. Your line is open..

Hi, good morning. Really just a kind of big picture question about, you know, all that you know about your new and used inventory in the channel and how production is this year versus retail.

Just for a generic framework, if hypothetically retail was flat next year for Ag globally and maybe the same question for construction, how would Deere's production be in that environment, up, down, in line with that retail environment? Just trying to think through all the under production, versus inventory draw down needs.

Just wrap it all into that one question..

Yes, I think in both cases, I would say in line with, which would imply higher year-over-year sales..

Can you repeat that if flat retail….

In line with retail..

Yes..

Which would imply higher sales because we're under producing this year..

That's sometimes so just be clear, your production would be higher than retail?.

Correct. Yes..

And when it comes to the mix of that….

No, no. Our production would be in line with retail, but it was less than retail in 2016..

Okay.

Let's not confuse it with the comp, just straight out if retail is flat?.

Yes..

Deere's production year-over-year is flat or up?.

Our production is higher, because we will produce in line with retail. So our year-over-year production will be higher..

Okay.

And a follow-on that the mix within that, if retails flat, but Deere is up because, you're under produce last year, this year, I mean next year you want it under produce, is that particularly a harvester works, Waterloo comment or how should we think about that on the mix of up and flat?.

It's certainly our greatest under production than large Ag in the year. So mix would be favorable year-over-year..

And does that comment hold for construction in core shares as well?.

That I don't have the details on as well, I have a hard time to answering that so yes, all right..

Very helpful. Thank you..

Our next question is from Joe O'Dea from Vertical Research Partners. Your line is open..

Hi, good morning.

On the construction front, could you just talk about kind of where your demand levels stand relative to what you see in the end market activity, and if you see anything on the horizon where some of the challenges from oil and gas or some of the dealer destock if you see some potential near term release from that so that such that your demand could improve?.

I think in the short term and what you're seeing reflected in our outlook on construction is our dealers do continue to be so flat. So as the market continues to decline as we would expect them to and hope that they would they are bringing their inventories down in line with that.

Some of that actually is related to the lead times we’re able to have right now in our factories with the lower production, they can get replenishment, the equipment pretty quickly and as a result of that they are able to do more of that de-stocking and make sure that they are putting their inventories in a good low level type of environment.

So as I turn that around a little bit to the extent you start to see positive turns in that market our dealers are likely in our - would respond maybe a bit more aggressively as dealers would need to do a little bit more stocking up. So it does have some negative now but more positive when the market does eventually rebound..

Great. Thanks very much..

Our next question is from Ann Duignan from JPMorgan. Your line is open..

Yes, hi good morning. Good morning J.B., I hope all is well there. My one question, I need to waste my question I guess but it’s one that I am wrecking my brain over.

Did you actually record a mark-to-market gain on your 9.5 million remaining shares at SiteOne in the quarter?.

No we did not..

Okay. That’s my question and thank you..

Our next question is from Seth Weber from RBC Capital Markets. Your line is open..

Hi, good morning. I want to ask about Brazil. I mean I know you didn’t update your outlook for South America for this year but some other data points that we’ve been getting, some of the shipment data our of Brazil for the last couple of months has been a little bit better.

Do you think that’s a market that could be up next year?.

Certainly, I mean if you ask me today which market was likely if I had to pick one which one has the best likelihood of being up, I think I would have to say Brazil or South America in general.

One of the things to keep in mind is and we talked about this throughout the year is a lot of downturn there has been related to the uncertainty around the government and the overall economy. Farmers have been pretty profitable.

As a result of that with the new government at least today there appears to be a more positive sentiment, inflation is coming down as an example so the overall economy seems to be showing some level of improvement. And in the short term we’re seeing that in the order books as well.

Now, the question there is remember there is a conversion to Tier 3 what we consider Tier 3 on January 1 in Brazil on large Ag equipment so that will and dealers know and customers know, that will come with the price increase.

So undoubtedly some of the at least short-term order book activity we’re seeing is strength around that buying equipment ahead of the Tier 3 conversion. So the real question remains, will we continue to see that demand surge as we go into calendar 2017 or not.

But again I think there is some fairly favorable signs that would indicate that could possibly be the case..

And have you been building inventory for that emissions change?.

Our order books would reflect demand related to that but we have not built inventory ahead to have on our dealer lots to lead further into 2017..

Okay. Thanks very much guys..

Our next question is from Robert Wertheimer from Barclays Capital. Your line is open..

Hi, good morning. Did you see any sequential materials cost reduction that was meaningful to margin, I mean the margins were very strong in Ag and turf on revenues that was down sequentially material seasonally obviously.

I am just curious about if you can bridge whether materials is a big part of that or whether it’s something else?.

Actually, if you look obviously we don’t give the actual number any longer but it would benefit in the quarter for Ag would have been slightly less than second quarter for material..

And that’s on a year-over-year basis, okay fair enough..

Yes, so again it’s starting to come down a little bit which you would expect as we’re looking some slight increase going into the fourth quarter.

There was really, certainly was contribution but it was holding other costs and finding ways to operate again as efficiently as we can at these low levels and so they just did a great job working through some of those costs..

Great. Thank you..

Our next question is from Michael Shlisky from Seaport Global Securities. Your line is open..

Good morning guys. Just checking out your slides towards the back, you did update your outlook for the 2016 cash receipts I do see that but I don’t see in there a 2017 outlook although at this time last year in ’15 you gave us a 2016 outlook.

And so kind of wondering if that’s just a reflection of the uncertainty out there or could at least give us maybe a base case scenario or directional view for next year’s restates for both crops and livestock. Thanks..

Yes, that was - you noted correctly. That’s actually a change we did make this year. Historically we would have provided the first look at a cash receipts forecast out into the future year and candidly it’s just too in our view at this point it is just so pretty mature and preliminary that we decided that would make that change this year.

And I’ll note that USDA doesn’t provide, it won’t provide their first 2017 cash receipts outlook until February of 2017. So historically we were almost six months ahead of the USDA and so as a result we’ve decided that we will wait.

We do expect in November that we’ll have again it’ll still be very preliminary but we will have our first 2017 cash receipts outlook. I would tell you if you look at our number I would call it flattish as this point year-over-year but again I can’t emphasize enough. It’s very, very premature..

Okay, fair enough. Thank you..

Our next question is from Mircea Dobre from Robert W. Baird. Your line is open..

Good morning, this is Mircea Dobre with Baird.

A quick question back at Ag and turf, Tony can you give us any color at this point how much turf and maybe the smaller equipment contributes to operating income and am also wondering how you are thinking about smaller equipment and inventory in the channel, is there any risk of destocking here into next year? Thanks..

We don’t provide any profitability breakdown by large and small.

We do on a annual basis provide some sales breakdown as you know but I think the second part of your question is worth noting especially when you think you about small Ag I would say the higher end of that small Ag business so what really it is attributed to livestock we have seen some softening in the retail environment around some of those product categories as the livestock margins have gotten squeezed a bit.

And you’ll actually see that reflected a little bit in some of the inventory levels that we report in the appendix. So the 100 horsepower and above you’ll see I forget what slide that is Josh, do you mind look at that up quick. But if you look at it you’ll see still on the mid 30% range..

47%.

47% where we’d be back down typically in the 20% range. Really what’s driving that is the 100 to 200 horsepower the 6000 series tractors are a bit elevated but it’s possible last quarter we talked about this and said this was likely that our expectation is would have those in line year-over-year with some of the weakness in livestock.

It’s possible that number will be a bit elevated, it should come down but it may not hit quite the same level that we were at as we ended 2016 but again that product is coming from Germany so there is longer lead times not building to retail order, we’re building to forecast and that retail sales forecast has slipped a bit in the quarter and obviously it’s wasn’t dramatic enough for us to change the overall retail sales outlook but it did soften some..

But Tony, isn’t there a bit of an issue with under 40 horsepower as well?.

From an inventory perspective I don’t believe that is the case and you’ve seen ours come up. Now remember our sales - our inventory levels are coming up but our sales are too. So it’s really coming up more in line with the sales at this point..

All right thanks..

Our next question is from Steven Fisher from UBS Securities. Your line is open..

Thanks. Good morning. So it looks like your leasing exposure went up in the quarter to about 5.6 billion, it’s up around a 100 million.

Can you just talk about how your efforts to effectively discourage some of that leasing activity is being received and when might you expect to see that lease exposure actually start to come down?.

Yes, I think you are right in the sense that the overall lease activity has continued to increase, so I think what's also worth nothing is the short term leases and the activity there is down significantly.

And so lot of the actions that we were taking at the end of second quarter and into third quarter were focused on reducing those short term leases and that has been effective.

And so we are pleased with that certainly I think, again you know we said this before our preference would always be a retail node over an operating lease that to the extent our customers continue to prefer an operating lease, our obligation there is to make sure we are structuring those in a way that John Deere Financial can continue to be profitable.

So that’s where we are focused on. Last quarter we did raise residual values, can’t say across the board but pretty much across the board not just on short term leases. But, I’m sorry we reduced residual values pretty much across the board last quarter to try to correct some of those challenges that we had been facing.

All right?.

Can you quantify what the percentage of short term lease is now and how much - and if declined in the third quarter per se?.

I don’t have that number off-hand, but if it was a significantly lower number in the quarter..

Okay. Thank you..

Our last question is from Joel Tiss from BMO Capital Markets. Your line is open..

Just snuck in there, I will make it quick too. In financial services it seems like the debt is rising roughly about $2 billion while the portfolio is shrinking.

I just wonder if you could explain what's going on there?.

Joel, I'm not sure we are tracking all. Our debt-to-equity ratio, we try to maintain at 7.5 to 1 and that’s been close to that, so we still maintained it around 7.5 to 1. And our portfolio overall has been slightly lower and even if you take a constant FX it’s about flat. So the portfolio has not grown..

Yes, I know but the debt is up $2 billion over since the end of the year. All right I will ask you later..

Okay. And I think we did have one more come into the queue so we can go ahead and take that..

Our next question is from Ann Duignan from JPMorgan Securities. Your line is open..

Yes, thank you for squeezing me in. My question is more on the European end markets and we saw German registrations down 21% last month which I don't know if we have ever seen it drop like that one month and I recognize its registrations, not retail sales. Can you just talk about the environment in Europe and France, Germany and U.K.

and also how you are feeling about dealer inventories in the region?.

Yes, certainly, you track things like there is a seam of business parameter and so on. We started seeing even a quarter or so ago that's starting to track more negative, a year ago at this time that was actually moving a more positive direction and we had some relatively positive hope for Europe as it went into 2016.

I think in the short term certainly you have a lot of factors like Brexit and so on that are causing some uncertainty. There were some challenges and if you look at some of the Eastern part of the EU28 with subsidies and timing of when subsidies were released again.

And then when you look at France, I mean you are starting to see some indications that the crop there is certainly not what many had hoped and so you are seeing some weakness there. So I think certainly you are seeing a sentiment get a bit weaker here in the latter part of the year.

J.B or Raj, do you have anything? All right, beyond that I am not sure there is much more, I would say it's your point, it’s one month, it’s registrations I wouldn't read too much into a single month..

And dealer inventories?.

Yes, dealer inventories I think we are reasonably comfortable with, that's one where again we would say used equipment, not an issue at this point but one we certainly have our eyes on and I'd say cautionary. Actually one of the bigger challenges there had been Great Britain, U.K. and with some of the FX and it was if the FX it held up pretty well.

With Brexit now and the FX changing, that’s actually in a short term created some benefit for their used equipment to move because most of that of course comes to the mainland and gets distributed kind of the Eastern part of Europe. So that’s been a positive again very short term impact of Brexit..

Okay. Thank you..

Thank you. And before we close Raj has a couple of comments he would like to make..

So there have been some questions around our third quarter margins and fourth quarter margins and around 2017 what to expect. I just wanted to make a few comments along those lines.

We have mentioned in the past that each of our units plan for the mid cycle trough and peak scenarios, in addition to the following year's forecast and you will have noted our decremental margin performance in the last three years show how well we have executed in this downturn.

Now as a result of our disciplined process, our margins have improved about 300 basis points at mid-cycle volumes now compared to mid-cycle volumes in 2010. So we have been working on reducing our SA&G, overhead expenses and also structurally reducing our material costs.

We have diverted more of our R&D resources to focus on cost reductions in the last two years and we have increased focus on efficiency improvement and structural cost reduction activities broadly and in general.

Now with such structural cost reduction activities, we expect to improve our pre-tax income by at least $500 million by the end of 2018 if large Ag down turn persists at current levels. Now I should also say our internal goals and targets are even larger.

Having said this, you should also note that we have balancing structural cost reductions with investments for the future and we remain committed to maintaining manufacturing capacity to support an eventual turnaround. Thank you..

All right. Thank you, Raj, and with that, we'll conclude our call. We appreciate the questions and we of course will be around throughout the rest of the day to answer any follow up. Thank you..

That concludes today's conference. Thanks for participating. You may now disconnect..