Joshua Jepsen - Deere & Co. Brent Norwood - Deere & Co. Rajesh Kalathur - Deere & Co. Ryan D. Campbell - Deere & Co..

Jerry Revich - Goldman Sachs & Co. LLC Timothy W. Thein - Citigroup Global Markets, Inc. Joseph John O'Dea - Vertical Research Partners LLC David Raso - Evercore ISI Group Jamie L. Cook - Credit Suisse Securities (USA) LLC Nicole Deblase - Deutsche Bank Securities, Inc. Ann P. Duignan - JPMorgan Securities LLC Andrew M.

Casey - Wells Fargo Securities LLC Rob Wertheimer - Melius Research LLC Stephen Edward Volkmann - Jefferies LLC Michael David Shlisky - Seaport Global Securities LLC Steven Michael Fisher - UBS Securities LLC Mig Dobre - Robert W. Baird & Co., Inc. Joel G.

Tiss - BMO Capital Markets (United States) Seth Weber - RBC Capital Markets LLC Stanley Stoker Elliott - Stifel, Nicolaus & Co., Inc..

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

Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer; Ryan Campbell, Vice President and Corporate Controller and Brent Norwood, Manager, Investor Communications. Today, we'll take a closer look at Deere's first quarter earnings, and then spend some time talking about our markets, and our current outlook for fiscal 2018.

After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed at our website at www.johndeere.com/earnings. First, 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 Quarterly Earnings & Events.

Brent?.

higher production costs and higher incentive compensation costs. On the favorable side, we expect price realization of about 1 point, and a more positive product mix. Now, let's look at some additional details. With respect to R&D expense on slide 19, R&D was up approximately 14% in the first quarter.

Currency translation had an unfavorable impact of 2 points, while another 5 points related to the acquisitions of Wirtgen and Blue River Technology. Our 2018 forecast calls for R&D to be up about 20%, with acquisition-related activities accounting for 9 points of the increase, and currency translation for 1 point.

The balance of the R&D increase relates to strategic investments in large Ag and precision Ag that help drive growth for these key areas.

Moving now to slide 20, SA&G expense for the equipment operations was up 8% in the first quarter, with acquisition-related activities, the voluntary employee-separation program and currency translation accounting for most of the change. Our 2018 forecast for SA&G expense is up approximately 23%.

Excluding acquisition-related expenses, SA&G is forecast to be up about 2% in 2018. Turning to slide 21, the equipment operations tax rate was 422% in the first quarter, primarily due to the impact of recent U.S. tax reform legislation, as noted earlier.

For the remainder of the year, the effective tax rate is expected to be in the range of 25% to 27%, which implies a full year effective tax rate of approximately 62%. Beyond fiscal year 2018, Deere's effective tax rate is projected to be between 25% and 27%.

On a long-term basis, recent tax reform legislation is expected to be beneficial to Deere's financial outlook. Slide 22 shows our equipment operations' history of strong cash flow. Cash flow from equipment operations is now forecast to be about $4.4 billion in 2018. The company's financial outlook is on slide 23.

Second quarter equipment sales are forecast to be up 30% to 40% over last year. Our full-year outlook now calls for net sales to be up about 29%, which includes about 1 point of price realization. Finally, our full year 2018 net income forecast is now about $2.1 billion. Excluding the effect of U.S.

tax reform legislation, adjusted net income is forecast to be about $2.85 billion using a 29.5% tax rate, which assumes no tax reform impact. I will now turn the call over to Raj Kalathur for closing comments.

Raj?.

Thanks, Brent. Before we respond to your questions, let me share a few thoughts on the first quarter and our expectations for the rest of the year. First, it's noteworthy that Deere closed the Wirtgen deal on December 1, representing the largest transaction in Deere's 181 year history.

Wirtgen has continued to perform in line with expectations since the purchase agreement was signed in May of last year. Our teams are making good progress on the integration front, and are working on synergy opportunities in the areas of sales, cost reduction and technology.

We're maintaining a positive outlook for the year as the underlying fundamentals continue to be strong, and Wirtgen's global order book showed a double-digit increase over 2017.

Though Wirtgen probably won't contribute to Deere's reported profits in 2018, due mainly to the effects of purchase accounting, it will make a meaningful cash contribution to our results over the course of the year.

Second, as the agricultural equipment cycle improves, it is being helped by a reduction in used equipment inventories, and by the impact of replacement demand, driven by customer need for new equipment.

Deere's Ag & Turf business is benefiting from this situation, and is on track to deliver incremental margins in the 30-plus percent range for the year. Now, this type of financial performance is particularly impressive, considering the headwinds of material cost inflation and increased investments in R&D that we are planning.

Regarding our ability to meet demand, we are working closely with our suppliers and logistics providers as they adjust to present conditions. We remain confident in our ability to fulfill customer demand over the course of the year. That confidence is reflected in our increased financial guidance.

As noted, we've raised our sales forecast by 7 points to up 29%, our adjusted net income forecast has been raised to $2.85 billion, versus $2.6 billion previously. As a final note, we are encouraged by the improving outlook for equipment demand across our businesses, and look forward to delivering continued strong performance in 2018 and beyond..

Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. Remember in consideration of others and our desire 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?.

Thank you. Our first question today is from Jerry Revich from Goldman Sachs..

Hi. Good morning, everyone..

Good morning, Jerry..

Raj, can you just build our confidence on the ability to ramp up with the supply chain.

Clearly with the guidance increase you feel like there's been progress made over the past couple of months, maybe just give us some granularity in terms of how many key components you're monitoring today versus a couple of months ago? And just give us some context in terms of how broad-based were the supply chain issues you mentioned, and just more context on what's improving there would be great?.

Yeah. Jerry, the underlying issues are related to availability of labor and freight that you probably read about in the media in general, okay. So if you think about the types of components that have been impacted, these are wiring harnesses where there's a lot of labor required, and any such interruptions essentially with time, it gets better.

If you think about where we are coming from, from the lower levels of volumes we've had in 2016 to up in a single-digit range. And now we're ramping up even further in the high-teens for our core business.

That takes a while – a lot of suppliers have the physical capacity, it takes time for them to actually put the people in place and get them trained and have them working in a synchronized fashion. So it's just a matter of time, and as we know from the past, this takes a little bit of time.

That's why we said, we were confident enough to increase our full-year forecast, knowing fully well that this is going to be addressed over the second quarter and third quarter.

Josh?.

And so it sounds like the second quarter, just to be clear, Raj, the second quarter, you folks laid out a pretty wide range.

So it sounds like based on your comment, though, you're confident that the performance improves in the second quarter?.

So, Jerry, most – yeah the performance improves substantially in the second quarter. I'm going to say, most of the catching up will be done, and we are also having a substantial increase in the second quarter.

All of those will be met, but there will be some elements that will go into the third quarter, okay?.

Jerry, what I'd add there is, there is significant amount of prioritization done there as you got seasonal products that are more important to get out in Q2. So where we've been able to, we've flattened our production schedule to accommodate this demand. And as Raj said, confident in our execution over the course of the year..

Okay. Thank you..

Thank you. Our next question is from Timothy Thein from Citi Research..

Thank you. Good morning. Maybe, Raj, just your updated thoughts in terms of capital allocation. And specifically, as it relates to the dividend, that the current rate of $2.40 (00:25:01), it basically implies like an $8 number based on your payout targets, and yet, you're on pace to generate earnings more than 10% higher than that.

So maybe just an update specifically as it relates to the dividend, and then maybe capital allocation update more broadly? Thank you..

Okay. So thanks, Tim. Now, let me go overall. Our cash flow from operations this year is going to be about $4.4 billion, and this clearly brings your question in front. Now, first, as we have said before, our focus in the first quarter was to meet all the requirements for a smooth Wirtgen transaction.

The first quarter is also usually when our working capital cash requirements are the highest. Now that we have managed through 1Q requirements, we can look at the next steps. And next, we've also talked about – we'll look at opportunities from U.S. tax reform.

So we have time until we file our 2017 taxes, which will be due in late July or early August of 2018, to contribute to our pension plans and get a 35% deduction.

While we do not have any current requirement for pension contributions, as our plans are well-funded, we're looking at this opportunistically, and may consider some contributions in fiscal 2018. Beyond that, you're right.

Our cash use priorities remain the same, the mid-single A (00:26:29), which we think are some very good stead (00:26:32), our growth investments, then dividends and repurchases. With respect to dividends, Tim, to your question, we try to keep our dividends between 25%, 35% of mid-cycle earnings.

And if you include the cash earnings from Wirtgen, yeah, we will be below the 25% level. So this will receive considerable attentions in the next few quarters from us.

So from a share repurchase standpoint, and as we've said before, it's an essential use of cash and we are keen to ensure that we are adding value to our longer-term-minded investors with any share repurchases. So on dividends, again, yeah, it's something that we will be looking at very closely in the next couple of quarters..

Thanks.

Next caller?.

Thank you. Our next question is from Joe O'Dea from Vertical Research Partners..

Hi. Good morning. Could you talk about your views just on Construction & Forestry cycle? When we look at underlying legacy business ex-Wirtgen, setting up for a very strong year in 2018.

Just how you're thinking about that relative to where we've come from, and then moving beyond that, and whether some of the restocking this year push – pulls forward a little bit extra demand?.

Yeah, Joe. When you think about C&F, I mean, obviously, the underlying conditions continue to be very strong. We're seeing that activity in our dealerships. We're seeing it with the rental business, and what we look to rental utilization, which continues to be strong.

And really when you step back and look at that inventory and receivable build in the C&F business, that's largely Wirtgen, there's a small amount that is C&F-related. So we're really – from a field inventory perspective, stepping up a little bit, but that's really coming off of what have been decade-long lows of field inventories.

Those were drawn down pretty aggressively in 2016 and then again in 2017. But I think as we look at the industry overall, continued strong demand across multiple segments, not just oil and gas, but also in the non-energy-producing regions. They continue to be attractive and driving investment in the business..

Hey, Joe. I will add a couple of statistics for your benefit. If you look at the orders you've gotten for the first 13 weeks of this fiscal year, it's about 40% higher than the same 13 weeks last year. And our order bank would be almost double; it actually is more than double where we were at this point last year.

So very strong order book and order bank, and very strong end market demand for these products..

Got it. Thanks very much..

Thank you. Our next question is from David Raso from Evercore ISI..

Hi, good morning. Just trying to reconcile, now we have the margin guide for the segments, you're basically implying your segment operating profit is up about $1.1 billion year-over-year but you're implying your net income is only up $700 million.

So I'm trying to reconcile that gap, right? Maybe $100 million is from higher interest expense, but that's still about $1 billion on EBIT but only $700 million on net income. Even if you tax affect it, we're still off here by a couple hundred million dollars, $0.60, $0.70 of earnings on the implied EPS.

So can you reconcile that gap? Why is that gap so wide all of a sudden between your EBIT growth and your net income growth?.

Hey, David, it's Ryan. And a couple things I'd ask you to think about it. One, it's early in the year, and given all the challenges that we faced, and while we still feel confident that we'll be able to work through that, we're seeing some inflation headwinds and other things that are coming at us.

And so, as we thought about $2.85 billion as the pro forma net income number, we're contemplating all of those things in there.

So you might not be able to perfectly reconcile everything, but at this point in the year, given where we are and given all the things that we're seeing in the marketplace, $2.85 billion is the number that we're comfortable with..

No, I appreciate that, but I mean, you're not reflecting that in the segment guide.

I mean, basically it looks like you're putting about 50 bps of cushion in your net income number of margin that you're not putting in the segment margin, right? So I'm just – so that's all basically is – there's, look, you have your thoughts on the segments and you kind of gave a little more of a conservative, how that rolls back down to the net income, is that a fair...?.

David, I'd say that's fair..

Okay. And lastly, real quick – sorry to bug you on this, but Wirtgen, what you're giving for second quarter sales guide and what you did in the first quarter guide, it implies a slowdown in the second half, like, basically you're saying second quarter is $1.16 billion on revenue.

We know we have the first quarter now, so that all of a sudden the back-half is only run-rating like $840 million, $850 million a quarter in revenue, a big step-down from 2Q.

Anything to be thoughtful on about that or is that just you wanted to keep the full year Wirtgen rev guide just sort of where it was and we'll update it later?.

Yeah, so we kept the full year Wirtgen. And keep in mind that for this quarter, it was only one month of Wirtgen activity, and so we're forecasting 10 months this year of Wirtgen activity. And so we really only have one month.

I would say that their business, they do have a little bit of seasonality in their business starting in the beginning of the calendar year over the next few months. But essentially, there's nothing really to read into that. We've kept Wirtgen consistent ex-currency and purchase accounting, and just keep in mind, we've got 10 months this year..

No, I hear, it's just the second quarter at $1.16 billion, all of a sudden dropping down. That's all I was asking. Okay, really appreciate it. Thank you..

Hey, thanks, David..

Yes. Thanks..

Thank you. Our next question is from Jamie Cook from Credit Suisse..

Hi, good morning. A clarification, and then just a question. Just to be clear, your net income guidance of $2.850 billion does not assume the lower tax rate in the remaining years.

So is the real net income guide $3.065 billion, and why aren't we assuming the lower tax rate in the remaining quarters? And then just my second question, is there any way you can quantify how much the supply chain issues or production issues impacted the first quarter, and what's implied for the rest of the year? Thank you..

Yeah, Jamie, when you think about the tax rate, that $2.85 billion contemplates the 29.5%. So you're right in that the rest of your forecast is in that 25% to 27% range..

Okay. But why aren't we assuming the 25% to....

Yeah, Jamie, it's Ryan. What we tried to do with the pro forma is keep it somewhat pure to kind of how we would have looked at the business if tax reform never happened. So that produced the 29.5% that we calculated the pro forma with, with we came at 32% and there's been some discretes that have come through that now we're thinking of 29.5%.

Certainly, as tax reform comes through, we're going to get a lower rate over time, and you can see in the slides where we're forecasting the lower rate..

Okay. Okay.

Yeah, and then just a second question on the supply chain, like – can you quantify the impact to the quarter? What's implied in the remaining two quarters, I guess?.

Not a clear quantification, Jamie. But obviously you see what – from our guidance perspective, what we expected to do on the top line in 1Q versus where we ended up. That's really the driver of that miss.

And then, as you look forward to the raise overall in terms of our sales, that's not – it includes obviously the catch-up as well as what we're seeing from additional demand..

So, Jamie, as Josh mentioned, we guided 38% in 1Q and ended up 27%. Think of all of it – almost all of it as (00:34:46) supply chain, because the end market demand is actually growing on us, not the other way around..

Okay.

And just to be clear, I'm assuming the supply chain issues were all Ag, right?.

It was on both sides..

Both sides.

Was one more concentrated versus the other?.

I would say, you think of it as where would logistics make a bigger difference, where would labor availability make a bigger difference on a supply base. You have to think about the type of supplier more than our segments with respect to where the impact was..

Okay. Thank you. I'll follow-up offline..

Thank you. Our next question is from Nicole Deblase from Deutsche Bank..

Yeah. Thanks, guys. Good morning. So forgive me if I'm just like – I'm completely confused by the way you guys are doing net income guidance versus the tax rate issues. So the pro forma 29.5% does not include any impact of U.S.

tax reform, correct? So your full-year guidance, the $2.85 billion essentially that increase that you had versus the $2.6 billion is coming completely from operations? Is that fair?.

Operations, and just a little bit of tax, because in the original opening budget guidance, we guided to about a 32% tax rate based on some discretes that have happened that would have happened irrespective of tax reform, the number's 29.5%..

Okay. Thanks for clarifying that. And then, I guess, Wirtgen, you guys increased the ongoing operation margin guidance. I think before you were saying 11% to 12%. And now you're saying 12% to 13%.

So what's driving that? Is that higher synergies over time? Is it just that the underlying business is better than you expected? Why is it higher?.

Yeah, we haven't baked in any synergies right now, although we're certainly confident that we're going to get them. That's purely purchase accounting. And so, what you saw, Wirtgen for this year has a little bit of higher purchase accounting driven by increased step-up than what we expected to inventory.

Then that step-up increase in inventory which comes through the P&L this year, there's lower step-up related to amortization of intangibles. So you see that on an ongoing run rate, that that amortization is lower. So that's the only difference that you're seeing there..

Okay. Got it. Thanks. I'll pass it on..

Thank you. Our next question is from Ann Duignan from JPMorgan..

Hi, good morning. My question is around, maybe you could talk about the impact of tax changes both to your own businesses as well as to maybe the way dealers will operate and farmers will operate.

Particularly I'm thinking about the changes around the like-for-like assets and what that might do to purchasing patterns in the field?.

Yeah, Ann, obviously from a company perspective, long-term this is beneficial. There are charges here that occur in year one, but long-term from a Deere perspective, favorable. As we think about customers, each individual customer and their situation is different. We'd say by and large, this has been viewed favorably as we've talked to customers.

But every situation varies and I'd say, from a dealer perspective it's very much the same. As you get into some of the details, whether it's like kind exchanges or 100% expensing, there are puts and takes. And really varies on how their business is set up, and how they operate.

So it's really hard to kind of broad-brush that with – what does this mean for all customers or all dealers. But generally, the feedback we've gotten so far is positive. And I'd point out, there's still revisions and components of this tax bill that are being written or contemplated changes, Section 199 is an example.

And as those play out, we'll have a better feel, but right now, we feel like generally positive..

And I think....

Ann, with respect to – just adding to what Josh said, you think about the improvements in Section 179, that was good for the customers broadly. Your point about like-kind exchange, but that's offset by 100% expensing, that's a positive for the customers, overall.

Other positives, like estate taxes, Ann, if Section 199A stays as is; yeah, that could be a huge positive in terms of additional cash for our customers in the U.S. So you're all with me – as long as the customers have more cash that we think is beneficial to our business long-term. So generally, we see this as positive (00:39:38)..

Would you expect any changes in how purchasing decisions are made, maybe more purchases, less leasing? Would that be a potential outcome? And then I'll leave it there. Thank you..

Yeah. We think there could be a drive to more purchasing as there are more known benefits of purchasing, whereas in the past few years there's uncertainty as to the tax benefit of purchasing, particularly when Section 179, for example, was not being extended or it was an annual basis. Thanks, Ann..

Okay..

We'll go ahead and go for the next question?.

Thank you. Our next question is from Andy Casey from Wells Fargo Securities..

Good morning. I was wondering if you could give a little bit more color on the R&D expense as a percent of sales. It went up a couple of points. You mentioned the large Ag and precision Ag projects.

Was that all of it? Or was there something else in there?.

No. That's right, Andy. Really, the change there is related to some additional investments in R&D, and really focused, as Brent pointed out, in precision Ag and large Ag, which we feel like are important as we think about looking forward to not only gain share, but also drive margins..

Okay. Thanks. And then on the inventory and accounts receivable outlook for Ag & Turf, you had a big build in the quarter, you explained that. Now, you're also looking for $50 million reduction for the year despite the strengthening markets.

How should we view that $50 million reduction? Is that just, you had pipeline fill at the end of the year in 2017 carried through into Q1 and you expect to normalize? Or how should we look at that?.

Yeah. I think, we view it as really finishing relatively flat for the year.

And one thing to think about too at this point, we have less visibility out as we go further through the year, and we start to do our spring seasonal EOPs and that kind of thing for our spring products, that's when we have a lot more visibility into how that looks as you go 4Q into 1Q of the following year..

Okay. Thank you..

Thank you. Our next question is from Rob Wertheimer from Melius Research..

Hi, good morning.

Could you please just talk a bit about Combine (00:42:09) Early Order Program, et cetera? And then, I wonder if you could comment on whether there's, outside of Turf, any market share gains built into your forecast?.

Yeah. As you think about the Combine EOP, it did come in strong, so up double-digits, and that was on the back of what we saw, up double-digits on our spring seasonal products. So I think, continued strength there, and then you see that build in our forecast from our net sales increase.

And really, what we're seeing there is – and it was mentioned earlier, but replacement demand in the way that we're – customers are talking about replacement demand and what's driving that. That's been a big question; what is driving replacement demand.

We're seeing that come through really a few different areas; wanting and feeling the need to upgrade technology, getting improved productivity, and be able to hit shorter, whether it's planting, spraying, or harvest windows, the warranty period and really staying within their warranty or their extended warranty and really just overall comfort level with kind of where their machine's at.

And I think as we've talked to dealers, as they've done kind of winter off-season refurbishments, they've noted that this equipment has put more age on. The further we get from those – further away we get from those years of 2011, 2012, 2013, there's putting a lot more wear and tear and hours on that equipment.

So I think that's what's kind of manifesting itself here in some of this improved replacement demand. And then, outside of the EOPs, our large tractor order book year-over-year, we're out. We're further ahead than we would have been last year on a higher schedule.

So for example, if you look at 8R tractors, we're out six weeks further than we would have been last year. 9R tractors, both wheel for 8R wheel and 9R wheel, would be out four weeks. So we've got quite a bit of strength there that we're seeing as a result of that..

Great. That's very helpful. I'll follow-up offline on the other. Thanks..

Thanks, Rob..

Thank you. Our next question is from Steve Volkmann from Jefferies..

Hi. Good morning, guys. I'm just kind of thinking conceptually here, I guess, you raised your top line organic guidance by about 5 points, but you kind of left the cost of goods sold flat in that scenario.

And does that just reflect sort of the increased material costs and the increases in incentive comp? Or how should I think about that?.

Yeah, I think that's fair. You do have – as we talked about, mentioned earlier, we've seen some favorable mix, which has been positive, but then you do have the rising material costs as well as some freight costs that are impacting that, and then to a lesser extent, incentive comp as well. So I think, the way you lay that out is fair..

Okay. All right. Fair enough. And then, I'm sorry, I'm just struggling with this tax thing relative to what you're forecasting.

Does the model that you're giving us assume the 25% to 27% in 2Q, 3Q and 4Q?.

No. It does not. This is Ryan, it doesn't. So the model that we have that produces the $2.85 billion is based on the 29.5% full year, as if tax had not happened..

All right. But it did happen, and so it's going to be in the 25% to 27%....

Correct. That's right. So you could take – I mean, if you were kind of thinking through what that would mean, take the 29.5% and put it down to the 25% to 27% range, and then you'd get kind of the ongoing impact of that..

All right. Okay. Thank you..

Thank you. Our next question is from Mike Shlisky from Seaport Global..

Hey, guys. Good morning. It seems super-important that you get these issues with your logistics solved, like right now, to kind of meet your sprayer and planter and other equipment shipments for the very early spring.

Can you kind of bucket for us maybe how far along are you inning-wise in getting these issues resolved? And is there any risk of cancellations of orders that might not come back this year if you don't have things to the kind of dealer and farmer on time?.

Yeah, I think, at this point, Mike, we feel confident that we'll be able to meet this demand over the course of the year.

And again, to your point on time-sensitive things, that's where we're really focused on prioritizing and making sure those seasonal products, spring seasonal products, for example, that they take priority over other things, that their season is further out.

So I think, that's the focus, and I would say we've been obviously working on that throughout the course of the first quarter and continue to obviously place a lot of time and resources to working through that..

Mike, this is something that's impacting the industry broadly and not just us. So that's something to factor in as well as you think about the demand, lost sales, et cetera., so..

Okay. Thanks..

Thank you. Our next question is from Steven Fisher from UBS..

Thanks. Good morning. Within the 15% sales growth forecast that you have for the Ag business at Deere, what assumptions do you have for small and medium-duty Ag versus the large Ag? And last quarter, you thought you were about 90% of mid-cycle overall with obviously a much earlier position in the large Ag.

But it sounds like large Ag is now advancing more.

So where do you think that metric falls out as you contemplate the end of 2018?.

Yeah, maybe starting at – kind of the latter part there. When we think about where we are from a (00:48:25) ops perspective, we'd say we're closer, much closer to that mid-cycle number than we were a quarter ago. Obviously, you've got the Construction side above that, and on the Ag side slightly below there.

So I think that's – we're continuing to see strength, continued strength in the small Ag business, which has really been strong for the last few years and, as you mentioned, starting to see large Ag grow, and when you think about that, kind of in that framework, you still have large Ag in North America well below mid-cycle and really much closer to our lower ends of what we would consider the trough side.

So lots of potential upside there as we come off very low levels..

But just to clarify, within the 15%, do you have anything assumed to be declining, like either on the smaller or medium duty side?.

No, we would see growth across all of those categories..

Okay. Thank you..

So most of the regions, as we have shown in our forecast, are either flat or up and with respect to small Ag and large Ag, they're both up. And as Josh mentioned, you take large Ag on a worldwide basis, we are still well below what we would say mid-cycle.

If you take just large Ag in North America, and it's close to the trough that we talk about; and when we say trough, 80%, 100%, 120% (00:50:08), it's closer to the trough, in terms of large Ag North America..

Thank you..

Thank you. Our next question is from Mig Dobre from Baird..

Yes. Good morning. So to a couple of questions earlier you basically said you pretty much assumed some conservatism below operating income versus what you've guided as segment. Obviously, on your tax rate, you're assuming that 29.5% rather than the actual rate.

When I'm looking at the divergence between what you're guiding for operating cash, you're raising that by $600 million. Your net income is raised by $250 million.

What I'm trying to understand is, does that operating cash flow assumption in guidance embed those two other elements of conservatism or is there something else that we need to be aware of here? What's the divergence, $600 million versus the $250 million?.

Yeah, let me clarify in terms of how we get to the cash flow; that might help you here. So if you look at our cash from operations last year, it was about $2.4 billion. This year we are saying it's going to be about $4.4 billion for the full year 2018.

So the biggest component of course is the increase in net income on an adjusted basis, the pro forma, that's about $650 million from last year to this year.

And then you have $300 million in additional dividend from John Deere Financial this year due to tax reform, okay? And there's another $300 million on a pre-tax basis, there was an OPEB contribution that we made at the end of 2017 fiscal year, and then there's about $200 million that was from SiteOne impact on net income last year that's not in income this year.

So that actually is a better income this year than last year. And then, we also have included in it about $300 million in cash from Wirtgen, which is not in the net income numbers, okay? So that gives you an idea of how we go from the $2.4 billion to $4.4 billion.

I think the same – the 50/50 forecast we have should apply on both sides, income and cash flow..

Right, Raj. But I'm just talking about the adjustment to your previously-provided guidance for the year, the $400 million change. That's what I'm interested in..

Yeah. That would be the net income increase and the additional dividend from John Deere Financial this year due to the tax reform. So those would be the two components and just the increase from our previous guidance to now..

Got it. Thank you..

Thank you. Our next question is from Joel Tiss from BMO..

I made it.

How's it going, guys? Just can you talk quickly about your Ag, your maybe large Ag shipments in North America versus the retail demand, how that shapes out for 2018?.

Yeah. Joel, we're producing in line with retail demand on the large Ag side by and large, so no departure from kind of where we've been, where we ended 2017, producing that in line with demand, which is where we want to be, and continue to be able to run at pretty lean field inventory levels..

Okay, great.

And then on Wirtgen, can you just give us the early read, purchasing synergies, sharing the footprint across their distribution and your existing, and ability to move product into your existing dealerships, and different things like that that can kind of help us understand behind the scenes some of the opportunities you might have longer-term?.

Yeah. I think right now when we look at that, we'd obviously – and as we commented on earlier, and Raj made the comment that – still early, but feel good about the synergies from a cost perspective and technology, and then, definitely do see opportunities from a sales side, and really identifying those.

I think the approach there is going to be much more of a pull. And when I say that, I mean the Wirtgen sales organization pulling the Deere product that is the best fit for them and their customers into their channels, and not a push of – here's our entire portfolio, take all of that now..

And Joel, to add to what Josh just said, we've said €100 million in synergies over five years and a lot – 90% of that was from the cost side. We are still focused on that and confident we'll deliver that.

Now, we're getting even more excited about some of the opportunities on the sales side, given Wirtgen organization's pulling some of these synergies now. For example, in Mexico City, Wirtgen had a – it goes both ways there. In Mexico City, for example, Wirtgen had a dealer and that's now possibly going to be our C&F dealer, too.

In West Virginia, where they had a – Wirtgen actually had a gap in their territory, we have a very strong dealer, that dealer is going to take on the Wirtgen contract as well. So the sales side is seeing some more momentum than we had.

And the technology side is another one that's – some of the technologies we bring, especially on the ISG side, the engineers in the working site feel – have very good potential, and they're pulling some of those type of synergies. Thank you for the question..

Yeah. Thank you..

Thank you. Our next question is from Seth Weber from RBC Capital Markets..

Hey, Good morning..

Good morning..

I wanted to ask you about pricing. I think the first quarter was expected to be up 2 points, I think it came in around flat. Is there anything you'd kind of highlight there? And then, your full-year guidance for up 1%, does that include positive pricing in both segments? Thank you..

Yeah. So when we say about pricing, you're right. We had forecast about 2 points, we came in about flat in the first quarter. And some of that is just timing quarter-over-quarter and how this plays out. I think, importantly, as we think about the price, the full year remains at 1 point.

I think, what we've seen impact us is, as we compensate our dealers based on their performance and their market share and strong market share gains in 2017, when we reflect that into our plans for 2018, we've seen that move up and that has played an impact. But overall, we'd say that's really a positive thing, because we're driving share gain..

Okay.

And then, just for the full-year guide, do you expect both segments to be positive?.

So what I would say is, we're still seeing a very competitive environment in C&F and have not necessarily seen those pressures alleviate over the last quarter; still a very challenging market from that perspective..

Okay. Thank you very much, guys..

Thank you. And our next question is from Stanley Elliott from Stifel..

Good morning. Thank you, guys, for fitting me in. A quick question, noticed that the government – kind of construction investment piece took down a – kind of moved down pretty significantly. I would have thought that, that's a big driver for the Wirtgen business, which you actually took up.

Could you kind of help talk around why the lowered investment on the government side, and then kind of what's driving that outperformance for Wirtgen? Thanks..

Yeah. The Wirtgen change from 3.1 to 3.2 (00:58:36) is just FX. No change to the underlying business there. And the government investment is North America-specific, which is from a Wirtgen perspective the Americas are 25%, so it's not as material to the Wirtgen business as it would, say, to our C&F business, which is by and large more North American.

So I think that's probably the biggest disconnect there if you think about how to connect those dots..

Perfect. Thank you..

Thank you. Our next question....

Okay. We'll take one more..

And our final question today is from Jerry Revich from Goldman Sachs..

Yes. Hi, thank you for taking the follow-up. Can you talk about, in Brazil, there's been a regulatory changeover within the past year.

Can you just comment on how that impacted your production schedule in calendar 2017? And how you expect the production ramp to look over the course of 2018?.

Yeah, so the emissions change happened last January, and really – and leading up to that, we didn't necessarily build inventory ahead of that. We were building, as you may recall in November, December, there was strong demand. We were seeing the early stages of the recovery there. So we were really building just to meet demand at that point.

So we didn't have a significant overproduction that we then bled-off. I'd say we built that pretty much in line or as close to in line as we could based on the strong demand. And I think as we go into this year, we'd see, I think, more of the same there in terms of our plans.

There have been – there was the, as Brent mentioned, the grace period got extended from 12 months to 14 months for the FINAME financing. That took effect in January, but was announced earlier. So you did see a bit of a pause in terms of retail activity as folks could wait a few weeks in order to get that two months of additional grace period.

But we don't feel like that changes or shifts at all the actual underlying demand. Economics for the farmers continue to be strong, so we feel very positive there..

Okay. Thank you..

Thank you..

All right. Well, that wraps up our call today. We appreciate everyone's participation, and we'll be available for any calls or questions. Thank you..

Thank you. And this does conclude today's conference. You may disconnect at this time..