Josh Jepsen - Director, IR Raj Kalathur - CFO Max Guinn - President, Construction and Forestry Ryan Campbell - VP and Comptroller Brent Norwood - Manager, Investor Communications.

Jamie Cook - Credit Suisse Jerry Revich - Goldman Sachs Mig Dobre - Baird Adam Uhlman - Cleveland Research Joe O’Dea - Vertical Research Rob Wertheimer - Melius Research Ross Gilardi - Bank of America Merrill Lynch Ann Duignan - JPMC Andy Casey - Wells Fargo Securities Michael Shlisky - Seaport Global Steven Fisher - UBS Joel Tiss - BMO Emily McLaughlin - RBC Courtney Yakavonis - Morgan Stanley Stanley Elliott - Stifel Larry De Maria - William Blair David Raso - Evercore ISI.

Good morning, and welcome to John Deere & Company Second 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..

Thanks, Angela. Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer; Max Guinn, President of the Construction and Forestry Division; Ryan Campbell, Vice President and Comptroller; and Brent Norwood, Manager, Investor Communications.

Today, we’ll take a closer look at Deere’s second quarter earnings, 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 on 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 may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, 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..

Today, John Deere reported higher earnings for the second quarter. It was another strong performance, helped by a broad-based improvement in market conditions and a favorable customer response to our innovative products.

Farm machinery sales are making solid gains in markets throughout the world while construction equipment sales continue to move sharply higher. Now, let’s take a closer look at our second quarter results in detail, beginning on slide three. Net sales and revenues were up 29% to $10.72 billion.

Net income attributable to Deere & Company was $1.208 billion or $3.67 per share. The results for the quarter included a favorable net adjustment to provisional income taxes of $174 million. Excluding this item, adjusted net income was $1.034 billion. On slide four, total worldwide equipment operations net sales were up 34% to $9.747 billion.

Currency translation was positive by 3 points; the impact of acquisitions was 12 points. Turning to a review of our individual businesses, starting with agriculture and turf on slide five. Net sales were up 22% in the quarter-over-quarter comparison, primarily driven by higher shipment volumes and the favorable effect of currency translation.

Operating profit was $1.056 billion, up 27% from the same quarter last year, excluding the impact from the sale of SiteOne. Operating margins for the quarter were 15%. Results benefited from higher shipment volumes, partially offset by higher R&D as well as increases in production costs, comprised largely of higher freight and material costs.

It’s also important to note that over the quarter, Deere has made progress addressing supplier and logistics challenges ensuring that our products reach customers in a timely manner. Before we review the industry sales outlook, let’s look at fundamentals affecting the ag business.

On slide six, corn and soybean stocks-to-use ratios are expected to decline in response to increasing global demand and drought conditions in Argentina, which have lowered the country’s corn and soybean production by roughly 25% and 33%, respectively.

While wheat stocks-to-use ratio remains close to its highest level in almost two decades, stocks are projected to decline modestly in 2018. Slide seven outlines U.S. farm cash receipts. 2018 farm cash receipts are estimated to be $375 billion, roughly flat with 2017.

Crop cash receipts are projected to be on-par with last year as increased commodity prices are partially offset by lower forecast production. Receipts from livestock are also flat due to strong domestic and export demand offset to an extent by growing supply and lower prices.

While global trade concerns weigh on farmers, overall sentiment is holding as commodity prices move upward and equipment demand shows broad-based improvement. Our ag economic outlook for the EU 28 is on slide eight. Despite a late start to the season, crops are in fair condition and the crop value of production is expected to increase in 2018.

Overall, arable farm margins remain slightly below long-term averages, although conditions differ by region in some areas such as Northwest Europe are showing signs of improvement in 2018. Margins for the dairy segment remain above long-term averages though rising production may pressure prices later in the year. Shifting to Brazil on slide nine.

The chart on the left displays the crop value of agricultural production, a good proxy for the health of agro business in Brazil. The value of ag production is now expected to be about the same as last year with a record soybean harvest being partially offset by soft sugar prices.

On the right side of the slide, you will see eligible rates for ag-related government sponsored finance programs. Rates for Moderfrota through June are shown below and are less favorable than the prevailing policy interest rate for the region.

However, customers are anticipating lower rates in July and therefore shifting purchases into the second half of the year. This shift in sales is evident in a strong order book, which is up from last year.

While the 2017 2018 season began with soft industry fundamentals, farmer confidence has increased dramatically for the second half of the season as corn and soybean margins have benefited from rising commodity prices, record production, and favorable FX movements. Our 2018 ag and turf industry outlooks are summarized on slide 10.

Industry sales in the U.S. and Canada are forecast to be up approximately 10% for the year. Replacement demand continued to drive sales as customer sight the need for increased productivity, updated technology and equipment within its warranty period.

Replacement demand is reflected in the results of our 2018 Combine Early Order program, which increased by double digits from previous year. Similarly, our large tractor order book now extends into October. The EU 28 industry outlook is forecast to be up about 5% in 2018, unchanged from previous guidance.

In South America, industry sales of tractors and combines are projected to be flat to up 5% for the year. This is primarily driven by strong industry fundamentals in Brazil, which is offsetting weakness in Argentina caused by drought conditions experienced in the first half of the year.

The region as a whole continues to deliver excellent operating results as Deere extends its market-leading position and achieves strong financial performance. Shifting to Asia, industry sales are expected to be relatively unchanged from 2017, though strong demand for tractors in India is driving improved results for the region.

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 2018. Putting this all together on slide 11.

Fiscal year 2018, Deere sales of worldwide ag and turf equipment are now forecast to be up about 14%, including about one point of positive currency translation. The ag and turf division’s operating margin is forecast to be about 12.5% for the year, up roughly 2 points from 2017, after excluding the gains on the sale of SiteOne.

Importantly, the impact of higher freight and material costs is being addressed through continued structural cost reductions and future pricing actions. Now, let’s focus on construction and forestry on slide 12.

Net sales for the quarter were up 84% compared with last year, driven by strong demand for construction and forestry equipment, as well as by the acquisition of Wirtgen, which closed on December 1 of 2017. Second quarter operating profit was $259 million, benefiting from higher shipment volumes, as well as the inclusion of Wirtgen.

However, Wirtgen’s overall profit contribution has been limited due to the unfavorable effects of first-year purchase accounting associated with the transaction. C&F operating margins were 9.6% for the quarter, but 12% excluding Wirtgen.

At this point, I would like to welcome Max Guinn, President of Deere’s Construction and Forestry business to the call. He will provide comments on the conditions in C&F and an update on the Wirtgen acquisition.

Max?.

Thank you, Brent. Good morning, everybody. We’re on slide 13. Let me start off by saying the economic environment for the construction, forestry and road-building industries looks good. It continues to support increased demand for new and used equipment. For the year, U.S. GDP is forecast to grow at 2.7%, that’s above the 20-year average.

Meanwhile, housing demand remains solidly with housing starts expected to be 1.3 million units for 2018; that’s a result of inventories of new and existing homes that are available-for-sale being at 36-year lows that provides a foundation for continued growth in new home construction.

In 2018, construction investment is forecast to grow 2.9% led by increased activity in oil and gas, and by residential construction. Oil prices, we had forecast to be $63 a barrel for the year; that’s a price that’s comfortably above breakeven economics for U.S. shale oil producers and it supports continued drilling and production growth.

Obviously, prices have progressed further and faster than we expected. So, we’re likely going to update that forecast. That’s good news though. In addition, machinery rental utilization rates continue improving and rental pricing is gaining positive traction.

These positive economic factors are also reflected in a strong order book and resulting in significant orders that are already being placed for 2019. Let’s move to slide 14 and an update on the newly acquired Wirtgen Group. Wirtgen is the global leader in road construction equipment.

The acquisition greatly enhances Deere’s exposure to global transportation infrastructure; that’s a segment we view as faster growing and less cyclical than the broader construction market.

Global transportation investment this year is forecast to grow 6%, driving increased demand for road construction equipment such as milling machines, rollers and asphalt pavers. Those are all products in which Wirtgen maintains a market-leading position, globally. Importantly, transportation spending is solid in core regions such as the U.S.

and Europe, and continues to see double-digit growth in China and India. Both of those are key growth markets for Wirtgen due to a market-leading position. Turning to company performance. Wirtgen continues to meet our high expectations through its relentless focus on market share and operating excellence.

The current order book is very strong, operating margins are expected to exceed 16% when excluding the impact of purchase accounting. Integration is well underway with the joint Deere-Wirtgen team working towards the synergy target of €100 million by 2022. I’m pleased to say that we see a clear path to achieving that level of savings and that timing.

And obviously, we’ll continue to seek out other value-enhancing opportunities as integration activities continue. As we learn more about Wirtgen’s business, we’re increasingly finding opportunities to leverage the two distribution channels. Just two examples.

In the U.S., Deere’s channel was able to fill a coverage gap for Wirtgen in West Virginia while the opposite was true in the Mexico City territory. We anticipate further opportunities to leverage the two channels as integration progresses. For fiscal year 2018, Wirtgen is forecast to produce $3.2 billion in revenue.

Remember, that represents 10 months of ownership. Additionally, we now project that Wirtgen will contribute $100 million in operating profit for the year, even with the unfavorable impact of acquisition costs and purchase accounting. Importantly, Wirtgen is generating strong positive cash flow in the current fiscal year.

Beyond 2018, Wirtgen operating margins are estimated to be in the 13% to 14% range and that includes purchase accounting adjustments. So, finally, I want to shed a little light on what things look like for the overall C&F business for the rest of the year we're moving to slide 15.

Deere’s construction and forestry sales are now forecast to be up about 83% in 2018 as a result of stronger demand for equipment as well as the acquisition of Wirtgen. As we said earlier, the revenue forecast includes about $3.2 billion of sales attributed to the acquisition.

The forecast for global forestry markets is up 10%, as a result of improvement in sales in the U.S. and Canada, and strong demand for cut-to-length products in Europe and Russia. C&F’s full year operating margin is now projected to be about 8.5%. That includes the negative impact of purchase accounting and acquisition cost from Wirtgen.

Excluding Wirtgen, C&F projects operating margins to be about 11%. That operating profit guidance is partially driven by pricing actions that we’re taking now and will take effect in the second half of the year. We expect to offset material cost inflation and allow for continued margin growth in future quarters. I’ll turn it back over to Brent..

Let’s move now to our financial services operations. Slide 16, shows the provision for credit losses as a percentage of the average owned portfolio. At the end of April, the annualized provision for credit losses was 9 basis points, reflecting the continued excellent quality of our portfolios.

The financial forecast for 2018, shown on the slide, contemplates a loss provision of about 21 basis points, 1 basis point lower than our previous forecast. This will put loss provisions for the year just below the 10-year average of 25 basis points and the 15-year average of 27 points. Moving to slide 17.

Worldwide financial services net income attributable to Deere & Company was a $104 million in the second quarter, roughly flat with last year. The results for the quarter included $33 million of net tax reformulated charges, arising from the re-measurement of deferred tax assets and deemed earnings repatriation.

For the full year and 2018, net income is forecast to be about $800 million. Excluding the impact for the previously mentioned tax reform-related items, adjusted net income is forecast to be $571 million. Beyond 2018, effective tax rates for John Deere Financial are forecast to be between 24% and 26%. Slide 18 outlines receivables and inventories.

For the Company as a whole, receivables and inventories ended the quarter up $4.8 billion. About $200 million of the change relates to currency translation. In the C&F division, the increase is largely attributable to Wirtgen, while for ag, the increase is due to higher sales.

By the end of fiscal year 2018, receivables and inventories are expected to increase about $2 billion from 2017 levels, driven largely by the inclusion of Wirtgen, as well as the higher sales across the Company. Slide 19 shows cost of sales as a percentage of net sales. Cost of sales for the second quarter was 75.2%.

Our 2018 cost of sales guidance is about 76% of net sales, up 1% from previous guidance. When modeling 2018, keep these unfavorable impacts in mind, higher production costs such as freight and material 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 20, R&D was up 28% in the second quarter. Currency translation had an unfavorable impact of 2 points, while another 10 points is 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 activity 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 21.

SA&G expense for the equipment operations was up 24% in the second quarter with acquisition-related activities, incentive compensation, and currency translation accounting for most of the change. Our 2018 forecast for SA&G expense is up about 18%. Excluding acquisition-related expenses, SA&G is forecast to be up about 2% in 2018. Turning to slide 22.

The equipment operations tax rate was 8% in the second quarter, primarily due to the favorable adjustment of $207 million, arising from tax reform related net deferred tax asset re-measurement and deemed earnings repatriation.

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 about 56%. Beyond fiscal year 2018, Deere’s effective tax rate is projected to be between 25% and 27%. Slide 23 shows our equipment operations history of strong cash flow.

Flow from the equipment operations is now forecast to be about $3.8 billion in 2018 compared to previous guidance of $4.4 billion. The decrease in forecast relates to an anticipated payment of $1 billion towards pension and OPEB liability, net of taxes. The Company’s financial outlook is on slide 24.

Third quarter equipment sales are forecast to be up approximately 35% compared with the same quarter last year. Our full-year outlook now calls for net sales to be up about 30%, which includes about 1 point of price realization and 1 point for positive currency translation.

Finally, our full-year 2018 GAAP net income forecast is now about $2.3 billion. The full-year net income forecast includes charges of $803 million, resulting from tax reform-related net deferred tax asset re-measurement and deemed earnings repatriation. Excluding the impact of these items, adjusted net income is forecast to be about $3.1 billion.

It is important to note, the previous adjusted net income guidance of $2.85 billion excluded the benefit of the lower tax rate in order to compare to our opening budget guidance given in November of 2017.

This quarter’s guidance only excludes the re-measurement of deferred tax assets and deemed earnings repatriation but includes the benefit of the ongoing lower tax rate. I’ll now turn the call over to Raj Kalathur for closing comments.

Raj?.

Before we respond to your questions, let me share a few thoughts on the second quarter and our expectations for the rest of the year. First, important to note, we are seeing strong demand across geographical regions from both ag and turf, and C&F divisions.

Replacement demand continues to drive equipment sales in large ag as customers express their need for increased precision and productivity enabled by our latest technologies.

For C&F, as you heard from Max, strong economic indicators such as GDP growth, housing starts and rising oil prices are generating robust equipment demand, which is reflected in a healthy order book for the remainder of 2018, stretching into 2019.

Second, although the economic environment is largely positive for demand, there are some supply side headwinds to overcome. Material and freight costs have exceeded our forecast for the year due largely to inflation in U.S. steel prices and a tight market for logistics providers.

As Max indicated, we are executing pricing actions for the C&F business that will take effect over the remainder of the year. Importantly, these actions should cover material inflation projected for the C&F division.

For ag and turf, we generally utilize early order programs for seasonal equipment and an advanced order book for our large tractor products. Orders are typically backed by retail customers. As a result, we typically implement price increases on an annual basis and have a strong history of price utilization over an extended period.

As we set prices for the next model year, we will take into consideration not only the additional value that we bring to our customers but also overall market conditions, including inflationary pressures.

At this time, we are confident that our actions, both in making structural cost reductions and in model year ‘19 prices will more than offset inflation in 2019. Lastly, strong levels of demand we are experiencing across our two equipment divisions will result in excellent cash flow generation for the year.

Note that we have resumed share repurchases in the second quarter. We also anticipate funding our pension and OPEB liabilities up to $1 billion over the course of the third quarter, in order to take advantage of the previous tax rate of 35%.

Additionally, it’s our desire to maintain a dividend payout ratio, it targets 25% to 35% of mid-cycle earnings and can be sustained through the cycle. Based on our performance in the previous cycle and the inclusion of Wirtgen, further dividend increases will be under consideration during the remainder of this year.

Overall, we are encouraged by the outlook for improving demand in 2018 and will continue to work and delivering strong results for the remainder of the year.

Josh?.

Now, we’re ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. 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.

As a reminder, Max Guinn, President of C&F is here with us available for questions as well.

Operator?.

[Operator Instructions] Our first question comes from Jamie Cook with Credit Suisse. Your line is now open..

Good morning. I guess, two questions.

One, Raj, I was hoping that you could elaborate a little more on the supply chain issues in the quarter in terms of, were they the same issues versus last quarter and what’s embedded in the guide for remaining back half for the year? And then, my second question is sort of longer term thinking about margins in the ag business.

I mean, it sounds like based on what you’re saying, given you’re going after pricing action, inflation and assuming the markets hold up, should we still -- as we look pass the next two quarters, should we still be able to generate above average incrementals for the ag business, given we’re still well below normalized levels? Thanks..

Hey, Jamie, I think, we will take second one first. We do anticipate strong margins going into the future in ag. None of that has changed. So, the constraints we're facing are more short-term. As we described, it’s purely steel inflation and also logistics inflation. With respect to your question on supply issues, it’s actually improved very nicely.

Availability issues are less of a concern now than it was just a couple of months back..

The only thing I would add there is we saw most significant issues we experienced really in the February time frame and we’ve seen improvements since there as we continue to execute and get product out to dealers and customers..

But my question is do the supply chain issues constrain your top line at all I guess for the back half of 2019? That’s what I’m trying to figure out..

No. I think, when you look at that we actually, you think about both of our divisions, you saw volume actually improve slightly from the previous guidance..

Our next comes from Jerry Revich with Goldman Sachs..

Hi, good morning everyone, I’m wondering if you could talk about how much of the annual raw material cost inflation that we see play out in the second quarter because of the standard cost accounting, can you just give us a rough sense of what proportion of the full-year inflation we recognized in Q2 versus what’s expected in the back half? And can you just flush out the drivers of the better incremental margins in back half? I’m assuming the standard cost accounting is a big driver but maybe you can expand on that a bit more for the ag and turf business..

Thanks, Jerry. I think, when you think about ag and turf, in the second quarter, it was more of an impact of freight. So, as we were trying to make sure we were getting products out to our dealers and customers, we had higher levels of premium freight, expedited freight as we’re working through some of those supply issues.

And when you pivot to the back half of the year, you definitely start to see the material come through more so. So, it’s a combination. I’d say second quarter was more freight; the back half of the year, you see more on the material side.

As you think about the margins for that business, the second half of the year for ag and turf does have more large ag than we typically would have in a usual year or a typical year. As a result of that, you see better margins and you also see improved pricing as a result of more large ag in the second half. So, that is favorable..

And Josh, sorry, just a clarification on the premium rate in 2Q, why are we assuming there is no premium freight in the back half? Have you already seen premium freight down significantly since quarter-end.

Can you just flush that out please?.

We do expect to see allocated freight, and it’s really as a result of demand and rates moving up. So, we have that in there as well. I said in the back half, you got more weighted to material than freight though. Thanks. We’ll move on to the next question..

Next question comes from Mig Dobre with Baird. Your line is open..

Yes, good morning. I wanted to talk a little bit about Wirtgen if we can, a couple of things.

I’m trying to understanding within SG&A, exactly, what is this reduction in cost from acquisition-related activities? And, how does this relate to your increased profitability guidance for Wirtgen?.

Yes. So, when you think about SA&G, really, as we’re incorporating it into our business, you have a little bit of movement amongst those where those costs are classified. So, largely that’s really adjusting and making changes to their forecast as we incorporate them into our process.

As you think about the improvement from zero operating profit to about a 100, it’s about two-thirds really the purchase accounting changes and adjustment and about a third related to operational performance. So, there is some improvement in the underlying business, but the majority is adjustment to purchase accounting..

Next question comes from Adam Uhlman with Cleveland Research..

Hi. Good morning. I was wondering if we could circle back to the pricing commentary for ag and turf. It sounds like large tractors are -- lead time is already out to October. So, you’d to be putting in some price increases here pretty soon. Could you maybe talk through the magnitude of the increases that you’re considering at this point.

And maybe just flush out like how much incremental productivity, material cost savings that you think that you would also have to offset, higher steel costs next year?.

Yes. So, on the pricing side, as we think about model year 2019, we do have -- we’ll start early order programs here in a few weeks for seasonal products. So, planters, sprayers, those types of things will come out. As we think about pricing, it’s pretty early to talk about in general. In total, we think that’s going to be varied product to product.

Given where we’re at in the year, we do, as Raj mentioned, expect the pricing that we are going to take for 2019 to be more than offsetting the inflationary pressures we’re seeing in 2018 and 2019..

Do you think you need more than the 2% that you’re guiding to for the second half of 2018?.

I think it’s fair to assume that. What we’ve done the last few years, we’re going to be higher than that, as a result of that..

Next question comes from Joe O’Dea with Vertical Research..

Hi. Good morning. Raj, you commented on dividend under consideration and increases there.

With respect to just how the strong cash balance is now and the strength, what do you need to gain a little bit more comfort on stepping up on the repurchase front?.

So, our cash use priorities have not changed, they’re the same. One of the things we said earlier is we are taking advantage of 35% tax rate, which will not last after fiscal 2017 tax filing. So, that’s the pension and OPEB. And otherwise, it’s a mid-single A [ph] growth investments, with organic and inorganic dividends and finally share repurchases.

That’s the priority order that we have articulated and we work towards. On the dividends, like you said, we are looking at 25% to 35% of mid-cycle earnings.

We have seen -- given this strong performance we’ve seen in the recent downturn and considering the growth we anticipate in the future, that’s under consideration, increasing dividends is under consideration. Share repurchases, which is your question, is residual use of cash. And you’ll notice that we did start buying back shares.

And generally, we think about longer term minded investors and the value it brings to long-term minded investors. So, you will see us buy back more shares when there is a larger gap between the intrinsic value of a short-term minded investor versus a longer term minded investor.

So, we have, of course as you mentioned, ample firepower in terms of the cash generation that we’re going to have this year and going forward do all of our cash justice..

Next question comes from Rob Wertheimer with Melius Research. Your line is open..

Just a quick question on Wirtgen. It seems you took up sales outlook for construction, not for Wirtgen.

Is there any reason that those products shouldn’t follow the heavy construction industry? Is there any destock you’re doing or anything else you’re doing in that and what explains it otherwise?.

There is nothing to be read into that. I don’t believe. We think the initial forecast we provided is solid. It does reflect considerable growth in Wirtgen’s business and they’re executing quite well..

The only thing I would add there, Rob too is when we look at the backlog, backlog is up double digits strong. And again, that’s off of what was a very strong 2017 as well..

Next question comes from Ross Gilardi with Bank of America Merrill Lynch..

I first wanted to ask about the pension contribution of $1.1 billion. I mean, given that you did that partly to take advantage of the higher tax rate, should we assume $1 billion bump to cash flow from ops next year? So, I would imagine the contribution wouldn’t be as large.

And then, can you just talk a little bit about the persistent weakness we’ve seen in the AEM data for tractors of 100 horsepower and above. I know you guys classify high horsepower tractors as 200 and above. So, I’m wondering that weakness we keep seeing in the data is really more in the midsize segment, which is less of a driver for you. Thanks..

Yes. I will take the first one. In terms of the $1 billion in pension OPEB, yes, it’s clearly opportunistic and taking advantage of that 35% tax rate. We have said our pension plans are well-funded. We do not have any mandatory contribution requirements.

And this is -- you can think of this is pulling forward some of our pension contributions into this year and take advantage of 35%. So, from that perspective, you should not see this continue into next year and so on, unless we see another opportunity to take advantage of giving you some high returns.

Otherwise, it’s going to be working capital requirements and sales growth. Those are the types of things that will impact the cash flow, as you know..

This is Ryan. Maybe just to add to that on the $1 billion, the impact to operating cash flow this year’s net of tax, and so that’s $650 million. So, it’s a $1 billion minus 35% rate that will get the deduction on that..

Yes. Related to AEM, I think, you’re right. 100 plus is a very large category. So, you are talking utility tractors, midsize tractors and then large row-crop tractors. So, mix there is wide when you think about what portion is high horsepower. I’d say, month-to-month this can be lumpy. We’ve certainly seen weather and timing be adjusted.

As we look at this, particularly the rest of the year, we are confident in our ability to execute and believe we are going to see retails -- as we look at our retail order book is very full, really strong position. As Brent mentioned earlier, our large tractor retail order books are out into the October timeframe.

So, we feel really good about the order book and the expectation that we are going to see retail maybe slightly shifted in terms of seasonality versus normal but that will continue to come through..

Next question comes from Ann Duignan with JPMC. Your line is open..

Can you guys talk a little bit about how you balance new equipment sales versus the risk of getting back into a used equipment slot? And in particular, can you address it in light of the fact that you are pressing your dealers to take back more of the off leased equipment under their balance sheet? How do you balance, it's great to have new equipment sales, great to have replacement demand, but how do we evolve getting back into the used equipment slot again?.

Yes. Ann, I think, when we think about used, there we’ve been focused on this for a number of years, if you think about throughout the downturn. We are down; used equipment is down about 36% from the peak. That’s pretty much where we were a quarter ago. So, we have made great, great strides.

And you look across the product categories, we feel like we are in good shape. And we're at [ph] used equipment levels, we haven’t seen since 2012 or before. So, there is a lot of great work done by our dealers and our sales teams to manage that inventory.

Row-crop tractors, we’d say, we still got a little bit of work to do, but in better shape than we’ve been in the past. I think, as we balance that, it’s continuing to make sure we are managing that used inventory levels that we are not seeing that grow and rise.

And as you think about lease returns, lease returns and when you think about the whole universe of used inventory, only equate to about 5% of the total. So, it’s not a huge amount. We are certainly focused on it and want to work it. And we are working with our dealers to make sure they’re engaged in managing those returns.

So, that focus hasn’t changed, working proactively with our dealers and customers as we know leases are maturing to work through those. But, I think we feel good about where we’re at. And definitely, as use inventories come down, we are seeing use prices strengthen, stabilize and start to strengthen, which helps there as well..

Next question comes from Andy Casey with Wells Fargo Securities. Your line is now open..

Couple of questions on Wirtgen. You now expect about $100 million operating profit for the year, pretty much unchanged revenue and the second half implied is about 6% margin.

First, what drove the increased operating profit outlook from prior expectations for I think about neutral contribution? And second, can you help us understand how to bridge the 6% second half implied margin outlook for the longer term 13 to 14.

And I guess, the core of that question is, should we expect the purchase accounting adjustments outside of the ongoing amortization to be complete by the end of this fiscal year?.

So, on the operating margin from zero to about a 100, two thirds of that’s really purchase accounting adjustments, as we continue to work through that on the integration side. The other third is really operational improvement. As you think about the full-year, so now we’re talking about 3% to 4% operating margin for the full-year.

You would expect to see improvements from what we’ve done now, kind of building in terms of operating profit throughout the rest of the year to go from where we started, obviously negative in the first quarter to be at about 100 at the end of the year..

This is Ryan, your question is on ongoing the biggest component of purchase accounting this year as the inventories step up, and that will come through the P&L over the -- come through the P&L to date and it will come through over the balance of this year. Next year, it should be clean with that.

And you’re just looking at the amortization of the intangibles. That bridges you from the plus or minus 4% or 5% margin this year, up to that 13% to 14% range..

Next question comes from Mike Shlisky with Seaport Global..

Good morning, guys. I wanted to ask about the turf business if I could. I’m seeing some of the companies on the wholesale, even some of the retail outlets have kind of slow start to the spring season due to the weather in March and April.

Do you have any comments on what you experienced in Q2 here in turf business? And I think, has that kind of reversed here very recently? I also want to ask, last quarter, last couple of quarters, you actually did mention that Deere expects to gain share in turf. But this quarter that language was not in your comments.

So, I’m wondering if you could tell us what has changed there. Thank you..

I think, when you think about turf, the weather, the late spring that we had has impacted that in the quarter. I think, we’ve seen a turn in the weather. So, there is still I think belief that you can catch that up, given the turn in the weather and improvements we are seeing. So, I think there is still confidence that that can be achieved.

I think, the commentary in terms of Deere outperforming, no, no change in terms of our expectations on that. So, I wouldn’t read into that..

Next question comes from Steven Fisher with UBS. Your line is now open..

In terms of the ag revenue guidance, the implied revenue growth is about 9% in the second half of the year with a little bit of help from currency.

So, how did you approach that guidance since the 9% will be a slowdown from a first half? Is that conservative or are there some weaker pieces you have to assume in there? Because it sounds like your overall commentary on ag is actually fairly positive..

Yeah. Steve, I think, as we look at the year, I mean, we took up the full year. When you look at kind of organic for the division, we’ve been up 12% for the year a quarter ago and now up 13%. So, our -- I wouldn’t say, there is an embedded conservatism or weakness there. I mean demand is very strong and we’re seeing that in our order book.

So, I think as we look at the full year, we feel good about the demand, customer demand, whether it’s in North America, South America or Europe; we’re seeing that demand and feel good about the year..

And so, is the slowdown, is that just comps or….

Yes. I think, it’s really just seasonal..

Okay. I’ll follow up. Thanks a lot..

Thanks.

Next question?.

Next question comes from Joel Tiss with BMO. Your line is open..

Hi.

How is it going?.

Hey, Joel..

I wonder if you can talk a little bit about the warranty issue in the C&F business. You just mentioned it and I just wanted to see what it was all about..

I don’t think we did mention anything on warranty, Joel?.

What were you referring to, Joel?.

Just in the slides that was the warranties were a little bit of negative factor in the profitability. All right. I can follow-up later..

Yes. Let’s follow-up offline. I’m not sure that we’re tracking..

And then, on your slide on the global stocks to use, the corn stocks, the use is dropping quite a bit as we go out towards the end of the year. And I just wondered what’s underneath that.

Are you taking out some of the Chinese corn that’s been decaying?.

Yes. So, just quick, that warranty is actually favorable. So, quarter-over-quarter, Q2 2018 versus Q2 2017 for C&F, warranty is a favorable item, not negative. Stocks use, that is really a story of what’s going on with the demand and slightly lower production for the year.

So, there is no exclusion there in terms of stocks, just the tightness we’re seeing there as demand is strong and you’re projecting a little bit of lower production for the year..

All right. Thank you..

Thanks.

Next question?.

Next question comes from Emily McLaughlin with RBC. Your line is open..

Hey, guys. Just a couple of questions. So, your March and April retail sales versus the industry for the U.S. and Canada were a little bit soft.

Just wondering do you have any color on that? And then secondly, we are little surprised you didn’t raise your South America forecast, just given the strong order books you mentioned and now maybe a little more favorable in the back half..

Yes. So, on the retail sales, as we mentioned, the month-to-month, there could be movement there. Our view is we’ve -- we feel very confident in our order book and the position of those retail orders. So, feel good about the full year and then what we’d expect to see second half of the year in terms of retail.

As you think about South America, basically, we had a little bit of a shift. A quarter ago, we said strength in Argentina and flat to up a little bit in Brazil. We’re seeing that shift now with the drought in Argentina, so a little bit of weakness there, but improved sentiment in Brazil. So, I mean, those were kind of the puts and takes.

But to your point, we do feel good about the Brazil demand, the farmer economics are strong from a margin perspective, confidence; FX has the reals weakened, which helps the margin side of the business for those farmers.

And then, as it relates to FINANE, we still haven’t had the announcement of what we expect for that program for the second half of this year and the first half of next year, so, the program that will take effect in 1 July. Expectations are that you will see more attractive rates.

And as a result, you are seeing customers wanting their deliveries in July and August, but that remains to be seen..

Next question comes from Courtney Yakavonis with Morgan Stanley. Your line is open..

Just another quick question on Wirtgen. I think, you had guided to this quarter adding about 16% to equipment ops and it came in only at 12, and I know you’ve kept the guidance for the year.

So, I just want to understand, is that related to the supply chain issues? Was there some other timing discrepancy and how we should think about modeling seasonality wise in next year into 2019?.

Yes. So, full-year, maintaining -- I think what we have here is a little bit of timing. And keep in mind there that they own a lot of their distribution. We are trying to forecast, not just sales to dealers but also from a retail perspective.

So, I think as we work through that seasonality, it’s taking a little bit of time but no concern on the full year..

It just reflects the maturing process. Wirtgen’s processes for forecasting were quite a bit of different than ours. There are a lot of entities involved. And they had not traditionally done a monthly forecast. So, it’s a transition issue. It’s not an issue at all for the full year..

So, is it safe to say that the majority of that was related to their distribution in Europe as well as to the U.S.?.

It’s just kind of the forecasting process..

Yes. No specific geography..

No geography..

Next question comes from Stanley Elliott with Stifel. Your line is open..

You all mentioned the C&F order book sitting out to 2019.

Could you give more commentary, is that kind of normal expectations? Is that a shift with more production class equipment that you have been focusing on or Wirtgen, or what’s really driving that order book out there?.

It’s definitely a shift towards the upper end. And I’d say that both dealers and customers are hungry for equipment. We see some of our largest customers accelerating their purchasing plans for 2019 to make sure that they are prepared to be able to execute work that they have on their books.

So, demand is really, really strong and it’s very strong on the big end, if that answers your question..

It does. Thank you.

And you mentioned a couple of things on the distribution side in West Virginia and Mexico, is there anything you could share in terms of how the synergies are coming together, either in Europe, Asia, anything along those lines between the Wirtgen and Deere businesses?.

Yes, it’s going to take some time, but I can tell you that we are answering questions on a daily basis from geographies -- from Wirtgen customers and geographies where we are not present in C&F about when we are going to be there. And we are excited about those opportunities but we are also realistic.

It’s not just a matter of taking orders and shipping equipment, but it’s making sure that we have the support mechanisms in place and can really take care of those customers the way we know they expect to be taken care of. So, there is lots of opportunity in front of us. It’s going to take a little bit of time..

Next question?.

Next question comes from Jerry Revich with Goldman Sachs. Your line is open..

Yes. Thank you for taking the follow-up. Raj, I’m wondering if you could talk about the cadence of ag and turf pricing you’re expecting over next couple of years, based on the product pipeline, also in past five years, I think you realized on average, 2.5% annual price increase due to features upgrades.

And I’m wondering if we should be thinking about the next couple of years based on the product line up, any differently at all. Obviously, this year was different from that front line. So, any comments would be helpful..

Jerry, in terms of the pricing, of course, you will appreciate, we’ll not be able to tell you exactly, how much or exactly when.

But, I think the points as we provided are as we come with a model year ‘19, we mentioned that around 1 June, we will be taking some of the orders for model year ‘19 and then almost 1 August, we start producing for model year ‘19.

Those are the times you will be thinking about price increases, not only for, like you said, some of the value addition that we’ll bring in these products but also looking at the inflationary aspects. So, we do have a healthy model year ‘19 from that regard; it’s going to like the ‘18, ‘19 is going to be there.

If you see our R&D investments and innovation we’re adding, you should expect that you can get better. So, our opportunity to get pricing is still going to be pretty positive, and the importance we place in development and research and especially on innovative ideas coming out in the precision ag sector..

I think I’d add there. It’s important, as you think about precision ag, investments that we’ve made, we didn’t pull R&D down significantly during the downturn. So, those are the products that will be coming.

And when you think about investments we’re making now, and things like incorporating Blue River and those technologies, machine learning, automation into our product portfolio, that will be coming out in, in the future as well..

Next question comes from Larry De Maria with William Blair. Your line is now open..

Your principal competitor noted they might be a bit more aggressive on price, given where their margins are.

Just curious what you are seeing and if you’re willing to give up some share on price and how [ph] is this playing out into 2019 where you start to take some motors? And then, secondly, bigger picture, Europe, just curious where you think we’re in the cycle? We’re seeing some mixed sentiment indicators over there.

And curious if you think this is a peak level or for just kind of back to normal Europe, which kind of bounces around at certain levels? Thank you..

Yes. Maybe starting on Europe, as we look at historically where we’ve been, we say we’re still below replacement demand levels. So, it’s a market that had -- doesn’t see as wide a fluctuation. So, we didn’t -- haven’t seen high highs or low lows.

But we would say when we look at the industry particularly for combines but also for tractors, we’re still below where we consider kind of normal replacement demand..

And on the pricing in general, we think more longer-term the expected pricing, that’s why we think about the value add and ability there, gain more pricing or earn more pricing from our customers. We don’t think about pricing in a short-term mentality. This also gives us loyalty with customers longer term.

So, it’s philosophically how we think about pricing..

So, the order book is stretching to next year, has new pricing -- or prices increased, and I just want to be clear on that..

I think your question was about C&F pricing.

Is that right?.

Yes, that’s correct..

Okay. We didn’t hear that at the beginning. I guess, I’d start off by saying, this will be the first year in several years when we have not generated a net cost reduction internally based on some really strong focus on cost reduction.

So, we’re going to take the pricing actions we feel are appropriate in the second half to be able to keep our margins improving, as I said earlier. I don’t think -- we don’t have any reason to give up share due to price, I don’t believe. I think, we can earn a good share and manage our pricing well..

Perfect. Thank you very much..

The thing to point out there too on the C&F side when you look at that business, ex-Wirtgen, we’re running about 30% incremental margin for the year. So, feel good about that..

Next question comes from David Raso with Evercore ISI..

Hi. Good morning. Hey, Max, for your C&F growth, pull out Wirtgen, do you expect after the second quarter where ex-Wirtgen sales were up low 20%, the third quarter to be similar kind of growth, just so I understand the cadence for the core business or do you think it slows on comps? Give a sense. And then, I have a follow-up..

So, it’s similar, David. No, we don’t see any slowdown there..

That’s what I thought. So, I’m just trying to figure, we have the rough idea of C&F organic, we have Wirtgen for the third quarter, then it hit the full company sales guidance for the third quarter. That means A&T sales growth for the third quarter has to be about, call it 15%, right.

That’s how you get to the full company 35% sales guide for the third quarter. But, if you do that, that implies the fourth quarter A&T is almost giving you zero growth to hit your full year sales guide for A&T of 14.

And just given all your color on the order book and so forth, I just want to make sure we understand, are you trying to imply the fourth quarter A&T revenue growth is almost nil or is that just a call it conservatism in the sales guide? Is that -- that is the -- that’s the math..

I mean, I think your math reasonable. I think, when you think about the fourth quarter, the thing that would not be reflected there is we haven’t started our EOP for the spring seasonal products yet.

And those we do know as we think about planters and sprayers, will come in, and you start to build those really in the fourth quarter as you’re building those for the spring seasonal delivery. So, I think that’s a piece that where we don’t have visibility yet.

Combines, we do -- large tractors, we do those spring seasonal products, we don’t have that visibility yet. And I think that’s where -- what you see there..

So, based on the order book right now on ag, just from the things you’ve said, field work we’ve done. I mean, clearly the order book is not suggesting fourth quarter should be flat.

Those are just sort of raise your hands and not trying to make a call on the fourth quarter, but you’re not really try to leave us thinking the fourth quarter is flat on the A&T sales, is that a fair summary?.

I think that’s fair. Like I said, we’ll obviously -- when we get to the third quarter, we’ll have more visibility into those early order programs. But again, I’d reiterate strong, what we see combines out the year, large tractors into October. So, that remains firm..

All right. I appreciate it. Thank you..

Okay. Well, thanks. We are at the top of the hour. So, we will go ahead and end the call. And we’ll be available for call backs the rest of the day. Thank you..

Thank you for your participation in today’s conference. Please disconnect at this time..