Tony Huegel - Director of IR Josh Jepsen - Manager, Investor Communications Rajesh Kalathur - CFO

Andrew Casey - Wells Fargo Securities Jerry Revich - Goldman Sachs & Company Jamie Cook - Credit Suisse Securities Robert Wertheimer - Melius Research Ann Duignan - JPMorgan Securities Nicole DeBlase - Deutsche Bank Securities Steven Fischer - UBS Securities Joel Tiss - BMO Capital Markets Joe O'Dea - Vertical Research Partners Timothy Thein - Citi Group Global Markets Stephen Volkmann - Jefferies David Raso - Evercore ISI Mig Dobre - Robert W. Baird & Company Larry de Maria - William Blair & Company Seth Weber - RBC Capital Markets

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

Hello. Also on the call today are, Raj Kalathur, our Chief Financial Officer; and Josh Jepsen, Manager, Investor Communications. Today, we'll take a closer look at Deere's fourth quarter earnings, our markets and our initial 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 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 Web site at www.johndeere.com/earnings under Quarterly and Events. Josh?

Today, John Deere announced its fourth quarter financial results in the end to another successful year. In fact, sales and earnings for 2017 were the fifth highest in the company history. Our performance was helped by improving markets for farm and construction equipment and also by our ongoing success established in a broad based product portfolio in a flexible cost structure. As a result, Deere has remained well positioned not only to serve its present customers but also to make investments needed to drive growth and attract even more customers in the future. Now, let’s take a closer look at the fourth quarter in detail beginning on slide four. Net sales and revenues were up 23% to just over $8 billion, net income attributable to Deere & Company was $510 million, EPS was $1.57 in the quarter. On slide five, total worldwide equipment operations net sales were up 26% to about $7.1 billion. Price utilization in the quarter was positive by one point. Currency translation was positive by two points. Turning to a review of our individual businesses, let’s start with Ag & Turf on slide six. Net sales were up 22% in the quarter-over-quarter comparison, all of the regions of the world were higher in the quarter, the increase was led by the US and EU 28. Operating profit was $584 million, up 57% versus the fourth quarter of 2016. The increase in operating profit was primarily driven by higher shipment volumes and favorable sales mix partially offset by higher production cost and higher selling administrative and general expenses. Operating margins were 10.7% in the quarter. Incremental margins were about 47% for the full year, excluding the impact of items such as the Site One gains and voluntary separation program expenses incremental margins were about 33%. Before we review the industry sales outlook, let’s look at some fundamentals affecting the Ag business. On slide seven, despite increasing global demand, global grain and oil seeds stock to use ratios are forecast to remain at elevated but generally unchanged levels in 2017, 2018 as an abundant crop are mostly offset by strong demand around the world. Chinese green and oil seeds stock remain high heading into 2018, after more than 10 years of supply which includes domestic production plus imports outpacing demand. Chinese grains still represent almost half of the world stock and considering that these stocks are unlikely to be exported the world market remains sensitive to production setbacks or major geopolitical disruptions. The world cotton stocks-to-use ratio has now fallen for second consecutive season and to the lowest level in five seasons reflecting stronger global demand. Slide 8 outlines US farm cash receipts. 2017 cash receipts are estimated to be 377 billion, about 3% higher than 2016’s levels. Given the large crop harvest in 2017 and consequently the lower commodity prices we are seeing today, we expect 2018 total cash receipts to be approximately 368 billion. That’s down about 2% from 2017 due to lower livestock and crop cash receipts. Our economic outlook for the EU 28 is on slide 9. GDP growth in the region is improving though risks remain. Arable farm margins are below the long-term average while the dairy market is recovering with prices holding at above average levels and forecast for margins exceeding the five-year average. Sentiment remains positive for beef and pork producers though downward pressure on pork prices is possible. Shifting to Brazil on slide 10. The chart on the left displays the crop value of agricultural production a good proxy for the health of agri business in Brazil. Ag production is expected to decrease about 4% in 2018 in US dollar terms due mainly to record production 2017 and the reversion to trend yields in 2018. In local currency the value of production is forecasted to be down about 2%. Although forecast to be lower in 2018, ag margins in Brazil are coming off of a record year and continued acreage expansion is expected. On the right side of the slide you see the eligible rates for ag related government sponsored finance programs. Rates for moderfrota remain at 7.5% for small and mid-sized farmers and 10.5% for large farmers. This demonstrates the government’s ongoing commitment to agriculture. Our 2018 ag and turf industry outlooks are summarized on slide 11. Industry sales in the US and Canada are forecasted to be up 5% to 10% for the year. Despite current commodities prices the industry is experiencing stronger replacement demand for large equipment while demand for small equipment remains solid. Deere is experiencing strong order activity in both our early order programs for seasonal products and our order book for large tractors which are supportive of the outlook. The EU 28 industry outlook is forecast to be up about 5% in 2018 a result of margin recovery in dairy and livestock as well as improved harvest outlooks in key markets such as France and the UK. In South America, industry sales of tractors and combines are projected to be flat to up 5% in 2018. This is driven mainly by demand in Argentina which continues to benefit from favorable policy effects, strong fundamentals and pent-up demand. Shifting to Asia, sales are expected to be relatively unchanged from 2017. Turning to another product category, industry retail sales of turf and utility equipment in the US and Canada are projected to be roughly flat in 2018 though Deere expects to outpace the industry. Putting this all together on slide 12, fiscal year 2018 Deere sales of worldwide ag and turf equipment are forecasted to be up about 9% including about 2 points of positive currency translation. The sales increase is led by the US market and to a lesser extent by the EU 28. The increase in the US is due in part to significant growth in the sale of small ag and turf products which are expected to benefit from new product introductions in the year. The ag and turf division operating margin forecast is about 12.5% in 2018 Excluding the impact of special items, the implied incremental margin in 2018 are nearly 35%. Furthermore, excluding the impact of currency translation and negative mix, forecasted incremental margins are above 40%. Now let’s focus on Construction & Forestry on slide 13. Net sales were up 37% in the quarter due to higher shipment volumes, price realization and the favorable effects of currency translation. Operating profit was $85 million due to higher shipment volumes and price realization partially offset by an impairment charge for international operations. Operating margin was 5% in the quarter, but 7.5% excluding the impairment charge. Moving to slide 14. The economic fundamentals affecting the Construction & Forestry Industries in North America continue to be supportive of increased industry demand. GDP growth is forecasted to be strong continuing a positive trend experienced during the past six months in the US and Canada. Housing demand is growing, but constrained by supply, as a result single family home inventories continue at 35-year lows. Single family housing starts are strong across all regions in the US. Single family homes require increased earthmoving and lumber content which are important drivers of earthmoving and Forestry equipment. Construction investment is forecast to grow in 2018 led by oil and gas and residential activity. Oil prices are forecasted to be above $50 which is important since oil and gas related activity tends to slow when oil prices are below $50 and tends to pick up when above that level. In addition, machinery rental utilization rates continue improving and rental pricing is gaining traction. Finally, new and used inventory levels have come down and auction activity has declined substantially year-over-year. Deere's outlook also reflects a strong order book based on industry activity and positive trend in retail sales. Moving to the C&F outlook on slide 15. Deere’s construction Forestry sales are now forecasted to be up about 69% in 2018 mainly driven by the anticipated acquisition of Wirtgen as well as by strong demand in US and Canada. The forecast includes about $3.1 billion in sales from Wirtgen and assume the acquisition will close in December. Regarding the Forestry the forecast for global forestry market is flat to up 5%, a result of improvement in the US and Canada. C&F’s full year operating margin is projected to be about 8% which includes estimated purchase accounting and transaction cost for Wirtgen. Excluding Wirtgen, the division’s annual operating margin is forecast to be about 10.5%. Let’s move now to our financial services operations. Slide 16, shows the provision for credit losses as a percent of the average owned portfolio. The provision at the end of 2017 was 24 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 25 basis points. This will put losses at the 10-year average of 25 basis points and slightly below the 15-year average of 27. Moving to slide 17. Worldwide financial services net income attributable to Deere & Company was $128 million in the fourth quarter versus $110 million last year. For the full year, financial services net income attributable to Deere & Company was $477 million versus $468 million in 2016. The higher results for both periods were primarily due to lower losses on lease residual values. Full year results were partially offset by less favorable financing spreads and higher selling, administrative and general expenses. Financial services is expected to earn about 515 million in 2018. The outlook reflects a higher average portfolio partially offset by higher selling, administrative and general expenses. Next, we will turn to receivables and inventories as shown on slide 18. For the company as a whole, receivables and inventories ended the year, up $1.477 billion. Ag and turf accounted for about two-thirds of the increase with the majority driven by growth in overseas receivables. 2018 receivables and inventories are expected to rise primarily due to the inclusion of Wirtgen while the rest of the business will likely see movement in line with sales. More specific guidance will be provided with our first quarter 2018 earnings release. Moving to slide 19, cost of sales as a percent of net sales for 2017 was 77%. Our 2018 guidance for cost of sales as a percent of net sales is about 75%. When modeling 2018, keep these impacts in mind; Positive price realization of about 1 point. On the unfavorable side, we expect an unfavorable product mix, higher overhead spending, and increased incentive compensation. Now, let’s look at some additional details. With respect to R&D on slide 20. R&D was up 3% in the fourth quarter but down 2% for the full year. Currency translation had an unfavorable impact of 1% in the quarter and no impact for the full year. Our 2018 forecast calls for R&D to up about 18%, half of which is related to the acquisitions of Wirtgen and Blue River Technology. Moving now to slide 21. S, A&G expense for the equipment operations was up 15% in the fourth quarter with acquisition related activities, commissions paid to dealers, incentive compensation and currency translation accounting for most of the change. S, A&G expense for the full year was up 12% due to the same factors noted for the quarter in addition to voluntary separation program expenses. Our 2018 forecast calls for S, A&G expense to be up about 26%. Excluding acquisition related expenses, S, A&G is forecasted to be up about 2% in 2018. Turning to slide 22. The equipment operations tax rate was 27% in the quarter and 30% for the full year. For 2018, the effective tax rate is forecasted to be in the range of 31% to 33%. The rate is a result of a more favorable mix of income, improved profitability outside the US, and structural changes within the business. Slide 23 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations $2.4 billion in 2017. The change versus our previous forecast of about $2.9 billion was due largely to OPEB contributions made earlier than previously anticipated for tax planning purposes. For 2018, cash flow from equipment operations is forecasted to be about $3.8 billion which includes positive cash flow from Wirtgen. The 2018 financial outlook is on slide 24. Net sales for the quarter are forecast to be up about 38% compared to 2018. This includes about 2 points of price realization and about 3 points of favorable currency translation. Wirtgen is expected to contribute about 6 points to the increase in the quarter. The full year forecast calls for net sales to be up about 22%. Price realization and favorable currency translation are expected to be about 1 point and 2 points respectively. Wirtgen sales are forecasted to contribute about 12 points for the year. Finally, our full year 2018 net income forecast is about $2.6 billion. Comparing 2017 and 2018, slide 25 shows the high-level reconciliation of operating profit for the equipment operations adjusted for special items. Operating profit was 2.82 billion for the equipment operations in 2017. Included were these special items which require consideration. $275 million pretax gain from sale of remaining interest in Site One landscape supply which has been discussed throughout the year. M&A cost of $37 million, impairment charge of $40 million mentioned earlier and voluntary separation program expenses of $92 million. Adjusted for these factors, 2017 operating profit would have been 2.615 billion. Looking at 2018, based on the guidance for net sales changes in operating margin by segment, projected operating profit for the equipment operations is forecast to be about 3.525 billion. Included in the operating profit forecast are following items of note: Wirtgen operating profit using very preliminary estimates for purchase accounting and deal cost is expected to be about $75 million resulting in operating margin between 2 and 3%. On a standalone basis, Wirtgen is forecast to deliver operating margin in the range of 15 to 16%. The operating margin expectation for the business going forward is in the 11 to 12% range reflecting estimated ongoing purchase accounting related expenses. The 2018 forecast does not include any benefit from synergies associated with the Wirtgen acquisitions which as noted at the time of announcement are expected to total €100 million by 2022. Additionally, the acquisition of Blue River technology results in higher year-over-year spending of roughly $60 million as we invest in machine learning and integrated technology into our portfolio. Taking these items into account, adjusted operating profit for 2018 is expected to be about 3.51 billion. On an adjusted basis, the comparison shows an improvement of roughly 900 million in operating profit for 2018 versus 2017, representing an incremental margin of about 33%. As a result, Deere is demonstrating improved operational performance due to disciplined cost execution, cost management and continued investment in innovative technology and solutions. This brings benefits to stakeholders in 2018 and beyond. I’ll now turn the call over to Raj Kalathur for closing comments.

Before we respond to your questions, I want to share a few thoughts about our performance in 2017 and what we see in store for the year ahead. First, its noteworthy that Deere has been able to perform so well for the North American market for large farm equipment, running at such a low level. Even in 2018, with the sales on the upswing we see the US market for things like large tractors, for example remaining over 25% below what we consider to be a mid-cycle level. So, there is lots of upside potential there when the market recovers. Our ability to maintain strong performance under these conditions preach to our success establishing a broad product line up including small tractors and turf equipment as well as a more profitable international presence. The second point concerns structural cost. Our performance in 2017 and our forecast for the year ahead provide clear evidence of the progress we’ve made reducing structural cost. This is helping us generate strong incremental margins and impressive cash flow which we are using to make investments in technology and growth. We remain committed to further bringing down structural cost and it will remain a priority for Deere in the future. Finally, a thought about Wirtgen, needless to say we remain excited about the many opportunities for growth that Wirtgen will bring to John Deere, thanks in large part to the world’s growing need for roads and infrastructure. The Wirtgen acquisition also underscores the financial strength of our company consider that in the coming weeks Deere will conclude a $5 billion plus acquisition by far the largest in our history, fund the acquisition with a relatively low amount of debt and still maintain a very strong balance sheet even after the deal is completed, we believe our net debt-to-capital ratio for the equipment ops will be in the mid 20% range and that will improve throughout 2018 given the strong cash flow we are expecting. All-in-all then, we have great confidence in Deere’s present course backed by solid performance in 2017 and our strong outlook for the year ahead. We firmly believe the company is in a prime position to capitalize on the world’s increasing need for advance equipment and is set to deliver stronger and more consistent results in the future.

Thank you, Raj. 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 are hope to a lot more you to participate in the call please limit yourself to one question. If you have additional questions, we ask you to rejoin the queue. Katy?

Thank you. At this time, we would like to begin the question-and-answer session portions of the conference. [Operator Instructions] Our first question comes from Andrew Casey from Wells Fargo Securities. Your line is now open.

Just wanted to ask a couple of questions about the Ag and Turf outlook. Within the 9% revenue growth specifically the 10% core growth expectation, are you including any expectations for potential dealer restock actions?

If you think about and I’m guessing the tip of that question is specifically targeted towards a large Ag in the US and Canada.

Yes.

And the answer there would be at this point we would be forecasting pretty much in line type of shipment in terms of retail. So, we would not be anticipating at this point in the year increasing any receivables in our field inventory on large Ag in the US and Canada. So, basically again think about it at this point building to retail demand.

Okay. Thank you, Tony. And then...

So, we’re going to have – I hate to say we’re going to have to limit to one question, there is a lot of people in the queue and we want to be fair to the others.

Okay.

Thank you. Next caller.

Our next question comes from Jerry Revich from Goldman Sachs & Company. Your line is now open.

Tony, I’m wondering if you could just talk about where your dealer used equipment inventories stand today and how much progress have you made over the past quarter? And just frame for us the ratio of used versus new equipment sales that the dealers are seeing in ‘17 compared to long-term averages if you could?

Sure yes, I think maybe the best way to think about used equipment is as we start to say really through 2017 and we continue to say our used equipment levels especially as it relates to large ag equipment has shifted really to being more supportive of the ability for our dealers to sell new equipment. So, we are making continued progress on that large ag inventory. And I think if you put it in context we have if you look on products like combines and four-wheel drive tractors, those used levels are today at levels that we really haven’t seen since kind of 2010 timeframe. The one challenge we would continue to have that we’re still working on would be on large row-crop tractors. And again, I want to emphasize the position is much better today than it would have been 12 to 18 months ago but it is an area of continued focus for us as we go into 2018. Alright?

So, can you frame the used versus new sales, can you just give us some context on that?

Again, I think it would still be in line. Again, as we’ve gone through the year, our dealers obviously they’ve focused on bringing down those used. You’d see a little higher than normal level of used to bring those down. I think on tractors we would anticipate a continuation of that going forward. But clearly, we are seeing some strength in the new sales as well, partly and due to the fact that dealers have been very successful in getting those used inventories more right sized.

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

Tony, just, sorry to focus so much on the large ag equipment market but you talked a little bit about your early order program. Can you just sort of provide more color across product line, how much visibility you have and how much the order book is up both for ag in the US as well as construction on an organic basis? Thanks.

You bet. Yes, and again as we talked about even last quarter on the kind of crop care early order programs as sprayers and planters up double-digits they did and so the early order program have ended up double-digits on those products. Again, keep in mind off a very low base. Our combine early order program, it will end in January but we did finish kind of the second phase of that. It also at this point is seeing some double-digit increase, now I want to be really carefully with that combine number because recognize this year our anticipation is we saw fairly aggressive orders early, it would anticipate those trailing off a bit still higher year-over-year but not necessarily that double-digit. Remember we were a high single-digit increase in 2017. So, seeing another year of strength from combines in 2018 is very encouraging. When you think about row-crop tractors those Waterloo tractors again remember those are not on an early order program. Think about that more as kind of a traditional sequential order. And we think about availability. Really pretty much across the board on those Waterloo tractors we would see availability further out than where we would have been a year ago. Some examples, if you look at 8R tractors, our availability is out in to kind of the March timeframe versus January to early February a year ago. It’s just one example and that’s pretty consistent and again that’s based on our current production schedules that we are seeing that type of order volume. Maybe in summary and perhaps where I should have started is when you think about our order books relative to the forecast, our order coverage today on our original budget outlook is much stronger really across the board than what we would have seen a year ago. As we shift to C&F, I would say it is much, much stronger today versus what we would have seen a year ago at this point. We continue to see very, very strong orders for that division and again put that in context we would continue to say basically we’re a quarter out generally on availability. Obviously as retail needs come in, we shift that around a little bit to accommodate needs but most of first quarter is spoken for today on orders. So very excited about where we’re at from an order perspective going into 2018.

Our next caller question comes from Rob Wertheimer from Melius Research. Your line is now open.

Good, thank you. So, the question is a little bit like what’s happened in the last month or three months and just how it feels. Stop me if I get something wrong but it seems as though your receivables inventories went up which I assume is a bullish sign rather than any kind of an issue or whatever? In October obviously AM sales were really, really strong, so is there any sort of inflection, I mean what do you attribute those two factors to and maybe just comment on what it feels like?

Sure. I would say you know certainly what we’re seeing in our outlook is really in what we saw in those early order programs and the tractor order book that I just talked about. I would say more as a confirmation of what we were seeing really kind of from mid-2017 forward, we talked about that replacement demand is appearing to come back and so from our perspective not a significant change. Again, it's encouraging for sure because until you actually see those orders, you know the sentiment is just that, it's sentiment. But that we’re seeing that translate into orders which is encouraging. I wouldn’t read as it relates to North American Ag, I wouldn’t read a lot into that receivables and inventory increase because most of that is related to outside the US in Canada, increases. And specifically, on the receivables versus what we had previously forecasted, it things like we talked in the last year where we did have a special deal with Turkmenistan, a large transaction and the timing of that can sometimes create differences in terms of whether its settled or not and that really is what happened at the end of year, that was a big part of that increase versus what we had forecast. So again, that’s really just supportive of the strength we’ve seen outside of the US and Canada through 2017 not really any significant build at all and really no builds in the field inventories in the US and Canada.

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

Yeah, hi good morning. I guess since J. B. is not there I'll ask question to Raj. With Construction & Forestry, you used to say that segment has earned its right to grow, but if we look at shareholder value add over the last two years it’s actually been negative. And if we look at the last four years, it’s basically been flat down $1 million actually. So, can you talk about the fact we also had impairments this quarter with impairments last year the same quarter. So, Raj, can you just talk about the risk of making a big acquisition in that segment, and what we should just -- how should think about that?

Thanks for the question. Of course, I want to remind you that if you took the underlying numbers that we talked about for this year in terms of margins. Josh said, it will be 10.5% margins for C&F this year, it didn’t include the working portion. Now the other part that you need remember is we’ve had these growth investments in Brazil and in China that actually pull our overall margins down. We look at the margins for the core business and we know it is pretty healthy. So that’s one of the requirements we have for the division and that’s coming along well. Now, supporting that as you know we’re getting to be larger overtime in the production class equipment and that’s going to be positive for us longer-term and even at the businesses in South America like Brazil start coming up, our factory capacity is utilized better the margins will improve there too. So, we watch it very carefully and we know the underlying health of their Construction & Forestry business is pretty good, we want to make it better of course. And then even with the Wirtgen transaction that you think about the area that Wirtgen participate in and the type of premium they get, we anticipate as we mentioned on the call 11% to 12% tight margins on an ongoing basis even after some of their purchase accounting items. So, if you look at cash for that business that’s almost 15% to 16%, cash EBIT type margin. So, overall that improves further our overall margins for C&F. So, yes, it’s doesn’t look good on paper when you look at it as supported but it’s actually the underlying health of that business is very good.

And if you wouldn’t mind just clarifying, where exactly where the impairment charges in those years?

Okay. Last year impairment charges primarily for a couple of our units in Brazil and China. And this year impairment charges are for another foreign entity that’s not Brazil and China, okay.

Our next question comes from Nicole DeBlase from Deutsche Bank Securities. Your line is now open.

Hi, so I guess around Ag & Turf incremental margins. I think you guys said that you’re implying a step up to 35% next year and 40% ex-items. So, given that material cost is still higher and you’ve talked about a little bit of incentive compensation pressure. If you could talk about the key drivers of those pretty robust incremental margins in your guidance?

Yes, and again we do not have significant material increases currently in the forecast for next year. So, we certainly had in 2017 but I would say ‘18 at least in the initial guide is relatively flat and that again is we’ve talked a lot about the cost reduction programs helping to offset some of that higher cost. As you think about obviously higher volumes will help, price realization will help, to be fair, we would be forecasting some lower warranty expense. Those would all be certainly helping from an operating profit perspective. On the flip side, we also have talked about and it’s clearly in the guidance higher R&D and much of that increased R&D is related to our agricultural side of the business. And specifically, large ag products as we start looking at new generation of products there as well there is some unfavorable mix, [indiscernible] lot of added is due to parts as well. And remember a complete good increase parts as a percent of the total tends to come down a bit. And then again, some higher S, A&G which as you mentioned would include some of that incentive comp. It also includes things like South American business in particular improves some higher dealer commissions that flow through into those -- into that SA&G. So those are really kind of the key drivers there as we look going forward. But again, I think as Raj mentioned and Josh as well, I think it’s really just evidence of the strength that the structural cost reductions are bringing and improvements that its making to the overall business to see those types of incremental.

Our next question comes from Steven Fischer from UBS Securities. Your line is now open.

Raj, thanks for the color on the 25% below mid cycle. I was wondering if you could sort of frame the trough and peak levels you see there in ag that kind of support that number? Because I think that would imply something like $27 billion to $28 billion of a mid-cycle ag revenue number which compares to about $29 billion plus peak. So, I was just kind of wondering how you’re thinking about framing what trough and peak would be with 25% below on a 2018 number?

Yes, this is Tony. Keep in mind that was specific to large Ag in the US and Canada, and not the total Ag business. So, if you look at our current forecast for 2018 we would be closer to 90% of mid cycle for the total division. But again, I think the point is these types of returns are being recognized when our largest most profitable portion of that business is down pretty significantly and continues to be down pretty significantly. We talked all along that versus peak of 2013 large ag in the US and Canada were down 60% or more. And you are starting to see us come off of those trough levels that are still at relatively low level. So, the good news there is as the recovery continues for those large Ag products. There is a lot of additional opportunity for profitability and certainly incremental margins as well.

Our next question comes from Joel Tiss from BMO Capital Markets. Your line is now open.

One clarification and then a question on the clarification for Raj. On the consolidated balance sheet, the inventories are $692 million but on the cash flow statement, it's closer to a $1.2 billion of negative working capital and when you deconsolidate the balance sheet, the inventories are only up $564 million. So, I just wondered if you could get to the bottom of that. And then the question is, is the cost per sales drop from 77 to 75, is that a structural change just because you’re including Wirtgen or is there something else behind that? Thank you.

Yeah, actually the Wirtgen numbers don’t change that cost of sales percentage significantly. I think if you look at cost of sales year-over-year, you’re really seeing again benefit of some increased volumes as well as price realization but again it goes to as I mentioned previously, it's the benefit that we’re seeing from some of those structural cost reductions that are starting to come into play in that cost of sales as well. We will follow up maybe later on your question on cash.

Our next question comes from Joe O'Dea from Vertical Research Partners. Your line is now open. Joe O'Dea: Hi good morning. Just back to the comments on, you continue to pace this one with a structural savings you talk about and that initial 500 million that you targeted. Could you give us a sense of how much of that is remaining or how much of that you expect to achieve in 2018?

Yeah, you know I think really what we would say there is as business is continuing to grow, the short answer is we’re basically chosen not to give a specific number I think as we talk about even last quarter, you can see it in the incremental margins, we certainly continue to be committed there. But the challenge is we have as we talked about previously, you have a structural cost programs continuing to be ongoing but then you have other levers being released, we’re making different decisions around investments, R&D is probably the best example of that. That was an area that we were focused on when we were back in 2016 type of levels reducing R&D. Now as our businesses are starting to improve we’re shifting the focus there and at these levels feel the need that we need to step up some of the investment in those products again and so with all of those moving pieces, I think the way to think about the structural cost reduction is clearly in our view as being seen in the 2018 incrementals, at least in the underlying business and certainly you should expect to continue to see the benefit of that as we go forward. Again, we’ll make decisions as we go forward how much of those structural cost reductions in the existing business are used to improve margins and how much of that is used to invest for future growth and that’s again consistent with what we’ve said pretty much all along with the structural cost reductions.

So, Joe I’ll add that qualitatively, we would say we’ve been very successful in our journey respect to structural cost reductions. Now as Tony mentioned, we can still a leverage we have added because of volume coming up, material inflation that we’ve compensated in ’17 an additional R&D that we’re investing in and growth investments we’re making and still delivered very strong incremental margins. I mean with ’17 and ’18 you’ll see that significant benefit to cost reduction exercise is delivered. Now, to your other part of your question, we do plan to further drive this effort in 2018 and beyond. So, clearly not done, we have more to get, we have been very successful today, we have more to get.

Our next question comes from Timothy Thein with Citi Group Global Markets. Your line is now open.

Thank you. Good morning. Tony, first just maybe a clarification on your comments earlier on the combine early order program in North America being up double-digits. My impression with that is that typically the first phase accounts for a much higher percentage of orders just because of the incentives are higher and then they kind of ratchet it down as you go through that. So, I guess my question is just with the discount structure change this year? Just I want to make sure I appreciate your comment, because again I would think that it would always be higher in that first phase.

That is certainly true and it would be still be true this year. I think the difference is as we go deeper into the program the anticipation is that where last year those orders remained actually pretty strong through the entire program we would expect it to come off a little bit versus what we saw last year. Again, I want to be clear on that early order program, our anticipation is that the combines orders will be higher year-over-year, I just want to be careful with the double-digits.

Okay. And just dove tailing on that Tony, just on the revenue progression for the year in Ag & Turf as we move beyond 1Q, the math would suggest that we’re going to be moving into a down organic year-over-year change in the back half of the year. Is there something contributing that you would highlight there contributing to that?

Well, again when you think about first quarter, remember again it’s a strength of the seasonal the spring season equipment or sprayers and planters in particular you’re going to see some impact of that in our first quarter. And again, I want to be really careful as I talked about last year when you think about year-over-year changes in the quarter, remember we’re still at pretty low levels especially large Ag in the US and Canada. So, as we contemplate the best manufacturing schedules that are going to be for us as we go into the next year, you may see some quarters that are stronger or weaker than you would typically see at least in the year-over-year comparison, you saw that last year where we had a very, very strong second quarter, third quarter and fourth quarter weren’t quite as strong versus what you saw in the second quarter. But for the year, very strong results and again that’s what we’re trying to setup from manufacturing perspective what’s the most cost-effective schedule that’s going to drive the most profitability and the most efficiency for the year. So, you may see some quarterly shifts here and there, but again it’s just us trying to accommodate the increased schedule as efficiently as we can.

Our next question comes from Stephen Volkmann from Jefferies. Your line is now open.

Hi. Good morning, guys. I actually wanted to ask about smaller Ag, because it sounds like that in the prepared commentary that the mix was a little bit more to the small side in terms of the new product and then so forth. And can you just flesh that out a little bit or do you think that you’re gaining share there. Do I have it right at that it will be kind of a higher mix in the 2018. And yeah, any color there would be great.

Yeah. Today, in our forecast -- you’re exactly right, as you think about mix it is actually what while large Ag is certainly strengthened in US and Canada the mix is slightly negative for us in Ag for the current forecast. Some of that is due if you think about small equipment, the strength of the industry continues to be very high, so certainly not seeing that come off any. And coupled with that we do have some new products that would be coming into the market and of course that often results in some higher shipments for us versus the industry. So, if you look at our shipments versus industry outlook, yes, we would outperform but a lot of that is due to some of that new equipment and filling channel with that new equipment that tends to occur. And so, our sales mix will be a bit different than what we would say the mix is for the industry retail sales in 2018. So, you are exactly right but I think underline that I think about strength -- continued strength in small ag and some additional benefit for us with new products that’s driving that.

Our next question comes from David Raso with Evercore ISI. Your line is now open.

My question relates to the Wirtgen business 2018 to 2019. Tony, you made a statement earlier about -- you gave a standalone margin which is helpful. But I think the real number was kind of run rate company with dealer amortizations about 11% to 12% margin. Is that correct?

Yes, that’s correct. So, as you think about 2019 that would be the one -- at least -- again keep in mind these are very preliminary assumptions. We would expect next quarter to have a lot more specifics that we can share around that. But that 11% to 12% is what you should think about as we go into 2019. The caution I would give thereof maybe the upside to that number is it does not include any assumptions for synergies. So, to the extent we start to see some synergy benefit in 2019, that would be additive to those margins.

I mean that’s the genesis -- basically it appears, if you’re doing a 2.5% margin this year and the run rate with your amortization is 11.5%, it implies there’s almost 280 million in this year’s guidance that’s one-time in nature, inventory step-up, other transactional fees. And then in ‘19 you get a full year where you have say a month to two months of Wirtgen that may be a 12%, 12.5%, we can swag the synergies as we like. But I mean just it seems you be implying like $0.70 delta from 2018 Wirtgen to 2019 Wirtgen. I just want to make sure we’re on the same page.

No, I would not take exception to any -- I mean again you can make the swag on what you think synergies may do but it you're understanding that guide correctly.

So, Dave I think overall again I want to reinforce that it’s very preliminary. Now what’s going well there is the underlying strength of the industry on a worldwide basis where road, construction, infrastructure that’s strong tailwinds, plus the market position this entity has. Those things work really well. On a cash basis, if you embedded it's even better than the 11% to 12% that we talked about.

Our next question comes from Mig Dobre with Robert W. Baird & Company. Your line is now open.

Tony, maybe you can comment a little more about replacement demand because obviously cash receipts in your forecast are down so are commodity prices and you know I’m wondering exactly what the trigger here, is it simply related to fleet age or is this related to productivity, product introductions? Any help would be appreciated?

Yeah, I think again this is similar to what we’ve really talked about through a lion's share of 2017. You know as we more forward, certainly the strength that we’re seeing in large Ag is not coming from improved fundamentals, we’re seeing pretty similar type of receipts and income levels year-over-year, slightly higher in ’17 looking at least at initial forecast to ’18 slightly lower but kind of flattish in both years. But what we are recognizing is that at these levels most farmers are making some level of income. Okay, and I think that’s one factor that you have to keep in mind certainly not what they were making in 2012, 2013 but there is some profitability there. You also have the fact that we’ve gone a number of years at very, very low level so the equipment has begun to age a bit and so that’s creating some demand and it sounds like everything you just said. We have continued to invest in our business and so we continue to bring efficient new product and new features into the market, that’s certainly contributes to the desire for customers to step back and in some cases its ways that they can actually reduce some of their breakeven points. If they get more efficient equipment that’s using some of those inputs more efficiently to reduce the breakeven or improve their yields, those sorts of things again kind of speaks to the benefit of our precision technology as well. So, I would say it’s a combination of those things. So obviously it's going to be different for each farmer in terms of what ultimately is driving them back into the market. But that’s what's going on with the customer side and we have a dealer network who has done a lot of hard work to reduce their used inventory and put themselves in a position where as farmers are willing and interested to step back in the market they can accommodate those sales today where they would have been much more challenged a year and half two years ago to do that. So again, kind of a wide range of factors that are driving that but again we think it’s really just underlined replacement demand that we’re seeing and we believe it’s very sustainable as well.

Underlying customer economics I want to reinforce has been pretty good, not great but pretty good now for the last few years as well. Now couple of things when people focus on the commodity prices. The cost side of the farmers equation that’s actually come down nicely and the other thing that lowers their breakeven point is the yield, the yield is grown. So, on the cost plus yield the economics is actually pretty good for the, while its not great but reasonably good and that’s what is pulling this equation of demand and we expect this to continue and if the commodity prices come up you know then the opportunity opens up even a lot more.

Our next question comes from Larry de Maria from William Blair & Company. Your line is now open.

Hi, good morning. Just to shift gears a little bit here and if you could talk maybe a little bit detail around Blue River where this is going to how you monetize it and maybe some of the financials. I think it was $300 million and related to that does the SVA model applies here or could we assume that maybe you’re willing to take some bigger bets for technology away from the SVA model going forward?

Yeah. I'm going to be really brief on just again just in the interest of time. But keep in mind, as we talk about the Blue River the interest we have in that company really was around the machine learning technology, that is and continues to be an investment in future technology. And so, it isn’t expected to be a revenue driver certainly in the short-term but there are wide range of areas where we think that machine learning technology really will take us into that next generation of intelligence. Blue River is the most advanced company in that regard and puts us clearly in the lead towards implementing that in product. But, in the short-term again that’s an investment in future technology, while you see in 2018 and our outlook it is the cost up and we would expect certainly long-term see some very positive returns from that investment, but it’s more of a long-term play versus short-term.

Yeah. The investments -- the terms are going to come in all the other equipment that very use this technology.

Exactly, yeah.

Our final question comes from Seth Weber with RBC Capital Markets. Your line is now open.

Just wanted to go back to Raj’s comment in his prepared remarks about increasing profitability in some markets outside North America. Is there any granularity around that, is it a function of better distribution, better mix, is the competitive environment changing? Maybe talk about Europe and Latin America specifically. Thank you.

Yeah. I mean Latin America as an example is one that we would point to, now one, if you look at where the market is headed, it is growing more in the large Ag side which help us, we have broader base of products that we offer in Latin America and these are large Ag type products you know planters sugarcane harvest, cotton pickers and sprayers and so on in addition to the combines and tractors. So, all of those actually help us. Now the other factor you would think about is Argentina, that market opening up and there is pent up demand in Argentina, it helped us well. But in general, our ability to manufacture locally and successfully grow our share especially in the large Ag side has helped grow profitability there as well. So that would be one example.

Okay. I mean can you just talk about the competitive environment there in Latin America as the business environment has softened a little bit here, in the last few months?

Yeah. Again, the competitive environment has always been there. So, again we focus on the areas where we can offer a differentiated product and command a differentiated margin. And that’s what we are focused on and industry growth has actually helped us.

Thank you, Seth. And with that we will conclude our call. As always, we’ll be around to take additional questions as we go through the day. And appreciate your time. Thank you.

That concludes today’s conference. Thank you for participating. You may disconnect at this time.