Q2 2017 Real-Time Call Brief

Highlights

Net sales and revenues were up 2% to $5.6 billion.

Net income attributable to Deere & Company was $194 million.

EPS was $0.61 in the quarter.

Our equipment operations effective tax rate was 50% in the first quarter due to largely and unfavorable discrete items.

It is worth noting the effective tax rate of the equipment operations in the first quarter of 2016 was 20%.

On Slide 4 total worldwide equipment operations net sales were down 1% to $4.7 billion.

Price realization in the quarter was positive by 2 points.

Currency-translation was positive by 1 point.

Turning to a review of our individual businesses starting with Agriculture & Turf on Slide 5.

Net sales were flat in the quarter-over-quarter comparison.

Operating profit was $213 million, up from $144 million last year.

Ag & Turf operating margins were 5.9% in the quarter.

The gain on the sale of a partial interest in Site One Landscape Supply contributed nearly 3 points of operating margin in the quarter, while expenses related to the voluntary separation program lowered margins by nearly 2 points.

Given the large crop harvest and consequently the lower commodity prices we're seeing today, our 2016 forecast calls for cash received to be down about 5% from 2015's levels.

Moving to 2017, we expect total cash receipts to be about $367 billion, roughly flat with 2016.

Shifting to Brazil on Slide 9.

Ag production is expected to increase about 8% in 2017 in US dollar terms due to record acreage expansion and yield expectations.

In local currency, the value of production is forecasted to be up about 3%.

Race promoter Moderfrota remain at 8.5% for small and mid-sized farmers and 10.5% for larger farmers.

Importantly the overall budget from Moderfrota has been raised by nearly 50% from the initial R5 billion to R7.5 billion.

Our 2017 Ag & Turf industry outlooks are summarized on Slide 10.

Industry sales in the US and Canada are forecasted to be down 5% to 10% with the effects being felt in both large and small models of equipment, particularly affected are products used in the livestock sector such as mid-sized tractors and hand-forged tools.

Still, there are signs the large Ag market at nearing bottom. For example, the magnitude of the industry decline expected in 2017 is considerably less than that experienced in 2016.

The EU 28 industry outlook is forecasted to be down about 5% in 2017 due to low crop prices and farm incomes as well as the geopolitical risks mentioned earlier.

In South America, industry sales of tractors and combines are now projected to be up 15% to 20% in 2017.

Shifting to Asia. Sales are expected to be flat to up slightly with growth in India being the main driver.

Putting this all together on Slide 11, fiscal year 2017 Deere sales of worldwide Ag & Turf equipment are now forecasted to be up about 3%.

The Ag & Turf division's operating margin is forecasted to be about 9% in 2017, roughly in line with 2016.

Now let's focus on Construction & Forestry on Slide 12.

Net sales were down 6% in the quarter as a result of the lower shipment volumes and higher sales incentive costs.

Operating profit was $34 million in the quarter, down from $70 million last year.

C&F operating margins was 3.1% in the quarter.

Expenses related to the voluntary separation program were incurred as expected in the quarter creating a nearly 1.5-point headwind to operating margins.

Looking at the economic indicators affecting the Construction & Forestry industries, there is slight improvement in the fundamentals. GDP growth is positive, job growth continues.

Construction spending is up from 2016 levels, and housing starts are expected to exceed 1.2 million units this year.

Construction investment in oil and gas activity improved in the fourth quarter of calendar 2016 after seven quarters of decline, while residential and commercial institutional construction continued to increase moderately.

Machinery rental utilization rates have made slight improvements after multiple quarters of deterioration, and forward looking sentiment has improved with the prospect for higher infrastructure spending.

On the other hand, used inventory for the industry remains above normal level and rental rates are still soft.

Also, economic growth outside the United States, particularly in Latin America, is sluggish.

Moving to the C&F outlook on Slide 14.

Deere's Construction & Forestry sales are now forecasted to be up about 7% in 2017, largely driven by production moving closer to retail demand.

The forecast for global forestry market is flat to down 5%, a result of lower sales in the US and Canada.

C&F's full year operating margin is now projected to be about 5%.

Let's move now to our Financial Services operations.

Slide 15 shows the provision for credit losses as a percent of the average owned portfolio.

At the end of January, the annualized provision for credit losses was 8 basis points, reflecting the continued excellent quality of our portfolios.

The financial forecast for 2017 shown on the slide contemplates a loss provision of 29 basis points, unchanged from the previous forecast.

This will put losses just above the 10-year average of 26 basis points, and below the 15-year average of 34 points.

Moving to Slide 16.

Worldwide financial services net income attributable to Deere & Company was $114 million in the quarter versus $129 million last year.

The lower results were primarily due to less favorable financing spreads and expenses related to the voluntary separation program.

2017 net income attributable to Deere & Company is forecasted to be about $480 million, unchanged from our previous forecast.

Slide 17 outlines receivables and inventories.

For the company as a whole, receivables and inventories ended the quarter down $461 million.

We expect to end 2017 with total receivables and inventory down about $200 million with reductions being made by both equipment divisions.

With respect to North American large Ag field inventories, Deere inventories as a percent of rolling 12 sales, are roughly half of those of the rest of the industry.

As an example, at the end of December, the inventory-to-sales ratio for Deere two wheel drive tractors of a 100-horsepower plus was 37% while the industry, less Deere, was 81%.

Slide 18 shows cost of sales as a percent of net sales.

Cost of sales for the first quarter was 80.8% which included the impact of the voluntary separation program cost.

Our 2017 cost of sales guidance is about 78% of net sales, unchanged from the last quarter.

When modeling 2017, keep these unfavorable impacts in mind and unfavorable product mix, emissions cost, voluntary separation expenses, and overhead spend.

On the favorable side we expect price realization of about one point.

Now let's look at some additional details.

With respect to R&D on Slide 19, R&D was down 3% in the first quarter including the costs associated with the voluntary separation program.

Our 2017 forecast calls for R&D to be down about 2%.

Moving to Slide 20.

SA&G expense for the quarter for the equipment operations was up 12% with the main drivers being the voluntary separation program expenses and commissions paid to dealers which results from direct sales to customers.

Our 2017 forecast contemplates SA&G expense being up by about 5%.

More than half of the full year change is expected to come from voluntary separation expenses and commissions to dealers.

Turning to slide 21, the equipment operations tax rate was 50% in the first quarter primarily due to discrete items as noted earlier.

For 2017, the full year effective tax rate forecast remains in the range of 33% to 35%.

Slide 22 shows our equipment operations history of strong cash flow.

Cash flow from the equipment operations is now forecasted to be about $2.6 billion in 2017.

The company's financial outlook is on Slide 23.

Net sales for the second quarter are forecasted to be up about 1% compared with 2016.

This includes about 2 points of price realizations.

Our full year outlook now calls for net sales to be up about 4% which includes about one point of price realization.

Finally, our full year 2017 net income forecast is now about $1.5 billion.

In addition our efforts to improve operating efficiency are gaining traction and we remain confident we can deliver at least $500 million of structural cost reductions by the end of 2018.