Q3 2003 Deere & Company Earnings Conference Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Alex Blanton - Ingalls & Snyder - Analyst : Good morning. That was an excellent rundown. I wonder if you could comment on the price increase. It's 3% year-over-year in which divisions and I think you said a 2% overall and comment on whether you have run into any resistance to that, because this is sort of unusual these days, these price increases.

Question: Alex Blanton - Ingalls & Snyder - Analyst : Yes. But any resistance to these at all?

Question: Alex Blanton - Ingalls & Snyder - Analyst : All right. Second question is, could you tell us what your sales to the big rental fleets are doing as opposed to sales to your dealers, how are they versus last year?

Question: Alex Blanton - Ingalls & Snyder - Analyst : I'm really talking on the construction side. So the sales to the rental.

Question: Alex Blanton - Ingalls & Snyder - Analyst : Are up in line with the total? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Alex Blanton - Ingalls & Snyder - Analyst : Because the rental fleets really haven't been buying a lot recently, so, this is a change since earlier in the year?

Question: Alex Blanton - Ingalls & Snyder - Analyst : Okay. Thanks.

Question: Mark Koznarek - Midwest Research - Analyst : Hi, it is Midwest Research. Good morning.

Question: Mark Koznarek - Midwest Research - Analyst : One clarification, Greg. On the foreign exchange, did you say you made 14 million in the quarter that was income?

Question: Mark Koznarek - Midwest Research - Analyst : Now, my main question involves inventory. Where are we trying to get inventories and receivables by year end and then sort of I'll ask the follow-on right now, which is why is there -- are you trying to clear out certain models to get ready for new models to be introduced next year? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Mark Koznarek - Midwest Research - Analyst : Okay.

Question: Mark Koznarek - Midwest Research - Analyst : Okay. Is there any major ag roll-outs planned for next year in terms of models?

Question: Andrew Casey - Prudential Equity Group - Analyst : Prudential Equity Group. Good morning.

Question: Andrew Casey - Prudential Equity Group - Analyst : Just a follow-up question to Mark's, I guess. If you are looking at the normal levels to be above where they were for the last 12 months, are you seeing the trends in place to get back to normal?

Question: Andrew Casey - Prudential Equity Group - Analyst : Ag equipment, Greg. You went through normal levels.

Question: Andrew Casey - Prudential Equity Group - Analyst : Sure and then when you look at your cash position, is there any usage for that in the near term?

Question: Andrew Casey - Prudential Equity Group - Analyst : Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Joel Tiss - Lehman Brothers - Analyst : Hi, still at Lehman Brothers, how are you doing, guys? Can you help us a little bit? The free cash flow has come down quite a bit in the quarter and I just wondered if your inventories are in shape, your net income is up a lot, can you just give us some of the pieces that would have caused that?

Question: Joel Tiss - Lehman Brothers - Analyst : Okay. And also can you just give us a sense about sustainability of this rebound that we're feeling in the construction industry? And I'm thinking into '04, '05, not anything specific, just kind of where are we in the cycle? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Joel Tiss - Lehman Brothers - Analyst : So a lot of that replacement demand is being satisfied in the nearer term, do you think?

Question: Steve Volkmann - Morgan Stanley - Analyst : Morgan Stanley.

Question: Steve Volkmann - Morgan Stanley - Analyst : Hi, guys. Most of it, I think has, been answered. In the subsidiary income the other income was stronger than what I was looking for in my model and sort of stronger than the recent run rate. What happenedthere and how should we look at that going forward?

Question: Steve Volkmann - Morgan Stanley - Analyst : Is 10 million reasonable going forward, or, any color on that?

Question: Steve Volkmann - Morgan Stanley - Analyst : While you are at it, when does the Nortrax thing go away?

Question: Steve Volkmann - Morgan Stanley - Analyst : Okay. And then is it too early to get an early look at pension in '04?

Question: Steve Volkmann - Morgan Stanley - Analyst : That's great. Thanks very much. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: David Bleustein - UBS Warburg - Analyst : Good morning. UBS. Just to clarify, you mentioned that ag sales had improved in the last few weeks but it didn't look like it in the July numbers. Does that mean August retail improved or are your dealers placing more orders with you?

Question: David Bleustein - UBS Warburg - Analyst : Fair enough. There's still an excess of 3 billion of cash on the balance sheet. Can you walk through how management prioritizes its use of funds and how you think about cash when calculating return on assets?

Question: David Bleustein - UBS Warburg - Analyst : All righty. Terrific. Thanks.

Question: Joanna Shatney - Goldman Sachs - Analyst : Good morning, Goldman Sachs. Can you guys talk about production versus retail in '04, are we implementing at some point the inventory management process or is that still further away?

Question: Joanna Shatney - Goldman Sachs - Analyst : Okay. And at the end of the year you've got your union contract coming up. Can you just kind of give us the dates and what we should be watching for and kind of -- I'm sure health care is going to be the big issue. It's the big issue for everybody. Just give us some color on what to expect in the next couple of months for that? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Joanna Shatney - Goldman Sachs - Analyst : Did we realize any of those savings that we had talked about because part of that involved hiring a lot of new people in under the old contract. Did we get any real incremental savings you should the prior five-year daily?

Question: Joanna Shatney - Goldman Sachs - Analyst : Is under new contract.

Question: Joanna Shatney - Goldman Sachs - Analyst : Thanks.

Question: John Mcginty - Credit Suisse First Boston - Analyst : Credit Suisse First Boston. Good morning. I want to get back to the thing that David Bleustein was touching on. I'm a little bit confused. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. It's very un-Deere like to make a statement that retail sales of machinery in the U.S. have moved up in recent weeks which implies not only a kind of recent time frame and admittedly, it was just June was when it started but also implies that -- are you saying anything about what's continued through August? I wondered if -- you said row crops were down double digits. Can you talk about things like orders, showroom activity, in other words is this just based on the EMI data that you're looking at or does it transcend it a little bit based on what you're hearing back from the dealers, the regions and everything else in terms of the implications for higher retail sales?

Question: John Mcginty - Credit Suisse First Boston - Analyst : Can you give us a quantification to the fact that you were saying down 5, you're now saying flat to down 5, what that means specifically for the fourth quarter now versus where you were a quarter ago in terms of the forecast?

Question: John Mcginty - Credit Suisse First Boston - Analyst : I guess kind of the follow-up to that, you mentioned quite -- I would agree that the tax legislation on depreciation, write-off and so on is likely to be beneficial. Are you seeing that now or is this more likely to be a November/December kind of a most people's, you know, taxpayer's year end rather than a Deere fiscal year end, in other words, are you expecting that in the fourth quarter or is that going to be, for Deere a first quarter event?

Question: John Mcginty - Credit Suisse First Boston - Analyst : Then just a final follow-up, not to be cynical but the way your SVA works, what's the trade-off for someone running that division in terms of keeping the inventories low therefore getting assets out but suffering a lower level of earnings in the fourth quarter but getting assets out? Is there any reason that the move to that is, in fact, bringing assets down at the same time that retail sales look like they're starting to get better since your investors are more of less where you want them now, looking better but if the retail goes up they're actually going to be too low?

Question: John Mcginty - Credit Suisse First Boston - Analyst : Yep.

Question: John Mcginty - Credit Suisse First Boston - Analyst : Fair enough. Thank you.

Question: Barry Bannister - Legg Mason - Analyst : Legg Mason. Hi, Marie.

Question: Barry Bannister - Legg Mason - Analyst : Maybe Greg knows the answer to this as well but you've mentioned the tax law changing helping with the retail sales number for the quarter. Could you discuss some of those changes and whether they're working from both the used equipment side, from the bottom up and the new equipment side from the top down, in the tax credits may be available to buyers at the first and second tier among farmers, whatever type of equipment they choose to buy from a dealer? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Barry Bannister - Legg Mason - Analyst : And, Greg, just as a follow-on, since you were talking generally about the effect on price, could you talk about the 3% ag worldwide price increase and break it down between North America and overseas because I was operating under the impression that the North American pricing improvement anniversaried around May 1st in terms of reductions of discounting and that that did not continue in this quarter. So I'm trying to derive where you managed to achieve a 300-basis point increase in pricing in ag.

Question: Barry Bannister - Legg Mason - Analyst : With weakening sales in overseas you managed to see a strengthening in pricing power?

Question: Barry Bannister - Legg Mason - Analyst : Okay. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Barry Bannister - Legg Mason - Analyst : Thanks, guys.

Question: Robert Rizzalara - First Trust - Analyst : First Trust. I'm just confused about one aspect. I don't understand, if things are looking up in most of your businesses, including the most important aspect of the ago agricultural cultural business relative to farm payments and livestock prices and the benefits of the new tax legislation, why is production being reduced? I don't understand it. It just doesn't seem to come together for me. Can you try again and see if you can get it across to me?

Question: Robert Rizzalara - First Trust - Analyst : All right. Okay. Thank you very much.

Question: Alex Blanton - Ingalls & Snyder - Analyst : It's Ingalls & Snyder. Marie, could you comment on the change in the capital spending figure? You're spending 50 million less than you had planned but for next year, the increase is a range of 20 to 33%. So that kind of goes along with what we're seeing in general. There's an increase in capital spending in the economy in general just starting up and it's affecting you because your customers are doing the same thing. So what is bringing that about?

Question: Alex Blanton - Ingalls & Snyder - Analyst : What happened there?

Question: Alex Blanton - Ingalls & Snyder - Analyst : So you really got more cautious about this year. Earlier in the year slowed down the project.

Question: Alex Blanton - Ingalls & Snyder - Analyst : Thank you.

Question: Andrew Casey - Prudential Equity Group - Analyst : Prudential Equity Group. Just a follow-up on Bob Brazalere's question. If you -- can I go back and assume that ag in North America has gotten a little bit better in the outlook? Are you just not building into your forecast any of the improvement that you've seen lately?

Question: Andrew Casey - Prudential Equity Group - Analyst : And then if we can go back to David Raso's question, I think it probably ties into the question before, if you look at Waterloo and the ongoing efficiency improvement, am I to look at the 14% reduction in tonnage in addition to the costs associated with the efficiency improvements, do those potentially go away towards the end of next year or get better? So the incremental profit, going forward, should be much higher, is that a correct way to read this?

Question: Andrew Casey - Prudential Equity Group - Analyst : Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Alex Blanton - Ingalls & Snyder - Analyst : Okay, thank you.

Question: Barry Bannister - Legg Mason - Analyst : Legg Mason. Greg, or Marie, could you give us, just to follow up on the two Davids questions earlier, if we finish this fiscal year at about 26 DSOs on the equipment side for trade receivables and about 7.6 turns in inventory, given that you have made quite a bit of progress in this down turn unlike some of your competitors in terms of producing working capital. Can you just empirically give us an idea of what your long term goals will be for inventory turnover and DSOs if we look out over several years rather than just the myopic next quarter or even next year view?

Question: Barry Bannister - Legg Mason - Analyst : That recalculation of the two is versus what currently?

Question: Barry Bannister - Legg Mason - Analyst : Okay, we are talking this year but what about long term has there been any discussion about long term goals or is this an ongoing thing, can we look forward to you producing under retail for quite a long time or is it more of an event related to this fiscal year?

Question: Barry Bannister - Legg Mason - Analyst : That is good to hear, thanks.