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

Good morning. Also on the call today are Ryan Campbell, our Chief Financial Officer; Cory Reed, President of Production and Precision Ag; and Brent Norwood, Manager of Investor Communications. Today, we'll take a closer look at Deere's third-quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2020. After that, we'll respond to your questions. Please note slides for the call are accessible 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 also include financial measures that are not in accordance with accounting principles generally accepted in the United States or GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.JohnDeere.com/earnings under Quarterly Earnings and Events. I'll now turn the call over to Brent.

John Deere demonstrated strong execution in the third quarter resulting in a 14.6% margin for the equipment operations, and an increased net income forecast for the full year. Despite persistent uncertainty in large Ag markets, profitability increased year-over-year for the division and take rates for precision technology improved markedly. Meanwhile, markets for our Construction & Forestry division slowed year-over-year but came in ahead of our forecast and showed progress towards rightsizing inventory levels. Now, let's take a closer look at our third quarter results beginning on slide 3. Enterprise net sales and revenues were down 11% to $8.925 billion, while net sales for our equipment operations were down 12% to $7.859 billion. Net income attributable to Deere & Company was down 10% to $811 million or $2.57 per diluted share. In the quarter, the company recorded impairments and closure costs totaling $37 million both pre-tax and after tax. In addition, the quarter's net income was unfavorably affected by discrete income tax adjustments, while the third quarter of 2019 had favorable discrete income tax adjustments. At this time, I'd like to welcome to the call Cory Reed, President of Production & Precision Ag for a discussion of the division's results and changes to the recently announced operating model. Cory?

Thanks Brent. Let's start with the Worldwide Ag & Turf third quarter results on slide 4. Net sales were down 5% compared to last year, primarily driven by lower shipment volumes and the unfavorable effects of currency translation; partially offset by price realization, which in the quarter was positive by 4%; while currency translation was negative by 3%. Operating profit was $942 million resulting in a 16.6% operating margin for the division. The year-over-year increase is primarily due to price realization, lower SG&A and R&D, as well as a decrease in warranty costs. These items were partially offset by the unfavorable effects of foreign currency exchange, lower shipment volumes and impairments and closure costs. During the quarter, the division incurred charges of $37 million related to the closure of a small tractor facility in China and the sale of a European Turf business. With that context, let's turn to our 2020 Ag and Turf industry outlook on slide 5. In U.S. and Canada, we expect Ag industry sales to be down roughly 5% to 10% for 2020. During the quarter, sales for small tractors have remained strong as the pandemic has driven an increase in projects for home and property owners. The strong retail environment combined with our planned underproduction has reduced our field inventory position for the year and should provide a healthy entry point for 2021. Meanwhile demand for large Ag machines is still forecast to be down relative to 2019, though demand has remained relatively stable throughout the year as our long lead order books and early order programs now provide visibility through the end of 2020 and beyond. Farmer sentiment continues to be fluid due to the many uncertain variables impacting our customers headed into 2021. Unresolved issues around global trade, and continued government support, combined with a sharp decline in ethanol during the early months of the lockdown have kept grain stocks elevated going into the harvest season. At the same time, the farm equipment fleet continues to age out and new and used inventory positions are low, especially as it relates to Deere equipment relative to competitive machines. Additionally, Precision Ag advancements for new and retrofit solutions continue to unlock economic headroom for our customers. The balance of these factors was reflected in the results of our phase one early order program for planners and sprayers, which both ended up relative to the previous year's program. In comparison to last year, keep in mind that 2019 was adversely affected by the delayed planting season. Encouragingly, nearly all of our advanced precision features such as ExactApply and ExactEmerge saw higher take rates compared to the previous year. The results give us confidence in our Precision Ag strategy and demonstrate customers' willingness for sustained investment in technology in the face of uncertain market conditions. Specifically, we see significant levels of investment in solutions that have the highest demonstrable impact on improved customer economics. Moving on to Europe; the industry's outlook is forecast to be down 5% to 10%. Over the quarter, the outlook for arable farmers declined slightly amid lower grain prices and weakening yields; especially in the UK and France where dry conditions have persisted throughout the growing season. Additionally, dairy margins continue to soften albeit from recent peaks. Meanwhile pork producers continue to enjoy favorable conditions as exports remain strong. Despite some modest headwinds this year, we continue to make progress in the region through our focus on Precision Ag. Over the year, we've seen increased market share in the 150 plus horsepower tractor category while engaged acres in our operations center has nearly doubled since the start of the year. In South America, industry sales of tractors and combines are projected to be down 10% to 15% for the year. Despite positive fundamentals in Brazil, the effects of COVID and the global trade uncertainty have weighed on farmers throughout the first half of the year. While industry sales will be lower for the fiscal year, we've seen sales momentum building in recent months. And our order books now extend well into the first quarter of fiscal year 2021, indicating a solid start to the year. Shifting to Asia; industry sales are expected to be down slightly as key growth markets like India are recovering after significant impacts of the countrywide lockdown. Lastly, industry retail sales of Turf and Utility Equipment in the U.S. and Canada are projected to be down about 5% in 2020. Moving on to our Ag & Turf forecast on slide 6. Fiscal year 2020 sales of Worldwide Ag & Turf equipment are forecast to be down roughly 10%, which includes expectations of 2.5 points of positive price realization offset by a currency headwind of about two points. For the division's operating margin, our full year forecast is roughly 11.5%, which is inclusive of costs related to both employee separation programs, as well as facility impairments and closures. In total, we estimate these costs to be roughly $260 million for the division in fiscal year 2020. Before moving on to the Construction & Forestry division, I'd like to first offer a few remarks on the new operating model announced in June. As noted in our release, our smart industrial strategy is designed to unlock new value for customers, helping them to become more profitable and sustainable; while revolutionizing agriculture through rapid introduction of new technologies. To accomplish this, we focused our strategy and organization around the three primary areas shown on slide 7. Production Systems, our Technology Stack, and Lifecycle Solutions.

At this time, I'd like to turn the call back over to Brent Norwood to cover the details on the quarter for construction and forestry. Brent? Now let's focus on Construction & Forestry on slide 9. For the quarter, net sales of $2.187 billion were down 28%, primarily due to lower shipment volumes and the unfavorable effects of currency translation; partially offset by price realization. Operating profit moved lower year-over-year to $205 million due largely to lower shipment volumes and sales mix; partially offset by price realization and lower SG&A. Let's turn to our 2020 Construction & Forestry industry outlook on slide 10. Construction equipment industry sales in the U.S. and Canada are now forecast to be down about 20%, reflecting sharp declines in the oil and gas sector; rental CapEx as well as overall moderation in general economic activity. Moving on to Global Forestry, we now expect the industry to decline between 20% and 25% this year with the U.S. and Canada markets declining more than the rest of the world. Moving on to our C&F division outlook on slide 11. Deere's Construction & Forestry 2020 net sales are now forecast to be down by about 25% compared to last year. The incremental decline relative to the industry guidance reflects plans to under produce retail sales, as we take further action to reduce field inventory by about 20% to 25% for earth moving equipment. The order book remains within our historical 30 to 60 day replenishment window, but at a much reduced production schedule relative to last year. Our net sales guidance for the year includes expectations of about one point of positive price realization and a currency headwind of about a point. For the division's operating margin, we are increasing our forecast to approximately 5% due to modest improvement in the Construction Equipment Segment and a strong third quarter performance in road building. Our margin forecast is inclusive of costs relating to both employee separation and impairments. In total, we estimate these costs to be about $130 million for the division in fiscal year 2020. Let's move now to our financial services operations on slide 12. Worldwide Financial Services net income attributable to Deere & Company in the third quarter was $183 million, benefiting from lower losses on operating lease residual values; decreased SG&A and a reduced provision for credit losses, largely offset by a higher provision for income taxes related to unfavorable discrete adjustments in the current quarter and favorable discrete adjustments last year. For fiscal year 2020, net income forecast is now $510 million which contemplates a tax rate between 24% and 26%. The provision for credit losses forecast in 2020 remains at 37 basis points, reflecting a higher degree of uncertainty relative to last year. Slide 13 outlines our guidance for net income, our effective tax rate and operating cash flow. Our full year outlook for net income is now forecast to be about $2.25 billion which includes the impact of our most recent employee separation program estimated to cost $175 million in the fourth quarter. The guidance also contemplates an effective tax rate projected to be between 27% to 29%, which moved higher for the year due to discrete tax items primarily in the third quarter. Cash flow from the equipment operations is now forecast to be about $2.8 billion.

Before we respond to your questions, I'd first like to offer some perspective on our liquidity, recent strategic actions and our financial results for the quarter. During our second quarter earnings call, we outlined the actions taken to enhance our overall liquidity and financial position. These actions involved raising over $4 billion total through two medium-term note offerings in addition to renewing our credit facilities. We also announced the indefinite suspension of our share repurchase plan. The environment remains very dynamic and accordingly, we expect to hold additional liquidity for an indefinite period; however, given the strength of our operating results and our strong cash generation, we are now comfortable restarting our share purchases. To be clear, we will execute any repurchases in accordance with our use of cash priorities that start with maintaining our single A rating, funding our capital expenditures; paying a dividend and finally using residual cash flow for purchases as conditions warrant.

Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the pulling 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. Julie?

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

That was actually a great overview of the new operating model and the importance of it. You touched a little bit more on the external features than the internal. And I wonder what if you can just do a little bit more on nimbleness or responsiveness or the internal cost that you sort of see from potentially changing as a result of the way you've organized yourselves. Thank you.

Yes. Thanks, Rob. I'll start and ask Cory or Ryan to add in. I mean I think as we think about this, there's obviously the customer-facing component and being more aligned to how they do their work. And I think that's a critical component. As we think about internally what this does in addition to accountability and fewer handoffs and those sorts of things; we also think it's going to create speed, and that speed is important because it's one to react and make quicker decisions as market dynamics shift, but also in the way that we're able to implement and execute technology and execute it throughout the portfolio and deliver it to customers in a more rapid way.

Yes, Rob. It's Ryan. We've talked about the cost and savings component and from the employee-related programs. And as we said, we'll continue to look at the portfolio and we'll talk about any decisions or actions that we have when we make those on our quarterly calls. And so those actions will still continue. I think a testament to the new organization is what we've just been through with COVID. We've taken some layers out of the organization. We've been able to respond much quicker in this very, very dynamic environment and that's given us a lot of confidence with the path we're going forward on.

And Rob, this is Cory. I'd just say if you think about how we were organized in the past around platforms and product lines, it served us very well, but it also required a lot of effort, time, and energy spent on aligning the organization for what we're going to do next. In the new model, we're operating by empowering teams closer to the business and creating less of those handoffs. The production system teams responsible will have the capital allocation responsibilities to make decisions faster and to bring those products to market more quickly to enable customer profitability. And we see it starting already while the model is just going in place right now.

Our next question comes from Andy Casey with Wells Fargo Securities. Your line is open.

Thanks a lot. Good morning, everybody. I wanted to ask a couple of questions about the updated, kind of shorter-term updated forecast implications for the fourth quarter. The revenue guidance seems to imply down around 18% in the quarter and then but roughly mid-teen percent decremental margin if I exclude the $175 million charge you disclosed. If I look at it ex charge and account for the inventory actions and C&F, what factors, other factors are leading you to anticipate both the weaker revenue and reduced ability to hold margins as well as you did in Q3, which is quite extraordinary but could you help with that.

Yes, Andy, thanks. I think, yes, you're right; one of the biggest pieces is just the continued inventory management. So we do expect to see underproduction in the construction equipment for North America as well as small tractors on the Ag side. So that is one of the components as it relates to the top line. I think things to consider when you think about margin; one is the employee separation cost that's in the fourth quarter. So $175 million across the company that's one; material, we've seen pretty positive material movements this year as we get into the fourth quarter we start to lap reductions that we saw in the fourth quarter of 2019. So while we see that improving, not to the extent that we have seen during the year because of lapping those. Price in the fourth quarter, we don't expect to be as strong as we've seen year-to-date or particularly in the third quarter. And then one other thing that I would point out is we still are in a pretty dynamic and fluid environment as it relates to COVID. So we have costs embedded in both of our divisions whether it's overhead disruptions in the factories or premium freight just because it's still a moving target in terms of the environment with the coronavirus and how that's impacting us. So those would be the biggest drivers and puts and takes. I think when we look at it and you go kind of ex items, ex the voluntary separation costs, decrementals from an equip ops perspective in 2020, so we feel like pretty reasonable given what we're seeing from the top line.

Our next question comes from Steven Volkmann with Jefferies. Your line is open.

Hi. Good morning, guys. I'm wondering if we could kind of go back I think both Cory and Brent talked in the opening comments about early order programs being good and take rates for the Precision Ag being strong. I'm wondering if we could perhaps put any bookends in terms of numbers around those. And then did that help the margin in the quarter as well in Ag & Turf because that was obviously very strong. And I'll leave it there. Thanks.

Regarding the early order program, yes, the orders were up, and we observed a 10% increase in unit sales for planters, with sprayers seeing an even higher increase. This is a positive indication. More importantly, we're witnessing strong adoption of technology. For planters, ExactEmerge adoption is in the low 40s, up compared to last year, and ExactApply on sprayers is in the high 40s. This reflects the willingness of farmers to invest in technology and their ability to achieve clear outcomes.

Yes, I would add. This is Cory. I would add that, in addition to a strong program, I think, the most important thing for us is to see that our customers continue to buy into those features, and we often reference ExactEmerge and we reference ExactApply, but it's across the board. So individual road hydraulic down force, road cleaner adjusts, closing wheel controls; electric drives on our planters all the way through what we're doing in air seeding and what we're doing across sprayers. In addition to a good program, what we have is a technology suite that is being adopted increasingly by our customers to drive profitability.

Yes, Steven, your question relative to margin. No impact on margin; we were taking those orders; we will start to build a little bit of that as we get into 4Q but really see more of that as we roll the fiscal year into 1Q.

Yes and it's Ryan. Maybe just a point on that; the margin performance that we've shown in the quarter is reflective of all the work that we've done with respect to developing technology and delivering solutions to our customers. As you think back what Ag produced this quarter, it's the second highest operating return on sales that we've had. You have to go back to 2013 in the third quarter to get a higher number, and in that period, our sales were about $2 billion higher. So if you take a step back and think through what's driven that margin performance this time on lower sales is really the technology and the solutions we're offering our customers.

Our next question comes from Steven Fisher with UBS. Your line is open.

Great. Thanks. Good morning. Just want to ask a big picture question on margins and so with the good outcome that you had this quarter overall, I'm wondering if there was anything in this particular quarter's results that you would say serves as a proving point for your 15% target. And I'm wondering if the construction contribution to that margin is more or less worrisome than it has been, I know, you've thought that that area needed a bit more work. It sounds like maybe more of the employee separation is focused on that side of it. I'm just curious about the kind of a bigger picture longer-term confidence in that margin now.

Hi, Steve. I mean certainly I think the performance in the quarter, and what we see for the full year continues to give us confidence in the direction and the ability to deliver 15% and doing that when you think about where we're at from a large Ag perspective. Our relatively low volume is, I think, it speaks to the power of what we've been able to do. As you think about construction and forestry, with significant destock occurring through the year we were able to ex-items like I said we're going to do margins kind of in the mid or excuse me decremental margins in the mid 20% range. So continues to perform pretty well given those challenges and then maybe importantly is as you think about the road building side of the business; in the quarter, we did about 15% margin on road building and that's with volume compared to a year ago down by about 20%. So we're seeing really strong performance there. And I think that continues to give us guidance too and just the power of the combination of our earth moving and forestry business with that road building business and what that's able to deliver; one of the big questions was how cyclical was that road building business and I think we've seen that come in as less cyclical for a full year. We expect that business to be down about 10% compared to much more significantly on the construction business. So I think that does give us continued confidence in what we can do there. And then one other thing to add is when we start to think about the opportunity to further leverage technology and technology that we've put in place in Ag and that we can leverage into both earth moving, forestry, and road building; we think there's a considerable opportunity for us as we go forward.

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

Yes. Good morning, everyone. I'm wondering if you can expand on your comments on the used market; the industry data that we track shows really big step down and used inventories for the industry this year. Is that consistent with what you're seeing somewhere in the range of contractors down 45% off the peak? And is that decline in use because that's what's driving the strong results in the early order program while farmer economics are obviously pretty tight.

I believe that when we look at the used market, it is in a very strong position. We have made substantial efforts, and our dealers have significantly contributed to reducing inventory levels. Specifically, in the row crop segment, which has been a focus area for improvement for some time, we are experiencing inventory levels not seen since 2014 or lower. As a result, inventories have decreased, and we are also seeing stable to increasing prices for late-model vehicles. This has been very beneficial for the overall market conditions.

Yes, this is Cory. I would like to add that when you look at late model used vehicles and analyze the auction trends, it's evident that the aging fleet has created a demand for new products in the market. We have observed very positive outcomes, not only in the number of views we receive but also in the prices that these used products are achieving in the marketplace.

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

Hey, guys. How's it going? And can you just give us any more color on your sort of your product line reduction. And I know you're going to update us quarter-by-quarter, but I'm sure there's a bigger picture planned there. And can you give us an idea like what inning you're in or how far the way through? You're just beginning or are you halfway through or just any sense there. Thank you.

Yes, Joel, I think we are still in the early stages. We are taking a careful approach to this and considering where we can differentiate our products the most and create significant value, including how we utilize technology. That's the first aspect we are focusing on. The second consideration is where we align strategically with our overall business. Those are the two main perspectives we are using as we continue to work through this.

Yes. And you'll see, this is Ryan. You'll see us take action throughout probably 2021 on this. And as we said, we'll update as we make decisions but Josh said kind of the areas that we can focus on the financial potential, ability for us to unlock value for our customers; those are the areas that we're going to refocus. It's not that we're going to turn our back on a lot of things. We'll take a look at those things and see how we can serve those customers in just a different way. So that's how we're thinking about it.

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

Hi. Good morning. Can you just talk a little bit about the fundamentals in U.S agriculture in particular and the growing competition from South America? And is there any risk that as you make U.S farmers more and more productive that we end up with just a continuation of global supply outstripping global demands, which is where we are today on most of the crops? And just how you think about that but we are at a point where we have excess supply of all crops and just making farmers more productive means we continue to grow the supply as opposed to focusing on growing demand.

As we consider this, it's essential to take a step back and assess the broader picture regarding consumption. We need to identify the macro events influencing activity. One significant factor we've noticed is the rebuilding of China's hog herd, which is leading to an increase in soybean consumption, as well as other commodities like corn, at an accelerating rate as that herd is rebuilt and commercialized. The fundamental backdrop of consumption trends is crucial. In terms of production, we have observed a robust crop this year. However, the effects of the coronavirus have led to reduced ethanol demand, impacting corn consumption in the short term. Despite these challenges, our focus remains on what we can control, specifically delivering technology that drives positive outcomes for our customers through more efficient input usage, improved yields, and increased sustainability. We believe we can continue to add value. When it comes to soybeans, the U.S. and Brazil together account for more than two-thirds of global production. These are vital regions for growth, and we feel confident in our ability to serve customers effectively in both areas. Cory, do you have anything to add?

Yes, Ann, this is Cory. The only thing I would add is in a little more detail is that the technologies we're delivering apply equally to whether we're trying to grow output, so productivity or efficiency which is to grow the same with a lower cost and lower environmental footprint. The good news, I think, is that the long-term fundamentals remain the same; population growth and our overall incomes over time being higher are going to drive that demand. We're 25 going into 26 years consecutive; so while we're going to have short term issues on over and under supply, our technologies that we're delivering scale appropriately either for production or for the efficiency of the crop. And I think that's what our customers are buying into in a time when commodity markets are tight. They're still buying the technology to lower their breakeven cost for producing the crop.

Our next question comes from Joe O'Dea with Vertical Research Partners. Your line is open.

Hi. Good morning, everyone. Could you expand a little bit on the pricing experience in the quarter? The degree to which that came in better than you anticipated? What the drivers were there? Why we don't see a little bit more sustainability? And I think in particular and C&F have given more the demand challenges there, and yet very strong pricing experience in the quarter.

Yes. As it relates to price, Joe, I mean I think one thing I'd say is on both divisions. We've really tried to maintain discipline and how we're managing price and how we're addressing our markets. I think what we've seen is really on both markets we were able to run with a little bit lower discounts in the quarter. We've had some benefits of just lower interest rates as it relates to low rate financing, which has helped and also in both divisions we saw stronger pricing from an overseas perspective which contributed in the quarter. So those are the things that we saw in the third quarter that led to the push-up price maybe a little bit higher than what we would have expected.

And why that doesn't persist in the Q4?

Yes, I think some of its timing as it relates to the overseas price and then we've just got lower volume also when you think about the fourth quarter. So just we're expecting that not to be as strong as what we saw in the quarter.

Our question comes from Ross Gilardi with Bank of America. Your line is open.

Good morning. Thank you. I wanted to ask if you could provide more insight into your reasons for another round of employee separations, considering the accelerating industry demand trends and the strong margins in Ag and Turf this past quarter.

Yes. I believe that when we consider our actions from an agricultural perspective, it’s important to separate that from current market conditions. What we're focusing on organizationally is strategic and aims to align with the key principles that Cory mentioned regarding our smart industrial strategy. In terms of market conditions, our efforts have primarily revolved around managing inventory and positioning ourselves effectively to close out this year amidst uncertainty. I see these as somewhat distinct issues.

Our next question comes from Adam Uhlman with Cleveland Research. Your line is open.

Yes. Hi, guys. Good morning. I was hoping you could explain a little bit more on the construction equipment business. The decent amount of upside this year and demand from what you were looking for before. Could you just talk about your thoughts on housing, rental demand, non-res, construction and then just more broadly as I think about 2021 demand? How do you think about the average age of the fleet? I would assume that it's younger on average but perhaps utilizations been stronger than I would have thought. So maybe that's not the case. Could you just maybe unpack that a little bit more?

Yes. When considering the construction landscape and the overall economic environment, we have noticed a rebound in housing starting in July, which was somewhat unexpected. This is a positive development. While rental demand has been slow, we observed some improvement in the last quarter, which is encouraging. However, it's an area we are monitoring closely, and rental companies, as well as dealers with their own fleets, are managing their inventories carefully. Regarding the age of our construction fleet, it remains relatively young, especially considering the strong market trends we've experienced. Furthermore, during the spring and summer, some machines were not utilized, which has posed challenges in terms of usage hours. Overall, we are still facing uncertainty about when the market will fully recover. Non-residential sectors have been particularly weak, and we are aware of this. Our primary strategy is to manage inventory effectively, and we plan to reduce our field inventory in North America by 20% to 25%. This approach should position us better to meet retail demands in 2021.

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

Hey, guys. Good morning. Hope you're doing well. Just wanted to circle back on the early order program for a second; you commented that up double digits year-over-year, but 2019 was obviously kind of a squishy year with the weather and stuff. Can you just talk about where you feel like it's at relative to say 2018 or more of a normal year? Thanks.

Yes, Seth, you're right. I mean we did see last year was an ideal with weather. I mean people were still planting well into the June time frame. I think as it relates to 2018 is probably closer to kind of flattish with that from a unit perspective, but maybe importantly given the technology and some of the things Cory mentioned; we're seeing the average kind of unit price of those machines is higher as a result of a greater adoption of technology.

Yes. I would say on the unit basis, it's pretty similar but what we are seeing are larger machines. We're trending toward larger, higher capacity machines and more technology-intensive offerings. So you think about a higher average per machine going out the door.

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

Hi. Good morning, guys. I guess maybe I'm just curious about the build up to your 15% mid-cycle margin target especially with something like the additional voluntary separation program sounding like it's more structurally related to your reorganization. So do you see any upside to that and then and maybe, Josh, you mentioned a couple of the headwinds that might be coming through on the margin side in the fourth quarter as it relates to lapping over material cost and pricing being a little bit lighter. But can you also just help us think about maybe the puts and takes of margins in 2021 especially as we start to see maybe more of the work in synergies or some benefits from international footprint production? Thanks.

Courtney, when considering 2021, it's important to note some of the one-time costs we faced this year related to employee separation, which we expect will result in a savings run rate of approximately $260 million next year. In 2020, we anticipate realizing about $65 million of that savings, but the full savings impact will be felt in 2021. This is the most significant benefit to expect in the upcoming year. Additionally, as Ryan mentioned, we are continuing to work through certain aspects of our operations which may provide further benefits down the line. Overall, focusing on that $260 million savings run rate is key.

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

On the puts and takes for the margin 2021 versus 2020, you just highlighted the $195 million incremental savings from the separation programs, but just so we have the list here; there were separation costs this year of about $350 million. Those don't repeat so that's the largest year-over-year, correct? And if we just go through the $37 million of impairment and factory closure costs this quarter; they also don't repeat, if you can clarify that. And the carryover of current pricing gains, if nothing changed at all; what's the carryover on the price? There's assuming there's a lot of tailwinds there but then the big headwind to ask is what was the number on discretionary cost savings this year that come back next year. So, if you can help us with that on the tailwinds versus the discretionary savings that don't repeat that do come back in 2021.

Thank you, David. Looking back, the one-time costs we faced in 2020, including separation, impairments, and closures, amounted to about $435 million for the entire year. As we consider potential costs that may arise again, we are being very strategic in our approach, focusing on structural changes. However, we do expect some discretionary costs or others related to volume to return, which we aim to manage carefully. It's still too early to estimate what those costs might be in 2021. Regarding pricing, we expect to see strong pricing this year and remain confident in our ability to achieve this while delivering value.

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

Yes, thank you. I’d like to revisit the construction topic. I’m trying to piece together your updated outlook. It seems like your de-stocking assumptions for the year haven't changed, correct me if I’m wrong. However, the road building business appears to be performing better than you anticipated last quarter. If I remember correctly, you expected that sector to be down 25%, but now it's only projected to be down 10%. I'm interested in what influenced this shift. Regarding your core earth moving business in North America, I’m curious about your perspective on end market demand because, from my observations throughout the quarter, it doesn’t seem to have evolved significantly from an end market demand standpoint; clearly, you’re seeing something different. I’m trying to grasp that dynamic.

That's a good question. When considering those two components, we certainly observed stronger performance in road building than we anticipated, as activity has picked up following various lockdowns worldwide, especially in markets like China. In Europe, the situation was somewhat mixed, although we did see some strength in certain Western European markets. Overall, recovery happened quicker than expected. Initially, we thought it would be down around 25%, but it turned out to be closer to a 10% decline. Regarding the construction sector, particularly in North America, our revenue outlook has improved a bit. Some of this improvement stems from the uncertainty we faced a quarter ago regarding what the situation would look like. Additionally, the housing market has shown more stability and positivity than we anticipated last quarter, especially when we saw housing starts drop below 1 million. These factors are the main drivers influencing and altering our top-line outlook.

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

Hi. Good morning. Most of the questions have been answered, but I guess just one question; obviously, you're seeing with fear in other industrial companies that the decremental margins this year given the challenges are proving much better than people would have expected. So, we get a lot of questions on does that sort of limit incremental margins? I mean as we come out of the downturn, so are there any structural reasons or changes in your cost structure or how you're thinking about things that would prevent Deere from putting up the same type of incrementals they've done historically while managing pretty good decrementals assuming the mix is there and the volume's there? Thanks.

Jamie, I wouldn't expect to see significantly different incrementals. I think we're confident in what we think we can do there as it relates to the margins, you think about what we're doing from a technology perspective and as we make some of these adjustments to our portfolio to those things certainly help as well when we think about overall margin.

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

Good morning, everyone. Thank you for accommodating me. Regarding the commentary on the housing market and its decline, can you provide insights into what is happening with the forestry side of the business? It seems that the forecasts are being adjusted downward at times, and I would like to know if this is due to inventory reductions or if there are other factors at play. Thank you.

Forestry has shown weakness globally, particularly in markets outside of the U.S. and Canada, with Russia being influenced by increased demand from China and Asia. In the U.S., lumber prices have begun to rise, and futures are also increasing, but mills are either closed or working through existing inventory. While the upward movement in lumber prices is encouraging, we have not yet seen this translate into increased demand from our customers. Thank you for your question, Stanley. We are at the end of the hour and appreciate your interest. We will connect and chat with everyone soon. Have a great weekend.

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