Good morning, welcome to Deere & Company's second 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.
Thank you. Also on the call today are Raj Kalathur, our Chief Financial Officer, and Susan Karlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's second quarter earnings, then spend some time talking about our markets and our outlook for the second half of fiscal 2014. 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. First, a reminder. This call is being broadcast live on the internet and recorded for future transmission and use by Deere and NASDAQ OMX. 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 and 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 website at www.johndeere.com/financialreports under Other Financial Information. Susan?
Thank you, Tony. Today, John Deere announced earnings for the second quarter of 2014. It was another solid performance. In reporting income of almost $1 billion, the company again demonstrated adept execution of its operating plans, keeping costs and assets under control while successfully managing major new product transitions. In addition, though Ag & Turf profits were somewhat lower, our Construction & Forestry and Financial Services operations had significantly improved results. In our view, this reflects the power of our broad-based business lineup. It is one of the reasons we are continuing to call for full-year income of $3.3 billion. Let's take a closer look at the second quarter in detail, beginning on slide three. Net sales and revenues were down 9% to $9.9 billion. Net income attributable to Deere & Company was $981 million. EPS was $2.65 in the quarter.
That's the second highest earnings per share in company history. On slide four, total worldwide equipment operations net sales were down 10% to $9.2 billion. In the quarter-over-quarter comparison of net sales, Landscapes accounts for three points of the change. Also included is an unfavorable impact from currency translation of one point. Price realization in the quarter was positive by two points. Turning to a review of our individual businesses, let's start with Agriculture and Turf on slide five. Sales were down 12%, primarily due to lower shipment volume as well as the three-point Landscapes impact noted on the previous slide. Operating profit was $1.2 billion. Before we review the industry sales outlook, let's look at fundamentals affecting the Ag business. Slide six outlines U.S. farm cash receipts, which are forecast to be down somewhat from 2013.
Assuming trend yields, grain production levels are expected to be up in 2014, which would result in lower feed grain prices. Livestock receipts are forecast to remain at record levels. As a result, our forecast calls for 2014 cash receipts to be about $393 billion, down only 3% from 2013, which was the second highest level ever recorded. On slide seven, global grain stocks-to-use ratios remain at sensitive levels even after abundant harvests in 2013. The Southern Hemisphere, notably Brazil and Argentina, is just now concluding large harvests of both corn and soybeans. Planting is well underway in North America, where farmers appear to be shifting some acreage from corn to soybeans in response to relative prices. Even though supplies appear to be adequate, global grain and oil seed demand remains strong.
Unfavorable growing conditions in any part of the world would hurt production, reduce the stocks-to-use ratio, and result in prices quickly moving higher. Our economic outlook for the EU 28 is on slide eight. There are signs of economic stabilization and cyclical recovery, with a modest forecast increase in GDP growth and rising business and consumer confidence. With feed costs easing, strong beef prices, and near-record milk prices, margins remain supportive for livestock and dairy farmers. While remaining near long-term averages, grain prices and farm income are expected to decrease in 2014. As a result, farm machinery demand is expected to be lower for the year. However, a differentiated picture continues to exist by country. While we see demand improving in the U.K. and Spain, some decline in important markets like France, Germany, and Poland bears watching.
On slide 9, you'll see the economic fundamentals outlined for other targeted growth markets. In the CIS, slowing economic growth and credit availability continues to weigh on equipment sales, while import policies are negatively impacting combine sales in Russia, Kazakhstan, and Belarus. As geopolitical tensions between Russia and Ukraine continue, fewer acres are being planted and less inputs, such as fertilizer and insecticides, are being used, putting the 2014 crop at risk. Slide 10 illustrates the value of agricultural production, a good proxy for the health of agribusiness in Brazil. The 2014 value of Ag production is expected to increase about 5% over the 2013 level. Brazil's soybean production is expected to increase again this year on the heels of historically high prices and margins. On the other hand, while partially offset by the weak real, lower global commodity prices could reduce farm income.
Our 2014 Ag & Turf industry outlooks are summarized on slide 11. In the U.S. and Canada, we continue to expect an Ag industry decline of 5%-10%. The EU28 industry outlook remains down about 5% due to lower crop prices and farm incomes. In South America, industry sales of Tractors and combines are now projected to be down about 10% from 2013's strong levels. South America continues to grow in importance for Deere. In April, we introduced over 60 new products in the region, including 5E Series Tractors with cabs, self-propelled Sprayers for sugarcane, Planters, and a new complete lineup of combines. Shifting to the CIS, we now expect industry sales to be down significantly. In Asia, sales are projected to be up slightly.
Turning to another product category, industry retail sales of turf and utility equipment in the U.S. and Canada are now projected to be flat to up 5% in 2014. This slight change in our outlook is mainly due to the impact the harsh winter had on sales in the first half of the year. Putting this all together on slide 12, fiscal year 2014 Deere sales of worldwide Ag & Turf equipment are now forecast to be down about 7%. In the year-over-year comparison of net sales, Landscapes account for about three points of the change. Negative currency translation accounts for about one point. The one-point reduction in our forecast from last quarter mainly reflects lower industry outlooks for Ag sales outside the U.S. and Canada and for the turf business. 2014 operating margin for the Ag & Turf division is forecast at about 14%.
The two-point decline in operating margin from 2013 is a result of volume, mix, foreign exchange, and higher production costs, including implementation costs related to final Tier 4. We have talked for some time about how a favorable mix associated with strength in the large Ag sector has been benefiting margins by one to two points. This year, the mix benefit is forecast to be about one point. The mix benefit in 2013 was two points. Let's focus now on Construction & Forestry on slide 13. Net sales were up 2% in the quarter, and operating profit was up 63%. The division's incremental margin of 196% is a result of C&F's diligent focus on cost and the law of small numbers.
Moving to slide 14, looking at the economic indicators on the bottom part of the slide, you'll note that although the fundamentals are all lower than three months ago, the economy is slowly moving forward and there are positive signs in the market. Unemployment is falling, and construction hiring is increasing. Housing starts are slowly ramping up, home inventories are low, and prices are improving. Landscaping activity is picking up, and financing for land developers is slowly recovering. Additionally, we continue to see a strong domestic energy sector. Deere's Construction & Forestry sales are forecast to be up about 10% for the year, which is unchanged from a quarter ago. The increase reflects higher shipments following the low levels of 2013, as well as industry growth in response to an improving U.S. economy. Increased international sales. Global forestry markets are now expected to be up about 10% in 2014.
Following double-digit growth in 2013, North American forestry markets are expected up about 10%, while Europe and Russia are expected to improve from the depressed levels of 2013. C&F full-year operating margin is projected to be about 9%. Let's move now to our Financial Services operations. Slide 15 shows the Financial Services provision for credit losses as a percent of the total average owned portfolio at April 30, was five basis points, reflecting the continued excellent quality of our portfolios. Our 2014 financial forecast contemplates a loss provision of about 12 basis points. Losses remain well below the 10-year average of about 28 basis points and the 15-year average of 48 basis points. Moving to Slide 16, worldwide Financial Services net income attributable to Deere & Company was $148 million in the second quarter versus $125 million last year.
2014 net income attributable to Deere & Company is forecast to be about $600 million, which is unchanged from a quarter ago. Slide 17 outlines receivables and inventory. For the company as a whole, receivables and inventories ended the quarter down $603 million. That was equal to 32.1% of prior 12 months sales, down from 33% a year ago. Ag & Turf ending receivables and inventory were down $554 million. Most of the decrease was accounted for by John Deere Landscapes and John Deere Water. Construction & Forestry ended the quarter down $49 million, driven by lower Canadian confined inventories. We expect to end 2014 with receivables and inventory down about $175 million. Our 2014 guidance for cost of sales as a percent of net sales, shown on Slide 18, is about 75%. When modeling 2014, keep in mind the following. Price, about two points.
Lower pension and OPEB expense, less favorable mix of product, overhead spend due to Tier 4 transitions, Tier 4 product cost, and foreign exchange. Looking at R&D expense on Slide 19. R&D was down about 6% in the second quarter, mainly due to timing of projects. Our 2014 forecast calls for R&D expense to be down about 1% compared to last year. Moving now to Slide 20. SA&G expense for the equipment operations was down about 14% in the second quarter and is forecast to be down about 7% for the year. In the year-over-year comparison of SA&G expense, Landscapes accounts for about seven points of the change, and Water about one point. On Slide 21, pension and OPEB expense was down about $40 million in the quarter, and it's forecast to be down about $150 million for the full year. Turning to Slide 22.
The equipment operations tax rate was approximately 32% in the second quarter. One of the discrete items benefiting the tax rate in the quarter related to John Deere Water, as noted in our financial statements. For full year 2014, the effective tax rate is now forecast to be in the range of 33%-35%. On Slide 23, you see our equipment operations history of strong cash flow. Our forecast for cash flow from equipment operations is approximately $4 billion in 2014. Slide 24 highlights share repurchase activity since 2004. Of note is our strong share repurchase activity year to date, which has exhausted our 2008 repurchase authorization. Repurchases are now taking place under the $8 billion authorization announced in December. On Slides 25 and 26, we outline our 2014 outlook for the third quarter in full year.
Our net sales forecast for the third quarter is down about 4% compared with 2013. This includes about two points of price realization. In the year-over-year comparison of third quarter sales, Landscapes accounts for about four points of the change. The full-year forecast calls for net sales to be down about 4%. In the year-over-year comparison of net sales, Landscapes accounts for about three points of the change. Price realization is expected to be positive by about two points. FX is expected to be negative by about one point. Finally, our full year 2014 net income forecast remains at about $3.3 billion. In closing
John Deere expects to achieve near record earnings for the full year. The company is well-positioned to deliver solid financial results throughout the business cycle. We're confident our investments in new products and markets, coupled with a tight rein on costs and assets, will keep our growth plans moving ahead. As for our plans, we believe they are essential to helping meet the world's growing need for food, shelter, and infrastructure. We continue to believe John Deere is exceptionally well-positioned to benefit from these developments in the quarters and years to come. Tony.
Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. As a reminder, in consideration of others, please limit yourself to one question and one related follow-up. If you have additional questions, we ask that you rejoin the queue. Operator?
At this time, I would like to inform everyone, in order to ask a question, press *1 on your telephone keypad. We will pause for a few moments to compile the Q&A roster. The first question comes from Jamie Cook with Credit Suisse.
Hi, good morning. I guess two questions. First, Tony or Susan, if you could just provide some color on how the order book has trended relative to last quarter with some of the new Tier 4 final products introduced, whether you've seen any drop-off and how you're thinking about visibility for the second half of the year. I guess my second question just relates to the implied decremental margins in the back half of the year in ag. It seems like they should be worse in the back half given your top-line assumptions. I thought the second quarter probably would've been the worst with production down more. If you can just walk me through if there's anything I'm missing there. Thanks.
Sure. Yeah. First of all, on the order book, I think maybe as an overarching comment on large ag, in particular, what we would tell you is if you think about the retail order coverage that we have on our forecast, we would tell you, compared to last year, we would be roughly in line. It's slightly below where we were a year ago, but again, roughly in line with the order coverage we have on the forecast. Again, I think trending pretty well there. Specifically related to final Tier 4, we talked about this last quarter as well with specifically the 8R tractor, where we were seeing very strong orders for that final Tier 4 tractor. Didn't really see any kind of drop-off at that time.
Our order book, we often talk about where we're at from an availability perspective, and we would tell you on 8Rs, our order availability is into October. There is some availability remaining on that product for the year, but well into October in terms of that availability. Again, pretty good story from that perspective.
Any color on Combine, Tony?
Again, it wouldn't have changed much from our second quarter. Our early order program tends to pretty much fill out that program, and we saw that order book fill pretty much the way we had anticipated. Again, we feel pretty good in terms of the order coverage, obviously, to the forecast we have in place today.
Sorry, then the second question on the implied decrementals in the back half.
On the decrementals, keep in mind that as you look historically at our cost of sales, second quarter tends to be the lowest cost of sales as a % of net sales of any. That will be true this year. If you look at the differential and what's implied in the outlook, you'll note that the second quarter, relative to the comments that you mentioned with the transitions we had, second quarter isn't as strong as what you would normally see. It still is forecast to be our best quarter from a lower cost of sales as a % of net sales kind of ratio. I would argue that you're seeing it in the forecast in terms of the differential not being as broad as what you would normally see.
Okay, thanks. I'll get back in queue.
Okay. Thank you. Next caller?
Your next question is from Seth Weber, RBC Capital Markets.
Hey, good morning, everybody.
Hey, Seth. How are you?
How are you? Good, thanks. Two questions. Just your level of confidence in the Construction & Forestry up 10% for the year, that suggests a pretty powerful ramp here in the second half, something like a high teens growth rate for each of the third and fourth quarters. Can you just maybe give us a little bit more color there on how much of that is dealer restocking, how much is some of the new production you're adding? I have a follow-up question.
Sure. Yeah. We would tell you again, that outlook, as you mentioned, hasn't changed. We've talked about this throughout the year. It always has recognized more strength in the back half. Remember that to be fair, the comps do get a bit easier in the back half of the year-over-year. If you look at our order book is up strong. We tell you that the order book is up double digits. We feel pretty good about that. As it breaks down, though, when you think about where are those higher sales coming from, we would tell you about three-fourths of the sales are coming from our U.S. and Canada market, and about a quarter of the sales increase will come from outside the U.S. and Canada. We didn't break out how much is inventory versus retail.
Again, as we talked about before, certainly, the inventory build is a fair amount of that increase for U.S. and Canada as we ended last year with very low inventory levels versus even what the market was last year. Our dealers are building inventory in anticipation or are expected to build inventory both in anticipation of the higher retail as well as really, we would argue, kind of right-sizing from a pretty strong pull-down last year.
Okay. Thank you. Just to follow up on the Brazil, the change in outlook for the South America market, that tempered a little bit.
Is that still around the FINAME dislocation or is there something that you feel like has actually softened in the overall market?
Yeah. First, I want to make sure we're clear. That's Tractors and combines only, so it wouldn't apply to the remaining part of our business, which is a significant part of our sales in South America. It's primarily driven by a little bit of softening in a couple markets, really around Tractors. As you think about Argentina, some challenges with import tariffs, and that's primarily impacting Tractors at least for Deere. Also the sugarcane industries had a little bit weaker markets in Brazil, little weaker margins, and we would anticipate sales to be a bit lower than what was previously expected on Tractors into that industry as well.
Okay. That's very helpful. Thank you very much.
Okay. Thank you.
Next caller.
Your next question comes from Steven Fisher, UBS.
Hi. Good morning. I wonder if you could just talk a little bit about the cost actions that you took in the quarter. Where were they focused? How quickly can they kind of give you some payback and how much more runway do you have on cost actions from here, should things deteriorate a little bit further?
I think as we've talked about, as we anticipate and see the markets changing, with our SVA structure, we do have what we refer to as lever studies and expectations of what we can pull. I think part of what you're seeing in the quarter actually is, as it relates to C&F, for example, we pulled a number of levers last year. That's a division that's been slow to release those levers until we see those very strong sales that we're anticipating coming through. They've kept some of those pulled to the extent they can. I think really, as you move forward in the upcoming years, depending on what the market provides, there are a number of things we can do. You saw quite a bit of discipline around R&D and SA&G in the quarter, for example. Some of that, to be fair, is timing of projects.
SA&G, for example, tends to be a little higher in the back half of the year for a number of reasons. Those would be the things we would think about certainly in terms of levers that we could pull if necessary to keep our margins as strong as possible.
Yeah. Steve, this is Raj. As you know, the process we have is by product. Almost every unit is looking at where they are on the line, okay? We talk about 80, 100, 120, or depending on the product line, might vary that line, and they need to provide us an expected return at different points on the line, okay? Different returns. Each one of them is working automatically on whether it's cost of sales items or SA&G items, okay? How they can walk down the line if they're coming down or walk up the line. We will have hundreds of things going on in the company, and depending on where that particular product line is, they may take a different action than another product line, okay? You are seeing us walking down the line, and that's the benefit you see.
If some portions of large ag are coming down, you can expect them to walk down the line. If small ag is going up in North America, they'll walk up the line.
Okay. That's helpful. Just a question on the small equipment side in ag. Seems to be holding up better than the larger side. Can you just talk about sort of the visibility you have there and if there's pent-up demand that's coming through now, with sort of the feed outlook looking maybe a little flatter, what kind of visibility you have there on the small equipment side?
Yeah. On small ag versus large, just as a broad statement, our order book would not be as far out and never, rarely would be versus the large. You don't have quite as much visibility, but certainly, as expected, we're seeing strength in that market. Livestock margins continue to remain very strong and are expected to really through the year, and most are expecting it to continue to be strong even into next year. That's a market that's had some struggles in recent years. Pent-up demand's hard to measure, but you could argue that that's a market or a part of our business that has had lower sales, in recent years and has opportunity to, just from a cycle perspective, to improve it as we move forward. That's really what we're seeing today. Okay? Thank you. Next caller.
Your next question is from Andrew Casey, Wells Fargo.
Thanks. Good morning, everyone.
Morning.
Thanks, Tony. Was there any specific region that is driving the $50 million decrease in the trade receivable and inventory outlook for 2014?
I don't believe there's any specific region that we would point to that would be driving that reduction. We tend to look at it from an enterprise perspective. I don't have a great answer for you on that, Andy.
Okay, thanks. Then I guess follow up on that.
Well, you're talking on C&F on the quarter?
Yeah.
Yeah. I would argue some of that is going to be Canada. If you look at a region, we talked a lot last year or a bit last year about consigned inventory in Canada, what was a bit high, and that came down nicely, and year-over-year is actually down very nicely. I was thinking for the year, but certainly at this point in time, it's I would argue Canada.
I'm sorry, Tony, I didn't ask the question right. The $50 million reduction in the Ag & Turf segment for the year. The down $275 versus prior down.
Oh
25.
Between Ag & Turf. No, I think, again, you're really looking at kind of minor adjustments here and there. I would argue that versus the total receivables and inventory, that's a minor adjustment.
Okay. Is that all behind you with Q2 or does some of that remain ahead?
Well, keep in mind, much of where we're at at Q2 is, I would say it's still ahead because as you look at Q2, much of that is really driven by lower receivables and inventory as it relates to John Deere Landscapes and John Deere Water. If you took those out, you're relatively flat year-over-year. When you get to the end of the year, we'll have further pull out.
Okay. I'll follow up, thanks.
I do want to point out for others as well, keep in mind that as you look at the end of Q2 versus the year end, there is a difference in terms of year-over-year compare. Last year at the end of Q2, the John Deere Landscapes inventory and receivables would have been in our reported numbers. They were not in our year end numbers. That's why when you look at the Q2 reduction is much greater than what we're anticipating for the end of the year. If you pull out the impact of Landscapes, you'll see a greater reduction actually at the end of the year versus where we're at currently. Okay, next caller.
Your next question is from Adam Holman, Cleveland Research.
Yeah. Hi, guys. Good morning.
Hello.
I guess first of all, on Construction & Forestry, could you start by addressing the price realization that you got in that business and also talk about how the Tier 4 final price increases are coming through?
Yeah. Specific to Construction & Forestry, we don't talk about price realization by division. We did talk about two points of price realization for the year on an enterprise basis, and what we would tell you is in our current forecast, we would anticipate both divisions participating in a positive way on price realization. Again, that's about all we'd really talk to from a price perspective. As you think about final Tier 4, I don't know if that was a broad comment or if that was specific to Construction & Forestry.
If you could just address both.
Yeah. As you think about that broadly, final Tier 4 is, while we do have some construction products transitioning in 2014, it's more or less a large Ag transition year more than construction. In that regard, from a cost perspective, we would tell you that we would anticipate recovering all of the cost on large Ag in the year. We are still recovering some of the interim Tier 4 costs actually on Construction & Forestry. We would say by the end of the year, our forecast would estimate roughly 90% recovered on interim Tier 4. Remember, construction, because of the size of the product, the horsepower range of the product tended to be about a year behind in the transition from what Ag was. We're making good progress kind of on plan.
Adam, this is Raj. On the topic of price realization regards to C&F, we did say in our press release about higher sales discounts. It is a competitive environment that we are facing. We have built our share over a long period of time based on providing better products, better services, and better business processes. You should expect us to defend our share while delivering healthy margins.
Okay. Gotcha. Maybe you didn't have positive price this quarter, but that's the goal for the year.
Well, yeah. I think if you ask specifically about the quarter, that would be true. Keep in mind, as you think about price realization and the mention of sales incentives in the press release, with accrual accounting as the assumptions change in terms of your anticipation on whether it be sales incentives or any other types of accruals like that, keep in mind the accrual change is not just for current sales, but also for the population that's in the field already that you've recorded sales in the past. You do get a larger than expected increase in that particular quarter. Again, I think it's more important really to look at it from an annual perspective as it relates to that. Again, that would be a positive price realization for the year.
Okay. Thank you.
Okay. Thank you.
The next question is from Jerry Revich, Goldman Sachs.
Good morning. It's Matt Rebec on behalf of Jerry.
Sure.
First, I was wondering if you could talk about the impact of Tier 4 conditions on factory costs in the quarter, and then possibly update us on the timing of major product line transitions and costs in the coming quarters.
Yeah. We don't talk about specific cost levels. The cost pieces, as you may recall, beginning in 2013, we changed our guidance, and we talk about the total cost of sales as a percent of net sales. At that time, we discontinued the individual pieces and the dollar amounts. Certainly, it was a factor as you look at the cost of sales for the quarter. I would tell you, as you look at things like mix and FX, those were also very significant impacts in the cost. As you go forward through the year, there would be some, but the majority of those transitions would be behind us, at least as it relates to large ag. Again, we have some significant transitions coming up for next year, 2015, as we transition small ag as well as a pretty large number of construction and forestry products.
Perfect. Can you talk a little bit about the drivers of your CapEx reduction guidance this year and maybe where you're cutting investment? Talk about your longer-term CapEx plans compared to significant new facility investments you've made over the past couple of years.
Yeah. I would tell you that CapEx reduction is really just minor adjustments. As we get closer to the end of the year, really examining what we would expect to complete this year. As you might imagine, many of those projects are multi-year projects. What's going to get done this year versus next, those sorts of things. I would not read much into that adjustment that we made there. We've talked about from a longer-term perspective, at least in the short to midterm, that $1.1 billion-$1.3 billion range is what you should anticipate as we move forward. That's not just new facilities. Remember, with final Tier 4, that's driving a significant portion of the CapEx requirements as well. At least through 2015, we certainly have a fair number of products to continue to transition.
Perfect. Thank you very much.
Okay. Thank you.
Your next question is from Vishal Shah, Deutsche Bank.
Hi. Thanks for taking my question. I'm just wondering if you can provide some more details around your C&F guidance of 10% growth this year. How much of it is coming from market growth versus inventory rebuild, and whether the growth is coming from domestic and international markets? Also, just any update on your thoughts on expectations for bonus depreciation as well as timing of 179 incentives. Thank you.
As I mentioned earlier on the call, really, if you think about that 10% net sales increase for Deere's construction and forestry business, about three-quarters of that is coming from U.S. and Canada both. As you mentioned, some inventory restocking as well as the stronger retail environment. About a quarter of those sales come from outside the U.S. and Canada. Those are things like our businesses in Brazil as those new factories come online. We've talked about strengthening forestry demand in the European market as an example. That's really what's driving that business. If you think about U.S. tax incentives, there's been a number of activities in Congress around that, kind of moving those potential extensions forward. What we would tell you, at least what we have in our modeling, what we're anticipating in our ag modeling is that they would both be extended.
The extension wouldn't be passed until late calendar 2014. For Deere, in terms of our 2014 benefit to our sales would be limited to nothing. Obviously, we would have had some benefit early in the year. That would be our expectation. Again, what we're modeling is that Section 179 gets extended at about half the level. It's not that we have any particular intelligence that would tell you that that's where it is, but effectively, we're splitting the difference, whether it would be at the 500,000 or not get extended at all. That's the rationale for why we use that number in our modeling. Again, that's what we're assuming model-wise.
Again, I think the thing to keep in mind is we're saying late calendar 2014. For the 2014 forecast, there is no impact. It would be 2015.
Right.
Thank you.
Okay.
Thank you.
Thank you. Next caller.
Your next question is from Ann Duignan with JPMorgan.
Hi, good morning, guys.
Hi.
Hi. I want to go back to Jamie's question, just get the question answered more clearly. If you look at your combine order book for North America this year, where did it come in relative to last year? Just the year-over-year change, not versus your forecast.
We've talked about large ag being down double digits, and certainly that would include our combine order book. Pretty much as expected, but certainly down double digits.
Combines down a little bit more than the average?
Let me look at Just a second, Ann. If you look at combines relative to, it depends on what other large ag products. As we look at what our industry retail sales estimates are, which obviously we'd be a fair chunk of that, I would tell you that they are not down more than the rest of the industry. More than the other large ag products. I would say it's pretty much right on average.
Okay. Other large products here, including things like Sprayers.
You're talking sprayers, planters, obviously there are row crop tractors, four-wheel drive tractors, those sorts of products. Think about the products that the typical row crop farmer would use.
Yeah. Okay. Then going forward, how should we think about your Financial Services business in terms of, the revenue came in a bit larger than we were forecasting. We shouldn't have been surprised, I suspect, but you tend to finance more, again, of the large crop farmer in the U.S. Can you just give us some context of how we should think about that business going forward if the large row crop farmer remains under pressure?
Yeah. If you think about market share, if you will, for John Deere Financial as it relates to our ag business in the U.S. and Canada, that would be our strongest market share business. It's running right around 60% of the ag sales, would be financed with John Deere Financial. As you're aware, our biggest competitor there is Cash.
which takes up the bulk of the remainder. As you move forward, to your point, while we're anticipating the portfolio to increase during 2014, it's because we're still, even though year-over-year our sales are down, they're still anticipating more acceptances this year versus those that would be maturing or are being paid off. If you continue to see pressure and our sales would flatten or maybe decrease, then obviously over a period of time, you would see some lower portfolio and revenues, at least as it relates to U.S., ag could potentially decrease. You'd have to make assumptions on what rest of the world and our penetration is on how that changes in the rest of the world as well. There's obviously a lot of moving pieces there.
Okay. Just quickly, as a follow-up to the Section 179 question earlier, what are your thoughts on the midterm elections and the outcome of the midterm elections, upside potential to your 179 or downside? Do you have any thoughts on that?
We really don't. We don't. Again, the assumption is that after those midterm elections, again, late calendar year, it's likely to be extended.
Okay. Thank you.
Again, at least that's what we have in our base case. Okay. Thank you.
Yep. Bye.
Next caller.
The next question is from Mircea Dobre, Robert Baird.
Good morning, guys.
Hey, Mig.
I guess I'd like to go back to Construction & Forestry for a second. I'm a little bit confused about the top-line guidance, because if I look at the last couple of quarters, you've had very good orders. You talked about very good orders here. Seasonally at least, it would make sense to me that the second quarter would be when we see a lot of dealer inventory restocking. Yet, we've seen relatively tepid growth from a top-line perspective over the last couple of quarters, and you're pointing out to much higher growth in the back half, yet the economic indicators you're using in your forecast all seem to have been adjusted lower. Can we sort of bridge the gap here? What sort of confidence do you have in your forecast at this point, and what gives you that confidence, I guess?
I think, again, I'll mention a couple things. First of all, I'd point out that while those economic indicators have lowered, again, and those are being pulled from outside sources, of course. Given that, they are still pointing upward and pointing towards some improved overall market conditions. The other thing I would point out as it relates specifically to that dealer restocking, keep in mind that one of the differences for Deere versus at least many of our competitors is our order fulfillment process. We have very much a pull-type system. We don't push a lot of inventory out into the market. We allow our dealers to pull it as needed. With our pretty short order windows that we at least attempt to have, we're much more of a just-in-time type of process versus build up that inventory ahead of time sort of situation.
We've been building much closer to retail. That part of the timing difference that you'll see for Deere versus maybe some of our competitors who push some significant inventory in the field ahead of those sales materializing.
I see. A&T, if we can talk a little bit about Russia, too. The sanctions there seem to be escalating. I know you have two plants in the country. Have you seen any impact on your operations, and how would you characterize the risk, if you would, to your operations in Russia at this point?
Yeah, I think that, obviously those conflicts, both as it relates to the Ukraine and Russia certainly is in our forecast. We talked about that in terms of our industry outlook being down significantly, again, especially as it relates to Western manufacturers like ourselves. There's a number of factors, obviously, that go into that ultimately a lot as a result of some of that conflict. We've anticipated and the greatest impact we think at this point would be on the sales. We've pulled that into our outlook. At this point, in terms of concerns around assets, those sorts of things, not a major impact.
Certainly, the other, at least as it relates to sales, not only do you have challenges and potential challenges around import restriction, credit availability because of that conflict is becoming even more of a difficult situation for our customers and dealers in some cases, those sorts of things. We're looking at how do we take some of the pressure off of our dealers, keeping inventories as low as possible, those sorts of things, for a variety of reasons. A, it reduces our exposure, but it also helps reduce the exposure of our dealers from a longer-term perspective.
All right, thanks.
Okay, thank you. Next caller.
Your next question is from Nicole DeBlase, Morgan Stanley.
Yeah. Good morning, Tony, Susan, and Raj.
Hey.
Good morning.
Maybe we could just talk a little bit about used equipment. I don't think that's been brought up yet. What are you guys seeing from a dealer perspective, both with respect to inventories and pricing?
Not a significant change from what we've talked about last quarter, again, on used combines. We would tell you, all things considered, we're pretty comfortable with used combine inventory levels at our dealers. Certainly pricing, we talked about last quarter, again, is lower year-over-year. We'd tell you as it relates to at least the best intelligence we have on competitors certainly in line with industry in terms of those lower combine used prices. As it relates to Tractors, again, as we said last quarter, they are relatively high. Again, it's reflective of the very strong demand that we've had on new Tractors. That's an area that we certainly continue to focus on. Pricing would be down a little bit year-over-year.
We'd tell you, again, to the extent we have intelligence around what's going on with our competitors, we would tell you we believe our used Tractor prices are holding in quite a bit better than competition. It is down slightly year-over-year.
Okay, great. That's really helpful, Tony. Maybe just with respect to the third quarter guidance, I don't know if you're willing to give any color on this, but I'm gonna try anyway. You said down 4% for equipment ops. Any color between the C&F and the A&T segments there?
Yeah, that's not something we obviously, if you look at the rest of the year kind of implied guidance, certainly we're expecting a pretty strong quarter from our C&F division as we go in, actually, rest of the year for that particular division versus what you would have implied in the Ag & Turf. Other than that, there's not much more we would speak to.
Okay, fair enough. I'll pass it on. Thanks.
Okay, thank you. Next caller.
The next question is from Andrew Kaplowitz with Barclays.
Hi, good morning. It's Alan Fleming standing in for Andy this morning.
Hey, Alan.
Tony, if I could, I'd like to press you a little more on your assumptions for Ag in the second half of the year. I think in Brazil, you had previously talked about growth coming from some of your other product lines, such as sugarcane harvesters and cotton pickers and maybe even Sprayers. Then, if you could talk about what you're seeing in Europe. It seems like it's a very mixed market there, and we're getting, I think, some mixed messages from some of your competitors. What's your visibility like, and are you seeing the recovery that you expected?
Sure. As it relates to Brazil, you're correct. We talked about if you think about the business outside of Tractors and combines for Deere in Brazil would be more than a third of our sales there are those other products. Certainly, if you look at industry guidance versus Deere expectations for our net sales, we would tell you we continue to see South America as the biggest differential Partly because of the fact that you're only looking at Tractors and combines in the industry outlook. As I mentioned that we have a fair amount of our sales coming from other types of products, as well as our expectation that we'll continue to see those market share gains that we've had in recent years, we would expect to continue. Again, that would be our greatest differential.
As you think about Europe, certainly as Susan Karlix mentioned in her opening comment, it is really a mixed bag. We didn't change our industry outlook in Europe. That would imply that we're, at least on an overall basis, not seeing further deterioration in that regard. We don't have the order book coverage that you would have on large ag in the U.S. and Canada. That's a typical situation there. You can't speak as well to where we're at from an order book perspective. You're seeing markets like the U.K., which is a good market for Deere, recovering off of low levels, had a couple fairly depressed years. We are seeing some strength there. Spain is beginning to recover. You have other key markets that Susan Karlix mentioned that are seeing some decline. France and Germany being the most notable. Poland notable as well.
Keep in mind, some of that isn't so much around what's going on from a profitability perspective. It's partly related to that, also in some of those Eastern European countries in particular, this being a transition year for Common Agricultural Policy in Europe is also having some impact in certain situations.
Okay. I appreciate that. If I could ask you a question on cash. You continue to ratchet up your repurchase activity. I know you're going to tell us that your cash priorities haven't changed, is it fair to say that you seem at least a little more confident that the intrinsic value of your stock versus where it's trading is undervalued and it means that it may be a little more worthwhile for you to be more aggressive than usual with buybacks?
Hey, Alan. This is Raj. Yes, our cash priorities have not changed. As you know, on the single A rating, then the funding of operations and M&A, and consistently and moderately raising our dividends to 25%-35% of payout ratio in the cycle. If we still have the cash that we can use, we put it to use only if we feel, especially long-term shareholders, it'll be a value add for. Okay? Now, when we had that $8 billion share repurchase authorization, which was about 25% of our market cap at the time of announcement in December. We suggested that be seen as a statement of confidence in our ability to do well throughout the cycle.
As long as we're generating good levels of cash and have enough for the priorities stated, and our analysis indicates repurchases are value enhancing, especially for our longer-term shareholders, you should expect us to continue repurchases.
Okay. Thank you.
Thank you.
We'll have time for one more, hopefully quick caller question.
Your last question is from David Raso, ISI Group.
Hi, I'll try to be quick, Tony. Just more direct questioning on the construction revenue guidance. You mentioned the order book is healthy. The revenue guidance implied for the rest of the year is 17% for C&F. Is the order book up that much?
We don't give you exact numbers. Also remember the order book is only for a certain period of time, right? These are orders for a certain period of time. It is a lot healthier, is all I can tell you right now.
It's certainly supportive of that outlook and that forecast.
Okay, that's helpful. The second quarter revenues for Construction & Forestry, I know you expected first half slower, second half stronger, I get that. Literally the second quarter, was that revenue as you expected or above or below?
For C&F? Yeah.
For C&F.
Specifically for C&F. I don't think it was significantly out of line from expectations.
Overall.
Interesting.
David, this is Raj again. For the total company, if you take the second quarter and the revenues coming down in the second quarter compared to our earlier guidance. There are two things that happened. One is related to weather. We talked about turf, and we talked about a little bit of ag, especially in Canada. The second part of it is to do with places where geopolitical issues exist. It is Argentina and CIS. If you look at going forward CIS, Argentina is where we see some more softness and we will not make up all those weather-related misses in the Q2. Otherwise, it is minor adjustments, not a significant change.
Those again, would be for the full company, mostly impacting ag. I think we mentioned in the opening comments, if you think about the sales coming in lower than what we had forecasted for the enterprise, most of that lower sales was driven by ag and not C&F.
Okay. I appreciate the clarification. Thank you.
Okay. Thank you. All right. That will conclude our call. We appreciate your participation, and as always, we'll be available throughout the day for return calls. Thank you.
Thank you. This does conclude today's conference. We thank you for your participation.