Good morning, and welcome to Deer and Company's 2nd Quarter Earnings Conference Call. I would now like to turn the call over to Mr. Tony Eagle, Director of Investor Relations. Thank you. You may begin.
Thank you. Also on the call today are Raj Kalitzer, our Chief Financial Officer and Susan Carlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's 2nd quarter earnings, then spend some time talking about our markets and our outlook for the second half of fiscal twenty fourteen. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning.
They can be accessed on our website at www dotjohndeere.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 and 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 ks 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 Q2 of 2014 and it was another solid performance. In reporting income of almost $1,000,000,000 the company again demonstrated a depth execution of its operating plans, keeping costs and assets under control, while successfully managing major new product transitions. In addition, though ag and turf profits were somewhat lower, our construction and forestry and financial services operations has significantly improved results. In our view, this reflects the power of our broad based business lineup and it is one of the reasons we are continuing to call for full year income of $3,300,000,000 Now let's take a closer look at the Q2 in detail beginning on Slide 3.
Net sales and revenues were down 9% to $9,900,000,000 Net income attributable to Deere and Company was 981,000,000 dollars EPS was $2.65 in the quarter, that's the 2nd highest earnings per share in company history. On slide 4, total worldwide equipment operations net sales were down 10% to 9 point $2,000,000,000 In the quarter over quarter comparison of net sales, landscapes accounts for 3 points of the change. Also included is an unfavorable impact from currency translation of 1 point. Price realization in the quarter was positive by 2 points. Turning to a review of our individual businesses.
Let's start with Agriculture and Turf on Slide 5. Sales were down 12%, primarily due to lower shipment volumes as well as the 3 point landscapes impact noted on the previous slide. Operating profit was $1,200,000,000 Before we review the industry sales outlook, let's look at fundamentals affecting the Ag business. Slide 6 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 remained at record levels. As a result, our forecast calls for 2014 cash receipts to be about $393,000,000,000 down only 3% from 20 13, which was the 2nd highest level ever recorded. On slide 7, global grain stocks to use ratios remain at sensitive levels even after abundant harvest in 2013.
The Southern Hemisphere, notably Brazil and Argentina, is just now concluding large harvest of both corn and soybeans. Planting is well underway in North America where farmers appear to be shifting from acreage from corn to soybeans in response to relative prices. But even though supplies appear to be adequate, global grain and oilseed demand remains strong. Unfavorable growing conditions in any part of the world would hurt production, reduce the stock to use ratio and result in prices quickly moving higher. Our economic outlook for the EU 28 is on slide 8.
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 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 weaker AI, lower global commodity prices could reduce farm income.
Our 2014 Ag and Turf Industry outlooks are summarized on Slide 11. In the U. S. And Canada, we continue to expect an ag industry decline of 5% to 10%. The EU industry outlook remains EU 28 industry outlook remains down about 5% due to lower crop prices and farm income.
In South America, industry sales of tractors and combines are now projected to be down about 10% from 20 thirteen's strong levels. South America continues to grow in importance for Deere. In April, we introduced over 60 new products in the region, including 5 E Series tractors with CAB, 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 and turf equipment are now forecast to be down about 7%. In the year over year comparison of net sales, landscapes accounts for about 3 points of the change and negative currency translation accounts for about 1 point. The 1 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 and Turf division is forecasted about 14%. The 2 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 1 to 2 points. This year, the mix benefit is forecast to be about 1 point. The mix benefit in 2013 was 2 points.
Let's focus now on Construction and Forestry on Slide 13. Net sales were up 2% in the quarter and operating profit was 63% was up 63%. The division's incremental margin of 196% is a result of C and 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 3 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 and 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 and 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 are expected to improve from the depressed levels of 2013.
C and S 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 30 April was 5 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 and Company was $148,000,000 in the 2nd quarter versus $125,000,000 last year. 2014 net income attributable to Deere and Company is forecast to be about $600,000,000 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 6 $3,000,000 That was equal to 32.1 percent of prior 12 month sales, down from 33% a year ago.
Ag and turf ending receivables and inventory were down 554,000,000 dollars Most of the decrease was accounted for by John Deere Landscapes and John Deere Water. Construction and Forestry ended the quarter down $49,000,000 driven by lower Canadian confined inventories. We expect to end 2014 with receivables and inventory down about $175,000,000 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 2 points lower pension and OPEB expense less favorable mix of product overhead spend due to Tier 4 transitions Tier 4 product costs and foreign exchange. Looking at R and D expense on Slide 19.
R and D was down about 6% in the 2nd quarter, mainly due to timing of projects. Our 2014 forecast calls for R and D expense to be down about 1% compared to last year. Moving now to Slide 20. SA and G expense for the equipment operations was down about 14% in the 2nd quarter and is forecast to be down about 7% for the year. In the year over year comparison of SA and G expense, Landscape accounts for about 7 points of the change and Water about 1 point.
On Slide 21, pension and OPEB expense was down about $40,000,000 in the quarter and is forecast to be down about $150,000,000 for the full year. Turning to Slide 22. The equipment operations tax rate was approximately 32% in the 2nd 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% to 35%.
On Slide 23, you see our equipment operations history of strong cash flow. Our forecast for cash flow from equipment operations is approximately $4,000,000,000 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 2,008 repurchase authorization. Repurchases are now taking place under the $8,000,000,000 authorization announced in December.
On slides 2526, we outline our 20 14 outlook for the 3rd 2 points of price realization. In the year over year comparison of 3rd quarter sales, Landscapes accounts for about 4 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 3 points of the change. Price realization is expected to be positive by about 2 points.
FX is expected to be negative by about 1 point. Finally, our full year 2014 net income forecast remains at about $3,300,000,000 In closing, John Deere expects to achieve near record earnings for the full year and 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 and 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 and A portion of the call. The operator will instruct you on the following procedure. But 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
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? And then 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 Q2 probably would have been the worst with production down more. If you can just walk me through if there's anything I'm missing there? Thanks.
Sure. Yes. 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. So again, I think trending pretty well there.
Specifically related to final Tier 4, we talked about this last quarter as well with specifically the 8 R 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 say on ADRs, we are 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. So again, pretty good story from that perspective.
Any color on combined, Tony?
Well, again, it wouldn't have changed much from our Q2. Our early order program tends to pretty much fill out that program and we didn't we saw that order book fill pretty much the way we had anticipated. And again, have we feel pretty good in terms of the order coverage obviously to the forecast we have in place today.
Sorry. And then the second question on the implied decrementals in the back half?
Yes. On the decrementals, I mean, keep in mind that as you look historically at our cost of sales, 2nd quarter tends to be the best the lowest cost of sales as a percent of net sales of any. And that will be true this year. But if you look at the differential in what's implied in the outlook, you'll note that the Q2 relative to the comments you mentioned with the transitions we had, Q2 isn't as strong as what you would normally see. But it still is forecast to be our best quarter from a lower cost of sales for as a percent of net sales kind of ratio.
So I guess, 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. Hey, how are you?
How are you? Good, thanks. Two questions. So the just your level of confidence in the Construction and Forestry up 10%
for the year. I mean that
suggests a pretty powerful ramp here in the second half, something like a high teens growth rate for each of the 3rd and 4th 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? And then I have a follow-up question.
Sure. Yes. And we would tell you, again, in that outlook, as you mentioned, hasn't changed. It's always and we've talked about this, strength in the back half. Remember that to be fair, the comps do get a bit easier in the back half of the year, year over year.
But as 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 3 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. But again, as you talked about before, certainly, the inventory build is a fair amount of that increase for
U. S. And Canada
as we last year. So our dealers are building inventory in anticipation or expected to build inventory, both in anticipation of the higher retail as well as really we would argue kind of rightsizing from a pretty strong pull down last year.
Okay. Thank you. And then just a follow-up on the Brazil, the change in outlook for the South American market that tempered a little bit. I mean, is that still around the Phenomie dislocation? Or is there something that's that you feel like has actually softened in the overall market?
Yes. And first, I want to make sure we're clear that 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. But it's primarily driven by a little bit of softening in a couple of markets really around tractors. So if you think about Argentina, some challenges with import tariffs and that's primarily impacting tractors and then at least for gear.
And then also the sugarcane industry has 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.
Thank you. Next caller.
And your next question comes from Steven Fisher, UBS.
Hi, good morning. Wondering 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?
Yes. I mean, I think as we talked about, as we anticipate and see the markets changing with our SBA 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 and 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 kept some of those pulled to the extent they can.
And 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 and D and quarter, for example. Some of that, to be fair, is timing of projects. SA and G, for example, tends to be a little higher in the back half of the year for a number of reasons. But 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.
Yes. Steve, this is Raj. As you know, the process we have is byproduct. 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.
So each one of them is working automatically on whether it's cost of sales items or S and G items, okay, how they can get to walk down the line if they're coming down or walk up the line. So we will have hundreds of things going on in the company depending on where that vertical product line is, they may take a different action than another product okay. So you are seeing us walking down the line and that's the benefit you see. If some portions of YJAG are coming down, then you can expect them to lock down the line. If small ag is going up in North America, they'll walk up the
Okay. That's helpful. And then 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 and with sort of the feed outlook looking maybe a little flatter, what kind of visibility you have there on the small equipment side? Yes.
On small
ag versus large, I mean, just as a broad statement, I mean, our order book would not be far out and never rarely would be versus the large. So 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 or expected to really through the year and most are expecting it to continue to be strong even in the next year. And that's a market that's had some struggles in recent years.
So 10 up demand is hard to measure, but you could argue that 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. And 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. Good morning. Thanks, Tony. Was there any specific region that is driving the $50,000,000 decrease in the trade receivable and inventory outlook for 2014?
I don't have I don't believe there's any specific region that we would point to would be driving that reduction. We tend to look at it from an enterprise F on the quarter? So you're talking on C and F on the quarter. No. Yes.
I actually I would argue some of that is going to be Canada. It's going to be the 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 nicely and year over year is actually down very nicely. So 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 $50,000,000 reduction in the Ag and Turf segment for the year, the down 275 versus prior to 25?
Between Ag and Turf, no. I think again that you're really looking at kind of minor adjustments here and there. I would argue that it's a relatively given the versus the total receivables and inventory that's a minor adjustment.
Okay. And 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 so I would say it's still ahead because if you look at Q2, much of that is really driven by lower receivables and inventory as it relates to landscapes and water. If you took those out, you're relatively flat year over year. And so when you get to the end of the year, we'll have further pulled out. Okay. I'll follow-up.
Thanks. And as and 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. So last year at the end of Q2, the Land John Deere Landscapes inventory and receivables would have been in our reported numbers. They were not in our year end numbers. So that's why when you look at the Q2 reduction, it's much greater than what we're anticipating for the end of the year.
But 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 Uhlman, Cleveland Research.
Yes. Hi, guys. Good morning. Hello. I guess, first of all, on Construction and Forestry, if you could 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?
Yes. As you specific to Construction and Forestry, we don't talk about price realization by division. So we did talk about 2 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. And so again, that's not all we really talk to from a price perspective.
If you think about final Tier 4, we do have some I don't know if that a broad comment or if that was specific to Construction and Forestry?
Maybe you could just address both.
Yes. So as you think about that broadly, Keith, the 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. And 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 four cost actually on construction and forestry. So we would say by the end of the year, our forecast would estimate roughly 90% recovered on interim Tier 4.
And remember, because of the size of the product, the horsepower ranges of the product tended to be about a year behind in the transition from what ag was. So we're making good progress kind of on plan.
So Adam, this is Raj. On the topic of price utilization, so CNF, we did say in our press release about higher sales discounts. It is a competitive environment that we are facing. And we have built our share over a long period of time based on providing better products, better services and better business processes. So you should expect us to defend our share while delivering healthy margins.
Okay. Got you. So maybe you didn't have positive price this quarter, but that's the goal for the year?
Well, yes, I mean, I think if you ask specifically about quarter that would be true. But 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. So you do get a larger than expected increase in that particular quarter. So and again, I think it's more important really to look at it from an annual perspective as it relates to that.
And 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 Ryback on behalf of Jerry. First, I was wondering if you could talk about the impact of Tier 4 transition on factory costs in the quarter and then possibly update us on the timing of major product line transitioning costs in the coming quarters?
Yes. I mean, 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. And at that time, we discontinued the individual pieces and the dollar amount. But certainly, it was a factor in the if you look at the cost of sales for the quarter.
But 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 we would the majority of those transitions would be behind us at least as it relates to large ag. And again, we have some significant transitions coming up for next year, 2015 as you transition small ag as well as a pretty large number of construction and forestry products.
Perfect. And then can you talk a little bit about the drivers of your CapEx reduction guidance this year? And maybe where you're cutting investment? And talk about your longer term CapEx plans compared to significant new facility investments you've made over the past couple of years?
Yes. I would tell you that that CapEx reduction is really just minor adjustments. And 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. So what's going to get done this year versus next, those sorts of things.
So I would not read much into that adjustment that we made there. And we've talked about from a longer term perspective, at least in the short to mid term that $1,100,000,000 to $1,300,000,000 range is what you should anticipate as we move forward. And that's not just new facilities. Remember, we had with final Tier 4, that's driving a significant portion of the CapEx requirements as well. And 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.
Yes. Hi. Thanks for taking my question. I'm just wondering if you can provide some more details around your C and 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? And also on just any update on your thoughts on expectations for bonus appreciation as well as timing of 179 incentives?
Sales increase for Deere's Construction and Forestry Business, about 3 quarters of that is coming from U. S. And Canada, both as you mentioned, inventory, some inventory restocking as well as the stronger retail environment. About a quarter of those sales come from outside the U. S.
And Canada. So those are things like our businesses in Brazil as those new facilities new factories come online. We talked about strengthening forestry demand in the European market as an example. So 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 extension forward. What we would tell you, at least what we have in our modeling, So what we're anticipating in our ag modeling is that they would both be extended, but the extension wouldn't be passed until late calendar 2014. And so for Deere, in terms of our 2014 benefit to our sales would be limited to nothing. Obviously, we would have some benefit early in the year.
So that would be our expectation. Again, what we're modeling is that Section 179 gets extended at about half the level. 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. And that's the rationale for why we use that number in our modeling. But 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 for 2014 forecast there is no impact. It would be 2015. Great.
Okay. Thank you. Thank you. Next caller?
Your next question is from Ann Duignan with JPMorgan.
Hi, good morning guys. Hi, Ann. Hi. I want to come back to Jamie's question, just get the question answered more clearly. If you look at your Comline 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?
Well, we haven't talked I mean, we've talked about large ag being down double digits and certainly that would include our combine order book. So pretty much as expected, but certainly down double digits.
And combines little bit more than the average?
I don't have let me look at where just a second, Ian. I would 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 would be a fair chunk of that, I would tell you that they are not down more than the rest of the industry or more than the other large end products. I would say it's pretty much right on average.
Okay. And other large products here including things like sprayers and
You're talking sprayers, planters, obviously, there are row crop tractors, 4 wheel drive tractors, those sorts of products. Think about the products that the typical row crop farmer would use.
Yes.
Okay. And then going forward, how should we think about your Financial Services business in terms of the revenue came in a bit lighter than we were forecasting. 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 world crop farmer remains under pressure?
Yes. I mean, I think as 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. And it's running right around 60% of the ag sales would be financed with John Deere Financial.
And as you're aware, our biggest competitor there is cash, which takes up the bulk of the remainder. But as you move forward to your point, while we're anticipating the portfolio to increase during 2014, it's because as you have 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 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. But you'd have to make assumptions on what rest of the world and our penetration is on how that changes in rest of the world as well.
So there's obviously a lot of moving pieces there.
Okay. And 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 179 or downside? Do you have any thoughts on that?
We really don't. We don't. Again, it's the assumption is that after those midterm elections, again, late calendar years, it's likely to be extended.
Okay. Thank you.
Again, at least that's what we have in our base case.
Okay. Thank you.
Yes. Thanks.
The next question is from Mig Dobre, Robert Baird.
Good morning, guys.
Hi, Mig.
I guess, I'd like to go back to Construction and Forestry for 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. And seasonally at least it would make sense to me that the Q2 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. So 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? Yes.
I
are have lowered again and those are out being pulled from outside sources, of course. And but 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 where our dealers, we don't push a lot of inventory out into the market. We allow our dealers pull it as needed.
And 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 a situation. So we've been building much closer to retail and that's 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. And then,
if A and T, if we can talk a little bit about Russia too. I mean, the sanctions there seem to be escalating. I know you have 2 plants in the country. Have you seen any impact on your operations? And how would you sort of characterize the risk, if you would, to your operations in Russia at this point?
Yes. 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. And so there's a number of factors obviously that go into that, but ultimately a lot as a result of some of that conflict. So we've anticipated then the greatest impact we think at this point would be on the sales.
And so 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 sale, not only do we have challenges and potential challenges around import restrictions, credit availability because of that conflict is becoming even more of a difficult situation for our customers and dealers in as low as possible, those sorts of things for a variety of reasons. They, 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. Thanks. Good morning. So 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
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. And we 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 combined 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 tractor on new tractors. And so but that's an area that we certainly continue to focus on. Pricing would be down a little bit year over year. We tell you again to the extent we have intelligence around what's going on with our competitors, we would tell you we believe our tractor prices are holding in quite a bit better than competition, but it is down slightly year over year.
Okay, great. That's really helpful, Toni. And maybe just with respect to the Q3 guidance, I don't know if you're willing to give any color this, but I'm going to try anyway. You said down 4% for equipment ops. Any color between the C and F and the A and C segments there?
Yes. That's not something we've obviously, if you look at the rest of the year kind of implied guidance, certainly we're expecting some a pretty strong quarter from our C and F division as we go and actually rest of the year for that particular division versus what you would have implied in the ag and turf. But 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. Hi, Andrew Kaplowitz.
Hi, good morning. It's Alan Fleming standing in for Andy this morning. 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. Is that still something that you're expecting to see in the second half of the year?
And 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. So what's your visibility like? And are you seeing the recovery that you expected?
Sure. And I would as it relates to Brazil, you're correct. And we talked about, as 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. And certainly, if you look at industry guidance versus Deere expectations for our net sales, we would tell you we continue to see South America is the biggest differential, partly because of the fact that you're only looking at tractors and combines in the industry outlook. And 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.
So again, that would be our greatest differential. As you think about Europe, certainly, as Susan mentioned in her opening comment, it is really a mixed bag and didn't change our outlook industry outlook in Europe. So 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. And you can't speak as well to where we're at from an order book perspective. But you see in markets like the U. K, which is a good market for deer recovering off of low levels and it had a couple fairly depressed years, but we're seeing some strength there.
Spain is beginning to recover. But then you have other key markets, as Susan 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 in from a profitability perspective. It's partly related to that, but also in some of those Eastern European countries in particular, the transition year, this being a transition year for common A policy in Europe is also having some impact in certain situations.
Okay. I appreciate that. And if I could ask you a question on cash. I mean, you continue to ratchet up your repurchase activity. I know you're going to tell us that your cash priorities haven't changed.
But 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 flow holidays have not changed. And as you know, the single A rating and then the funding of operations and M and A consistently and markedly raising our dividends to 25% to 35% of payout ratio mid cycle. And then if we still have cash that we can use, we put it to use only if we feel long term, especially long term shareholders, it will be a value add for, okay? And now when we had that $8,000,000,000 share repurchase authorization, it was about 25% of our market cap at the time of announcement in December, we suggested that we've seen as a statement of confidence in our ability to do well throughout the cycle.
So 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. We'll have time for one more hopefully quick call for questions.
Your last question is from David Raso, ISI Group.
Hi. I'll try to be quick, Tony. Just more direct question 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 CNS.
Is the order book up that much?
We don't give you exact numbers, but it's then 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. In the second quarter revenues for Construction and Forestry, I know you expected first half slower, second half stronger, I get that. But literally the second quarter, was that revenue as you expected or above or below?
For C and L, yes. Specifically for C and L. I don't think it was significantly out of line from expectations.
So overall, David, this is Raj again. If you take what for the total company, if you take the Q2 and the revenues coming down in the Q2 compared to our earlier guidance. Now there are 2 things that happened. 1 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 has to do with places like where geopolitical issues exist, Argentina and CIS. So 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's minor adjustments, not a significant change.
And those again would be for the full company and mostly impacting Ag. And I think we mentioned in the opening comments, as 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 CNF.
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 a return close. Thank you.
Thank you. This does conclude today's conference. We thank you for your participation.