Good morning, and welcome to Deere and Company's First 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 Heagle, Director of Investor Relations. Thank you.
You may begin.
Thank you.
Also on
the call today are Raj Kalathar, our Chief Financial Officer and Susan Carlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's Q1 earnings, then spend some time talking about our markets and our outlook for fiscal 20 14. 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.johndeere.com.
First, a reminder, this call is being broadcast 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 expressed 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 that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8 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. With this morning's Q1 earnings announcement, John Deere has started 2014 on an impressive note. Income and sales both reached new records for the first quarter of the year. It was our 15th consecutive quarter of record earnings. The improvement was broad based with all 3 of our divisions reporting higher income.
Performance for the quarter also reflected success executing our marketing and operating plans, which are aimed at expanding our customer base worldwide. Adept execution is essential to successfully launching new products and getting new capacity up and running. Finally, our full year earnings forecast remains unchanged at approximately $3,300,000,000 It was in short a sound start to what is expected to be another good year. Now let's take a look at the Q1 in detail beginning on slide 3. Net sales and revenues were up 3% to 7 $700,000,000 Net income attributable to Deere and Company was $681,000,000 which as noted was the highest income ever recorded in any Q1.
EPS was up 10% to $1.81 On slide 4, total worldwide equipment operations net sales were up 2% to $6,900,000,000 This includes an unfavorable impact from currency translation of 2 points. 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 up 2% due to a number of factors including John Deere Landscapes, a smooth vinyl Tier 4 transition and slightly higher than anticipated shipments of several other products.
Operating profit was up 4% to $797,000,000 In spite of the transition of small combines, 7R tractors and sprayers to final Tier 4, Ag and Turf's incremental margin was an impressive thirty percent. 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 Livestock receipts are forecast to remain at record levels. As a result, our forecast calls for 2014 cash receipts to be about $378,000,000,000 down 7% from 20 13, which was the highest level ever recorded. On slide 7, global corn to use remain at historically low levels. Corn production was strong in 2013 due to good weather globally, resulting in higher yields. However, global corn stocks used are only expected to increase by about 1 percentage point.
In addition, global corn plantings will likely decrease in 2014. In fact, our Deere estimate expects approximately 4,000,000 acres of corn to shift to soybeans in the next planting season in the U. S. Taking a global look, our consultant Informa is forecasting a cut in planted corn area of about 10% in Brazil for the 2013 2014 season. Planted corn acres for Argentina's early crop were down about 30%.
Informa expects another 4% to 5% drop in the late corn crop. Moving to the CIS. Ukraine is also expected to cut back on corn planted area by about 20%. If 2014 brings unfavorable growing conditions in any part of the world, the U. S, Brazil and Argentina in particular, corn stocks to use would fall and commodity prices could rebound.
Our economic outlook for the EU 28 is on slide 8. Beef prices are close to historic highs and record milk prices are supporting livestock and dairy farmers. Grain prices and farm income are expected to be lower in 2014, but remain near long term averages. While it appears that short term economic stress has diminished for now, concerns over slow European Union growth are weighing on farmer confidence. 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 and Germany bears watching. Slide economic fundamentals outlined for other targeted growth markets. In the CIS, credit availability continues to weigh on equipment sales and import policies are negatively impacting combine sales in Russia, Kazakhstan and Belarus.
Late fall planning in Russia has put some of the 2014 winter 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 in Brazil is expected to increase about 3% over the 2013 level. Brazil soybean production is expected to increase again in 2013 2014 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.
As shown on slide 11, in mid December the Brazilian government announced the tsunami interest rates for 20 14. The interest rates now in place are 4.5% for small and medium farmers and 6% for large farmers, both up from 3.5%. The new tsunami rates remain at very attractive levels, considering inflation in Brazil was slightly over 6 percent in 2013 and private financing rates are currently in the mid teens. Planter technology highlighted on slide 12 at the Louisville Farm Show. Planning is a critically important operation to a farmer and breakthrough technology in this planter takes in ground seed spacing accuracy and depth control to a new level even at higher speeds.
At 10 miles per hour, twice the speed of current machines, our ExactEmerge planter achieves equivalent or better in ground spacing and depth control. This new planter allows producers to cover more acres in less time. This is critically important when they are challenged by narrow planting windows to reach maximum yield potential. Our 2014 Ag and Turf Industry outlooks all unchanged in the past quarter are summarized on slide 13. In the U.
S. And Canada, we expect an industry decline of 5% to 10%, mainly reflecting lower sales of higher horsepower tractors and combines. The EU 28 industry outlook is down about 5% due to lower crop prices and farm income. In South America, industry sales of tractors and combines are projected to be down 5% to 10% from 20 13 strong levels. South America continues to grow in importance for Deere.
Our tractor market share has grown considerably there and our strong position in products such as combines, sugarcane harvesters, sprayers and seeding equipment should not go unnoticed. Shifting to the CIS, we expect industry sales to be down slightly, while 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 projected to be up about 5% in 20 slide 14, fiscal year 2014 Deere sales of worldwide ag and turf equipment are forecast to be down about 6%.
In a year over year comparison of net sales, Landscape accounts for about half of the change. 2014 operating margin for the Ag and Turf division is forecast at about 14%. The 2 point decline from 2013 is a result of mix, foreign exchange and higher overhead 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.
Let's focus now on Construction and Forestry on Slide 15. Net sales were up 4% in the quarter and operating profit was up 32%. The division's incremental margin of about 45 percent is a result of C and F's diligent focus on cost. An aerial view of our 2 new construction factories in Brazil is on slide 16. We feel Brazil has the long term demographic and market characteristic that the John Deere strategy is built around.
The construction equipment market in Brazil is expanding at a rapid pace and the country continues to grow as an exporter of agricultural and other commodities. This means it will continue to expand and upgrade its transportation system and infrastructure. At the same time, urbanization and increasing incomes are creating demand for more housing and institutional building. The Deere, Brazil factory is solely owned and will manufacture backhoe loaders and 4 wheel drive loaders. The factory has manufacturing capabilities similar to our U.
S. Facilities, which includes cutting steel, welding, machining, painting and product assembly. The Deere Hitachi, Brazil factory is a fifty-fifty joint venture with Hitachi Construction Machinery Limited. It will produce 5 John Deere and Hitachi branded excavator models. Natco and excavator production has started.
We will be in loader production later this year. Moving to slide 17, looking at the economic indicators on the bottom part of the slide. The economy continues slowly moving forward and there are positive signs in the market. Construction employment numbers are rising, housing starts are ramping up, home sales and prices are improving and home inventories are low. Some markets are seeing building lot shortages.
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, industry growth in response to an improving U. S.
Economy and increased international sales. Global Forestry Markets are expected to be up about 5% in 2014. Following double digit growth in 2013, North American forestry markets are expected up about 5%, while Europe and Russia are expected to to Slide 18 shows the financial services provision for credit losses at 3 basis points based on the percentage of the total average owned portfolio at the end of the year. This reflects the continued excellent quality of our portfolios. Our 2014 financial forecast contemplates a loss provision of about 13 basis points.
Losses remain well below the 10 year average of about 28 basis points and the 15 year average of about 48 basis points. Moving to slide 19. Worldwide Financial Services net income attributable to Deere and Company was $142,000,000 in the first quarter versus $133,000,000 last year. Attributable to Deere and Company is forecast to be about $600,000,000 which is unchanged from a quarter ago. Slide 20 outlines receivables and inventory.
For the company as a whole, receivables and 12 month sales, down from 29.8 percent a year ago. Ag and turf ending receivables and inventory were down 6 $33,000,000 About half of the decrease is accounted for by John Deere Landscapes with the remainder due to lower quarter down $265,000,000 driven by a decrease in Canadian confined inventories. We expect to end 2014 with receivables and inventory down about $75,000,000 Our 2014 guidance for cost of sales as a percent of net sales shown on slide 21 is about 75%. When modeling 2014, keep in mind the following price about 2 points lower pension and OPEB expense an unfavorable mix of product in ag as we talked about earlier Tier 4 product costs, overhead spend due to Tier 4 transitions and foreign exchange. Looking at R and D expense on Slide 22.
R and D was down about 9% in the Q1, mainly due to timing of projects. Our 2014 forecast calls for R and D expense to be about flat with last year. SA and G expense for the equipment operations was down 4% in the first quarter and is forecast to be down about 5% for the year. In the year over year comparison of SA and G expenses, Landscape accounts for about 7 points of the change. On slide 24, 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 25. The equipment operations tax rate was approximately 31% in the Q1. For full year 2014, the effective tax rate is forecast to be in the range of 34% to 36%. On slide 26, you see our equipment operations history of strong cash flow. Our forecast for cash flow from equipment operations remains at approximately $3,900,000,000 in 20 14.
On slide 27, we outline our 2014 outlook for the Q2 and full year. Our net sales forecast for the Q2 is down about 6% compared with 2013. This includes about 2 points of price realization. In a year over year comparison of 2nd quarter sales, landscape accounts for about 3 points of the change. A couple of things to keep in mind when modeling 2nd quarter sales and incremental margins.
As has been the case the last few years, changeover of engine technologies creates anomalies in our normal seasonality patterns. Production levels will be down in the Q2 due to final Tier 4 transitions. Products transitioning in the quarter will be important ones such as large combines and 8R tractors, so mix will also be a factor. The full year forecast calls for net sales to be down about 3%. In the year over year comparison of net sales, landscape 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 20 14 full year net income forecast remains at about $3,300,000,000 In closing, John Deere has entered 2014 on a strong pace. Even in the face of lower demand for large farm machinery, we believe the company is well positioned to deliver solid performance and have another good year. Indeed, we believe our extensive investments in new products, new markets and additional capacity will provide strong support to our results and keep our strategic plans moving ahead.
As a result, we remain highly confident about the company's future prospects and our ability to deliver value to our customers and investors in the quarters and the years to come.
Thank you, Susan. We're now ready to begin the Q and A portion of the call. The operator will instruct you on the polling 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 rejoin the queue. Operator?
The first question comes from Andrew Kaplowitz, Barclays Capital.
Good morning, guys. Nice quarter.
Hey, Andy. Thank you.
Toni, can you talk about the near term visibility that you have in Ag? You guided to overall equipment sales down 6%. We assumed some modest growth in C and F in the quarter. So you're seeing this fall off in ag and turf. Susan mentioned sort of the IT4 transition.
Is that sort of what this is more of in 2Q? And then can you talk about the order book in that context? You had pretty good visibility around wheeled tractors, especially. Has anything really changed in the order book?
Yes. And you're right. The second quarter, especially if you look at ag and turf is very much about the IT4 or final Tier 4 transition. Keep in mind, as you pointed out, that you have ADAR tractors transitioning during the month of April and we also have large combines transitioning during the quarter as well. So looking we talk about combine shipping patterns, for example, have in the past.
In this year, we would say first half, second half is about 45% first half, 55% second half. Last year, it was about fifty-fifty. So not a significant change, but if you look quarter to quarter, there is a big change in the second quarter where our expected shipments will be down similarly on tractors. Now as you look at order book, we continue to have a very strong order book on tractors. In fact, if you look at AR Tractors, the wheeled models, our order book is now out into early September in terms of kind of how we would look at first availability.
Now keep in mind that is on a lower production schedule or said differently, a lower allocation for U. S. And Canada tractors in that. So and it of course accounts also for the fact that we have some lower production in the second quarter in particular. As you know, on combines, we don't talk so much about effective availability as much as how the early order programs came in.
And they were down year over year on the combine early order 2014, especially as it relates to large ag equipment, year over year our order books are, I'd say, if you just kind of took a broad brush on large products are roughly in line in terms of the coverage we have, keeping in mind on lower expectations, but certainly have relatively the same level of coverage of orders versus our forecast.
Okay. That's helpful, Tony. And then you previously said that your base case in ag and turf was based on an extension of Section 179 sort of a middle ground around 250,000. Dollars Has your thinking changed on that? And how do we get comfortable that there wasn't some significant pull forward in equipment purchases in your sort of November, December timeframe.
Maybe you could give us some color on how January was versus those 2 months?
Yes. We would tell you today, I mean, our base case in terms of what we have modeled is still continue to expect that we'll have an extension of the kind of that half level for Section 179. Now keep in mind that the difference though that we would say today is really expecting that to happen later in the year. Of course, if there is any extension, we would anticipate that it would be made retroactive, But that still means our business until then, in our customers' buying decisions, there is an element of uncertainty in terms of whether or not they'll actually have those tax incentives by the end of the year. But that would be our base case is that they would come in.
With that in terms of pull ahead, again, I think as you look at our first quarter, some of the strength there really was when we talked about it ahead of time, November December production of combines were higher than normal as we were preparing for the final Tier 4 transition. So we still had a couple of months of interim Tier 4 purchases. Certainly from a used equipment perspective, we think that was beneficial as those U. S. Tax incentives were expiring and customers knew that.
But the reality is from a retail sales perspective, if customers were coming in late in the year trying to take advantage of those tax incentives on new equipment, they would have had very limited opportunity in terms of just the availability of the equipment we would have to sell to them at that point in time. So pretty limited pull ahead as it relates to tax incentives. Appreciate it. Thank you. Thank you, Andy.
Your next question is from Stephen Volkmann with Jefferies. Can I just ask you, your Q1 obviously came in a little bit better than what you had expected? And again, I guess, I'm just trying to get a sense of the cadence. Was this sort of more preparation for the switch over to Tier 4 final? Or was there something else that drove that?
Yes. I mean, certainly on the top line, we would have had a little more strength obviously than what we would have guided to. And really there isn't a simple answer in terms of one particular item or even a couple of items. Susan kind of hit a few of the larger items and there were a variety. We talked about the fact that with John Deere Landscapes, we did end up with more sales in the quarter than what we had anticipated in the forecast.
And as you might expect with those sorts of situations, You put in your best estimate and things do move around a little bit. And then to your point, we did have some timing benefit in terms of shipments. Some of that was related to our Tier 4 transitions in the quarter, went better than we had even anticipated. And so we were able to ship more product than what we had in the forecast. And there were a variety of other products that we could say it wasn't a transition, but we were able to ship some additional products in the quarter.
I wouldn't imply that that and obviously it didn't change dramatically our full year production. So I wouldn't say that was necessarily a strength that we would expect to have those higher level of sales as we move forward.
Okay, great. And then just a quick follow-up. I think if I'm not mistaken, you took your Ag and Forestry margin expectation down to 14% from 15% I think we had quarter. Please correct me if I'm wrong, but I'm curious if there's any color you want to give us around that. And I noticed CE didn't really go up.
So what made up the difference to keep the guidance kind of flat?
Yes. I assume you meant the ag and turf? I'm sorry, yes. Yes. Okay.
And so, yes, I mean really a big change there is around FX. It's probably the biggest change that's impacting the margins there. The remaining difference year over year is very similar to what we would have talked about at original budget. Obviously, from a positive perspective, we are expecting price realization, talked a little bit about pension OPEB having some benefit there. But then from a negative side, mix is a big item.
And then the Tier 4 transitions, both from a product cost perspective as well as the overhead expenses related to those drags on that operating profit.
But Tony is mix worse than it was a quarter ago when you
No, the change if you're looking at the change from original budget, it's really more about FX. That would be the biggest change. Thank you. Okay. Thank you.
Next caller?
Your next question comes from Ross Gilberty with Bank of America.
Hey, good morning. Thank you. Hey, Ross. Hey, Tony. Could you talk a little bit more about your South American farm equipment outlook and how you're planning to manage production into the region?
You've obviously stuck with your down 5% to 10% retail sales outlook, but you're also forecasting soybean prices down another 17% into the 'fourteen, 'fifteen crop year, which obviously implies that we're on a downward pricing slope as fiscal 'fourteen unfolds. So how do you avoid overproducing to the region in this environment? And what are you hearing from your Latin American dealers right now? Yes. And really as we look at our 2014 and keep in mind as we think about our South American outlook that's anticipating just tractors and combines.
And as we talk about quite often, we have a significant business outside of tractors and combines. In fact, our sales more than a third of our sales there would be product beyond the tractors and combines in that region. So those are continuing to have some strong sales as well. So as we look at that South American market, Brazil in particular, we're still looking for some very positive things to come from that region. We've talked a lot about our market share improvement, especially in tractors.
We saw some nice market share movement on combines as well in 2013. So our business there is actually continuing to be pretty strong. Keep in mind too, as you look at commodity prices and as you project out into 2014, a couple of things generally about commodity prices would be, we're assuming in those numbers, trend yields at this point. And so that would assume that we would have some very good weather and some good production. And we're seeing corn acres come down and much of that is moving into soybean acres.
So if you see that shift into soybeans and good growing conditions, which is a big assumption, then you're going to see some drawdown in soybean prices as a result of that. But keep in mind too as it relates specifically to Brazil, with the FX impacts today and weaker real, it doesn't have quite as strong of an impact on farmer incomes as it might in other parts of the world in the U. S. In particular. So that's actually helping buoy those farmer incomes in Brazil.
Okay. Thank you. And then just my follow-up. For Construction Equipment, I mean, clearly you're looking for further acceleration as the year progresses to hit your plus 10% outlook. Does your order book reflect that optimism at this point?
Have you seen any drop off in demand in early 14 on the back of perhaps a pre buy in front of final Tier 4? No. In fact, we would tell you as we look at our order books kind of broadly speaking, we tell you they're very strong and so we continue to be encouraged by that. Thanks a lot. Okay.
Thank you. Next caller?
Your next question comes from Seth Weber with RBC Capital Markets. Hey, good morning. How are you?
Good morning. How are you, Seth?
Good. Thanks. So two questions. In Brazil, did you experience a pause around the dislocation in the Fanami financing? And has that reaccelerated since the program has been cleared up?
I guess that's my first question.
Sure. And I think that that would be a fair way to say it. As they've ramped down the 2013 program at the 3.5 percent and then the new rates have been announced for 2014. But it does take a little bit of time for those to kind of ramp back up. Our view though overall is that that's a short term sort of pause and we don't think that's going to have an impact on our overall shipments for the year, but certainly and you'll see that in the likely see that in the numbers coming out of on FABIA here in the next month or so, where you'll see a little bit weaker shipment volume across the industry.
But again, we think that's a short term issue. Okay.
And thanks. And then a follow-up, the pricing realization for the Q1 came in at plus 2 versus I think the plus 3 that was expected. Is there any color around that? And can you talk I guess separately about the acceptance of the Tier 4 pricing that you're pushing through?
Yes. I would tell you, in mind those are rounded numbers, the 2 and the 3. So it doesn't take a lot of shift in the actual number for that to move from 2 to 3. So I wouldn't read a lot into that difference on the price realization. Regarding the pricing on final Tier 4, obviously, we didn't change our long term, our annual projections on price realization.
And I think the easiest way to answer that is looking at the ADAR trackers, where that's I think about an 8% increase in price this year. We'll have to look at that again. But again, we're seeing very strong orders continue on that and that production beyond May obviously is all final Tier 4.
Okay. Thank you very much.
Okay. Thank you.
Your next question comes from Eli Liskerten with Longbow Securities. Your line is open.
Thank you. Good morning, everyone. Good
morning, Eli.
Just a quick question on used equipment. Can you give us some idea what the status of used equipment around the dealers are with that? I mean that was a complaint that we kept hearing that used equipment is pretty high now with Section 179 not being applicable to at least for now for used equipment. Is there any issue there with product or types that we have to worry about?
Yeah. And I would start with saying, as we look at used equipment, broadly speaking, we think used equipment is in relatively good shape. Keep in mind, if you look at absolute level, certainly it's at high levels, but that's used combine inventories are actually in very good shape. Our dealers did some great work in bringing those down really during the fiscal Q4 of last year and those have continued to be at good levels from our perspective. Large tractors are certainly at higher levels, but again it's relative to the sales and is not raising any red flags.
As you know, Eli, we're always cautious about used equipment and always focused on used equipment. So I can't say that we aren't don't have any concerns about it because we always do. But I wouldn't say necessarily any significantly heightened concerns around used equipment. And depending on what dealers you're speaking with, keep in mind that my comments are really talking about on a broad basis. Certainly, there's going to be pockets on all products, where you're going to see a little bit elevated inventory at certain dealers, those sorts of things.
So that's always the case.
And Eli, if I can add on the pricing. For large row crop and 4 wheel drive practice, used pricing has actually been up. Now for some models of combines, it has come down high single digits, okay? So the pricing's overall held there too. So since it came down low single digits, the combine pricing has stayed.
So we feel pretty good about the pricing as well. Although like Tony said, we're always going to be cautious about used equipment.
Okay. And just a quick follow-up. Can you talk about your thinking in production schedules in the second half of the year? You're up a couple of percent in the first quarter, the NAG down in the Q2. Are we looking at just modest declines right now in the plan for 3rd Q4?
Or is there any skewness in 1 quarter or getting the other as you usually do sometimes the 4th quarter takes the hit, but no one that can change if necessary?
Yes. I don't know that I would expect anything real dramatic other than the Q2. But as you're looking at the back half of the year, I don't believe there's any obviously, for the full year, we're expecting some lower production levels. But in terms of skewing between quarters versus normal production, I think the biggest difference is going to be around Q2. All right.
Thank you very much.
Your next question comes from Ann Duignan with JPMorgan.
Hi, good morning guys.
Hi, Ann.
Hi. Can you talk about the notion that if Section 179 or accelerated depreciation do not get extended, would it be fair to say that fiscal 2015 will be looking tougher than fiscal 2014 in an environment with no tax incentives?
Certainly, if all else is equal and you remove U. S. Tax incentives, certainly that would tend to have a negative impact. But keep in mind there, as you know and are well aware, there's a number of factors that farmers look at when they're making their buying decision and obviously taxes is just one of those.
Sure. And cash receipts being the other and also forecasted to be done.
My follow-up Yes, certainly cash receipts as you point out is forecasted to be down somewhat. Keep in mind, some of that, as you look at year over year, 2013 was raised considerably by the USDA as well. Some of that increase though is as you see drought in California and other parts of the country, for example, you're seeing some higher levels of receipts from fruits and vegetables. Livestock is certainly better as well. So that's starting to give a little bit different view and maybe a little bit more skewed view of 2014 versus 2013.
Sure. And my follow-up question is more academic really. With the Farm Bill passed and kind of base level prices of $3.70 per corn and $8.40 per beans and insurance. Why wouldn't we expect to see more acres of corn than you are projecting? And have you taken into consideration the $370,000,000 and the $840,000,000 when putting together your forecast for acres for corn?
Yes. Well, as you know that was just signed into law last Friday. And so we're still evaluating what all that means and what the implications are throughout the business. So what we tell you is certainly the Farm Bill is supported. It's a long term Farm Bill and it's very supportive from our perspective for our farmer customers.
In terms of short term impact on our business, I think I would say the biggest impact is it just removes one level of uncertainty that had been there previously. So that's certainly on the margin would be positive. But I think it's a little premature to talk about what other either positive or negative benefits, although we would certainly see more positives than negative from the Farm Bill, but what the details may preclude.
But wouldn't you agree that the difference between current prices in $3.70 versus current prices of beans in $8.40 would definitely farmers
go ahead.
Yes. Certainly, current prices of corn would be above that 3 $70 level. So I'm not sure that would have a dramatic impact. But again, that's for us, it's a little premature for us to comment on that. So but it's certainly something we'd be looking at.
Okay. I'll take it offline. Thanks guys.
Okay. Thank you. Next caller?
Your next question comes from Jamie Cook with Credit Suisse.
Hey guys. This is actually Andrew Buscaglia on behalf of Jamie. So I noticed in your I noticed on your Construction and Forestry side, you took down your non res assumption a little bit. Can you just tell us what's implied in your construction forecast above 10% with regards to non res, if there's if you're leaving some room for upside there or is it mostly just res at this point?
Yes. I would say for starters that's not a factor. I mean that isn't a it's a relatively small factor in our modeling and in terms of what we're looking at. Maybe taking it a little bit broader, as we look at our up 10% for Construction and Forestry sales for the year. Just roughly, you can say it's about a third, a third, a third in terms of what the where that growth is coming from.
About a third of it is coming from industry growth, our expected industry growth in the underlying business roughly a third is higher shipments around inventory adjustments. As you may remember, we ended 2013 with new inventory levels at our dealers very, very low. And so we would expect some rebuild of that inventory. And then about a third will come from markets outside of the U. S.
And Canada. We've talked about, we highlighted our new Brazilian facilities, forestry in Europe and Russia are expected to recover off of some pretty low levels that see some recovery there as well. So that's really where those that 10% is coming from. So it's a variety of factors, one of which is certainly a stronger U. S.
And Canada industry.
Got it. Okay. And then I'm just going to channel Jamie here for a second. But I got to ask, no one's mentioned your buyback at this point. Do you just have any updated thoughts on the remainder of the year?
Yes. So this is Raj. Our use of cash priorities Andrew stay the same. We'll be a broken record on it. 1st, keeping enough liquidity for maintaining our A rating.
2nd, for all our capital expenditures and M and A requirements. And 3rd, modestly but consistently increasing our dividends and keeping it between 25% to 35% up the mid cycle earnings. And only after doing those, we'll be using our cash for share repurchases. Now the $8,000,000,000 share repurchase is essentially a statement we are making that we'll have enough confidence in our ability to generate good cash in the next few years to be able to return cash to shareholders in the form of share repurchases, but only when and if it adds good value to our long term shareholders. Now there is one a couple of differences you need to note from last year's Q1 to this year's Q1.
Last year, Q1, we had a little bit more caution in terms of the uncertainty in the external markets, in the financial and capital markets. We felt slightly better about that this time. And we've also said the $300,000,000 plus that we get out of the John Deere Landscapes as partial sale, we'll give it back in the form of share repurchase. And you've seen some of that come out in the Q1 of 2014 as well.
All right. Thanks guys.
Thank you. Next caller?
Your next question comes from Robert Wertheimer with Vertical Research Partners.
Hi. Good morning everybody. First question, I mean, you've talked a little bit, but the gross margin change year over year on solid ag revenue anyway. I mean, can you quantify maybe the currency impact and or whatever other impact you want to quantify? Why would that?
Yes. Again, it's really related to FX. And again, I'd remind you these are rounded numbers. And so keep that in mind as well. But again, the biggest impact really is the FX.
Okay. And then if I understand what you mentioned on the production schedule and the outlook, I'm not sure how far forward you'd normally be booked on tractors at this point. I'm guessing that you took your production down and consistent with your guide let's say 10% or 20% of the high horsepower and therefore you're booked solidly out but booked out down that level. Is that right? And are you constraining demand by pushing that out further just because of the uncertainty in the market?
Can you maybe give a little detail around that?
Yes. I think how we would describe obviously is as we look at our availability that is on assumed lower production levels, at least that we're allocating to the U. S. And Canada, consistent with our lower projections for the year. So as you look at year over year though, the ADAR tracker I I mentioned early September last year, you were in early July in terms of effective availability.
And then on 9s and these are wheeled tractors, you'd be early May this year and you were kind of mid to late April last year. The tracks would track tractors on both of those would actually be near closer in than last year. But remember, we had some availability constraints earlier in the year last year on track. So we were kind of mid to late June this year versus late August But the real tractors are the larger part
of that. The larger part, yes, yes, and
then the tractors are small still. Thanks. Thank you. Next caller?
Your next question comes from Andy Casey with Wells Fargo Securities.
Hey, good morning everybody. Good morning.
Just wanted to get a better feel for the combined and Series 8R production profile through the year. Should we expect it to go back to run rate in Q3 after the air pocket in Q2? Or should we anticipate kind of a slow ramp up in from that Q2 level?
Yes. As you think about certainly on the combines as you look year over year and how I'm looking at it is as percent of the total of the annual shipments. So keep in mind, we're on a lower year over year production schedule on those combines. You would see a little bit heavier actually year over year in both the 3rd Q4, but not a dramatic shift. And it's fairly evenly spread between the 2 quarters.
So again, on combine, you saw higher 1st quarter, lower second quarter, 3rd and 4th to your point gets more in line with the run rate that we would have had last year. And I don't have that level of detail on the 8R tractors other than I know 2nd quarter is certainly the quarter that's impacted on those ADAR tractors. And then I would assume again you're going to go back to more normal run rates again on lower production levels, but more normal run rates into the 3rd and 4th quarters.
Okay. Thanks. And then if we could kind of look at Europe, one of your competitors made some comments about a 20% drop in their orders for Europe. Could you give a little color on what you're seeing over in that region?
Yes. And Susan, I think, pointed out a little bit, it does vary country by country in terms of what you're seeing overall. Our outlook is down 5%. So I don't know if they were perhaps speaking about a specific country or not, but that would be a pretty dramatic drop. But generally speaking, the UK is a little stronger year over year.
Of course, they were coming off of a weather related lower level in 2013. Spain on the margin would be a little lower. We're seeing some flat to maybe a little bit of weakness in some of the markets like Germany and France. But again, they're coming off in some strong markets as well. But I wouldn't we certainly aren't hearing any kind of dramatic reduction like that in terms of orders in that particular region.
So again, we're kind of seeing a market that's a little softer year over year, but generally hanging in there.
Okay. Thank you very much.
Okay. Thank you. Next caller?
Your next question comes from Adam Fleck with Morningstar.
Hi, good morning. Thanks for taking my question. I wanted to follow-up on the C and F segment. You noted that the dealer inventories were awfully low at the end of last year, but your volumes were down this quarter. I'm just curious, did dealers continue to reduce their inventories?
Or was there basically flat? Any details there would be helpful.
Yes. The biggest difference really in the quarter year over year relates to our inventories in Canada. And you may be aware we have confined inventories there. And so we did draw down those inventories in the quarter, but certainly on an overall basis as we move through the rest of the year, we would expect. And so shipments, if you look at shipments versus retail, they were pretty much in line this quarter and we would anticipate that that would shift towards heavier shipments over retail as we move through the year.
Okay, great. That's helpful. And then Russia and Kazakhstan and all are still dealing with these combine tariff headwinds. Just curious on any thoughts or updates you have on how that may play out for you?
Yes. And at this point, the tariffs are the easy answer is that the shifting environment continues to be one that's challenging from that perspective. Certainly, they did make a little bit of a change in terms of some allocations of combines that they would allow in. And then there's also some requirement changes in terms of beyond the allocation, moving more away from tariffs and toward required local content to import beyond what the allocations allow. For 2014, we feel like we feel pretty confident that we've met those local content requirements.
But again, the challenge is in future years, what will the definitions be and how quickly can we ramp up and meet those requirements. So we would still be very cautious about that region on the basis of the not necessarily import tariffs, but import policies in that region and the challenge of meeting those as they shift. Okay, great. Thank you. Thank you.
Next caller?
Your next question comes from Joel Tiss with BMO.
Hi, Mitch. How's it going? Good. Hi, Joel. Good.
How are you? All right. I wondered if well, just two I'll just ask both of my questions together. And first one is the regional breakdown. Can you just give us a little more color region by region in Europe?
And then second is, are there anything notable happening in the finance business while the margins dropped? And just what the outlook for those margins in the second and third quarter? Thank you.
In terms of margin, are
you referring to the comment around spread on the
social service? Yes. Yes.
I think you're building out some of your regions and that might hurt the mix going Actually, the yes, keep in mind, some of that is, as you look at the portfolio, the mix of the portfolio does impact our spread in the sense that if you get a higher ag portfolio and if it's the returns on that portfolio would not be as high from a spread perspective as some of the others. And so that's part of the answer there. Certainly from Europe, other than that, I talked a little bit about France and Germany, U. K. And Spain.
Those are probably the highlights. As you think about the other maybe to give a little more color, as you think about cap reform, in 2014 certain regions you may see a short term impact there as they transition to the new plan. The cap changes do put in some cases more flexibility country by country. And so some of the Eastern European countries, we would anticipate there may be a short term slowdown in the sense of how they get the definitions out and apply those cap payments. But again, that's a real short term kind of phenomena.
But outside of that, I really don't have much more I can add. So, operator, if we can go to the next caller and this will be our last call.
Thank you. The final question comes from Adam Yulman with Cleveland Research. Your line is open. Hi, guys. Thanks for squeezing me in.
You bet.
I guess the first question I had is congrats on the early Tier 4 success.
I'm wondering if you could
help us dial in a
little bit more though how you're thinking about the decremental margins for the Q2 and maybe how much contingency you have in the plan?
Yes. I would say, if you look at Q2, when you think about decremental margins, remember that you're talking about key products with 8R tractors and large combines as well as the lower production of those products and you also have higher costs from an overhead perspective as we're transitioning those products and bringing those lines down and so on. So those 2 couple together can have some sizable impact on operating margins in that second quarter as we look forward. So in terms of what's in our forecast, I mean, that is our best estimate on our current production plans. Those can shift either direction.
1 week can make a big impact if there's a delay or if we're a little bit ahead, as you saw in part in the Q1. So I would tell you that there is as much risk that you could see that production schedule slide a little bit as we pull forward some. So that's how we tend to put the forecast together and what we would expect for Q2.
And then just a clarification, you mentioned that you're watching the used tractor market a bit. Have you made any changes to
work through use the equipment and so on. So there's always tweaks. I mean in terms of we're still using pool funds as the basis of our effort with dealers that from time to time will change what programs they can utilize that pool fund for and in some cases tweak some existing ones, maybe add some additional here and there. So those sorts of things happen on a regular basis. But nothing dramatically different in terms of shifting away from pool funds or anything of that nature.
Okay. Thank
you. Okay. All right. Thank you. And with that, we'll conclude our call.
But as always, we'll be available throughout the rest of the day for callbacks. Thank you.
Thank you. This does conclude today's conference. We thank you for your participation and you may now disconnect your line.