Good morning, and welcome to Deere's 4th Quarter Earnings Conference Call. I would now like to turn the call over to Mr. Tony Hiegal, Director of Investor Relations. Thank you. You may begin.
Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer Marie Ziegler, Deputy Financial Officer and Susan Carlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's 4th quarter earnings, then spend some time talking about our market and our initial outlook for fiscal 2014. 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 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 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 information. Susan?
Thanks, Tony. Today, John Deere wrapped up 2013 with the announcement of our 4th quarter results. All in all, it was an excellent quarter and marked the end of what CEO Sam Allen called another year of impressive achievement. 4th quarter earnings were $807,000,000 the highest ever for the final quarter of the year and our 14th straight quarterly record. The improvement was led by Ag and Turf, which had another strong performance.
Financial Services had higher income as well and Construction and Forestry profit held steady despite rocky conditions in some of its key markets. Results for both the quarter and full year reflected a disciplined approach to carrying out the company's business plans and a continuation of positive conditions in the North and South American farm sectors. For the year as a whole, John Deere had its highest ever level of sales, earnings, shareholder value added and operating return on operating assets. That last metric operating return on operating assets doesn't get a lot of headline attention, but it may be the single best indicator of our success delivering profit while controlling costs and asset levels. In fiscal 2013, OROA as it's known reached a new high of just under 32% with inventories at standard cost.
It was in summary a terrific quarter year and it puts the company squarely in position for what we see as another solid performance in 2014. Now let's take a look at the 4th quarter in detail beginning on slide 3. Net sales and revenues were $9,500,000,000 in the quarter, down 3% from the very robust 4th quarter last year. Recall last year shipments were unusually high due to interim Tier 4 transitions, especially in combines and our factories were running at very high rates catch up with customer orders. In spite of the decline in sales, net income attributable to Deere and Company was up 17% to $807,000,000 which as noted earlier are the highest 4th quarter results the company has ever recorded.
EPS was up even more 21 percent to $2.11 On slide 4, total worldwide equipment operations net sales were $8,600,000,000 down 5%, again in comparison with last year's particularly strong 4th quarter results. This includes an unfavorable impact from currency translation of 2 points. Price realization in the quarter was a strong four points. Before looking at ag and turf in detail, let's touch on 2 events in the quarter that will have an impact on the division's results going forward. On slide 5, in October, Deere entered into an agreement for the future sale of 60% of John Deere Landscapes for approximately $300,000,000 Initially, Deere will retain 40% of the business and will report results as an equity investment in unconsolidated affiliates.
John Deere Landscapes distributes irrigation equipment, nursery products and landscape supplies such as seed, fertilizer and hardscape materials primarily to landscape service professionals. The sale is in line with our strategy to focus resources on our growing core businesses. An example of this focus is illustrated on Slide 6. In September, Deere completed its purchase of Bauer Built Manufacturing, allowing us to leverage our global dealer network, manufacturing capabilities and management skills to continue growing this business. As you may know, Bauer has manufactured co branded planters with Deere since 2002 under a design and manufacturing partnership.
These planners range in size from 44 feet to 120 feet in width, the latter being the largest planner in the industry. We have seen demand for the Dear Bower series planners grow quickly in the last few years, predominantly in North America. Going forward, not only do we anticipate further market growth in North America, we see a lot of potential in Brazil and Argentina where large farms demand highly productive machines such as these. We have already localized production of the Dierbauer series planners at our Horizontina factory in Brazil and have created a local supply base. These steps support further growth and add to our highly successful product lineup in the country.
Now let's turn to a review of our individual businesses starting with Agriculture and Turf on slide 7. Sales were down 4% in the quarter, primarily due to lower shipment volumes and unfavorable currency translation, partially offset by realization. In spite of the sales decline, operating profit was up 7% to approximately $1,000,000,000 We believe this is a testament to the execution of our business plans, which stress the rigorous management of costs and assets. Before we review the industry sales outlook, let's look at fundamentals affecting the Ag business. Slide 8 outlines U.
S. Farm cash receipts, which are forecast to be down somewhat from 2013. Grain production levels are expected to be up in 2014, resulting in lower prices. Livestock receipts are forecast to be about flat with 2013 levels. As a result, our forecast calls for 2014 cash receipts to be approximately $380,000,000,000 down about 4% from 2013, which was the 2nd highest level ever recorded.
2014 cash receipts, the number one predictor of farm equipment sales are expected to remain at a historically high level, which should help keep farmers in a financially sound position. On slide 9, global grain stocks used remain at historically low levels. Due in part to good weather globally, yields will be higher resulting in lower commodity prices. However, global corn specs use are only expected to increase by about 2%. According to our consultant Informa, there is already talk about among U.
S. Farmers looking ahead to the 2,004 planting season about adjusting corn acreage down by about 4% in favor of soybeans. Looking at South America, Informa is forecasting a cut in planted corn area of about 10% in Brazil and of about 30% in Argentina. The drop in Argentina is due to planning delays for corn as well as the economics of lower corn prices relative to beans. If 2014 brings unfavorable growing conditions in any part of the world, the U.
S, Brazil and Argentina in particular, corn stock fees would fall suggesting that commodity prices would stabilize. Our economic outlook for the EU 28 is on slide 10. Beef and pork prices are at historic highs and milk prices are favorable supporting livestock and dairy farmers. While remaining near long term averages, grain prices and farm income are expected to be lower in 2014. While it appears that short term economic stress has diminished for now, concerns over slow European Union growth are weighing on farmer confidence.
As a result, farm machinery demand is expected to be lower in 2014. On Slide 11, you'll see the economic fundamentals outlined for other targeted growth markets. In the CIS, import policies continue to affect combine sales in Russia, Kazakhstan and Belarus. In Russia, heavy rain affected fall planting putting some of the 2014 winter crop at risk. Credit availability there continues to weigh on equipment sales.
Turning to China and India. Government support as well as a favorable monsoon season in India allow for a slightly improved industry outlook. Slide 12 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.
Government financing is expected to remain favorable, but likely at higher rates. On the other hand, lower global commodity prices will reduce farm income. Our 2014 Ag and Turf industry outlooks 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 large equipment such as high horsepower tractors and combines. The EU 28 industry outlook is down about 5% due to lower commodity prices and farm incomes. In South America, industry sales of tractors and combines are projected to be down 5% to 10% from 20 thirteen's strong levels. South America continues to grow in importance for Deere. Our tractor market share has grown considerably there and our strong position in other 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 2014. Market conditions are improving in tandem with the slow economic recovery. Also, the pent up demand seen in late 2013 is expected to continue mainly benefiting the Writing Lawn Equipment and Utility Vehicle segments. Putting this all together on slide 14.
Fiscal year 2014 Deere sales of worldwide ag turf equipment are forecast to be down about 6%. As discussed earlier, the forecast contemplates the sale of 60% of On a comparable basis, the change in worldwide ag and turf sales is down about 2% in 2014. 2014 operating margin for the Ag and Turf division is forecast at about 15%. The one point decline from 2013 is a result of implementation costs of Final Tier 4 on large ag equipment and a return to a more normal product mix. As you may recall, we had talked for some time about mix benefiting margins by 1 to 2 points due to the strength of large ag.
Finally, ag and turf price realization is projected to be positive. Let's focus now on Construction and Forestry on slide 15. Net sales were down 8% in the quarter and operating profit was down 2%. The $132,000,000 decline in sales with only a $2,000,000 reduction in operating profit is a reflection of price realization, good execution and lever pulling to control costs in response to slower demand. On slide 16, looking at the economic indicators on the bottom part of the slide, the economy continues slowly moving forward.
Although government construction continues to fall and the situation in Washington remains uncertain, we are beginning to see some positive indicators. Home sales and prices are improving and residential construction is growing. Some markets are seeing building lot shortages and architects and builders are reporting more activity. 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 improve from the depressed levels of 2013.
Fiscal 2014 net sales in Construction and Forestry are forecast to be up about 10%. The increase reflects increased shipments following the low levels of 2013 in response to an improving U. S. Economy. As we move into 2014, Deere inventories of new fresh machines as a percentage of sales are at all time lows.
That gives us the ability to quickly respond to improving market conditions. The division also will benefit from increased international sales as its factories in Brazil and China begin low levels of production. C and S full year operating margin is projected to be about 9%. Let's move now to our Financial Services operations. Slide 17 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 excellent quality of our portfolios and recoveries from prior year's write offs. Our 2014 financial forecast contemplates a loss provision of about 16 basis points as a percentage of the average owned portfolio. The increased provision is a result of unsustainably low loss levels of the last 3 years. Even with the forecast increase, losses would remain well below the 10 year average of about 28 basis points and a 15 year average of 48 basis points. Moving to slide 18.
Worldwide Financial Services net income attributable to Deere and Company was $157,000,000 in the 4th quarter versus $122,000,000 last year. 2014 net income attributable to Deere and Company is forecast to be about $600,000,000 that compares with $565,000,000 in 2013. Slide 19 outlines receivables and inventory. For the company as a whole, receivables and inventories ended the year down 2.76 $1,000,000 equal to approximately 24.8 percent of prior 12 month sales compared with 20 6.8 percent a year ago. Receivables and inventories ended the year at about 25.9 percent of prior 12 month sales, including the impact of $372,000,000 of receivables and inventory for John Deere Landscapes that were reclassified to assets held for sale.
Ag and turf ending receivables and inventory were up $269,000,000 including the assets held for sale mentioned above. Construction and Forestry ended the year with $173,000,000 with the end of the year down $173,000,000 putting us in prime position to react to improving markets. We expect to end 2014 with receivables and inventory down about $150,000,000 reflecting strong asset management in both divisions. Our 2014 guidance for cost of sales as a percent of net sales is shown on slide 20 and is forecast to be about 74%. When modeling 2014, keep in mind the following price about 2 points an unfavorable mix of product as we talked about earlier Tier 4 product costs overhead spend due to higher employment levels and lower pension and OPEB expense.
Looking at R and D expense on slide 21. R and D was about 1% in the 4th quarter compared with the same period last year and up about 3% for the full year. Our 2014 forecast calls for R and D expense to be down about 3% for the full year. Moving now to slide 22. SA and G expense for the equipment operations was down about 1% in the 4th quarter and up about 5% for the full year.
SA and G expense is forecast to be down about 4% in 2014. In the year over year comparison of SA and G expenses, Landscape's accounts for about 8 points of the change. On slide 23, pension and OPEB expense was down about $5,000,000 in the quarter compared with last year and up about $65,000,000 for the full year. Pension OPEB expense is forecast to be down about $150,000,000 in 2014 due to a higher discount rate and strong asset performance. Turning to slide 24.
The equipment operations tax rate was approximately 35% in the 4th quarter and about 36% for the full year. For full year 2014, the effective tax rate is forecast to be in the range of 34% to 36%. On slide 25, you see our equipment operations history of strong cash flow. Cash flow from equipment operations was approximately 4 point 7 in 2013. Our 2014 forecast is about $3,900,000,000 Slide 26 outlines our use of cash priorities, which are unchanged and no doubt familiar to many of you.
Our number one priority is to manage the balance sheet including liquidity to support a rating that provides access to low cost and readily available short and long term funding. Thus, Deere is strongly committed to its A rating. Our second use of cash priority is funding value creating investments in our operations. A third A 25% to 35% payout ratio on average. In this regard, we're mindful of the importance of maintaining the dividend and not growing it beyond a point that can be comfortably sustained by our cash flow.
Share repurchase is our method of deploying excess cash once the previous requirements are met and as long as such repurchase is value enhancing. From 2004 to 2013, we have returned about 58% of cash from the equipment operations to shareholders through dividends and share repurchase. On slide 27, we outline our 2014 outlook for the Q1 and full year. Our net sales forecast for the Q1 is down about 2% compared with 2013. This includes about 3 points of price realization.
In the year over year comparison of 1st quarter sales, landscape accounts landscapes accounts for about 2 points of that change. The full year forecast calls for net sales to be down about 3%. In the year over year comparison of worldwide net sales, Landscapes accounts for about 3 points of the change. On a comparable basis, the change in 2014 net sales is about flat with the strong level of 2013. Price realization is expected to be positive by about 2 points.
Finally, our full year 2014 net income forecast is about $3,300,000,000 In closing, John Deere enters 2014 on a strong pace. As mentioned, we're expecting the world's ag markets to relax a bit next year and for sales of farm machinery to be somewhat lower. But we also expect to see improvement in our construction business and benefits from our global investments and new factories. At the same time, our plans will continue moving ahead to pursue new markets, add productive new models of equipment and expand our global customer base. John Deere in our view remains well positioned to respond to the needs of a growing world and equally well positioned to provide significant benefits to our investors in the years ahead.
I'll now turn the call over to Raj.
Yes. I'll take a minute to recognize Marie Zigler. As many of you know Marie Zigler, Deere's long time Head of Investor Relations and currently Deputy Chief Financial Officer will be retiring soon after 35 years with the company. Over this time, she has become well known to the investment community as Deere's primary face and voice. She initiated Deere's quarterly conference calls in 1990s and has been a knowledgeable and authoritative presence on them ever since.
Indeed, Murray essentially created the Deere IER function and has developed quite a reputation in the field for her efforts to build strong relations with the company's investors. She's also developed employees and capabilities at Deere to sustain our reputation in this field for the long term. This is Marie's final call. She will be missed by all of us, but her many contributions to the company, its investors and to the practice of Investor Relations itself will no doubt be felt for years to come. I'm sure Marie's friends and the analyst community join those of us at Deere and wishing her much health and happiness as she enters the next chapter of her life.
You, Marie.
Okay. Now we're 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?
Thank The first question comes from Jamie Cook. And please state your company name.
Hi. Good morning, Credit Suisse.
Hi, Jamie.
And congratulations, Marie. We'll miss you a lot. I guess just my question relates if you could provide a little more color on what your assumptions are. You said within when we think about the Ag business, we should think about Tier 4 and what the implications are. Can you just give us a little more color on what you assume the costs are sort of associated with that as well as what you're assuming with material costs this year?
I guess I'll start off with that.
Sure. And as you're aware last year we did change our guidance some and we're giving an overall cost of sales number. And so we're no longer giving the details of the moving pieces. I think as Susan went through the list of things to keep in mind in terms of those items that are creating higher costs. Mix would be the largest and then Tier 4 emissions cost would be the 2nd largest.
You'll note the absence of reference to material costs, which I think from there you can infer that the impact is not material enough to mention.
All right. I guess my second question, what struck me about your forecast in a down ag market, the earnings that you're going to be able to put up. So you talked about R and D being down I think 3% or something like that year over year. Can you just talk about sort of structurally should R and D continue to come down as a percent of sales with some of the major spending initiatives over and just your ability to hold up profits and potentially a much softer equipment market? Thanks and I'll get back in queue.
Sure. And I think with the R and D reduction, it's fair to note. First of all, Susan had mentioned the reduction in pension and OPEB expense and that does impact R and D to some degree. So that's part of the reduction. And so I would argue we're really not flat.
We're a little below flat, but closer to that if you take out the impact of the pension OPEB. But it does reflect our focus on continuing to maintain the cost to your point, as we move through final Tier 4 now and as we 2015, we have a significant number of products coming in as well. But as we continue to move through that, it would be fair to expect all things being equal to start to see some reduction in R and D. Of course, that's assuming there aren't other additional opportunities in new product, those sorts of things.
Okay. Thanks. I'll get back in queue.
I'll chime in to that. When we look at our R and D spend, Jamie, we're really looking at the long term and the opportunities and we're investing for growth. And while, of course, depending on business conditions, you're going to be very mindful of that. We really have our eye on the long term when we consider that. So we shouldn't really look at a near term market condition per se and correlate that to the R and D spend because the lead times and the investment horizon is much longer.
Thank you.
Okay. Thanks and congrats Marie.
Thank you. Next caller.
Thank you. The next question comes from Adam Uhlman. Please state your company name.
Hi. It's Cleveland Research.
Hi, Adam.
I was wondering if we could start with the revenue forecast for the global ag markets with most of the markets forecast down 5% to 10% or so, but Deere's revenues down only a little bit less than that. And the price realization outlook, it does look like that's going to be easing as the year progresses with price being 3% for the company going down to 2% for the year. So I was wondering if you could walk through some of those moving pieces?
Yes. Keep in mind that the industry guidance would not include, you pointed out pricing. So as we're forecasting 2 points of positive price realization for 2014, of course, ag would be contributing to that. So that wouldn't be included. Market share gains and expectations also would not be included in those only referring to combines and tractors.
And so, only referring to combines and tractors. And so for Deere, there's significant opportunity as we're a full product offer have a full product offering in South America, things like sugarcane harvesters, planters, Susan also mentioned the Deere Bauer Planter, which is localized in Brazil now, sprayers that we've recently localized. So we have a lot of opportunity beyond that there. And of course, CIS and Asia are not numerically represented. So those are a few items that cause some disparity between the industry outlook and the Deere guidance.
Okay. Got you. And then, Tony, could you also address what the order book looks like right now in total and also for the large ag products please? Thanks.
Yes. Most of the commentary we would have would be around large ag in particular. As we look at the one most or couple that most are focused on are combines and large tractors. And the early order program combines, keep in mind, it's a little hard because of some of the timing differences in our 2013 2014 early order programs. We had a much earlier start this year as part of our final Tier 4 transition.
But what we would tell you is combines today are down year over year on orders. That's reflected in our outlook. As you look at large tractors, however, it's still a very, very strong order book. It is open through the end of May today. And so as you look at ADAR tractors, our availability on ADAR tractors is out to basically early June This year on the wheel tractor, last year that would have been around April timeframe.
And then if you look at track tractors, our 9R tractors again on the wheeled variety availability is March this year of 2014. Last year, we would have been in the February timeframe. So both of those are running a little ahead. Track tractors conversely are about a month or so lighter than where we were last year. So 8R track availability in April versus May last year and then 9Rs are February versus May of last year.
But still overall a pretty strong order book as we look out into especially the first half of next year.
Great. Thank you.
Thank you. Next caller?
Thank you. The next question comes from Rob Wertheimer. And please state your company name.
It's Vertical Research Partners. Good morning, everybody.
Hey, Rob.
So let me just see if I can follow-up on that. So it seems as though your more cautious outlook on industry volumes next year is a little bit more driven by assumption than it is by orders on the ground unless you've got production cuts embedded in those longer lead times year over year. Is that correct? Or is the combines down enough to offset that?
No, you would be correct. And as we talked about tractors, you would have if you looked at a numeric basis, you're more apples to apples. If anything, you have a little bit higher volume in terms of numbers of tractors in the 2014 order book versus the 2013. So it actually be the opposite on tractors.
Yes. Perfect. And then can you walk through a little bit just the timing of pricing as you go from Tier 4i to Tier 4 final, especially in Europe where over at AgriTektica, I believe some people have sort of engines stockpiled both in large public competitors and smaller ones. And then I think you've done a stub pricing on combines starting in November for the old tier, but not but can you kind of walk through when you started raising pricing? And then I assume as your volume outlook for unit sales fade throughout the year, what is offsetting as that is the pricing?
So I just wanted to see if you could go market by market when that pricing kicks in? Thanks.
Yes. As you think about the pricing, certainly, you're right. We did as we started our model year, we did have some stub price some lighter price increases on the interim Tier 4 product that we're producing ahead of the transitions. And in November, pardon me. Yes, that would have been effective in November on combine.
And then when we begin our transition in January and start shipping final Tier 4, of course, there will be a bit of another bump in pricing with the final Tier 4 product. Similar situation with the ADAR tractors. You have a smaller price increase beginning in November on the IT4 product. Again, the ADAR, as you might recall, transitions in April timeframe. 7R is a little less impact because it's similar to combines.
It's transitioning in
January timeframe. But remember, final Tier
4 with the compliance are not included in the final Tier 4 with the compliance are not included in price because we consider that buy in because you're getting something different or new with that. And so it is all stripped out and reclassed into volume. So you won't see that in that 2% number.
No, for sure, Marie. Thank you very much. Are you able to say on Europe? I don't know whether you're going to go over the new emissions tier in January or more like on average July or August September?
Europe is a the primary market in Europe is a smaller horsepower. So that's really not the first phase of final Tier 4. I think I can't remember what it's called in Europe Stage 4 or something like that. But that's really a 2015 phenomenon, yes.
Yes, exactly. And to your point though, keep in mind in Europe, it's based on when the effective date is based on when the engine is produced, not when in the U. S. Where it's based on when the equipment begins final production. So there is a little bit different strategy in terms of how you plan for those transitions for Europe versus the U.
S. Yes.
I probably should I think I said smaller market, I should have
said
horsepower tracker.
Awesome. Thanks, Marie, and good luck.
Okay. Thank you.
Thanks, Tony.
Thank you. Next caller?
Thank you. The next question comes from Steven Volkmann. And please state your company name.
It's Jefferies. Good morning, everybody.
Good morning.
Marie, I think you were the first person I met in 1998 when I started covering this group. So I appreciate all of your insights.
Wow. Thank you.
So on to business. I'm wondering if we could focus just a little bit on Brazil. I'm curious if you think that the market share gains in ag that you've had down there will continue or do you sort of reach a balancing point at some point? And then maybe on the construction side, how much do we think we'll actually get out of those plants down there in 2014?
Sure. And the answer to the first question is specifically related to tractors in terms of market share, absolutely. We believe we'll continue to gain traction and gain market share in that market. We continue to localize product. We've talked about the ADAR tractor will be localized by the end of 2015.
But as we continue to leverage that dealer distribution, as we continue to leverage our full product offering that we have available in country, we fully expect that that market share trend will continue. In terms of importance for Deere, keep in mind that this is also the 1st full year that we'll have our distribution in place in Brazil. So as you look at the sales increase for Construction and Forestry, certainly you're beginning to see and I think Susan mentioned in the opening comments, we're beginning to see some benefit from those investments like Brazil. Of course, our China facility, we export a significant portion of that into the Russian market. So we'll see some benefit there.
And then of course, forestry, starting to recover outside of the U. S. And Canada as well. But certainly, we'll begin to see some benefit from those operations.
Okay. And then I guess my related follow-up, there seems to be quite a bit of confusion about the availability of tsunami financing in various end markets down there in 20 14. Do you guys have any intelligence on that?
Yes. At this point, we still feel that the Phenomie program will continue to be very supportive to sales. I think there was some confusion or some concerns around a recent announcement that was made that's limiting a bit of the 2013, the remaining 2013 financing that's available. Really as we look at that, it's our view is it's really regulating kind of that year end process as they transition to the 20 14. What's happened is that under the there's 2 ways you can apply for that financing under the conventional application process, which is a little bit longer term, but you also have longer lead times.
That basically was suspended. You had it until the end of November to deliver product. But there is still the opportunity to get that 3.5% interest rate through the simplified application process. So it's the funds are still available. As you look out into 2014 maybe more to your question, we fully expect that there will be a Phenomie program in place at the beginning of 2014.
While nothing specifically has been announced, most are expecting that that interest rate will increase. Our best estimate is somewhere in the 4.5% to 5.5% interest rate versus the 3.5% this year or in the back half of twenty thirteen. But again, continue to believe it will be very supportive for equipment sales.
That's great. I appreciate it. Thanks.
Yes. And that's a good point. And that is all fully factored into our outlook. Okay. Thank you.
Next caller?
Thank you. The next question comes from Ross Gilardi. And please state your company name.
Yes. Thanks very much, Bank of America. Good morning, everybody.
Hi,
Ross. Hi, Ross.
Yes. I was just wondering, can you elaborate
a little bit more on Europe on the
back of Agri Tecnica and sort of demand levels there? And you're forecasting a little bit of weaker outlook for 2014? And any color on the U. K. Versus other parts of Europe versus Scandinavia for
example? Sure. I think generally speaking, again, we are looking for the markets, the industry to be a little softer and it's really reflective I think overall as you look at lower farm income as a result of the lower commodity prices. But certainly that's still at very strong levels and very supportive levels, but year over year it would be down somewhat. Livestock margins of course will benefit from those lower commodity prices.
So you're seeing some strength there as well. As you look at some of the moving pieces, certainly the U. K, we would expect to see some recovery. As you might remember, 2013 was a down year on demand in the UK as a result of some of the weather impact. They had some very wet both harvest of 2012 and into the planting season of 2013.
Actually seen some recovery in Spain as well. Conversely, you're seeing France, one of our larger markets there, you're seeing a little bit of weakness there, again following a very strong 2013. So still a good level, but seeing a little bit of weakness, as we go into 2014 year over year.
And just I'll just add that France actually is the largest agricultural equipment market in the EU 28. So as they go that does have an impact on the overall outlook.
Okay. Thank you. And then just on Construction and Forestry. I mean clearly you've managed your profitability very well in your working capital. But you seem to be going into 2014 as with others on a somewhat weak note from a top line perspective.
So aside from the different macro indicators and so forth, what gives you the confidence in the construction outlook to call for 10% growth at this point?
Well, I think as we mentioned before, certainly as you look at the U. S. Markets, U. S. And Canada markets and look at the underlying fundamentals, they are much improved as we go forward.
You look at things like GDP forecasted at 2.5% versus the 1.5% in 2013%.
If you can call that much improvement. Yes, it's in
the right direction. Housing starts being up yet again in the forecast for 2014. You're starting to see some site development financing while not picking up. You're not seeing that continuing to drop off. So you have the underlying fundamentals.
But again, keep in mind as we look at that up 10%,
those businesses, we're starting to see that pay off
in sales. And those businesses, we're starting to see that pay off in sales.
And the fact that we're able to build the demand as opposed to reducing inventories, which we did do in 2013. So a combination collectively gives us an up
10%. Great.
Thanks very much.
All right. Thanks. Next caller?
Thank you. The next question comes from Eli Lusgarten. Please state your company name.
Longbow Securities. Good morning, everyone. And obviously, Marie, we've had a long relationship. I'm going to miss you an awful lot. I wish you the best.
Thank you. Nice one.
Can I get one clarification with the sale of John Dee of the landscaping or the portion of ownership in the 2014? You took a $45,000,000 impairment charge in the 4th quarter, so it's about $0.08 Is there a gain that's going to be associated with the $300,000,000 that you're going to get in your 2014 forecast? You've embedded you said it's a part of it. Was there a gain associated with that $300,000,000
No. No, there would not be.
Okay. Even though the fair value is of what you own is $80,000,000 implying it's worth $920,000,000
The $45,000,000 would reflect what the fair value is based on the terms of the agreement.
So there would be no gain on the $300,000,000 that you're getting?
Correct.
And now can we talk a little bit of the outlook? I mean the biggest change that happened on Friday night was the ethanol ruling from the on the National Fuel Standard to reduce the amount of corn ethanol that's going to be likely for 2014. And that's going to raise the carryover somewhat materially if it actually goes through. Have you embedded that into your forecast and your outlook for this year?
Absolutely. That was done as actually even though it was leaked in October, the rumors and the expectations have been in play long before that. So that is fully factored into our outlook.
And can you talk about I mean the profitability of ag was far higher than the guidance we got initially. We were 15% you came in at 16% with a very, very strong 4th quarter. Was that just strictly volume going volume and pricing going through and the difference decline to 15% the same thing as the changes that you gave us? Was there anything else happening in that quarter that gave us a strong profitability?
Again, I think as you look, certainly, you had production costs were as you look at the Q4, price realization was the biggest piece. We did S and G was down year over year in the quarter as well. So I think kind of the spending price and spending were the biggest impact.
We came in a whole point better on the price than what we would have originally projected.
Hey, Eli on the John Deere landscapes, you're right that there is no accounting gain. But I want you to understand that economically it was a good decision for us.
Absolutely. I just know what the accounting game embedded in the guidance that you gave us. And the 9% margin in construction is due to higher volume I assume?
Largely driven by better volumes absolutely.
We have a little more favorable mix that's been an issue this year. So but a little a mix is primarily volume.
All right. Thank you. Okay. Thank you. Next caller?
Thank you. The next question comes from Nicole DeBlase. And please state your company name.
Yes. It's Morgan Stanley. Thanks. I was hoping you might be able to talk a little bit about the within the 5% 5% to 10% decline forecast within U. S.
And Canada Ag. What is the outlook for large versus small and medium Ag?
Yes. I think certainly as we've mentioned in the opening comments, you're looking at a greater decline closer to lower double digits in the large ag and some strength in small ag.
Okay. Okay, got it. And then can you just give a sense of how used equipment inventory is tracking on the ag side?
Sure. As you look at used, again, I think the 2 categories most are asking about would be large tractors and combine. As you look at used equipment levels in the quarter on combines actually inventories dropped very considerably during our Q4 about a 25% drop from July to October. So that's been a very good sign. Used tractor inventory on the flip side is up and certainly that's reflective of the higher demand level we've had on new equipment.
But we are seeing higher levels of tractors and certainly are focused on that and monitoring that closely.
But pricing on used tractors is actually up single digit and turnover continues to be very good. Combines are down a little from very high levels, but still at good levels in terms of
Okay, perfect. Thanks guys and congratulations and best of luck Marie.
Thank you.
Thank you. Next caller?
Thank you. The next question comes from Mig Dobre. And please state your company name.
Yes. Good morning. Robert W. Baird and Company. Good morning.
Marie, first congrats and good luck going forward. I guess the first question for me was kind of a housekeeping question. Looking at JD Landscape, can you help us with the operating income impact on 2014? You helped us with the revenue.
There's not much of an impact. I would you can just consider it a neutral. They were profitable, but it's but you will the absence of the impairment is probably
a more
important item. So it's just think of it as slightly accretive going forward. Yes. Okay.
Okay. And sort of in the same vein, looking at financial services, income is expected to increase slightly about $35,000,000 versus 13 dollars But volumes generally speaking are challenged. I guess I'm wondering what exactly is it to drive this growth next year in Financial Services?
The portfolio is up significantly. We're up about $5,000,000,000 this year. And so you get the benefit of having that larger portfolio for a whole year.
So you're not really expecting a contraction in the portfolio given lower volumes at the year? Correct.
But expect that there in next year we're actually projecting further growth in the portfolio.
I see. Then the last question for me. For me it would be 1 on pricing. I'm trying to sort of equate your expectations for pricing in 2014 given that most ag end markets are expected to actually see decline in volumes?
What do you hear from the New York?
Remember when you talk about a portfolio for credit, the notes are written with 5 year lives and our I think our average life is in the range of 2 to 2.5 years. So 1 year's activity in terms of sales will impact that portfolio for up to 5 years. Does that help?
It does. Thank you. Okay. And I don't know if you caught my last one on pricing. I'm wondering what the dealers' perspective in your conversations with your dealers how are they thinking about their ability to push through the price increases that you're talking about?
Certainly, that would be as we set our pricing and so on that would be one of the factors we're considering. So it's all included in our outlook. And so that up to two points of price realization in the year is what we would anticipate being able to do.
And we just had a large number of new product introductions. We believe we'll be adding significant value into the market and we think that will help that certainly helps support our ability to get that price realization.
Thank you. Okay.
Okay. Next caller? Thank you.
Thank you. The next question comes from Seth Weber. And please state your company name.
Hi. This is actually it's Daniel on for Seth with RBC Capital Markets.
Hi, Daniel.
Hi. So I guess my question was on pricing. This year it's up 2%. I guess it's a little lower than prior year. So I guess is this kind of a function of mix with less big equipment or are marketing?
Yes, that would certainly have a play a very big role in it. As you see the large ag softening a little and small ag stepping up a bit, you don't necessarily have the same impact on pricing. And a lot of the new product introductions of the last year really were targeted at large ag. And again, project introduction schedule has been driven by the compliance with final Tier 4 emissions. So you'll see a round of activity in the coming year or 2 related to that smaller thing that will smaller products that will help support pricing there as well.
Tony, do you have anything to add?
I do not.
Have markets been getting more competitive at all as well? Or is this it's just really the mix?
I think it's mix. I wouldn't say that the markets are ever not competitive.
Okay. And I guess one quick follow-up just on the bonus depreciation. Is this kind of baked into your forecast or?
Yes. We certainly as we're looking into next year, our base case would assume that the bonus depreciation does not get renewed. And on Section 179, just obviously there's a and as you look at Section 179, we would believe there is a better potential that you'd see some extension there. Our base case given the uncertainty, and at least in our outlook is based on kind of in the middle ground where it would be extended, but it would be at the $250,000 versus the $500,000 this year. Okay.
Next caller?
Thank you. The next question comes
from This will be our last question.
Thank you. The final question comes from Andrew Kaplowitz. And please state your company name.
Good morning, guys. It's Barclays. Nice quarter. Marie, congratulations and enjoy.
Thank you, Andy.
So can you talk about your cash generation in the quarter? It was way higher than we modeled. I know there's some noise, I guess, from JD Landscape in the accounting. But is there anything you did differently in the quarter? Is it just lower inventories and just better working capital management when it comes down to it?
It's actually we had better income. You have the impairments, which actually further helped because those were non cash charges. Crude taxes came in a little lower and payables also were favorable. And those are really the big items, affecting the cash flow generation in the quarter versus our expectations.
Okay. So Marie, I'm going to try and ask a share repurchase question and I know Tony is going to not want to give me an answer, but I'm going to ask it anyway. Can we think at least that your recent share repurchase behavior is more representative of what we might expect going forward versus your cautiousness at the beginning of FY 13 despite what we've seen from corn prices lately and continued government uncertainty? Like how do we look at what was a very strong 4Q I thought in repurchases?
I think as we got confidence and certainly saw the cash flow coming in better in the quarter, you saw us able to respond better. In any given quarter, it's very difficult to read anything into our future plans. I'm going to tell you in the Q1, you can expect that we're going to typically be fairly cautious because remember we are big users of cash in that Q1. So you're going to want to look at our activities over the course of the year. This year we returned 50% of our cash through dividends and share repurchase.
And over the last decade, we've been running more like 55% to 60%. We are very proud of that track record. And we've always said that we're interested in being known as a company that has a long history of making dividend increases and we've kept our word on that. It's not necessarily every year at a fixed period, but consistently. And then secondly, we very much view share repurchase as the way we return our residual cash.
And looking at the cash projections, there would be some hope for those of you cheering on share repurchase that you'll continue to see that.
So, Andy, I would add that the receipts from the sale of Down Deer Landscapes now $300,000,000 in cash that is something that you should expect us to use for share repurchases over the next 12 months
as well. Yes. And that is not in our cash flow number because that's cash generated by investing activity. So that would be overall. And with that, we're going to need to wrap up.
So I'm going to just sign off on my 83rd conference call. Thank you all.
Thank you. This does conclude today's conference. We do thank you for your participation and you may now disconnect your lines.