Good morning,
and welcome to Deere'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 Hiegal, Director of Investor Relations. Thank you.
You may begin.
Thank you. Also on the call today are Jim Field, our Chief Financial Officer Marie Zeigler, Vice President and Treasurer Susan Carlix and Justin Maravik. Today, we'll take a closer look at Deere's first quarter earnings, then spend spend some time talking about our markets and how we see 2011 shaping up. 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. Just a reminder that this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Thomson Reuters. Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written of Deere is strictly prohibited. Participants in the call, including the Q and A, 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 projections, plans and objectives 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 slash financial reports under other financial information. Now for a closer look at the Q1, here's Susan.
Thanks, Tony. With this morning's Q1 earnings announcement, John Deere has started The improvement was big and broad. Ag and Turf had another terrific quarter and our other divisions, Construction and Forestry and Financial Services reported dramatically higher profit as well. Positive global farm conditions were certainly a factor. But John Deere is achieving record results in the face of conditions that remain lackluster in some sectors.
Indeed, our performance reflects continued Finally, our full year earnings forecast has been raised considerably and now stands at about $2,500,000,000 All in all, it was a start to what is expected to be a very strong year. Now let's look at the quarter in more detail starting with Slide 3. As just mentioned, net sales and revenues were up 27 percent to $6,100,000,000 in the quarter. Net income attributable to Thier and Company was $514,000,000 the highest ever for a Q1. Turning to Slide 4, total worldwide equipment operations net sales were up 30% to $5,500,000,000 another first quarter record.
Price realization in the quarter was positive by 2 points. On Slide 5, worldwide production tonnage was up 41% in the quarter. Higher tonnage was attributable to the following: continued strong demand for large ag equipment, recovery in the EU27, strength in South America and the continuing rebound in the construction and forestry markets. We also experienced higher production in the Q1 compared with a normal year due to our interim Tier 4 product transition plan and CNS implementation of SAP this spring. Projected worldwide production tonnage is up about 26% in the 2nd quarter and up about 16% for the full year.
Let's turn to the company outlook on Slide 6. 2nd quarter sales are expected to be is percent compared with fiscal year 2010, an increase of 8 points over our prior guidance. This includes about 2 of positive currency translation and 2 points of positive price realization. Included in our guidance is the 3.5% increase on our 8R and ninety-thirty series tractors announced this morning and effective March 1. Due to our sold ahead position, this increase will have minimal impact in fiscal 2011.
Net income attributable to Deere and Company is projected to be approximately $2,500,000,000 in fiscal 20 11. That's $400,000,000 more than more than the guidance provided in November. Turning to review of our individual businesses, let's start with agriculture and turf on Slide 7. Production tonnage was up 34%. Sales increased 21%.
Operating profit was $558,000,000 The profit improvement was primarily due to higher shipment and production volumes and improved price realization, partially offset by increased raw material costs and higher incentive compensation expenses in line with our operating performance. The division had an operating margin of about 13% in the quarter and an incremental margin of approximately 27%. Before we review the sales outlook, let's look at some of the fundamentals affecting the Ag business. Slide 8 outlines our U. S.
Commodity price estimates. Due to disappointing yields in 2010 and growing global consumption, corn supplies are tight. Coupled with ethanol demand, extreme weather conditions in many parts of the world and strength in exports, we have again raised our corn price estimates for the 2010, 2011 and 20 eleven-twelve crop years. Wheat prices remain strong as the world recovers from the 2010 supply shock caused by wet planting conditions in Canada and severe temperatures and drought in the CIS. Soybean prices are expected to remain strong through the 20 11 crop year as Chinese demand continues to surpass expectations and stocks are very low.
Asian demand and exports to other countries will allow cotton prices to remain strong as well. Turning to Slide 9, 2010 U. S. Farm cash receipts remain at a high level, about $321,000,000,000 We have increased our forecast for 2011 about 4% since last quarter to $359,000,000,000 This surpasses the all time high of $330,500,000,000 recorded in 2,008 by almost 9%. Historically, farm cash receipts for both the current year and the prior one are a key driver for ag equipment sales.
Slide 10 highlights our base case on acres planted and yields for the 20 eleven-twenty twelve crop year. Obviously, it's early, too early to know the ultimate outcome as acres and yields will be determined by weather and springtime prices. That said, our base case calls for planted acres to increase driven by strong global demand and historically low carryover stocks. Strong commodity prices are driving planted acres to some of the highest levels since 2003. Good profitability creates an incentive for farmers to plant on every available acre.
In fact, our agricultural consultant Informa projects 7,400,000 more acres in total crops will be planted during the year. Deere's outlook for the EU 27 is shown on Slide 11. Again, this quarter, we are happy to report that customer sentiment has shown further improvement, which is contributing to a turnaround in demand for agricultural equipment in Europe. Livestock, milk and grain milk and grain prices continue to rise, while input costs are expected to moderate improving farm income levels. In addition, high used equipment levels, which we have spoken of in the past, are returning to a more normal level, supporting the sales of new equipment.
Farm net income in Brazil and Argentina is on Slide 12. In Brazil, 20 11 farm net income is expected to be almost 10 times the level of 2,009 and up 80% from 2010 levels. The improvement is being led by big increases in sugarcane and soybeans, the 2 crops that drive the bulk of equipment purchases in Brazil. Contributing to strength in the region is strong global demand for Brazilian commodities, high crop prices and crop prices and lower production costs. La Nina has had a negative effect on corn production in Argentina.
The USDA took 1,500,000 metric tons out of its February production numbers for the country. However, recent rains should prevent further deterioration. For 2011 I'm sorry, our 2011 ag and turf industry outlooks are on Slide 13. Fundamentals the U. S.
And Canadian farm sectors remain robust and we have now increased our forecast to up about 5%. With respect to Deere, our order books are strong. Beginning this quarter, guidance is provided for the EU27. This is a small change from our prior practice, which focused primarily on Western Europe. For fiscal 2011, the EU27 is projected up about 10%.
Our guidance for sales in the CIS is unchanged with moderate gains expected from the depressed levels of the last few years. Asia sales are expected to increase moderately as well, but do so from the very strong levels of 2010. Industry sales in South America are expected to be about flat in 2011 in relation to last year's strong levels. Underlying economic fundamentals for the regions are positive. Our industry retail forecast reflects a reduction in sales of lower horsepower tractors that have from Brazilian government programs that targeted smaller farms.
These programs have been in place for a few years and may have reached saturation. Deere expects to benefit from our 50 new products introduced over the last year and our presence in cotton and sugarcane equipment. Turning to another product category, after rising almost 15% in 2010, we expect retail sales of turf and utility equipment in the U. S. And Canada to be about flat in 2011.
Our new utility vehicles have experienced an extremely launch and are being widely accepted in the marketplace. Putting this all together on Slide 14, Deere sales for worldwide ag and turf are now projected to be up about 16% with an operating margin around 14%. As we discussed last quarter, small ag equipment sales are expected to recover from their fairly low levels of the past few years. The Ag and Turf divisions operating margin will receive about one point of benefit from the mix of large ag sales in comparison with a normal year. Last year, the mix advantage was more about 2 points versus a normal year.
Let's focus now on Construction and Forestry on Slide 15 where the improvement was quite substantial. Deere's net sales were up 81% in the quarter, while production tonnage almost doubled, up 97%. The division's operating profit of $88,000,000 was helped by higher shipment and production volumes and improved price realization, partially offset by increased raw material costs and higher incentive compensation expenses, again in line with our operating performance. On Slide 16, fundamentally growth is slower coming out of this recession than previous ones. On the heels of last year's 41% increase, net sales sales for the year to just above trough levels.
P and F is benefiting from sales to independent rental companies and in the governmental segment. Also encouraging, Deere dealers continue to see an improvement in rental utilization and used equipment markets. Meanwhile, global forestry markets are expected to build on last year's big gains. The industry was up about 50 percent last year. Our current forecast calls for a further increase of about 35% in 2011 led by strong pulp and paper prices.
The full year operating margin for Deere's C and F division is projected at about 8%. Slide 17 shows our new interim Tier 4 compliant 8R tractor. We began producing it just last month. Customer response has been strong. There is limited availability remaining in our model year Interim Tier 4 solution and is symbolic of Deere's innovative use of technology throughout our product offerings.
Turning to Slide 18, as another indication of our global growth opportunities, Deere announced 2 new operations during the Q1, an investment of about $100,000,000 will build small ag tractors both for the local and export markets. Our new factory in China will begin production of 4 wheel drive loaders and excavators in late 2012. The new factory will be located in Teta, the Tianjin Economic, Technological Development Area. Let's move now to our financial a percent of the total average owned portfolio as of 31 January 2011 at 13 basis points. This reflects much lower write offs primarily in the construction and forestry portfolio.
We are seeing fewer repossessions and much stronger used equipment values in addition to increased market pricing on the repossessions that are occurring and improving recovery rates. The 2011 full year provision for credit losses as a percent of the average owned portfolio is forecast to run around 38 basis points, down about 10 points from 2010. Moving to Slide 20, worldwide financial services net income attributable to Deere and Company was $118,000,000 in the quarter versus $85,000,000 last year. Biggest factors were growth in the portfolio and a lower provision for credit losses. Because the previous credit segment and the captive insurance business related to extended warranty policies that used to be included in the other segments were combined in the quarter.
This insurance business did not meet the materiality threshold of reporting. Looking ahead, we are projecting worldwide financial services net income attributable to Deere and Company of about $400,000,000 in 2011. Now let's turn our focus back to the equipment operations and take a look at receivables and inventories on Slide 21. For the company as a whole, receivables and inventories were up roughly $1,500,000,000 compared to the Q1 of 2010. This mainly reflects much stronger demand in most of our markets.
On a full year basis, receivables On a full year basis, receivables and inventories are expected to decrease about $250,000,000 That's a modest change compared to fiscal 2010, again reflecting improved global prospects. Now let's discuss the latest on retail sales. Slide 22 presents the product category detail in the U. S. And Canada for the month of January expressed in units.
Utility tractor industry sales were up 10%, beer was up more than the industry. Row crop tractor industry sales were down 12% and beer was down in line with the industry. 4 wheel drive tractor industry sales were up 55%, Deere was up more than the industry. Combine industry sales were up 48% and Deere was up more than the industry. Looking at Deere dealer inventories in the bottom chart, tractors, Deere ended January with inventories at 16% of trailing 12 month sales.
Combine inventories were at 11% of sales. Turning to Slide 23, in the EU 27, sales of John Deere tractors were up double digits in January, while combines were down a single digit. Deere's retail sales of selected turf and utility equipment in the U. S. And Canada were up double digits in the month.
Construction and forestry sales in the U. S. And Canada on both the first in the dirt and settlement basis were up double digits for the month. On Slide 24, 1st quarter material costs were up about 115,000,000 comparison to Q1 of 2010. By division, the increase was roughly 80% attributable to ag and turf and 20% construction and forestry.
Commodity markets are extremely volatile and forecasting the impact on our business are forecasting steel price reductions during calendar 2011, but the projected timing and the degree of those reductions varies widely. For the fiscal year, our forecast assumes a negative margin impact from raw materials of about 1 to 2 points with the percentage breakdown by division similar to this quarter's. This is primarily due to contractual obligations steel and rubber. We do anticipate price realization to fully cover these cost increases. Importantly, keep in mind, we continually work with our suppliers on structural cost reduction to offset any cost increases we can.
Now let's take a look at a few housekeeping items. Looking at R and D expense on Slide 25, R and D was up about 14% in the Q1 with currency translation being negative by about 1 point. For fiscal spending is expected to remain at high levels for the next few years as we approach significant product launches with interim Tier 4 engines and soon thereafter final Tier 4 emission standards. Also included in the increase is ongoing new product development up about 8% in the Q1 and is forecast up about 12% for fiscal 2011. Incentive compensation accounts full year, growth will account for about 2 points of the change consistent with our global growth objectives.
Currency translation on net sales will account for about one point of the increase. Moving to the income tax rate on Slide 27. The first quarter effective tax rate for the equipment operations was about 31%. For 2011, our effective tax rate is now forecast to be in the range of 33% to 35%. Both rates are affected by the renewal of the R and D tax credit through this year.
On Slide 28, you dollars in fiscal 2011. Such strong cash generation speaks to the successful execution of our SVA model, which emphasizes high returns from a lean slate of assets. In fiscal 2011, as Slide 29 illustrates, capital expenditures are expected to be about $1,100,000,000 in the year, primarily driven by investments related to interim Tier 4. The increase is also related to new product development as well as our increased presence in global growth markets. Depreciation and amortization for 2011 is expected to be about $600,000,000 with pension and OPES contributions of about $100,000,000 Slide 30 is a rearticulation of our use of cash priorities as we discussed last quarter.
It expresses our commitment to a single A rating, the funding of operating and growth needs, consistently and moderately raising the dividend and making share repurchases. Turning to Slide 31, you can see we have a relatively high level of unsecured term debt maturities in the Financial Services division, nearly $3,000,000,000 in 20 11 and approximately $5,000,000,000 in 20 12. The level and and timing of the 2012 maturities will affect the amount of cash we are targeting to have on hand for year end turning to Slide 32, you see a summary of the amounts returned to shareholders through share repurchase over the last 7 years. During the Q1, we repurchased 3,600,000 shares for repurchased about 123,000,000 shares at a cost of $6,200,000,000 In closing, John Deere has started out 2011 on a strongly positive note and is looking for further improvement in the quarters ahead. For the rest of the year, we'll be focused on increasing capacity, bringing productive new models of equipment to market and extending our global competitive position.
In this way, John Deere is strengthening its ability to capitalize on positive global economic trends through the aggressive funding of organic growth and we'll continue returning cash to our stockholders as well. This approach in our view is the best way to produce high levels of value for our investors, customers and other constituents and the best way to do so sustainably over the long term. And of course, we're pretty excited about the way things are shaping up for the year ahead too.
Thank you, Susan. 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 that you rejoin the queue. Operator?
Thank Our first question comes from Steven
Volkmann. Hi, good morning. It's Jefferies.
Hi, Steve. I'm wondering,
I guess, just how to kind of interpret your guidance, I guess, and this is the way I'm going to phrase it. Obviously, some things have changed quite a bit in the last 90 days or so since we last heard from you. And I guess I'm trying to figure out whether you were surprised by the cost perhaps not coming on quite as strongly as you thought they would or if the end market growth was really the key driver and or maybe we just started out very conservative and how should we sort of interpret that? What happened during the quarter that really resulted in this big change here today?
Sure. Well, during the quarter and you can see in our outlook for sales as well as income, Certainly, we have increased our production schedules and so on in the quarter. But from a cost perspective, not a tremendous amount of change. We talked about last quarter expecting higher volumes and the two points of price. Obviously, volumes have gone up.
Pricing, we're still looking at 2 points of pricing. But from a cost side of things, raw material costs, we're looking at the 1 to 2 points of margin. And keep in mind, and we talked about this on the last call as well that much of that comes in the latter half of the year. We also talked about mix in A and T, Ag and Turf with the one point of margin, we would still expect that to happen. R and D, SA and G costs, our IT product costs, last time we gave you a guidance of about $135,000,000 that's increased a little bit to $160,000,000 again indicative of the some of the sales increases.
And much of that is rest of the year. While we did ship some in January, that was pretty limited. So most of that will be in future quarters. We talked about absorption related to the overhead I'm sorry, the inventory and receivable reductions year over year. And as you can see in the quarter, our inventories and receivables actually built.
So that was a benefit in the quarter, but we're still forecasting reduction. So and that perhaps is part of the story as well as we build that receivables and inventory perhaps it's masking some of those cost increases, the R and D and SG and A increases that we did talk about.
Okay. But it sounds like the basic message is that this was mostly top line driven and the costs are coming in about as you expected?
I would say that's a very fair characterization of it. I mean, the end markets for our customers have improved over the course of the quarter and that's led to a firming up of our schedules and as you suggest, primarily top line driven.
Okay. Thanks, Jim. Maybe you could just give us an update on those order boards or how far out various things are sold and I'll pass it off to somebody else. Thanks.
Okay. Sure. On the order book, as Susan indicated, our orders are very strong this year with the 8R tractors and the 9,000 series tractor really very limited availability, especially through the summer months, so that's very strong. Our early order program on the combines went very well. In addition, I we're at the 90%.
We're basically sold out. Yes. So again, we're the order book is very strong and we're very positive about the year in that regard.
Thank you very much.
Thank you, Steve. Next question?
Thank you. Our next question comes from Robert Wertheimer. Please state your company name.
It's Morgan Stanley. Good morning, everybody.
Good morning. Good morning.
Quick question on just the 1Q margins, which were obviously very solid. I think it was a record in Ag and Turf and I think that Construction and Forestry is up 300 bps on flattish quarter over quarter revenues. So the question is, is that a sign that the Tier IV impact is coming through positive? And is it potentially something that could fade? I don't know whether you're selling stuff selling the emissions credits or sort of positive margin trade versus what is going to come through as true Tier 4 product?
First of all, in the quarter, Rob, we have very little in the way of IT4 production other than the 8R. Construction would have only one model in production at this time. That's for them, the bulk of their product line really is subject to IT regulations starting next year because of the horsepower ranges.
Okay, fair enough. And then second question, I should know this definitionally. If you do less of a, let's say, a volume discount for somebody buys a lot of equipment on the farm equipment side and you get better realized pricing, is that within the 2% pricing or do you not expect any variance in that this year?
Yes, that would be in our pricing.
That would be in there. Okay, great. And last question for me, as you've started start to get into the year, have you seen as you balance the production, have you seen any upside potential to the stuff that you're starting to sold out on the factory shutdowns you do to change over to IT4? Do you think there's upside to your volume estimates or does it look pretty much like it did 3, 4 months ago?
Yes. Basically, we talked last time about there was some upside potential and as you can see we did increase our schedules as reflected in our sales. So, we would have very limited upside potential.
So you think you used up kind of what you thought you had on the cushion or on the easy cushion and if not, you wouldn't assume that you have the same question as you said last time?
Correct. That would be correct. And importantly for 2011.
Right. Great. I'll get back in line. Thanks.
Okay. Thank you. Thank you.
Our next question comes from Andrew Obin. And please state your company name.
Yes. BofA Merrill Lynch.
Hi, Andrew.
Hi, how are you? Just a question on raw material costs. Just to understand your guidance specifically, given the Q1 price increases, the lower end of your guidance does imply flat or positive contribution from raw material costs in the second half. Is that correct? If I'm thinking it was like what over $100,000,000 in Q1, we're sort of guiding 1% to 2%, so 1% would be like 250,000,000 dollars So volumes really pick up in Q2, Q3, Q4 sort of implies no raw material drag.
I just want to understand what's going on here at the lower end of the guidance?
Yes, there is a range at 1% to 2%. We have 2% positive price realization. If the raw material costs do come in at that 1%, clearly that would be favorable and it would be somewhat back end loaded. You are absolutely correct. We, however, are not sure where those prices exactly will come in for the reasons that Susan articulated, including the variability of steel costs.
And so that's why we have the range.
So 1% just simply includes you taking what the Street is forecasting what you commented on declining fuel prices and that's what you come up with and 2% would be another end of your scenario range. Is that fair?
Yes. I think when you the way to think about that 1% to 2%, Andrew is that we have a very, very volatile situation particularly on steel and also with regard mean, we have a variance for instance in the Q3 of calendar 'eleven from the low point on the forecast to the high forecast is 40% difference. And so, I think the way to think about the 1% to 2% is reflective of a very broad range given this high level of of uncertainty when this where this pricing goes and when it goes, because it's also very important because as you know, we have these several indexed agreements and when the price when it arrives at whatever level it arrives at is very important to us in terms of the resetting of the index. And so when you look
at that low end of the range or the high end
of the range, it just reflects a very, very high level of uncertainty.
And $2,500,000,000 in net income guidance has the low end, midpoint or the high end of the range?
I'll be the one to weigh in. It's
something we're not going to specify.
Thank you very much.
Thanks.
Thank you. Our next question comes from Ann Duignan. And please state your company name.
Hi, good morning, JPMorgan. Good morning. Good morning. Can you talk a little bit about the livestock sector and that's one of the areas where you took up your outlook for cash receipts both here and in Europe. I mean, that is the sector that I'm assuming you're seeing incremental improvements in and that's the comment about product mix maybe being a little bit more of a headwind this year versus prior years.
Is that am I interpreting that correctly?
Livestock actually is absolutely is in a recovery mode, although it's something that we're watching carefully with the run up in feed costs, etcetera. But as Ann, as we're talking about mix, just generally speaking, you're seeing improvements in some of the other like Europe, which would certainly be livestock oriented, but just more generally reflecting very good conditions.
Right. And on Europe, the BDMA gave us the registrations in Germany for January and they were up 57%. What are you seeing there? What is your organization seeing in Europe in terms of I know you commented on livestock, but livestock versus crops and the expectation for improved planting this year. Just a little bit more color on the fundamentals in Europe as we head into CMAT in Paris this next week?
Sure. As you look at the EU 27, as we indicated earlier, the sentiment is very positive there. Rise and stabilized at very strong levels. From a livestock perspective, milk and beef prices are at high levels. There is some weakness in pork, but as a general rule, livestock is very it's trending very equipment over hang in the EU 27 and that has greatly improved and really returning to more normal levels, which of course is supportive of new sales.
So in general, things are trending up. I think you see that in our outlook as well.
So I'm assuming if that if Europe turns out to be better than anticipated, you still have capacity in Europe?
We have the ability to respond. That would be a true statement.
Okay. Thank you. I'll leave it there and get back in line.
Thank you, Ann. Thank you. Our next question comes from Jerry Revich. And please state your company name.
Hi, good morning. It's Goldman Sachs.
Hi, Jerry.
Can you talk about what your raw material guidance assumes for steel and tire inflation? And would you consider a tire surcharge mechanism? Also you mentioned 8 hour price increases. Are you considering price increases on other product lines as well if inflation hits the high end of the range, Susan, that you outlined? Thank you.
Okay. Sure. And we don't as Jim just mentioned, we don't have a specific assumption in terms of where steel pricing goes. Again, as you look out and we look at various analysts, things are all over the board in terms of where we would be in calendar, Q3, for example, and Q4 also has not as wide of a variation, but certainly some variation in terms of where the pricing is going. So in terms of a surcharge, that would not be something we would normally consider.
And so the other question I think he had was on price increases and certainly we're always looking over a long term, we would expect to price at levels that would enable us to meet our income targets. So but keep in mind, price increases now because of our sold ahead and our order book position would have limited impact on current year. That would really be the price increase we mentioned earlier is largely a 2012 implication versus 2011, have limited impact this year.
Okay. And can you give us an update on customer credit availability in Russia and CIS? Any discussions on potential government financing subsidy programs, region? Thanks.
Sure. We did in the quarter financing seems to be easing and opening up a little bit, but in terms of where that financing is coming from, it's again, it's a wide variety of places and it's really dependent on the individual customer in terms of where that financing is coming in.
And I'll just chime in that we are working on developing other alternatives in the region, but we have no announcement.
And Marie, with the other alternatives, is that with governments as partners or is that with local?
We have a variety of alternatives that we're working on. I don't have a definitive answer.
Thank you. Our next question comes from Henry Kearns. Please state your company name.
It's UBS.
Good morning.
Hey, good morning guys.
Good morning. Good morning.
On the supply chain, can you talk about where you may be feeling tightness there and how much that would constrain you if you wanted to take production much higher as
you went through the year?
Sure. And really as we talked about our production schedules are have grown a lot this year and certainly have heavy build schedule. We work closely with our suppliers. At this point, there are no major issues that we're aware of. Of course, is as we've talked about before, there are day to day issues and challenges that we work through.
But we'll just continue to work with our suppliers. But no, there aren't supplier constraints that we would be able to point to today that would prevent us from expanding.
Really, we're looking at more of issues of capacity, managing our emissions credits, planned product transitions. Remember, we have a significant transitions ahead of us. And so there are a lot of factors at play as we look at our abilities to further increase schedule.
And could you talk a little bit about what you're hearing from ag and construction customers about the tax bonus depreciation for this year?
We've I think it would it's certainly a factor as you look at the market, but so would be the very strong incomes and the need for good equipment. We think in the U. S. Alone, we'll plant over 7,000,000 more acres this year than we did last year. So the thing is, if you look at it, Henry, incrementally year over year, while they've tweaked some of the programs, we've been in a period of bonus
depreciation for several years now.
So I don't think at the incrementally on the Ag side. On the construction side, that incentive alone is not a reason for people to buy equipment. They buy equipment if they know they're going to use it and it will be operational. So we think the activity that we're seeing in the market, which is and the biggest changes there have been in the rental and some on the governmental side. Those things are really driven by need, not incentives.
Thanks a lot.
All right.
Thank you. Thank you.
Thank you. Our next question comes from David Raso. And please state your company name.
ISI. Just a quick question on the interim Tier 4 for the non-8000s. What is the timing expected for the interim Tier 4 9000, 7000 and also the new combine?
Yes. And again, we've not given specific dates on any of those, but other than second half of the year. And nothing further has been announced.
Do you have any flexibility in the timing of that? Just again due to the idea of second half calendar year, if you do have some relatively strong demand, the timing of that, do you feel it's under your control where if you do, you say you run out of the pre interim Tier 4, is there going to be any hole in the production schedule where the dealers are looking for product, but you're not ready for the interim Tier 4 to be released?
We would not anticipate that being an issue.
Okay. And on the pricing announced at 3.5, obviously, one of the products mentioned is already Tier 4, But how should I think about new 9000 Series, 7000 Series interim Tier 4 pricing for 2012? Is this 35 trying to smooth out that interim Tier 4 increase for next year or is it completely separate and I should think of interim Tier 4 as we get another XYZ percent whatever that would be.
It would be separate. We would expect that as we introduce the new products that there would be pricing associated with that.
Okay. And lastly, in Construction Equipment, how should we be thinking about just opening the question, how should we be thinking about the margins this year in Construction and Forestry?
In what way? I'm not sure
where you're going with it.
Well, the margin just came in at 7.7%. Should we be looking at low double digit? How should we think about margins
for the quarter? The guidance that we provided was that we were thinking about an 8% margin on the Construction Equipment business.
And to that point, we're at 7.7% now. The lack of improvement the rest of the year of any significance, why would that be given the revenue growth? Is
it all possible to do
is it David as you move through
last year excuse me, David. As we move through
last year, we were increasing our schedules. So your comparisons change over the course
of the year, plus you see
our costs will accelerate
as we move through
the year. And do bear in mind, there's an SAP conversion as we move from the second to the Q3. So there's a lot going on in that division as we move into the year. And their IT for compliance, their product startups are definitely more back half loaded.
The new product in IT, the before it seemed like you felt the material costs may become less of a drag late in the year?
Yes, we've got a range on material costs and so I'm not prepared to specifically
But the IT4 material cost of this back end loaded. So we're dealing with 2 different buckets of material costs. One is what's going on in the steel markets and the rubber markets and then the other is the increased cost associated with IT4 and that clearly is back
Our next question comes from Eli Lusgarten.
Longbow Securities, congratulations on the quarter.
Thank you. Thank you.
Well, I want one clarification to make sure that maybe I'm slow to thinking. Your 1% to 2% margin impact on material costs, you originally said $250,000,000 You're really saying somewhere between $250,000,000 $500,000,000 in round numbers at the 22% pace?
Yes.
That's correct, isn't it? Yes. Got that. So and the only way you're at the lower end is if there's no price is all of a sudden prices stop going up and come down. I mean, I'm not sure who's giving you a low steel forecast.
So, Pat, a question on your big capacity well, the big capital spending that you're doing. And I think you indicated a couple of minutes ago that your ability to further increase schedules this year would be limited, but you use both the bulk of it. How much incremental capacity do you think you'd have available for 2012 versus 2011 from the spending that we're going on this year? Because we're running pretty full out at this point.
Eli, the bulk of the product expenditures,
some
refreshing of things in product expenditures, some refreshing of things in conjunction with IT4. There is some growth in some markets, growth spending, and we've been talking for several quarters about some of the new facilities that we're building. I think you might be referring to the fact that we did delay some capital at specifically at Waterloo in the financial crisis. You may all recall that in 2000 and 8, we had 2 separate AFEs that collectively were to raise Waterloo's capacity by about 40%. We got 20 5 points of that of the 40 point increase in place and then elected to defer.
And that capacity of the additional 15 points will come in over the course of 2012.
So I guess what I would ask the answer, how much since you're running pretty full
out this year, will there
be much incremental capacity available in 2012 versus 2011 in the core product lines?
Yes. And if you're looking at if you're referring to large tractors and combines, yes, because keep in mind, and we've talked about the fact that when we talk about having limited capacity this year, that's due to the constraints with all of the transitions with IT4. That goes away for 2012.
So you will have some reasonable ability to produce more physical product next year,
and that's what I'm really asking? Yes. On the large equipment, keep in mind, we go through on the smaller ag, we go through transitions next year in 2012. They'll be facing some of the transitions that the large equipment is facing this year.
And can you help me with the pricing on the 8,000 tractor, I thought the year over year pricing was about 9.6% and now I think you just hit with another 3%. Is that indicative of the times of pricing we can expect on income Tier 4 for next year that as those products keep rolling out they could be into a post double digit price increases year over year?
We have a variety of pricing strategies and things that we're looking at in our pricing. So you really can't look at one model and say it's indicative of what we'll be doing across the product line, Eli.
Yes, I know. But right now,
we're looking at 2% pricing year over year and I know you adjusted for features and all that, but that's mostly raw material driven. But there's a second level of pricing affecting the market, which is regulatory driven. And it seems it's much, much bigger than what we're seeing in raw material. And I'm just trying to get a handle on how to think about that. The regulatory is
I'm sorry, I didn't mean
to interrupt you. The regulatory pricing is reclassed as you know into our volume numbers and we don't have a specific amount that we are publicly articulating model by model on regulatory. It's a factor as we look at the overall pricing. Thank you. Next question.
Thank you. Our next question comes from Andy Casey. And please state your company name.
Wells Fargo Securities. Good morning, everybody.
Good morning.
Just a follow-up on the construction outlook. Should we expect most of the projected receivable reduction to occur in Q2?
I don't believe that is the case.
No, we are not. No. It will occur over the course of the year.
Right. Okay. So it wasn't entirely a buildup in Q1 in front of the SAP related shutdown?
Well, certainly, part for Construction and Forestry, the SAP shutdown would be a part of that. But as we look but as you look at ag, which is a larger a big chunk of that receivable and inventory buildup, that's going to that will come out throughout the year.
I'm sorry. Maybe I wasn't specific. I was just talking about the construction outlook for receivables.
I'm sorry. Yes, I was looking at everything. And it would be about the same. It's really throughout the year.
Okay.
That comes up. Okay. And
then a question on availability for some stuff that we don't talk about that much. Is the availability for cotton pickers and sugarcane harvesters similar to combines right
now? Pretty much sold out, yes.
Okay. Thank you very much.
Thank you. Thank you. Our next question comes from Seth Weber. And please state your company name.
Hey, good morning. It's RBC. Good morning. On the construction business, can you just give us some clarity, was pricing positive there in the quarter?
Both divisions contributed to the pricing, yes.
And just conceptually, as we move deeper into the year on the construction business and you move further away from some of the early buyers, should we think the pricing would get better there as there's less discounting?
I would not be able to articulate, I guess, a different set of expectations. Our pricing actually is fairly good in construction and we would expect it to continue. Don't know that we would have a different expectation as you move over the course of the year.
Okay. Mean the thought was just
I would add to that.
I mean we've experienced as we've shared with the group previously, we've had reasonable price realization in the construction business throughout the course of the crisis and the periods that followed that. So, and we would anticipate to have positive price increases.
Sure. Now, the thought was just maybe initially you get the big customers buying early and then you get better pricing from the smaller customers. And I guess just my follow-up question is on the higher revenue guide, does that affect at all the absorption headwinds that you guys had talked about last quarter? I think it was $100,000,000 Does that change at all how we should
be thinking about it?
Go ahead.
That wasn't an absorption number.
That really was just strictly overhead related to all the significant amount of capital and the startups and things like that and nothing has changed in that outlook.
Okay, great. Thanks very much.
Thank you.
Thank you. Our next question comes from Mark Kocnerich. And please state your company name.
Hi, Cleveland Research. Good morning. Good morning. Can you guys hear me okay? I'm on a hotel phone.
Yes, we can hear you fine. Great. Thank you.
Just a clarification, where do IT for technology costs reside? Is that considered part of your materials cost?
I mean the development of or the actual mean the actual like catalytic converter or
The actual content on the ADAR.
That would be in product cost, right.
Right. Okay. So some of your upgraded schedule outlook is incorporated in your higher materials outlook?
Well, and keep in mind, we're giving a separate number related to the IT4 costs, and that did increase. We're now looking at about $160,000,000 in the year versus our on our last call, we said $135,000,000 and that again is indicative of the increased schedule.
But that's separate and distinct from the one to two points of material inflation.
Okay. So where does that IT for the 160 reside?
That will be in product cost. They'll be in our cost of sales.
Okay. So both are in COGS, but you're just
split different buckets? Correct. We're splitting those out. That's correct.
Okay, great. The question I had had to do with CIS. Given that you've got an outlook that's moderately improving, but it's off a very low base. I'm just wondering if you can help maybe characterize the market a little bit different. I think in past discussions, the commentary suggests that the market is down 70% or 80% from the peak.
First of all, is that a reasonable assessment? And are we talking about getting halfway back this year? Or what kind of magnitude of improvement are we talking about prior relative to prior peak? Right. The first half of your
question is no, we wouldn't expect that kind of an increase this year. While things are certainly turning and improving, not to that level.
I think we
would use the word
moderate in the way that I mean 50% would not be our view
of moderate. So, we're not going to give a
specific percent, but I think when we say moderate, you can I mean, we mean moderate?
Yes. Okay. Thank you.
Thank you. And operator, I think we have time for one last question.
Thank you. Our final question comes from Jamie Cook. And please state your company name.
Good morning. Just one quick follow-up. Can you give us an update? Last quarter you talked about closing down facilities for 2 weeks, where we are? And is it still are we still assuming April time period?
Actually that would be pretty much they're looking at April late April early May. So and that is still on schedule. That's I assume you're referring to the SAP conversion for construction.
Yes. And is that still 2 weeks?
Yes. That's still
2 weeks. Okay.
Thanks.
Okay. Thank
you. Thank you all for participating. The IR team
will be available the rest of the day to answer your questions.
Thank you. This does conclude today's