Be accessed on our website at www.johndyehr.com/earnings. First a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Company. Any other use, recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of Deere is strictly prohibited. Participants in the call, including the Q and A session, agree that their likeness and remarks in all media may be stored and used as part of the call. This call also 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 may also include financial measures that are non conformance with accounting principles generally accepted in the United States. 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/earningsunderquarterlyearningsandevents. Brent? John Deere completed the 2nd quarter with solid results despite uncertain conditions in the agricultural sector.
While near term ag markets remain challenging in the U. S, foreign markets such as Brazil show signs of strength. Additionally, the Ag Division continues to make solid progress advancing our technology investments and innovative new product programs. In Construction and Forestry, end market demand remains strong resulting from broad based industry drivers such as GDP growth, oil and gas activity and infrastructure investment. With order books extending into the 4th quarter, the division is on track for a solid finish to the year.
Now, let's take a closer look at our 2nd quarter results beginning on Slide 3. Net sales and revenues were up 6% to 11,300,000,000 dollars Net income attributable to Deere and Company was $1,135,000,000 or $3.52 per diluted share. On Slide 4, total worldwide equipment operations net sales were up 5% to 10,273,000,000 dollars Price realization in the quarter was positive by 4 points, while currency translation was negative by 4 points. At this point, I would like to welcome
to the call Corey Reed, President of Ag and Turf with responsibility for sales and marketing in the Americas as well as a number of platforms including precision ag and crop harvesting. Over his 20 plus year career at Deere, Corey has held many roles within the Ag and Turf division and most recently served as President of John Deere Financial.
Corey? Thanks, Brent. I'll start with a review of our Agriculture and Turf business on Slide 5. Net sales were up 3% in the quarter over quarter comparison, primarily driven by higher shipment volumes and price realization, partially offset by negative impact of currency translation. Operating profit was $1,019,000,000 resulting in a 14% operating margin for the division.
During the quarter, price realization offset material and freight inflation, while other production costs ran slightly higher than expected. With regards to material cost inflation, keep in mind that our steel contracts operate on a 3 to 6 month lag to spot prices. Lastly, changes in currency had an unfavorable impact to the margins of 1.5%. Before we review the industry sales outlook, let's look at the fundamentals affecting the Ag business on Slide 6. Despite high production levels forecasted for the 'nineteen and 'twenty season, corn's global stock to use ratio is expected to decline in response to record consumption outpacing supply.
Conversely, wheat stock to use ratio is projected to increase in 2019 2020 due to a sharp production recovery from last year's drought stricken regions such as Europe and Australia. Meanwhile, soybean stock to use ratio is forecasted to remain at elevated levels through the 'nineteen-twenty marketing year in response to higher than expected yields in the U. S. And the ongoing trade dispute between the U. S.
And China, the inventory increase is further compounded by uncertainty for near term global demand
as the
African swine fever has significantly diminished the herd size in China. Slide 7 outlines U. S. Principal crop cash receipts, an important indicator for equipment demand. 2019 principal crop cash receipts are estimated to be roughly 117,000,000,000 a decline of 4% since last quarter reflecting the recent pressure on commodity prices resulting from rising stocks, diminished market access and near term demand uncertainty.
The confluence of these factors compounded further by U. S. Late planting season have adversely affected farmer sentiment in recent weeks. As a result, further trade progress between the U. S.
And China is becoming increasingly important to the near term sentiment. By region, our 2019 ag and turf industry outlooks are summarized on Slide 8. Tree sales in the U. S. And Canada are forecast to be flat to up 5% for 2019.
However, as near term fundamentals have weakened, we anticipate large ag industry sales to be on the lower end of that range with Canadian demand turning negative due to adverse weather and currency fluctuations and further complicated by tariffs on certain crops such as canola and lentils. Our small ag equipment compact tractors continue to show a strong order book for 2019, driven by a healthy U. S. Economy and GDP growth, while growth for midsized tractors is more modest due to the softness in the livestock and dairy sector. Moving on to the EU 28, the industry outlook is forecast to be flat in 2019, stabilized by healthy margins for the arable and dairy sectors in the South and West regions, offsetting less favorable conditions in the North Central and Northeast regions.
In South America, industry sales of tractors and combines are projected to be flat to up 5% for the year with strength in Brazil balanced by slowness in Argentina on account of high inflation and political uncertainty. Farmer sentiment remains quite positive in Brazil, which had a very strong first half of the year. Farm margins in the region continue to be supportive of equipment demand and sentiment has been boosted following record corn and soybean harvest in 2019. We experienced positive farmer sentiment at the recent AgriShow where equipment sales continued at healthy levels. Furthermore, this year's AgriShow featured the initial launch of our leading technologies to the Brazilian market.
Products such as Combine Advisor, ExactEmerge and ExactApply well received during their debut. Shifting to Asia, industry sales are expected to be flat to slightly down as key growth markets slow modestly. Lastly, industry retail sales of turf and utility equipment in the U. S. And Canada are projected to be flat to up 5% in 2019 based on solid economic factors that are supported by continued consumer confidence.
Putting us all together on Slide 9, fiscal year 2019 sales of worldwide agriculture and turf equipment are now forecasted to be up approximately 2%, which includes a negative currency impact of about 3 points. The reduction from previous guidance relates to recent softness in the North American large ag and dairy markets as well as our decision to under produce retail for the remainder of the year. Furthermore, we're reducing our full year operating margin forecast from 12% to 11% to reflect unfavorable movements in volume and mix as well as the impact of lower production schedules. Also, the unfavorable impact of currency is over a point. Before moving on to Construction and Forestry, I'd like to acknowledge the challenging conditions that many of our customers are facing right now.
As such, we'd like to highlight a key initiative that is producing positive results for producers and helping them better manage the many variables affecting their operations, even while end markets remain difficult. Over 5 years ago, the Agriculture and Turf division began executing the deliberate shift towards a crop production systems business model. This strategy reframed our approach to innovation and deeply impacted 3 primary areas of business. Number 1, our product portfolio planning number 2, our go to market strategy and number 3, the integration of precision ag technologies. Our production system strategy ensures that innovation efforts focus on the entire system of producing a crop, leveraging the entire suite of Deere products from field prep to planting, protecting and harvesting, driving tremendous value for our customers by maximizing yields and decreasing input cost.
The results from this approach have been clear. Today, Deere is producing meaningfully differentiated technology and has achieved its highest North American market share in over a decade. The strategy's first step involved in focusing efforts on product portfolios that optimize a crop system. To do this, we form production system innovation teams organized by crops such as corn, soy and small grains. These teams ensure innovation focuses on farming jobs that address our customers' biggest pain points and have the most potential to unlock value.
The teams then work across the various product platforms to allocate R and D investments accordingly. Next, we engage our dealer channel to focus on the agronomic impact of our equipment. To do this, we conducted LEAD events around the country, LEAD standing for Leading Economic and Agronomic Decisions. These events hosted local customer demonstrations showing the agronomic impact of our technology and equipment. Today many dealers now employ agronomist and host their own LEAD events.
Lastly, our integrated precision ag technologies are the most critical enabler of our production system strategy. Today, John Deere is the global leader in precision agriculture and our unique combination of best in class machinery, dealer channel and advanced technologies deliver improved outcomes for every pass, every field and every season bringing real value to farming operations with both reduced cost and increased yields. Precision Ag is the common thread across each production step helping farmers and helping producers manage their operations. It allows farmers to use the same guidance line from planting to spraying or leverage a common display interface through each step. Increasingly, agronomic data is driving farming decisions and our digital platform provides an opportunity to integrate data across all the production steps and to use it through the entire season to create real value.
The John Deere Operations Center is our digital platform that allows farmers to plan their work in the off season, monitor and control their operations in real time and then analyze all the data. Today, we are the only ag OEM to have a comprehensive digital ecosystem, combining both agronomic and machine data into one application. Today, the operation center has over 145,000,000 unique engaged acres in its system globally. Leveraging data across each production step results in making decisions differently. It also allows for the precise beginning of the season.
It makes each seed count in planting and gives every seed the best opportunity for success during the season. It makes every drop count in applications adding the right amount at the right location whether nutrient, herbicide or pesticide. And lastly, it makes every grain and farming output count in harvesting, so that farmers get maximum value from the work they've done throughout the season. Even small changes in these items can produce tremendous value for our customers, driving better yield and lowering the cost of their operations. With each production step, equipment can use the data gathered from every pass as connected machines deliver data to the cloud.
Simply put, each production step informs the next and subsequent steps can measure the outcomes of prior steps. In order to unlock the power of data, we've designed our digital systems to be as open as possible. Our systems, in other words, are compatible with those of many other industry to growing our leadership position as the most open platform in the industry based on these three important factors: number 1, customer control number 2, customer choice and number 3, compatibility. Our first guiding principle is that customers control their data, while Deere provides the most secure means to protect their privacy. That said, customers do not farm alone and often employ trusted advisors as an integral part of their operation and the decisions they make.
John Deere Operations Center gives customers the control to grant access to whomever they choose, providing secure collaboration environment for farmers. Regarding customer choice, the operation center maintains over 115 connected 3rd party providers and provides unparalleled access to the industry leaders. From aerial image services to farm profitability providers, these connected partners make our digital platform more valuable and easier to use for customers. Lastly, John Deere has a history leading the industry in machine and technology compatibility, thus ensuring that our equipment works well in multicolored fleets. We helped pioneer the creation of standards that enable equipment interoperability such as ISOBUS, the Adapt Standard and Ag Gateway.
Our compatibility efforts also enable customers with mixed fleets to bring their data into the operation center. In summary, while we've made great strides to date, we're still in the early innings of executing this strategy. One of our next steps involves rolling out our latest technology to new markets such as Brazil. As I mentioned, we're just now introducing ExactEmerge, ExactApply and Combine Advisor to the Brazilian market and have been very encouraged by the early results. We look forward to updating investors as we move ahead in these areas in the future.
I'll now turn the call back over
to Brent Norwood. Brent? Thanks, Corey. Now let's focus on Construction and Forestry on Slide 11. Net sales of $2,990,000,000 were up 11%, a result of increased shipments and positive price realization for the quarter, partially offset by the negative impact of currency translation.
Operating profit was 347,000,000 dollars largely benefiting from increased price realization, shipment volumes and a lower impact of Wirtgen purchase accounting, partially offset by higher production costs and less favorable product mix. Moving to Slide 12, the economic drivers for the division remain broad based and supportive of continued equipment demand for the year. For 2019, total construction investment and housing starts are both slowing, but do remain supportive. Meanwhile, oil and gas activity hovers at solid levels for equipment demand growth with oil prices firmly in the mid-60s and infrastructure investments are growing at the state and local level. Furthermore, equipment rental utilization remains high, while rental rates continue to grow in 2019.
Importantly, CapEx budgets from the independent rental companies continue at levels supportive of further equipment demand. Lastly, global transportation investment this year is forecast to grow at about 4%, though results vary by market and product form. The overall positive economic indicators are reflected in a healthy order book, which is now extending into the Q4. Moving to the C and F outlook on Slide 13. Deere's Construction and Forestry 2019 sales are now forecast to be up about 11% compared to last year, driven by strong demand for equipment as well as an additional 2 months ownership of Wirtgen.
Wirtgen's 2019 forecasted sales have been reduced slightly as certain geographies have slowed in recent months. The global forestry market forecast is expected to be flat to up 5% with growth coming primarily from cut to wings products in Europe and Russia. C and F's full year operating margin is projected to be about 11.5% with Wirtgen margins forecasted to be above that. Let's move now to our financial services operations. Slide 14 shows the provision for credit losses as a percentage of the average owned portfolio.
The financial forecast for 2019 shown on the slide contemplates a loss provision of about 23 basis points. Current forecast puts loss provisions on par with the 10 year average and below the 15 year average. Moving to Slide 15, worldwide financial services net income attributable to Deere and Company was $121,000,000 in the 2nd quarter. For the full year in 2019, net income forecast is now $600,000,000 compared to previous guidance of 630,000,000 dollars The reduced forecast contemplates a higher provision for credit losses. Slide 16 outlines receivables and inventories.
For the company as a whole, receivables and inventories ended the quarter up $1,300,000,000 In the CNS division, the 2nd quarter increase is a result of a higher order book and production schedule, while the full year rise is largely attributable to a historically low inventory position at the beginning of 2019, it's worth noting that our forecasted inventory to sales ratio is below the 10 year average. For Ag, the quarter's increase is due to continued demand for small ag products and a front end loaded production schedule for large ag. By the end of the year, we forecast a $50,000,000 decrease in inventory and receivables compared to 2018 due to reduced production schedules. Moving to Slide 17. Cost of sales for the 2nd quarter was 75% of net sales and our 2019 guidance is about 76%, down about a point from 2018.
R and D was up about 10% in the 2nd quarter and forecasted to be up 6% in 2019 or 5% when excluding Burt Chemical. The year over year increase in 2019 primarily relates to strategic investments in precision ag as well as next generation new product development programs for large ag product lines. SA and G expense for the equipment operations was down 1% in the quarter and projected to be up about 6% for the full year or 5% excluding Wirtgen. Turning to Slide 18. For the quarter, the equipment operations tax rate was 22% and the full year effective tax rate still projected to be between 24% 26%.
Slide 19 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $4,100,000,000 in 2019, up from $3,300,000,000 in 20 18. The company's financial outlook is on Slide 20. Our full year outlook now calls for net sales to be up about 5%, which includes about 3 points of price realization and 1 point related to an additional 2 months of Urkana ownership. On the negative side, we expect currency to be about a 3 point headwind for the year.
Finally, our full year 2019 net income is now forecast at $3,300,000,000 I will now turn the call over to Ryan Campbell for closing comments. Ryan? Thanks, Brent.
Before we respond to your questions, I'd like to share some thoughts on current Ag Industry Fundamentals and our response to a very dynamic environment. First, it's important to acknowledge the confluence of difficulties impacting U. S. Farmers in recent months. In addition to persistent uncertainty around global trade and market access, grain farmers are also contending with weather related planning delays and uncertain near term demand prospects due to African swine fever.
The resulting decline in commodity prices have taken a toll on farmer sentiment and correspondingly our large ag sales forecast has come down. Deere has historically been quick to respond to end market fluctuations and we've already taken action this year by reducing factory schedules. Furthermore, we are actively identifying opportunities to further manage costs while continuing to invest for the long term. Ultimately, these measures ensure
we'll be
best positioned at year end to respond to market dynamics in 2020. Importantly, the underlying fundamentals of replacement demand remain intact even as the market faces current headwinds. As such, we expect a continued gradual recovery to resume once these challenges abate. The hours and age of the fleet, along with the technology advancements included in our latest offerings will continue to drive demand. As Corey noted, our production systems approach prioritizes investments that produce cost savings or yield enhancements for farmers.
Many of the current pressures today illustrate the need for technology to help farmers adapt to an ever changing and fluid environment.
Lastly,
the long term positive fundamentals for agriculture remain intact and we continue to see a growing need for technology to transform farming practices. Our proven ability to perform throughout the cycle, combined with our leadership in precision agriculture, give us confidence in our ability to deliver strong results over the long term for our customers and investors.
Now we're ready to begin the Q
and A portion of the call. The operator will instruct you
on the polling procedure. In consideration of others and
our hope to allow all of you to participate,
please limit yourself to one question. If you have additional questions, please rejoin the queue. Angela?
Thank you. We will now begin the question and answer session. Our first question comes from Adam Uhlman with Cleveland Research. Your line is open.
Hi, good morning everyone.
Good morning. I was hoping
we could start with the domestic farm equipment business. What are shipment volumes looking like? What were they here in the second quarter? What are you planning for the second half of the fiscal year? And then could you also talk about used equipment market trends, the weakness that have we seen any weakness unfolding there?
Thanks.
Yes. I mean, if we start thinking about shipment volumes, as we think about the latter portion of the year with what we've seen given the uncertainty in our move to reduce production levels, we will see the lower production shipments in the second half of the year. So that's definitely the case. I mean, if you look at a couple of our larger facilities on a unit basis, they'll be down second half compared to second half of twenty eighteen in the 20% range. I think from a used perspective, we continue to see that market be stable.
Pricing has been stable. Inventory, I'd say, by and large, we're very comfortable with where we're at. And if you look at combines, there's been some conversation around combines ticking up. I'd say seasonally, that's normal in that new retail combines are being sold and you're taking trades and those trades don't move until you get closer to the harvest. So we think that's a normal pattern, but we feel good about where we're at today.
Adam, this is Corey. I was going to say that on the late model used in particular, what we've seen is high demand. If you look at volumes, they've come down since the 2014 timeframe. So, you have a lot of the late model used has been moved into the market and a lot of folks are looking for late models and that's driving what some of the continued demand in the market today as replacement demand is really holding the market in there.
All right. Thanks. Go to the next question.
Our next question comes from Andy Casey with Wells Fargo Securities. Your line is open.
Good morning. Thanks. On the decision to under produce to reduce inventory, is that isolated specifically to North America
or are
there other regions also doing that? And the reason I ask is, it looks like you're set up to hold margins for ag and turf in the second half in the mid-ten percent range despite that 20% down number. I'm just wondering if there's anything going on in other regions?
Yes. Andy, when we look at that under production, I'd say it's really North America and large ag in particular. There's maybe a little bit of that as you look at kind of midsize equipment, but that's that is mostly a U. S. And Canada issue.
Thank you. We'll go ahead and jump to the next question.
Our next question comes from Chad Dillard with Deutsche Bank. Your line is open.
Hi, good morning everyone.
Hi Chad.
So with the tougher environment in large ag, to what extent are you changing the pricing assumptions or funding allocated to any discounting or promotions as we go into the 2020 early order program for planners and sprayers?
Yes. As we think about pricing, and as noted with our guidance, we haven't seen a change. So we're still expecting about 3 points of price with both divisions participating. So no major change there. I think a big part of that is continuing to manage used and this as we calibrate and reduce production levels, that's all trying to keep that in balance.
So I'd say no major shift in terms of our view.
No, I'd agree. We're holding on the price side, we're holding through the remainder of the year and we'll have very similar programs as we open up those early order programs going into next year.
Thanks Chad.
Our next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning. Just color on potential cost cutting that you guys alluded to, obviously, you're a little more doesn't get doesn't get resolved? I'm just trying to understand the opportunity and what levers you could pull? Thank you.
Yes. Thanks, Jamie. I mean, I think as we've gone through this before, always start certainly managing production levels and trying to manage field inventory and where we're at and what we want to deliver there. So that's certainly step 1 as we go through there. I think the cost side is the combination of continuing to invest in the long term and how do we protect R and D and continue to invest in the product.
A really good example of our view on that is as we went through 2015 2016, we continued investing in R and D and we're able to deliver products like Combine Advisor and like ExactApply and the sprayers that came out during that time that had we pulled too hard on those may have been impacted. So we want to take a long term view from an R and D perspective, but then look certainly at the cost opportunities. So I think those are the things that we're continuously looking at and then we'll be looking at regardless of the environment in terms of costs.
Jamie, it's Ryan. I think one of the factors that you're seeing now is we reduced production schedules. There's a bit of inefficiency that comes into our factories and so that takes a little bit of time to work that out and we're certainly committed to working that out. The other aspect of in our S and G budgets, we'll continue to look at those. But one aspect of that is we're investing in customer support initiatives in order to support all of the precision ag and protection systems approach that Corey has alluded to.
And offers like connected support and expert alerts are truly differentiated in the industry. So we're going to be surgical about this, but for sure we're taking a look at it and there is some opportunity certainly to the extent things potentially get worse. Thank you.
Our next question comes from Joe O'Dea with Vertical Research Partners. Your line is open.
Hi, good morning. Related to Jamie's question, I think earlier in the year, you were talking about something in the area of around $850,000,000 of cost headwinds that you had in 2019 and tied to materials inflation and tariffs and supply chain constraints and currency. But when you think about things that you can manage, can you give us any sense of the opportunities that you have within those cost headwinds to address some of them and quantify kind of what that opportunity set looks like by how much you could take that down independent of what happens with currency, for example?
Yes. Joe, I'd say starting just at the high level where you talked about, I think material and steel in particular is progressing as we expected. We because of the lagging of our contracts, as we get into the Q3 on the ag and turf side on hot rolled coil, we start to see that come down. So we'd expect to see some of that benefit end of the 3rd quarter into Q4. Now as we pull back production, you see that the impact or the benefit is dampened as a result of that.
You also have the 301 tariffs that we talked about from China. A quarter ago, we talked about $100,000,000 impact. Today, we'd say it's somewhere between $75,000,000 $100,000,000 but that's a bit of a moving target right now given some of the uncertainty of how and when that will be put into place, but that's considered there. And then the other piece we talked about has been on the logistics side. So while by and large we've seen less premium freight, we continue to have some critical components that we're bringing in that we have airfreight as noted a quarter ago that will continue into the 3rd quarter.
And overall, there has been just higher rates for freight as a result of availability and really low unemployment. So those would be the things that we've been talking about that have impacted us and kind of refers to the initial part of your question there, Joe. I think as Ryan just mentioned on cost, it's something that we are always looking at, continuing to look at. I don't know that we're want to talk about or quantify what could be. But I think there's continued focus in terms of how do we do that both from the material side as well as from cost structure, SA and G and the like.
Thank you. We'll go ahead and go to the next question.
Our next question comes from Courtney Yakavonis with Morgan Stanley. Your line is
Just wanted to clarify on the expectations for underproduction in the second half. I just want to make sure that I've heard it down 20%. And then secondly, just wanted to also make sure that is assuming that there is no trade resolution in the back half of the year and that obviously the AFF situation persists. I just wanted to understand is there any upside risk if there is a trade resolution that you could change those production plans or is that kind of set in stone at this point?
Yes. Thanks, Courtney. So I'd say as we think about what's going on with the forecast, I'd say we're not assuming
trade resolution. I think
from a quarter ago to today, trade resolution. I think from a quarter ago to today, trade uncertainties persisted plus the wet weather conditions and then things like ASF that are impacting near term demand. So those are all contemplated. We haven't we've not assumed we get resolution at this point. And as a result, this is why we are taking down production in an effort to calibrate our field inventory and where we want to end the year to position ourselves for 2020.
The one thing I'd point out on that comment on the 20%, that's a couple of our factories just as an example of our large egg factories. So that's not broadly across the entire division. But on a production unit basis, that's the magnitude we are seeing in a few of our larger facilities. Thank you.
Next question comes from Tim Thein with Citi. Your line is open.
Thank you. Just the first quarter, maybe just I want to make sure I have clarified your comments earlier on pricing. You alluded to as we think about pricing for 'twenty something like a very similar program, I think you said, you don't mean I mean, it's early, but you're not anticipating similar level of price increases for 'twenty, correct? Or I just want to make sure.
Yes. Tim, my comment was related to the early order programs that we'd see very similar early order programs that we've run-in the past. That was the comment. Okay.
No commentary on pricing at this point of what we expect in the upcoming year.
Okay. And then, Josh, maybe just quickly on Wirtgen, 2 quarters in a row, obviously, the global economic environment has moved around a bit. But some of the other players in that general market haven't kind of been holding more steady. So in terms of their commentary, maybe just a sentence or 2 on Wirtgen and what changed there from a geographic perspective? Yes.
So, I mean, our Virtgen outlook is down about $100,000,000 in sales. So and about half of that is FX related. So I'd say it's really Tim looking at the markets that we mentioned before China, Turkey, Argentina, Russia. And then we have seen some mix shifting in markets like India, which is we actually see movement out of concrete paving into asphalt. So from
a market share
perspective, no change for Wirtgen, but you do just see from a ticket price shift there. But so that's really the what we've seen with Wirtgen thus far. And probably important to note there too, the margin forecast there has held in unchanged from our previous quarters. So even with some of that reduction, they've pulled some levers and done some things to hold their margin performance, which we feel really good about. So thank you.
We'll go ahead and go to the next question.
Next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes. Hi. Good morning, everyone. I'm wondering if you can comment and just build our comfort level around this production cut, getting everything done that we need to in ag in terms of rightsizing the channel, maybe comment on how order trends have played out over the course of the quarter or any other data points you'd share on just to build our comfort level that we won't be looking at a couple more production cuts to adjust to the current demand environment?
As we look at production levels and what we're doing in terms of to calibrate those, I mean really the idea there is that we are pulling back. It's based on what's been happening in the market, what we've seen from order flow. So if you think about large tractors, for example, we're ordered out through September, which is about a month less than we would have been a year ago. So that has impacted that view. Corey mentioned, we've seen some weakness in Canada also that impacts some of our larger products like combines and like 4 wheel drive tractors.
So I think a few of those things have impacted what we've seen there. But I'd say that's the view. And as I noted with Courtney's question, we're not baking in trade resolution. So I would say we're taking what we think is a balanced view here, but shifting to where do we want to be ending 2020 to position ourselves well given the dynamics of what 2020 could be. Thank you.
We'll go to the next question.
Next question comes from David Raso with Evercore ISI. Your line is open.
Hi, good morning. Just want
to be clear the setup for ag and turf going into 'twenty. I think the company used to feel high horsepower ag 2020 would be a recovery year. The way you're targeting your inventory exiting this year, if we just kept it simple and said next year was flat, let's just say, would production be in line with retail? I'm just trying to get comfortable with the setup going into 'twenty on how you're now targeting your ending inventory? Thanks, David.
Yes, you're right. And the idea being this under production this year sets us up to be in a position to produce a retail. That's always where we target to be. As we've seen the uncertainty persist here, as we've made these adjustments, that shifted, but that's the idea. We want to be in a position that we're producing to retail next year.
So thank you. We'll go ahead and jump to the next question.
Our next question comes from Ralph Giordi with Bank of America. Your line is
open. Yes, thanks. Good morning, guys.
Hi, Ross. Hi, Ross.
I was just wondering,
I mean, we've heard a lot about how the trade war obviously is impacting the U. S. Farmer and the Brazilian farmer has been on more of the winning end of that. But what about the European farmer? You talked about rising end stocks for wheat.
Now you're seeing more cautious trends there at all in the core European markets of Germany and France due to rising wheat inventories and just what does your European order book look like?
Yes. So our view on that market is relatively flat and I think our order book would be in line with that or supportive of that view. As you think about kind of the trade war and puts and takes there, I think I'd say they've been benefited, not to the extent of say the Brazilian farmer, but benefited through exports particularly pork, but also dairy going into China. So I think that's been supportive. Some of that too this year prospects look better because of drought last year.
So by and large, I think the overall environment there is better with the uncertainty overhang in Europe really on Brexit and what does that mean for the longer term?
Yes. So Ross, it's Ryan. I think maybe a slight shift, but nothing significant right now.
All right. Thanks, Ross. Go ahead and go to the next question.
Our next question comes from Sameer Rathod with Macquarie. Your line is open.
Thank you for taking my question. There seems to be more political discussion around the national right to repair law. Can you help us understand the impact that could have on the company's top line or margin?
Yes. Thanks, Sameer. So, right to repair has been in the news a lot. And I think for us, it's important to really carve out 2 issues that are typically embedded in that conversation. 1 is right to repair and we would say we're supportive of our customers' ability and their ability to repair their machines.
So we work with the AEM to support access to service tools, diagnostic tools and the ability to repair. So, we would not have any issue or concern with that matter. Right to modify and when you get into modifying actual code, we think that's a bigger concern as you get into things like safety and emissions and a lot of other components that would be more concerning. So I think we would delineate between those 2 and then I'll ask Cory to add his comments.
Yes, Sameer, I would say we're leading the industry in offering great tools to both our customers and repairs of equipment that can get in and keep our customers up and running. Uptime is a big deal. So, we want to give our customers the opportunity to repair what they can themselves, also to use who they want to. But at the same time, we work to build a dealer network that's best in the industry at keeping them up and running all the time. So, we feel strongly about giving them all the tools they need and they're leading the industry in the right to repair space of providing those tools out to the market.
Thank you, Sameer. We'll go ahead and go to the next question.
Our next question comes from Robert Wertheimer with Melius Research. Your line is open.
Hi, good morning everybody. You have been quite clear, but I still just wanted to go kind of back to the high horsepower, the large equipment side and just make sure I understand kind of how the business is working and what you're trimming. You build most stuff to order, I think, and you referenced how you're 1 month shorter on the outlook than you had been. And so you're building to order, but the production is down and there's a sort of 20% fall. So what is falling?
Is it just a little bit
of cleanup of excess inventory that's not to order and the rest of it's kind of chugging along as it is or am I misunderstanding something?
Yes. Thanks, Rob. Yes, I think there's a combination. I mean, some of it is you've got some geographic distribution areas that are maybe a little bit weaker than others are seeing some impacts. We've talked about some of the challenges in Canada, for example, and some other parts of the country.
So some of it is just working through some of those things. And I think that's the biggest piece of that. So I think nothing materially different in terms of how we've seen that activity transpire. Thank you. We'll go ahead and go to our next caller.
Our next question comes from Larry Di Maria with William Blair. Your line is open.
Hi, thanks. Good morning, everybody. Question, given the adjustment to the guidance, it relates to last night's announcement, cancellation of U. S. Pork imports to China, which is independent of ASF, has that factored into your outlook?
Or should we think about maybe incremental risk to the midsize range? Just curious how you describe maybe midsize as you've gone through the large size and what the incremental risk from pork exports and other things like that not going to China, which is maybe incremental to obviously Dean?
Yes. Obviously, very new news, so not contemplated in our forecast. What I'd we haven't seen a material shift or change in our kind of midsized tractors or we haven't seen a material shift or change in our kind of midsized tractors or hand forged equipment. So I think right now, I would say we didn't have kind of upside or downside implied there based on what's going on with the pork, ASF or broadly any retaliation with China, Cory?
Yes. I would say the broader impact in our mid range has been from the continuing challenges in the dairy market in the U. S. And that's already been reflected in what we're doing there. So I don't anticipate a large impact from the announcement last night.
Yes, I think that announcement probably benefits EU. Back to the earlier question, EU pork, probably see increased exports as a result of that. You probably see some incrementally from Brazil as well.
Our next question comes from Steven Fisher with UBS. Your line is open.
Thanks. Good morning. Just curious what this year's experience is telling you about the bigger picture of the replacement cycle. Are we back to the old adage of equipment really just kind of lasting 1 more year and farmers are just going to run it until they break? And then what did you contemplate for retail sales in 2020 at this point with that 20% production cut?
So we haven't obviously don't have a guide on 2020 yet that particularly in the dynamic market we're in right now. So I think that's probably the starting point. As you think about replacement demand, we do believe the drivers of replacement demand remain intact and that's hours and age on equipment and technology and productivity. I think what we're seeing today is a bit of a pause as a result of the uncertainties that are out there. But we feel like drivers are still there.
And as we work through some of these short term uncertainties, you see the resumption of that replacement demand. One thing that I would point out is, I think one thing we see through technology and the ability to take down input costs through using precision technologies, there's appetite to invest in those things that can help reduce breakevens and improve profitability that certainly are important.
No, I would agree.
And in fact, I mentioned earlier that what we've seen use the example of the combine market is that our late model combine used inventory is running lower and that's really driving the replacement demand side. If you start to think of the technology changes that occurred in the last 3 or 4 years 2014 forward, there's a lot of technology that's enhancing the productivity of those machines and there's demand at the top end of the market to bring it in.
Yes. I'd say this is Ryan. If we look at the fleets aging out another year, at the end of 2019, high horsepower tractors, 220 plus and 4 wheel drives are going to be back to 2,007 age levels, same with combines. So it's just another year and it's aging out. And as soon as some of these uncertainties abate, we will see a gradual recovery in replacement demand given the factors of age and technology adoption.
Yes. Maybe one last thing to add
is the importance of uptime is even accentuated even more in times like this right now. We got a really short planting window because of weather patterns. So as we can obviously newer machines, but then connected support and other things deliver more uptime as these windows tighten. I think that's increasingly important for the customers. So thank you.
We'll go to the next question.
Our next question comes from Mig Dobre with Baird. Your line is open.
Yes. Good morning. I want to talk a little bit about C and
question with 2 parts, if
you would. So on your outlook, you lowered the top line by about 2 points, and it looks like about half of that came from Wirtgen. I'm trying to understand the other half. And then on Wirtgen specifically, I'm looking to understand how you view the full year revenue. So the full year revenue contraction and I ask that because it looks to me like your margin guidance implies very solid margins in the back half versus what you've done in the front half.
So how much risk is there at this point to that vertical margin? Thanks.
Mig, yes, thank you. So I think as you think about the overall C and F, you're right. In terms of reduction, you have about half Wirtgen, we talked about that about half of that half. So quarter is really kind of FX driven. If you look at the legacy C and F business, I'd say the biggest individual piece of that was where we saw weakness in Canada, where it's been a few different impacts.
Oil and gas, we've seen production come down in Canada specifically a little bit. Demand for lumber because of the slowing of housing starts in the U. S. Has impacted Canadian lumber as well. So I think those have been those would be the major drivers of what we're seeing on the top line.
As it relates to Wirtgen, as we talked about before, 3Q is their bigger quarter in terms of revenue and margin. And the Q2 came in strong, I'd say as we expected. And maybe worth noting in this year with VAALMA that falls into the Q3 for Wirtgen. So you see that impact. We saw a good response to the show, very positive reaction to their new products.
So we continue to feel good about that business, the long term prospects, but also as we talked about no change in our view on margins for the full year.
Yes. This is Ryan. As Josh said, Bauma years can have a little bit slower start, but we feel really good about how the show went. And then if we take a step back and look at how they performed for each quarter compared to their historical averages and looking what they need to deliver for the rest of the year, it's roughly in line with what they've delivered historically. So we feel comfortable about where we are with them.
Thank you. We'll go ahead and go to our next question.
Our next question comes from Ann Duignan with JPMorgan. Your line is open.
Yes. Hi. I think I'll switch gears and maybe take a step back and ask the question about the fundamentals. I mean, can you comment on the notion that the future is bright for global demand? Given the unprecedented 30% plus or minus reduction in the herd size in China and plus the potential that the U.
S. Export market is more permanently damaged, particularly with South America producing near record crops this year, I mean, have you contemplated at all the fact that this may be more permanent than just a 6 month production cut?
Yes. I'll start there, Ann. This is Josh. I mean, I think, one, we say we think it's early to kind of model or say we've seen permanent shifts in production or market share globally. I think importantly, we support open markets for our customers their ability to compete globally.
I think in that same vein, we really like our positioning in the particularly in the those production systems of big grains, corn, soybeans and small grains. So we like how we're positioned there from a global basis. I think as you think about ASF and the impact there, it's obviously early there. We do expect that herd size, I think as of March is down about 20%. So, certainly, I think there's some near term impact there in terms of demand.
However, what we're seeing is and we've seen exports from many different countries and different regions of pork moving pretty quickly to China, whether it's from the U. S. Or Brazil or from China excuse me, from Europe?
Ann, this is Corey. I would say, we see those the latest forecast would say that global demand is still going to to rise year over year. We feel like we're in the best positions in those markets that produce grain around the world as we've continued to build out the competitiveness of the North American farmer with technology. We're doing the same now in Brazil. Our focus on 2 things, creating the most competitive output, so on a bushel or an acre basis or a hectare basis in different parts of the world and then investing in things that help differentiate our customers to grow more yield at that lower cost point.
So, I think we're positioned well and the demand is holding in there.
All right. Thanks, Ann. We'll go ahead and go to our next question.
Our next question comes from Steve Volkmann with Jefferies. Your line is open.
Hi, good morning. Thanks.
Most of my questions have been answered. But Josh, can I just ask you on Slide $550,000,000 from your previous forecast, but we've talked lots about cutting production? So maybe can you just square that up for us?
Yes. Thanks, Steve. Yes. So we've got as we talked about, we talked a lot about what we're doing on the large ag side and you see some reduction there on the ag side of the business. On the construction and forestry side, compared to where we were, it is up.
And that's I think really driven by where we started the year. We came into the year at historically low inventory to sales ratio levels. And even with where we're going to end or where we project to end this year, we're below our 10 year average on inventory to sales. So I think it's driven by kind of where we started, customer and dealer demand and comfort level as they pull to get to levels that they're comfortable with. And we're going to continue to monitor that.
But that's really the view is we're seeing strong enough demand and dealers comfort level with their inventory levels and trying to get there. As you'll recall, we had hoped to build some inventory in both 2017 2018, but strong demand impeded that. So we actually drew down. We were at historically low levels in both of those years. So you see us really coming back from that.
All right. Thanks, Steve. We'll go ahead and go to our next question.
Our next question comes from Seth Weber with RBC Capital. Your line is open.
Good morning guys.
Just wanted to get a little bit more color on the big step down in the FinCo profitability in the second quarter and just your comp your full year guide kind of implies that that snaps back pretty quickly in the Q3 Q4. So just trying to get a better understanding as to what happened and why that's going to come back so quickly? Thanks.
Yes. So when we think about our JDF guidance, sorry, we talked about in total, if we think about the full year, we came down about $30,000,000 really driven by 2 things, provision as well as tax rate. Tax has moved a little bit on us, that's one. And then the provision would be the bigger component of that. Provision really driven by, I'd say, 2 major components.
1 would be our growth in our international portfolio. So as our international portfolio has grown, particularly in markets like Argentina, Brazil, China, India, you see the provision moves with that. And then the other would be on our multi use account or revolving credit. So that's been the other driver. So as you think about the multi use, the revolving credit, we take a conservative approach there in that we write off 100 percent of those balances when they go 90 days past due.
Historically, we see strong recoveries post write off. And I know in times of stress in the industry, we've continued to produce really strong returns in that portfolio. So we think underlying there we see strong customer fundamentals. Some of this I think really driven by just the seasonality as well as what we've seen with commodity prices. A number of folks haven't marketed their grains.
So there are a few different dynamics there and I'll ask Corey to provide some comments too. Yes. I
think the thing in this to keep in mind is that we've been running at write off levels significantly below where our averages have been over a 10 or 15 year period. And the adjustment that we're taking now puts us right in line with between the 10 15 year average on write offs in the provision. So, it's a my take on it is it's a really solid portfolio that despite what we have in terms of headwinds in the industry, we see write offs stay in line with our averages historically, which is a which means we have a stronger portfolio today as we've had in the past.
Yes. And maybe one last thing to just to note on that as we think about kind of the multi use and that driving the big change in the provision. Overall, our portfolio has grown about 8% and that multi use component is growing at a lower rate. It's about 3% growth this year.
And about 7% of the total portfolio.
So thank you. We'll go ahead and take one more question.
Our last question comes from Stanley Elliott with Stifel. Your line is open.
Good morning, everyone. Thank you for fitting me in. Can you talk about the engaged acres on a regional basis? And then how quickly could some of these technologies start to drive that Engage component in South America and other markets?
Yes. I mentioned that we have 145,000,000. We started 1st in the North American market and that's where a predominant number of those acres reside today. But the fastest growing engaged acres are places like Brazil, what you see are things of building out communications network that allow our machine population to get connected. We're taking more technologies in.
I mean it's incredible to see the growth rates around the world. The European market guidance technologies have adopted very fast in a very fast pace and now we have connectivity and growing across those acres. The real opportunity is what I mentioned in the production system discussion, customers move from farming to understanding how each pass impacts their cost structure and profitability and we are now generating both the data and insights that allow them to evaluate those on a near real time basis. So really big opportunities for both yield growth and cost management on the customer side being driven off of those engaged acres.
Yes. One thing I'd note, Stanley, is so $145,000,000 engaged acres that includes acres in all four regions as you think about how we talk about the world divided up into 4, a little over $105,000,000 in North America. So to Cory's point, we are seeing growth in that outside of North America piece. And as discussed, it's not just an absolute number in terms of growth in acres, it's the depth. And we think as we offer full solutions across the production system, there's opportunity to have deeper engagement there in the operations center.
Yes. If you look right now, I mean planters are lit up all around as prior to last night's rain, planters have been lit up all around the country and that's taking place and you can see those acres coming in and being able to evaluate down to the individual seed level what their placement, what their depth, what their singulation that allows them to understand how they invest in nutrients going forward that ultimately as they close the loop in harvesting and they take that section in and evaluate both their cost structure and yield, they'll be able to improve again year over year. So the opportunity is growing and more and more customers are adopting the technology that will help drive their business forward and competitiveness forward.
Thank you. Well, with that, we'll conclude the call. I appreciate everyone's time and we will be talking soon. Thank you.
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