Good morning, welcome to Deere & Company second 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 Huegel, Director of Investor Relations. Thank you. You may begin.
Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer, and Susan Karlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's second quarter earnings, spend some time talking about our markets and our outlook for the second half of fiscal 2015. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning. They can be accessed on our website at www.johndeere.com. First, a reminder. This call is being broadcast live on the internet and recorded for future transmission and use by Deere & Company. Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.
Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call. This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K 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/earnings under Other Financial Information. Susan?
John Deere announced second quarter earnings today, in our view, the results were impressive in light of the weak conditions plaguing the global agricultural sector. Our performance reflected the skillful execution of our operating plans and the contributions of a well-rounded business lineup. The company's Construction and Forestry and Financial Services businesses had higher results for the quarter, while our Agriculture and Turf operations remain solidly profitable despite lower demand for large models of farm machinery. We also saw benefits from our success holding the line on costs and assets, a fact that gives our performance a measure of resilience we have not seen in prior downturns. Another item weighing on our results was the strong U.S. dollar. It continues to put pressure on reported sales made outside of the United States and is expected to continue doing so for the rest of the year.
Now let's take a closer look at the second quarter in detail, beginning on slide three. Net sales and revenues were down 18% to $8.171 billion. Net income attributable to Deere & Company was $690 million. This includes a $38 million after-tax gain associated with the previously announced sale of our crop insurance business. EPS was $2.03 in the quarter. On slide four, total worldwide equipment operations net sales were down 20% to $7.4 billion. Price realization in the quarter was positive by two points. Currency translation was negative by five points. Turning to a review of our individual businesses, let's start with Agriculture and Turf on slide five. Sales were down 25% in the quarter-over-quarter comparison. Lower sales were recorded in all regions of the world, but the decrease was primarily due to lower shipment volumes of large ag equipment in the U.S. and Canada.
Also hurting sales in the quarter was the negative impact of foreign currency exchange. Operating profit was $639 million. The division's incremental margin in the quarter was 31%, quite respectable considering the decrease in large ag sales. Before we review the industry sales outlook, let's look at fundamentals affecting the ag business. Slide six outlines U.S. farm cash receipts, which in spite of softer commodity prices, remain near historically high levels, thanks to help from record livestock receipts. As a result, our 2014 forecast calls for cash receipts of about $418 billion, up about 1% from 2013 and the highest level ever recorded. Given the record crop harvest of 2014, and consequently, the lower commodity prices we're seeing today, our 2015 forecast calls for cash receipts to be down about 6%. Of note, crop receipts for 2015 are forecast to be about 23% lower than 2012's record.
On slide seven, global grain stock-to-use ratios remain at somewhat sensitive levels, even after the abundant harvest of the past two years. Global grain and oil seed demand remains strong, while supplies are now fully adequate. Even so, unfavorable growing conditions in any key region of the world, as well as unknown impacts from any geopolitical tensions could lower production, reduce stocks-to-use ratio, and result in prices quickly moving higher. Our economic outlook for the EU 28 is on slide 28. Is on slide eight, I'm sorry. Economic growth continues in the region, although at a slow pace. Grain prices appear to be stabilizing at levels near the long-term average. While livestock margins remain at good levels, dairy margins are being squeezed. As a result, farm machinery demand in the EU region is expected to be lower for the year.
On slide nine, you'll see the economic fundamentals outlined for other targeted growth markets. In China, the government continues its investment in ag equipment subsidies, but the growth rate has slowed. This, as well as the continued slowdown in economic growth and lower commodity prices, has led to a decrease in forecast industry sales. Turning to India, the 2015 monsoon season rainfall is expected to be below normal. That, on top of last year's relatively dry monsoon season, will result in lower overall agriculture output. In the CIS, continued deterioration of economic growth and further tightening of credit continue to weigh on equipment sales. Notably, Western equipment manufacturers are being heavily impacted by the weak Russian currency and geopolitical uncertainties. Shifting to Brazil, slide 10 illustrates the value of agricultural production, a good proxy for the health of agribusiness.
Ag production is expected to decrease about 11% for the year in U.S. dollar terms due to lower global commodity prices. With the weak real, the value of production is much more attractive in the local currency as the price for which farmers sell crops is set in U.S. dollars but paid in Brazilian real. Even with the recent drop in prices, Ag fundamentals remain positive for grains. On balance, though, farmer confidence in Brazil is lower as a result of economic uncertainty and political concerns in the country, leading to lower equipment purchases. Slide 11 illustrates eligible finance rates for Ag equipment in Brazil. Eligible finance rates for Ag equipment through the end of June increased 3% in April to 7.5% and 9%, depending on a farmer's revenues, with no change on the required down payment.
Uncertainty over the 2015-2016 Ag budget, as well as concerns about possible further increases in interest rates, are also weighing on farmer confidence. Our 2015 Ag and Turf industry outlooks are summarized on slide 12. Lower commodity prices and falling farm incomes are putting pressure on demand for farm equipment, especially larger models. At the same time, conditions in the livestock sector are positive, providing support to sales of small and midsize Tractors. As we refine our forecast of market conditions, we now expect industry sales in the U.S. and Canada to be down about 25% for 2015. The EU 28 industry outlook is down about 10%, unchanged from last quarter, due to lower crop prices and farm incomes, as well as pressure on the dairy sector. In South America, industry sales of Tractors and Combines are now projected to be down 15%-20% in 2015.
The decline in our outlook is a result of economic uncertainty in Brazil, the questions surrounding government-sponsored financing noted previously, and potential currency movements. Shifting to Asia, we now expect sales to be down modestly. In the CIS, we continue to expect industry sales to be down significantly due to economic concerns, limited credit availability, and the weak ruble. Turning to another product category, industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat to up 5% in 2015, no change from our prior forecast. Putting this all together on slide 13. Fiscal year 2015 Deere sales of worldwide Ag and Turf equipment are now forecast to be down about 24%, including about five points of negative currency translation. The one-point change in the forecast from last quarter is all attributable to the impact of foreign currency exchange.
The Ag and Turf division operating margin is now forecast to be about 8%. Before turning to construction and forestry, let's take a look at our all-new 8000 Series Self-Propelled Forage Harvester on slide 14. After 20 years of incremental changes to our SPFH product line, it represents a complete update with a total of 5,500 new part numbers. The new machine addresses the needs of livestock and dairy customers, as well as biogas producers for higher efficiency and productivity. It offers innovative features such as field guidance products and smart unloading systems, as well as a new cab- Combine to increase performance and uptime and decrease the cost of ownership while adding comfort for the operator. Earlier this year, the 8000 Series won the 2015 Forage Harvester Machine of the Year at SIMA, the Paris International Agribusiness Show.
The 8000 Series forage harvester, added to our lineup of self-propelled wind rowers and our recent entry into the large square baler business, better positions Deere within the hay and forage market. Let's focus on Construction & Forestry on slide 15. Net sales were up 2% in the quarter, and operating profit was up 43%. The division's incremental margin was about 173%. Moving to slide 16, looking at the economic indicators on the bottom part of the slide, the economy continues to move forward. GDP growth is improving, unemployment is falling, construction hiring is on the increase, and housing starts are expected to exceed 1 million units this year. In contrast, we are seeing weakening conditions in the energy sector and energy-producing regions. Deere's Construction & Forestry sales are now forecast to be up about 2% in 2015. Currency translation is forecast to be negative by about 3 points.
The change in our forecast from last quarter is due to lower sales outside the U.S. and Canada, as well as the impact of foreign currency exchange. Global forestry markets are expected to be about flat on the heels of a 10% increase in 2014. C&F's full-year operating margin is projected to be about 11%. Before moving to Financial Services, the first Deere-designed and -built production class dozer is shown on slide 17. The Model 1050K is the largest crawler dozer John Deere has ever produced and is part of our growing production class equipment portfolio. It was introduced earlier this year for mass earthmoving and quarry operations. Its dual-path hydrostatic transmission, a unique feature to this size class, provides better fuel economy and maneuverability. Other improvements include a higher power-to-weight ratio, which provides more pushing power and more turning power with full loads.
In addition, the 1050K Crawler is equipped with John Deere WorkSight Telematics to allow technicians to connect to the machines wirelessly, reducing the repair cycle time, the overall cost of repair, and customer downtime. Let's move now to our Financial Services operations. Slide 18 shows that the Financial Services annualized provision for credit losses as a percent of the average owned portfolio was eight basis points at the end of April. This reflects the continued excellent quality of our portfolios. The financial forecast for 2015 now contemplates a loss provision of about 14 basis points versus nine basis points in 2014. The year-over-year increase is a reflection of the unsustainably low loss level of the last four years. For reference, the 10-year average is 26 basis points, and the 15-year average is 43 points.
Moving to slide 19, worldwide Financial Services net income attributable to Deere & Company was $170 million in the second quarter versus $148 million last year. Net proceeds from the sale of the crop insurance business benefited the division's second quarter income by about $27 million after tax. Earlier, I mentioned a $38 million enterprise gain on the sale. The difference is largely due to the enterprise utilization of capital loss carryforwards, not originating at the Financial Services division level. 2015 net income attributable to Deere & Company is forecast at about $630 million, no change from our previous forecast. Slide 20 outlines receivables and inventories. For the company as a whole, receivables and inventories ended the quarter down $1.6 billion. That was equal to 31.4% of prior 12-month sales, compared with 32.1% a year ago.
The decrease, which came entirely from Ag & Turf, is reflective of the aggressive way we have cut production in line with our 2015 outlook. We expect to end the year with total receivables and inventories down about $600 million. The decrease in the Ag division from prior guidance is due to reductions outside the United States and Canada and foreign currency exchange. Our 2015 guidance for cost of sales as a percent of net sales, shown on slide 21, is about 78%, unchanged from last quarter. When modeling 2015, keep these factors in mind. Price realization of about two points, favorable raw material costs, an unfavorable mix of product, and Tier 4 product costs. Looking at R&D expense on slide 22. R&D was down about 4% in the second quarter, including about three points of negative currency translation.
Our 2015 forecast calls for R&D to be down about 1% for the full year, including about three points of negative currency translation. The forecast reflects higher R&D spending in the second half of the year, which is the typical pattern. Moving now to slide 23. SG&A expense for the equipment operations was down about 14% in the second quarter, including about four points of currency translation. Our 2015 forecast contemplates SG&A expense being down about 11%, with Landscapes, Water, and currency accounting for about six points of the change. Similar to the situation with R&D spending, SG&A expense is forecast to be higher in the second half of the year. Turning to slide 24. Pension and OPEB expense was up about $15 million in the quarter, and it's forecast to be up about $70 million in 2015. On slide 25.
The equipment operations tax rate was approximately 30% in the quarter, primarily due to mix of income and discrete items. For the remainder of fiscal 2015, the projected effective tax rate is forecast to be in the range of 34%-36%. Slide 26 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $3.4 billion in 2015. The company's third quarter financial outlook is on slide 27. Net sales for the quarter are forecast to be down about 17% compared with 2014. This includes about two points of price realization, with unfavorable currency translation of about six points. Turning to slide 28 and the full-year outlook. The forecast now calls for net sales to be down about 19%. Price realization is expected to be positive by about two points. Currency translation is negative, about four points.
Finally, despite strong currency headwinds, our full-year 2015 net income forecast is now about $1.9 billion, an increase from our previous guidance. In closing, John Deere expects to be solidly profitable in 2015. In fact, the year is forecast to rank among our stronger ones in sales and profits, even with the pullback we're experiencing in the farm sector. Such an achievement says a lot about the progress we've made establishing a wider range of revenue sources and a more durable business model. All in all, we remain confident in the company's present direction and in its ability to meet customer needs for advanced machinery and services in the future. I'll now turn the call back over to Tony.
Thank you, Susan. Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. As a reminder, in considerations of others and our hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue. David?
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press *1 on your touch-tone phone. Please be sure your phone is unmuted in order to ask your question. One moment please for our first question. The first question today comes from Vishal Shah of Deutsche Bank Securities. Your line is open.
Yeah. Hi, thanks for taking my question. Maybe just talk a little bit about how you see the inventory levels at the dealers and what you're seeing in the used equipment pricing market.
Yeah. If you think about used equipment, obviously, overall, and I assume you're referring mostly to large ag equipment.
That's right.
Yeah. If you look at dealer inventory, certainly we took last year again, as a reminder, we pulled a lot of inventory out. As Susan Karlix pointed out in the opening comments, we're down pretty significantly year-over-year as we ended the quarter this year with receivables and inventory, we're down almost $2 billion year-over-year for ag and turf. Certainly, there's a lot of conversation about used equipment levels as well. We would tell you, as you look at large ag in total, certainly, we're always concerned about used equipment. If you ask us, are we more concerned today than we were three months ago or six months ago? The answer would be no. We continue to be very focused on that. We believe we're materially in better position than our competition.
We're really focusing on lowering those used inventory levels, but also protecting resale values as we do that. We believe we're on the right path. We feel pretty good about the direction we're heading with used equipment, but certainly, we have a lot of work ahead of us, continuing to pull that down.
That's helpful. Just one other question. Can you maybe talk about what percentage of?
Yeah, I'm going to have to ask you to get back in the queue. I'm sorry.
Sure. That's okay.
Next caller.
Your next question comes from Andy Casey of Wells Fargo Securities. Please go ahead with your question.
Thanks. Good morning.
Good morning.
Quick question on the modest improvement of the U.S. and Canada outlook. Is that all driven by lower horsepower, or are you seeing better order intake than previously expected in the high horsepower equipment sector?
Yeah, I would not characterize that as a significant improvement, really, in any of our businesses.
Okay.
I would argue it's a bit of a tweaking. As Susan pointed out, refining the forecast. Certainly, we have not changed our outlook on large ag business. We're continuing to see that down closer to the 40% range in the industry, not a significant change really anywhere, but certainly not with large ag.
Okay. Thank you.
Okay, thank you. Next caller?
Your next question comes from Jerry Revich of Goldman Sachs. Please go ahead with your question.
Hi. Good morning.
Good morning.
Tony, can you talk about the raw material benefit that you folks saw in the quarter and what's factored into guidance? Can you calibrate us on the transactional impact of currency along those lines as well, please?
Okay. I'll take the first question. If we want to talk about currency, we'll have to have someone get back in, either get back in queue or we'll have someone else pick up on that. As you know, we don't disclose specific guidance in terms of $ impact from raw materials. A couple of years ago now, we switched and started providing guidance on overall cost of sales. Certainly, that has been a benefit in the first half of the year. I would tell you, as you look at the second half of the year, certainly for Ag and Turf , but really on the overall business, it's slightly less benefit in the back half of the year. Before anyone gets too excited about that, it's not that we're implying that steel costs and other commodity costs necessarily go up.
Think about the timing of our general purchases and our production on any year. We tend to build inventory in the first half of the year sequentially, and then it comes down in the back half. You tend to get the benefit earlier in the year in some of those material costs. Continued benefit from material costs year-over-year. If you're looking first half, second half, there is actually a slight difference, a slightly lower benefit in the back half in our implied guidance. Okay.
Thank you.
Thank you. Next caller?
Next question comes from Mircea Dobre of Robert W. Baird. Please go ahead with your question.
Yeah, good morning, everyone.
Morning.
Tony, can you maybe range us in terms of your expectations for full year margins in Construction versus Ag and Turf?
Yeah. If you look at the margin, I think Susan pointed out on the call, we are looking for CNF margins to be about 11% for the full year. Ag and Turf would be about 8%. No change on CNF from our prior forecast. A slight increase actually for Ag and Turf. We had previously forecasted about 7%.
Thanks.
Okay, thank you. Next caller?
Next question comes from David Raso of Evercore ISI. Please go ahead with your question.
Thank you. Given your new inventory and receivable forecast, where do you see production versus retail heading into 2016? If you can break it out between Ag and Turf and Construction and Forestry, because obviously I assume that must have been baked into why you altered some of the receivable and inventory forecasts.
Yeah. As you look at receivables and inventory, and specifically we'll start with ag and turf. If you look at the change in the forecast from last quarter to this quarter, I would tell you it does not relate to the U.S. and Canada. It relates to both receivables and inventory outside of the U.S. and Canada, as well as some FX impact quarter-over-quarter. It's mostly about those receivables outside of the U.S. and Canada. It's implied already and not to be forgotten that we pulled a lot of receivables and inventory out in 2014 as we ended the year. Certainly in our initial, in our original budget guidance, we had a pretty healthy level of receivables and inventory continuing to come out on ag and turf as we seek to underproduce the retail environment through the year.
We have underproduced year-to-date, and we would continue, especially as we go into the back half of the year, we'll be underproducing the retail environment and continuing to bring those field inventories down, both on new as well as providing some additional support that way for our dealers on used equipment. When you think about C&F, remember we talked about it early on. Much of that increase, I mean, some of that is because of higher sales, of course. I don't want to imply there isn't any increase in field inventories. Much of that has to do with the change in some of the terms, and we think that will drive some higher levels of receivables.
Really, the reduction you saw in the quarter had more to do with refinement of what we think that impact will be from those terms changes versus really any kind of significant expectation in terms of a change in actual field inventory. That's really what's driving most of that as we look towards the end of the year.
Tony, just to my question, just so I'm clear on the takeaway. Is this forecast to set you up going into 2016, that whatever we think retail will be, you expect to produce in line with retail?
Our expectation for 2015 is certainly to produce under with the hope that in 2016 we will be able to produce to retail next year. Again, that's making a lot of assumptions on what 2016 would be as well. What I don't want to imply is that as you look at that reduction in receivables and inventory, that there is any kind of signaling of what 2016 may or may not be, because again, that change was not related to U.S. and Canada.
Totally understand. I just want to make sure the spirit of that forecast is to set you up into 2016.
Yeah
where there isn't necessarily more inventory reduction. The spirit is to enter 2016.
That has been our expectation all year, and that has not changed.
Thank you so much. I appreciate it.
Thank you. Next caller.
Next question comes from Steve Fisher of UBS Securities. Please go ahead with your question.
Great. Thanks. Good morning. A bigger picture on ag. We're still seeing most ag markets down around the world. Looking forward, give us your sense for which ag market you think has the best potential to turn positive first, and why.
That's a tough question at this point. Actually, I think, if you look at the U.S. and Canada markets, for example, I think it really implies the overall commodity markets in general. If you talk to our chief economist, he would say we're really in kind of a year-to-year type of mode right now. As frustrating as it may be for people to hear, it really is about what happens this summer with the current crop that's in the ground. If you're going to assume another year of better than average weather where yields are above trend yield, certainly it's going to be a challenging argument to make that the 2016 would certainly improve really anywhere around the globe.
If you look back at what would the implications be of trend yields or a little less than ideal weather or average weather, and you see below trend yields, that story changes pretty dramatically because we would argue that you're not, while you certainly have ample supply of commodities, and you're seeing that reflected in commodity prices. There isn't a glut of commodities either. If you underproduce demand going through the 2015 crop and going into 2016, we believe prices would be very responsive to that. As cash receipts would recover in that type of environment, you would see sales begin to recover as well. That's close to, and I can't pinpoint a certain geography specifically, I would say that's probably a pretty consistent global statement that we would make.
Okay. Thank you.
Thank you. Next caller.
Next question comes from Jamie Cook of Credit Suisse. Please go ahead with your question.
Hi. Good morning. I guess just can you just comment on the order book where we stand today versus expectations and where we were last year by combining seven, eight, or nine, et cetera? Thanks.
You bet. As you think about order book, I think in general, we would continue to say versus our forecast. Obviously, we're forecasting a much lower level of orders. Versus that forecast, we continue to be in very good shape compared to last year in terms of the order coverage. Certainly combines at this point in the year with the early order program, we're well over 90% covered, and the bigger question tends to be things like large tractors. If you think about 7000 Series Tractors, today we would be really 7s, 8s, and 9s for this year. We're out into early October in terms of availability, and these are the wheel tractors, not track tractors. Across the board on wheel tractors, we'd be early October. Last year on 7s, that would have been late August.
8s would have also been early October, so consistent, and on 9s, it would have been mid-June.
Okay
In terms of availability. Our order book is actually on, again, much lower order levels or much expectations. As an availability perspective, in very good shape. I didn't mention the track tractors. Those would also be on 8s, would be out into early October. 9s would be in August, which would be a little bit behind where we were last year. Last year, we would've been out into September.
All right. Great. Thank you for the color.
Great. Thank you. Next caller.
Next question comes from Ann Duignan of J.P. Morgan. Please go ahead with your question.
Yes. Hi. Good morning.
Hi, Ann.
Yeah, just clarification first, if I can, just on David Raso's question. Your point is that until we get through July and August, July and August make or break the crop. Until we get through those months, we really cannot even begin to forecast what 2016 might look like. I think you would agree with that.
Yes.
Okay. My real question is, if you look at this whole trend in the industry towards leasing, can you talk about the increase in your equipment leasing? It was up about $1 billion, about 31% year-over-year. Talk about the risks on residual values when those leases expire and why this trend towards leasing versus selling.
Sure. That's a great question. Certainly, you're right. We are seeing a move towards more leasing. We think some of that has to do with giving some of the lower margins customers are facing as well as, again, when you purchase the equipment, you tend to get a better advantage from a tax deduction perspective. As margins are a bit lower, that isn't as attractive always. There's also questions around Section 179 and bonus depreciation. Will we really have that or not? We think that's factoring in to some of those decisions in terms of a move towards leasing. Really as we look at it, the key here is making sure that residuals, and I think as you implied, making sure that residuals are valued properly. That tends to be what we focus on.
As you know, we tend to be relatively conservative on the setting of residual values. We continue to do that to date. We certainly evaluate those on a regular basis. We haven't had any kind of write-downs or accruals that we've had to make against the residual values of that leasing portfolio. That's really where the risk is it does move some risk to the financial services organization in the sense of, if residuals would drop dramatically as they come off of lease, that could create some challenges there. Couple of things I would point out, though, related to that is, one, while it's increasing, it's still a relatively small part of our total portfolio. Just to keep that in perspective.
The other thing is, it's one of the reasons why it's so important for us as we manage used inventories in general, to make sure we're protective of pricing on that used equipment. Not only does it help the value of that used equipment. It helps certainly our dealers, it's supportive there, but it's also supportive of the financial services organization in the sense of making sure we're protecting those residual values as we go through this downturn, and as we continue to focus on moving those used equipment levels lower. It is a balancing act in terms of looking to reduce those and still being protective of those values. Anyway, thank you, and we'll move on to the next caller.
Next question comes from Ross Gilardi of Bank of America Merrill Lynch. Please go ahead with your question.
Yeah, thanks. Good morning.
Hey, Ross.
I'm just wondering if you could talk a little bit more about Brazil, Tony. I mean, soybean fundamentals seem pretty poor. You've cut your price outlook there. The borrowing rates are up sharply. You tweaked your outlook a little bit more negative, but it doesn't seem like anything major. Does the situation feel like it's still in the process of deteriorating, or are you seeing any signs of stabilization at the bottom?
If you think about Brazil on the ag side, it's an interesting situation this year with the outlook that we have in place. Because if you look at, I would actually turn around a little bit with the soybean prices, while in U.S. dollars, certainly it's down when you consider the impact of currency, because remember, Brazilian farmers sell in U.S. dollars and then convert back to local currency. Their cash receipt in local currency and their margins, because most of their inputs were purchased in local currency, and to the extent that they were purchased in U.S. dollars, it would have been before the currency shifted last fall. When you look at margins on the crop that was recently harvested, they're pretty attractive levels, which is in stark contrast to the outlook.
Really what we're seeing in our outlook is, in our view, a concern around the general economy in Brazil. You're seeing that in some of the increased rates of FINAME financing. I would tell you, much of that is going to be dependent on what happens as we move forward with that Brazilian economy. There's still some questions. You'll note our slides end in June in terms of what the FINAME financing rates are because they haven't been announced beyond that. We'll be hearing, hopefully in early June is the expectation now. Not just what the FINAME financing rates will be for both PSI and Moderfrota, but also what down payment levels are going to require. Will they keep Moderfrota at the 10%? As importantly, what's the overall budget? Will they change that overall budget?
We'll have a much better feel for what happens as we move forward with Brazil, at least in the short term. Again, I'd remind you, this is about a cycle. Longer term, we continue to believe that we have great opportunity in Brazil as agricultural output continues to grow, as acreage continues to grow, and certainly, as our market share continues to grow. Okay, next caller.
Next question comes from Eli Lustgarten of Longbow Research. Please go ahead with your question.
Good morning, everyone. Brilliant quarter, actually.
Good morning.
Can we talk a little bit about the change in construction equipment, the lower sales and outlook, and what you're seeing in the marketplace? 2% is probably a little bit disappointing type of gains and there's some currency. What are you seeing in the marketplace, the impact of oil and gas, and are we basically looking at a flattish environment for you guys for a while?
Yeah. I think it's important to point out and remind you, as Susan pointed out, I guess, in her comments, that the reduction really is not related to the U.S. and Canada. It's more about sales outside of the U.S. and Canada, as well as FX. Within the U.S. and Canada, certainly we're seeing in those areas that are heavily influenced by energy, certainly seeing lower orders and business slowing down somewhat. The overall market continues to be fairly attractive in terms of what we saw at the beginning of the year as well. Again, as a reminder, coming off of a very strong 2014. As you see those growth rates slow as we go into the back half of the year, remember, we move into much tougher compares in that division.
When you look at markets like Brazil, and I just mentioned that in my last commentary on the ag sector, and I would say, certainly the overall business there is down significantly while we have our new facilities and we continue to look for market share increases in Brazil as we go through 2015. Those market share increases just are not going to offset the impact of the overall reduction in the industry. Again, those are some of probably the major reduction quarter-over-quarter is what our expectation is in Brazil. A variety of overseas locations really have weakened, in our view, over the quarter. That's primarily what's driving that difference.
You're able to hold profitability is the issue.
Profitability has not, as you look at that, profitability has not changed. We're still forecasting the same 11% margin. Okay?
All right. Thank you.
Let's move on to the next caller. Thank you, Eli.
Next question comes from Nicole DeBlase of Morgan Stanley Investment Research. Please go ahead with your question.
Yeah, thanks. Good morning, guys.
Morning.
My question is around the competitive environment. I guess, what are you guys seeing on the pricing front out there, both with respect to new and used equipment? I think Vishal asked the question, but I am not sure if that part of it got answered. Not just ag, but also if you are seeing any increase in competitive pricing within construction.
Competitive pressure certainly, we talked about that with the Ag and Turf Division, and it is not a surprise given the level of inventories that our competition has. As a reminder, we went into the year on large ag, if you look at inventory as a % of sales, about half of where our competition was. We continue to say on large ag equipment that our inventory levels are, as a % of sales, about half of what the rest of the industry would be. Certainly, that puts pressure because those inventories need to come down. You do see some pricing pressure. There is a variety of methods that they may choose to use to do that. Certainly, we continue to see that. We talked about it last year in Construction and Forestry, both on our dealer sales as well as with the independent rental business.
A lot of pricing pressure. I would certainly tell you year-over-year, that pricing pressure has not reduced. Now, we still continue to forecast, even in that environment, a two-point price realization. That is for the enterprise. I would tell you both divisions are contributing to that, both Ag and Construction. While it is a tough environment, we continue to focus on bringing value to customers that enable us to get some of that price realization.
Okay, thank you.
Thank you. Next caller.
Next question comes from Rob Wertheimer of Vertical Research Partners. Please go ahead with your question.
Hi, good morning. I'm trying to understand North American row crop inventory. I totally get that the industry is twice as high as you do. Industry dealer inventory, I think in units is up year-over-year. I think your dealers are up year-over-year in units for row crops specifically. In sales, I think your retail are down like 20%. I'm trying to understand why isn't your inventory down? Forgetting the industry is worse, why isn't your inventory down? Because I thought everything was matched to a farmer. Maybe there's just a pulse I'm not understanding or something like that. How do you get to the down 40% if it seems like you're down 20% or less for the first six months?
As you think about row crop Tractors, I think the first thing to keep in mind is the data that's made public is 100 horsepower and above for AEM data. In terms of row crop Tractors, that break down to be more 180 to 200 horsepower and above. When you look at the AEM data, it gets clouded because you have our 6000 Series Tractors in those numbers. You have some of our 5000 Series Tractors in those numbers, and certainly, those are tied much more closely to the livestock industry. We've talked about year-over-year seeing some strength in livestock, that does cloud that picture. I would point out, those 6000 Series Tractors come from Germany. While we talk about building to retail order, that is on large ag. That would be our sevens, eights, and nines.
That certainly is the case on those. I think that's part of what is causing maybe some of the confusion. The other thing to keep in mind, too, is what's reported in AEM is what inventory the dealer owns at the end of the month. You do get some distortion. Not all of that is inventory or stock at the dealer. You can have retail sold inventory or tractors that are marked as retail sold counted in those numbers. From the day it ships from our factory until it's delivered to the customer, it does get reported as dealer inventory. Again, that can distort things. I'd also caution anytime, and we've talked about this for years, to be very careful about looking at any single month, and especially this year, as you look at year-over-year comparisons through the second quarter.
Remember last year, our 7000 Series Tractors and 8000 Series Tractors were converting to final Tier 4. You had different levels of inventory as you prepared for that transition and certainly as you came out of that transition. It can distort the year-over-year comparison. We would continue to tell you from a new inventory level perspective, we're quite comfortable. In large ag, we continue to have the lowest levels in the industry, and that's not expected to change as we go through the year. Again, that being said, as we talked about earlier, we are underproducing retail, which we think will help lower inventories even further as we go through the year.
Hey, Rob, this is Raj. Let me add a couple of points, okay? If you just step back, think of the industry environment we are facing and what we have done with respect to new and used inventories. We are facing, as you know, the deepest downturn in North American large ag equipment that's seen in 25 years. As Tony mentioned, we've been working on our both used and new. On used combine volumes, our position today is less than where our used combine volumes were a year before and two years before. Okay. We have confidence that we'll work down our row crop used inventory as well.
As for the new row crop equipment sold to the corn and soybean producers in the U.S. and Canada, if you take the 7000 and 8000 Series Tractors in the first half of this year, our shipments in the U.S. and Canada came down with the decline in retail and a lot further as well. We actually undershipped retail sales by over 20% in the first half. We are forecasted to undership retail for the second half as well. The point I'm trying to make is we are managing our inventories aggressively, while at the same time, as Tony mentioned, keeping the long-term in mind. Thanks for the question.
Next caller.
Thank you. Appreciate it.
Next question comes from Michael Shlisky of Global Hunter Securities. Please go ahead with your question.
Good morning, guys. I wanted to touch on Brazil as well, especially on your Combine shipments. Some data coming out showing that your shipments were actually down quite a bit in the second quarter here. I was wondering if you could maybe comment on your company's retail sale versus shipments in Brazil, and whether they've been in line with your expectations for the quarter.
Yeah, that's a good point. When you think about the information that's available publicly in Brazil, as a reminder, that is shipments, not retail sales. While we certainly have continued to push for the industry to move to retail sales, others in the industry haven't been supportive of that change. It can distort things. We would tell you that certainly from a retail sales perspective, things are moving forward as we would expect. We continue to take market share. It's showing, I think, even in the shipment numbers, but certainly from a retail sales perspective, our market shares continue to grow in Brazil, especially on Tractors. We feel pretty comfortable with where we're at on inventories and as well as the retail sales from a market share perspective in Brazil. Okay.
Great. Thanks, Tony.
You bet. Thank you.
Next question comes from Seth Weber of RBC Capital Markets. Please go ahead with your question.
Good morning. This is Emily McLaughlin on for Seth.
Hello.
Hello, can you hear me?
Yep, I can.
Okay. Just wanted to see if you guys had any update to some of the countries in Europe. Are any better or worse than what you were thinking three months ago?
I think probably if you look at Europe, maybe the most noteworthy thing is you're starting to see at least some glimmers of hope from just a general economy perspective in some countries. If you look at the ag industry, we didn't change the overall outlook. I would tell you from a country-by-country perspective, really not any kind of significant changes.
It's a year that's really moving forward fairly consistently with what we had anticipated early on. Again, just not really much noteworthy in terms of a year-over-year change.
Okay, great. Thank you.
Next caller.
Next question comes from Larry DeMaria of William Blair & Company. Please go ahead with your question.
Okay, thanks. Good morning. Just curious, you guys have talked a lot about MyJohnDeere and JDLink over the last couple of years. How did the MyJohnDeere platform do this planting season? Have been collecting data for farmers, are they using it or blocking the data collection? Related to that, how did the new high-speed planter do this year into planting season versus expectations? Thanks.
Yeah. Unfortunately, I'll take the first question. If you think about the MyJohnDeere, certainly it is being used. Things have gone well with that from our perspective. Obviously, we continue to work with our customers to improve that process. It is online, and it is gathering data, and I think it's mostly being used, obviously, to gather prescription information and download into the machines, given that it's more planting season. Certainly, would expect customers to use that on the back half of the year as they gather harvesting information as well. Again, we think it's off to a good start and feel pretty confident that that's going to be a real value enhancer for our customers as we move forward.
Hey, Larry, this is Raj. I would also add that we watch the metrics on MyJohnDeere, the number of copy acres and a number of other things like that. So far, we're very encouraged by the results that we're seeing.
Okay, great. Could you put some numbers to that in terms of acreage that it's being used on?
We at this point have not disclosed any kind of acreages that's covered or anything along that line. Okay, next caller.
Next question comes from Brian Sponheimer of Gabelli & Company. Please go ahead with your question.
Hi, good morning. Thanks for fitting me in here.
Sure.
Just one clarification on the guidance. It's inclusive of the gain on the landscapes business, right?
On-
The net income increase is inclusive of the gain on sale.
On the sale of the insurance.
I'm sorry. The insurance, rather, yes.
Crop insurance.
The crop insurance.
Crop insurance, rather.
Yes, it is.
I'm just curious about from a planning, what type of weather is really kind of the 50%-
Brian, I would-
base point for how you do your planning, and what's the plus/minus on what would constitute a good year or a bad year as it relates to how you see the next six to 12 months shaping up?
Yeah. First of all, I want to make sure I point out, by the way, that gain was implied in our forecast last quarter as well for the-
Okay, thank you.
for the year. That wasn't necessarily a full change as we go into the rest of the year. The other thing, at this point, you assume average weather, you assume trend yields until you get data that can potentially change that. We would continue to use trend yield in our internal forecasting at this point, recognizing that you can certainly see variation from that. We'll start adjusting that as we go through the summer and see weather develop.
All right. Thanks, Tony.
Yep, thank you. The next question will have to be the last question we can take for the call.
Your last question today comes from Brett Wong of Piper Jaffray & Company. Please go ahead with your question.
Thanks for fitting me in here at the end, Tony. Appreciate it.
You bet.
Just wondering, I understand there's a lot of uncertainty around what 2016 will look like, and if we do have a strong crop this year pressuring a potential recovery, what other levers can you pull in order to kind of support margins?
Yeah. Certainly, we would continue to look at, from a cash perspective, our CapEx would be one area we continue to look at. Although, we did pull that down quite a bit. You continue to look at options with SG&A and R&D. We've talked about when C&F went through their super trough in 2009. When you get into levels that you didn't anticipate, you tend to also find levers that you didn't necessarily anticipate. Depending on the perspective, we kept R&D pretty flat year-over-year in our outlook. That would be something you would continue to look at, and that, as we've said all along, that's something you balance in terms of long-term needs that wouldn't be necessarily a desirable lever. We would continue to look at those things that we could pull out as we go through the year.
I would also point out, if you see a large incremental drop, that creates challenges given where our capacity, where our facilities are at today in terms of % of capacity utilization. Again, we certainly, as we look at the outlook for next year, unless you're going to argue for better than average weather, it's hard to argue that you're going to see a significant drop in commodity prices, given the strength in demand that we continue to see on commodities. That would be one area I would make sure to remind people. Okay. With that, we will conclude the call. I think it's important maybe to step back a little too and think about the year that we're forecasting.
If you look at our guidance for 2015 and put that in perspective, in a historical perspective, if you look at what we're forecasting for equipment operations net sales, if you look at what we're forecasting for cash flow from operations in equipment operations, as well as our EPS overall, it puts us in a top five year in all three of those categories in terms of what this guidance provides. When you put that in context of where our largest business, where the end markets went this year in terms of the significant drop, we think that's really demonstrating again the power of the overall portfolio, the strength of that SVA model, and our ability to continue to drive very solid earnings even in lower end markets. With that, we'll be around for the rest of the day to take any additional questions you may have.
Thank you for participating.
This does conclude today's conference. All parties may disconnect at this time.