Good morning, and welcome to Darrin and Company Second Quarter Earnings Conference Call. I would now like to turn the call over to Mr. Tony Hiegel, Director of Investor Relations. Thank you. You may begin.
Hello. Also on the call today are Raj Kalitzer, our Chief Financial Officer and Susan Carlix, our Manager of Investor Communications. Today, we'll take a closer look at Deere's 2nd quarter earnings, then spend some time talking about our markets and our outlook for the second half of fiscal twenty fifteen. After that, we'll respond to your questions. Please note that slides are available to complement the call this morning.
They can be accessed on our website at www. Johndeere.com. First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and 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 and A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
This call includes forward looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8 ks and periodic reports filed with the Securities and Exchange Commission. This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America or GAAP. Additional information concerning these measures, including reconciliations to 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 2nd quarter earnings today and 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 remained 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 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 Q2 in detail beginning on slide 3. Net sales and revenues were down 18 percent to $8,171,000,000 Net income attributable to Deer and Company was $690,000,000 This includes a $38,000,000 after tax gain associated with the previously announced sales of our crop insurance business.
EPS was 2 point quarter. On slide 4, total worldwide equipment operations net sales were down 20% to $7,400,000,000 Price realization in the quarter was positive by 2 points. Currency translation was negative by 5 points. Turning to a review of our individual businesses, let's start with Agriculture and Turf on slide 5. 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 United States and Canada. Also hurting sales in the quarter was the negative impact of foreign currency exchange. Operating profit was $639,000,000 The division's decremental 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 6 outlines U.
S. Farm cash receipts, which in spite 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 $418,000,000,000 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 20 12 record.
On slide 7, global grain stocks to use ratios remain at somewhat sensitive levels even after harvest of the past 2 years. Global grain and oilseed 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 tension 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 8, 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 level, 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 9, you'll see the economic fundamentals outlined for other targeted growth markets. In China, the government continues its investment in ag equipment 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. However, with the weak real.
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% 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 income 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 midsized 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 income as well as pressure on the dairy sector. In South America, industry sales of tractors and combines are now projected to be down 15% to 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 5 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 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 8,000 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 which combined to increase performance and uptime and decrease the cost of ownership, while adding comfort for the operator. Earlier this year, the 8,000 Series won the 2015 Forage Harvester Machine of the Year at CEMA, the Paris International Agribusiness Show. The 8,000 Series Forage Harvester added to our lineup of self propelled windrowers and our recent entry into the large square baler business better positions Deere within the hay and forage market.
Now let's focus on Construction and 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 1,000,000 units this year.
In contrast, we are seeing weakening conditions in the energy sector and energy producing regions. Deere's construction and forestry producing regions. Deere's construction and 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 and F's full year operating margin is projected to be about 11%. Before moving to Financial Services, the 1st Deere designed and built production class dozer is shown on slide 17.
The Model 1050 ks 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. Addition, the 10 50 ks crawler is equipped with John Deere worksite 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 8 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 a reflection of the unsustainably low loss levels of the last 4 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 and Company was $170,000,000 in the 2nd quarter versus $148,000,000 last year. Net proceeds from the sale of the crop insurance business benefited the division's 2nd quarter income by about $27,000,000 after tax. Earlier, I mentioned a $38,000,000 enterprise gain on the sales. The difference is largely due to the enterprise utilization of capital loss carry forwards not originating at the Financial Services division level. 2015 net income attributable to Deere and Company is forecast at about 6 $30,000,000 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 $1,600,000,000 That was equal to 31.4 percent of prior 12 month sales compared with 32.1 percent a year ago. The decrease which came entirely from ag and 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 600,000,000 dollars 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 2 points favorable raw material costs and unfavorable mix of product and Tier 4 product costs. Looking at R and D expense on Slide 22. R and D was down about 4% in the 2nd quarter including about 3 points of negative currency translation. Our 2015 forecast calls for R and D to be down about 1% for the full year, including about 3 points of negative currency translation. The forecast reflects higher R and D spending in the second half of the year, which is the typical pattern.
Moving now to Slide 23. SA and G expense for the equipment operations was down about 14% in the 2nd quarter, including about 4 points of currency translation. 20 and currency accounting for about 6 points of the change. Similar to the situation with R and D spending, S and G expense is forecast to be higher in the second half of the year. Turning to slide 24, pension and OPEB expense was up about $15,000,000 in the quarter and is forecast to be up about $70,000,000 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% to 36%. Slide 26 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $3,400,000,000 in 2015. The company's 3rd 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 2 points of price realization with unfavorable currency translation of about 6 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 2 points.
Currency translation is negative about 4 points. Finally, despite strong currency headwinds, our full year 2015 net income forecast is now about $1,900,000,000 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 in 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 and A portion of the call. The operator will instruct you on the polling procedure. But 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. Your first question today comes from Vishal Shah of Deutsche Bank Securities. Your line is open.
Yes. Hi. Thanks for taking my question. Maybe just talk a little about how you see the inventory levels at the dealers and what you see in the used equipment pricing market?
Roughly half. Yes. So if you think about used equipment, obviously, overall, I assume you're referring mostly to large ag equipment. That's right. Yes.
So if you look at dealer inventory, certainly, we took last year again as a reminder, we pulled a lot of inventory out as Susan 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 $2,000,000,000 year over year for ag and turf. And certainly there's a lot of conversation about used equipment levels as well. And we would tell you as you look at large ag in total, certainly,
we
feel and we're always concerned about used equipment. If you ask us, are we more concerned today than we were 3 months ago or 6 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 we do that.
So 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 in terms of continuing to pull that down.
That's helpful. And just one other question. Can you maybe talk about what percentage
of Yes. I'm going to have to ask you
to get back in the queue. I'm sorry. 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 in the U. S.
And Canada outlook. Outlook. Is that all driven by lower horsepower? Or are you seeing better order intake than previously expected in the high horsepower sector? Yes.
I would not characterize that as a significant improvement really in any of our businesses. I would argue it's a bit of a tweaking, as Susan pointed out, refining the forecast. So but 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. And so 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? And then can you calibrate us on the transactional impact of currency along those lines as well please?
Okay. So, I'll take the first question. If we want to talk about currency, we'll have someone get back in either get back in queue or we'll have someone else pick up on that. And as you know, we don't disclose specific guidance in terms of dollar impact from raw materials. A couple of years ago now, we switched and started providing guidance on overall cost of sales.
But 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. Now 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.
So you tend to get the benefit earlier in the year in some of those material costs. So continued benefit from material costs year over year. But if you're looking first half, second half, there is actually a slight difference, slightly lower benefit in the back half in our guidance. Okay. Thank you.
Thank you. Next caller?
Next question comes from Mick Dobre of Robert W. Baird. Please go ahead with your question.
Yes. Good morning, everyone. Tony, can you maybe range us in terms of your expectations for full year margins in construction versus ekendorf?
Yes. So if you look at the margin, I think Susan pointed out on the call, we are looking for C and F margins to be about 11% for the full year. Ag and turf would be about 8%. So no change on CNF from our prior forecast, a slight increase actually for ag and turf. We 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? And 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 forecast? Yes. So as you look at receivables and inventory, and specifically we'll start with ag and turf.
As you look at the change in the forecast from last quarter to this quarter, I would tell you, it really it does not relate to the U. S. And Canada. It relates to receivables and both receivables and inventory outside of the U. S.
And Canada as well as some FX impact quarter over quarter, but it's mostly about those receivables outside of the U. S. And Canada. But it's implied already and not to be forgotten that we pulled a lot of receivables and inventory out in 2014 level of receivables and inventory continuing to come out on ag and turf as we seek to under produce the retail environment through the year. So we have underproduced year to date and we would continue especially as we go into the back half of the year, we'll be under producing 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 and F, remember we talked about it early on much of that increase and some of that is because of higher sales. Of course, I don't want to imply there isn't any increase in field inventories, but 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. And really the reduction you saw in the quarter had more to do with a 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. So that's really what's driving most of that as we look towards the end of the year.
But 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. Now again, that's making a lot of assumptions on what 2016 would be as well. But 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 in the 2016 where there isn't necessarily more inventory reduction. The spirit is the answer is 16.
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 Steve Fisher of UBS Securities. Please go ahead with your question.
Great. Thanks. Good morning. Bigger picture on ag, we're still seeing most ag markets down around the world. But 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 great a tough question at this point. And actually, I think if you look at the U. S. And Canada market, for example, and I think it really implies the overall commodity market in general. You talk to our Chief Economist, he would say, we're really in kind of a year to year type of mode right now.
And it's 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, then certainly, it's going to be a challenging argument to make the 2016 would certainly improve really anywhere around the globe. But 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, then 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.
And so, if you under produce demand going into through the 2015 crop and going into 2016, we believe prices will be very responsive to that. And as cash receipts would recover in that type of environment, you would see sales begin to recover as well. So that's it's close to and I just I can't pinpoint a certain geography, specifically, but 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 combine 7, 8 or 9 or etcetera? Thanks.
You bet. Yes. And as you think about order book, I think in general, we would continue to say versus our forecast. I mean, obviously, we're forecasting a much lower level of orders. But versus that forecast, we continue to be in very, 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 7,000 series tractors, today we would be really 7, 8s and 9s for this year. We're out into early October in terms of availability and these are the wheeled tractors not track tractor. So across the board on wheeled tractors, we'd be early October. Last year on 7, that would have been late August.
8 would have also been early October, so consistent. And on 9, it would have been mid June in terms of availability. So our order book is actually on again much lower order level, our much expectations, but as an availability perspective in very good shape. I didn't mention the track tractors. Those would also be on 8 would be out into early October, 9 would be in August, which would be a little bit behind where we were last year.
Last year, we would have been out into September.
All right. Great. Thank you for the color.
Great. Thank you. Next caller? Next question comes from Ann Duignan of JPMorgan. Please go ahead with your question.
Yes. Hi. Good morning. Hi Ann. Yes.
And just a clarification first, if I can. Just on David Raso's question. Your point is that until we get through July August, July 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. And then 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 $1,000,000,000 about 31% year over year. Talk about the risks of 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 and as well as so again the when you purchase the equipment you tend to get a better advantage from a tax deduction perspective. So as margins are a bit lower that isn't as attractive always.
But then there's also questions around Section 179 and bonus depreciation. Will we really have that or not? And so we think that's factoring in to some of those decisions in terms of a move towards the 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 and 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 reevaluate 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. But that's really where the risk is, 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 1, while it's increasing, it's still a relatively small part of our total portfolio.
So just to keep that in perspective. And the other thing is, and it's one of the reasons why it's so important for us as we manage used inventories in general to make sure we are protective of the pricing on that used equipment. Not only does it help the value of that used equipment. So it helps certainly our dealers. It's so 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. So it is a balancing act in terms of looking to reduce those and still being protective of those values. So 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.
Yes. Thanks. Good morning.
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 were up sharply. You tweaked your outlook a little bit more negative, but it doesn't seem like anything major.
So does the situation feel like it's still in the process of deteriorating? Or do you 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. You consider the impact of currency, because remember Brazilian farmers sell in U. S. Dollars and then convert back to local currency. So 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 that would have been before the currency shifted last fall. And so 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.
Some of the increase you're seeing that in some of the increased rates of Phenami financing. So I would tell you much of that is questions. You'll note our slides end in June in terms of what the Phenomie financing rates are because they haven't been announced beyond that. So we'll be hearing hopefully in early June is the expectation now, not just what the Phenomie financing rates will be for both PSI and Motorfroda, keep motor for OTA at the 10%. And as importantly, what's the overall budget?
Will they change that overall budget? And then we'll have a much better feel for what happens as we move forward with Brazil, at least in the short term. But 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 Lusgaarden of Longbow Research. Please go ahead with your question.
Good morning, everyone. Brilliant quarter actually. 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? I mean, 2% is probably a little bit disappointing type of gains and some currency.
But what you see in the marketplace, the impact of oil and gas and we basically look at a flattish environment for you guys for a while? Yes. 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 seen lower orders and business slowing down somewhat. But 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. So 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. But 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. And so again, those are some of the probably the major reduction quarter over quarter is what our expectation is in Brazil, but a variety of overseas locations really have weakened in our view over the quarter. So that's primarily what's driving that difference.
But you're able to hold profitability
issue? Profitability has not as you look at that profitability has not changed. I mean, we're still forecasting the same 11% margin. Okay.
All right.
Thank you.
We'll 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.
Yes. Thanks. Good morning, guys. So 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'm not sure if that part of it got answered. And then not just ag, but also if you're seeing any increase in competitive pricing within construction?
Yes. I mean competitive pressure certainly, we talked about that with the Ag and Turf division. It's not a surprise given the level of given the level of inventories that our competition has. And as a reminder, we went into the year on large ag. If you look at inventory as a percent of sales, about half of where our competition was.
We would continue to say on large equipment that our inventory levels are as a percent of sales about half of what the rest of the industry would be. But certainly that puts pressure because those inventories need to come down. And so you do see some pricing pressure. There's a variety of methods that they may choose to use to do that. And 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. And 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 2 point price realization that's for the enterprise. But I would tell you both divisions are contributing to that both ag and construction. And so, while it's 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 Otheimer of Vertical Research Partners. Please go ahead with your question.
Hi, good morning. I'm trying to understand North American row crop inventory and I totally get that the industry is twice as high as you do. But industry dealer inventory I think in units is up year over year. I think dealers are up year over year in units for row crops specifically. And sales I think in retail down like 20s.
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. So maybe there's just a pulse on that understanding or something like that. And then how do you get to the down 40?
It seems like you're down 20 or less for the 1st 6 months.
So 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. And we would view in terms of row crop tractors that breakdown to be more 180 to 200 horsepower and above. So when you look at the AEM data, it gets clouded because you have our 6,000 series trackers in those numbers. You have some of our 5,000 series trackers 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. And so that does cloud that picture. And I would point out those 6,000 series tractors come from Germany. And so while we talk about building to retail order that is on large ag. So that would be our 7, 8s and 9s.
And that certainly is the case on those. So 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 quarter or at the end of the month. And so 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.
So from the day it ships from our factory until, it's delivered to the customer, it does get reported as dealer inventory. So again, that can distort things. And I'd also caution any time and we 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 Q2, remember last year, our 7,000 series tractors and 8,000 series tractors were converting to final Tier 4. And so you had different levels of inventory as you prepared for that transition and certainly as you came out of that transition.
So it can distort the year over year comparison. So we would continue to tell you from a new inventory level perspective, we're quite comfortable. In large ag, we industry and that's not expected to change as we go through the year. Now again, that being said, as we talked about earlier, we are under producing retail, which we 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? So if you just step back, think of the industry environment we are facing, 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 Industry in 25 years. And as Tony mentioned, we've been working on our both used and new Now on used combined volumes, our position today is less than where our used combined volumes were year from now year before 2 years before.
Okay. So we have confidence that we'll work down our row crop in Houston, we as well. And as for the new row crop equipment sold to the corn and soybean producers in the U. S. And Canada, We take the 7,008,000 series taxes 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 under shipped retail sales by over 20% in the first half. We have forecasted to under ship retail for the second half as well. So 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.
So thanks for the question. Next caller?
Thank you. Appreciate it.
Next question comes from Mike Schulinski 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 of the data coming out shipments were actually down quite a bit in the Q2 here. But I was wondering if you could maybe comment on the your company's retail sales versus shipments in Brazil and whether they've been in line with your expectations for the quarter?
Yes. 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 retail sales. Others in the industry haven't been supportive of that change.
And so 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. I mean, 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. And so, 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?
Yes, I
can. Okay. Just wanted to see if you guys had any update to some of the countries in Europe or any better or worse than what you were thinking 3 months ago?
I think probably as 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. But if you look at the ag industry, we didn't change the overall outlook. And 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 very fairly consistently with what we had anticipated early on. So again, just not really much noteworthy in terms of a year over year change.
Okay, great. Thank you.
Next caller.
Next comes from Larry De Maria of William Blair and Company. Please go ahead with your question. Okay. Thanks. Good morning.
Just curious, Ted has talked a lot about myjohndeere.com and JDLink over the last couple of years. How did the myjohndeere.com platform do this planting season have been collecting data for farmers? Are they using it or blocking the data collection? And related to that, how did the new high speed planter do this year into planting season versus expectations? Unfortunately, I'll have to take just I'll
take the first question. And as you think about the myjondere.com, 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, but 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.
And certainly, we'll use that, would expect customers to use that on the back half of the year as they gather harvesting information as well. So 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'll also add that we watch the metrics on smelnickdanya.com, a number of car vendors and a number of other things like that. So far it is actually very encouraged by the results we've seen.
Okay. Great. Can you put some numbers to that in terms
of acreage that's been used on it? Yes. We are at this point have not disclosed any kind of acreage that's covered or anything along that line.
Okay. Next caller? Next question comes from Brian Sponheimer of Gabelli and 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, insurance rather, yes. The crop insurance. Crop insurance, rather.
Yes, it is. And I'm just curious about from planning, what type of weather is really kind of the 50% 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 6 to 12 months shaping up? Yes, I would say 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.
And so that wasn't necessarily a full change as we go into the rest of the year. So the other thing at this point, you assume average weather, you assume trend yield until you get data that can potentially change that. And so we will 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. Yes, thank you. The next call next question will be have to be the last question we can take for the call.
Your last question today comes from Brett Wong of Piper Jaffray and Company. Please go ahead with your question.
Thanks for fitting me in here in the end, Tony. Appreciate it. 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 levels can or levers can you pull in order to kind of support margins?
Yes. I mean, 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 SANG and R and D. We've talked about when C and F went through their super trough in 2,009, when you get into levels that you didn't anticipate, you tend to also find levers that you didn't necessarily anticipate. And depending on the perspective, we kept R and D pretty flat year over year in our outlook.
And so 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 need. That wouldn't be necessarily a desirable lever, but we would continue to look at those things that we could pull out as we go through the year. But it would I would also point out if see a large incremental drop that creates challenges given where our capacity where our facilities are at today in terms of percent of capacity utilization. And so but 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. So that would be one area I would make sure to remind people.
So, okay. With that, we will conclude the call. And think it's important maybe to step back a little bit too and think about the year that we're forecasting. As you look at our guidance for 2015 and put that in perspective in a historical perspective, as you look at what we're forecasting for equipment operations net sales, as you look at what we're forecasting for cash flow from operations and equipment operations as well as our EPS overall, it puts us in a top 5 year in all three of those categories in terms of what this guidance provides. And 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 SBA 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.