Good morning. Welcome to Deere & Company's first quarter earnings conference call. Your lines have been placed on a listen-only mode 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, sir. You may begin.
Thank you. Also on the call today are Rajesh Kalathur, our Chief Financial Officer, and Susan Karlix, our Manager of Investor Communications. We'll take a closer look at Deere's first quarter earnings, then spend some time talking about our markets and our outlook for 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?
Thank you, Tony. With the announcement of our first quarter results, John Deere has started out 2015 on a good note. We did so in spite of sluggish conditions in the global farm economy, which are reducing demand for agricultural machinery, particularly for larger models. Both sales and profit for our agriculture and turf equipment operations were lower for the quarter and are forecast to be down for the year as well. Our Construction & Forestry and financial services businesses had higher profits, showing the value of a well-rounded business lineup. Deere's results for the quarter also demonstrated the progress we've made managing costs and creating a more flexible, responsive cost structure. One other item worth emphasizing in today's earnings report is the impact of a stronger U.S. dollar.
It is putting significant pressure on reported sales made outside of the U.S., a fact reflected in both our first quarter results and our full-year forecast. Let's take a closer look at the first quarter in detail, beginning on slide three. Net sales and revenues were down 17% to $6.383 billion. Net income attributable to Deere & Company was $387 million. EPS was $1.12 in the quarter. On slide four, total worldwide equipment operations net sales were down 19% to $5.6 billion. In the quarter-over-quarter comparison of net sales, Landscapes and Water accounted for two points of the change. Price realization in the quarter was positive by one point. Currency translation was negative by two points. Turning to a review of our individual businesses, let's start with agriculture and turf on slide five.
Sales were down 27% due to lower shipment volumes of large ag equipment in the U.S. and Canada and lower sales in Europe and Brazil. Operating profit was $268 million. The division's decremental margin in the quarter was 35%. 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 lower grain prices, remain at historically high levels, thanks to help from record livestock receipts. As a result, we now see 2014 cash receipts at 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 down about 23% lower than the levels in 2012, which was the record. On slide seven, global grain stocks 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 appear to be 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 the stocks to use ratio, and result in prices quickly moving higher. Our economic outlook for the EU 28 is on Slide 8. Economic growth continues in the region, although at a slow pace. Grain prices have declined but appear to be stabilizing at levels near the long-term average.
While livestock margins remain at good levels, dairy margins are being squeezed, especially in the U.K. 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 the CIS, increasing economic pressure and further tightening of credit availability continue to weigh on equipment sales. Notably, Western equipment manufacturers are being heavily impacted by geopolitical uncertainties. In China, the government continues its investment in ag equipment subsidies, but the growth rate has slowed. This, among other things, has led to a decrease in industry sales. Turning to India, the monsoon season rainfall was below normal, which could result in lower overall agriculture output. Slide 10 illustrates the value of agricultural production, a good proxy for the health of agribusiness in Brazil.
Ag production is expected to decrease about 12% in 2015 in US dollar terms due to lower global commodity prices and the decline in the Brazilian real. However, with the weak real, the value of production is much more attractive in the local currency. Even with the recent drop in prices, ag fundamentals remain positive for grains, and sugar margins are expected to improve in the coming year. On balance, though, farmer confidence in Brazil is lower as a result of economic uncertainty and political concerns in the country. This is leading to lower equipment purchases despite positive ag fundamentals. Slide 11 illustrates eligible finance rates for ag equipment in Brazil. Finame/PSI has been the primary financing source for ag producers from 2009 through 2014. For the first half of 2015, last year's favorable interest rates remain in place for the agriculture sector through the Moderfrota program.
While agricultural producers are able to utilize the more attractive Moderfrota rates, construction equipment financing continues through PSI and will be subject to increased rates in 2015. 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 more positive, providing support to sales of small and mid-size tractors. As a result, we continue to expect industry sales in the U.S. and Canada to be down 25%-30% 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 10%-15% in 2015, mainly as a result of economic uncertainty in Brazil. This follows a 13% decline in 2014, compared with the extremely strong levels of 2013. Shifting to the CIS, we now expect industry sales to be down significantly due to economic concerns and limited credit availability. In Asia, we continue to expect sales to be down slightly. 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 23%.
Currency translation is now forecast to be a negative four points, though this outlook reflects about one point less volume than our prior guidance. The Ag and Turf division operating margin is now forecast to be about 7%. Technically, that is one point less than we said in our prior guidance. However, without the impact of rounding, the difference is closer to half a point. Now, let's focus on Construction & Forestry on Slide 14. Net sales were up 13% in the quarter. Operating profit was up 55%, the result of higher shipment volumes. The division's incremental margin was about 30%. Moving to Slide 15. 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. Based on these factors, Deere's construction and forestry sales forecast remains up about 5% in 2015. Currency translation is forecast to be negative by about two points. 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%. Let's move now to our financial services operations. Slide 16 shows financial services annualized provision for credit losses as a percent of the average own portfolio was two basis points at the end of January. This reflects the continued excellent quality of our portfolios.
The financial forecast for 2015 now contemplates a loss provision of about 17 basis points, down about seven basis points from our previous guidance. The year-over-year increase in the provision is a reflection of the unsustainably low loss levels of the last four years. For reference, the 10-year average is 26 basis points, and the 15-year average is 43 basis points. Moving to Slide 17, worldwide financial services net income attributable to Deere & Company was $157 million in the first quarter versus $142 million last year. 2015 net income attributable to Deere & Company is now forecast to be about $630 million. Slide 18 outlines receivables and inventories. For the company as a whole, receivables and inventories ended the quarter down $1.4 billion. That was equal to 24.9% of prior 12-month sales, compared to 26.4% 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 2015 with total receivables and inventories up about $100 million, with the increase coming from the C&F division. Our 2015 guidance for cost of sales as a percent of net sales, shown on Slide 19, is about 78%, unchanged from last quarter. When modeling 2015, keep these factors in mind. Price 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 20. R&D was up about 3% in the first quarter, including about two points of negative currency translation. Our 2015 forecast calls for R&D to be down about 1% for the full year, including about two points of negative currency translation.
SA&G expense for the equipment operations was down 16% in the first quarter, as you'll see on Slide 21. Landscapes and Water, and negative currency translation accounted for about 10 points of the change. Our 2015 forecast contemplates SA&G expense being down about 9%, with Landscapes and Water, and currency accounting for about five points of the change in the year-over-year comparison. Turning to Slide 22, pension and OPEB expense was up about $20 million in the quarter, and is forecast to be up about $80 million in 2015. On Slide 23, the equipment operations tax rate was approximately 28% in the quarter, primarily due to discrete items. While it is not our practice to provide specifics on discrete items, we note that the R&D tax credit for 2014 was extended through the end of the calendar year.
For the remainder of fiscal 2015, the projected effective tax rate is forecast to be in the range of 34%-36%. Slide 24 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $3.3 billion in 2015. The company's second quarter financial outlook is on Slide 25. Net sales for the quarter are forecast to be down about 19% compared with 2014. This includes about two points of price realization, with unfavorable currency translation of about four points. Turning to Slide 26 and the full-year outlook, the forecast now calls for net sales to be down about 17%. Price realization is expected to be positive by about two points. Currency translation is negative, about three points.
Finally, our full-year 2015 net income forecast is now about $1.8 billion, a decline of approximately $100 million compared with our previous guidance. The change is primarily attributable to foreign currency translation. Now, on Slide 27, there's no doubt Deere's Ag business is facing a challenging year. The large Ag industry in the United States and Canada, defined on this slide as tractors greater than 220 horsepower and combines, is forecast to be down about 50% from 2013 levels. Yet, as Sam Allen noted in today's earnings release, our forecast reflects a level of results much better than we've experienced in previous downturns. With a 50% decline in large Ag, Deere net sales are forecast to be down 22%, with net income down 49%, again from 2013 levels. This is much better than the two other recent downturns shown on the slide. Why the improvement?
Because we reacted early to this pullback in the Ag sector, controlling costs and assets and aligning production levels with demand. But more importantly, today's John Deere is more than a large Ag company. Our 2015 outlook illustrates the power of our portfolio with a wider range of revenue sources, as well as a more durable SVA and OROA business model. As a final note, it should be stressed that Deere's future continues to hold great promise for our customers and investors. That's because the trends underlying our businesses, such as global population growth and rising living standards, are very much intact and largely unaffected by swings in the farm economy. All in all, we remain confident that Deere is positioned to deliver value throughout the business cycle and to benefit from the world's increasing need for advanced equipment in the quarters and years ahead.
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, in consideration of others and our hope to allow more of you to participate in the call, we'll be limiting each caller to one question today. If you have additional questions, we ask that you rejoin the queue. Operator?
Thank you. As a reminder, to ask a question, please press *1. Our first question today is from Timothy Thein from Citigroup.
Great, thanks. Good morning.
Good morning.
My single question here is just on the Ag and Turf receivable and inventory guidance there. Can you maybe give us some underlying color within that, the change from last forecast in terms of the large versus small ag? I am just curious, given your comments on improving dairy and livestock markets and some of the more consumer-affected markets within small ag going up, has the outlook for large ag within that guidance changed versus the prior forecast? Thank you.
I don't have great detail, Tim, on the large versus small in terms of the ending receivables and inventory. I would tell you, generally, it would not be a significant difference. Keep in mind, FX is, as you look at that line from the $375 to the $525, there is some FX impact in there as well in terms of bringing the inventory and receivables down. As you might expect, as our overall forecast for the year has not changed significantly, at this point, we really haven't made significant shifts in the ending inventory and receivables as it relates to that, as you point out, the breakdown between large and small. Thank you. Next caller?
Thank you. Our next question is from Rob Wertheimer from Vertical Research Partners.
Hey, good morning, everybody.
Hi, Rob.
Wondered if you could comment on the combine early order program and the current level of orders for row crop tractors versus retail sales and production. Thank you.
Sure. I would tell you, I'll go a little broader than just combines. As you think about the early order program and the order book in general, I would tell you from a large perspective, we would say it's kind of coming in line with what our expectations were. You have plus and minuses here and there. That's, again, why you didn't see much, really any change in our outlook on the U.S. and Canada side. The combines, we did end that program in early January, and it was down roughly 30% year-over-year, which again was maybe even slightly better than what we had anticipated. We've had some others that are going a little bit different direction. All in all, very much in line with our expectations. You've seen that reflected in our outlook.
If you think about tractors, again, if you look year-over-year, I want to make sure I point out, obviously we have much lower daily order or daily production in our Waterloo factory on those large tractors. On that lower production schedule, our availability on large tractors are pretty much in line with where we were last year. 8R tractors would be a little lighter. Our availability this year is in June. Keep in mind too, last year there was some impact from Tier 4 transitions as well. If you think about the 8R tractor, this year availability is out into June. Last year it would've been a little further out into August. 9R tractors were in early June. Last year was actually early May, so we're a little further out on availability there. On 7R tractors, again, we're very much in line.
Last year it was late June, this year it's very early July. Again, that was as of the first week in February. Again, very much in line year-over-year, or very much in line with our expectations. Thank you. Next caller?
Thank you. Our next question is from Vishal Shah from Deutsche Bank.
Yeah. Hi, thanks for taking my question. Maybe can you talk about how we should think about the decremental margins going forward as you are looking at the rest of the year? Thank you.
Sure. Well, I assume you're referring to the Ag and Turf division since you're talking about decremental margins. In the first quarter, of course, the decremental margins were right at 35%. If you look at our guidance for the year with the margins around 7%, the annual guidance is going to get you very close to the same type of decremental margins. Again, you'll see some pluses and minuses perhaps in given quarters, but as you think about for the full year, roughly in line with what we were able to do in the first quarter. Okay, next caller.
Thank you. Our next question is from Seth Weber from RBC Capital Markets.
Hey, good morning.
Hi, Seth.
Hi. The pricing outlook up 2% for the year. You did 1% in the quarter. Can you talk about just the cadence on how you get to the 2% and whether you're seeing positive pricing in both segments? Thank you.
Sure. For the year, certainly, we are seeing positive pricing in both segments. In the quarter, you may have noticed the note in the earnings release around incentive costs on C&F, and that's really related to an accrual in the quarter. If you look at the full year, the incentive budget as a % of sales is basically flat year-over-year. That accrual from the first quarter will effectively reverse itself throughout the year. That obviously impacted pricing for the quarter. Again, I would remind you that certainly you've got some rounding in there too as you move between the one and the 2%. I wouldn't expect a significant change other than perhaps the impact of that accrual.
Hey, Seth, this is Raj. I would add that we do have some slight pressure, but overall, broadly, we're still at that same 2%.
Okay.
There is some slight pressure, yeah.
Okay. Thank you.
Next caller.
Thank you. Our next question is from David Raso from Evercore ISI.
Hi, I'm just trying to get a little more specific on the inventory. Did the inventory growth sequentially go as planned? I know historically the first quarter usually sees a nice build sequentially. I just would've thought given the downturn in Ag, we would've looked to take out some inventory sequentially. Can you just give us some thoughts on how inventory ended up versus your expectations? And I have a related question to the year-end expected inventory.
Yeah. We'll have to have you get back in the queue for the year-end one unfortunately, but as it relates to the quarter, I would tell you it was very much in line with our expectations. Even in a lower production year we are ramping up for the spring selling season. It's natural from the end of the year to see some level of build as we go into the first quarter in particular. That again, was very much in line.
I would point out and remind people that, yes, while we're expecting some lower production in the year, we took a dramatic amount of inventory and receivables out of the system in fourth quarter last year, which is why you didn't see a significant continued reduction this year and really more we set up the year so that we could be more in line with that lower production. That's what you're seeing in the inventory receivables as we move through the year. I think you'll see them again come back down by the end of the year as our forecast indicates. Thank you. Next caller.
Thank you. Our next question is from Jamie Cook from Credit Suisse.
Hi. Good morning, nice quarter. I guess my question relates to inventory in the channel both on the used and the new level. Can you talk about the progress you made in the first quarter versus your expectations? Is there any change in where you want to be in year-end relative to what you originally thought? Thanks.
I think certainly a related question maybe, did we see a significant benefit from Section 179 being passed at the end of the year? Certainly on the margin it was helpful, but as everyone knows, I think we had two weeks maybe at the end of the year to provide a little bit of benefit for the year. Certainly we're making progress, but used inventories in particular continue to be at high levels. I think it's important to point out, however, as we indicated last quarter, relative to competition our used inventory as a percent of sales continues to be in a much better position than the competition. We feel like we're in good position in that regard, but certainly have a lot of work to do with our dealers in continuing to bring used inventory down as we move through the year.
That will continue to be our focus as we talked about at the beginning of the year.
Alrighty.
Okay. Thank you. Next caller.
Our next question is from Stephen Volkmann from Jefferies.
Hi, good morning. Wondering if you can just comment a little bit on C&F. Your forecast is up five, but you did up 13 in the quarter. I think maybe Susan might have said you're starting to see some slowing in the energy-related markets. Does that sort of explain some of this incentive comp that you're seeing there? Just maybe a little more color on any slowing that you're seeing in those markets.
Right. Yeah, I would point out, as you think about the first quarter increased sales versus the outlook, remember, as you think about the comparison for 2014, we have much tougher comps as we move through the year, especially in the third and fourth quarter. We had a relatively light first and second quarter. We also do have some FT4 transition that is going to create some moves from one quarter to the other in some cases that contributed to the very strong first quarter. There are a lot of things along that line. As it relates to the incentives, and I mentioned this on an earlier question, I want to be clear, this isn't an increased incentive for the full year.
It's really a timing issue as it relates to an accrual that was booked for some changes in some of the incentive structures that will largely reverse itself as we go through the year. In fact, you'll see a lot of that reverse in the second quarter. It should not indicate a higher level of year-over-year incentives. In fact, as I mentioned earlier, if you look at the total budget, incentives as a % of sales are flat year-over-year for that division. Specific to energy, certainly the expectation is that you'll start to see some slowing in terms of orders for dealers that are in regions that are heavily impacted by energy. Yeah, we've seen a little bit of a slowdown in replenishment orders as one would expect, again, in those specific regions. Some of that's being offset by strength in other areas.
The overall economy continues to improve, so you're seeing some strength there as well. We would tell you longer term, as you think about lower oil prices, certainly in the short term, that's going to have a negative impact on the business from an energy sector perspective. Longer term, if they stay at these levels, it could have a more positive impact on the overall economy, which could help with some offsetting strength longer term in other parts of the business. It's a little bit of give and take, certainly in the short term, the lower oil prices would be a little bit more take than give for us. From a longer-term perspective, not necessarily a bad deal.
Thanks, Tony.
Okay. Thank you. Next caller.
Thank you. Our next question is from Larry DeMaria from William Blair.
Hey, good morning. Thanks. It seems like there's a move towards leasing in the market. We're seeing some farmers even probably liquidate some of their fleets and move towards that model. Curious, what do you think that means for Deere in maybe the near and longer term? Are you pushing that model? Just curious what the impact is and if we think about, is this a change to your business model and what that might mean?
Yeah, I think certainly, even if you looked last year, we did see a little bit higher rate of leases versus retail notes in our financial services portfolio. I don't know that it necessarily has a major impact on our bottom line longer term. I think the risk obviously shifts a little bit from a residual value perspective, but we have a lot of history that we put in play when we set those residual values on the equipment. I think that the advantage we have with having a financial services organization like we do is that we can evaluate those things both from a short-term potential and risk as well as a longer-term potential positive as well as risk and act accordingly. That's really what we're doing. I would not say that we're aggressively pursuing leasing necessarily.
Certainly not participating in some of the very aggressive leasing programs that are rumored to be in the market. That wouldn't be our expectation going forward that certainly for those customers who choose to lease their product versus buying it and financing through a retail note, we'd be able to accommodate that through our financial services operation.
Hey, Larry, this is Raj. Let me add that leases are still only about a tenth of our total portfolio, okay? As we have historically done, we will continue to manage our residual values very conservatively, okay?
Okay. Thank you. Next caller.
Okay, thank you.
Thank you. Our next question is from Steven Fisher from UBS.
Great. Thanks very much. Wondering how you guys are thinking about when you could see the trough year of revenues in ag and maybe how that view has changed at all in the last few months. Thank you.
Thank you. I don't know that our view has changed necessarily in the last few months. I think the first and maybe the last thing I'll say on it is it's very premature really to talk about market conditions beyond 2015. As we all know, that will largely be impacted by the upcoming growing season, and it's just very early. That being said, as we talked about previously, if you look at and assume more normal weather patterns, and we've talked about an analysis that our chief economist has completed. If you look at normal weather patterns trend yields with the expected lower acreage that most are anticipating for corn as we go into the upcoming growing season, that would result in production slightly less than usage. You would see stocks brought down and pricing being more supportive.
If that would transpire, we would certainly expect to see some improvement next year. Now, again, that's based on assumptions of weather, that's always risky. While we've had two very good years in a row now for growing, especially last year had pretty much ideal growing conditions, that doesn't mean we won't see it again this year. That's the risk to the outlook. Again, we'll be watching closely as planning season approaches and what actually gets planted in terms of various crops, as well as, of course, as we move through the summer, what happens with the growing conditions, and that will largely drive what we'd expect to see as we move into 2016. Again, I'll end where I started. It's really very premature to talk about things beyond 2015.
Thank you.
Okay. Thank you. Next caller.
Thank you. Our next question is from Ann Duignan from J.P. Morgan.
Hi, good morning. Just building on those comments. Why would you then be saying on slide 27 that the downturn is over in 2015 and that you should be able to react quickly when the market recovers? What if the market does not recover and we get a decade like we saw in the 2000s of significantly lower equipment sales?
Certainly, we would be in a position, and that's where I think if you look at how we've handled this particular downturn. If we look out into 2016, certainly, as you point out on slide 27, we've looked at it through 2015 in terms of what our outlook is and where our performance has been relative to those past downturns. If for some reason, again, it would be a rare occurrence that you would see a longer downturn without any kind of increase as you move into 2016. It wouldn't be unprecedented, but it'd be very rare. You'd have to go back much further than the '80s to find that kind of consistent kind of downturn.
If that were to happen, certainly we're positioning ourselves as we move through the year such that if the downturn persists, we can be in a good, strong position to be able to continue to perform well during that downturn, but also believe that we're in a good position to react quickly if we need to bring production back up and so on. One example I would point out in that regard is, as you know, with our UAW contracts, we have the ability to utilize inventory adjustment shutdowns or indefinite layoffs. Certainly, as you've noted, I'm sure, we have largely utilized indefinite layoffs in our UAW facilities, our large ag facilities versus choosing to keep a higher level of workforce and leveraging a little more heavily the inventory adjustment shutdown.
That does put us, again, in a bit better footing as we move towards 2016 from a workforce perspective. While we would argue if you wanted to play percentages that there's probably a greater likelihood that 2015 would be the lowest year, again, recognizing there's always a risk that we could see a further downturn. We aren't playing that risk internally in how we're managing the businesses with full assumption that we'll see that return in 2016. We're playing it conservatively internally, even though we're optimistic as we look forward. Okay, next caller.
Thank you. Our next question is from Andrew Casey from Wells Fargo Securities, LLC.
Good morning. Thanks.
Hey, Andy.
Question for you. I wanted to follow up on the Construction & Forestry, given your comment about reasonably easy comps continuing into Q2. Does your guidance embed any year-to-year declines in the second half?
Well, I think as you go through the year, I mean, certainly, again, I would point out and probably should have mentioned before, remember, as you think about first quarter, the other thing I would point out is first quarter does tend to be a seasonally light quarter relative to the others. Yeah, I mean, you're certainly looking at some tougher comparisons. Fourth quarter in particular was a very strong quarter for that division. I'm not going to get too specific in terms of quarter by quarter, but that one in particular, I would point out will be a particularly tough compare for the division.
Okay. Thank you.
Okay. Thank you. Next caller.
Thank you. Our next question is from Mike Shlisky from Global Hunter Securities.
Good morning.
Morning.
Good morning. I was wondering if you can maybe update us on the certified pre-owned program. I know you just added sprayers just very recently, but perhaps on the original categories that are covered, can you tell us whether you plan to expand that to some additional categories going forward?
Yeah. You stole some of my thunder by pointing out that we had added the sprayer, which I think is an indication. Again, that was a poll, really, from our dealer organization requesting that. I think that alone indicates the confidence they have in the program. I do want to make sure we clarify as we talk about this, we do not want to characterize the certified pre-owned program as some sort of silver bullet. It certainly is beneficial, especially as our dealers look to market some of this newer, used John Deere equipment, in a lot of cases, marketing against brand-new competitive equipment. That's really the biggest strength that the certified pre-owned program provides. I think our dealers are embracing that. It's growing, and I think there's a fair amount of confidence from the dealer organization around this being a very useful tool for them.
Again, I think all very positive signs as we move forward with that program. As far as other products being added, I think it'd be premature to talk about that. Certainly, if that's an area where our dealers feel that it would be beneficial to them, that would certainly be something we would consider in conjunction with them. Thank you.
Okay.
Next caller.
Thank you. Our next question is from Eli Lustgarten from Longbow Research.
Good morning, everyone.
Hello.
Can we go back one more time to the C&F outlook? Much easier comparison to second quarter, and I think you covered the third and fourth quarter. Two questions are, one, can you maintain the profitability numbers in the second half of the year that you will average in the first half of the year, or do they begin to weaken and then associate with it? You indicated that your inventories and stuff are mostly going up because of C&F. Would you begin to rethink your C&F inventories and maybe want to trim them, particularly if the energy market gets softer? And can you add what % of your business is related to the energy markets in C&F?
Sure. Yeah. I think in answer to the first part of the question, that was very creative in adding two questions into one.
Well, I try
Certainly, we talk about 10% margins in the first quarter, and I'll note that for the full year, it's 11%, so one point higher. Again, I want to be clear, it's not that sales are expected to fall off in the back half of the year. It's just the year-over-year comparison. The growth year-over-year is what would be challenged as we go through the year. I think that's probably the key there as you think about that. From an energy perspective, certainly in recent years, that's been a stronger portion of our business, a stronger portion of the industry. We've seen a lot of strength in the energy business across the industry.
We would tell you, if you look at the machines that go directly into things like pipeline, oil, gas, fracking, those sorts of things, we would estimate roughly 10%-15% again, in recent years. Deere would not be out of line from where the industry was in that regard. I would also point out that in those regions that are heavily influenced by energy, you have the residual impact as well on the overall economy and other types of construction that occurs in support of the strength of energy. In terms of overall business, for some, could be a bit heavier than that. That would be our view on that. Thank you. Next caller.
Thank you. Our next question is from Ross Gilardi from Bank of America Merrill Lynch.
Good morning. Thank you. Hey, Tony, I was just wondering, have you gotten any more color on the size of the credit line under the Moderfrota program for Brazil? This program had become pretty trivial over the last three to five years. Is it really sort of fair to say that rates are flat with where they were last year, given you're comparing Moderfrota to Finame? Is the program actually getting tapped and are approvals happening? Is it active right now?
I think what my understanding is as we speak with our sales group there in country, is that the financing is available for Moderfrota, again, because there was financing in place, set up in place that wasn't being utilized in the early part of their fiscal year. The second half of calendar 2014. Again, we believe that there's certainly available credit. People are beginning to utilize the Moderfrota program. Really, as you think about differences between the two, to be fair, rates are the same as you switch to Moderfrota, but there is a slightly higher PSI last year, it would've been 0% down payment, and it's 10% under Moderfrota. There is a slightly higher down payment.
From a funding perspective, at least through the middle of the year, which is where we have the rates available, the belief is that there will be adequate funding for that.
Thanks.
Okay. Thank you. Next caller.
Thank you. Our next question is from Adam Uhlman from Cleveland Research.
Yeah. Hi, guys. Good morning.
Hello.
Can we circle back to the small ag products in the U.S. and your outlook there? I guess you mentioned weaker dairy markets over in Europe, but there wasn't any comment to dairy and livestock conditions here in the U.S. Can you maybe just talk about what you've been seeing and the order trends for that product, and if you've changed your outlook at all?
I think, certainly as you go through 2014 and as you go into 2015, I would say overall for livestock, our view would be, and of course, we've talked about before, we do use Informa Economics as an external consultant. Their views would be consistent in that livestock profitability generally is expected to continue through 2015. There are a couple areas where you will receive some margins compressing a bit. Dairy would be one area I would point out that as the herd expanded through 2015, you're likely to see some squeezing of margins. Today they would be close to break even, roughly, but still slightly profitable. Poultry, again, coming off of very strong margins last year. We believe those strong margins will continue through the first half of the year.
Production is up, that's a part of the industry that can recover fairly quickly. We would expect to see perhaps some margin squeezing there. Pork, of course, again, we would expect to see some growth in the herd and some reduction as we move through the year. Second half in particular could be a challenge from a margin perspective there. We are seeing some squeezing there. Beef, of course, that takes a while to rebuild herds, profitability is expected to still be relatively strong, especially for cow-calf producers. Overall, we're still looking at small ag, which tends to be a little more closely tied to livestock, to be relatively strong versus certainly large ag, as we move through 2015, again, coming off of some pretty strong years for livestock producers. Thank you. Next caller.
Thank you. Our next question is from Sameer Rathod from Macquarie Capital.
Hello and good morning.
Hello.
Could you expand a little bit on the competitive landscape and what it looks like given the current downturn and how the dealers are doing just given the competition? Thank you.
Yeah. I would simply say, I would go back to inventory levels. Our dealers are very strong, very capable. We've proven that time and time again. We've entered this downturn with inventories while we would tell you a little higher than we would like and used in much better position than the competition. We feel very good about the competitive position that we're in and feel confident that like in other downturns, we'll come through this, both Deere and our dealers will come through this much stronger on the back end. Again, I'm referring specifically to North America, which I'm assuming is where your question was directed. Thank you. Next caller.
Thank you. Our next question is from Jerry Revich from Goldman Sachs.
Good morning.
Good morning.
I'm wondering if you could talk about for John Deere Capital Corp, really good credit loss provision performance. Can you just give us some more color on trends and frequency of repossessions, severity of losses, for instance, delinquency rates? I know we haven't approached it in the past on prior calls, but now that it's a third of the earnings here, I'm wondering if you could just give us some additional color on those indicators.
I think the short answer there is certainly we aren't seeing any kind of spike in losses. Our residuals, we talked earlier about leases. We've tended to be relatively conservative with leases. Again, we're really nothing cautionary on that at this point in time. To be fair, it is a little early in the sense that many of our annual payments are coming due today. We'll have probably better guidance on that topic as we move into second quarter.
This is Raj. Let me add a couple of points there. We watch this very carefully. There are a couple of smaller revolving products that we offer. One is a seasonal pay. Last fall, we did not see anything that would indicate additional caution. Although we are in a cautionary environment, and we are watching it carefully. Another would be a monthly pay, more like a credit card. Even there, we watch that carefully and like Tony said, we haven't seen anything that would raise a good flag for us yet.
Thank you.
Thank you. Next caller.
Thank you. Our next question is from Mig Dobre from Robert W. Baird.
Good morning. Just going back to A&T again. Decremental margin performance there has been pretty good versus our expectations, at least at about 35%, and I understand that that's your guidance for the full year as well. I'm wondering, based on everything you know of the cost structure, how should we think about this longer term, especially if, say, for instance, ag declines continue into 2016?
Certainly, we would continue to it's a tough one to answer candidly as you think about that. If you would anticipate further reductions, obviously, we would evaluate that. We would continue to look for ways we could pull costs out and keep those margins in positive territory. We've talked a lot about the lever studies we have and plans that we have in place to make sure we do that as we move down the line. Certainly, we're well down the line, especially if you think about large ag, but that doesn't mean that as you continue down the line, you don't find additional levers that you can pull. A best example I would point out to that is in our C&F division in 2009.
We certainly went to levels that were far lower than what most would have anticipated they could have gone, and additional levers were pulled in that regard in order to try to compensate for that. We would, again, as we look into 2016, we're trying to position ourselves for whatever the market brings, and we'll make further changes as we need to.
May I just interject? It also depends on the products, okay? Depending on which product line is impacted more or less. If it's large ag, the impact is going to be different than small ag. Okay?
Thank you. Next caller.
Thank you. Our next question is from Nicole DeBlase from Morgan Stanley.
Yeah, thanks for fitting me in, guys.
Yeah.
My question is just around used equipment pricing. I don't think we've touched on this subject yet.
Yes.
Can you comment on what you've seen quarter to date, how it compares with last quarter, and if you're seeing any increased competition from the other guys out there as everyone in the industry is looking to move inventory?
Yeah. So far, it's actually not a bad story. It's a pretty good story. If you look at, and again, looking at large ag in U.S. and Canada, I would tell you product by product, it's plus or minus single digits. There are some that are and again, this is year-over-year pricing. In some cases, you're going to see some small single digits of actually improved pricing year-over-year. In some cases, you're going to see some small single digits of lower. I would argue all in all, relatively flattish, but recognizing that some products are stronger than others.
Okay, thanks.
Thank you. Next caller, and this will be our last caller. Thank you.
Thank you. Our final question today is from Andrew Kaplowitz from Barclays Bank PLC.
Good morning, guys. Nice quarter.
Good morning. Thank you.
Tony Huegel, I just wanted to push you on decremental margins this year a little bit more. You did 35%, which I think previous callers have said it was pretty good. That beat our estimate, and that was on a relatively large mixed headwind that you've talked about in the past in combines especially, and a big destock year-over-year. Why would decrementals be similar for the rest of the year? Was there some conservatism in that? Can you still push G&A as you've done consistently?
Yeah. Well, I think some of that, Andrew Casey, is if you think about going into the back half of the year, remember, we were pulling levers in the back half of the year of 2014 as we started to see this further reduction coming. It does get a bit more difficult in terms of some of the comps. As you think about SA&G, I would tell you it's the same thing from a SA&G reduction comparison as what I talked about with C&F sales. It becomes more challenging as you go through the year. Certainly, as you put together a forecast, there are a lot of assumptions in there, and certainly, we try to put our best estimate that we can in that regard. Some of the big questions candidly too, will be what continues to happen with material costs.
We've seen some positive move there, which has certainly helped, at least in the short term. Those lower costs, especially in things like steel, if oil prices remain at low levels, that flows through not just our logistics, but a lot of other oil-related type of inputs. That certainly would be beneficial as well. We'll just have to see where those things go. At this point, we are forecasting similar decrementals for the year as what we've seen in the first quarter.
Got it.
Okay. Thank you very much. With that, we'll bring our call to a close. We do appreciate your participation on the call, and as always, we'll be available the rest of the day to answer any additional questions you may have. Thank you.
Thank you, this does conclude today's conference. You may disconnect at this time.