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Operator
Good morning, and welcome to the Deere's first quarter earnings conference call [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Miss Marie Ziegler, Vice President, Investor Relations.
- VP, IR
Good morning.
Also joining me on the call this morning, are Mike Mack, our Chief Financial Officer, as well as Tony Huegel, and Susan Karlix from the Deere Investor Relations staff.
Today we will take a closer look at Deere's first quarter earnings. then spend a few minutes talking about our markets and where things are headed for the rest of the year.
And after that, we will responds to your questions.
Please note that slides are again available to compliment the call this morning and they can be accessed on our website at www.deere.com.
We do have a couple of reminders.
This call is being broadcast live on the internet and recorded for future transmission and use by Deere, Thomson and third parties.
Participants in the call, including the Q&A session agree their likeness or remarks in all media may be stored and used as part of this earnings call.
This call includes forward-looking comments concerning the Company's projections, plans, and objectives for the future that are subject to important risks and uncertainties.
Actual results might differ materially from those projected in the forward-looking statements.
Additional information concerning factors that could cause actual actual results to differ materially, is contained in the Company's most recent Form 8-K and periodic report filed with the Securities and Exchange Commission.
The Company, except as required by law, undertakes no obligation to update or revise its forward-looking statements.
This call also may include financial measures that are not in conformance with generally accepted accounting principles.
Additional information concerning these measures, including reconciliations to the comparable GAAP measures are posted on the website at www.deere.com/financial reports under First Quarter, 2007 Reports.
Call participants should consider the other information on risks and uncertainties and non-GAAP measures in addition to the information presented on this call.
And now, Tony.
- Manager, IC
Thanks, Marie.
This morning, Deere reported first quarter net income of $239 million on equipment operation net sales of 3.8 billion. as shown on slide three of the presentation.
This represents a 1% increase of income and 5% increase in earnings per share versus the first quarter of 2006.
On a continuing operations basis, net income increased 7% and earnings per share rose 11%.
On slide four, first quarter total worldwide equipment sales were up 3% compared to the prior year quarter.
Price realization was a positive three points with another positive two points related to currency translation.
Moving to slide five, one of the major drivers of the sales change in the quarter was lower sales of construction equipment in the U.S. and Canada.
Off setting this decrease were higher sales outside of the U.S. and Canada. $253 million as recorded.
Roughly half of this increase is attributable to agricultural equipment sales in Europe with the remainder from higher sales of Construction and Forestry equipment.
On slide six, we have provided a table with production tonnage data, both actual, and forecast.
You will note that second quarter 2007 tonnage for the worldwide equipment operations is expected to be up 4%, with an anticipated 23% reduction in Construction and Forestry tonnage in U.S. and Canada.
For the full fiscal year worldwide production tonnage is forecast to be down 2%.
Regarding our Company outlook, we will turn to slide seven.
For the second quarter, 2007, we expect Company wide net equipment sales to be up about 5%, with net income of 525 to $550 million.
For the year, we are now forecasting net equipment sales to be up slightly compared with fiscal year 2006 versus our previous guidance of roughly flat.
This includes about two points of positive price realization, and about one point of positive currency translation.
The estimated net income is around $1.4 billion for the year compared to the previous guidance of of around 1.325 billion.
Please note the previously provided supplemental data related to fiscal year 2006 is summarized by quarter on slide 38 in the Appendix.
Let's turn now to a review of our individual businesses starting with agricultural equipment on slide eight.
For the first quarter, Deere's worldwide Ag sales were up 10% as expected, including three points of positive currency translation.
The quarter also benefited from increased sales in Germany, ahead of the January 1st value added tax increase.
Somewhat off setting the impact of the increased sale volumes was higher SG&A expense in the quarter, with over $20 million of the increase attributable to growth initiatives and currency translations.
In addition, production inefficiencies weighed on the quarter with tonnage in U.S. and Canada down 4%.
The resulting operating profit was $137 million versus 106 million last year.
Global Ag fundamentals are very encouraging.
Renewably fuels are continuing to drive increased demand for corn as well as oil seeds such as soybeans and rapeseed.
And worldwide stocks to use ratios remain at very low levels for corn and wheat.
These factors support crop prices which have risen dramatically in the United States which you can see on slide nine.
On our last call, the price increases were relatively recent, beginning in early October 2006.
Throughout the quarter, however, these increases were not only sustained but rose even further for corn and soybeans.
As slide ten shows, this improvement has been incorporated into our model.
The current Deere estimates for U.S. commodity prices have corn rising to $3.10 per bushel for the 2006-07 crop and increasing to $3.25 for 2007-08.
Our estimated soybean prices rose even more dramatically to $6.35 for the 2006-07 crop and $7.00 for 2007-08.
These increases are reflected in our estimates of U.S. farm cash receipts as shown as slide 11, where our forecast now calls for cash crop receipts of $121.4 billion in 2006. rising to 133.3 billion in 2007.
This compares to just 114 billion in 2005.
Total U.S. farm cash receipts are now estimated at $259 billion for 2006 and 267 billion for 2007.
Our outlook for industry sales of agricultural equipment in the U.S. and Canada, as shown on slide 12, is now flat to up 5% for fiscal year 2007 versus fiscal year 2006, compared to our previous outlook of roughly flat.
We are seeing strength in large tractors, combines, planters and tillage equipment being offset somewhat by weakness in cotton, small tractors, and some livestock related equipment.
Note that as anticipated, Deere retail activity was down 15% in the first quarter versus first quarter of 2006.
And we continue to expect weak sales in the first half of 2007 with recovery in the second half.
As we said last quarter, about 40% of the forecasted Deere retail sales for fiscal year 2007 are anticipated in the first half of the year, followed by 60% in the second half.
Typically, this split would be closer to 50/50.
Also as we discussed in our last call, while commodity prices and farm cash receipts are strong, it will take time to translate into sales.
Keep in mind, cash receipts in any given year impact equipment sales both in that year and the following.
In western Europe, shown on slide 13, our current out look is for industry sales to be about flat for the fiscal year, compared to the previous out look of flat to down slightly, with strength in the overall farm sector primarily due to higher commodity prices.
Sales are also expected to be higher in the Commonwealth of the Independent State's countries, including Russia, due to continued market growth in the region.
In Australia our outlook remains unchanged with industry retail sales projected to decline about 25% for the year as serious drought continues in the country.
And in Brazil, conditions are beginning to improve for farmers.
As slide 14 shows, farm income is expected to recover in 2007.
As the Deere forecast for 2007 net income has risen to $6.1 billion compared to $0 in 2006.
This is due mostly to the expected strength in the commodity markets and in particular, soybeans and corn.
We are beginning to see evidence of some improved retail activity.
Slide 15.
Driven primarily by these improved conditions in Brazil, our outlook for South America now calls for sales to be flat to up 5% in fiscal year 2007 versus our initial outlook of down about 10%.
How does all of this impact our outlook for worldwide sales of John Deere farm machinery?
As shown on slide 16. we now project Deere sales to be up about 8% for the year.
Including about 2 points of currency translation.
This compare to to our previous outlook of up about 4%.
Production tonnage is expected to be about 4% higher in the year versus the previous projection of down about 3%.
While this change may seem modest to some, we believe we are in the early stages of a multi-year period of strength for the Ag industry.
Let's move now to our Commercial and Consumer equipment business on slide 17, where sales rose 2% in the quarter with a $38 million operating profit versus 19 million a year ago.
In the seasonally quiet quarter, improved operating cost and positive price realization led to strong results.
We should also note that our landscapes operations continued to perform well.
Turning to the full year on slide 18, our outlook has been tweaked slightly and now has sales up about 3% for fiscal year 2007, versus our previous outlook of up about 4%.
We expect continued strength in our landscapes operations as well as contributions from new products, like our residential zero-turn mower and the XUV Gator utility vehicle, and the introduction of our select series riding lawn equipment in Europe.
Let's focus now on construction and forestry on slide 19, where sales were down 7% to $1.1 billion in the quarter, with weakness in the U.S. and Canada being off set some what by strength and sales outside the region.
Operating profit was negatively impacted by lower shipping volumes.
Manufacturing inefficiencies related to lower producted also weighed on the quarter.
In the U.S. and Canada, Construction and Forestry factories were shut down 27% of the available production days and production tonnage was off 25% in the quarter.
While price realization was positive, it was fully offset by raw material cost increases of about $15 million.
SA&G and R&D costs were up in the quarter as we continue to look towards long term growth opportunities.
The resulting operating profit was $95 million versus 136 million a year ago.
As a reminder, last year's operating profit included a $13 million pretax charge related to the closing of our forestry equipment factory in Woodstock, Ontario, Canada.
Turning to the outlook on slide 20, our net sales of Construction and Forestry equipment are now forecast to be down about 9% for the year.
A deterioration from our previous outlook of down about 5%.
With a weaker residential spending outlook as housing starts are now forecast at 1.5 billion versus 1.6 billion previously.
U.S. forestry markets are also softer and less spending is anticipated from independent rental companies.
Production tonnage projections have been lower and now are expected to be down about 20% for the year versus the previous forecast of down 11%, with production in the U.S. and Canada down about 24%.
Moving now to our credit operations, the press release talked about the impact of higher credit losses on credit net income.
Slide 21shows the historical chart of our provision for credit losses as a percent of the average owned portfolio.
As you can see, while our provision for losses is higher, it remains at a relatively low rate.
Slide 22.
Credit report of net income in the quarter for $87.1 million, up from 84.3 million a year ago.
The forecasted credit net income for the full year has been revised upwards to about $355 million from the original outlook of around 345 million.
Before moving on to retail sales and housekeeping, let's l look at receivables and inventory.
This marks the 27th consecutive quarter where we have reduced trade receivables and inventories as a percent of sales when compared to the same quarter in the prior year.
This data is shown graphically on slide 23.
Slide 24 lists the changes in receivables and inventory at the end of the first quarter 2007 versus first quarter of 2006 by division.
And our fiscal year 2007 goal on slide 25 now calls for an $100 million reduction in inventory and receivables, all in Construction and Forestry, compared to our previously communicated goal of $225 million reduction.
This change reflects improvement in the agricultural markets.
Before turning to housekeeping, let's look at the latest on retail sales.
We'll start with agricultural equipment in the U.S. and Canada where retail activity for the quarter was down double-digits on a current dollar basis.
As the January retail sales data, published by the Association of Equipment Manufacturers was not available in time to include on a slide, I will be providing our commentary orally.
Here is the product category detail for the month of January expressed in units.
For utility tractors, the industry was down 2%.
Deere was down double-digits.
On row crop tractors, the industry was down 18%.
Deere was down more than the industry.
Four wheel drive tractors, the industry was down 8% and Deere was down double-digits.
And on combine, the industry was up 18%, Deere was up a single digit.
Our field inventories in the U.S. and Canada remain in very good shape, as Deere inventories at the end of December remained below industry levels in each of the categories just cited.
And on slide 26, you see the for row crop tractors, Deere ended January with inventories at 23% of trailing 12 months sales, versus 22% a year ago.
Combine inventories remain at extremely low levels, 8% of sales versus 6% at the same time last year.
Turning to slide 27, in western Europe, sales of John Deere tractors were down low double digits in January, while combines were down double digits.
Moving to slide 28, Deere's retail sale of commercial and consumer equipment in the U.S. and Canada were down double-digits in January.
Construction and forestry sales in the U.S. and Canada were also down in double digits, on both the first in the dirt and settlement basis.
Now let's touch on a few housekeeping items.
Actual shares outstanding at the end of the quarter it was 226.9 million and average diluted shares outstanding for the quarter were 229.8 million as shown as slide 29.
Regarding raw material and freight, let's move to slide 30.
In the first quarter, these costs rose approximately $20 million versus last year.
Our fiscal year 2007 forecast now includes an increase in raw material and freight of 175 to $225 million versus our previous forecast of 200 to 250 million.
By division, the breakdown is about $75 million for Ag, approximately $50 million for C&CE, and about 75 million for Construction and Forestry.
Looking at R&D expense on slide 31.
Spending was up 10% in the first quarter and we are now forecasting an increase of around 11% for fiscal year 2007.
This increased spending relates to our continued emphasis on new products and technology.
Moving now to slide 32, SA&G expenses.
SA&G for the equipment operations was up 15% in the first quarter including about 6 points related to growth initiative and currency translations.
Our fiscal year 2007 forecast now includes SA&G increases of about 8%, including about 5 points relating to our growth and currency initiatives.
Regarding the tax rate on slide on 33, the effective tax rate for the first quarter was 35.5%.
For fiscal year 2007 our forecast continues to assume a tax rate of 34 to 35%.
Slide 34 highlights the share repurchases as part of our publicly announced plan by quarter for fiscal year 2007 and fiscal year 2006 During the first quarter of 2007, we repurchased 2.1 million shares with an expenditure of about $0.2 billion.
Approximately 8 million shares remain on our current authorization of up to 26 million.
Slide 35 provides some additional information related to our fiscal year 2007 forecast.
Capital expenditures are currently forecast to be about $600 million.
Depreciation and amortization is expected to be $400 to $450 million, and we anticipate about $325 million in pension and OPEB contributions during the year.
Looking ahead, we are anticipating another solid financial performance this year.
Global agricultural markets are clearly improving and strong underlying fundamentals hold promise for a sustained recovery.
And we're continuing to serve a growing worldwide customer base, while investing in new products and important growth initiatives.
We are helping ourselves with a continued sharp focus on asset management.
- VP, IR
Thank you, Tony.
We are now ready to begin the Q&A portion of the call.
The operator will instruct you on the polling procedures.
Now for my usual quarterly reminder.
We ask that you limit yourself to one question, and if you need a clarifying follow-up, go ahead and do that.
And then please get back in the queue.
We would like to make it through all participants in the queue for a change.
With that, operator?
Operator
Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from David Bleustein.
Please state your company name.
- Analyst
It is UBS.
- VP, IR
Good morning, David.
- Analyst
The pace of share repurchase seemed to have slowed a bit in the quarter.
Given the run in the stock should we expect that trend to continue?
If so, what are your updated thoughts on capital allocation?
- CFO
This is Mike Mack.
Maybe I will respond to this one.
I would say very simply that you shouldn't read anything into it with respect to the share repurchases that occurred in this particular quarter.
We have certain periods where we have to stay out of the market.
As an example around any announcements coming out of the Board meeting last December.
And so I think I'd just leave it at that.
Nothing to read into it.
- Analyst
And how about capital allocation, can you walk through what you expect to do with all this money you are generating?
- CFO
Again, our plans are not very different than we've expressed before with respect to a balanced approach towards this, going to continue to invest in projects for the future, for SVA growth around both R&D and capital expenditures, where, as you know, we made four increases in the dividend in the last two years for a cumulative increase of 100% since that time.
Our off-balance sheet applications are in very good shape at this stage based on some prior funding.
And then of course we have the other residual lever which we described just a moment ago with regard to share repurchase.
- VP, IR
Thank you, David.
Next question.
Operator
Jamie Cook and state your company name.
- Analyst
Hi, Credit Suisse.
I guess, Marie, my first question, when I looked at you implied margins overseas and your sales growth, your sales overseas were up 24%.
If you look at the implied margins you are actually down 40 basis points.
That was a little surprising to me.
Can you provide a little color on that?
- VP, IR
The sales would reflect the sales as to where the ultimate shipment or ultimate sale took place.
Sometimes you can get some anomalies, especially in a fairly low volume quarter, depending on where the machines are produced, because the manufacturing margin then would stay in the resident country, and that would be particularly true in our Construction and Forestry activity..
I wouldn't read anything into it.
Especially, again, given in the first quarter you are dealing with small numbers so a small change in number can make a big percentage increase.
- CFO
Another thing with respect to overseas.
The Brazil market continues to be soft and that is partly reflected in this.
And also on top of that, we have factory start up expenses that are occurring, but we don't have the volume yet from that new factory we're building in Montenegro.
So I think that, at least in the short term, influences us.
- Analyst
I guess my follow up question, you know, on the flip side, when I look at the consumer and commercial business the margins were much better than I anticipated.
So was there anything unusual in there?
You mentioned higher you know, improvement in landscaping sales, would that have a favorable impact on mix?
- VP, IR
Really in the quarter, I would say that they just had a little better operating performance would be more significant than any changes in, like, landscaping.
Landscaping does continue to be profitable, it's an acquisition that is working out very well.
But really, it's just in the operations.
- Analyst
Okay.
Thank you.
Operator
Our next question comes from Steve Volkmann and state your company name.
- Analyst
JPMorgan.
Just a couple of quick ones.
Construction equipment pricing, how does it look and should do we expect for '07?
- VP, IR
Again, I am going to remind everyone to limit yourself to one question.
We have had a fair amount of feedback from our shareholders regarding our ability to get through the queue.
In terms of construction pricing, actually all three equipment divisions had positive price realization in the quarter and are anticipating positive for the full year.
We did tweak up our guidance from what had been 1 to 2 points and now we are looking at 2 points of price realization.
That forecast does take into account the market realities, which are that things are a little more difficult in Construction and little bit better in Ag from our previous guidance.
- Analyst
Just so I'm clear, even though volumes are down in the U.S. for most of your business, you still expect positive pricing for CE specifically.
- VP, IR
Yes.
All three equipment divisions we expect positive pricing.
- Analyst
Thanks.
- VP, IR
Next question.
Operator
Our next question comes from Ann Duignan.
- Analyst
Hi, Bear Stearns.
My question is focusing on the outlook for input costs.
You started the year with the expectation that input costs would be up mid-point $225 million and now, it is 200 million.
But input costs were only up 20 million in the first quarter.
Now I know Q1 is the lowest volume quarter in the year, but it still seems like this expectation of an increase of $200 million is quite conservative.
Can you just walk us through what's baked into your outlook and how much is freight versus how much is raw materials.
Frankly, why wouldn't we see it dissipate a little bit in the back half of the year?
- VP, IR
Well, we did to a pretty extensive analysis of that raw material cost and this is based on our best estimates as of this time.
Obviously, we all would hope that that number could come in better, but this is what our analysis showed us.
Some of the factors would be steel prices, we are fairly good users of plates, which would not have the same market response as sheet.
We are seeing higher tire prices.
And we still have higher logistics expenses, in part due to an assumption of higher fuel prices.
Obviously, the longer we see oil prices and resulting diesel prices stay below $3 that would help us.
But at this point, based on how we see our volumes shaping up we aren't prepared to bake a hope into our financial forecast.
And that's the bottom line.
- Analyst
Any color, Marie on how much of the $200 million you think is going to be freight surcharges versus raw materials?
- VP, IR
I would prefer not to do that.
We are just looking at it on a total basis.
- Analyst
Okay.
I will get back in queue.
- VP, IR
Thank you.
Operator
Our next question comes from Andy Casey.
State your company name.
- Analyst
Wachovia Securities.
Question about the guidance. implicit in the full year 1.4 billion in continuing Ops net income, and the H1 '07 guidance the second half guidance of around $6.11 to $6.36 is below last year of $7.12.
- VP, IR
Andy, you just cut out on us.
Hang on.
Operator.
Operator
Yes, go ahead, sir.
Your line is open.
- Analyst
Can you hear me now, Marie?
- VP, IR
We can hear you, but you're going to have to start over.
I heard the implicit in the guidance.
- Analyst
Thanks.
I am trying to understand the second half guidance.
If I take out the first half guidance now with your second quarter, net income and the 1.4 billion for the full year, it looks like the second range is somewhere around $6.11 to $6.36, which is down from last year of around $7.12.
I am trying to understand what drivers would cause a decline in the second half, given raw material impact likely is first half weighted and you expect second half improvement in North American Ag.
Are there any internal initiatives that we should be aware that dampen the second half performance.
- VP, IR
One thing you do need to bear in mind is that we do look for Construction and Forestry to have lower production during the year and that would and factor.
The other factor that we've talked about is the R&D and the SA&G spend which are both driven really by growth and nonetheless have an impact on our financials throughout the year.
Pricing is about 2 points, some of you may be looking at something higher than that, and of course you know we had a very good first quarter so that means your rate of improvement might narrow a bit as you run through the year.
In our current forecast.
And then of course the raw material cost, which would be more concentrated in your heavier production period, which would really be the second and the third quarter.
- Analyst
I guess, one last clarifying on that.
What percentage of your combine productions are already ordered?
- VP, IR
A very high percentage of it.
We would be looking at, you to, 95% comfortably, and candidly, in our improved outlook for sales and for production volumes is the fact that our combine program, our earlier combine program did go well and we were continuing to -- we have increased what we expect that we will sell for the year and that is reflected in our guidance.
- Analyst
I will leave it for someone else.
- VP, IR
Next question please.
Operator
Our next question comes from Mark Koznarek.
- Analyst
Cleveland Research.
Good morning.
The question about the revision in the Ag equipment outlook, we are going from prior up 4 to up 8% in revenue and your tonnage though has been revised pretty sharply from down 3 now to up 4.
So you raise the revenue 4 percentage but the tonnage 7 percentage points and I guess two things could be at work here.
What is the change in your attitude toward inventory reduction or instead is the tonnage change representative of a mix shift that you're expecting?
- VP, IR
There is definitely some mixed implications in this.
Tony cited the fact that cotton equipment is weak, it is quite weak in view of the current market situation, and those are large machines that are very important to us.
And you also, have some some decline in smaller tractors, relatively speaking from our last outlook and livestock related equipment.
So you do get some unusual mix.
- CFO
I wanted to comment.
The slide we have on the consolidated receivables inventory as a percent of sales should give you some indications our attitude about inventory hasn't changed at all.
We're very committed to turn our assets better.
We feel more and more confident relative to our ability to respond quickly to changes and demand.
And so a fundmental change is certainly not the case.
- VP, IR
And you do want to point out that we have tweaked the guidance on our estimated ending Ag receivables, which for the division, we had previously said would be down 100 million and we are seeing roughly flat.
And that's, you know, very early in the year to get a precise reading on that.
This is not a signal that we'll be taking sales or receivables down significantly from last year's level.
- Analyst
You will not be.
- VP, IR
In our plans.
Our plans call for inventory to be roughly flat.
- Analyst
Okay.
And, I am trying to clarify it.
I thought previously, we had expected to see some cuts to the receivables in the Ag equipment.
- VP, IR
Receivables and inventory together.
Our previous guidance had been down 225 for the total company. 100 out of Ag, 100 out of construction, and 25 out of commercial and consumer.
And we're now saying, the new guidance is 100 for the full company, all coming out of construction.
- Analyst
Okay.
Got it.
- VP, IR
Thank you very much.
Next question.
Operator
Our next question comes from Barry Bannister.
Please state your company name.
- Analyst
Stifel Nicolaus.
Good quarter.
According to a Successful Farming magazine story recently, the pricing and demand for used equipment, and especially Deere, has been very strong.
If your used competes head to head wit competitors new equipment oftentimes, as I think, may I infer that strong sales of your used equipment is one of the reasons why you have new equipment versus the industry recently?
- VP, IR
I don't know if I can say they are lagging.
But I can tell you that our dealers tell us that they are emphasizing that.
As you know, we have talked, the last three conference calls, about the fact that our used inventories in north america, while not alarming, were higher than desired and based on what our dealers were feeding back to us, they were going to be focusing on that, and given what has happened in the market, we are seeing the year over year gap, if you will, narrow.
And it is about 100 million when we first started talking about it and it was a gap of about 250 million year over year increase.
So that gap is coming down some and we are seeing that pricing is stable and there are some instances where you've actually seen prices improving slightly on used equipment.
So we are very encouraged by used equipment, but you are also correct to say certainly that our dealers are focusing on that, and that would be a factor.
- Analyst
Good to know.
- VP, IR
Thank you, Barry.
Operator
Our next question comes from Terry Darling.
- Analyst
Goldman Sachs.
Question on slide 39, on the bushels of corn used in ethanol, and I understand it's an informa source, but obviously you're putting it in the package here, so at least it's within the ballpark.
If you look at the '08-'09 number, that is a very large number relative to a number of other estimates.
Wondering if you can about what the corn price and oil price assumptions behind that, and whether you think at current prices of over $4.00 for corn and under $60 for oil, that ethanol economics are strong enough to drive this continued capacity expansion in ethanol production.
- VP, IR
I think that's a great question.
We don't have point estimates at this time to share publicly.
With the out years beyond '07, '08.
Again, this is an informa generated number as they are looking at their -- at what the implications are of the current pricing, current capacity coming on, that is the results, that number.
We will actually have an opportunity to take a look at the U.S.D.A.'s base line in another hour or two.
I think their number comes out at noon Eastern and so we'll have a chance maybe to take a -- to do a further comparison.
But I really don't have anything else to add.
- Analyst
Thank you.
- VP, IR
Mike, you wanted to chime in.
- CFO
I was going to just comment that I think, with tax incentives and say, $4.00 corn, ethanol producers can still make money even as low as in the 40s, in terms of oil prices.
So I think they have head room yet with respect to their economics.
- VP, IR
Next question please.
Operator
Our next question comes from [Robert Wurthiemer].
State your company name.
- Analyst
It is Morgan Stanley.
I want to follow up on the construction pricing question.
Do you have a view that industry pricing is going to be flat to up?
I mean, to the extent that you are willing to comment where you are seeing industry pricing at retail still positive in the first quarter, or is it that you are signalling that you going to hold your pricing no matter --
- VP, IR
Bob, we're not able to engage in signalling.
All I really can tell you is what is included in the forecast which is the 2 points of positive price realization affecting all division and that is all we are allowed to comment on.
- Analyst
Are you able to say what you were seeing historically in the last couple of months in industry pricing?
- VP, IR
We had a reasonably good first quarter.
I don't have anything else to add.
- Analyst
Thanks.
- VP, IR
Thank you.
Operator
Our next question comes from Henry Kern, please state your company name.
- Analyst
It is Lehman Brothers.
Question for you on the growth initiatives.
You mentioned a couple of times increased growth initiatives this year.
Can you talk about how much of that is the Brazilian plant and some of the specifics around the other ones potentially and where we might see see some benefits from those growth initiatives?
- VP, IR
I would prefer not to give you a point blank number on the Brazilian plant.
But the Brazilian plant is -- actually I was just down there.
And the construction is coming along very nicely.
They are on target to begin pilot builds this summer and obviously with the very good market conditions there, taking a look at how they transition production from the existing factory in Horizontina over to Montenegro to make sure the we do that in the best manner and most efficient manner possible, given the improving market.
But there are many other activities that we have underway.
We have got new dealer networks in eastern Europe and in Russia that we are supporting.
We are looking at -- our last analyst meeting we talked about auto track, that is all folded in the umbrella of intelligent mobile equipment technologies.
We think that is going to be very important in adding value to our customers, so there is a lot of activity in this area.
There's some spend still related to our acquisitions on landscapes as we grow irrigation business.
We just made an acquisition less than a year ago of Roberts, which is an Ag irrigation company, drip tape, and we see opportunities in there.
That just gives you a very quick flavor.
Mike, is there anything else you wanted to add?
- CFO
Just the number of them.
But you could put to Agro Services as another area that we have been investing in for some time.
We have big hopes for that long term.
Two other countries that were worth mentioning in terms of investments are China and India.
Both of which we think have very strong long term potential pay-offs for us, and some short term as well.
- Analyst
Okay.
Thanks a lot.
That was helpful.
- VP, IR
Next question.
Operator
Our next question comes from David Raso.
- Analyst
Citigroup.
I have a question on the implied sales growth, the rest of the year, in farm equipment.
Based off the full year guidance, what you just did in the first quarter, the last three quarters the revenue is supposed to grow for farm equipment about 7.6%, slower than the first quarter.
I can appreciate the currency help to the first quarter.
But I'm just trying to understand the logic behind that, when your production tonnage in North America, the comps get easier going forward.
And of course, you just raised it the outlook for most of your end markets.
- VP, IR
You are correct that in the quarter, currency is fairly significant in terms of the sales gain overseas.
It would have been about a third of that.
- Analyst
3%.
It was 3% worldwide, correct, for the quarter.
I would like to clarify what you said earlier?
- VP, IR
2 points for the full company in the quarter, but if you looked just our Ag, which is what I think is what you're talking about, it would of course have a more significant impact.
If you, you know, in terms of how it is going to shake out, we do, we have made some adjustments again, in some high weight equipment on the down side and again, I specifically would cite our cotton equipment.
You have a little lower tonnage than what we'd originally expected for production on some of the smaller tractors.
And while our outlooks are certainly improved in all three businesses, you're really still looking at flat to up in the U.S. and Brazil.
So we haven't made --- I'm sorry, South America.
So we haven't made huge changes year over year.
While these changes are better versus our previous guidance, they are still not huge year over year.
And that is really sets the stage for why we didn't get the results you do.
- Analyst
How does production relate to retail, I guess, then, for the first quarter just completed for Ag?
And what you expect for the rest of the year?
- VP, IR
I don't know that I could -- I don't think I can give you a definitive answer.
It is a pretty light quarter.
- Analyst
Production versus retail.
I am just trying to figure, again, if you just did 6.9% core growth for Ag, ex-currency, and the tonnage comp gets easier, and where the pick-up in North America is the bigger ticket items.
These cotton harvesters I assume are, what, 400 to 450 million a year for you?
It's just not that big a piece of the pie to offset Waterloo ramping up.
- VP, IR
Mike, do you have anything else to add?
I do not have anything else to add.
Again, you're looking at an estimate that has just been tweaked from flat to flat to up and there are some offsets in some of the smaller products.
- Analyst
Okay.
We will talk off line.
I appreciate it.
Thank you.
- VP, IR
Next question.
Operator
Our next question comes from Eli Lustgarten.
- Analyst
Longbow Securities.
Very nice quarter guys.
- VP, IR
Thank you.
- Analyst
Can we talk about the production schedules for the rest of the year, both in Construction equipment and Ag.
In construction equipment, is it uniformly down 9 to 10% for the rest of the year or does it skew and change in 2 Quarter?
And in Ag, can you be more specific about the gains in the bigger equipment and the large power tractors and combines that you are expecting?
- VP, IR
In terms of our retail outlook in North America on combines, we went into the year with a very cautious outlook in terms of combines.
So when we say we improved our outlook, you are really still looking at a combine retail sales market that probably relatively flat with last year, although significantly better than what we had originally expected.
On large tractors it is certainly up and it would probably be fair to characterize it as an up double digit -- very low double-digit at this point.
In terms of the construction, and how that plays out over the course of the year, basically we would -- we have tonnage for the full year down about 20% -- this is worldwide in the first quarter down about 20%.
That probably indicates you are looking at changes year over year that would be in the range of 20% for the remaining three quarters, without getting too specific.
And we said for the -- in the U.S. and Canada specifically in the second quarter down 23.
- Analyst
I guess I'm trying to figure out, you were down 16.5% in construction equipment sales in the first quarter, and you are going to be down 9 for the year, which requires 9 to 10%, almost 10% for the second, for the next remaining quarters.
Is that uniformly distributed or is that sort of a stronger --
- VP, IR
At this point we wouldn't be prepared to provide you with any more definitive sales commentary.
- Analyst
All right.
Thank you.
- VP, IR
thank you.
Operator
Next question comes from Seth Weber and please state your company name.
- Analyst
It is Bank of America.
- VP, IR
Good morning.
- Analyst
Following up on Eli's question.
Can you give us some color of the confidence you are feeling in the large tractor business.
We haven't seen that yet in the monthly retail numbers.
Is there anything you can point to?
You gave us the pre-sale number for the combines.
Is there anything to that effect that you could talk to about via large tractors?
- VP, IR
It would be true that when we started the year we had a more cautious view on very large tractors, I guess, without giving a specific number and now we are now looking for them to be up, again, very round number, low double-digits.
We have reflected in our tonnage outlook and production schedule, some increased retail activity, based on what we are seeing in the market.
So we do have some comfort that these increases are justified in the market.
And I am not sure what more to add.
- CFO
You think of where -- what products are particularly important to the corn market, which is the one that is quite affected by the prices you are looking at, you know, large tractors, combines, planters and sprayers.
So those are the kinds of products that will be in the path of that, I would imagine.
- Analyst
Okay.
Thank you.
- VP, IR
Thank you Seth.
Operator
Our next question comes from Alex Blanton.
- Analyst
Ingalls and Snyder.
Good morning.
- VP, IR
Good morning, Alex.
- Analyst
On the construction equipment, Marie, your declines are greater than what you are forecasting worldwide.
Could you characterize what it is like in Europe for that business?
Construction and Forestry?
- VP, IR
Well, quite candidly, in Europe, our business is really a forestry business.
There's very little construction that's going there.
And the forestry markets in Europe, for the full year are probably flattish there, and that compared to the decline if the United States forestry, that would be 20% or so.
- Analyst
So what is pulling the total up then versus the North America?
It is down less worldwide than in North America, is what I am pointing out.
Where is it up?
- VP, IR
Oh, I think you get some mix issues in terms of where we have some production.
I don't think you can read too much more into that.
The other thing you need to remember, as you're thinking about tonnage and then how division sales break out, is remember, this division does have purchase product that come through the joint ventures, includinge excavators, a pretty important project.
- Analyst
Finally, landscaping, it would seem, depends on housing.
And yet you've reported strength in the landscaping.
So what is going on there?
Why are you so strong versus the housing market.
- VP, IR
I think in part it is demographics, like in my own neighborhood, were people are putting in irrigation systems because of the weather we have had over the last few years.
And so, it is a demographic issue and also an issue of just customer preference to have more attractive lawns.
And I think we are benefiting from the efficiencies as we roll these now three operations together.
- CFO
These three operations, I think we made a lot of progress with respect to the integration of these acquisitions.
And now the organic growth that's coming from these business actually has been pretty good these last couple of years.
- Analyst
Thanks.
Operator
Our next question comes from Andy Casey.
State your company name.
- Analyst
Wachovia Securities.
- VP, IR
Hey, Andy.
- Analyst
If I can revisit the second half for a little bit.
The R&D and SG&A increase that you talked about.
Are those skewed towards the second half, or are those up?
- VP, IR
No, actually we started seeing our rate of spend somewhat accelerate in the second half and second quarter of last year.
So the rate for our guidance for the full year for SA&G is in the range of 8% and we were up about 15 in the first quarter, but nonetheless, that is still incremental spend.
- Analyst
Okay.
I will take the rest off line.
- VP, IR
We have time for one more question.
Our final question comes from Barry Bannister.
State your company name, sir.
- Analyst
Stifel Nicolaus.
On Brazil. there is going to be soon an end to the payment holiday and some of the receivables that have been accrued without cash payments may go bad.
Do you have any outlook on the Deere accounts receivable book down there and how the payment holiday might affect them?
- VP, IR
We have actually done a very extensive analysis of the portfolio.
And our reserve position right now is 5.5% and we think that will be adequate based on what we have seen in the market.
And you know, including the improved economic conditions that we are experiencing this year.
It remains to be seen, ultimately what happens with those payments.
And we don't know if there will be any changes in the program.
That assumption is based on people making payments under the current existing programs with no changes.
- Analyst
Thanks a lot.
- VP, IR
Thank you and thanks to all of you participating in today's call.
As usual, we will be around the rest of the day to answer your questions.
Operator
This does conclude the conference call, we thank you for your participation.