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Operator
Good morning, and welcome to the Deere first quarter 2009 earnings conference call.
Your lines have been placed on listen only until the question and answer session of today's conference.
I would now like to turn the call over to Ms.
Marie Ziegler, Vice President, Investor Relations.
Please go ahead.
- VP of IR
Good morning.
Also on today's call are Mike Mack, our Chief Financial Officer; Susan Karlix, and Justin Merrimac, both from the Deere Investor Relations staff.
Today we'll take a closer look at our first quarter earnings and then spend a few minutes talking about our markets and where at this time we see things headed for the remainder of fiscal 2009.
After that, we'll open for 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, though, a reminder.
This call is being broadcast live on the internet and recorded for future transmission and use by Deere and Thomson Reuters.
Any other use, recording or transmission of this call without the express written content 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 this earnings call.
The call today 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 these forward-looking statements.
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.
The company, except as required by law, undertakes no obligation to update or revise its forward-looking information.
The call and the accompanying materials are not an offer to sell or solicitation of offers to buy any of the company's security.
This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP.
Additional information concerning these measures, including reconciliations to comparable GAAP measures, is posted on our website at www.JohnDeere.com/financialreports under Other Financial Information.
Call participants should consider the other information on risks and uncertainties and non-GAAP measures in addition to the information presented on the call.
And now for a closer look at our results, here is Susan.
- Asst. Secretary
Thank you, Marie.
John Deere reported another quarter of solidly profitable performance today and did so despite the impact of the global economic slowdown.
Among the highlights, our agricultural equipment operations in the United States and Canada continued on a strong pace.
Our construction and forestry division reported a profit in spite of trying market conditions.
Also, our credit operation has maintained access to the credit market.
That is helping ensure ample financing for our customers.
On the negative side, our results very definitely reflected the impact of the global recession, as well as the effect of volatile exchange rates and a further increase in material costs.
Let's take a more detailed look at the quarter, starting with Slide 3.
Net income for the quarter was $204 million on first quarter equipment sales of $4.6 billion.
Turning to Slide 4, total worldwide equipment operations net sales were up about 1% in the quarter versus first quarter 2008.
Currency translation on net sales was negative by approximately 6 points and there were about 6 points of positive price realization.
On Slide 5, worldwide production tonnage was flat in the quarter compared with our previous forecasts of up 12%.
This illustrates that all three equipment divisions are not hesitating to step on the brakes, rapidly adjusting to changing market conditions.
Worldwide production tonnage is expected to decrease about 17% in the second quarter of 2009 and be down about 12% for the full year.
As we turn to Slide 6, ag markets have remained strong in the US and Canada, while the remainder of our businesses have seen a dramatic slowdown in the quarter.
The forecast we review today represents our best assessment of the 2009 outlook, but keep in mind, it also reflects a high degree of uncertainty.
Second quarter net sales are expected to be down about 9% compared to the second quarter of 2008.
Currency translation on net sales is about a negative 6 points with about 5 points of positive price realization.
As the press release states, we have suspended providing quarterly net income guidance for now.
Our intent is to revisit this decision when there is less uncertainty in the global economy and evidence of stabilization in foreign currencies.
For the full year, net equipment sales are now forecast to be down about 8% compared with fiscal year 2008.
This includes about 6 points of negative currency translation on net sales and about 6 points of price realization.
The current outlook for net income is approximately $1.5 billion for the full year with risk on the downside.
Turning to a review of our individual businesses, let's start with agricultural equipment on Slide 7.
Net sales in ag were up 18% due to higher volume, reflecting strength in the US, Canada, and Western Europe.
Operating profit was up 5% to $348 million.
Price basically offset the impact of higher material costs.
Currency had a significant negative impact on ag equipment performance for the quarter, basically offsetting the benefit of higher volumes.
This was due to extremely volatile currency exchange rates and the dollar strengthening against the major currencies we do business in.
Currency movements, both translation and transaction or trade flows, reduced operating profit by about $150 million in the first quarter.
Slide 8 illustrates the radical decline in foreign currencies versus the US dollar over the last year.
But as shown on Slide 9, the biggest part of the change has occurred in the last few months.
Over the course of the year, our trade flows are relatively well balanced, but that may or may not be the case in any reporting period.
Where there tend to be annual imbalances, we may hedge our exposure using currency forward contracts or currency risk sharing agreements.
That said, the extraordinary volatility of exchange rates and the timing of our trade flows increased our exposure to currency movements in the first quarter.
In fact, if we look at ag sales and operating profit on a constant exchange basis, the division would have had a 23% incremental margin in the first quarter.
Now let's move to Slide 10 and take a look at some of the economic assumptions that underlie our ag forecast.
Projected commodity prices for '08 to '09 reflect very little change from last quarter.
As is our practice, we have included the next crop year's prices on the chart.
Although down from last quarter's estimate, they still remain at good levels by historic levels.
For a visual perspective, turn to Slide 11.
The forecast prices, as you can see, though down from recent levels, remain higher than the past several years -- and as shown on Slide 12, at levels that generally permit our farm customers to earn a good return.
On Slide 13, US farm cash receipts remain at very good levels and are up significantly from as recently as 2007.
This supports our expectation that the US farm sector will hold up reasonably well in the year ahead.
Before moving to our retail sales outlook, I would like to address an issue where we are frequently asked about, order cancellations, as seen on Slide 14.
The US and Canada, as well as Western Europe, have seen very few cancellations.
South America experienced somewhat higher than normal cancellations in the quarter while central Europe and the Commonwealth of Independent States, including Russia, have seen a high number of cancellations, as market conditions in those areas have deteriorated.
Our outlook for industry sales of agricultural equipment in the US and Canada, as shown as Slide 15, is now flat to up 5% in fiscal 2009.
We continued to see strength in large tractors and combines in contrast to sales of small tractors and equipment commonly used by livestock producers, which have seen further deterioration.
Remember, small tractors tend to be popular with the general customer segment that has been hurt by the economic slump.
Livestock producers have taken a sizable hit to their profitability, largely because of higher feed costs.
Cotton equipment sales have also deteriorated since our November outlook.
Our outlook for large equipment remains strong as retail orders in the US and Canada for many products extend through much of the year.
This includes 8000 and 9000 series tractors, combines, sprayers, tillage, and seeding equipment.
Transition to a new 8000 series tractor will begin later this year and effective availability on the current series has expired.
For 9000, effective availability is now August.
Due to reduced activity in other parts of the world, we are now able to offer earlier availability to our customers in the United States and Canada.
The combine early order program closed in early February with nearly 95% of expected 2009 retail sales covered.
As shown on Slide 15, our South America outlook now is for the industry to be down 15% to 25% in fiscal 2009.
This outlook is down slightly from last quarter, reflecting drought conditions and a change in tractor mix in Brazil.
Brazilian government subsidies on 55 to 75 horsepower tractors have shifted the tractor mix towards sales of smaller units with lower selling prices.
We now expect Western Europe to be down 10% to 15% and central Europe and the Commonwealth of Independent States, including Russia, to be down significantly.
So putting this all together, on Slide 16, the outlook for the sale of John Deere farm machinery and services in 2009 is projected to be down about 2%.
Currency translation on net sales is negative by about 7 points.
Turning to our commercial and consumer equipment business on Slide 17, reported net sales were down 25% in the quarter.
Operating profit was negative $59 million, reflecting lower shipment and production volumes and higher raw material costs.
The division did benefit from lower SA&G expenses as it continues to make expenses in the cost structure as recessionary economic conditions persist.
Production tonnage was down 20%.
Moving to the outlook on Slide 18, for fiscal 2009, net sales are projected to be down about 14%.
Let's focus now on construction and forestry on Slide 19, where net sales were down 28% in the quarter.
Operating profit was $18 million due to lower shipment and production volumes and higher raw material costs.
C&F had positive price realization, a plus in this discouraging market, which offset the impact of higher material costs.
The real news, though, is the division remained profitable and did so in spite of extremely weak business conditions in a seasonally slow time of year.
C&F's performance demonstrates rigorous expense control, and it lends credence to the division's ongoing success in creating a more flexible, sustainable business.
On Slide 20, for the division as a whole, we expect construction and forestry net sales to now be down about 24% in 2009.
Forestry markets in Europe and Russia weakened dramatically in the quarter.
The industry forecast for these markets in 2009 is now down almost 50%.
On the construction side, the outlook for all geographies weakened in the quarter, with the most significant declines occurring in Latin America.
Slide 21 contains information about the American Recovery and Reinvestment Act of 2009, also known as the stimulus package, which was signed into law yesterday.
The good news for Deere is that the legislation clearly shows the political resolve of the administration and Congress concerning two important segments in which our company and our customers participate -- infrastructure and renewable energy.
Key among the legislation's provisions are the following -- well over $100 billion in infrastructure funding; extension of bonus depreciation -- businesses can write off 50% of the costs of equipment acquired in 2009; extension of the Section 179 deduction by an additional year through calendar 2009 -- customers who place into service qualifying assets with a value of less than $800,000 will be able to expense the first $250,000 of the asset purchases during 2009.
Also in the legislation is a three-year extension of the production tax credit for electricity from wind and biomass, among other sources; $4.5 billion for electricity delivery and energy reliability, including upgrades to the transmission grid; and programs targeted to help rural development, such as more than $7 billion for extending broadband services.
Let's move now to our credit operations on Slide 22.
The current provision is running at about the very low 10-year average.
This continues to reflect strong farmer cash flows, ag and C&CE dealer reserves, rigorous underwriting standards, robust collection practices, and strong used equipment values.
On Slide 23, we have broken out the first quarter write-off activity by collateral type.
Results are shown on an annualized basis.
The ag portfolio is in excellent shape.
In fact, write-offs in ag are minimal.
Write-offs in the other two portfolios have increased, as you might expect, reflecting the underlying economic condition of those businesses.
Bottom line, the portfolio performance is solid led by the continued strength in ag.
John Deere Capital Corporations have continued to have access to the global credit market as shown as Slide 24.
In the first quarter, JDCC issued $4.7 billion in medium-term notes and asset-backed securities.
That exceeds all John Deere Credit's 2009 maturities in those two funding classes relative to the Federal Deposit Insurance Corporation, FDIC, guaranteed debt issuance.
On 16 December 2008, JDCC agreed to issue $2 billion of FDIC guaranteed debt under the Temporary Liquidity Guarantee Program, TLGP.
Since that issuance, the guidance has evolved, and the FDIC published an additional Frequently Asked Question, FAQ, on December 19, 2008, which in pertinent part applied to all grandfathered unitary thrift holding companies such as JDCC.
Consistent with that FAQ, the FDIC has notified Deere and JDCC that JDCC needs additional review and written determination from the FDIC prior to issuing additional FDIC guaranteed debt.
Accordingly, JDCC has submitted the documentation to the FDIC related to this, and will continue to seek the guidance of the FDIC.
I want to be clear that this has no effect on the December 2008 issuance.
That debt continues to carry the FDIC guarantee.
Slide 25 illustrates further evidence of Deere's liquidity.
The enterprise cash, cash equivalents, and marketable securities balance at 31 January 2009 was $5.2 billion.
This mainly reflects John Deere Credit's success in securing funding during the quarter.
In addition, Deere and its credit operations continue to access the commercial paper markets on a regular basis, placing commercial paper at various maturities and at very good rates.
Deere's total worldwide commercial paper outstanding at 31 January was $2.3 billion.
That leaves an incremental $2.2 billion of commercial paper capacity.
Moving back to our worldwide credit operations now, as seen on Slide 26, first quarter net income was about $45 million.
That was down from about $96 million in the first quarter of last year.
Factors leading to the decline included narrower financing spreads, lower commissions from crop insurance, and a higher provision for credit losses.
As shown on the previous slide, in the current environment, our overriding focus is on liquidity.
Prefunding and cash balances come with a price -- the cost of negative carry.
But it also assures we can provide financing to our customers.
These increased costs are reflected in our first quarter results and in our full year forecast.
Credit net income for fiscal 2009 is now expected to be about $250 million.
Before moving on to retail sales, let's review receivables and inventory.
On Slide 27, consolidated trade receivables and inventory ended the quarter higher than a year ago.
The increase was mainly attributable to two factors.
One, high rates of production of large tractors and combines in the United States, and two, some products not shipped or materials not yet used in the markets where conditions have softened.
In those cases, we expect the buildup will be unwound over the course of the year.
Although ag receivables and inventories were up in the quarter, they are forecast to only be up about $75 million by the end of the year.
For the company, the 2009 year end forecast calls for inventories and trade receivables to be down about $250 million.
Although trade receivables and inventories have increased year-over-year, Slide 28 shows they remain well aligned with sales activity.
Now let's discuss the latest on retail sales.
Slide 29 presents the product category detail for the month of January expressed in units.
Utility tractor industry sales were down 15%.
Deere sales were down a single digit.
Row crop industry sales were up 7%.
Deere sales were up double digits.
Four-wheel drive tractor industry sales were up 15%.
Deere sales were up strong double digits.
Combine industry sales were up 13%.
Deere sales were up in line with the industry.
On Slide 30, you see that for row crop tractors, Deere ended January with inventories at 19% of trailing 12-month sales.
Combine inventories were at 8% of sales.
Turning to Slide 31, in Western Europe, sales of John Deere tractors were up low double digits with combines down double digits in January.
And on Slide 32, Deere's retail sales of commercial and consumer equipment in the US and Canada were down low double digits in the month.
Construction and forestry sales in the US and Canada were down double digits on a first in the dirt basis and down a low single digit on a settlement basis.
Let's turn to raw materials and logistics on Slide 33, which shows raw material and logistic cost increases of about $270 million in the quarter.
Looking ahead, our forecast for the year now calls for material cost increases in the range of $400 million to $500 million, well below the level we were expecting earlier.
With $200 million to $225 million hitting in the second quarter, this implies material costs will be flat to down in the second half of the year versus 2008.
Now let's look at a few housekeeping items.
Looking at R&D expense on Slide 34, R&D increased about 7% in the first quarter.
Currency translation was negative by about 2 points.
For fiscal 2009, R&D expenses are expected to increase about 3%.
Currency translation is forecast to be about a negative 3 points.
Moving now to Slide 35, SA&G expense for the equipment operations was down about 5% in the quarter.
This included about a 4 point increase associated with global growth initiatives, primarily in ag, which was more than offset by currency translation of about 4 points and a reduction in variable incentive compensation expense of about 5 points.
It is important to note that everyone on the John Deere team in all geographies and all divisions is taking vigorous action to control costs.
For the year, we project SA&G to be down about 4 points.
The ag division continues to spend for growth initiatives, adding about 3 points.
This, however, will be more than offset by currency translation of about 4 points and reduced incentive compensation expense of about 4 points.
As I pointed out, incentive compensation expense is forecasted to be down about 4 points in 2009.
Our variable incentive compensation system is designed to align performance around strategy and to flex rewards with business results.
Some of you may remember Slide 36 from our marketing deck.
It summarizes the variable incentive compensation plan.
For those of you running models, this forecasted reduction in incentive compensation will also affect cost of sales.
Moving to the tax rate on Slide 37, during the first quarter, the effective tax rate was approximately 29% due to discreet items.
The full year 2009 tax rate continues to be forecast at about 35%.
Turning to Slide 38, for fiscal 2009, we anticipate capital expenditures running about $800 million, $200 million less than the previous forecast.
Depreciation and amortization is forecast around $500 million and we anticipate in contributing roughly $180 million to benefit plans.
Financial services CapEx will be about $100 million in 2009, primarily for wind.
Actual shares outstanding at 31 January 2009 were 422.7 million and can be found in the appendix on Slide 40.
As you see, there was no repurchase activity in the first quarter.
In closing, there's little question that Deere faces a difficult year ahead.
However, we're taking vigorous actions to make adjustments in our costs and asset structure, and in particular to keep factory production aligned with demand at the retail level.
Also, our number one market, farm machinery in the US and Canada, remains strong while the company as a whole continues to benefit from a sound financial position.
Finally, we still believe that macroeconomics are on our side.
The positive trends that support our businesses, such as global demand for food and infrastructure, remain fundamentally intact.
In our view, they continue to hold great long-range promise for the company and for all who share in its success.
Marie?
- VP of IR
Thank you, Susan.
We're now going to open for Q&A.
As is our usual custom, we ask that you limit yourself to one question and a follow-up and then get back into the queue to permit others to have the opportunity to ask questions.
Laura will now give us the instructions.
Operator
Thank you.
(Operator Instructions).
Our first question comes from Andrew Obin, and please state your company name.
- Analyst
Yes, Banc of America Securities Merrill Lynch.
Can you hear me?
- VP of IR
Yes, we can, Andrew.
Good morning.
- Analyst
Yes, hi.
Just could you comment, one of the surprises was a significant deterioration in Western European ag outlook.
Could you just give us a little bit more color on what you have seen over the past couple of months in that market in terms of access to credit and demand?
- VP of IR
Actually in Western Europe, I would say it was more of a tweaking.
We went from down 5% to 10% to down 10% to 15%, so it's not a tremendous change.
And frankly the reason for the change in the outlook has to do with the fact that although we have a good order bank, we have seen very few cancellations, we are not seeing a lot of new orders coming in.
And so we felt it was appropriate to make an adjustment in our outlook.
- Analyst
The other thing, just in terms of thinking about the timing of your internal planning, I think on February 2, you guys put out a press release saying that one of the employment reductions in one of your construction equipment facilities were consistent with your guidance of down 12% in '09 for construction in forestry.
A couple weeks later, guidance is reduced significantly.
Does that indicate that the guidance was tweaked over the past couple of weeks?
Or does it indicate that you just sort of did not want to change guidance as part of that press release?
- VP of IR
Well, I won't comment on the timing of that particular thing.
But when we had an outlook that called for our sales volumes to be down 12%, it -- we knew that we would be required to make some adjustments in our outlook, or in our employment, and that's what you saw reflected.
- Analyst
But I guess what I'm trying to understand, did you change the guidance -- am I correct to understand that you really got all the facts together over the past couple of weeks, or was it work in process throughout the quarter?
- VP of IR
Oh, I'm not going to comment on that.
But Andrew, the timing of when we actually get our forecast, as you're aware, we have a fairly rapid close.
And so we would have had our forecast information not very many days ago, quite candidly, before we released.
- Analyst
I appreciate it.
Thank you very much.
- VP of IR
Thank you, Andrew.
Operator
Thank you.
Our next question comes from Mike Koznarek.
Please state your company name.
- Analyst
Hi, Cleveland Research.
Good morning.
- VP of IR
Good morning.
- Analyst
Just you usually give the average commodity prices and you didn't this time.
I'm just wondering if you could roll through those pretty quickly.
- VP of IR
Actually they are on -- unless something happened in the document you're looking at, but we have them on Slide 10 and I would be happy to give you them.
On Slide 10 for this crop year, the '08 to '09 crop year, corn is at $4, wheat is at $6.85.
Soybeans are at $9.35, and cotton--
- Analyst
Marie, sorry.
I see it now.
I'm sorry I missed that.
- VP of IR
No problem.
- Analyst
And could you -- in your North American outlook, can you talk about changes that might have occurred between some of the categories within the overall business being high horsepower tractors versus low horsepower and then combines?
How do they look versus the prior outlook?
- VP of IR
One thing that has happened is as conditions declined in central Europe and the former Soviet Union or CIS, we had availability earlier in the year, especially for US and Canadian customers that we otherwise wouldn't have had.
So we've seen an availability shift.
So we actually have seen some improvements, if you will, in the order -- or capability of meeting our customer demand there.
If you look, though, in terms of the slight tweaking of our industry outlook, it had been up 5%, and we're now saying flat to up 5%.
That really is coming from the small tractors, from hand forge equipment and deterioration in outlook for cotton equipment.
- Analyst
Okay, so large tractors over 100 horse would be unchanged from your prior forecast?
- VP of IR
I don't think they would be materially different.
Combines would be improved.
- Analyst
Okay, and that -- what roughly is the increase for the large horsepower that you're looking for, for the market?
- VP of IR
That would not be a number I'm able to share with you.
I am sorry.
- Analyst
Okay, great.
Thank you.
Operator
Thank you, Mark.
Next question?
Thank you.
Our next question comes from Robert Wertheimer, and please state your company name.
- Analyst
It's Morgan Stanley, and good morning, everybody.
- VP of IR
Good morning.
- Analyst
I wanted to ask a little bit of a structural question, if I can, on your goal to sort of the [FDA] breaking it positive on things like C&F and the trough.
Is this trough just too bad to achieve that goal or is it still something you think you can do no matter the economic situation?
- VP of IR
Let -- maybe -- I would like to start and then I know Mike would like to make a few comments, too.
In our current forecast, we do still contemplate the construction and forestry equipment division remaining profitable with profitability in the low single digits.
So with that preamble --
- SVP & CFO
I think first of all, I want to recognize, this is a very good question because it's quite central to what we've been talking about for a while, and that is our ability it manage our way through a cycle and reduce our volatility.
This is something, as you know, Rob, in particular, that we've been working on for quite some time.
We talked about this since September 2006 with all the analysts in Waterloo, so we've been focused on it as a company.
I think we are at extremely low level on the volume right now, so that the target of hitting 12% OROA at the trough right now I think would be very difficult to achieve in this year, but certainly much better than we ever have done in the past, and it's our ongoing ambition to try to perform at that level.
But I think that's going to be very difficult in this year.
- Analyst
Okay, that's helpful.
And if I can ask another question, pricing, how much -- I don't know how to ask this exactly.
How much pricing could you quote, unquote, achieve through having backlog and having priced orders, and are you anticipating getting pushed back on any of that backlog?
- VP of IR
What I can tell you is that our pricing guidance is 6 points for the year and that if you think about the large tractors and combines because of the back order position, you've got some comfort I think in some of those numbers.
But obviously we're in a difficult market conditions in the other segments.
And I don't have the ability to give you a number of points, nor candidly probably would we.
- Analyst
All right.
Thanks, Mike.
Thanks, Marie.
- VP of IR
Thank you.
Next question?
Operator?
Operator
Our next question comes from Ann Duignan.
Please state your company name.
- Analyst
Good morning.
JPMorgan.
- VP of IR
Good morning, Ann.
- Analyst
I wanted to pick up on the pricing question a little bit.
Your outlook for the full year is 6 points.
Your outlook for this coming quarter is 5 points.
Can you talk me through a little bit of what's going on there in terms of mix?
Is it less combines more small lawn tractors, or is there anything structural that we need to be careful about what we won't be able to realize the 6 points for full year then?
- VP of IR
Well, our guidance is the 6 points, so we wouldn't have given the guidance of 6 points if we hadn't expected that.
One thing you do see in the second quarter is that is the seasonally strong quarter for our commercial and consumer equipment division.
So there is a little bit of mix in there affecting that guidance.
- Analyst
Okay, okay.
That's helpful.
I just wanted to make sure that that indeed what it was.
And then could you talk a little bit, follow-up question, could you talk a little bit about your outlook for decrementals in construction and forestry and consumer?
Just as we go through the year, I know you'll have perhaps a tailwind from input costs, and was there anything specific in Q1 that won't be repeated such that the decrementals should improve as we go forward?
Trying to understand how to model the operating profit in those divisions.
- VP of IR
Well, again, on an absolute basis, Ann, for both divisions, both commercial and consumer and construction and forestry, we are -- our current forecast contemplates margins in the low single digits on an absolute basis.
I don't have anything really more specific.
Our pricing would -- get relative to the raw material costs, will be a little more of a favorable tailwind.
- SVP & CFO
Maybe just to comment -- C&C has quite a seasonal component through the year, and the most challenging quarter is the one we just had in the first quarter and then the best two, of course, are the second and third quarters.
So I would anticipate that pattern to hold up this year like it does every year.
- Analyst
But the input costs will be more of a tailwind in the back half?
- VP of IR
That's what our -- that's certainly what our forecast has, yes.
- Analyst
Okay, okay.
I just wanted to try and organize that in my brain.
Thank you.
I'll get back in line.
- VP of IR
Thank you, Ann.
Next question?
Operator
Thank you.
Our next question comes from David Raso.
Please state your company name.
- Analyst
ISI.
I wanted to keep the question broad just to get your color.
How would you describe the downside risk to guidance that you speak of?
Which areas in particular are providing that risk in your perspective?
And the reason I really ask is, if you look at the production tonnage and what you've put up in the first quarter, where you are guiding the second quarter, and where you looking for the full year -- it implies the second half year-over-year production declines, maybe a little bit less than we'll see in the second quarter.
But then you look at your US and Canadian ag production tonnage guidance, it implies, and probably rightfully so, the second half of the year, your declines get worse.
So what's the offset in the second half that's less worse than the second quarter to allow the full year tonnage?
Obviously something must be getting a little bit better on a year over year in the second half to let US/Canadian ag get worse, but the total doesn't get worse.
- VP of IR
I'm sorry, David, for interrupting.
The commercial and consumer and the construction and forestry divisions were making schedule adjustments as we moved through last year, so they have relatively easier compares, at least in our current forecast.
- Analyst
On a profitability, obviously that's not a great trade-off, US and Canadian ag getting worse on production year-over-year, but C&CE not getting as bad.
That's an obvious statement I guess, but--
- VP of IR
We've made an adjustment in our guidance as well, as you know.
- Analyst
Sure.
I appreciate that very much.
- VP of IR
Thank you.
Next question, please?
Operator
Your next question comes from Eli Lustgarten.
Please state your company name.
- Analyst
Longbow Securities.
Good morning.
- VP of IR
Good morning, Eli.
- Analyst
I'd like to compliment you for the willingness to go out on a limb in this environment.
Can we talk about pricing and your clarification?
I know you gave 6% for the year and the quarter.
Do you still have pricing assumptions by segments and are you still positive in C&CE and C&F?
- VP of IR
I can't give you exact numbers.
We no longer do that by division, but I can tell you that all three equipment divisions in the current forecast and the 6 points of price realization have positive price realization.
Clearly ag would be stronger and the other two would be somewhat south of the 6.
- Analyst
Obviously.
And can we talk about demand in the ag side?
I guess you said, what is it, 9000 tractors -- I would have thought you would have said 8000.
But are we past the point where cancellations are really probable in those big tractors, given that we're getting into delivery and getting into the really into the production cycle?
And really the more important question, if things hold up this well in 2009 in big ag, and I know you hate to go out, are we running some risk that 2010 could be a more difficult year in the big ag stuff?
- VP of IR
Well, it is not our custom to comment beyond the current year, so I'm not going to be able to answer your question, the second part of your question.
The first part of your question regarding cancellations, we would tell you that historically on a retail end, in the US and Canada and in Western Europe, because we've been in those markets for a very long time -- once the customer places an order we typically have very few cancellations.
And in part, remember, most of the stuff comes with trade-in.
The dealer's already working on the trading cycle, so historically we have not seen cancellations.
You are correct in observing that we are getting close to the spring planting season.
As we move through the year, we're going to obviously be getting closer to fall work, where you again need the tractor and the combine.
I can only tell you that historically we have not had a lot of cancellations.
I might also comment -- Susan mentioned earlier that we had had a lot of cancellations in the former Soviet Union and that -- those really are not customer cancellations per se.
Those are really because we are simply unable to get financing, so were the financing available, there is still a very strong demand in that part of the world.
It's just simply that we cannot get financing and so obviously can't make the sale.
- Analyst
How long does that 8000 tractor go out?
You said 9000 was August.
I missed the 8000?
- VP of IR
It's into the summer.
We basically said that the order book is closed.
You are no longer able to place an order for an 8000 series tractor because we are over the course of the summer transitioning to a new model.
- Analyst
Okay, thank you.
- VP of IR
Thank you, Eli.
Next question?
Operator
Thank you.
Our next question comes from Henry Kirn.
Please state your company name.
- Analyst
Good morning, it's UBS.
- VP of IR
Good morning.
- Analyst
Dovetailing with Eli's question, could you talk about what stops a farmer from canceling an order once it's in place?
- VP of IR
Well, again, they have looked at their crop needs.
They have made an assessment of risk of going down, if you will, in season.
They have looked at the technology and the productivity that they can gain and very often, again, the -- the dealer knows that there's a trade-in coming and the dealer's already worked on that trading cycle.
And remember that depending on the age of the equipment being traded in, there's anywhere from usually 3 to 5 subsequent trades associated with the sale of a new tractor.
And so as the dealer's working on that trading cycle, that acts also as a factor.
- SVP & CFO
I would add that farm cash receipts are still at a high level by any kind of historic comparison and their farmer balance sheets are probably the best they have ever been in terms of debt to equity or debt to asset ratios.
- VP of IR
And with what we've done with John Deere Capital Corporation, we are able to offer financing and clearly local banks, et cetera, have cash available to also finance those customers.
So access to credit is absolutely not an issue for our farm customers.
- Analyst
Thanks, that's helpful.
And in terms of the global fleet, could you maybe talk a little bit about each of the regions where you see the age and how long that ag fleet could be aged before replacement would need to happen?
- VP of IR
Well, if you go into the emerging markets, I really don't have a number, but I can tell you that there's enormous demands for the productivity that our new tractors and combines and sprayers, et cetera, offer farm customers.
So there it's really not an issue of age of equipment.
It's really access to credit.
In the US, I think you're all aware, for a very long time, we don't have firm industry numbers.
We think the average age of a tractor is probably close to 20 years in the US.
But candidly, no one's doing high production agriculture with a 20-year-old tractor.
Usually it's something under 10 years and sometimes under 7 years.
And again, over time -- and the reason we talk incessantly about cash receipts is because that has been far and away the most significant driver, or the best correlation to equipment sales, has been farm cash receipts.
I don't have a number on Western Europe.
- SVP & CFO
Reflecting back to spring of 2008, I think that's a good example of why people need large productive equipment.
Because, remember, the late rains we had, there was basically about a two-week planting window for our farmers, and I think that really highlighted requirements to have that capability, and so it's not age of fleet and wear out that drives purchases.
It's productivity capability.
- Analyst
Okay.
Thanks a lot.
- VP of IR
Thank you.
Next question, please?
Operator
Thank you.
Our next question comes from Terry Darling, and please state your company name.
- Analyst
Goldman Sachs.
Thanks.
Marie, I appreciate we're not giving guidance on 2010, but it is a rather provocative slide on Page 10 with regards to thinking about 2010 with your forecast for the commodity prices down pretty significantly.
And you're just indicating that crop receipts has been the best indicator of future demand, yet you've also got CapEx still well above depreciation.
Just trying to sort of calibrate -- your forecast for commodity prices and history would probably suggest $0.20 down significantly.
You are cutting costs here.
Raw materials should help as you move into 2010 and pricing seems to be holding up reasonably well, but can you square off the investment level still running well north of depreciation in that context?
- VP of IR
Well, I think, Terry, that's a very fair question.
I want to first, though, point out that our guidance is approximately $200 million lower than it was last quarter.
Last quarter we were looking at about $1 billion.
Now we're looking at about $800 million.
I think you are aware that we have projects in the US where we are -- where we were adding some capacity.
Those things are, like at Harvester, that capacity will be in place by the end of March.
Waterloo, there we have slowed down some of the rates of increase.
We had talked about that earlier, and we are assessing what we might do going forward.
But also some of that spend relates to Tier 4 and we had talked about that even last year in terms of capital and R&D.
And that spend must go forward if we are going to sell tractors that are compliant starting in 2011.
I said Tier 4 -- I should have said interim Q4.
Okay.
So there's a chunk of it.
Some of it, we are still investing in infrastructure, in some of the emerging parts of the world.
Even though they may have temporarily slowed down, we still see great opportunity there.
- Analyst
Okay.
That's fair.
And then, Mike, I'm wondering if on the credit business you can address two issues.
One, how do we handicap what might happen with this FDIC request?
Are you confident that it's just a process and you'll get through it and there won't be much change?
And if you're unable to really handicap that for us, what are the alternative funding plans as you look forward out to 2010?
- SVP & CFO
Well, I let me take your questions one at a time.
Relative to handicap and the FDIC, I don't think I can add very much to what Susan said in the opening remarks, and I don't want to speak for the FDIC.
We'll have to see how that plays out and it's just not resolved at this time.
I think the most important conclusion from the slides relative to this is we have secured liquidity which handles all of our [needs] for 2009 in the first quarter already.
So we've had quite a lot of good success accessing the capital markets.
We've done that through a variety of funding alternatives, some which we had not had in the past.
For example, this conduit, we had a different type of conduit before, but this is a new one.
We had more capability there.
We could also access some other alternatives, which we're going to be looking at here in the next few months.
So I think we have very good capabilities for accessing the capital markets this year, as well as next year.
I think that reduces that risk in that area.
- Analyst
And, Mike, that other alternatives comment you just made, is that referring to securitization receivables?
Is that maybe the ABS markets get some benefit from stimulus and you get more active there, or what do you mean by that comment?
- SVP & CFO
I don't think it requires any stimulus to get there.
We can get there with what we have right now.
We have already another $2.2 billion capability in CP.
We have more capacity that's available in receivable conduits.
We have the ability to access medium term note markets.
I think both in Europe and the United States, we have other alternatives on top of that as well.
I think we're in very good shape.
Plus we're starting, as you know -- this is a record level of cash for our company I think for all time right now.
- Analyst
Okay, and just lastly, can you update us as to where we are with the investment in wind and when we might start to see some profits from those investments coming through?
- VP of IR
We are continuing to -- for right now for wind, finish out those things that we had commitments on.
We had actually with the last quarter's call, we talked about the fact that we had put the brakes on any new projects, so we're just finishing out those projects that we had started.
Current guidance for the financial services is about $100 million and the bulk of that is wind.
As those projects come on, as we slow frankly, putting on some new ones, we will start to see that business turn profitable.
It's not significant -- it's actually an incremental contributor this year and -- but I don't have a specific time to share publicly.
- Analyst
Thank you.
- VP of IR
Thank you.
Next questioner?
Operator
Thank you.
Our next question comes from Jamie Cook, and please state your company name.
- Analyst
Good morning.
Credit Suisse.
- VP of IR
Good morning, Jamie.
- Analyst
Hey.
Just two questions.
One, housekeeping -- what's your forecast this year for FX translation on operating income and in terms of what are you forecasting for absorption, too, relative to -- I'm just trying to compare that [flat] to what you did last quarter.
- VP of IR
Okay.
For translation, now, you know there's transaction and translation.
Translation, our guidance would be $125 million to $175 million negative impact on operating profit.
And previous guidance was $100 million to $150 million.
In terms of absorption, last year we had -- because of the build in inventories and receivables, we had a favorable $250 million pretax benefit.
This year, because we're not looking for a significant decline in inventory receivables, we're looking for a slight negative and it would be $15 million pretax.
- Analyst
Okay, and just my last follow-up question, you mentioned in the slide benefits from the stimulus in particular on the construction and forestry side.
I know it's a depressing year this year, but do you have any anecdotal evidence from your dealers that this at least puts a floor on current things?
Do you think this is incremental?
Just how -- I understand it's 2010, but what you're hearing anecdotally and whether your dealers are positive about this on construction and forestry or it's just at least things don't get worse?
- VP of IR
Anecdotally, what we've heard is that they're encouraged.
I think they're waiting to see some actual budgeting authority.
We have been in communication with our construction equipment dealers about the particulars of the bill, and so we're providing them with information so that they can make good business decisions in terms of going after some additional things.
But frankly, none of that -- there's very little money that gets spent this year.
At least that's what people expect and so it will be a while before that money starts flowing.
- Analyst
I don't care about 2009.
I'm just thinking more potential for 2010.
- VP of IR
I think it's very -- we're hopeful, but I think hopeful -- I mean things have just gotten passed, and people have yet to see anything -- I mean we're just very early.
- Analyst
And then just last, just to understand your construction and forestry forecast, you're now saying down 24%, and I think in your press release you commented a lot of that was related to forestry.
I just want to make sure I understood that correct.
I'm just surprised when it's a relatively small part of your construction and forestry division and that market's been so depressed anyway, unless I misinterpreted it.
- VP of IR
Well, actually about two-thirds of our forestry business is outside the US and Canada, and our outlook last time was maybe down for that part of the industry segment, maybe down 5% or 10% and it's down, as Susan said, about 50%.
So there was really a dramatic change there.
But she also said the outlook for every construction geography also declined.
- Analyst
All right, thanks.
I'll get back in queue.
- VP of IR
Thanks, Jamie.
Next questioner?
Operator
Thank you.
Our next question comes from Daniel Dowd, and please state your company name.
- Analyst
Bernstein.
- VP of IR
Good morning.
- Analyst
I just wanted -- good morning.
How are you?
- VP of IR
Great.
- Analyst
I wanted to follow up on some of the input cost issues.
The guidance seems -- if I'm reading this correctly, seems to suggest that the incremental input costs in Q3 and Q4 are actually going to be flat year on year.
- VP of IR
Flat to down.
- Analyst
Yes.
Okay.
Are you seeing something in commodity markets or transport costs that lead you to believe there's no benefit in the back end of the year on input costs?
- VP of IR
The -- our current guidance does take into account reduction in transport costs.
So I think that's already fully factored in.
- Analyst
Right, but if you --
- SVP & CFO
I think if you look at spot prices right now, certainly they are going down, but there is certain amount of lag effect that occurs because of the way that commodities are purchased, not just by ourselves, but by our suppliers or several layers into that.
So there's -- I would describe it as an inertia or lag effect that takes place both when prices go up as well as go down, and I think that's what you were seeing more than anything else.
- Analyst
Perhaps I'm misunderstanding from the guidance.
Looked like you're guiding now to between $400 million and $500 million across the year in incremental input costs.
You had $275 million of incremental costs in Q1 and you're guiding between $200 million and $225 million for Q2.
- VP of IR
Right.
- Analyst
That implies you're basically flat compared to Q3 and Q4 of '08 and Q3 and Q4 of '09, which --
- VP of IR
Flat to down $100 million, yes --
- Analyst
Which seems awfully conservative.
So you're not seeing anything particular other than the fact that it takes a while for these issues to roll through your income statement?
- VP of IR
Yes, I can only -- I mean this number has gotten a significant amount of attention and that is our best estimate.
- Analyst
Okay.
Let me just -- a quick comment or question on the balance sheet.
Can I ask you to talk strategically where you think you should take your balance sheet for the equipment business and also for the financial services business over the next, say, 24 months?
I mean are the current leverage ratios the right place to stay, or do you see -- is it appropriate to be changing those things in this context?
- VP of IR
I'll turn that to Mike.
- SVP & CFO
Well, let me take them one at a time.
I think with respect to the equipment operations, our leverage is significantly less than what the target would be described by S&P or Moody's relative to a mid single A.
In fact, if you look across the whole host of operating metrics and where we are, they would suggest that we would even be in the ranges of double-A or better on a lot of these.
So I think our single-A is very secure.
Where we are in fact at the end of the year, we're basically net debt zero for the equipment operations, so I think we're in very good shape there at our leverage.
With respect to the financial services, we have reduced our leverage here about a quarter ago with the capital infusion.
It is our plan to not pay dividends from the credit company for the balance of this year.
So we'll be taking our leverage down over the course of the year to I think about 7.5 to 1 for the worldwide credit operations by the end of this year.
So having had extensive discussions with rating agencies on these points as well, we feel quite comfortable and confident relative to that plan for leverage.
- Analyst
Okay, thank you.
- VP of IR
Thank you.
Next question?
Operator
Thank you.
Our next question comes from Meredith Taylor.
Please state your company name.
- Analyst
Hi.
It's Barclays Capital.
Good morning, everybody.
- VP of IR
Good morning.
- Analyst
I'm wondering if you can talk a little bit about your expectations for write-offs and how those are going to trend going forward by receivable types?
I see that we're already above prior peaks for the C&CE business.
If you could talk about what the expectations are for construction and forestry.
Ag's clearly trending very attractively.
- VP of IR
Meredith, I'm not at liberty to give it to you by product line.
I can tell you our current estimate write-offs will run at 57 basis points.
Our previous guidance was 49 basis points.
And of course that's basically driven by the construction, forestry and commercial consumer portfolios.
- Analyst
Okay.
I guess I can make the appropriate assumptions based on that then.
- VP of IR
Okay.
- Analyst
And then just as a follow-up, within the ag business, can you talk a little bit what what you actually saw in the quarter in the regions where you're looking for the greatest pressures based on credit, particularly in South America and Eastern Europe?
- VP of IR
What we actually saw, I'm not sure.
We had -- the former Soviet Union there, in most of those countries, not all, credit is just very, very difficult to come by.
And so we had -- we were canceling orders because we simply couldn't get the funding for them.
In South America, it's really a mix of issues.
Everyone is well aware of at least up to this point the severe drought that has afflicted Argentina and has moved into parts of Brazil and I think it's Uruguay.
Credit actually eased.
Our marketing folks told us it eased just a little bit in the quarter, but it's still a very, very difficult situation.
- Analyst
I guess I was more wondering if you've seen the cancellations for going forward, but revenues were still holding in better than the estimate for the full year.
- VP of IR
Well, we cut our guidance for South America.
I'm not sure --
- Analyst
Well, I guess I'm just wondering what the -- what your expectation is of the cadence through the year for those regions, whether there already was a steep drop-off from a revenue basis or whether the expectation is still to come.
- VP of IR
I would say that we had a fairly weak first quarter, and I guess I don't know exactly how the numbers play out over the rest of the year, but I think the guidance reflects to a large degree what we were already experiencing.
- SVP & CFO
I think with respect to CIS, the news is baked in right now in terms of the environment relative to tariffs and the availability of input financing, and so I don't think there's going to be any kind of news in that regard.
- Analyst
Okay.
That's helpful, thanks.
- VP of IR
Thank you, Meredith.
We have time for one more question.
Operator
Thank you.
Our final question comes from Robert McCarthy.
Please state your company name.
- Analyst
Hi, it's actually Chris Weltzer in for Robert.
We're both from Robert W.
Baird.
You obviously have pretty good detail on ag dealer inventory levels in the US, but could you give us a view on dealer inventory levels and trends internationally.
You took your international production forecast down to negative 17%, but it looks like your international retail demand forecast might even be a little worse than that.
- VP of IR
Well, when you look at the tonnage numbers, you need to be careful -- because the tonnage numbers reflect where the goods are manufactured and not where they are sold.
And so you get a mixed bag of things going across the ocean.
Inventories generally speaking, we've been pretty rapid on the response times, so we feel generally pretty good about the level of our inventories.
- Analyst
Okay.
That's helpful.
Then just a quick cleanup.
Was there any special costs related to the shutdown of your Canadian facility in the quarter?
- VP of IR
Yes, there would have been $11 million in the quarter.
- Analyst
Do you know what segment that was in?
- VP of IR
That would be split 60% ag, 40% commercial and consumer.
- Analyst
Thank you.
- VP of IR
That's a pretax number.
Actually we've got time for one more question.
Operator
Thank you.
Our final question will come from Andy Casey.
Please state your company name.
- Analyst
Wachovia Capital Markets.
Thanks for taking my question.
- VP of IR
Oh, our pleasure.
- Analyst
Just a follow-up on that previous question.
Were there any additional fixed cost reduction charges in addition to that plant closure?
- VP of IR
There were no other plant closures.
No.
- Analyst
Okay, and then a clarification.
The other operating expense increase year over year -- is that all currency or is there something else?
- VP of IR
No, it's currency.
- SVP & CFO
Currency.
And maybe to expand on that, that doesn't reflect every aspect of currency, because some of it shows up in cost of sales as well.
- Analyst
Thanks, Mike.
- VP of IR
And that's actually the smaller piece.
Thank you all for participating.
As usual, Susan, Justin, and I will be around to answer your questions all day.
Thank you.
Operator
Thank you.
This does conclude today's conference call.
We thank you for your participation.
You may now disconnect your lines.