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Operator
Good morning, and welcome to Deere's first-quarter earnings conference call.
Your lines have been placed on listen-only until the question-and-answer session of today's conference.
I would now like to turn the call over to Mr.
Tony Huegel, Director of Investor Relations.
Thank you, sir.
You may begin.
Tony Huegel - Director, IR
Thank you.
Also on the call today are Jim Field, our Chief Financial Officer; Marie Ziegler, Vice President and Treasurer; and Susan Karlix, our Manager of Investor Communications.
Today we will take a closer look at Deere's first-quarter earnings, then spend some time talking about our markets and the outlook for the remainder of 2012.
After that, we will respond to your questions.
Please note that the slides are available to complement the call this morning.
They can be accessed on our website at www.JohnDeere.com.
First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere and Thomson Reuters.
Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.
Participants in the call, including the Q&A session, agree that their license and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking comments concerning the Company's projections, plans and objectives for the future that are subject to important risks and uncertainties.
Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.
This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP.
Additionally, information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/financial reports under Other Financial Information.
Now, here is Susan.
Susan Karlix - Manager, Investor Communications
Thank you, Tony.
With this morning's first-quarter earnings announcement, John Deere has started 2012 on a strong note.
Income and sales both reached new records for the first quarter of the year.
It was our seventh straight quarterly record.
The improvement was broad-based.
Ag & Turf had another strong quarter, and our other divisions, Construction & Forestry and Financial Services, contributed as well.
Healthy demand for farm machinery continued to play a big role in our results.
But our performance also reflected success executing our ambitious marketing and operating plans.
Such execution is especially important right now, as we are adding new products and global capacity at unprecedented rates.
Finally, our full-year earnings forecast has been adjusted upwards, and now stands at about $3.275 billion.
All in all, it was a solid start to what is expected to be another strong year.
You may have noticed the slide deck looks a little different this quarter.
We have moved slides we felt were only "number updates" to the Appendix to allow more time for your questions.
Now let's look at the first quarter in detail, starting with slide 3.
Net sales and revenues were up 11% to $6.8 billion in the quarter.
Net income attributable to Deere & Company was $533 million.
As we noted earlier, this was the Company's seventh consecutive quarterly earnings record.
Total worldwide equipment operations net sales were $6.1 billion, up 11% quarter over quarter, shown on slide 4.
Price realization in the quarter was positive, by 4 points, while currency translation was a negative 1 point.
The Company outlook is on slide 5.
Second-quarter net sales are forecast to be up about 15% compared with the second quarter of 2011.
This includes about 4 points of positive price realization and about 3 points of negative currency translation.
For the full year, net sales are expected to be up about 15% versus 2011.
This includes about 3 points of negative currency translation, which is a negative swing in currency translation of 4 points from our previous forecast.
So, effectively, forecast volumes have increased by 4 points, all of which have been offset by exchange.
In addition, we are expecting positive price realization of about 4 points.
Remember, our price realization excludes any pricing related to Interim Tier 4, which is included in volumes.
The full-year impact on operating profit from currency translation is negative about $80 million.
Net income attributable to Deere & Company is now projected at $3.275 billion in 2012.
Turning to a review of our individual businesses, let's start with Ag & Turf on slide 6.
Sales were up 8% in the quarter; production tonnage was up 5%.
Operating profit was $574 million, resulting in an impressive 12% operating margin, the second-highest margin for the Ag & Turf division in any first quarter.
Price realizations and higher shipment volumes benefited results, but were partially offset by increased production costs related to new products and to emission requirements and higher raw material costs.
Taking a look at Ag & Turf's incremental margin, it came in at 5%.
As we discussed on the call in November, first-quarter incremental margins would be a challenge due to the timing of expenses and a very tough comparison to the first quarter of 2011.
Importantly, pricing offset material costs in the quarter, including Interim Tier 4 product costs.
As the press release states, the improved operating profit for Ag & Turf was "partially offset by increased production costs related to new products and engine-emission requirements." Those costs in the quarter were roughly $100 million.
The additional expense was associated with a significant number of startups, which resulted in higher capital spend, factory costs and overhead expenses.
Included were costs of installing new equipment, training new workers and starting preproduction processes.
Coupled with strong demand in the quarter, we experienced some inefficiencies in our factories.
All that said, we met customer demand and delivered a 12% operating margin, signifying very strong execution.
The forecast calls for double-digit incremental margins the remainder of the year.
Before we review the industry sales outlook, let's look at some of the fundamentals affecting the Ag business.
Slide 7 outlines the US commodity price estimates that underlie our financial forecast.
As you can see, US crop prices are forecast to remain strong in the 2011/2012 crop year, driven by strong global demand and tight supply.
The assumption for more normal, higher yields next year accounts for the drop in crop prices in 2012/2013.
Slide 8 highlights cash receipts.
2011 US farm cash receipts were at record levels, 16% higher than the previous record in 2008.
The 2012 cash receipts number is down slightly from 2011's record level, but are still extremely strong.
In our modeling, current-year and prior-year cash receipts are the primary driver of equipment purchases.
This bodes well for the Ag business and is translating into increased demand, as illustrated by our strong outlook.
Our base case on acres planted and yields for the 2012/2013 crop year is shown on slide 9.
Driven by strong global demand and low carryover stocks, our base case calls for an increase in total planted acres this crop year.
The increase in corn acres reflects a shift from cotton.
Assuming moisture levels recover in the wheat belt, acreage will increase slightly.
And as a result of the extreme drought in West Texas, we expect cotton acres planted to decrease in the 2012/13 crop year.
Keep in mind that forecasts involving acreage and yield are very preliminary at this point and will be ultimately determined by weather and springtime prices.
Our economic outlook for the EU 27 is on slide 10.
We see the European Ag sector strengthening, with 2012 farm income expected to remain at very attractive levels, supported by commodity prices.
Equipment demand continues strong, with the favorable outlook for large farm markets in northern Europe offsetting weakness in the south.
On slide 11, you will see the economic fundamentals outlined for a few additional targeted growth markets.
Slide 12 tells the weather-related story for Argentina and southern Brazil, which serves as the basis for our outlook change in the regions and the slide change from the farm net income slide you are used to seeing.
Drought conditions in central Argentina and southern Brazil have lowered production and yields, while heavy rain in central Brazil has slowed the soybean harvest and the planting of the second-season cotton crop.
Our 2012 Ag & Turf industry outlooks are summarized on slide 13.
With strong farm fundamentals in the US and Canada, demand continues to increase, especially for high-horsepower equipment.
We have increased our forecast for the region to up about 10%.
The EU 27 industry outlook has been increased and is now projected to be flat to up 5% from the attractive levels of 2011.
The improvement is due to favorable conditions in the grain, livestock and dairy sectors, which are outweighing general economic concerns in southern Europe.
Our 2012 industry outlook in the CIS countries is for considerably higher growth after last year's notable rise.
Moving to Asia, we expect sales to increase moderately.
The tweaking in our forecast is the result of the tractor industry in India.
After two years of strong double-digit growth, the 2012 forecast for tractors is flat this year.
Higher interest rates and moderating commodity prices are also dampening growth.
We view this as only a pause in India, as government support for agriculture and farm mechanizations are both on the rise.
Industry sales of tractors and combines in South America are now expected to be flat to down 5% in relation to the strong levels of 2011 due to drought in parts of the region.
Remember, industry outlook for South America does not include cotton and sugar cane harvesting equipment, both categories in which Deere has a strong market presence.
The ag sector in Brazil continues to receive governmental support, stimulating investments in ag equipment.
Turning to another product category, we expect industry retail sales of turf and utility equipment in the US and Canada to be up slightly in 2012.
Putting this all together on slide 14, the fiscal year 2012 forecast is for Deere sales of worldwide Ag & Turf equipment to be up about 15%.
Currency translation is negative by about 3 points, which is a 4 point negative change from our forecast in November.
So effectively, forecast volumes have increased by 4 points.
Operating margin for the division is forecast at about 15%, which would be a record.
And that is despite the headwinds we discussed earlier.
This certainly illustrates solid execution on our part.
To update you on our early order programs, the combine early order program ended in the middle of January, with about 95% of the production slots covered.
Concerning used combine levels you may recall we made good progress in reducing the number of used units at year-end.
And we made still more progress in the first quarter.
January ended with used combines well below year-earlier levels, with values rising.
In response, we added additional combine production to the schedule.
This clearly demonstrates our confidence that we have effectively managed through this situation.
The cotton early order program is full.
Remaining early-order programs for air seeding, sprayers, planters, drills, tillage, windrowers and self-propelled forage harvesters have gone exceptionally well.
Aggregate orders for these programs are up about 30% over last year.
The order book for large tractors is also strong, with effective availability of August 2012 for the 8R model and June 2012 for the four-wheel-drive 9R.
All this supports our outlook for very good market conditions.
Let's focus now on Construction & Forestry on slide 15.
Deere's net sales were up 22% in the quarter, while production tonnage was up 26%.
Division operating profit rose 41% to $124 million, helped by higher shipment volumes and improved price realization, partially offset by increased raw material costs.
C&F recorded a 9% operating margin and a 14% incremental margin.
On slide 16, let's look at the economic indicators on the bottom part of this slide.
While stable or increased from last quarter, the underlying fundamentals certainly don't point to strong recovery.
Overall, economic growth continues at a slow pace, though there are promising signs that things are picking up.
C&F continued to benefit from replacement demand for very aged fleets and improved sales to independent rental companies, as they record higher utilization levels and rental rates.
We also see strength in the energy and material-handling sectors, the latter pertaining mostly to skid-steers and loaders.
Also encouraging, Deere dealers continue to see an improvement in rental utilization and used equipment markets.
Net sales in Construction & Forestry are now forecast to be up about 18% in fiscal 2012, with negative currency translation of about 1 point.
Global forestry markets are expected to be flat to up 5% in 2012 from the strong levels of a year ago.
We are seeing growth in all our markets except Europe, where the market remains healthy but restrained by economic concerns.
The full-year operating margin for the C&F division is projected to be about 8%.
Let's move now to our Financial Services operations.
Slide 17 shows the financial services provision for credit losses as a percent of the total average owned portfolio.
Year to date on an annualized basis, the provision is an incredibly low 2 basis points.
This reflects lower write-offs, primarily in the Ag and Construction & Forestry portfolios, as well as recoveries of prior-year write-offs and fewer repossessions.
Our 2012 financial forecast contemplates the provision for credit losses increasing toward a more normal level, to about 24 basis points as a percentage of the average owned portfolio.
For your reference, the 10-year average is about 34 basis points.
Moving to slide 18, worldwide Financial Services net income attributable to Deere & Company was $119 million in the quarter versus $118 million in 2011.
Net income benefited from growth in the credit portfolio, revenue from wind energy credits and a lower provision for credit losses.
These items were largely offset by higher crop insurance claims and increased selling, administrative and general expenses.
The wind energy credits relate to the wind energy business we sold in 2010.
Looking ahead, we are now projecting Worldwide Financial Services net income attributable to Deere & Company of about $460 million in 2012.
The decrease from 2011, when income was $471 million, is mainly attributable to two things.
First, the provision for credit losses rising toward more normal levels, about 24 basis points for the year.
Last year's loss provision was only 4 basis points, well below average levels.
Second, the forecast also includes higher selling, administrative and general expenses in support of the equipment operations' global growth.
For example, Financial Services has recently added or soon will be adding locations in China, Russia, Chile, India and Thailand.
Growth in the portfolio will partially offset these two items.
Now on slide 19, let's look at receivables and inventories.
For the Company as a whole, receivables and inventories ended the first quarter up about $1.6 billion compared to the first quarter of 2011, equal to 30% of trailing 12 month sales.
The same percentage of trailing 12 month sales was achieved in the first quarter of 2011.
Historically for the first quarter, we run between 28% and 30%.
The higher first-quarter inventory levels are necessary to meet the strong demand ahead of us this year.
For the full year, receivables and inventories are expected to be about $150 million higher versus 2011.
Let's turn now to raw materials and logistics on slide 20.
First-quarter material costs were up about $130 million in comparison with the first quarter of 2011.
Our 2012 full-year forecast now assumes an increase of around $400 million to $500 million versus 2011, as we are seeing lower steel prices run through our costs.
About 80% of the increase is for Ag & Turf, and about 20% for C&F.
As we have shared in the past, increases or decreases in Deere's raw material costs tend to lag by three to six months, depending on the commodity or type of contract.
Our forecast calls for about two thirds of the increase in raw material costs to occur in the first half of the year.
Finally, as we introduce new products and features to our growing customer base, the product cost of compliance with engine emission regulations in North America and Europe will be roughly $500 million higher than 2011.
However, the forecast 4 points of price realization will offset the combination of increased material costs and Interim Tier 4 product costs.
Looking at R&D expense on slide 21, R&D was up 16% in the first quarter compared to the same period last year.
Our 2012 forecast calls for R&D expense to be up about 12%.
Currency translation is negative by about 2 points.
As stated in previous quarters, R&D spending is expected to remain at high levels for the next few years as we continue product launches with Interim Tier 4 engines, and soon thereafter, meet final Tier 4 emission standards.
Also included is ongoing new product development expense for our growing global customer base.
Moving to slide 22, SA&G expense for the equipment operations was up 7% in the first quarter.
Growth accounted for almost all of the increase.
Our fiscal year 2012 forecast calls for SA&G expense to be up about 10%, with growth accounting for about 4 points and currency translation a negative 2 points.
Turning to slide 23, we detail our use of cash priorities.
Deere's Worldwide Financial Services operation provides a strategic advantage in funding customer purchases, but only so long as we can access the credit markets on a cost-effective basis.
One of the key elements to this end is maintaining a single A rating, which is our top priority.
Rating agencies expect 12 months of debt maturities to be covered by cash and/or untaxed credit facilities.
This also implies appropriately funding our pension and OPEB benefits, which we have done proactively and prudently over the years.
Our second use of cash priority is funding value-creating investments in our operations.
As an example, mentioned in the press release, over the last year, we announced plans for seven new factories, as well as expansions at existing factories.
A third priority is provide for the common stock dividend.
Over time, we want to consistently deliver a series of moderately increased dividends, while targeting a 25% to 35% payout ratio, on average.
We are mindful of the importance of maintaining the dividend and thus not growing it beyond a point that it can be comfortably sustained by cash flow.
Share repurchase is our method of deploying excess cash once the previous requirements have been met, and so long as such repurchase is viewed as value-enhancing.
And on slide 24, you see our equipment operations history of strong cash flow.
Following years of impressive cash flow performance, we are forecasting cash flow from equipment operations to reach about $3.5 billion in 2012.
In closing, the Company started out 2012 on a strongly positive note and is looking for further improvement in the quarters ahead.
Our recent performance and our positive outlook for the year give strong momentum to the Company's plans for achieving increased growth and profitability in the future.
What's more, our substantial investment in new products and additional capacity puts Deere on a sound footing to respond to any further improvements that may occur in key markets, now, in the early stages of recovery.
These investments, as you see summarized on slide 25, include the seven new factories referenced in the press release in emerging markets crucial to our growth, as well as significant expansions and modernizations now underway in the United States.
The added capacity will help the Company capitalize on the world's increasing need for food, shelter and infrastructure, and for the productive equipment needed to help produce it.
These powerful trends, in our view, have staying power, and they represent nothing less than an exceptional opportunity for John Deere and its investors in the quarters and years to come.
Tony?
Tony Huegel - Director, IR
Thank you, Susan.
Now we are ready to begin the Q&A portion of the call.
The operator will instruct you on the polling procedure, but as a reminder, in consideration of others, please limit yourself to one question and one related follow-up.
If you have additional questions, we ask that you rejoin the queue.
Operator?
Operator
(Operator Instructions) Andrew Obin.
Andrew Obin - Analyst
Bank of America Merrill Lynch.
Just a question on your outlook.
You know, you guys guided first to a down Q1 versus last year.
It also seems that production was a little bit low in the Q1 than we were thinking, so more of it is being pushed back in the second half.
And then you also guided to lower costs.
Yet as I look at the increase, it sort of barely covers the [beat] and lower costs that you guided to.
So why would incremental production in your outlook not result in more earnings?
Jim Field - SVP, CFO
Well, I think one of the key pieces in that whole equation is this $80 million, or in round numbers, about $100 million of headwinds that we are facing on the currency side from a translation perspective.
I think if you look at the increase in physical volume that we've added, after you strip out the FX, and you put normalized incremental margin assumptions on that, and consider the other headwinds we've talked about and then consider also this, in round numbers, $100 million of translation headwind, it gets -- it seems to be a pretty reasonable outcome where we ended up.
Andrew Obin - Analyst
And a follow-up question on Construction & Forestry.
If we go back in the prior cycles, Construction & Forestry was a much bigger percentage of your revenue and profit as well.
Given sort of the ongoing mix change in the Company, do you think in several years Construction & Forestry can go back to its historic percent of revenue and profit that would be similar to what we saw in the middle of the past decade, or has the mix changed sufficiently that we should just think about the Company being different?
Jim Field - SVP, CFO
Absolutely it can, and the expectation is that it would.
And as you've rightfully pointed out, when you look at the last construction cycle, Construction recorded the highest operating margin of any of our divisions.
And they would be shooting for operating margins that are very consistent with that going forward.
Andrew Obin - Analyst
Thank you very much.
Operator
Andy Kaplowitz.
Andy Kaplowitz - Analyst
Barclays Capital.
Maybe I could follow up on Andrew's question about Construction in one sense, and that is you had almost 9% margins in the quarter in what usually is a seasonally weak 1Q, and you didn't change the guidance for the year.
So I guess I'm just trying to figure out why that is.
And the incremental margins were also quite good versus what we thought.
So any help you can give us as to -- maybe there is a little upside in your guidance now for the year.
Marie Ziegler - VP, Treasurer
This is Marie.
As you think about construction, they will have phase-in of the IT4 compliance machines over the course of the year, and so you will see the cost of product transitions and the product costs reflected in their costs as we move through 2012.
And that's the difference.
Andy Kaplowitz - Analyst
Okay, Marie.
That's helpful.
Shifting back to Ag, you mentioned inefficiencies in the factory in the first quarter, and production was a lot less than you guided.
So I'm just wondering how that improved over time.
Why did 1Q production, why does it look weaker than you guys had expected it to be?
Tony Huegel - Director, IR
Keep in mind, the inefficiencies in the quarter that we talked about with Interim -- again, going back to Interim Tier 4 transition, certainly our combines were transitioning, as well as large tractors, our 9000 series tractors were transitioning during that first quarter.
So that is part of what is driving some of those inefficiencies.
Andy Kaplowitz - Analyst
Tony, what gives you the --?
Marie Ziegler - VP, Treasurer
In terms of the tonnage change, that is merely just shifts in a variety of products, a little bit less in the first quarter and a little bit more as you move through the year.
And that is pretty typical for us.
The tonnage numbers, as many of you are aware of, are not terribly precise.
Andy Kaplowitz - Analyst
So Marie, it is really just timing, you are saying.
Marie Ziegler - VP, Treasurer
Yes, absolutely, because we took our full tonnage up for the year.
Andy Kaplowitz - Analyst
Okay.
That's fine.
Thank you, guys.
Operator
Jamie Cook.
Jamie Cook - Analyst
Good morning.
Credit Suisse.
Two questions.
One, just back to the Tier 4, I just want to make sure I understood you correctly.
And it relates to Andy's question in Construction.
Is Tier 4 now $500 million, but you said you will cover all of it, relative to before, you said $475 million and you would cover a good portion.
So I'm just trying to make sure I understand that relative to the comments you made about Andy's -- the margin impact on the C&F business.
And then I guess my other question is you talked about -- just on the combine issue, it sounds like you are taking production up.
Is that all happening in the fourth quarter, and how should we think about combine production relative to retail in 2012 now?
Tony Huegel - Director, IR
On the first question, Interim Tier 4 costs, as -- you are right -- we did bump that up a little bit to about $500 million for the year.
And as you look at the 4 points of price realization, what we've said is that will more than cover the Interim Tier 4, as well as the material price increases that we are anticipating for the year.
Jamie Cook - Analyst
But is that better than what you said last quarter?
I think -- I didn't think last quarter you were covering it all, so that is the disconnect I'm trying to -- unless I misinterpreted that.
Marie Ziegler - VP, Treasurer
I think it's a little bit of a change, but not much.
Jamie Cook - Analyst
So it is better?
Marie Ziegler - VP, Treasurer
It is a little better, yes.
Jamie Cook - Analyst
Okay.
So just with Andy's comments and why, then, it is going to hurt -- if you are more than covering it, why is it going to hurt your C&F margins?
Marie Ziegler - VP, Treasurer
We aren't in production yet on a lot of the construction equipment.
That has a phase-in over the course of the year, Jamie.
So you are not seeing some of the Tier 4 product costs yet in the first quarter at the same level that you will in subsequent quarters, just simply because we are launching products over the course of the year.
Jamie Cook - Analyst
Okay.
And then just the last on the combines, just if you are taking the production up in the fourth quarter and where we are going to produce relative to retail in 2012.
Marie Ziegler - VP, Treasurer
Jamie, we don't have specific fourth-quarter public guidance, but it is true that we added combines.
And I think you could say that some of those combines certainly would have been added in the latter half of the year.
Jamie Cook - Analyst
And then production (multiple speakers).
Jim Field - SVP, CFO
This is Jim.
I think relative to the combine issue, which was yesterday's headline, I think the important thing is that we've reached closure on this issue.
We've got the channel where we think it needs to be in terms of used goods.
And I think it also shows the type of actions that we will take as a Company to make sure that this is a long-term, sustainable business.
So I think that is the important thing as you look at the combines situation.
Jamie Cook - Analyst
Okay.
Thank you.
I'll get back in queue.
Operator
Henry Kirn.
Henry Kirn - Analyst
It's UBS.
I'm wondering if you could chat a little bit about where you think we are versus normalized demand in South America and Europe.
Tony Huegel - Director, IR
Well, certainly, in Europe, from a normal or mid-cycle, while we are continuing to look at kind of a flat to up 5%, we would still be below mid-cycle levels within the Company in Europe.
Marie Ziegler - VP, Treasurer
And in South America, as we look to South America, we see a very exciting opportunity as that market continues to grow and as Deere individually continues to broaden its market coverage with product and with distribution.
Jim Field - SVP, CFO
And I think as you look at Europe, an important point there, as was said by Tony, we are below mid-cycle.
We have seen some strength in that market.
As a matter of fact, if you look at tractors, the order book is up 12%, combines 25%, self-propelled forage harvesters 17%.
And that is all happening in a market where there is still, in our view, a significant amount of headroom vis-a-vis mid-cycle.
Henry Kirn - Analyst
And dovetailing with that, can you update your thoughts on the steps you are taking to improve the market share in both those regions?
Marie Ziegler - VP, Treasurer
He's asking about market share.
We could not hear you Henry, but I believe your question was what steps have we taken to improve market share in both those regions.
Is that correct?
Henry Kirn - Analyst
Yes, that's right.
Update the thoughts on the steps you are taking to do that.
Marie Ziegler - VP, Treasurer
When you were in Lisbon in the summer, you we saw the over 100 new products that have been introduced in Europe to broaden the market coverage in that market.
We are continuing to add and strengthen our dealer capabilities.
We've added parts capabilities throughout really Europe and far into the CIS.
And really the same is true in Brazil and South America, where we continue to add, again, additional dealer locations, and we've had a very significant broadening of the product line.
And that has already been reflected, if you look at market shares.
Tony Huegel - Director, IR
Right.
And Marie mentioned the distribution network, and in addition to the product, certainly we've talked a lot about continuing to strengthen our distribution network.
In Brazil, we would say our distribution actually is very strong, and I think you've seen that reflected in the market share gains.
As we brought that new product, we've seen those market share gains, and that is reflective of both sides of that equation.
And we will continue to work on those same concepts in Europe as we move forward.
Henry Kirn - Analyst
Thanks a lot.
Tony Huegel - Director, IR
I think we need to move to the next caller, please.
Operator
Rob Wertheimer.
Rob Wertheimer - Analyst
It's Vertical Research Partners.
Just wanted to circle back to inventory.
I mean, you talked about inventory receivables.
But it you look at inventory on a standalone, it looks to me like your turns were the worst in 10 or 15 years, either forward-looking or -- on sales or backward-looking.
And I just wanted to make sure you are not having any production hiccups with Tier 4 or anything else that would explain that.
Or maybe I've got the arithmetic wrong.
Marie Ziegler - VP, Treasurer
There is absolutely no production hiccups with Interim Tier 4; it has gone very smoothly.
But that said, year-over-year, Rob, we have a very different look in the first -- where we ended the first quarter in terms of our production.
So it is somewhat difficult to make a comparison, because last year you were in very high production in the first two months of the quarter.
This year, relatively low levels of production because of the significant turnover that we had in our production on combines and on large tractors.
Jim Field - SVP, CFO
So a great example of that, Rob, is if you looked at the Harvester Works, last year, the schedule was very heavy in the first quarter, which would have drawn down a lot of that inventory.
This year, we are facing a schedule that is accelerating as you went into the quarter, which means you are building the inventories.
And so obviously, when you look at the endpoint, you get a different equation.
But I would definitely underscore what Marie is saying.
As a matter of fact, we are not having any production difficulties, and as a matter of fact, we are very, very proud of what we've been able to accomplish with this major number of new products coming off the line and the efficiency levels which we've completed them with.
Rob Wertheimer - Analyst
Okay.
You guys have been great on inventory for a long, long time.
It just seemed like an outlier, even relative to the sales ramp.
But I hear you.
Just one quick follow-up, if I may.
I know you don't disclose this quarterly or anything, but the Construction mix and geography, it looks like the volumes are back, at least on a quarterly basis, above peak.
I know you've gained share and I know you are expanding geographically.
I just don't quite know how to think about (multiple speakers) which of those is -- yes, is predominant.
Marie Ziegler - VP, Treasurer
We are still -- we are not even back to mid-cycle volumes in that division.
Rob Wertheimer - Analyst
In the US, okay.
Marie Ziegler - VP, Treasurer
The Forestry business is -- which is 20% to 25% of the business, as we have said has been stronger and is taking a little bit of a pause.
But the construction business, which the bulk of it is still in the US, that has been very weak.
It has been recovering from an extremely low level.
But they are nowhere near mid-cycle.
Rob Wertheimer - Analyst
Okay.
It's just the 1Q number, but I get it.
Okay, thank you.
Operator
Andy Casey.
Andy Casey - Analyst
Wells Fargo Securities.
Question on the cadence of the outlook for the remaining three quarters in Ag & Turf incremental margin.
You are looking for roughly 21%, with the numbers that you gave.
Is that more back-half loaded than what we normally see in Q2?
Tony Huegel - Director, IR
I think you will see -- I mean, again, our seasonal shipping in Ag & Turf is returning to a much more traditional pattern this year versus what we would have seen last year.
Andy Casey - Analyst
Okay.
And then on Construction & Forestry, I think in the last call, some of the muted margin expectations were talked about as being caused by production ramp-up.
And I'm wondering if you are seeing an impact from the production capacity expansion in international markets this year, or if that is more a '13 event.
Tony Huegel - Director, IR
Most of that is going to be a 2013 event, when we look outside of the United States and Canada.
Of course, we have talked about the factory in India is producing, but it is on relatively low levels at this point, and we will ramp up as we go through the year.
But again, most of that is a 2013 event.
Jim Field - SVP, CFO
From a production standpoint.
Now, obviously we are recurring costs related to that geographic expansion, which are in fact being reflected in the '12 numbers.
And I would say vis-a-vis steady-state has suppressed them somewhat.
Andy Casey - Analyst
Okay.
Thank you very much.
Operator
Stephen Volkman.
Stephen Volkmann - Analyst
Jefferies & Company.
Actually, I sort of -- I guess maybe you just answered this.
But I was thinking also about all the new factories that are coming online and some of the costs that are going to be ramping up before you get revenues and so forth.
And I guess I'm wondering, is the margin headwind from that bigger in '13 than it is in '12?
And then does it sort of ramp down in '14?
Am I thinking about that the right way, sort of medium-term?
Jim Field - SVP, CFO
We, of course, aren't going to get into giving a whole lot of guidance as it relates to '13.
Clearly, we have some of the IT4 costs behind us as you look out at '13.
But on the other hand, we will have still the development costs going forward.
But our expectation, of course, would be as you bring these factories online, you are going to start generating revenues to cover some of the expenses.
And of course, there are some expenses that are initial startup expenses that do go away.
But the aggregate picture of how that all fits together, to be perfectly honest with you, we don't have a good view of that today.
Stephen Volkmann - Analyst
Okay.
Fair enough.
Jim Field - SVP, CFO
That we're willing to share.
Stephen Volkmann - Analyst
Fair enough.
I'll ask it again in a couple quarters maybe.
How about (multiple speakers) --?
Jim Field - SVP, CFO
Somehow, that would be my expectation.
Stephen Volkmann - Analyst
Maybe just a little bit of a follow-up in Europe.
I'm kind of struck by -- thank you, Jim, for the color on the order book in Europe -- and clearly we have seen some strong retail numbers over there recently, for the past few months and your order book looks pretty good.
So sort of the flat forecasts there, I guess I'm wondering are you hearing something from the marketing folks that just makes you nervous about the second half, perhaps.
Or is it more just we are not sure what is happening and we want to be conservative?
Tony Huegel - Director, IR
First of all, the outlook is flat to up 5%.
Jim Field - SVP, CFO
Which is increased from the prior outlook.
Tony Huegel - Director, IR
And with that, keep in mind -- and what Jim was talking to was our order book.
And as we mentioned earlier in the call, of course with the new products and our drive there in Europe for market share, I think that is just reflecting some of those expectations, in terms of our performance versus the overall market.
Stephen Volkmann - Analyst
So you're not calling for a deceleration over there?
Jim Field - SVP, CFO
No, no, not at all.
As a matter of fact, if you look around the world, basically we've got all the markets accelerating sans South America.
And so -- and Europe is the same way.
Stephen Volkmann - Analyst
Great.
Thanks so much.
Operator
Robert McCarthy.
Robert McCarthy - Analyst
Robert W.
Baird.
I wanted to ask about your forecasting for the US and Canada ag market, in the context of the discussion about crop receipts, et cetera, and a reversion to more normal yields.
But of course we have an ongoing precipitation issue, particularly in the upper Midwest, but also in the Southern Plains you referred to West Texas cotton.
How do you factor that into your forecast?
Do you just accept that you can't be a weather forecaster and so, by default at this point in the year, you are going to assume normal yields?
Or have you baked something specific into your forecast that could accommodate some pressure on yields because of the low moisture condition that we are looking at?
Marie Ziegler - VP, Treasurer
Rob, at this point, the only weather impact that we have put into the forecast is the shift down in some cotton acreage and a little bit of increase in corn as a result, because of the drought situation that we have talked about in Texas.
But at this time of the year, our practice has been to go with a trend yield, because there is a lot of variables yet in the weather that can affect that.
So you are really looking at what we would consider to be trend yields.
Robert McCarthy - Analyst
Okay.
I just wanted to make sure that I understood.
And just a point of clarification.
The answer may be obvious, but as I look at your slide 13 that details your Ag & Turf industry outlook by region, the first five of the six bullet points are the core agricultural business.
Would it be fair to say that in your plan you expect to outperform these industry growth numbers in each of those five regions?
Marie Ziegler - VP, Treasurer
Absolutely.
Robert McCarthy - Analyst
Okay.
Thank you.
Operator
Jerry Revich.
Jerry Revich - Analyst
Goldman Sachs.
Can you say more about the factors that drove 16% lower production than you expected outside US and Canada this quarter?
And I'm looking at slide 27.
Thanks.
Marie Ziegler - VP, Treasurer
Slide 27 --.
Jim Field - SVP, CFO
The first thing, of course, it's 16% on a seasonally weak quarter for our European operations.
And the other issue is we had some production shift that is reflected in the overall tonnage that we moved into the second quarter that is affecting some of that as well.
But there is -- beyond that, Marie.
Marie Ziegler - VP, Treasurer
There would be a little bit of impact probably from combines out of South America.
I think that is well-documented.
But if you look at the full-year forecast for outside US and Canada, it is actually up a little bit.
Jerry Revich - Analyst
Jim, did you mention some of that is because of production shift in Europe?
Can you say more about that point into the second quarter?
Jim Field - SVP, CFO
It was just as we got into the schedule for the European operations, there were some units that were moved from late in the quarter to the following month.
Tony Huegel - Director, IR
It is really minor timing changes within the production.
Jerry Revich - Analyst
Okay.
And your sales guidance in C&F implies a slower production increase in coming quarters than typical seasonality.
Is that just room for upside or any specific drivers that you're looking at?
Marie Ziegler - VP, Treasurer
Again, that reflects IT4 conversions.
And remember, you have to shut the line down, then you convert and then you restart.
So you've got some ramp-up through there.
Tony Huegel - Director, IR
Keep in mind, as compared to last year, in the first and second quarter, we had some increased production as we were moving to the SAP conversion that was right at the end of our second quarter.
And so it is really as much a 2011 shift in production as 2012.
Jerry Revich - Analyst
Thank you.
Operator
Joel Tiss.
Joel Tiss - Analyst
Buckingham Research.
I just wondered if you can give us a sense of what is happening to the farmers' breakeven costs on corn and on beans.
And I'm just trying to gauge how much of an impact a potential drop in crop prices in 2013 might have on volumes.
Tony Huegel - Director, IR
Sure, and actually, one thing I would cite is if you look at -- there was a University of Illinois study that was done last fall that kind of looked at expected crop price -- or input costs and so on.
And it was -- they looked at a 1200-acre farm, and the metric they used is in terms of not so much breakeven, but making decent money.
So at $50,000 net farm income, corn, the pricing they had on corn was about $3.70.
And soybeans would be about $8.50.
And that is very consistent with what we would get from Informa Economics, who is our outside consultant.
They would say corn in the $3.50 to $3.70 range, farmers still make good money, and soybeans in the $7.50 to $8 range.
Jim Field - SVP, CFO
So lots of headroom vis-a-vis where prices are today.
Joel Tiss - Analyst
Right.
Okay, good.
And then is there any number you can share with us on the earnings impact from the lower provision for credit losses in the quarter?
Is that material?
Tony Huegel - Director, IR
Yes, I mean, it was in the $4 million range.
Joel Tiss - Analyst
Okay.
All right.
Thank you very much.
Operator
Ashish Gupta.
Ashish Gupta - Analyst
Credit Agricole Securities.
If we just step back for a second and focus on the long-term, you have seven new factories and are increasing production capacity at existing facilities.
Can you just kind of give us an idea of what you're most excited about in terms of incremental contributions over a multiple-year period?
Jim Field - SVP, CFO
We are excited about several different aspects of it.
What we've said is near-term, one of our largest growth opportunities would be kind of Europe, from an SVA perspective.
South America, we believe, has plenty of headroom.
And we are seeing really pretty good activity starting to be restored in the CIS regions today.
And the CIS is all about large ag for us, just in many respects very, very similar to the upper Midwest, and generates margins that are very, very consistent with the types of margins that we see in the large ag space in North America.
And then we've of course announced these factories in Asia.
These are large unit volume markets.
I think you are looking at something north of 500,000 industry volume in India this year.
But of course, a much, much lower ticket per unit.
So there are six geographies we are focused on around the world and each of them holds some very interesting and promising opportunities for us.
Ashish Gupta - Analyst
Great.
And just to follow up on the balance sheet quickly, I'm just trying to think about how much incremental cash you guys will have this year to buy back stock.
Can you kind of review your balance sheet management and your debt maturity schedule versus your liquidity for 2012?
Marie Ziegler - VP, Treasurer
Our cash flow that we expect to generate from operations is about $3.5 billion.
We have talked about the fact that we do have some large debt maturities; that's in one of the schedules in the appendix.
Our cash management, we will put it be positioning ourselves with some amount of cash to make sure that we have a fairly smooth transition as we have to repay those.
We've got a very large maturity in the second and then another one in the third quarter.
And quite candidly, we have been doing some pre-funding; you see that reflected in our cash balances.
But we expect to manage very comfortably through it.
And I have already demonstrated by virtue of the amount of cash that we have on that we will have a smooth transition.
Ashish Gupta - Analyst
Great.
Thank you.
Tony Huegel - Director, IR
We need to move on to the next caller, please.
Thank you.
Operator
Seth Weber.
Seth Weber - Analyst
It's RBC.
Sorry if I missed this, but the $100 million of additional cost that you absorbed in the quarter for startup and overhead, did you -- can we talk about how that is going to trend through the year?
Do you expect that to trend down quarterly as we go through the year, or is that kind of a steady state for the next couple quarters?
Jim Field - SVP, CFO
Right now, the way we see it is that that would be a heavier headwind in the first half of the year than in the second half of the year.
So yes, it does trend down in the second half of the year.
Seth Weber - Analyst
Okay, great.
Thank you.
And just to follow up, on Latin America, you guys have done a really nice job taking share there.
Have you noticed any kind of competitive response with respect to pricing?
Has pricing gotten more aggressive across the industry or can you comment on any of that?
Jim Field - SVP, CFO
I would -- it is not our practice really to get into talking too much about what is going on with the competition.
But I would tell you that we had positive price realization in South America last year, we are forecasting positive price realization in South America this year, and so -- and we had it in the first quarter.
So obviously, there is a lot of competitive dynamics around the globe.
But for us, it is about getting market share and getting it in a sustainable way, and if it is through price, it is not sustainable.
So I think the fact that we've gotten this personalization is a good evidence that we are doing it the John Deere Way and the right way and the sustainable way.
Tony Huegel - Director, IR
Okay.
Thanks, Seth.
We will move on to the next caller, please.
Operator
David Raso.
David Raso - Analyst
ISI.
Really just one quick question.
The costs you said in the first quarter for Ag & Turf, if I add those back, it implies an incremental margin of 33%.
And an operating margin at 14.3%, a 33% incremental would be the strongest incremental in a couple years.
So I am just trying to get a feel for how you look at the underlying profitability of Ag & Turf.
Because if you look at the full-year guidance, you are roughly implying still the same idea of about a 15% Ag & Turf margin, maybe a tad higher.
I'm just trying to get to the underlying business, when these costs recede, should I -- I'm just trying to get my arms around -- ex those costs, you had a core incremental margin of 33% for the quarter?
It just doesn't seem that logical, given a tough comp against the combine production a year ago.
Tony Huegel - Director, IR
I think for starters, is certainly, as we talked about with -- the combines were lower in the quarter, but we did have some strength last year.
Our large tractor, the 8000 series tractor, was lower than normal as we went through conversion in January of last year.
And there are other products that have very strong margins as well that we're seeing some strength in this year.
Jim Field - SVP, CFO
But I think if you think about this from a macro perspective, David, I think you are thinking about it more right than wrong.
What we've got here is a situation where we are investing a lot around the globe for the future growth of this Company.
We have these headwinds caused by regulatory requirements.
And despite all of that, we are putting up first-quarter operating margins on an absolute basis -- forget about the incrementals -- that are about as good as we've ever had.
And so I think we are accomplishing what we wanted to accomplish, which was invest in the growth, invest in what we need to do to bring out a superb IT4 product and maintain very healthy levels of margins.
And we've done that.
Thank you, David.
David Raso - Analyst
Okay.
Tony Huegel - Director, IR
Okay, thank you.
Next caller, and I think we have time for one more call -- one more caller.
Operator
Ann Duignan.
Ann Duignan - Analyst
JPMorgan.
One of the questions we get a lot from investors is just Deere's mix going forward.
You invest in the rest of the world, and the North America high-horsepower and combine market maybe matures, the mix going forward may be a negative.
Could you just talk about your what your expectations are for the mix of product, maybe the mix of margin?
I know you won't get into margin in any great detail, but any color you could give us in terms of what your expectations are from a mix perspective as you expand globally.
Tony Huegel - Director, IR
Right.
Well, I think I'd start, first of all, as part of that global expansion, we also -- and in our aspirations, we talk about an aspiration of growing our operating margin from roughly 10% at mid-cycle to 12%.
So I think that is reflective of our expectation that, mix aside, that we will continue to improve our operating margins as we move forward.
And again, as you look at mix, I think you can also look at, yes, we have growth in some regions where you might be more heavily weighted towards smaller ag.
But we also have some good growth opportunities in places like Russia and the CIS, which will have certainly a significant large ag mix.
Not to mention South America and our growth opportunities there.
Ann Duignan - Analyst
And just as a follow-up, on your outlook for Asia -- Asia is a very large region, and within it, we have China and we also have Australia and New Zealand.
Can you talk about the fundamentals in both of those regions, one versus the other?
Tony Huegel - Director, IR
In terms of Australia versus in Asia?
Ann Duignan - Analyst
Australia/New Zealand versus China.
When you give guidance, you just give Asia, which incorporates both.
Tony Huegel - Director, IR
Right.
Well, primarily -- our Asia guidance is primarily being driven by India and China.
And so -- and we talked about on the opening comments that India in the tractor industry this coming year, we are looking at about relatively flat tractor industry, after two very strong growth years, and still at very, very high levels.
And then certainly China continues to see some nice growth.
In both cases, government is very supportive of the growth of agriculture.
So with that, we thank you for your call.
Marie Ziegler - VP, Treasurer
Maybe I will just summarize quickly.
Thank you for joining us today as we talked about an excellent first quarter, excellent prospects for the remainder of the year.
And certainly we've had the opportunity to talk about some of the things we are doing to position ourselves to take advantage of the very exciting tailwinds we have globally.
Susan, Tony, I and Christian will be available for your questions as we move through the day.
Thank you.
Operator
Thank you.
This does conclude today's conference call.
We do thank you for your participation, and you may now disconnect your lines.