強鹿 (DE) 2014 Q1 法說會逐字稿

Good morning and welcome to Deere & Company's first-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations.

Thank you.

You may begin.

Thank you.

Also on the call today are Raj Kalathur, our Chief Financial Officer, 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 our outlook for fiscal 2014.

After that we will respond to your questions.

Please note that slides are available to complement the call this morning.

They can be accessed on our website at www.JohnDeere.com.

First, a reminder.

This call is being broadcast live on the Internet and recorded for future transmission and use by Deere and NASDAQ OMX.

Any other use, recording, or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.

Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.

This call includes forward-looking comments concerning the Company's plans and projections for the future that are subject to important risks and uncertainties.

Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.

This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP.

Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.JohnDeere.com/financial reports under Other Financial Information.

Susan?

Thank you, Tony.

With this morning's first-quarter earnings announcement, John Deere has started 2014 on an impressive note.

Income and sales both reached new records for the first quarter of the year.

It was our 15th consecutive quarter of record earnings.

The improvement was broad-based, with all three of our divisions reporting higher income.

Performance for the quarter also reflected success executing our marketing and operating plans, which are aimed at expanding our customer base worldwide.

Adept execution is essential to successfully launching new products and getting new capacity up and running.

Finally, our full-year earnings forecast remains unchanged at approximately $3.3 billion.

It was, in short, a sound start to what is expected to be another good year.

Now let's take a look at the first quarter in detail, beginning on slide 3. Net sales and revenues were up 3% to $7.7 billion.

Net income attributable to Deere & Company was $681 million which, as noted, was the highest income ever recorded in any first quarter.

EPS was up 10% to $1.81.

On slide 4, total worldwide equipment operations net sales were up 2% to $6.9 billion.

This includes an unfavorable impact from currency translation of 2 points.

Price realization in the quarter was positive by 2 points.

Turning to a review of our individual businesses, let's start with agriculture and turf on slide 5. Sales were up 2% due to a number of factors, including John Deere Landscapes, a smooth Final Tier 4 transition, and slightly higher than anticipated shipments of several other products.

Operating profit was up 4% to $797 million.

In spite of the transition of small combines, 7R tractors, and sprayers to Final Tier 4, ag and turf's incremental margin was an impressive 30%.

Before we review the industry sales outlook, let's look at fundamentals affecting the ag business.

Slide 6 outlines US farm cash receipts, which are forecast to be down somewhat from 2013.

Assuming trend yields, grain production levels are expected to be up in 2014, which would result in lower feed grain prices.

Livestock receipts are forecast to remain at record levels.

As a result, our forecast calls for 2014 cash receipts to be about $378 billion, down 7% from 2013, which was the highest level ever recorded.

On slide 7, global corn stocks-to-use remain at historically low levels.

Corn production was strong in 2013 due to good weather globally, resulting in higher yields.

However, global corn stocks-to-use are only expected to increase by about 1 percentage point.

In addition, global corn plantings will likely decrease in 2014.

In fact, our Deere estimate expects approximately 4 million acres of corn to shift to soybeans in the next planting season in the US.

Taking a global look, our consultant, Informa, is forecasting a cut in planted corn area of about 10% in Brazil for the 2013/2014 season.

Planted corn acres for Argentina's early crop were down about 30%.

INFORMA expects another 4% to 5% drop in the late corn crop.

Moving to the CIS, Ukraine is also expected to cut back on corn planted area by about 20%.

If 2014 brings unfavorable growing conditions in any part of the world -- the US, Brazil, and Argentina in particular -- corn stocks-to-use would fall and commodity prices could rebound.

Our economic outlook for the EU 28 is on slide 8. Beef prices are close to historic highs, and record milk prices are supporting livestock and dairy farmers.

Grain prices and farm income are expected to be lower in 2014, but remain near long-term averages.

While it appears that short-term economic stress has diminished for now, concerns over slow European Union growth are weighing on farmer confidence.

A differentiated picture continues to exist by country.

While we see demand improving in the UK and Spain, some decline in important markets like France and Germany bears watching.

As a result, farm machinery demand is expected to be lower in 2014.

On slide 9, you will see the economic fundamentals outlined for other targeted growth markets.

In the CIS credit availability continues to weigh on equipment sales, and import policies are negatively impacting combine sales in Russia, Kazakhstan, and Belarus.

Late fall planting in Russia has put some of the 2014 winter crop at risk.

Slide 10 illustrates the value of agricultural production, a good proxy for the health of agribusiness in Brazil.

The 2014 value of ag production in Brazil is expected to increase about 3% over the 2013 level.

Brazil's soybean production is expected to increase again in 2013/2014, on the heels of historically high prices and margins.

On the other hand, while partially offset by the weak real, lower global commodity prices could reduce farm income.

As shown on slide 11, in mid-December the Brazilian government announced the FINAME interest rates for 2014.

The interest rates now in place are 4.5% for small and medium farmers and 6% for large farmers, both up from 3.5%.

The new FINAME rates remain at very attractive levels, considering inflation in Brazil was slightly over 6% in 2013.

And private financing rates are currently in the mid-teens.

Consequently, Deere does not expect any significant impact on sales from the higher rates.

This morning we introduced a new line of planters and planter technology, highlighted on slide 12, at the Louisville Farm Show.

Planting is a critically important operation to a farmer.

The breakthrough technology in this planter takes in-ground seed-spacing accuracy and depth control to a new level, even at higher speeds.

At 10 miles per hour, twice the speed of current machines, our ExactEmerge planter achieves equivalent or better in-ground spacing and depth control.

This new planter allows producers to cover more acres in less time.

This is critically important when they are challenged by narrow planting windows to reach maximum yield potential.

Our 2014 ag and turf industry outlooks, all unchanged since last quarter, are summarized on slide 13.

In the US and Canada we expect an industry decline of 5% to 10%, mainly reflecting lower sales of high horsepower tractors and combines.

The EU 28 industry outlook is down about 5% due to lower crop prices and farm incomes.

In South America, industry sales of tractors and combines are projected to be down 5% to 10% from 2013's strong levels.

South America continues to grow in importance for Deere.

Our tractor market share has grown considerably there; and our strong position in other products such as combines, sugar cane harvesters, sprayers, and seeding equipment should not go unnoticed.

Shifting to the CIS, we expect industry sales to be down slightly, while in Asia sales are projected to be up slightly.

Turning to another product category, industry retail sales of turf and utility equipment in the US and Canada are projected to be up about 5% in 2014.

Putting this all together on slide 14, fiscal year 2014 Deere sales of worldwide ag and turf equipment are forecast to be down about 6%.

In the year-over-year comparison of net sales, Landscapes accounts for about half of the change.

2014 operating margin for the ag and turf division is forecast at about 14%.

The 2 point decline from 2013 is a result of mix, foreign exchange, and higher overhead costs, including implementation costs related to Final Tier 4.

We have talked for some time about how a favorable mix associated with strength in the large ag sector has been benefiting margins by 1 to 2 points.

This year, the mix benefit is forecast to be about 1 point.

Let's focus now on construction and forestry on slide 15.

Net sales were up 4% in the quarter and operating profit was up 32%.

The division's incremental margin of about 45% is a result of C&F's diligent focus on cost.

An aerial view of our two new construction factories in Brazil is on slide 16.

We feel Brazil has the long-term demographic and market characteristics that the John Deere strategy is built around.

The construction equipment market in Brazil is expanding at a rapid pace, and the country continues to grow as an exporter of agricultural and other commodities.

This means it will continue to expand and upgrade its transportation system and infrastructure.

At the same time, urbanization and increasing incomes are creating demand for more housing and institutional building.

The Deere Brazil factory is solely owned and will manufacture backhoe loaders and four-wheel-drive loaders.

The factory has manufacturing capability similar to our US facilities, which includes cutting steel, welding, machining, painting, and product assembly.

The Deere-Hitachi Brazil factory is a 50-50 joint venture with Hitachi Construction Machinery Company Limited.

It will produce five John Deere and Hitachi branded excavator models.

Backhoe and excavator production has started; we will begin loader production later this year.

Moving to slide 17, looking at the economic indicators on the bottom part of the slide, the economy continues slowly moving forward and there are positive signs in the market.

Construction employment numbers are rising; housing starts are ramping up; home sales and prices are improving; and home inventories are low.

Some markets are seeing building lot shortages.

Landscaping activity is picking up, and financing for land developers is slowly recovering.

Additionally, we continue to see a strong domestic energy sector.

Deere's construction and forestry sales are forecast to be up about 10% for the year, which is unchanged from a quarter ago.

The increase reflects higher shipments, following the low levels of 2013; industry growth in response to an improving US economy; and increased international sales.

Global forestry markets are expected to be up about 5% in 2014.

Following double-digit growth in 2013, North American forestry markets are expected up about 5%, while Europe and Russia are expected to improve from the depressed levels of 2013.

C&F's full-year operating margin is projected to be about 9%.

Let's move now to our financial services operations.

Slide 18 shows the financial services provision for credit losses at 3 basis points, based on the percentage of the total average owned portfolio at the end of the year.

This reflects the continued excellent quality of our portfolios.

Our 2014 financial forecast contemplates a loss provision of about 13 basis points.

Losses remain well below the 10-year average of about 28 basis points and the 15-year average of about 48 basis points.

Moving to slide 19, worldwide financial services net income attributable to Deere & Company was $142 million in the first quarter versus $133 million last year.

2014 net income attributable Deere & Company is forecast to be about $600 million, which is unchanged from a quarter ago.

Slide 20 outlines receivables and inventory.

For the Company as a whole, receivables and inventories ended the quarter down $898 million.

That was equal to 26.4% of prior 12-month sales, down from 29.8% a year ago.

Ag and turf ending receivables and inventory were down $633 million.

About half of the decrease is accounted for by John Deere Landscapes, with the remainder due to lower inventory associated with planned reduced volumes in the second quarter and foreign exchange.

Construction and forestry ended the quarter down $265 million, driven by a decrease in Canadian consigned inventories.

We expect to end 2014 with receivables and inventory down about $75 million.

Our 2014 guidance for cost of sales as a percent of net sales, shown on slide 21, is about 75%.

When modeling 2014, keep in mind the following: price, about 2 points; lower pension and OPEB expense; an unfavorable mix of product in ag, as we talked about earlier; Tier 4 product cost; overhead spend due to Tier 4 transitions; and foreign exchange.

Looking at R&D expense on slide 22, R&D was down about 9% in the first quarter, mainly due to timing of projects.

Our 2014 forecast calls for R&D expense to be about flat with last year.

SA&G expense for the equipment operations was down 4% in the first quarter and is forecast to be down about 5% for the year.

In the year-over-year comparison of SA&G expenses, Landscapes accounts for about 7 points of the change.

On slide 24, pension and OPEB expense was down about $40 million in the quarter and is forecast to be down about $150 million for the full year.

Turning to slide 25, the equipment operations tax rate was approximately 31% in the first quarter.

For full-year 2014, the effective tax rate is forecast to be in the range of 34% to 36%.

On slide 26 you see our equipment operations history of strong cash flow.

Our forecast for cash flow from equipment operations remains at approximately $3.9 billion in 2014.

On slide 27, we outline our 2014 outlook for the second quarter and full year.

Our net sales forecast for the second quarter is down about 6% compared with 2013.

This includes about 2 points of price realization.

In the year-over-year comparison of second-quarter sales, Landscapes accounts for about 3 points of the change.

A couple of things to keep in mind when modeling second-quarter sales and incremental margins.

As has been the case the last few years, changeover of engine technologies creates anomalies in our normal seasonality patterns.

Production levels will be down in the second quarter due to Final Tier 4 transitions.

Products transitioning in the quarter will be important ones, such as large combines and 8R tractors.

So mix will also be a factor.

The full-year forecast calls for net sales to be down about 3%.

In the year-over-year comparison of net sales, Landscapes accounts for about 3 points of the change.

Price realization is expected to be positive by about 2 points.

FX is expected to be negative by about 1 point.

Finally, our 2014 full-year net income forecast remains at about $3.3 billion.

In closing, John Deere has entered 2014 on a strong pace.

Even in the face of lower demand for large farm machinery, we believe the Company is well positioned to deliver solid performance and have another good year.

Indeed, we believe our extensive investments in new products, new markets, and additional capacity will provide strong support to our results and keep our strategic plans moving ahead.

As a result, we remain highly confident about the Company's future prospects and our ability to deliver value to our customers and investors in the quarters and the years to come.

Thank you, Susan.

We are now 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 Instructions) Andrew Kaplowitz, Barclays Capital.

Good morning, guys.

Nice quarter.

Andy, thank you.

Tony, can you talk about the near-term visibility that you have in ag?

You guided to overall equipment sales down 6%.

We assume some modest growth in C&F in the quarter.

So you're seeing this fall-off in ag and turf.

Susan mentioned the IT4 transitions.

Is that what this is more of in 2Q?

And then can you talk about the order book in that context?

You had pretty good visibility around wheeled tractors especially.

Has anything really changed in the order book?

Yes, you're right, the second quarter especially if you look at ag and turf is very much about the IT4 -- or Final Tier 4 transition.

Keep in mind, as she pointed out, that you have the 8R tractors transitioning during the month of April; and we also have large combines transitioning during the quarter as well.

So you're looking -- we talk about combine shipping patterns, for example, have in the past.

And this year we would say first-half/second-half is about 45% first half, 55% second half.

Last year it was about 50-50.

So not a significant change, but if you look quarter to quarter there is a big, big change in the second quarter, where our expected shipments will be down, similarly on tractors.

Now as you look at order book, we continue to have a very strong order book on tractors.

In fact, if you look at 8R tractors, the wheeled models, our order book is now out into early September in terms of how we would look at first availability.

Now keep in mind, that is on a lower production schedule -- or said differently, a lower allocation for US and Canada tractors in that.

And it, of course, accounts also for the fact that we have some lower production in the second quarter in particular.

As you know, on combines we don't talk so much about effective availability as much us how the early order programs came in.

And they were down year-over-year on the combine early order program; it would have been down a double-digit.

Roughly in line, though, with our expectations.

So as we look at our outlook for 2014, especially as it relates to large ag equipment, year-over-year our order books are, I would say, if you just took a broad brush on large products, are roughly in line in terms of the coverage we have.

Keeping in mind, on lower expectations; but certainly have relatively the same level of coverage of orders versus our forecast.

Okay.

That's helpful, Tony.

Then you previously said that your base case in ag and turf was based on extension of Section 179, sort of a middle ground around $250,000.

Has your thinking changed on that?

And how do we get comfortable that there wasn't some significant pull forward in equipment purchases in your November/December time frame?

Maybe you could give us some color on how January was versus those two months.

Yes, we would tell you today our base case in terms of what we have modeled is we'll continue to expect that we will have an extension of both the bonus depreciation and the Section 179 at kind of that half level for Section 179.

Now keep in mind, the difference, though, that we would say today is really expecting that to happen later in the year.

Of course, if there is any extension we would anticipate that it would be made retroactive.

But that still means our business until then, our customers' buying decisions, there is an element of uncertainty in terms of whether or not they will actually have those tax incentives by the end of the year.

But that would be our base case, is that they would come in.

With that, in terms of pull ahead, again I think if you look at our first quarter some of the strength there really was -- when we talked about it ahead of time, November and December production of combines were higher than normal as we were preparing for the Final Tier 4 transition.

So we still had a couple months of Interim Tier 4 purchases.

Certainly from a used equipment perspective, we think that was beneficial, as those US tax incentives were expiring and customers knew that.

But the reality is from a retail sales perspective, if customers were coming in late in the year trying to take advantage of those tax incentives on new equipment, they would have had very limited opportunity in terms of just the availability of equipment we would have to sell to them at that point in time.

So it is pretty limited pull-ahead as it relates to tax incentives.

Operator, let's go to the next caller.

Appreciate it.

Thank you.

Stephen Volkmann, Jefferies.

Hey, good morning.

Can I just ask you, your first quarter obviously came in a little bit better than what you had expected.

And again I guess I'm just trying to get a sense of the cadence.

Was this more preparation for the switchover to Tier 4 Final?

Or was there something else that drove that?

Yes, certainly on the top line we would have had a little more strength, obviously, than what we would have guided to.

And really there isn't a simple answer in terms of one particular item or even a couple items.

Susan hit a few of the larger items, and there were a variety.

We talked about the fact that with the John Deere Landscapes we did end up with more sales in the quarter than what we had anticipated in the forecast.

And as you might expect, with those sorts of situations, you put in your best estimate and things do move around a little bit.

Then to your point, we did have some timing benefit in terms of shipments.

Some of that was related to our Tier 4 transitions in the quarter went better than we had even anticipated, and so we were able to ship more product than what we had in the forecast.

And there were a variety of other products that we could say it wasn't a transition, but we were able to ship some additional products in the quarter.

I wouldn't imply that that -- and obviously it didn't change dramatically our full-year production, so I wouldn't say that was necessarily a strength that we would expect to have those higher level of sales as we move forward.

Okay, great.

Then just a quick follow-up.

I think if I am not mistaken you took your ag and forestry margin expectation down to 14% from 15% I think we had last quarter.

Please correct me if I am wrong.

But I am curious if there is any color you want to give us around that.

And I notice it didn't really go up; so what made up the difference to keep the guidance flat?

Yes, I assume you meant the ag and turf?

I'm sorry, yes.

Yes, okay.

Yes, really a big change there is around FX, is probably the biggest change that is impacting the margins there.

The remaining difference year-over-year is very similar to what we would have talked about at original budget.

Big -- obviously from a positive perspective, we are expecting price realization, talked a little bit about pension OPEB having some benefit there.

But then from a negative side, mix is a big item.

And then the Tier 4 transition, both from a product cost perspective, as well as the overhead expenses related to those transitions, are really the biggest drags on that operating profit.

But, Tony, is mix worse than it was a quarter ago when you (multiple speakers)?

No, if you're looking at the change from original budget, it is really more about FX.

That would be the biggest change.

Okay.

Thank you.

Ross Gilardi, Bank of America.

Hey, good morning.

Thank you.

Could you talk a little bit more about your South American farm equipment outlook, and how you are planning to manage production into the region?

You've obviously stuck with your down 5% to 10% retail sales outlook; but you are also forecasting soybean prices down another 17% into the 2014/2015 crop year, which obviously implies that we are on a downward pricing slope as fiscal 2014 unfolds.

So how do you avoid overproducing to the region in this environment?

And what are you hearing from your Latin American dealers right now?

Yes.

Really as we look at our 2014 -- and keep in mind, as we think about our South American outlook, that is anticipating just tractors and combines.

And as we talk about quite often, we have a significant business outside of tractors and combines.

In fact, our sales, more than a third of our sales there would be product beyond the tractors and combines in that region.

So those are continuing to have some strong sales as well.

So as we look at that South American market, Brazil in particular, we are still looking for some very positive things to come from that region.

We have talked a lot about our market share improvement, especially in tractors.

We saw some nice market share movement on combines as well in 2013.

So our business there is actually continuing to be pretty strong.

Keep in mind, too, as you look at commodity prices and as you project out into 2014, a couple things generally about commodity prices would be -- we are assuming in those numbers trend yields at this point.

And so that would assume that we would have some very good weather and some good production.

And we are seeing corn acres come down, and much of that is moving into soybean acres.

So if you see that shift into soybeans and good growing conditions, which is a big assumption, then you're going to see some drawdown in soybean prices as a result of that.

But keep in mind, too, as it relates specifically to Brazil, with the FX impact today and the weak real, it doesn't have quite as strong of an impact on farmer income as it might in other parts of the world, in the US in particular.

So that is actually helping buoy those farmer incomes in Brazil.

Okay, thank you.

Then just on my follow-up, for construction equipment clearly you are looking for further acceleration as the year progresses, to hit your plus-10% outlook.

Does your order book reflect that optimism at this point?

Have you seen any drop-off in demand in early 2014 on the back of perhaps a pre-buy in front of Final Tier 4?

No.

In fact, we would tell you as we look at our order books, just broadly speaking, we would tell you they are very strong.

So we continue to be encouraged by that.

Thanks a lot.

Seth Weber, RBC Capital Markets.

Hey, good morning.

How are you?

So two questions.

In Brazil, did you experience a pause around the dislocation in the FINAME financing?

And has that reaccelerated since the program has been cleared up?

I guess that is my first question.

Sure.

I think that would be a fair way to say it.

As they ramped down the 2013 program at the 3.5%, and then the new rates have been announced for 2014, but it does take a little bit of time for those to ramp back up.

Our view, though, overall is that that is a short-term pause, and we don't think that is going to have an impact on our overall shipments for the year.

But certainly -- and you will likely see that in the numbers coming out of Anfavea here in the next month or so, where you will see a little bit weaker shipment volumes across the industry.

But again we think that is a short-term issue.

Okay, thanks.

Then a follow-up.

Your pricing realization for the first quarter came in at plus 2 versus I think the plus 3 that was expected.

Is there any color around that?

And can you talk, I guess separately, about the acceptance of the Tier 4 pricing that you are pushing through?

Yes.

I would tell you, keep in mind those are rounded numbers, the 2 and the 3. So it doesn't take a lot of shift in the actual number for that to move from 2 to 3. So I wouldn't read a lot into that difference on the price realization.

Regarding the pricing on Final Tier 4, obviously we didn't change our long-term or our annual projection on price realization.

I think the easiest way to answer that is looking at the 8R tractors where that -- I think about an 8% increase in price this year.

We will have to look at that again.

But again, we are seeing very strong orders continue on that.

And that production beyond May obviously is all Final Tier 4.

Okay, thank you very much.

Eli Lustgarten, Longbow Securities.

Thank you.

Good morning, everyone.

Quick question on used equipment.

Can you give us some idea what's the status of used equipment around the dealers (inaudible)?

That was a complaint that we keep hearing, that used equipment was pretty high now with Schedule 179 not being applicable, at least for now, for used equipment.

Is there any issue there by product or types that we have to worry about?

Yes, I would start with saying we look at used equipment broadly speaking, we think used equipment is in relatively good shape.

Keep in mind if you look at absolute levels, certainly it is at high levels; but that is reflective of the very high level of sales we have had.

Now if you dive a little deeper, used combine inventories are actually in very good shape.

Our dealers did some great work in bringing those down really during the fiscal fourth quarter of last year.

And those have continued to be at good levels, from our perspective.

Large tractors are certainly at higher levels.

But again, it is relative to the sales and is not raising any red flags.

As you know, Eli, we are always cautious about used equipment and always focus on used equipment; so I can't say that we aren't -- don't have any concerns about it, because we always do.

But I wouldn't say necessarily any significantly heightened concern around used equipment.

And depending on what dealers you are speaking with, keep in mind that my comments are really talking about on a broad basis.

Certainly there's going to be pockets on all products where you're going to see a little bit elevated inventory at certain dealers, those sorts of things.

So that is always the case.

And, Eli, if I can add on the pricing, for large row-crop and four-wheel-drive tractors, used pricing has actually been up.

Now for some models of combines, it has come down high single digits.

Okay?

So the pricing's overall held their [tier].

So since it came down low single digits, the combine pricing has stayed.

So we feel pretty good about the pricing as well, although, like Tony said, we are always going to be cautious about used equipment.

Just a quick follow-up.

Can you talk about your thinking in production schedules in the second half of the year?

I know you're up a couple percent in the first quarter in ag, down in the second quarter.

Are we looking at just modest declines right now in the plan for third and fourth quarter?

Or is there any skewedness?

Is one quarter worse than -- we're getting the other.

Usually sometimes the fourth quarter takes the hit and the window can change, if necessary.

Yes, I don't know that I would expect anything real dramatic, other than the second quarter.

But as you are looking at the back half of the year, I don't believe there is any -- obviously for the full year we are expecting some lower production levels.

But in terms of skewing between quarters versus normal production, I think the biggest difference is going to be around second quarter.

All right.

Thank you very much.

Ann Duignan, JPMorgan.

Hi, good morning, guys.

Can you talk about (technical difficulty) if Section 179 or accelerated depreciation do not get extended, would it be fair to say that fiscal 2015 will be looking tougher than fiscal 2014 in an environment with no tax incentives?

Certainly if all else is equal and you remove US tax incentives, certainly that would tend to have a negative impact.

But keep in mind there, as you know and are well aware, there is a number of factors that farmers look at when they are making their buying decisions.

And obviously, tax is just one of those.

Sure, and cash receipts being the other, and also forecasted to be down.

(multiple speakers) Certainly cash receipts, as you point out, is forecasted to be down somewhat.

Keep in mind, some of that as you look at as you look at year-over-year, 2013 was raised considerably by the USDA as well.

Some of that increase, though, is as you see drought in California and other parts of the country, for example, you are seeing some higher levels of receipts from fruits and vegetables.

Livestock is certainly better as well.

So that is starting to give a little bit different view and maybe a little bit more skewed view of 2014 versus 2013.

Sure.

My follow-up question is more academic really.

With the Farm Bill passed and base level prices of $3.70 for corn and $8.40 for beans and insurance, why wouldn't we expect to see more acres of corn than you are projecting?

Have you taken into consideration the $3.70 and the $8.40 when putting together your forecast for acres for corn?

Yes, well, as you know, that was just signed into law last Friday; and so we are still evaluating what all that means and what the implications are throughout the business.

What we'd tell you is certainly the Farm Bill is supportive.

It is a long-term Farm Bill and it is very supportive from our perspective for our farmer customers.

In terms of short-term impact on our business, I think I would say the biggest impact is it just removes one level of uncertainty that had been there previously.

So that certainly on the margin would be positive; but I think it is a little premature to talk about what other, either positive or negative, benefits -- although we could certainly see more positive than negative from the Farm Bill -- but what the details may preclude.

But wouldn't you agree that the difference between current prices and $3.70 versus current prices of beans and $8.40 would definitely (multiple speakers) farmers -- go ahead.

Certainly current prices of corm would be above that $3.70 level.

So I am not sure that would have a dramatic impact.

But again, for us it's a little premature for us to comment on that.

But it's certainly something we would be looking at.

Okay.

I will take it off-line.

Thanks, guys.

Jamie Cook, Credit Suisse.

Hey, guys.

This is actually Andrew Buscaglia on behalf of Jamie.

I noticed on your construction and forestry side you took down your non-res assumption a little bit.

Can you just tell us what is implied in your construction forecast above 10% with regards to non-res?

If there's -- if you're leaving some room for upside there, or is it mostly just res at this point?

Yes, I would say for starters, that is not a factor.

It is a relatively small factor in our modeling and in terms of what we are looking at.

Maybe taking it a little bit broader, as we look at our up 10% for construction and forestry sales for the year, just roughly you can say it is about a third, a third, a third in terms of what the -- where that growth is coming from.

About a third of it is coming from industry growth, our expected industry growth in the underlying business.

Roughly a third is higher shipments around some inventory adjustments.

As you may remember, we ended 2013 with new inventory levels at our dealers very low.

So we would expect some rebuild of that inventory.

And then about a third will come from markets outside of the US and Canada.

We have talked about -- we have highlighted our new Brazilian facilities.

Forestry in Europe and Russia are expected to recover off of some pretty low levels, but see some recovery there as well.

So that is really where those -- that 10% is coming from.

So it's a variety of factors, one of which is certainly a stronger US and Canada industry.

Got it, okay.

Then I am just going to channel Jamie here for a second, but I've got to ask.

No one has mentioned your buyback at this point.

Do you have any updated thoughts on the remainder of the year?

Yes, so this is Raj.

Our use of cash priorities, Andrew, stay the same.

We will be a broken record on it.

First, keeping enough liquidity for maintaining our A rating.

Second, for all our capital expenditures and M&A requirements.

And third, modestly but consistently increasing our dividends and keeping it between 25% and 35% of the midcycle earnings.

And only after doing those will we use our cash for share repurchases.

Now, the $8 billion share repurchase, that's essentially a statement we are making that we will have enough confidence in our ability to generate good cash in the next few years to be able to return cash to shareholders in the form of share repurchases.

But only when and if it adds good value to our long-term shareholders.

Now, there is one -- a couple of differences you need to note from last year's first quarter to this year's first quarter.

Last year, first quarter we had a little bit more caution in terms of the uncertainty in the external markets, in the financial and capital markets.

We felt slightly better about that this time.

And we have also said the $300 million plus that we get out of the John Deere Landscapes partial sale, we'll give it back in the form of share repurchase; and you have seen some of that come out in the first quarter of 2014 as well.

All right.

Thanks, guys.

Robert Wertheimer, Vertical Research Partners.

Hi, good morning, everybody.

First question, you've talked a little bit, but the gross margin change year-over-year on solid ag revenue anyway, can you quantify maybe the currency impact and/or whatever other impact you want to quantify with them?

Yes.

Again it's really related to FX.

And again I would remind you, these are rounded numbers and so keep that in mind as well.

But again, the biggest impact really is the FX.

Okay.

If I understand what you mentioned on the production schedule and the outlook, I am not sure how far forward you would normally be booked on tractors at this point.

I am guessing that you took your production down, consistent with your guide; let's say 10% or 20% of the high horsepower; and therefore you're booked solidly out, but booked out down that level.

Is that right?

Are you constraining demand by pushing that out further just because of the uncertainty in the market?

Can you maybe give a little detail around that?

Yes, I think how we would describe it, obviously, is we look at our availability; that is on assumed lower production levels.

At least that that we are allocating to the US and Canada, consistent with our lower projections for the year.

So as you look at year-over-year, though, the 8R tractor I mentioned early September; last year you were in early July in terms of effective availability.

And then on 9s -- and these are wheeled tractors -- you would be early May this year; and you were mid to late April last year.

But the tracks -- track tractors on both of those would actually be near, closer in than last year.

But remember we had some availability constraints earlier in the year last year on tracks.

So we're mid to late June this year versus late August last year on 8s.

And 9s we're early April versus August of last year.

Got it.

But the wheeled tractors are the larger part of that.

Larger part?

Yes, yes, then the tracks are small still.

Thanks.

Andy Casey, Wells Fargo Securities.

Good morning, everybody.

Just wanted to get a better feel for the combine and series 8R production profile through the year.

Should we expect it to go back to run rate in Q3 after the air pocket in Q2?

Or should we anticipate a slow ramp-up from that Q2 level?

Yes, as you think about -- certainly on the combines as you look year-over-year, and how I am looking at it is as a percent of the total of the annual shipments.

So keep in mind we are on a lower year-over-year production schedule on those combines.

You would see a little bit heavier actually year-over-year in both the third and fourth quarter, but not a dramatic shift.

And it is fairly evenly spread between the two quarters.

So again, on combines, you saw higher first quarter, lower second quarter.

Third and fourth to your point get more in line with the run rate that we would have had last year.

And I don't have that level of detail on the 8R tractors, other than I know second quarter is certainly the quarter that is impacted on those 8R tractors.

And then I would assume again you're going to go back to more normal run rates; again on lower production levels, but more normal run rates into the third and fourth quarters.

Okay, thanks.

Then if we could look at Europe, one of your competitors made some comments about a 20% drop in their orders for Europe.

Could you give a little color on what you are seeing over in that region?

You know, and Susan I think pointed out a little bit, it does vary country by country in terms of what you are seeing overall.

Our outlook is down 5%.

So I don't know if they were perhaps speaking about a specific country or not.

But that would be a pretty dramatic drop.

But generally speaking, the UK is a little stronger year-over-year.

Of course they were coming off of a weather-related lower level in 2013.

Spain on the margin would be a little lower.

We are seeing some flat to maybe a little bit of weakness in some of the markets like Germany and France.

But again they are coming off of some strong markets as well.

But I wouldn't -- we certainly aren't hearing any kind of dramatic reduction like that in terms of orders in that particular region.

So again we are seeing a market that is a little softer year-over-year but generally hanging in there.

Okay.

Thank you very much.

Adam Fleck, Morningstar.

Hi, good morning.

Thanks for taking my question.

I wanted to follow up on the C&F segment.

You noted that the dealer inventories were awfully low at the end of last year, but your volumes were down this quarter.

I am just curious.

Did dealers continue to reduce their inventories?

Or was there basically flat?

Any details there would be helpful.

Yes, the biggest difference really in the quarter year-over-year relates to our inventories in Canada.

You may be aware we have consigned inventories there; so we did draw down those inventories in the quarter.

But certainly on an overall basis as we move through the rest of the year we would expect -- plus shipments, if you look at shipments versus retail, they were pretty much in line this quarter.

And we would anticipate that that would shift towards heavier shipments over retail as we move through the year.

Okay, great.

That's helpful.

Then Russia and Kazakhstan and all are still dealing with these combine tariff headwinds.

Just curious on any thoughts or updates you have on how that may play out for you.

Yes.

At this point the tariffs are -- the easy answer is that the shifting environment continues to be the one that is challenging from that perspective.

Certainly they did make a little bit of a change in terms of some allocations of combines that they would allow in.

And then there is also some requirement changes in terms of, beyond the allocation, moving more away from tariff and toward required local content to import beyond what the allocations allow.

For 2014, we feel like we feel pretty confident that we have met those local content requirements.

But again the challenge is in future years, what will be definition be?

And how quickly can we ramp up and meet those requirements?

So we would still be very cautious about that region on the basis of not necessarily import tariffs but import policies in that region, and the challenge of meeting those as they shift.

Okay, great.

Thank you.

Joel Tiss, BMO.

I wondered if -- well, just two -- I will just ask both my questions together.

First one is the regional breakdown.

Can you just give us a little more color region by region in Europe?

And then second, is there anything notable happening in the finance business, why the margins dropped, and just what the outlook for those margins in the second and third quarter?

Thank you.

In terms of margin, are you referring to the comment around spread?

On (multiple speakers)

Yes.

You are building out some of your regions, and that might hurt the mix going forward.

Yes.

Actually, keep in mind, some of that is , as you look at the portfolio, the mix of the portfolio does impact our spread in the sense that if -- as you get a higher ag portfolio and if it's a -- the returns on that portfolio would not be as high from a spread perspective as some of the others.

So that is part of the answer there.

Certainly from Europe, other than that, I talked a little bit about France and Germany, UK, and Spain.

Those are probably the highlights.

As you think about the other, maybe to give a little more color, as you think about CAP reform, in 2014 certain regions you may see a short-term impact there as they transition to the new plan.

The CAP changes do put, in some cases, more flexibility country by country; and so some of the Eastern European countries we would anticipate there may be a short-term slowdown in the sense of how they get the definitions out and apply those CAP payments.

But again that is a real short-term phenomenon.

But outside of that I really don't have much more I can add.

Okay.

So, operator, if we can go to the next caller, and this will be our last call.

Adam Uhlman, Cleveland Research.

I guess the first question I had is, congrats on the early Tier 4 success.

I am wondering if you could help us dial in a little bit more, though, how you are thinking about the decremental margins for the second quarter; and maybe how much contingency you have in the plan.

Yes.

I would say as you look at second quarter, when you think about decremental margins, remember that you are talking about key products with 8R tractors and large combines, as well as the lower production of those products; and you also have higher costs from an overhead perspective as we are transitioning those products and bringing those lines down and so on.

So those two coupled together can have some sizable impact on operating margins in that second quarter as we look forward.

So, in terms of what is in our forecast, that is our best estimate based on our current production plans.

Those can shift either direction.

One week can make a big impact, if there is a delay or if we're a little bit ahead, as you saw in part in the first quarter.

So I would tell you that there is as much risk that you could see that production schedule slide a little bit as be pulled forward some.

So that is how we tend to put the forecast together, and what we would expect for second quarter.

Okay.

Thanks, Tony.

Then just a clarification.

You had mentioned that you are watching the used tractor market a bit.

Have you made any changes to programs yet?

We are always working with our dealer network in terms of how best to work through used equipment and so on.

So there is always tweaks.

In terms of -- we are still using pool funds as the basis of our effort with dealers.

But from time to time we will change what programs they can utilize that pool fund for, and in some cases tweak some existing ones, maybe add some additional here and there.

So those sorts of things happen on a regular basis.

But nothing dramatically different in terms of shifting away from pool funds or anything of that nature.

Okay, thank you.

Okay.

All right.

Thank you.

With that, we will conclude our call, but as always we will be available throughout the rest of the day for callbacks.

Thank you.

Thank you.

This does conclude today's conference.

We thank you for your participation and you may now disconnect your lines.