使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good morning and welcome to Deere & Company's second-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.
You may begin.
Tony Huegel - Director of IR
Thank you.
Also on the call today are Raj Kalathur, our Chief Financial Officer; and Susan Karlix, our Manager of Investor Communications.
Today we'll take a closer look at Deere's second-quarter earnings, then spend some time talking about our markets and our outlook for the second half of FY14.
After that, we'll respond to your questions.
Please note that slides are available to complement the call this morning.
They can be accessed on our website at www.JohnDeere.com.
First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere 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/financialreports, under Other Financial Information.
Susan
Susan Karlix - Manager of Investor Communications
Thank you, Tony.
Today, John Deere announced earnings for the second quarter of 2014, and it was another solid performance.
In reporting income of almost $1 billion, the Company again demonstrated adept execution of its operating plans, keeping costs and assets under control, while successfully managing major new product transitions.
In addition, though Ag and turf profits were somewhat lower, our construction and forestry and financial services operations had significantly improved results.
In our view, this reflects the power of our broad-based business lineup, and it is one of the reasons we are continuing to call for full-year income of $3.3 billion.
Now let's take a closer look at the second quarter in detail, beginning on slide 3. Net sales and revenues were down 9% to $9.9 billion.
Net income attributable to Deere & Company was $981 million.
EPS was $2.65 in the quarter; that's the second highest earnings per share in Company history.
On slide 4, total worldwide equipment operations net sales were down 10% to $9.2 billion.
In the quarter-over-quarter comparison of net sales, Landscapes accounts for 3 points of the change.
Also included is an unfavorable impact from currency translation of 1 point.
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 down 12%, primarily due to lower shipment volumes, as well as the 3 point Landscapes impact noted on the previous slide.
Operating profit was $1.2 billion.
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 $393 billion, down only about 3% from 2013, which was the second highest level ever recorded.
On slide 7, global grain stocks-to-use ratios remain at sensitive levels, even after abundant harvests in 2013.
The Southern Hemisphere, notably Brazil and Argentina, is just now concluding large harvests of both corn and soybeans.
Planting is well underway in North America, where farmers appear to be shifting some acreage from corn to soybeans in response to relative prices.
But even though supplies appear to be adequate, global grain and oilseed demand remains strong, unfavorable growing conditions in any part of the world would hurt production, reduce the stocks-to-use ratio, and result in prices quickly moving higher.
Our economic outlook for the EU 28 is on slide 8. There are signs of economic stabilization and cyclical recovery, with a modest forecast increase in GDP growth and rising business and consumer confidence.
With feed costs easing, strong beef prices, and near record milk prices, margins remain supportive for livestock and dairy farmers.
While remaining near long-term averages, grain prices and farm income are expected to decrease in 2014.
As a result, farm machinery demand is expected to be lower for the year.
However, 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, Germany, and Poland, bears watching.
On slide 9, you'll see the economic fundamentals outlined for other targeted growth markets.
In the CIS, slowing economic growth and credit availability continues to weigh on equipment sales, while import policies are negatively impacting combine sales in Russia, Kazakhstan, and Belarus.
As geopolitical tensions between Russia and Ukraine continue, fewer acres are being planted and less inputs, such as fertilizer and insecticides are being used, putting the 2014 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 is expected to increase about 5% over the 2013 level.
Brazil's soybean production is expected to increase again this year, 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.
Our 2014 Ag and turf industry outlooks are summarized on slide 11.
In the US and Canada, we continue to expect an Ag industry decline of 5% to 10%.
The EU industry outlook remains at down about 5%, due to lower crop prices and farm incomes.
In South America, industry sales of tractors and combines are now projected to be down about 10% from 2013's strong levels.
South America continues to grow in importance for Deere.
In April, we introduced over 60 new products in the region, including 5E-series tractors with cabs, self-propelled sprayers for sugar cane, planters, and a new complete line-up of combines.
Shifting to the CIS, we now expect industry sales to be down significantly, 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 now projected to be flat to up 5% in 2014.
This slight change in our outlook is mainly due to the impact the harsh winter had on sales in the first half of the year.
Putting this all together on slide 12, FY14 Deere sales of worldwide Ag and turf equipment are now forecast to be down about 7%.
In the year-over-year comparison of net sales, Landscapes accounts for about 3 points of the change, and negative currency translation accounts for about 1 point.
The 1 point reduction in our forecast from last quarter mainly reflects lower industry outlooks for Ag sales outside the US and Canada and for the turf business.
2014 operating margin for the Ag and turf division is forecast at about 14%.
The 2 point decline in operating margin from 2013 is a result of volume, mix, foreign exchange, and higher production 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.
The mix benefit in 2013 was 2 points.
Let's focus now on construction and forestry on slide 13.
Net sales were up 2% in the quarter and operating profit was up 63%.
The division's incremental margin of about 196% is a result of C&F's diligent focus on cost and the law of small numbers.
Moving to slide 14, looking at the economic indicators on the bottom part of the slide, you'll note that although the fundamentals are all lower than three months ago, the economy is slowly moving forward, and there are positive signs in the market.
Unemployment is falling and construction hiring is increasing; housing starts are slowly ramping up; home inventories are low and prices are improving; 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, as well as industry growth in response to an improving US economy and increased international sales.
Global forestry markets are now expected to be up about 10% in 2014.
Following double-digit growth in 2013, North American forestry markets are expected up about 10%, while Europe and Russia are expected to improve from the depressed levels of 2013.
C&F full-year operating margin is projected to be about 9%.
Let's move now to our financial services operations.
Slide 15 shows the financial services provision for credit losses as a percent of the total average owned portfolio at 30 April, was 5 basis points, reflecting the continued excellent quality of our portfolios.
Our 2014 financial forecast contemplates a loss provision of about 12 basis points.
Losses remain well below the 10-year average of about 28 basis points, and the 15-year average of 48 basis points.
Moving to slide 16, worldwide financial services net income attributable to Deere & Company was $148 million in the second quarter, versus $125 million last year.
2014 net income attributable to Deere & Company is forecast to be about $600 million, which is unchanged from a quarter ago.
Slide 17 outlines receivables and inventory.
For the Company as a whole, receivables and inventories ended the quarter down $603 million.
That was equal to 32.1% of prior 12-month sales, down from 33% a year ago.
Ag and turf ending receivables and inventory were down $554 million.
Most of the decrease was accounted for by John Deere Landscapes and John Deere Water.
Construction and forestry ended the quarter down $49 million, driven by lower Canadian consigned inventories.
We expect to end 2014 with receivables and inventory down about $175 million.
Our 2014 guidance for cost of sales as a percent of net sales, shown on slide 18, is about 75%.
When modeling 2014, keep in mind the following: price, about 2 points; lower pension and OPEB expense; less favorable mix of product; overhead spend due to Tier 4 transitions; Tier 4 product costs; and foreign exchange.
Looking at R&D expense on slide 19, R&D was down about 6% in the second quarter, mainly due to timing of projects.
Our 2014 forecast calls for R&D expense to be down about 1% compared to last year.
Moving now to slide 20, SA&G expense for the equipment operations was down about 14% in the second quarter, and is forecast to be down about 7% for the year.
In the year-over-year comparison of SA&G expense, Landscapes accounts for about 7 points of the change, and Water about 1 point.
On slide 21, pension and OPEB expense was down about $40 million in the quarter, and it is forecast to be down about $150 million for the full year.
Turning to slide 22, the equipment operations tax rate was approximately 32% in the second quarter.
One of the discrete items benefiting the tax rate in the quarter related to John Deere Water as noted in our financial statements.
For full-year 2014, the effective tax rate is now forecast to be in the range of 33% to 35%.
On slide 23, you see our equipment operations history of strong cash flow.
Our forecast for cash flow from equipment operations is approximately $4 billion in 2014.
Slide 24 highlights share repurchase activity since 2004.
Of note is our strong share repurchase activity year to date, which has exhausted our 2008 repurchase authorization.
Repurchases are now taking place under the $8 billion authorization announced in December.
On slides 25 and 26, we outline our 2014 outlook for the third quarter and full year.
Our net sales forecast for the third quarter is down about 4% compared with 2013.
This includes about 2 points of price realization.
In the year-over-year comparison of third-quarter sales, Landscapes accounts for about 4 points of the change.
The full-year forecast calls for net sales to be down about 4%.
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 full-year 2014 net income forecast remains at about $3.3 billion.
In closing, John Deere expects to achieve near record earnings for the full year, and the Company is well positioned to deliver solid financial results throughout the business cycle.
We're confident our investments in new products and markets, coupled with a tight rein on cost and assets, will keep our growth plans moving ahead.
As for our plans, we believe they are essential to helping meet the world's growing need for food, shelter, and infrastructure, and we continue to believe John Deere is exceptionally well positioned to benefit from these developments in the quarters and years to come.
Tony
Tony Huegel - Director of IR
Now we're 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)
The first question comes from Jamie Cook with Credit Suisse.
Jamie Cook - Analyst
Hi, good morning.
Two questions: first, Tony or Susan, if you could provide some color on how the order book has trended relative to last quarter with some of the new Tier 4 Final products introduced, whether you've seen any drop-off in how you're thinking about visibility for the second half of the year?
And then, my second question relates to the implied decremental margins in the back half of the year in Ag.
It seems like they should be worse in the back half.
Given your top-line assumptions, I thought the second quarter probably would have been the worst, with production down more.
If you could walk me through if there's anything I'm missing there.
Thanks.
Tony Huegel - Director of IR
Sure.
First of all, on the order book, I think maybe as an overarching comment on large Ag in particular, what we would tell you is if you think about the retail order coverage that we have on our forecast, we would tell you, compared to last year, we would be roughly in line, if slightly below where we were a year ago.
But, again, roughly in line with the order coverage we have on the forecast.
So again, I think trending pretty well there.
Specifically related to Final Tier 4, we talked about this last quarter as well, with specifically the 8R Tractor, where we were seeing very strong orders for that Final Tier 4 tractor, didn't really see any drop-off at that time.
Our order book, we often talk about where we're at from an availability perspective, and we would tell you on 8Rs, we -- our order availability is into October.
There is some availability remaining on that product for the year, but well into October in terms of that availability.
Again, a pretty good story from that perspective.
Jamie Cook - Analyst
Any color on combines, Tony?
Tony Huegel - Director of IR
Well, again, it wouldn't have changed much from our second quarter.
Our early order program tends to pretty much fill out that program, and we didn't -- we saw that order book fill pretty much the way we had anticipated.
And again, we feel pretty good in terms of the order coverage, obviously, to the forecast we have in place today.
Jamie Cook - Analyst
Sorry, then the second question on the implied decrementals in the back half?
Tony Huegel - Director of IR
Yes, on the decrementals, keep in mind, as you look historically at our cost of sales, second quarter tends to be the best -- the lowest cost of sales as a percent of net sales of any and that will be true this year.
But if you look at the differential and what's implied in the outlook, you'll note that the second quarter, relative to the comments you mentioned with the transitions we had, second quarter isn't as strong as what you would normally see.
But it still is forecast to be our best quarter from a lower cost of sales as a percent of net sales ratio.
So I would argue that you're seeing it in the forecast, in terms of the differential not being as broad as what you would normally see.
Jamie Cook - Analyst
Okay.
Thanks.
I'll get back in queue.
Tony Huegel - Director of IR
Thank you.
Next caller.
Operator
Your next question is from Seth Weber, RBC Capital Markets.
Seth Weber - Analyst
Hey, good morning, everybody.
Tony Huegel - Director of IR
Hey, Seth.
How are you?
Seth Weber - Analyst
How are you?
Good, thanks.
Two questions, so your level of confidence in the construction and forestry, up 10% for the year, that suggests a pretty powerful ramp here in the second half, something like a high teens growth rate for each of the third and fourth quarters.
Can you give us a little bit more color there on how much of that is dealer restocking, how much is some of the new production you're adding?
And then I have a follow-up question.
Tony Huegel - Director of IR
Sure.
We would tell you, again, and that outlook, as you mentioned, hasn't changed.
It's always -- and we've talked about this throughout the year.
It always has recognized more strength in the back half.
Remember that to be fair, the comps do get a bit easier in the back half of the year, year-over-year.
But as you look at our order book, it is up strong.
We tell you that the order book is up double-digits.
We feel pretty good about that.
As it breaks down, though, when you think about where are those higher sales coming from, we would tell you about three-fourths of the sales are coming from our US and Canada market, and about a quarter of the sales increase will come from outside the US and Canada.
We didn't break out how much is inventory versus retail.
Again, as you talked about before, certainly the inventory build is a fair amount of that increase for US and Canada, as we ended last year with very low inventory levels versus even what the market was last year.
So our dealers are building inventory in anticipation -- or expected to build inventory, both in anticipation of the higher retail, as well as really, we would argue, right-sizing from a pretty strong pull-down last year.
Seth Weber - Analyst
Okay.
Thank you.
And then a follow-up on the Brazil, the change in outlook for the South America market, that tempered a little bit.
Is that still around the FINAME dislocation, or is there something that you feel like has actually softened in the overall market?
Tony Huegel - Director of IR
First, I want to make sure we're clear; that's tractors and combines only.
So it wouldn't apply to the remaining part of our business, which is a significant part of our sales in South America.
But it's primarily driven by a little bit of softening in a couple markets, really around tractors.
So as you think about Argentina, some challenges with import tariffs, and that's primarily impacting tractors -- and then, at least for Deere.
Then also the sugar cane industries have a little bit weaker markets in Brazil, a little weaker margins.
We would anticipate sales to be a bit lower than what was previously expected on tractors into that industry as well.
Seth Weber - Analyst
Okay.
That's very helpful.
Thank you very much.
Tony Huegel - Director of IR
Thank you.
Next caller.
Operator
And your next question comes from Steven Fisher, UBS.
Steven Fisher - Analyst
Hi, good morning.
Wondered if you could talk a little about the cost actions that you took in the quarter, where were they focused?
How quickly can they give you some payback?
And how much more runway do you have on cost [actions] from here?
Should things deteriorate a little bit further?
Tony Huegel - Director of IR
I think, as we've talked about, as we anticipate and see the markets changing with our SVA structure, we do have what we refer to as lever studies and expectations of what we can pull.
I think part of what you're seeing in the quarter, actually, is as it relates to C&F, for example, we pulled a number of levers last year.
That's a division that's been slow to release those levers, until we see those very strong sales that we're anticipating coming through, they've kept some of those pulled to the extent they can.
I think really, as you move forward in upcoming years, depending on what the market provides, there are a number of things we can do.
You saw quite a bit of discipline around R&D and SA&G in the quarter.
For example, some of that, to be fair, is timing of projects.
SA&G, for example, tends to be a little higher in the back half of the year for a number of reasons.
But those would be the things we would think about, certainly, in terms of levers that we could pull, if necessary, to keep our margins as strong as possible.
Raj Kalathur - SVP and CFO
Steve, this is Raj.
As you know, the process we have is by product.
Almost every unit is looking at where they are on the line.
We talk about 80, 100, 120, or depending on the product line, it might vary that line, and they need to provide us a expected return at different points in the line, different returns.
So each one of them is working automatically on -- whether it's cost of sales items or SA&G items, how they can get to walk down the line, they're coming down, or walk up the line.
So we will have hundreds of things going on in the Company, depending on where the particular product line is, they may take a different action with another product line.
So you are seeing us walking down the line.
That's a benefit you see if, like some portions of large Ag are coming down, then you can expect them to walk down the line.
If small Ag is going up in North America, they'll walk up the line.
Steven Fisher - Analyst
Okay.
That's helpful.
And then a question on the small equipment side in Ag, seems to be holding up better than the larger side.
Can you talk about the visibility you have there.
If there's pent-up demand that's coming through now?
And with the feed outlook looking maybe a little flatter, what visibility you have there on the small equipment side.
Tony Huegel - Director of IR
On small ag versus large, as a broad statement, our order book would not be as far out and never -- rarely would be, versus the large.
So you don't have quite as much visibility, but certainly, as expected, we're seeing strength in that market.
Livestock margins continue to remain very strong, are expected to, really through the year, and most are expecting it to continue to be strong even into next year.
And that's a market that's had some struggles in the recent years.
So pent-up demand is hard to measure, but you could argue that a market -- or a part of our business that has had lower sales in recent years and has opportunity to, on a cycle perspective, to improve as we move forward.
That's really what we're seeing today.
Steven Fisher - Analyst
Okay.
Tony Huegel - Director of IR
Thank you.
Next caller.
Operator
Your next question is from Andrew Casey, Wells Fargo.
Andrew Casey - Analyst
Thanks.
Good morning, everyone.
Tony Huegel - Director of IR
Good morning.
Andrew Casey - Analyst
Thanks, Tony.
Was there any specific region that is driving the $50 million decrease in the trade receivable and inventory outlook for 2014?
Tony Huegel - Director of IR
I don't believe there's any specific region that we would point to that would be driving that reduction.
We tend to look at it from an enterprise perspective, so I don't have a great answer for you on that, Andy.
Andrew Casey - Analyst
Okay.
Thanks.
And then a follow-up on that.
Tony Huegel - Director of IR
You're talking on C&F on the quarter?
Actually, I would argue some of that is going to be Canada, is going to be the -- if you look at a region.
We talked a lot last year or a bit last year about consigned inventory in Canada was a bit high, and that came down nicely and year-over-year, is actually down very nicely.
So I was thinking for the year, but certainly at this point in time, it's, I would argue, Canada.
Andrew Casey - Analyst
I'm sorry, Tony, I didn't ask the question right.
The $50 million reduction in the Ag and turf segment for the year, the down $275 versus prior $225.
(Multiple speakers)
Tony Huegel - Director of IR
Oh, between Ag and turf.
No, I think again, you're really looking at minor adjustments here and there.
I would argue that it's a relatively -- given the -- versus the total receivables and inventory, that's a minor adjustment.
Andrew Casey - Analyst
Okay.
And is that all behind you with Q2, or does some of that remain ahead?
Tony Huegel - Director of IR
Well, keep in mind, much of where we're at Q2 is -- I would say it's still ahead.
Because as you look at Q2, much of that is really driven by lower receivables and inventory, as it relates to Landscapes and Water.
If you took those out, you're relatively flat year-over-year, and so when you get to the end of the year, we'll have further pulled out.
Andrew Casey - Analyst
Okay.
I'll follow up.
Thanks.
Tony Huegel - Director of IR
I do want to point out for others as well, keep in mind that as you look at the end of Q2 versus the year end, there is a difference in terms of year-over-year compare.
So last year at the end of Q2, the John Deere's Landscapes inventories and receivables would have been in our reported numbers.
They were not in our year-end numbers.
So that's why when you look at the Q2 reduction is much greater than what we're anticipating for the end of the year.
But if you pull out the impact of Landscapes, you'll see a greater reduction, actually, at the end of the year versus where we're at currently.
Okay, next caller.
Operator
Your next question is from Adam Uhlman, Cleveland Research.
Adam Uhlman - Analyst
Hi, guys, good morning.
Tony Huegel - Director of IR
Hello.
Adam Uhlman - Analyst
First of all, on construction and forestry, if you could -- could you start by addressing the price realization that you got on that business?
Also talk about how the Tier 4 Final price increases are coming through?
Tony Huegel - Director of IR
Yes, as you -- specific to construction and forestry, we don't talk about price realization by division.
So we did talk about 2 points of price realization for the year on an enterprise basis.
What we would tell you is in our current forecast, we would anticipate both divisions participating in a positive way on price realization.
And so, again, that's about all we really talk to from a price perspective.
If you think about Final Tier 4, we do have some -- I don't know if that was a broad comment or if that was specific to construction and forestry?
Adam Uhlman - Analyst
If you could address both.
Tony Huegel - Director of IR
Yes.
So as you think about that broadly, Final Tier 4 is -- while we do have some construction products transitioning in 2014, it's more or less a large Ag transition year, more than construction.
In that regard, from a cost perspective, we would tell you that we would anticipate recovering all of the cost on large Ag in the year.
We are still recovering some of the Interim Tier 4 cost actually on construction and forestry.
So we would say by the end of the year, our forecast would estimate roughly 90% recovered Interim Tier 4. Remember, construction, because of the size of the product, the horsepower ranges of the product tended to be about a year behind in the transition from what Ag was.
So we're making good progress on plan.
Raj Kalathur - SVP and CFO
Adam, this is Raj.
On the topic of price utilization, with regards C&F, we did say in our press release about higher sales discounts.
It is a competitive environment we are facing, and we have built our share over a long period of time based on providing better products, better services, and better business processes.
So you should expect us to defend our share while delivering healthy margins.
Adam Uhlman - Analyst
Okay.
Got you.
So maybe you didn't have positive price this quarter, but that's the goal for the year.
Tony Huegel - Director of IR
Well, I think if you ask specifically about the quarter, that would be true.
But keep in mind, as you think about price realization and the mention of sales incentives in the press release with accrual accounting as the assumptions change in terms of your anticipation on whether it be sales incentives or any other types of accruals like that.
Keep in mind the accrual change is not just for current sales, but also for the population that's in the field already that you recorded sales in the past.
So you do get a larger-than-expected increase in that particular quarter.
Again, I think it's more important really to look at it from an annual perspective as it relates to that and, again, that would be a positive price realization for the year.
Adam Uhlman - Analyst
Okay.
Thank you.
Tony Huegel - Director of IR
Thank you.
Operator
The next question is from Jerry Revich, Goldman Sachs.
Matt Rybak - Analyst
Good morning.
It's Matt Rybak on behalf of Jerry.
First, I was wondering if you could talk about the impact of Tier 4 conditions on factory costs in the quarter?
And then possibly update us on the timing of major product-line transition and costs in the coming quarters?
Tony Huegel - Director of IR
Yes, we don't talk about specific cost levels.
The cost piece, as you may recall beginning in 2013, we changed our guidance and we talk about the total cost of sales as a percent of net sales.
And at that time, we discontinued the individual pieces and the dollar amounts.
But certainly it was a factor in the -- as you look at the cost of sales for the quarter.
But I would tell you, as you look at things like mix and FX, those were also very significant impacts in the cost.
As you go forward through the year, there would be some, but we would -- the majority of those transitions would be behind us, at least as it relates to large Ag.
Again, we have some significant transitions coming up for next year, 2015, as you transition small Ag, as well as a pretty large number of construction and forestry products.
Matt Rybak - Analyst
Perfect.
And then, can you talk a little about the drivers of your CapEx reduction guidance this year?
Maybe where you're cutting investment, and talk about your longer-term CapEx plans compared to significant new facility investments you've made over the past couple of years?
Tony Huegel - Director of IR
I would tell you that CapEx reduction is really minor adjustments, and as we get closer to the end of the year, really examining what we would expect to complete this year.
As you might imagine, many of those projects are multi-year projects, so what's going to get done this year versus next, those sorts of things.
I would not read much into that adjustment that we made there.
We talked about from a longer-term perspective, at least in the short to midterm that $1.1 billion to $1.3 billion range is what you should anticipate as we move forward.
That's not just new facilities.
Remember, we had -- with Final Tier 4, that's driving a significant portion of the CapEx requirement, as well and at least through 2015 we certainly have a fair number of products to continue to transition.
Matt Rybak - Analyst
Perfect.
Thank you very much.
Tony Huegel - Director of IR
Okay.
Thank you.
Operator
Your next question is from Vishal Shah, Deutsche Bank.
Vishal Shah - Analyst
Hi, thanks for taking my question.
I'm wondering if you can provide some more details around your C&F guidance of 10% growth this year?
How much of it is coming from market growth versus inventory rebuild?
Whether the growth is coming from domestic and international markets?
And also any update on your thoughts on expectations for bonus depreciation, as well as timing of Section179 incentives.
Thank you.
Tony Huegel - Director of IR
Sure.
As I mentioned earlier on the call, really if you think about that 10% net sales increase for Deere's construction and forestry business, about three quarters of that is coming from US and Canada, both, as you mentioned, inventory, some inventory restocking, as well as the stronger retail environment.
About a quarter of those sales come from outside the US and Canada.
So those are things like our businesses in Brazil, as those new factories come online.
We talked about strengthening forestry demand in the European market, as an example.
So that's really what's driving that business.
As you think about the US tax incentives, there's been a number of activities in Congress around that, moving those potential extensions forward.
What we would tell you, at least what we have in our modeling, so what we're anticipating in our Ag modeling is that they would both be extended, but the extension wouldn't be passed until late calendar 2014.
And so for Deere, in terms of our 2014 benefit to our sales, would be limited to nothing.
Obviously, we would have had some benefit early in the year.
So that would be our expectation.
Again, what we're modeling is the Section 179 gets extended at about half the level.
Not that we have any particular intelligence that would tell you that, that's where it is, but effectively, we're splitting the difference.
Whether it would be at the $500,000 or not get extended at all.
That's the rational for why we use that number in our modeling.
But again, that's what we're assuming model-wise.
Susan Karlix - Manager of Investor Communications
I think the thing to keep in mind is we're saying late calendar 2014.
So for the 2014 forecast, there is no impact; it would be 2015.
Tony Huegel - Director of IR
Right.
Vishal Shah - Analyst
Thank you.
Tony Huegel - Director of IR
Okay.
Thank you.
Next caller.
Operator
Your next question is from Ann Duignan with JPMorgan.
Ann Duignan - Analyst
Hi, good morning, guys.
Susan Karlix - Manager of Investor Communications
Hi, Ann.
Ann Duignan - Analyst
Hi.
I want to go back to Jamie's question, to get the question answered more clearly.
If you look at your combine order book for North America this year, where did it come in relative to last year?
The year-over-year change, not versus your forecast.
Tony Huegel - Director of IR
Well, we haven't talked -- we've talked about large Ag being down double-digits, and certainly, that would include our combine order book.
So pretty much as expected, but certainly down double-digits.
Ann Duignan - Analyst
And combines down a little bit more than the average?
Tony Huegel - Director of IR
I don't have -- let me look at where -- just a second, Ann.
I would -- if you look at combines relative to -- it depends on what other large Ag products -- as we look at what our industry retail sales estimates are.
Which obviously we'd be a fair chunk of that, I would tell you that they are not down more than the rest of the industry -- or more than the other large Ag products.
I would say it's pretty much right on average.
Ann Duignan - Analyst
Okay.
And other large products, you're including things like sprayers and --
Tony Huegel - Director of IR
You're talking sprayers, planters, obviously our row-crop tractors, four-wheel drive tractors, those sorts of products.
Think about the product that the typical row-crop farmer would use.
Ann Duignan - Analyst
Going forward, how should we think about your financial services business, in terms of the revenue came in -- [a bit larger than] we were forecasting.
We shouldn't have been surprised.
I'd suspect that you tend to finance more, again, of the large crop farmer in the US.
Can you give us some context of how we should think about that business going forward, if the large row-crop farmer remains under pressure?
Tony Huegel - Director of IR
As you think about market share, if you will, for John Deere financial, as it relates to our Ag business in the US and Canada, that would be our strongest market-share business.
And it's running right around 60% of the Ag sales would be financed with John Deere, John Deere Financial.
As you're aware, our biggest competitor there is cash, which takes up the bulk of the remainder.
But as you move forward, to your point, while we're anticipating the portfolio to increase during 2014, it's because as you have -- we're still, even though year-over-year our sales are down.
They're still anticipating more acceptance as this year versus those that would be maturing are being paid off.
If you continue to see pressure and our sales would flatten or maybe decrease, then obviously, over a period of time, you would see some lower portfolio and revenues, at least as it relates to US, Ag could potentially decrease.
But you'd have to make assumptions on what rest of the world and our penetration is on how that changes in rest of the world as well.
There's obviously a lot of moving pieces there.
Ann Duignan - Analyst
Okay.
And quickly as a follow-up to the Section 179 question earlier, what are your thoughts on the midterm elections and the outcome of the midterm elections, upside potential to your 179 or downside?
Do you have any thoughts on that?
Tony Huegel - Director of IR
We really don't.
We don't.
Again, it's -- the assumption is that after those midterm elections, again, late calendar year, it's likely to be extended.
Ann Duignan - Analyst
Okay.
Thank you.
Tony Huegel - Director of IR
Again, at least that's what we have in our base case.
Okay.
Thank you.
Ann Duignan - Analyst
Thanks.
Tony Huegel - Director of IR
Next caller.
Operator
The next question is from Mig Dobre, Robert Baird.
Mig Dobre - Analyst
Good morning, guys.
Tony Huegel - Director of IR
Hey Mig.
Mig Dobre - Analyst
I'd like to go back to construction and forestry for a second.
I'm a little bit confused about the top-line guidance, because if I look at the last couple of quarters, you had very good orders.
You talked about very good orders here.
Seasonally, at least, it would make sense to me that the second quarter would be when we see a lot of dealer inventory restocking.
Yet, we've seen relatively tepid growth from a top-line perspective over the last couple of quarters.
You're pointing out to much higher growth in the back half, yet the economic indicators you're using in your forecast all seem to have been adjusted lower.
So can we bridge the gap here?
What sort of confidence do you have in your forecast at this point, and what gives you that confidence?
Tony Huegel - Director of IR
I think, again, I'll mention a couple things.
First of all, I'd point out that while those economic indicators are -- have lowered, again, and those are being pulled from outside sources, of course.
But given that, they are still pointing upward and pointing towards some improved overall market conditions.
The other thing I would point out, as it relates specifically to that dealer restocking, keep in mind that one of the differences for Deere versus at least many of our competitors is our order fulfillment process.
We have very much a pull-type system, where our dealers -- we don't push a lot of inventory out into the market.
We allow our dealers to pull it as needed.
And with our pretty short order windows that we at least attempt to have, we're much more of a just-in-time type of process, versus build-up that inventory ahead of time situation.
So we've been building much closer to retail, and that part of the timing difference that you'll see for Deere versus maybe some of our competitors who push some significant inventory in the field, ahead of those sales materializing.
Mig Dobre - Analyst
I see.
And then A&T, if we can talk a little about Russia too, the sanctions there seem to be escalating.
I know you have two plants in the country.
Have you seen any impact on your operations, and how would you characterize the risk, if you would, to your operations in Russia at this point?
Tony Huegel - Director of IR
I think that obviously those conflicts, both as it relates to the Ukraine and Russia, certainly is in our forecast.
We talk about that in terms of our industry outlook being down significantly.
Again, especially as it relates to Western manufacturers like ourselves.
So there's a number of factors, obviously, that go into that.
But ultimately, a lot as a result of some of that conflict.
So we've anticipated -- and the greatest impact we think at this point would be on the sales, and so we've pulled that into our outlook.
At this point, in terms of concerns around assets, those sorts of things, not a major impact.
Certainly, the other -- at least as it relates to sales, not only do you have challenges and potential challenges around import restrictions, credit availability, because of that conflict, is becoming even more of a difficult situation for our customers and dealers in some cases.
Those sorts of things.
So we're looking at how do we take some of the pressure off of our dealers, keeping inventories as low as possible, those sorts of things for a variety of reasons.
A, it reduces our exposure, but it also helps reduce the exposure of our dealers, from a longer-term perspective.
Mig Dobre - Analyst
All right.
Thanks.
Tony Huegel - Director of IR
Okay.
Thank you.
Next caller.
Operator
Your next question is from Nicole DeBlase, Morgan Stanley.
Nicole DeBlase - Analyst
Yes, good morning, Tony and Susan and Raj.
Susan Karlix - Manager of Investor Communications
Good morning.
Nicole DeBlase - Analyst
So maybe we could talk a little bit about used equipment; I don't think that's been brought up yet.
What are you guys seeing from a dealer perspective, both with respect to inventories and pricing?
Tony Huegel - Director of IR
Not a significant change from what we've talked about last quarter.
Again, on used combines, we would tell you, all things considered, we're pretty comfortable with used combine inventory levels at our dealers.
Certainly, pricing, we talked about last quarter, again, is lower year-over-year.
We'd tell you as it relates to, at least the best intelligence we have on competitors, certainly in line with industry, in terms of those lower combine used prices.
As it relates to tractors, again, as we said last quarter, they are relatively high.
Again, it's reflective of the very strong demand that we've had on tractor -- on new tractors.
And so -- but that's an area that we certainly continue to focus on.
Pricing would be down a little bit year-over-year.
We'd tell you, again, to the extent we have intelligence around what's going on with our competitors, we would tell you we believe our tractor prices, used tractor prices are holding in quite a bit better than competition.
But it is down slightly year-over-year.
Nicole DeBlase - Analyst
Okay.
Great.
That's very helpful, Tony.
Maybe with respect to the third-quarter guidance, I don't know if you're willing to give any color on this, but I'm going to try anyway.
You said down 4% for equipment ops.
Any color between the C&F and the A&T segments there?
Tony Huegel - Director of IR
Yes, that's not something we -- obviously, if you look at the rest of the year, implied guidance, certainly, we're expecting a pretty strong quarter from our C&F division as we go and actually rest of the year for that particular division, versus what you would have implied in the Ag and turf.
But other than that, there's not much more we would speak to.
Nicole DeBlase - Analyst
Okay.
Fair enough.
I'll pass it on.
Thanks.
Tony Huegel - Director of IR
Okay.
Thank you.
Next caller.
Operator
Next question is from Andrew Kaplowitz, Barclays.
Alan Flemming - Analyst
Hi, good morning.
It's Alan Fleming standing in for Andy this morning.
Tony Huegel - Director of IR
Hey, Alan.
Alan Flemming - Analyst
Tony, if I could, I'd like to press you a little more on your assumptions for Ag in the second half of the year.
I think in Brazil, you had previously talked about growth coming from some of your other product lines, such as sugar cane, harvesters, and cotton pickers, and maybe even sprayers.
Is that still something that you're expecting to see in the second half of the year?
And then, if you could talk about what you're seeing in Europe.
It seems like it's a very mixed market there, and we're getting, I think, some mixed messages from some of your competitors.
So what's you're visibility like, and are you seeing the recovery that you expected?
Tony Huegel - Director of IR
Sure.
And I would -- as it relates to Brazil, you're correct and we've talked about as you think about the business outside of tractors and combines for Deere in Brazil would be -- more than one-third of our sales there are those other products.
And certainly, if you look at industry guidance versus Deere expectations for our net sales, we would tell you we continue to see South America as the biggest differential, partly because of the fact that you're only looking at tractors and combines in the industry outlook.
And as I mentioned, we have a fair amount of our sales coming from other types of products, as well as our expectation that we'll continue to see those market-share gains that we've had in recent years, we would expect to continue.
So again, that would be our greatest differential.
As you think about Europe, certainly as Susan mentioned in her opening comments, it is really a mixed bag.
We didn't change our outlook, industry outlook in Europe, so that would imply that we're at least on an overall basis, not seeing further deterioration in that regard.
We don't have the order-book coverage that you would have on large Ag in the US and Canada.
That's a typical situation there.
And so you can't speak as well to where we're at from an order-book perspective.
But you're seeing markets like the UK, which is a good market for Deere, recovering off of low levels.
Had a couple fairly depressed years, but we are seeing some strength there.
Spain is beginning to recover.
But then you have other key markets, as Susan mentioned, that are seeing some decline.
France and Germany being the most notable.
Poland, notable as well.
Keep in mind, some of that isn't so much around what's going on from a profitability perspective.
It's partly related to that, but also in some of those Eastern European countries, in particular, the transition year, this being a transition year for Common Ag Policy in Europe, is also having some impact in certain situations.
Alan Flemming - Analyst
Okay.
I appreciate that.
And if I could ask you a question on cash.
You continue to ratchet up your repurchase activity.
I know you're going to tell us that your cash priorities haven't changed, but is it fair to say you seem at least a little more confident that the intrinsic value of your stock versus where it's trading is undervalued?
And it means that it may be a little more worthwhile for you to you be more aggressive than usual with buybacks?
Raj Kalathur - SVP and CFO
This is Raj.
Yes, our cash priorities have not changed.
As you know, the single A rating, then the funding of operations and M&A and consistently and markedly raising our dividend, 25%to 35% of payout ratio mid-cycle.
And then if we still have cash we can use, we put it to use, only if we feel long-term -- especially long-term shareholders could be a value-add for.
When we had that $8 billion share repurchase authorization, it was about 25% of our market cap, at the time of the announcement in December.
We suggested that we've seen the statement of cash and our ability to do well throughout the cycle.
So as long as it you're delivering good levels of cash and have enough for the priorities stated and our analysis indicates repurchases are value-enhancing, especially for our longer-term shareholders, you should expect us to continue repurchases.
Tony Huegel - Director of IR
Okay.
Thank you.
We'll have time for one more, hopefully, quick call or question.
Operator
Your last question is from David Raso, ISI Group.
David Raso - Analyst
Hi.
I'll try to be quick, Tony.
More direct questioning on the construction revenue guidance.
You mentioned the order book is healthy.
The revenue guidance implied for the rest of the year is 17% for C&F.
Is the order book up that much?
Raj Kalathur - SVP and CFO
We don't give you exact numbers, but it's -- also remember, the order book is only for a certain period of time, right?
These are orders for a certain period of time.
It is a lot healthier is all I can tell you right now.
Tony Huegel - Director of IR
It's certainly supportive of that outlook and that forecast.
David Raso - Analyst
That's helpful.
And the second quarter revenues for construction and forestry, I know you expected first half slower, second half stronger.
I get that.
But literally the second quarter, was that revenue as you expected or above or below?
Tony Huegel - Director of IR
For C&F, I don't think it was significantly out of line from expectations.
Raj Kalathur - SVP and CFO
So overall, David, this is Raj again.
If you take what -- for the total Company, if you take the second quarter and the revenues coming down in second quarter compared to our earlier guidance, there are two things that happened.
One is related to weather.
We talked about turf and we talked about a little bit of Ag, especially in Canada.
The second part of it has to do with places like where geopolitical issues exist, Argentina and CIS.
If you look at going forward, CIS, Argentina is where we see some more softness, and we will not make up all those weather-related misses in Q2.
Otherwise, it's minor adjustments, not a significant change.
Tony Huegel - Director of IR
And those, again, would be for the full Company and mostly impacting Ag, and I think we mentioned in the opening comments, as you think about the sales coming in lower than what we had forecasted for the enterprise, most of that lower sales was driven by Ag and not C&F.
David Raso - Analyst
I appreciate the clarification.
Thank you.
Tony Huegel - Director of IR
Thank you.
All right, that will conclude our call.
We appreciate your participation, and as always, we'll be available throughout the day for return calls.
Thank you.
Operator
Thank you.
This does conclude today's conference.
We thank you for your participation, and you may now disconnect your line.