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Operator
Good morning, and welcome to Deere & Company's third-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
Hello.
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 third-quarter earnings, then spend some time talking about our markets and our outlook for the remainder of the year.
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 third-quarter earnings.
And all in all, it was a solid performance.
In fact, our income of $851 million was the second-highest for any third quarter in Company history, exceeded only by last year's total.
Our results did reflect moderating conditions in the global farm sector, which hurt demand for farm machinery, and contributed to lower sales and profits for our Ag and Turf business.
However, our other divisions, Construction and Forestry, and Financial Services, saw improvement in their results.
This shows the benefit of having a broad-based business lineup.
Overall then, it was a quarter of solid performance and one that puts the Company on the home stretch of another good year.
Now, let's take a closer look at the third quarter in detail, beginning on slide 3. Net sales and revenues were down 5% to $9.5 billion.
Net income attributable to Deere & Company was $851 million.
EPS was $2.33 in the quarter.
On slide 4, total worldwide equipment operations and net sales were down 6% to $8.7 billion.
In the quarter-over-quarter comparison of net sales, landscapes accounted for 4 points of the change.
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 11%, primarily due to lower shipment volumes as well as the 4-point landscapes impact noted on the previous slide.
Operating profit was $941 million.
In addition to volume, margins in the quarter were negatively impacted by higher production costs related to engine emission regulations, which includes product material costs and foreign exchange.
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 above-trend yields, grain and soybean production levels are expected to be up in 2014, which is resulting in lower prices for those crops.
Livestock receipts are forecast to remain at record levels.
As a result, our forecast calls for 2014 cash receipts to be about $387 billion, down about 5% from 2013, which is forecast to be the highest level ever recorded.
Concerning cash receipts for next year, based on our expectation of record grain yields in 2014 and resulting lower commodity prices, our very early forecast calls for cash receipts to be down about 3% in 2015.
On slide 7, global grain stocks-to-use ratios remain at somewhat sensitive levels, even after abundant harvests in 2013.
Although supplies appear to be adequate, global grain and oilseed demand remains strong.
Unfavorable growing conditions in any key growing region of the world, coupled with the unknown impacts from geopolitical issues, could lower 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, rising consumer and business confidence, and increased exports.
With feed costs easing, strong beef prices and near-record milk prices, margins remain supportive for livestock and dairy farmers.
However, grain prices have declined, and farm income is expected to decrease in 2014.
As a result, farm machinery demand is expected to be lower for the year.
Furthermore, a differentiated picture continues to exist by country.
While demand is improving in the UK and Spain, we are seeing declines in important markets like France and Germany.
On slide 9, you'll see the economic fundamentals outlined for other targeted growth markets.
In the CIS, declining economic growth and further tightening of credit availability continues to weigh on equipment sales.
Notably, Western equipment manufacturers are being impacted by the uncertainty from geopolitical issues in the region.
Economic growth is expected to slow in China in the second half of the year.
And the ag economy there is slowing as well, due to lower grain prices.
And while ongoing subsidies are supportive of agriculture, their pace of increase has slowed.
In addition, the construction sector recession has deepened.
Turning to India, although rainfall is expected to return to a more normal level, the weak onset of the monsoon season and minimal precipitation in key agricultural regions could have a negative impact on production.
Slide 10 illustrates the value of agricultural production, a good proxy for the health of the agribusiness in Brazil.
The 2014 value of ag production is expected to increase about 5% over the 2013 level.
Even with the recent drop in prices, ag fundamentals remain strong for grain, helped by 2013's extremely strong market and favorable financing environment.
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.
Although the ag economy remains in a relatively healthy state, falling commodity prices are putting pressure on demand for farm equipment, especially larger models.
At the same time, strength in the livestock sector is providing support to sales of mid and smaller size tractors.
As a result, we now expect industry sales in the US and Canada to be down about 10% this year.
The EU-28 industry outlook remains down about 5%, due to lower crop prices and farm income.
In South America, industry sales of tractors and combines are now projected to be down about 15% from 2013's strong levels.
Shifting to the CIS, we continue to expect industry sales to be down significantly, with Western ag equipment manufacturers feeling the most impact, due to geopolitical issues and resulting credit availability.
In Asia, sales are now projected to be about flat.
Turning to another product category, industry retail sales of turf and utility equipment in the US and Canada continued to be projected at flat to up 5% in 2014.
Putting this all together on slide 12, fiscal year 2014 Deere sales of worldwide Ag and Turf equipment are now forecast to be down about 10%.
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 reduction in our forecast from last quarter mainly reflects lower industry outlooks for sprayer and turf sales in the United States, and lower sales in Brazil and Canada.
The 2014 forecast for the Ag and Turf division operating margin remains 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 product and implementation costs related to final Tier 4.
Before turning to Construction and Forestry, let's touch on used equipment.
Strong large ag tailwinds have driven record new equipment sales growth and higher levels of used inventory.
The rise in used inventory has been steady across large ag product lines, and the spread between used prices and their original new prices has widened from the tightest-ever spreads of 2008 and 2009.
Specifically, Deere prices are holding up as well or better than the competition.
Our dealers' ability to move used equipment is crucial to our long-term strategy.
A new tool to enable this is outlined on slide 13.
Earlier this month, the John Deere Certified Preowned Program was introduced.
Combines less than two years old with less than 1000 hours, and 8R and four-wheel-drive tractors less than three years old and fewer than 1500 hours are eligible.
Products in the program will undergo rigorous inspections.
More than 280 points on combines and 150 on tractors will be inspected and tested by John Deere certified technicians.
Products also will be backed by an industry-leading, one-year, 500-hour comprehensive Powerguard warranty, and include a one-year subscription to JDLink.
This will allow our used-equipment customers to experience uptime, similar to new equipment, and take advantage of the increased fuel economy, comfort, convenience, and technology associated with late-models.
Now let's focus on Construction and Forestry on slide 14.
Net sales were up 19% in the quarter and operating profit was up 81%.
The division's incremental margin of about 31% was a result of increased volume and price.
A less favorable product mix negatively affected C&F's operating margin in the quarter.
This was driven by a tough comparison on service parts and a less favorable region mix, primarily driven by increased sales in Brazil.
Moving to slide 15, looking at the economic indicators on the bottom part of the slide, although growth has been disappointing, the United States 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 existing home sales are rebounding.
Landscaping activity is picking up and financing for land developers is slowly recovering.
Additionally, we continue to see a strong domestic energy sector.
Based on these factors, Deere's Construction and Forestry sales are forecast to be up about 10% for the year.
This is unchanged from our initial outlook in November 2013.
Our C&F order books are strong.
The outlook for the year contemplates increased 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 expected to be up about 10% in 2014, unchanged from our previous forecast.
Following double-digit growth in 2013, North American forestry markets are expected to be up about 10%, 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 turn now to our Financial Services operations.
Slide 16 shows the Financial Services' provision for credit losses as a percentage of the total average owned portfolio at the end of July was 10 basis points.
This reflects the continued excellent quality of our portfolios.
Our 2014 financial forecast contemplates a loss provision of about 11 basis points.
Losses remain well below the 10-year average of 28 basis points and the 15-year average of 48 basis points.
Moving to slide 17, Worldwide Financial Services net income attributable to Deere & Company was $162 million in the third quarter versus $150 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 18 outlines receivables and inventory.
For the Company as a whole, receivables and inventories ended the quarter down $469 million.
That was equal to about 30% of prior 12-month sales -- the same as the situation a year ago.
Ag and Turf ending receivables and inventory were down $552 million.
Most of the decrease was accounted for by John Deere Landscapes and John Deere Water.
For your reference, we have included on this slide receivables and inventory for our Landscapes and Water businesses at the end of the third quarter and fiscal year 2013.
Construction and Forestry ended the quarter up about $83 million.
We expect to end 2014 with total receivables and inventory down about $300 million.
Our 2014 guidance for cost of sales as a percentage of net sales shown on slide 19 remains at about 75%.
When modeling 2014, keep in mind the following: price, about 2 points; lower pension and OPEB expense; overhead spending due to Tier 4 transitions; less favorable mix of product; and Tier 4 product costs.
Looking at R&D expense on slide 20, R&D was up about 7% in the third quarter, but is forecast to be down about 2% for the year.
Moving now to slide 21.
SA&G expense for the equipment operations was down about 15% in the third quarter, and is forecast to now be down about 10% for the year.
In the year-over-year comparison of SA&G expenses, Landscapes accounts for about 7 points of the change and Water about 1 point.
On slide 22, 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 23, the equipment operations tax rate was approximately 35% in the third quarter, and is now forecast to be in the range of 33% to 34% for the year.
Slide 24 shows our equipment operations history of strong cash flow.
Our forecast for cash flow from equipment operations is approximately $3.7 billion in 2014.
The 2014 outlook for the fourth-quarter and full-year are on slides 25 and 26.
Net sales for the quarter are forecast to be down about 8% compared with 2013.
This includes about 1 point of price realization.
In the year-over-year comparison of fourth-quarter sales, Landscapes accounts for about 3 points of the change, and John Deere Water about 1 point.
The full-year forecast calls for net sales to be down about 6%.
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 is now forecast at about $3.1 billion.
In closing, John Deere is looking forward to completing another successful year.
What's more, we continue to believe the longer-term outlook for our businesses holds considerable promise.
For the balance of the year, the Company will be scaling back production in line with demand for agricultural products -- actions that illustrate our commitment to responding decisively to changes in market conditions.
At the same time, plans to expand Deere's market presence throughout the world remain on track, and are continuing to move ahead.
As a result, we have confidence the Company is well-positioned to earn solid returns throughout the business cycle, and to realize substantial benefits from the world's growing need for food, shelter, and infrastructure in the years ahead.
I'll now turn the call back to Tony.
Tony Huegel - Director of IR
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
(Operator Instructions) Tim Thein, Citigroup.
Tim Thein - Analyst
First, Tony, I was hoping you could just (multiple speakers) update us on the early order activity in North America on your spring programs?
And I think -- just remind us -- but I think you were planning to do a bit more stocking at the dealer level this year.
So, presumably, that maybe inflates things.
But can you just kind of update us in terms of what you're seeing there in the tillage and other products?
Tony Huegel - Director of IR
Right.
Yes, we have -- there are three early order programs that have just completed Phase 1 or are about to complete Phase 1 in the US and Canada.
And it would be sprayers, planters, and tillage equipment.
To your point -- and this would be true for various reasons -- there are definitely year-over-year differences in those early order programs.
For examples, planters last year had a fast start program that didn't get repeated this year.
Sprayers were pretty heavily influenced by our Tier 4 transitions last year.
So to give -- and in some years, we've given a percentage change, and it's just really apples-to-oranges in most cases.
But clearly, at least in the early indications of Phase 1 on those three products, we would tell you that the order programs are down double-digits year-over-year.
Tim Thein - Analyst
Okay, got it.
And then secondly, on the Ag and Turf margins, you called out the impact from Tier 4 costs in the third quarter.
Can you just help us in terms of how we should think about the -- in rough terms, the impact in 2015 as you transition to some of the lower horsepower products, which presumably take a little bit longer and are a bit more difficult to cover with the price increase, at least upfront or initially?
Tony Huegel - Director of IR
Sure.
Yes.
Yes, and that's a good point.
We -- in the third quarter, we did see -- you know, a lot of that cost was related, that we pointed out was related, to product costs, which is certainly higher in the third quarter as we transitioned, earlier in the year, most of those products.
And to your point, in large ag, which is what transitioned this year, the cost portion of that -- not necessarily cost plus margin, but the cost portion of that -- has largely been recovered through pricing.
As we move into 2015, that will be a bigger challenge, not just on small ag, but also as you think about construction.
Similar to Interim Tier 4, where we were very clear in year-one, we will not be recovering -- did not recover the costs on Interim Tier 4 in year-one.
The same will be true with Final Tier 4 on those products.
Of course, in all cases, we do have -- have made a three-year commitment that we would cover both costs and margin, but it will take a period of time to grow into that.
So, all else being equal, as you look at next year, that would be a margin drag as we transition those small ag and a lot of our Construction and Forestry products next year.
Tim Thein - Analyst
Great.
Thank you.
Tony Huegel - Director of IR
Great.
Thank you.
Next caller?
Operator
Adam Uhlman, Cleveland Research.
Adam Uhlman - Analyst
I guess just quickly a follow-up on that.
Tony, would you care to dimension the potential margin drag that you're anticipating, or at least dimension it for us?
(multiple speakers)
Tony Huegel - Director of IR
Yes, we've not -- as you may recall, a couple of years ago, we -- as we were going through Interim Tier 4, we talked about the actual cost and all the underlying pieces of cost of sales.
Last year, we started providing an outlook on cost of sales overall, and not giving all of the individual details underlying.
And that was -- continued to be the case next year.
So when we go -- when we release our fourth-quarter earnings and provide our first 2015 guidance, at that point, we'll have guidance on cost of sales, and we'll be able to talk directionally order of magnitude of what's driving that cost up or down as we go into 2015.
Raj Kalathur - SVP and CFO
Hey, Adam, this is Raj.
On the 2015 margin, we will not get into the specifics, but let me give you some outline of how we think about it.
Okay?
These are some points you can consider with respect to it.
Assuming demand for ag equipment in the US and Canada continues to moderate, now, one of the things we've always said -- our goal is to earn above our cost of capital throughout the cycle.
Okay?
So think overhead absorption.
We will continue to align factory production to demand, as we have mentioned in the third quarter press release.
So, lower production will have a negative impact on overhead absorption for the A&T division, and especially true for large ag products.
On the SA&G side, we will continue to pull levers in SA&G expenses as appropriate.
And in SA&G, numbers still may go up as a percent of sales.
And again, all these are assuming ag equipment in US continues to moderate.
Right?
Now R&D side, we will be pragmatic, but R&D expenses balancing the need for short-term lever-pulling with investments needs that can help deliver our long-term aspirations.
Okay?
So, remember our 12%/20%/28% structure line that is at a trough of 80% midcycle upon it and a peak of 120%.
That's the 12%/20%/28%, the OROA, the operating return on operating assets.
That's our commitment to provide a solid return throughout the cycle.
So you should think of that line but margins will be lower as we move down the line.
And as we move up the line, we have said you should expect the margins to be higher.
Okay?
Now some of the other considerations -- material costs -- we are significantly impacted by steel prices.
So, our steel costs generally follow the market prices with a lag of three to six months.
And if you can forecast fuel prices, that should give an indication for material costs.
In terms of Tier 4 transitions as Tony mentioned, many of our small, mid-ag and C&F products will be transitioning to Final Tier 4 in 2015, and higher material costs and higher spending during the transition should be expected.
And we will not fully recover material cost increases with pricing in year-one, especially for these products.
But, however, we are targeting to be margin-neutral; margin-neutral in three years.
Now on pension and OPEB expense, well, there are several factors that impact pension and OPEB expenses, and they can vary significantly between now and the end of October.
If you take, for example, the more recent discount rate of around 4.25%, if that were to apply at the end of October, and all other factors being equal, our pension and OPEB expenses can go up.
Okay?
I hope that's helpful.
Thanks.
Adam Uhlman - Analyst
That is helpful.
Thank you.
I'll get back in queue.
Tony Huegel - Director of IR
Okay.
Thank you.
Next caller?
Operator
And the next question is from Ross Gilardi with Bank of America Merrill Lynch.
Ross Gilardi - Analyst
Hey, good morning.
Can you hear me okay?
Tony Huegel - Director of IR
We can.
Thank you.
Ross Gilardi - Analyst
All right.
Thanks, Tony.
So you guys are guiding to 1% pricing in the fourth quarter, but still at 2% for the year.
So are you seeing deterioration in the new equipment pricing outlook?
Or is this more or less a rounding error?
Tony Huegel - Director of IR
Yes.
I think I would point out that certainly rounding can have an impact on that.
So, yes, I wouldn't read much into that.
Ross Gilardi - Analyst
Okay.
And then any thoughts on Brazil and whether or not you think the lower soybean price and the general ag weakness and economic weakness in Brazil incentivizes the government to extend FINAME into 2015?
Or any thoughts on FINAME in the next year?
Tony Huegel - Director of IR
Yes, you know, with FINAME in general, our view would be, in a lot of ways, similar to the US Farm Bill, in the sense that it's -- the process in which Brazil has helped to incentivize and help support agriculture as well as other businesses.
And so, again, it's less of an issue in our minds of whether FINAME continues and is extended into 2015, but more about what's the rate at which it will continue.
So the budget has been set really for the year.
That gets set in the June timeframe.
But the current program is only defined through December.
So, again, it's really more about what will the rate be rather than whether it's in existence or not.
Ross Gilardi - Analyst
Any initial thoughts there?
Tony Huegel - Director of IR
We do not have any thoughts on that at this point.
Ross Gilardi - Analyst
Okay.
All right, thanks a lot.
Tony Huegel - Director of IR
Okay.
Thank you.
Next caller?
Operator
Andy Casey, Wells Fargo Securities.
Andy Casey - Analyst
Just a question, Tony, on the SG&A.
You did really well in the third quarter, down about 80 basis points year-over-year.
The annual guidance kind of implies a relatively flat year-to-year performance in Q4.
Can you help us understand what caused the decrease in Q3 and why we really shouldn't expect that to continue into Q4?
Tony Huegel - Director of IR
Yes.
I think -- as you think about SA&G, I mean, there is always -- in some cases, there are some timing differences between third-Q and fourth-Q -- our fourth quarter.
And that would be the case this year, where you look at year-over-year comparisons, the expenses hitting third-quarter last year, and they'll be in the fourth quarter this year.
I'd also point out that fourth-quarter does tend to be a heavier quarter with SA&G expenses as we finish out the year.
The third thing I'd mention is there was some favorable FX impact in the third quarter that's expected to flip and actually go the other direction.
That would have some impact as well.
Andy Casey - Analyst
Okay, thanks.
And then on cash flow, if I look at the guidance, it decreased roughly $300 million.
You had an approximate $200 million decrease to net income that should be partially offset by that $150 million positive inventory in receivables, given no change to depreciation CapEx and just a slight change to the pension contribution.
Can you help us understand the puts and takes that are driving the $300 million decrease?
Tony Huegel - Director of IR
Yes, you hit two of the three.
The third really would be payables; the assumption around payables changed.
So those are really the three things that drove that lower cash flow forecast.
Andy Casey - Analyst
Okay, thanks.
And then if I can sneak one more in -- the Certified Used Equipment Program.
While the equipment is waiting to be sold, is that still on the dealer's balance sheet?
Or is that now on Deere's balance sheet?
Tony Huegel - Director of IR
That would still be on the dealer's balance sheet.
Absolutely.
Andy Casey - Analyst
Okay.
Thank you.
(multiple speakers)
Tony Huegel - Director of IR
It's just another -- think about it as another tool for our dealers to help move that used equipment, so.
Andy Casey - Analyst
Okay, thanks a lot.
Tony Huegel - Director of IR
Okay.
Thank you.
Next caller?
Operator
Jamie Cook, Credit Suisse.
Jamie Cook - Analyst
I guess a couple of questions.
One, just given the risk that -- well, I guess the first question -- you mentioned in your prepared -- or in Q&A that when we think about the order book, and you talked about sprayers, planters and tillage, early indications are they're down year-over-year -- or sorry double-digit year-over-year -- historically, you've said tillage has been sort of a good indicator of demand for equipment, as it's more discretionary.
Would that imply, as you think about 2015 -- you know, when we think about large tractors and large combines, that we should at least see sort of that level of decline, just given what we are seeing in tillage in a historic relationship?
And then I guess my second question is, can you talk about your comfort level with the inventory at the dealer level?
So in the event that we do have some sort of downturn in 2015, whether we're actively managing this, or could inventory in the channel be a potential issue?
Thanks.
Tony Huegel - Director of IR
Sure.
I think as you think about the early order programs, I mean, certainly, it does give us some early indication of the farmers' and customers' appetite for purchases going into the year.
There are a variety of things that can influence that as well.
So, certainly, we would be using that and that would be part of our evaluation, as we consider what next year would be.
But we would not have an outlook at this point on ag equipment going into 2015 that we are in a position to share publicly.
I would stress again it is very early in the process.
It's Phase 1 on three of our crop care programs.
But it can -- as you pointed out, in the past, we've certainly viewed that as, at least some directionally, an idea of where sales may end up going.
And some of the things you want to be a little careful not to read too much in or try to ignore some of the facts.
But the difference -- there are a lot of differences year-over-year too, in terms of the -- in years past, we've been at capacity in many of our products.
Customers and dealers knew that.
So there was certainly a greater sense of urgency.
I think the expectation next year is for production -- or for demand to be down.
And certainly, we'll have the capacity to meet that demand as we go into 2015.
So there is that element as well, that could factor into some of those year-over-year differences again in the very early stages of those programs.
So we'll have a much better view, as we always do, when we get to November with our fourth-quarter earnings, as we get further into the programs and start to see what's going on with the combine early order programs, and so on as well.
So those would be some things that I would mention.
From an inventory perspective, I think the -- from a concern perspective, and we talk about it all year, I think the greater concern would be around used equipment.
As we come through a period of time with some very high level of sales, that brings along with it a high level of used equipment.
And so we are working very diligently with our dealers to bring those used inventories down in line with what we are expecting demand to be.
We talked about the -- on the call, some of the new programs we have with the Certified Used.
Again, I want to be clear, this is a long-term strategic program.
It isn't intended to be viewed as a silver bullet to remedy the situation overnight.
But it will certainly be helpful.
And I think this is something we've put together in conjunction with our dealers, and should be very helpful, especially with moving that newer used equipment through the channel.
Jamie Cook - Analyst
So, Tony, to be clear, last quarter, I think you said tractors were a bigger issue relative to combines.
Is that still the case?
Or have things in total for both tractors and combines deteriorated versus last quarter?
Or is the inventory (multiple speakers) --?
Tony Huegel - Director of IR
I think that would still be the case.
As you look at used -- in fact, I shouldn't say I think; it is still the case where tractors are a little more elevated than combines.
But remember, you are also going through a period where we are selling a lot of new combines just ahead of the harvest.
So, fall is always a critical timeframe for moving those used combines through the system as we move through harvest.
Jamie Cook - Analyst
Okay, thanks.
I'll get back in queue.
Tony Huegel - Director of IR
Thank you.
Next caller?
Operator
Steven Fisher, UBS.
Steven Fisher - Analyst
As we head into this weaker period on ag in North America, just trying to gauge how you guys are really thinking about it more broadly.
Are you viewing this as maybe a -- sort of a shorter twelve-month phenomenon, an 18 months?
Or is this -- you're thinking about it as a multi-year sort of downturn?
And how does that affect your planning?
Tony Huegel - Director of IR
Well, you know, I think the way I would answer that is, at this point -- and Susan mentioned it in her opening comments -- you know, you're still -- you're seeing stocks-to-use ratios at least to the expectation of another good year.
Those stocks will continue to rebuild.
But given the very strong demand environment on commodities as well, the answer to that question is what's going to happen with the crop that will get planted next year, in terms of, do you have yet a third year in a row of good growing conditions on a global basis?
Or do you have a year where those yields moderate a bit, due to weather, whether that's in the US or some other region?
So that's a tough one to answer.
And certainly, that's the advantage we have, I think, of how we structure the business today in the sense of being able to shift, pull-levers where we need to, to be able to ensure that we are able to maintain good returns throughout that cycle.
So, again, I think it's just very premature to try to call whether this is a 12-month sort of phenomenon or longer-term.
Raj Kalathur - SVP and CFO
So I'd just add that longer-term tailwinds for ag demand are still intact.
Okay?
So from that perspective, demand is continuing to grow.
And as Tony said, it depends on how the supply is.
If the weather conditions are great everywhere, then you might have the issue we have today.
But if the weather conditions turn out to be more erratic, then, you know, it can be different.
Steven Fisher - Analyst
Okay.
And then, since he mentioned the levers, I guess curious for your views on the notion that nearly everyone in the global ag markets is down in tandem at this point, and really how that affects your manufacturing strategy?
Because I think in the past, the factory utilization has been supported by allocating some US capacity for shipments to some of the non-US markets.
So, I guess I'm wondering to what extent is that reallocation still an option?
Tony Huegel - Director of IR
Yes.
That would be true, Steven, in some cases.
So, as you look at tractors, for example, in Waterloo, somewhere in the neighborhood of 30% or so, typically, of the production there is shipped outside of the US and Canada.
I would point out some of that will change at the end of 2015 as we localize the 8R tractor in Brazil.
But then as you look at combines, you're down in the neighborhood of 10% of the production in the US is shipped outside of the US and Canada.
So it's -- we've shifted some of that production; those large combines are now being produced in Europe, for example, as well as Brazil.
So that is shifting.
As business is growing in some of these other regions, some of that demand has moved closer to the use.
So, obviously, when you look at global production, it still has an impact.
But on specific factories in the US, a lot of those cases, it wouldn't be as impactful as it would've been three years ago.
Steven Fisher - Analyst
Okay, very helpful.
Thank you.
Tony Huegel - Director of IR
Thank you.
Next caller?
Operator
Andrew Kaplowitz, Barclays.
Andrew Kaplowitz - Analyst
Sorry about that before.
So, Tony, can you talk about dealer inventory in the construction channel actually?
Your largest competitor in construction, when it announced earnings, talked about having to destock about $1 billion of dealer inventory in the second half of 2014.
Now, we recognize that they are much more international outside of North America than you guys are.
But how do you look at a dealer channel right now?
How concerned should we be that there's quite a bit of inventory in the channel?
Or is it actually in pretty good shape?
Tony Huegel - Director of IR
We would say the latter.
Certainly, for Deere Construction and Forestry inventories at the dealer channel would be at very good levels.
In fact, you may recall we had some questions last quarter on our sales levels.
And we talked about the fact that, with our order fulfillment process in Construction and Forestry, we don't tend to push inventory out into the market.
Our dealers don't have a heavy rent program that they can use to bulk up their inventory levels either.
And so we tend to run with some leaner inventories as a result, given our factories' ability to replenish that inventory pretty quickly.
Andrew Kaplowitz - Analyst
Okay, that's helpful.
And Tony, can you talk about your ability to get price, excluding the Final Tier 4 transitions?
You maintain your guidance for the Company for plus-2% for fiscal 2014, but you're getting 1% in fiscal 4Q.
And if I might recall, this excludes sort of -- this pricing excludes these transitions.
So, can you talk about the competitive environment you see in ag?
Is there any sort -- is mix change impacting price at all?
What do you see going forward?
Tony Huegel - Director of IR
Certainly, for this year, we -- someone asked earlier, and I would say it's really more about rounding than a significant change in our pricing for price realization for the fourth quarter.
So, again, I wouldn't read much into that.
And as you look back over the last decade, we've talked about this, where we've averaged a little over 3 points of positive price realization each year.
We are at 2 points this year in a slower equipment demand environment, especially for large ag, in the US and Canada.
And to your point, in year-one of introducing Tier 4 product, we would not count the price related to that in our price realization calculation.
So we're getting 2 points plus the pricing that we've taken on, on Tier 4 for the products that transitioned this year.
So I think that demonstrates we've had through -- we had pretty good pricing.
And again, that's really about bringing efficiency and being able to provide that higher productivity to the farmer to warrant that higher pricing.
Andrew Kaplowitz - Analyst
Thanks, Tony.
Tony Huegel - Director of IR
Thank you.
Next caller?
Operator
Larry De Maria, William Blair.
Larry De Maria - Analyst
Hey, sorry about that before.
Long-term farm fundamentals and demand obviously suggests money for food, and that's kind of always been the case.
But there's been periods of long-term weakness in equipment.
When we come off a boom, it's kind of like we are in the 1990s.
Just curious, what is different or the same this cycle compared to the 1990s?
I know balance sheets are kind of similar, in good shape now like they were back then.
And you called out weather and politics as potential changes to the trajectory, but -- and obviously, the supply side is where you're focused on if there is a weather interruption -- but can you just help us understand what is similar or different about this cycle versus the late-1990s, which had a relatively extended period of downturn?
Tony Huegel - Director of IR
You know, I think one thing I would point out is, you mentioned balance sheets.
And certainly, compared to the 1980s, it would be better today; but even compared to the 1990s, late 1990s, I think if you look at the data, you are in even better shape.
We talk a lot about the underlying demand of commodities, and we continue to point to that as well in the sense of our -- historically, the cycles have been much more about changes in supply.
We know there's a lot of conversation around ethanol, for example, which has been very supported over the last decade of building supply.
And while the growth is clearly moderating on ethanol demand -- or corn use for ethanol -- the supportive demand is still in place.
And our view is that you're going to continue to see food demand pick up in other parts of the world and see that growth curve continue to be very strong.
And that is basically where we think it's going to be different year-over-year -- or this time around.
Raj Kalathur - SVP and CFO
And Larry, aside from the market demand, you may also want to look at the improvements Deere made structurally to our business, and that will be a difference from the 1990s to now.
Okay?
So we think, structurally, we are in a better position to return above our cost of capital at any point in the cycle now.
Larry De Maria - Analyst
Okay.
Thanks, guys.
And then back then, you used to talk about you had your economic models, that would talk about normalized tractor demand and combine demand, which kind of overshot to the downside, because fundamentals obviously turned pretty bad back then.
But care to offer kind of some perspective on where normalized demand and where the models would suggest that maybe long-term averages are for tractor and combine demand, given that we are coming off, obviously, a very high level?
And where we could think about normalized support in an environment like this?
Tony Huegel - Director of IR
Yes.
At this point, we've not disclosed -- and especially for specific product, where we are as a percent of normal.
We have talked about in our forecast for 2014, we'd tell you with this with our current forecast, we would be slightly below mid-cycle.
And on a global basis for ag and turf would be, again, slightly below mid-cycle with our current forecast.
But beyond that, there's not much help I can give.
Larry De Maria - Analyst
Well, could you say where we would be in North America then, as far as you would see (multiple speakers) --?
Tony Huegel - Director of IR
The only thing we have provided is on a global basis.
So, that's really all the help I'm going to be able to give on -- in that regard.
Larry De Maria - Analyst
Okay.
Thanks, Tony.
Tony Huegel - Director of IR
You bet.
Thank you.
Next caller?
Operator
Vishal Shah, Deutsche Bank.
Vishal Shah - Analyst
Thanks for taking my question.
I was just curious as to what you think about the Brazilian market outlook?
I know that you've talked in the past about outgrowing that market in light of the down 15% industry forecast.
Where do you think -- can you maintain relatively flattish revenues in that market?
And also, how do you think about opportunity in the EU-28 region, considering I think some of the share gain initiatives that you have in place over there?
Tony Huegel - Director of IR
If you think about Brazil, and to your point -- we've mentioned this throughout the year and it would continue to be true -- as you look at the industry guidance that we provide versus Deere expectations of sales, South America would be the greatest differential on the positive side for Deere.
Some of that is the fact that we provide industry guidance on tractors and combines only in South America.
And, of course, we have a full line of product offered there.
With this latest downturn, we were seeing -- we weren't necessarily expecting Deere sales to be down.
I don't believe I can say that any more.
But certainly, strongly outperforming the industry, both because of the strength of our broad portfolio there; also, the market share gains that we continue to get on both tractors and combines.
So -- but that certainly will drive that.
As you think about the market in general, I think it's important to note that you are coming off -- it's a down year, but you're coming off of a record level in 2013.
So, most in that market would tell you that it -- things aren't what they would consider weak just because it's lower year-over-year.
Things continue to be very strong.
Soybean farmers, even at these levels of pricing, are still in profitable territory.
And so we still have a very positive view on Brazil as we move forward.
Vishal Shah - Analyst
That's helpful.
And just on EU-28, share gain opportunities, are you seeing any of that play out this year?
And also, what's your view of decremental margins in North America, given the mix shift towards small ag?
I mean, are we looking at 40% decremental margin or slightly more than that next year?
Thank you.
Tony Huegel - Director of IR
Yes.
We're -- as you think about EU-28, obviously, we continue to be in a difficult market there.
We've seen sales forecast be lower year-over-year.
So, we're making good progress in terms of our dealer consolidation there, those sorts of things.
So we feel like we are putting ourselves in a good position -- though, to be candid, the market share has been a little slower to come; though, from a strategic perspective, we are still very encouraged by that.
You know, just real quickly on margins, obviously, we don't disclose margin by individual product.
But certainly, we've been very clear that large ag equipment has better margins than small.
So, if you're expecting a decrease next year, and you are assuming it's all large ag-driven decreases, then the incrementals will be difficult.
But at this point, it's, again, premature, really, to talk about any kind of specifics in that regard, so.
And with that, we'll move on to the next caller.
Operator
Rob Wertheimer, Vertical Research.
Rob Wertheimer - Analyst
Sorry for the interruption before.
And I apologize if these have been asked before.
I'll just ask three and you can skip if they have been.
On the certified used, what seems like a nice way to sort of manage without giving price discounts, is there a fee charged to the buyer?
Or is that sort of gratis in the way for you to give away something that you can deliver in a cost-effective way?
Will your production plans be influenced?
I mean, are you going to change the way you sell at all if used inventories rise, to kind of make the dealers place that years before they take an order?
And last question, do you contemplate making your cost of capital if you go below the 80% cyclical industry swings?
Thanks.
Tony Huegel - Director of IR
Yes, I'll start with the used.
And I'm not aware of any fee that will be charged to the customer related to that certified used.
Again, it's a tool that the dealer can offer.
Now, certainly, you -- whether -- while there may not be a specific fee, you would expect that that's going to help drive higher pricing on that used piece of equipment, as it comes with, again, an additional inspection on the product; the warranty; the free one-year JDLink -- again, should be very supportive of the underlying pricing that the dealer gets on that particular piece of equipment.
Again, in terms of the way we sell equipment, in terms of expecting dealers to have a used piece of equipment sold before we ship new, I think was your question.
I don't -- there's certainly not a change there.
We have talked about, on combines, as we allocate our early order program, we do -- the used inventory at an individual dealer's location would impact -- does have some impact on the allocation of orders they get in any particular phase of our early order program.
But that would be the only area that I could really point to that we are looking at that from a -- what we are willing to sell new equipment.
Okay?
Rob Wertheimer - Analyst
And I'm sorry.
On the trough, if you go below 80%, do you still hope to cover the cost of capital?
Or is that something you don't contemplate?
Raj Kalathur - SVP and CFO
Hey, Rob, I think it's too early to say anything there.
What we will tell you is -- again, when I say early -- it's not something that we look at in terms of below trough on a daily basis.
Okay?
What we do do is we do model [80/100/120].
And what I clearly said is [80, 100, 120], we know and we persevere our goal is to return above the cost of capital.
So we model those.
We know those.
We talk about those.
And we can talk in more detail at the right time, but I don't think we should get beyond that right now.
Tony Huegel - Director of IR
One other thing I would point out is there is a lot of talk about large ag and the reductions that are expected in large ag.
Remember, on the flipside of that livestock continues to do very well; margins are very strong.
And small ag, while not as profitable as large ag, is still very profitable.
And we are looking at an opportunity to see some strengthening in that part of the business that will certainly help from a returns perspective.
So, it's not all a downward trajectory as you look at, again, our broad base of business.
Similarly, we have Construction and Forestry, that if you look at underlying fundamentals, continue to support some recovery in that particular division.
So, there are some bright spots in the enterprise that we can point to as well.
Okay?
Can we have the next question?
(multiple speakers) Thank you.
Next caller?
Operator
Mike Shlisky, Global Hunter.
Mike Shlisky - Analyst
I noticed in your financials that your interest comp to the fin co.
was up about 9% from the prior year.
It was up a little bit as a percent of overall sales.
Can you tell us a little bit about some of your financing programs that you have in place today compared to either maybe last quarter or last year?
What's kind of changed as far as how you -- how farmers finance your equipment from the marketing sides?
Tony Huegel - Director of IR
Yes.
If you're looking at the comp to credit line on the equipment operation side?
Mike Shlisky - Analyst
Correct.
Tony Huegel - Director of IR
Is that correct?
Yes, that -- keep in mind, that is really -- what you're seeing reflected there relates to wholesale financing.
So, to the extent that there is a period of interest-free or low interest, wholesale financing available as we ship the product to the dealer prior to them selling that equipment, that gets charged back to the equipment operations and on that line.
So it really isn't reflective of any kind of changes in incentives on retail sales.
That actually would impact our net sales as a sales discount.
Mike Shlisky - Analyst
Got it.
And then looking at your crop receipts, you did mention that you have livestock down in 2015.
So, a little bit more color there.
Is it going to be -- do you think it's going to be more on pricing?
Or just smaller herds?
And kind of what do you see as far as the health of the livestock farmers out there with current feed costs so low?
Tony Huegel - Director of IR
Yes, as I just mentioned when we were talking with Rob, they are in very, very good shape, livestock producers.
You know, margins are very strong really across the board.
And as you look into next year, you're coming off of record high prices.
And I think the expectation is that you would see some moderation there as production starts to come up.
So -- but to your last point, still at very good levels.
And margins should remain strong for most livestock producers, at least for the foreseeable future.
Okay?
Mike Shlisky - Analyst
All right.
Thanks so much.
Tony Huegel - Director of IR
Thank you.
Next caller?
Operator
Ann Duignan, JPMorgan.
Ann Duignan - Analyst
Can we talk a little bit about your outlook for crop cash receipts?
You know, you're looking for a decline of about 3% into 2015.
When we take the average prices and yields from WASDE from yesterday, we get minus-15%.
So I'm just curious, why the difference between you and the USDA?
What are you seeing out there that you believe prices will be higher and yields lower?
Tony Huegel - Director of IR
Well, first of all, I wouldn't necessarily say -- because the USDA does not -- has not updated their cash receipt number.
And keep in mind that cash receipts -- when you look at crop prices and yields, that's on a commodity year basis, as you know, and cash receipts are on a calendar year basis.
So, 2014 cash receipts are being impacted by -- somewhat -- by what will get sold this fall for the current crop.
Similarly, 2015 cash receipts will be impacted by some assumptions of next year's crop that gets sold immediately following harvest.
So, it's not as simple as taking what the changes are, what the current year crop prices are times production.
But I would point out as you think about cash receipts, to that point, it's not just about the lower pricing.
It is also about production.
So as you have higher yield, more commodities to sell, even in a lower pricing environment, that's supportive of the overall cash receipts.
The other factor that's hard to weigh in there is -- which would be anticipated in the USDA price assumptions for current year, but how much has been sold ahead?
And is that sold ahead going to occur in calendar year 2014 or is that contracts that are for sometime in early 2015, for example, in terms of whether those land at -- in our 2014 cash receipts or 2015.
So, that's a long way of saying cash receipts is a pretty complex calculation.
It's -- you can't simply look at the USDA current reports and make good assumptions from that.
But it is early.
And we'd be very quick to point that out.
It's a very early forecast on what we see as 2015.
Ann Duignan - Analyst
Yes, but your outlook for farm commodity prices is higher than what the USDA said yesterday.
I mean, I appreciate all the (multiple speakers) --
Tony Huegel - Director of IR
(multiple speakers) It would be higher than the midpoint of their range.
It is not outside of their range.
Ann Duignan - Analyst
Fair.
And secondly, I'm just curious -- I'm out here in Illinois at a conference with a couple-hundred of your suppliers on the hydraulic side.
I'm just curious what kind of conversations you're having with your supply base at this point in the cycle?
And how are the -- what kinds of expectations are you setting for your supply base going into 2015?
Tony Huegel - Director of IR
Yes.
That's not something we are going to discuss.
We view our supply base as partners.
And we, on a regular basis, have conversations with them to make sure they are prepared to meet the demand.
(multiple speakers)
Raj Kalathur - SVP and CFO
So, Ann, this is Raj.
On the supplier side, we have a process we follow.
So, we routinely sit down with them and talk about our orders, regardless of where they are, right?
Upside or downside or stateside.
So, we'll follow the same process that we have had in the past.
Tony Huegel - Director of IR
Okay.
Let me move on to the next caller.
Thanks, Ann.
Operator
Joel Tiss, BMO Capital Markets.
Joel Tiss - Analyst
I learned something today too.
The next time my wife busts my chops about getting fat, I'll just tell her it's a rounding error.
Tony Huegel - Director of IR
There you go.
(laughter)
Joel Tiss - Analyst
All right.
So two things more, probably more just clarifications.
I didn't hear you mention why the credit loss provisions were rising?
Tony Huegel - Director of IR
Well, I mean, we've anticipated that really even last year.
I mean, again, that 10-point provision is -- I would argue it's just reflective of the strength of our credit portfolio.
It's still well below our historic ranges.
When we were at 3 points and zero points two years ago, we were very clear those are not sustainable levels.
And they -- at some point, were going to move back towards those historic ranges.
Joel Tiss - Analyst
Okay.
So, I was just looking for any color, like is it a little more Russian-focused?
Or is there anything else underneath it?
But I can follow-up too.
Raj Kalathur - SVP and CFO
So now -- as you know, Joel, this is still a very strong -- any which way you look at it.
And if you're not reading any more into it.
Okay?
So (multiple speakers) --.
Joel Tiss - Analyst
Okay.
(multiple speakers)
Tony Huegel - Director of IR
In some ways -- a portion of that is lack of recovery.
As you look at the provision in the last couple of years, some of that has been recovery of some of the prior-year write-offs.
And as we've had some very good years, there just aren't the losses to recover that we've had previously.
Joel Tiss - Analyst
Okay.
Great.
And you haven't talked very much about share repurchase.
And I know you have your priorities for cash and all that, but can you just give us a little flavor of what you guys are thinking around that going forward?
Raj Kalathur - SVP and CFO
We'll sound like a broken record on this, Joel, again, but cash use policy and outlined on slide 29 has not changed, and we don't have any intentions of changing it.
Again, our single-A rating of highest priority for us, and growth capital expenditures, M&A, the next priority; and consistent moderate dividend increase.
And we want to have it at 25% -- the payout at 25% to 35% of mid-cycle earnings.
And then share repurchase, which is a residual use of cash.
And we do it when it's value-enhancing for our long-term shareholders.
And what I will add is we have confidence in our ability to generate good operating cash flow throughout the business cycles.
And so you should expect us to continue with our cash use policy as stated.
And you can think of what we did last -- the last three years, and that should be an indication of how we'll act in the future.
Joel Tiss - Analyst
All right.
Thank you.
Tony Huegel - Director of IR
Thank you.
And we'll take one more call.
Operator
The last question is from Seth Weber with RBC Capital Markets.
Seth Weber - Analyst
Wow, I just made it.
Thanks.
Thanks, guys.
Most of them asked and been answered.
But can you just give us any update or since what you're thinking about Section 179 or bonus depreciation, and how you're thinking about that?
And kind of just what you're hearing about that from a legislative perspective?
Tony Huegel - Director of IR
Sure.
Yes.
As you think about Section 179, I think most would argue that the most likely scenario is that both Section 179 and bonus depreciation would be extended at 2013 levels, but not likely to happen before mid-term elections.
And again, any extension would likely be retroactive and pick up 2014.
Actually, if you look at what we have in our models, we've actually taken a bit more conservative approach as we look at both our 2014 and 2015 model.
And we have our models assuming no extension.
But again, as you read and what we are hearing, the more -- most are assuming that it will still be extended at those 2013 levels.
Seth Weber - Analyst
Okay.
That's all I had.
Thank you very much.
Tony Huegel - Director of IR
Thank you.
And again, we apologize for the interruption in the middle of the call.
Hopefully -- we did extend the call a bit, so appreciate those of you who were willing to stick around a bit longer.
And, as always, we'll be available throughout the day to take any follow-up questions.
Thank you.
Operator
This concludes today's conference call.
You may now disconnect.