強鹿 (DE) 2015 Q1 法說會逐字稿

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  • Operator

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

  • (Operator Instructions)

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

  • Thank you, sir.

  • You may begin.

  • Tony Huegel - Director 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 first-quarter earnings, then spend some time talking about our markets and our outlook for fiscal 2015.

  • After that, we will respond to your questions.

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

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

  • First, a reminder.

  • This call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company.

  • 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/earnings under Other Financial Information.

  • Susan?

  • Susan Karlix - Manager Investor Communications

  • Thank you, Tony.

  • With the announcement of our first-quarter results, John Deere has started out 2015 on a good note.

  • And we did so in spite of sluggish conditions in the global farm economy, which are reducing demand for agricultural machinery, particularly for larger models.

  • As a result, both sales and profits for our agriculture and turf equipment operations were lower for the quarter and are forecast to be down for the year as well.

  • At the same time, our construction and forestry and financial services businesses had higher profit, showing the value of a well-rounded business lineup.

  • Deere's results for the quarter also demonstrated the progress we've made, managing costs and creating a more flexible, responsive cost structure.

  • One other item worth emphasizing in today's earnings report is the impact of a stronger US dollar.

  • It is putting significant pressure on reported sales made outside of the United States, a fact reflected in both our first-quarter results and our full-year forecast.

  • Now let's take a closer look at the first quarter in detail, beginning on slide 3. Net sales and revenues were down 17% to $6.383 billion.

  • Net income attributable to Deere & Company was $387 million.

  • EPS was $1.12 in the quarter.

  • On slide 4, total worldwide equipment operations net sales were down 19% to $5.6 billion.

  • In the quarter-over-quarter comparison of net sales, Landscapes and Water accounted for 2 points of the change; price realization in the quarter was positive by 1 point; currency translation was negative by 2 points.

  • Turning to a review of our individual businesses, let's start with agriculture and turf on slide 5. Sales were down 27% due to lower shipment volumes of large ag equipment in the United States and Canada and lower sales in Europe and Brazil.

  • Operating profit was $268 million.

  • The division's decremental margin in the quarter was 35%.

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

  • Slide 6 outlines US firm cash receipts which, in spite of lower grain prices, remain at historically high levels thanks to help from record livestock receipts.

  • As a result, we now see 2014 cash receipts at about $418 billion, up about 1% from 2013 and the highest level ever recorded.

  • Given the record crop harvest of 2014 and, consequently, the lower commodity prices we are seeing today, our 2015 forecast calls for cash receipts to be down about 6%.

  • Of notes, crop receipts for 2015 are forecast to be down about 23%, lower than the levels in 2012, which was the record.

  • On slide 7, global grain stocks-to-use ratios remain at somewhat sensitive levels, even after the abundant harvests of the past two years.

  • Global grain and oilseed demand remains strong, while supplies appear to be fully adequate.

  • Even so, unfavorable growing conditions in any key region of the world as well as unknown impacts from any geopolitical tensions, 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. Economic growth continues in the region, although at a slow pace.

  • Grain prices have declined but appear to be stabilizing at levels near the long-term average.

  • While livestock margins remain at good levels, dairy margins are being squeezed, especially in the UK.

  • As a result, farm machine new demand in the EU region is expected to be lower for the year.

  • On slide 9 you'll see the economic fundamentals outlined for other targeted growth markets.

  • In the CIS, increasing economic pressure and further tightening of credit availability continue to weigh on equipment sales.

  • Notably, Western equipment manufacturers are being heavily impacted by geopolitical uncertainties.

  • In China, the government continues its investment in ag equipment subsidies, but the growth rate has slowed.

  • This, among other things, has led to a decrease in industry sales.

  • Turning to India, the monsoon season rainfall was below normal, which could result in lower overall agriculture output.

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

  • Ag production is expected to decrease about 12% in 2015 in US dollar terms, due to lower global commodity prices and the decline in the Brazilian reais.

  • However, with the weak reais, the value of production is much more attractive in the local currency.

  • Even with the recent drop in prices, ag fundamentals remain positive for grain, and sugar margins are expected to improve in the coming year.

  • On balance, though, farmer confidence in Brazil is lower as a result of economic uncertainty and political concerns in the country.

  • This is leading to lower equipment purchases despite positive ag fundamentals.

  • Slide 11 illustrates eligible finance rates for ag equipment in Brazil.

  • FINAME-PSI has been the primary financing source for ag producers from 2009 through 2014.

  • For the first half of 2015, last year's favorable interest rates remain in place for the agriculture sector through the Moderfrota program.

  • While agricultural producers are able to utilize the more attractive Moderfrota rates, construction equipment financing continues through PSI and will be subject to increased rates in 2015.

  • Our 2015 ag and turf industry outlooks are summarized on slide 12.

  • Lower commodity prices and falling farm income are putting pressure on demand for farm equipment, especially larger models.

  • At the same time, conditions in the livestock sector are more positive, providing support to sales of small and midsize tractors.

  • As a result, we continue to expect industry sales in the US and Canada to be down 25% to 30% for 2015.

  • The EU 28 industry outlook is down about 10%, unchanged from last quarter due to lower crop prices and farm income as well as pressure on the dairy sector.

  • In South America, industry sales of tractors and combines are now projected to be down 10% to 15% in 2015 mainly as a result of economic uncertainty in Brazil.

  • This follows a 13% decline in 2014, compared with the extremely strong levels of 2013.

  • Shifting to the CIS, we now expect industry sales to be down significantly due to economic concerns and limited credit availability.

  • In Asia, we continue to expect sales to be down slightly.

  • Turning to another product category, industry retail sales of turf and utility equipment in the US and Canada are projected to be flat to up 5% in 2015, no change from our prior forecast.

  • Putting this all together on slide 13, fiscal-year 2015 Deere sales of worldwide ag and turf equipment are now forecast to be down about 23%.

  • Currency translation is now forecast to be a negative 4 points, so this outlook reflects about 1 point less volume than our prior guidance.

  • The ag and turf division operating margin is now forecast to be about 7%.

  • Technically, that is 1 point less than we said in our prior guidance, with the difference mainly due to foreign exchange.

  • However, without the impact of rounding, the difference is closer to 0.5 point.

  • Now let's focus on construction and forestry on slide 14.

  • Net sales were up 13% in the quarter.

  • Operating profit was up 55%, the result of higher shipment volumes.

  • The division's incremental margin was about 30%.

  • Moving to slide 15, looking at the economic indicators on the bottom part of the slide, the economy continues to move forward.

  • GDP growth is improving, unemployment is falling, construction hiring is on the increase, and housing starts are expected to exceed 1 million units this year.

  • In contrast, we are seeing weakening conditions in the energy sector and energy-producing regions.

  • Based on these factors, Deere's construction and forestry sales forecast remains up about 5% in 2015.

  • Currency translation is forecast to be negative by about 2 points.

  • Global forestry markets are expected to be about flat on the heels of a 10% increase in 2014.

  • C&F's full-year operating margin is projected to be about 11%.

  • Let's move now to our financial services operations.

  • Slide 16 shows financial services' annualized provision for credit losses as a percent of the average owned portfolio was 2 basis points at the end of January.

  • This reflects the continued excellent quality of our portfolios.

  • The financial forecast for 2015 now contemplates a loss provision of about 17 basis points, down about 7 basis points from our previous guidance.

  • The year-over-year increase in the provision is a reflection of the unsustainably low loss levels of the last four years.

  • For reference, the 10-year average is 26 basis points, and the 15-year average is 43 basis points.

  • Moving to slide 17, worldwide financial services net income attributable to Deere?&?Company was $157 million in the first quarter versus $142 million last year.

  • 2015 net income attributable to Deere?&?Company is now forecast to be about $630 million.

  • Slide 18 outlines receivables and inventory.

  • For the Company as a whole, receivables and inventories ended the quarter down $1.4 billion.

  • That was equal to 24.9% of prior 12 month sales, compared to 26.4% a year ago.

  • The decrease, which came entirely from ag and turf, is reflective of the aggressive way we have cut production in line with our 2015 outlook.

  • We expect to end 2015 with total receivables and inventories up about $100 million, with the increase coming from the C&F division.

  • Our 2015 guidance for cost of sales as a percent of net sales, shown on slide 19, is about 78%, unchanged from last quarter.

  • When modeling 2015, keep these factors in mind: price of about 2 points, favorable raw material costs, an unfavorable mix of product, and Tier 4 product costs.

  • Looking at R&D expense on slide 20, R&D was up about 3% in the first quarter, including about 2 points of negative currency translation.

  • Our 2015 forecast calls for R&D to be down about 1% for the full year, including about 2 points of negative currency translation.

  • SA&G expense for the equipment operations was down 16% in the first quarter, as you'll see on slide 21.

  • Landscapes, Water, and negative currency translation accounted for about 10 points of the change.

  • Our 2015 forecast contemplates SA&G expense being down about 9%, with Landscapes, Water, and currency accounting for about 5 points of the change in the year-over-year comparison.

  • Turning to slide 22, pension and OPEB expense was up about $20 million in the quarter and is forecast to be up about $80 million in 2015.

  • On slide 23, the equipment operations tax rate was approximately 28% in the quarter, primarily due to discrete items.

  • While it is not our practice to provide specifics on discrete items, we note that the R&D tax credit for 2014 was extended through the end of the calendar year.

  • For the remainder of fiscal 2015, the projected effective tax rate is forecast to be in the range of 34% to 36%.

  • Slide 24 shows our equipment operations' history of strong cash flow.

  • Cash flow from the equipment operations is now forecast to be about $3.3 billion in 2015.

  • The Company's second-quarter financial outlook is on slide 25.

  • Net sales for the quarter are forecast to be down about 19% compared with 2014.

  • This includes about 2 points of price realization, with unfavorable currency translation of about 4 points.

  • Turning to slide 26 and the full-year outlook, the forecast now calls for net sales to be down about 17%.

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

  • Currency translation is negative about 3 points.

  • Finally, our full-year 2015 net income forecast is now about $1.8 billion, a decline of approximately $100 million compared with our previous guidance.

  • The change is primarily attributable to foreign currency translation.

  • Now on slide 27, there's no doubt Deere's ag business is facing a challenging year.

  • The large ag industry in the United States and Canada -- defined on this slide as tractors greater than 220 horsepower and combines -- is forecast to be down about 50% from 2013 levels.

  • Yet, as Sam Allen noted in today's earnings release, our forecast reflects a level of results much better than we've experienced in previous downturns.

  • With a 50% decline in large ag, Deere net sales are forecast to be down 22%, with net income down 49%, again from 2013 levels.

  • This is much better than the two other recent downturns shown on the slide.

  • Why the improvement?

  • Because we reacted early to this pullback in the ag sector, controlling costs and assets and aligning production levels with demand.

  • But more importantly, today's John Deere is more than a large ag company.

  • Our 2015 outlook illustrates the power of our portfolio, with a wider range of revenue sources as well as a more durable SVA and OROA business model.

  • As a final note, it should be stressed that Deere's future continues to hold great promise for our customers and investors.

  • That's because the trends underlying our businesses, such as global population growth and rising living standards, are very much intact and largely unaffected by swings in the farm economy.

  • All in all, we remain confident that Deere is positioned to deliver value throughout the business cycle and to benefit from the world's increasing need for advanced equipment in the quarters and years ahead.

  • I'll now turn the call back over to Tony.

  • Tony Huegel - Director IR

  • Thank you, Susan.

  • Now we're ready to begin the Q&A portion of the call.

  • The operator will instruct you on the polling procedure; but in consideration of others and our hope to allow more of you to participate in the call, we will be limiting each caller to one question today.

  • If you have additional questions we ask that you rejoin the queue.

  • Operator?

  • Operator

  • (Operator Instructions) Timothy Thein, Citi Research.

  • Timothy Thein - Analyst

  • Great, thanks.

  • Good morning.

  • My single question here is just on the ag and turf receivable and inventory guidance there.

  • Can you maybe give some underlying color within that, the change from last forecast in terms of the large versus small ag?

  • I'm just curious given your comments on improving dairy and livestock markets, and some of the more consumer-affected markets within small ag going up, has the outlook for large ag within that guidance changed versus the prior forecast?

  • Thank you.

  • Tony Huegel - Director IR

  • Yes, I don't have great detail, Tim, on the large versus small in terms of the ending receivables and inventory.

  • But I would tell you generally it would not be a significant difference.

  • Keep in mind, FX is -- as you look at that line from the $375 million to the $525 million, there is some FX impact in there as well, in terms of bringing the inventory and receivables down.

  • So as you might expect, as our overall forecast for the year has not changed significantly, at this point we really haven't made significant shifts in the ending inventory and receivables as it relates to that -- as you point out -- the breakdown between large and small.

  • But thank you.

  • Next caller.

  • Operator

  • Rob Wertheimer, Vertical Research Partners.

  • Rob Wertheimer - Analyst

  • Hey, good morning, everybody.

  • Wondered if you could comment on the combine early order program and the current level of orders for row crop tractors versus retail sales and production?

  • Thank you.

  • Tony Huegel - Director IR

  • Sure, and I would say -- I will go a little broader than just combines.

  • As you think about the early order program and the order book in general, I would say that from a large perspective we would say it's kind of coming in line with what our expectations were.

  • You have plus and minuses here and there.

  • That's again why you didn't see much -- really any change in our outlook on the US and Canada side.

  • But combines, we did end that program in early January.

  • And it was down roughly 30% year-over-year, which again was maybe even slightly better than what we had anticipated.

  • And we've had some others that are going a little bit different direction.

  • But all in all, very much in line with our expectations, and you've seen that reflected in our outlook.

  • As you think about tractors, again as you look year-over-year -- and I want to make sure I point out, obviously we have much lower daily order -- our daily production in our Waterloo factory on those large tractors.

  • So on that lower production schedule, our availability on large tractors are pretty much in line with where we were last year.

  • 8R tractors would be a little lighter.

  • Our availability this year is in June.

  • Keep in mind, too, last year there was some impact from Tier 4 transitions as well.

  • But as you think about 8R tractor, this year availability is out into June; last year it would've been a little further out into August.

  • But 9R tractors were in early June; last year it was actually early May.

  • So we're little further out on availability there.

  • And on 7R tractors, again we are very much in line.

  • Last year was late June; this year is very early July.

  • Again that was as of the first week in February.

  • So again, very much in line year-over-year -- or very much in line with our expectations.

  • Thank you.

  • Next caller.

  • Operator

  • Vishal Shah, Deutsche Bank.

  • Vishal Shah - Analyst

  • Yes, hi.

  • Thanks for taking my question.

  • Maybe can you talk about how we should think about the decremental margins going forward as you are looking at the rest of the year?

  • Thank you.

  • Tony Huegel - Director IR

  • Sure.

  • Well, as you think about from a -- in the -- I assume you're referring to the ag and turf division, since you are talking about decremental margin.

  • In the first quarter, of course, the decremental margins were right at 35%.

  • If you look at our guidance for the year with the margins around 7%, the annual guidance is going to get you very close to the same type of decremental margins.

  • So again you'll see some pluses and minuses perhaps in given quarters; but as you think about for the full year, roughly in line with what we were able to do in the first quarter.

  • Okay.

  • Next caller.

  • Operator

  • Seth Weber, RBC Capital Markets.

  • Seth Weber - Analyst

  • Hey, good morning.

  • The pricing outlook, up 2% for the year; you did 1% in the quarter.

  • Can you talk about just the cadence on how you get to the 2% and whether you are seeing positive pricing in both segments?

  • Thank you.

  • Tony Huegel - Director IR

  • Sure.

  • For the year certainly we are seeing positive pricing in both segments.

  • In the quarter you may have noticed the note in the earnings release around incentive costs on C&F, and that's really related to an accrual in the quarter.

  • So that will -- if you look at the full year, the incentive budget as a percent of sales is basically flat year-over-year.

  • So that accrual from the first quarter will effectively reverse itself throughout the year.

  • So that obviously impacted pricing for the quarter.

  • And again, I would remind you that certainly you've got some rounding in there, too, as you move between the 1% and the 2%.

  • So I wouldn't expect a significant change other than perhaps the impact of that accrual.

  • Raj Kalathur - SVP, CFO

  • Hey, Seth; this is Raj.

  • I would add that we do have some slight pressure.

  • But overall, broadly we're still at that same 2%.

  • But there is some slight pressure, yes.

  • Tony Huegel - Director IR

  • Okay.

  • Thank you.

  • Next caller.

  • Operator

  • David Raso, Evercore ISI.

  • David Raso - Analyst

  • Hi, I'm just trying to get a little more specific on the inventory.

  • Did the inventory growth sequentially go as planned?

  • I know historically the first quarter usually sees a nice build sequentially.

  • I just would have thought, given the downturn in ag, we would have looked to take out some inventory sequentially.

  • So can you just give us some thoughts on how inventory ended up versus your expectations?

  • Then I have a related question to the year-end expected inventory.

  • Tony Huegel - Director IR

  • Yes.

  • We'll have to have you get back in the queue for the year-end one, unfortunately.

  • But as it relates to the quarter, I would tell you it was very much in line with our expectations.

  • Even in a lower production year, we are ramping up for the spring selling season, and so it's natural from the end of the year to see some level of build as we go into the first quarter in particular.

  • So that again was very much in line.

  • I would point out and remind people that, yes, while we are expecting some lower production in the year, we took a dramatic amount of inventory and receivables out of the system in fourth quarter last year, which is why you didn't see a significant continued reduction this year and really more -- we set up the year so that we could be more in line with that lower production.

  • And that's what you are seeing in the inventory and receivables as we move through the year, and I think you'll see them again come back down by the end of the year, as our forecast indicates.

  • So thank you.

  • Next caller.

  • Operator

  • Jamie Cook, Credit Suisse.

  • Jamie Cook - Analyst

  • Hi, good morning and nice quarter.

  • I guess my question relates to inventory in the channel, both on the used and the new level.

  • Can you talk about the progress you made in the first quarter versus your expectations?

  • And is there any change in where you want to be in year-end relative to what you originally thought?

  • Thanks.

  • Tony Huegel - Director IR

  • Yes, I think certainly a related question may be: did we see a significant benefit from Section 179 being passed at the end of the year?

  • Certainly on the margin it was helpful.

  • But as everyone knows, that was a -- I think we had two weeks maybe at the end of the year to provide a little bit of benefit for the year.

  • But certainly we are making progress.

  • The used inventories in particular continue to be at high levels.

  • I think it's important to point out, however, as we indicated last quarter, relative to competition our used inventory as a percent of sales continues to be in a much better position than the competition.

  • So we feel like we're in good position in that regard, but certainly have a lot of work to do with our dealers in continuing to bring used inventory down as we move through the year.

  • That will continue to be our focus, as we talked about at the beginning of the year.

  • Jamie Cook - Analyst

  • All righty.

  • Tony Huegel - Director IR

  • Thank you.

  • Next caller.

  • Operator

  • Stephen Volkmann, Jefferies.

  • Stephen Volkmann - Analyst

  • Hi, good morning.

  • Wondering if you can just comment a little bit on C&F.

  • Your forecast is up 5%, but you did up 13% in the quarter.

  • I think maybe Susan might have said you are starting to see some slowing in the energy-related markets.

  • Does that explain some of this incentive comp that you are seeing there?

  • Or just maybe a little more color on any slowing that you are seeing in those markets.

  • Tony Huegel - Director IR

  • I would point out, as you think about the first quarter increased sales versus the outlook, remember: as you think about the comparison for 2014, we have much tougher comps as we move through the year, especially in the third and fourth quarter.

  • We had a relatively light first and second quarter.

  • We also do have some FT 4 transition that's going to create some moves from one quarter to the other.

  • In some cases that contributed to the very strong first quarter.

  • So there are a lot of things along that line.

  • As it relates to the incentives, and I mentioned this on an earlier question, I want to be clear.

  • This isn't an increased incentive for the full year.

  • It's really a timing issue as it relates to an accrual that was booked for some changes in some of the incentive structures that will largely reverse itself as we go through the year.

  • In fact, you'll see a lot of that reverse in the second quarter, so it should not indicate a higher level of year-over-year incentives.

  • In fact, as I mentioned earlier, there's -- if you look at the total budget, incentives as a percent of sales are flat year-over-year for that division.

  • But specific to energy, certainly the expectation is that you'll start to see some slowing in terms of orders.

  • For dealers that are in regions that are heavily impacted by energy, yes, we've seen a little bit of slowdown in replenishment orders, as one would expect, again, in those specific regions.

  • But some of that's being offset by strength in other areas.

  • The overall economy continues to improve, and so you are seeing some strength there as well.

  • We would tell you longer term that as you think about lower oil prices, certainly in the short term that's going to have a negative impact on the business from an energy sector perspective.

  • But longer term, if they stay at these levels it could have a more positive impact on the overall economy, which could help with some offsetting strength longer term in other parts of the business.

  • So it's a little bit of give and take.

  • But certainly in the short term the lower oil prices would be a little bit more take than give for us.

  • But from a longer-term perspective, not necessarily a bad deal.

  • Stephen Volkmann - Analyst

  • Thanks, Tony.

  • Tony Huegel - Director IR

  • Okay.

  • Thank you.

  • Next caller.

  • Operator

  • Larry De Maria, William Blair.

  • Larry De Maria - Analyst

  • Hey, good morning.

  • Thanks.

  • Seems like there is a move towards leasing in the market.

  • We're seeing some farmers even probably liquidate some of their fleets and move towards that model.

  • Curious: what do you think that means for Deere in maybe the near and short term -- near and longer term?

  • Are you pushing that model?

  • Just curious what the impact is and if we should think about is this a change to your business model, and what that might mean.

  • Tony Huegel - Director IR

  • Yes, I think certainly even if you looked last year we did see a little bit higher rate of leases versus retail notes in our financial services portfolio.

  • I don't know that it necessarily has a major impact on our bottom-line longer term.

  • I think the risk obviously shifts a little bit from a residual value perspective.

  • But we have a lot of history that we put in play when we set those residual values on the equipment.

  • I think that's the advantage we have with having a financial services organization like we do, is that we can evaluate those things both from a short-term potential and risk as well as a longer-term potential, a positive as well as risk and act accordingly.

  • And that's really what we are doing.

  • I would not say that we're aggressively pursuing leasing necessarily.

  • Certainly not participating in some of the very aggressive leasing programs that are rumored to be in the market, and that wouldn't be our expectation going forward.

  • But certainly for those customers who choose to lease their product versus buying it and financing through a retail note, we would be able to accommodate that through our financial services operations.

  • Raj Kalathur - SVP, CFO

  • Hey, Larry; this is Raj.

  • Let me add that leases are still only about a tenth of our total portfolio, okay?

  • And we are -- as we have historically done, we will continue to manage our residual values very conservatively.

  • Tony Huegel - Director IR

  • Thank you.

  • Next caller.

  • Larry De Maria - Analyst

  • Okay, thanks.

  • Operator

  • Steven Fisher, UBS.

  • Steven Fisher - Analyst

  • Great.

  • Thanks very much.

  • Wondering how you guys are thinking about when you could see the trough year of revenues in ag, and maybe how that view has changed at all in the last few months.

  • Thank you.

  • Tony Huegel - Director IR

  • Thank you.

  • I don't know that our view has changed necessarily in the last few months.

  • I think the first and maybe the last thing I'll say on it is: it's very premature really to talk about market conditions beyond 2015.

  • As we all know, that will largely be impacted by the upcoming growing season; and it's just very, very early.

  • That being said, as we talked about previously, if you look at and assume more normal weather patterns -- and we've talked about an analysis that our Chief Economist has completed.

  • If you look at normal weather patterns, trend yields, with the expected lower acreage that most are anticipating for corn as we go into the upcoming growing season, that would result in production slightly less than usage.

  • And you would see stocks brought down and pricing being more supported.

  • If that would transpire, we would certainly expect to see some improvement next year.

  • Now again, that's based on assumptions of weather, and that's always risky.

  • While we've had two very good years in a row now for growing, especially last year had pretty much ideal growing conditions, that doesn't mean we won't see it again this year.

  • So that's the risk to the outlook.

  • So again, we'll be watching closely as planting season approaches, and what actually gets planted in terms of various crops, as well as of course as we move through the summer what happens with the growing conditions.

  • And that will largely drive what we would expect to see as we move into 2016.

  • So again, I'll end where I started: it's really very premature to talk about things beyond 2015.

  • Steven Fisher - Analyst

  • Thank you.

  • Tony Huegel - Director IR

  • Okay, thank you.

  • Next caller.

  • Operator

  • Ann Duignan, JPMorgan.

  • Ann Duignan - Analyst

  • Hi, good morning.

  • Just building on those comments, why would you then be saying on slide 27 that the downturn is over in 2015 and that you should be able to react quickly when the market recovers?

  • What if the market does not recover and we get a decade like we saw in the 2000s of significantly lower equipment sales?

  • Tony Huegel - Director IR

  • Certainly we would be in a position -- and that's where I think if you look at how we've handled this particular downturn, as we look out into 2016 certainly -- and as you point out on slide 27, we looked at it through 2015 in terms of what our outlook is and where our performance has been relative to those past downturns.

  • If for some reason -- and again, it would be a rare occurrence that you would see a longer downturn without any kind of increase as you move into 2016.

  • It's not -- wouldn't be unprecedented, but it would be very, very rare; you would have to go back much further than the 1980s to find that kind of consistent downturn.

  • But if that were to happen, certainly we are positioning ourselves as we move through the year such that if the downturn persists we can be in a good, strong position to be able to continue to perform well during that downturn.

  • But also believe that we are in a good position to react quickly if we need to bring production back up and so on.

  • One good -- one example I would point out in that regard is, as you know, with our UAW contracts we have the ability to utilize inventory adjustment shutdowns or indefinite layoff.

  • And certainly as you've noted I'm sure, we have largely utilized indefinite layoffs in our UAW facilities, our large ag facilities, versus choosing to keep a higher level of workforce and leveraging a little more heavily the inventory adjustment shutdown.

  • So that does put us again in a bit better footing as we move towards 2016 from a workforce perspective.

  • So while we would argue, if you wanted to play percentages, that there is probably a greater likelihood that 2015 would be the lowest year -- and again, recognizing there is always that risk that we could see a further downturn -- we aren't playing that risk internally in how we are managing the businesses, with full assumption that we'll see that return in 2016.

  • So we're playing it conservatively internally even though we are optimistic as we look forward.

  • Okay?

  • Next caller.

  • Operator

  • Andy Casey, Wells Fargo Securities, LLC.

  • Andy Casey - Analyst

  • Good morning.

  • Thanks.

  • Question for you, I wanted to follow up on the construction and forestry, given your comment about reasonably easy comps continuing into Q2.

  • Does your guidance embed any year-to-year declines in the second half?

  • Tony Huegel - Director IR

  • Well, I think as you go through the year, I mean certainly -- and again I would point out and probably should have mentioned before: remember, as you think about first quarter, the other thing I would point out is first quarter does tend to be a seasonally light quarter relative to the others.

  • But yes, you are certainly looking at some tougher comparisons.

  • Fourth quarter in particular was a very strong quarter for that division.

  • I'm not going to get too specific in terms of quarter by quarter, but that one in particular I would point out will be a particularly tough compare for the division.

  • Andy Casey - Analyst

  • Okay, thank you.

  • Tony Huegel - Director IR

  • Okay.

  • Thank you.

  • Next caller.

  • Operator

  • Mike Shlisky, Global Hunter Securities.

  • Mike Shlisky - Analyst

  • Good morning.

  • I was wondering if you can maybe update us on the Certified Pre-Owned program.

  • I know you just said it's just very recently.

  • But perhaps on the original categories that are covered, tell us whether you plan to expand that to some additional categories going forward.

  • Tony Huegel - Director IR

  • Yes, you stole some of my thunder by pointing out that we had added the sprayer, which I think is an indication -- and again that was a pull really from our dealer organization requesting that.

  • So I think that alone indicates the confidence they have in the program.

  • I do want to make sure we clarify as we talk about this, we do not want to characterize the Certified Pre-Owned program as some sort of silver bullet.

  • But it certainly is beneficial, especially as our dealers look to market some of this newer used John Deere equipment, in a lot of cases marketing against brand-new competitive equipment.

  • That's really the biggest strength that the Certified Pre-Owned program provides.

  • I think our dealers are embracing that.

  • It's growing, and I think there is a fair amount of confidence from the dealer organization around this being a very useful tool for them.

  • So again I think all very positive signs as we move forward with that program.

  • As far as other products being added, I think it would be premature to talk about that; but certainly if that's an area where our dealers feel that it would be beneficial to them, that would certainly be something we would consider in conjunction with them.

  • Thank you.

  • Next caller.

  • Operator

  • Eli Lustgarten, Longbow Securities.

  • Eli Lustgarten - Analyst

  • Good morning, everyone.

  • Can we talk -- go back one more time to the C&F outlook and much easier comparison second quarter, and it should get tougher in the third and fourth quarter.

  • Two questions are: one, can you maintain the profitability numbers in the second half of the year that you will average in the first half of the year, or do they begin to weaken?

  • And an associate with it, you indicated that your inventories and stuff are mostly going up because of C&F.

  • Would you begin to rethink your C&F inventories and maybe want to trim them, particularly if the energy market gets softer?

  • And can you add, what percent of your business is related to the energy markets in C&F?

  • Tony Huegel - Director IR

  • Sure.

  • Yes, I think in answer to the first part of the question -- that was very creative in adding two questions into one, but --

  • Eli Lustgarten - Analyst

  • Right, we try.

  • Tony Huegel - Director IR

  • Certainly, we talked about 10% margins in the first quarter; and I'll note that for the full year it's 11%, so 1 point higher.

  • And again, I want to be clear.

  • It's not that sales are expected to fall off in the back half of the year.

  • It's just the year-over-year comparison.

  • So the growth year-over-year is what would be challenged as we go through the year.

  • I think that's probably the key there as you think about that.

  • From an energy perspective, certainly in recent years that's been a stronger portion of our business, a strong portion of the industry.

  • We've seen a lot of strength in the energy business across the industry.

  • We would tell you, if you look at the machines that go directly into things like pipeline, oil, gas, fracking, those sorts of things, we would estimate roughly 10% to 15% -- again, in recent years.

  • Deere would not be out of line from where the industry was in that regard.

  • But I would also point out that in those regions that are heavily influenced by energy, you have the residual impact as well on the overall economy, in other types of construction that occurs in support of the strength of energy.

  • So in terms of overall business, for some could be a bit heavier than that.

  • So that would be our view on that.

  • Thank you.

  • Next caller.

  • Operator

  • Ross Gilardi, Bank of America Merrill Lynch.

  • Ross Gilardi - Analyst

  • Good morning.

  • Thank you.

  • Hey, Tony, I was just wondering, have you gotten any more color on the size of the credit line under the Moderfrota program for Brazil?

  • Because this program had become pretty trivial over the last three to five years.

  • Is it really fair to say that rates are going to be -- are flat with where they were last year, given you're comparing Moderfrota to FINAME.

  • Is the program actually getting tapped, and are approvals happening?

  • Is it active right now?

  • Tony Huegel - Director IR

  • Yes, I think what my understanding is, as we speak with our sales group there in-country, is that the financing is available for Moderfrota -- again because there was financing in place, set up in place, that wasn't being utilized in the early part of their fiscal year.

  • So the second half of calendar 2014.

  • Again we believe that there's certainly available credit.

  • People are beginning to utilize the Moderfrota program.

  • Really, if you think about differences between the two, to be fair, rates are the same as you switch to Moderfrota; but there is a slightly higher downpayment.

  • Under PSI last year it would have been zero percent downpayment, and it's 10% under Moderfrota.

  • So there is a slightly higher downpayment.

  • But from a funding perspective, at least through the middle of the year, which is where we have the rates available, the belief is that there will be adequate funding for that.

  • Ross Gilardi - Analyst

  • Thanks.

  • Tony Huegel - Director IR

  • Okay.

  • Thank you.

  • Next caller.

  • Operator

  • Adam Uhlman, Cleveland Research.

  • Adam Uhlman - Analyst

  • Yes, hi, guys.

  • Good morning.

  • Can we circle back to the small ag products in the US and your outlook there?

  • I know you mentioned weaker dairy markets over in Europe, but there wasn't any comment to dairy and livestock conditions here in the US.

  • Could you maybe just talk about what you've been seeing in the order trends that product, and if you've changed your outlook at all?

  • Tony Huegel - Director IR

  • Yes, I think certainly as you go through 2014 and as we go into 2015 I would say overall for livestock our view would be -- and of course as we've talked about before, we do use Informa Economics as an external consultant.

  • And their views would be consistent in that livestock profitability generally is expected to continue through 2015.

  • There are a couple areas where you will see some margins compressing a bit.

  • Dairy would be one area I would point out; that as the herd expanded through 2015, you're likely to see some squeezing of margin.

  • Today, they would be close to breakeven, roughly, but still slightly profitable.

  • Poultry again coming off of very strong margins last year.

  • We believe those strong margins will continue through the first half of the year.

  • But production is up, and so that's a part of the industry that can recover fairly quickly, and so we would expect to see perhaps some margin squeezing there.

  • And pork of course, again we would expect to see some growth in the herd and some reduction as we move through the year.

  • Second half in particular could be a challenge from a margin perspective there.

  • So we are seeing some squeezing there.

  • Beef, of course that takes a while to rebuild herds.

  • So profitability is expected to still be relatively strong, especially for cow/calf producers.

  • So overall we're still looking at small ag, which tends to be a little more closely tied to livestock, to be relatively strong versus certainly large ag as we move through 2015, again, coming off of some pretty strong years for livestock producers.

  • Thank you.

  • Next caller.

  • Operator

  • Sameer Rathod, Macquarie Capital.

  • Sameer Rathod - Analyst

  • Hello and good morning.

  • Could you expand a little bit on the competitive landscape and what it looks like, given the current downturn, and how the dealers are doing just given the competition?

  • Thank you.

  • Tony Huegel - Director IR

  • Yes.

  • I would simply say I would go back to inventory levels.

  • Our dealers are very, very strong, very capable.

  • We've proven that time and time again.

  • We entered this downturn with inventories, while we would tell you a little higher than we would like in used, in much better position than the competition.

  • So we feel very good about the competitive position that we're in and feel confident that, like in other downturns, we'll come through this -- both Deere and our dealers will come through this -- much stronger on the back end.

  • Again, I am referring specifically to North America which I'm assuming is where your question was directed.

  • Thank you.

  • Next caller.

  • Operator

  • Jerry Revich, Goldman Sachs.

  • Jerry Revich - Analyst

  • Good morning.

  • I am wondering if you can talk about for John Deere Capital Corp., really good credit loss provision performance.

  • Can you just give us a more color on trends and frequency of repossessions, severity of losses, for instance, delinquency rates?

  • I know we haven't approached it in the past on prior calls.

  • But now that it's a third of the earnings here I am wondering if you could just give some additional color on those indicators.

  • Tony Huegel - Director IR

  • Yes, I think the short answer there is certainly we aren't seeing any kind of spike in losses.

  • Our residuals -- we talked earlier about leases.

  • We've tended to be relatively conservative with leases.

  • So again we are -- really nothing cautionary on that at this point in time.

  • But to be fair, it is a little early in the sense that many of our annual payments are coming due today; and so we'll have probably better guidance on that topic as we move into second quarter.

  • Raj Kalathur - SVP, CFO

  • This is Raj.

  • Let me add a couple of points there.

  • We watch this very carefully.

  • There are a couple of small revolving products that we offer.

  • One is a seasonal pay.

  • So last fall we did not see anything that would indicate additional caution, although we are in a cautionary environment; we are watching it carefully.

  • Another would be a monthly pay, more like a credit card.

  • Even there we watch that carefully, like Tony said.

  • We haven't seen anything that would raise a red flag for us yet.

  • Jerry Revich - Analyst

  • Thank you.

  • Tony Huegel - Director IR

  • Thank you.

  • Next caller.

  • Operator

  • Mig Dobre, Robert Baird.

  • Mig Dobre - Analyst

  • Yes, good morning.

  • Just going back to A&T again, decremental margin performance there has been pretty good -- versus our expectations at least -- at about 35%.

  • I understand that that's your guidance for the full year as well.

  • But I am wondering.

  • Based on everything you know of the cost structure, how should we think about this longer term?

  • Especially if, say for instance, ag declines continue into 2016.

  • Tony Huegel - Director IR

  • Yes, certainly we would continue to -- that's a tough want to answer, candidly, as you think about that.

  • But if you would anticipate further reductions, obviously we would evaluate that.

  • We would continue to look for ways we could pull costs out and keep those margins in positive territory.

  • We've talked a lot about the lever studies we have and plans that we have in place to make sure we do that as we move down the line.

  • Now certainly, we are well down the line, especially if you think about large ag; but that doesn't mean that as you continue down the line you don't find additional levers that you can pull.

  • The best example I would point out to that is in our C&F division in 2009.

  • We certainly went to levels that were far lower than what most would have anticipated they could have gone; and additional levers were pulled in that regard in order to try to compensate for that.

  • So we would -- again as we look into 2016 we're trying to position ourselves for whatever the market brings.

  • And we'll make further changes as we need to.

  • Raj Kalathur - SVP, CFO

  • And, Mig, this is Raj.

  • It also depends on the products, okay?

  • So depending on which product line is impacted, more or less, if it's large ag the impact is going to be different than with small ag.

  • Tony Huegel - Director IR

  • Thank you.

  • Next caller.

  • Operator

  • Nicole DeBlase, Morgan Stanley.

  • Nicole DeBlase - Analyst

  • Yes, thanks for fitting me in, guys.

  • My question is just around used equipment pricing.

  • I don't think we've touched on this subject yet.

  • Can you comment on what you've seen quarter to date, how it compares with last quarter, and if you are seeing any increased competition from the other guys out there as everyone in the industry is looking to move inventory?

  • Tony Huegel - Director IR

  • Yes.

  • So far it's actually not a bad story; it's a pretty good story.

  • As you look at -- and again, looking at large ag in the US and Canada, I would tell you product by product it's plus or minus single-digit.

  • There are some that are -- again, this is year-over-year pricing.

  • In some cases, you're going to see some small single digits of actually improved pricing year-over-year; and in some cases you're going to see some small single digits of lower.

  • So I would argue all in all relatively flattish, but recognizing that some products are stronger than others.

  • Nicole DeBlase - Analyst

  • Okay, thanks.

  • Tony Huegel - Director IR

  • Thank you.

  • Next caller.

  • And this will be our last caller.

  • Thank you.

  • Operator

  • Andrew Kaplowitz, Barclays Bank plc.

  • Andrew Kaplowitz - Analyst

  • Good morning, guys.

  • Nice quarter.

  • Tony Huegel - Director IR

  • Thank you.

  • Andrew Kaplowitz - Analyst

  • Tony, I just wanted to push you on decremental margins this year a little bit more.

  • You did 35%, which I think previous callers have said that's pretty good; that beat our estimate.

  • And that was on relatively large mix headwind that you talked about in the past, in combines especially and the big destock year-over-year.

  • So why would decrementals be similar for the rest of the year?

  • Was there some conservatism in that?

  • Can you still push G&A as you have done consistently?

  • Tony Huegel - Director IR

  • Yes, well, I think some of that, Andy, as you think about going into the back half of the year, remember: we were pulling levers in the back half of the year of 2014, as we started to see this further reduction coming.

  • So it does get a bit more difficult in terms of some of the comps.

  • As you think about SA&G I would tell you it's the same thing from an SA&G reduction comparison as what I talked about with C&F sales.

  • It becomes more challenging as you go through the year.

  • Certainly as you put together a forecast, there are a lot of assumptions in there; and certainly we try to put our best estimates that we can in that regard.

  • Some of the big questions candidly, too, will be what continues to happen with material costs.

  • We've seen some positive move there which has certainly helped at least in the short term.

  • And if those lower costs, especially in things like steel, if oil prices remain at low levels, that flows through not just our logistics but a lot of other oil-related type of inputs.

  • And that certainly would be beneficial as well.

  • So we'll just have to see where those things go.

  • But at this point we are forecasting similar decrementals for the year as what we've seen in the first quarter.

  • Okay.

  • Thank you very much and with that we'll bring our call to a close.

  • We do appreciate your participation on the call; and as always we'll be available the rest of the day to answer any additional questions you may have.

  • Thank you.

  • Operator

  • Thank you.

  • This does conclude today's conference.

  • You may disconnect at this time.