強鹿 (DE) 2015 Q2 法說會逐字稿

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  • Operator

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

  • (Operator Instructions)

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

  • Thank you, you may begin.

  • 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 second-quarter earnings, then spend some time talking about our markets and our outlook for the second half of FY15.

  • 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 of Investor Communications

  • John Deere announced second-quarter earnings today, and in our view, the results were impressive in light of the weak conditions plaguing the global agricultural sector.

  • Our performance reflected the skillful execution of our operating plans and the contributions of a well-rounded business line up.

  • The Company's construction and forestry and financial services businesses had higher results for the quarter, while our agricultural and turf operations remain solidly profitable despite lower demand for large models of farm machinery.

  • We also saw benefits from our success holding the line on costs and assets, a fact that gives our performance a measure of resilience we have not seen in prior downturns.

  • Another item weighing on our results was the strong US dollar.

  • It continued to put pressure on reported sales made outside of the United States and is expected to continue doing so for the rest of the year.

  • Now let's take a closer look at the second quarter in detail, beginning on slide 3. Net sales and revenues were down 18% to $8.171 billion.

  • Net income attributable to Deere & Company was $690 million.

  • This includes a $38 million after-tax gain associated with the previously-announced sale of our crop insurance business.

  • EPS was $2.03 in the quarter.

  • On slide 4, total worldwide equipment operations net sales were down 20% to $7.4 billion.

  • Price realization in the quarter was positive by 2 points.

  • Currency translation was negative by 5 points.

  • Turning to a review of our individual businesses, let's start with agriculture and turf on slide 5. Sales were down 25% in the quarter-over-quarter comparison.

  • Lower sales were recorded in all regions of the world, but the decrease was primarily due to lower shipment volumes of large ag equipment in the United States and Canada.

  • Also hurting sales in the quarter was the negative impact of foreign currency exchange.

  • Operating profit was $639 million.

  • The division's decremental margin in the quarter was 31%, quite respectable considering the decrease in large ag sales.

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

  • Slide 6 outlines US farm cash receipts, which, in spite of softer commodity prices, remain near historically high levels thanks to help from record livestock receipts.

  • As a result, our 2014 forecast calls for cash receipts of 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're seeing today, our 2015 forecast calls for cash receipts to be down about 6%.

  • Of note, crop receipts for 2015 are forecast to be about 23% lower than 2012's record.

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

  • Global grain and oil seed demand remains strong, while supplies are now 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 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 appear to be stabilizing at levels near the long-term average.

  • While livestock margins remain at good levels, dairy margins are being squeezed.

  • As a result, farm machinery 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 China, the government continues its investment in ag equipment subsidies, but the growth rate has slowed.

  • This, as well as the continued slowdown in economic growth and lower commodity prices, has led to a decrease in forecast industry sales.

  • Turning to India, the 2015 monsoon season rainfall is expected to be below normal.

  • That, on top of last year's relatively dry monsoon season, will result in lower overall agriculture output.

  • In the CIS, continued deterioration of economic growth and further tightening of credit continued to weigh on equipment sales.

  • Notably, western equipment manufacturers are being heavily impacted by the weak Russian currency and geopolitical uncertainties.

  • Shifting to Brazil, slide 10 illustrates the value of agricultural production, a good proxy for health of agribusiness.

  • Ag production is expected to decrease about 11% for the year in US dollar terms, due to lower global commodity prices.

  • However, with the weak real, the value of production is much more attractive in the local currency, as the price for which farmers sell crops is set in US dollars but paid in Brazilian real.

  • Even with the recent drop in prices, Ag fundamentals remain positive for grains.

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

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

  • Eligible finance rates for ag equipment through the end of June increased 3% in April to 7.5% and 9%, depending on a farmer's revenues, with no change on the required down payment.

  • Uncertainty over the 2015-2016 ag budget, as well as concerns about possible further increases in interest rates, are also weighing on farmer confidence.

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

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

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

  • As we refine our forecast of market conditions, we now expect industry sales in the US and Canada to be down about 25% for 2015.

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

  • In South America, industry sales of tractors and combines are now projected to be down 15% to 20% in 2015.

  • The decline in our outlook is a result of economic uncertainty in Brazil, the questions surrounding government-sponsored financing noted previously, and potential currency movements.

  • Shifting to Asia, we now expect sales to be down modestly.

  • In the CIS, we continue to expect industry sales to be down significantly due to economic concerns, limited credit availability, and the weak ruble.

  • 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 altogether on Slide 13, FY15 Deere sales of worldwide ag and turf equipment are now forecast to be down about 24%, including about 5 points of negative currency translation.

  • The 1 point change in the forecast from last quarter is all attributable to the impact of foreign currency exchange.

  • The ag and turf division operating margin is now forecast to be about 8%.

  • Before turning to construction and forestry, let's take a look at our all-new 8000 Series Self-Propelled Forage Harvester on slide 14.

  • After 20 years of incremental changes to our SPFH product line, it represents a complete update with a total of 5,500 new part numbers.

  • The new machine addresses the needs of livestock and dairy customers, as well as biogas producers, for higher efficiency and productivity.

  • It offers innovative features such as field guidance, products, and smart unloading systems, as well as a new cab, which combine to increase performance in up time and decrease the cost of ownership, while adding comfort for the operator.

  • Earlier this year, the 8000 Series won the 2015 Forage Harvester Machine of the year at SIMA, the Paris International Agri-Business Show.

  • The 8000 Series Forage Harvester added to our line-up of self-propelled wind growers and our recent entry into the large square baler business better positions Deere within the hay and forage market.

  • Now, let's focus on construction and forestry on slide 15.

  • Net sales were up 2% in the quarter, and operating profit was up 43%.

  • The division's incremental margin was about 173%.

  • Moving to slide 16, 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.

  • Deere's construction and forestry sales are now forecast to be up about 2% in 2015.

  • Currency translation is forecast to be negative by about 3 points.

  • The change in our forecast from last quarter is due to lower sales outside the US and Canada, as well as the impact of foreign currency exchange.

  • 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%.

  • Before moving to financial services, the first Deere designed and built production class dozer is shown on slide 17.

  • The model 1050K is the largest crawler dozer John Deere has ever produced and is part of our growing production class equipment portfolio.

  • It was introduced earlier this year for mass earth moving and quarry operations.

  • Its dual-path hydrostatic transmission, a unique feature to this size class, provides better fuel economy and maneuverability.

  • Other improvements include a higher power-to-weight ratio, which provides more pushing power and more turning power with full loads.

  • In addition, the 1050K crawler is equipped with John Deere WorkSight telematics to allow technicians to connect to the machines wirelessly, reducing the repair cycle time, the overall cost of repair, and customer downtime.

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

  • Slide 18 shows that the financial services annualized provision for credit losses as a percent of the average owned portfolio was 8 basis points at the end of April.

  • This reflects the continued excellent quality of our portfolios.

  • The financial forecast for 2015 now contemplates a loss provision of about 14 basis points versus 9 basis points in 2014.

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

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

  • Moving to slide 19, worldwide financial services net income attributable to Deere & Company was $170 million in the second quarter, versus $148 million last year.

  • Net proceeds from the sale of the crop insurance business benefited the division's second-quarter income by about $27 million after tax.

  • Earlier, I mentioned a $38 million enterprise gain on the sale.

  • The difference is largely due to the enterprise utilization of capital loss carry forwards not originating at the financial services division level.

  • 2015 net income attributable to Deere & Company is forecast at about $630 million, no change from our previous forecast.

  • Slide 20 outlines receivables and inventories.

  • For the Company as a whole, receivables and inventories ended the quarter down $1.6 billion.

  • That was equal to 31.4% of prior 12 month sales, compared with 32.1% 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 the year with total receivables and inventories down about $600 million.

  • The decrease in the ag division from prior guidance is due to reductions outside the United States and Canada and foreign currency exchange.

  • Our 2015 guidance for cost of sales as a percent of net sales, shown on slide 21, is about 78%, unchanged from last quarter.

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

  • Looking at R&D expense on slide 22, R&D was down about 4% in the second quarter, including about 3 points of negative currency translation.

  • Our 2015 forecast calls for R&D to be down about 1% for the full year, including about 3 points of negative currency translation.

  • The forecast reflects higher R&D spending in the second half of the year, which is the typical pattern.

  • Moving now to slide 23, SA&G expense for the equipment operations was down about 14% in the second quarter, including about 4 points of currency translation.

  • Our 2015 forecast contemplates SA&G expense being down about 11% with landscapes, water and currency accounting for about 6 points of the change.

  • Similar to the situation with R&D spending, SA&G expense is forecast to be higher in the second half of the year.

  • Turning to slide 24, pension and OPEB expense was up about $15 million in the quarter and is forecast to be up about $70 million in 2015.

  • On slide 25 the equipment operations tax rate was approximately 30% in the quarter, primarily due to mix of income and discrete items.

  • For the remainder of FY15, the projected effective tax rate is forecast to be in the range of 34% to 36%.

  • Slide 26 shows our equipment operations history of strong cash flow.

  • Cash flow from the equipment operations is now forecast to be about $3.4 billion in 2015.

  • The Company's third-quarter financial outlook is on slide 27.

  • Net sales for the quarter are forecast to be down about 17% compared with 2014.

  • This includes about 2 points of price realization, with unfavorable currency translation of about 6 points.

  • Turning to slide 28 and the full-year outlook, the forecast now calls for net sales to be down about 19%.

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

  • Currency translation is negative, about 4 points.

  • Finally, despite strong currency headwinds, our full-year 2015 net income forecast is now about $1.9 billion, an increase from our previous guidance.

  • In closing, John Deere expects to be solidly profitable in 2015.

  • In fact, the year is forecast to rank among our stronger ones in sales and profits, even with the pull back we're experiencing in the farm sector.

  • Such an achievement says a lot about the progress we've made establishing a wider range of revenue sources, and a more durable business model.

  • All in all, we remain confident in the Company's present direction and in its ability to meet customer needs for advanced machinery and services in the future.

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

  • Tony Huegel - Director of 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 as a reminder, in consideration of others and our hope to allow more of you to participate in the call, please limit yourself to one question.

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

  • David?

  • Operator

  • (Operator Instructions)

  • The first question today comes from Vishal Shah of Deutsche Bank Securities.

  • Vishal Shah - Analyst

  • Thanks for taking my question.

  • Maybe you could just talk a little bit about how you see the inventory levels at the dealers and what you are seeing in the used equipment pricing market.

  • Tony Huegel - Director of IR

  • So if you think about used equipment, obviously, overall -- I assume you're referring mostly to large ag equipment.

  • So if you look at dealer inventory, certainly we took -- last year, again as a reminder, we pulled a lot of inventory out, as Susan pointed out in the opening comments.

  • We're down pretty significantly year over year; as we ended the quarter this year with receivables in inventory, we're down almost $2 billion year over year for ag and turf.

  • And certainly there's a lot of conversation about used equipment levels as well.

  • And we would tell you, as you look at large ag in total, certainly we feel -- and we're always concerned about used equipment.

  • If you asked us are we more concerned today than we were three months ago or six months ago, the answer would be no.

  • We continue to be very focused on that.

  • We believe we're materially in better position than our competition, but we're really focusing on lowering those used inventory levels, but also protecting resale values as we do that.

  • So we believe we're on the right path.

  • We feel pretty good about the direction we're heading with used equipment, but certainly we have a lot of work ahead of us in terms of continuing to pull that down.

  • Vishal Shah - Analyst

  • That's helpful and just one other question.

  • Tony Huegel - Director of IR

  • Actually, I'm sorry, I'm going to have to ask you to get back in the queue, I'm sorry.

  • Vishal Shah - Analyst

  • Sure.

  • Tony Huegel - Director of IR

  • Next caller.

  • Operator

  • Your next question comes from Andy Casey of Wells Fargo.

  • Andy Casey - Analyst

  • Quick question on the modest improvement in the US and Canada outlook: is that all driven by lower horsepower?

  • Or are you seeing better order intake than previously expected in the high-horsepower equipment sector?

  • Tony Huegel - Director of IR

  • I would not characterize that as a significant improvement, really, in any of our businesses.

  • I would argue it's a bit of a tweaking, as Susan pointed out, refining the forecast, but certainly we have not changed our outlook on large ag business.

  • We're continuing to see that down closer to the 40% range in the industry and so not a significant change, really, anywhere, but certainly not with large ag.

  • Andy Casey - Analyst

  • Thank you.

  • Tony Huegel - Director of IR

  • Next caller.

  • Operator

  • Your next question comes from Jerry Revich of Goldman Sachs.

  • Jerry Revich - Analyst

  • Tony, can you talk about the raw material benefit that you folks saw in the quarter, and what's factored into guidance?

  • And then can you calibrate us on the transactional impact of currency along those lines as well, please?

  • Tony Huegel - Director of IR

  • Okay, so I'll take the first question.

  • If we want to talk about currency, we'll have to have someone either get back in queue, or we'll have someone else pick up on that.

  • As you know, we don't disclose specific guidance in terms of dollar impact from raw materials.

  • A couple years ago now we switched and started providing guidance on overall cost of sales, but certainly that has been a benefit in the first half of the year.

  • I would tell you, as you look at the second half of the year, certainly for ag and turf, but really on the overall business, it's slightly less benefit in the back half of the year.

  • Now, before anyone gets too excited about that, it's not that we're implying that steel costs and other commodity costs necessarily go up, but think about the timing of our general purchases and our production on any year.

  • We tend to build inventory in the first half of the year sequentially, and then it comes down in the back half.

  • So you tend to get the benefit earlier in the year in some of those material costs.

  • So continued benefit from material costs year over year, but if you're looking first half/second half there is actually a slight difference, a slightly lower benefit in the back half in our guidance.

  • Jerry Revich - Analyst

  • Okay, thank you.

  • Operator

  • Next question comes from Mig Dobre of Robert W. Baird.

  • Mig Dobre - Analyst

  • Tony, can you maybe range us in terms of your expectations for full-year margins in construction versus ag and turf?

  • Tony Huegel - Director of IR

  • Yes, so if you look at the margin, I think Susan pointed out on the call we are looking for C&F margins to be about 11%.

  • For the full year, ag and turf would be about 8%.

  • So, no change on C&F from our prior forecast; a slight increase actually for ag and turf.

  • We had previously forecasted about 7%.

  • Mig Dobre - Analyst

  • Thanks.

  • Tony Huegel - Director of IR

  • Thank you.

  • Next caller?

  • Operator

  • Next question comes from David Raso of Evercore ISI.

  • David Raso - Analyst

  • Thank you.

  • Given your new inventory and receivable forecast, where do you see production versus retail heading into 2016?

  • And if you can break it out between ag and turf and construction and forestry, because obviously I assume that must have been baked into why you altered some of the receivable and inventory forecasts.

  • Tony Huegel - Director of IR

  • Yes, so as you look at receivables and inventory -- and specifically we'll start with ag and turf.

  • As you look at the change in the forecast from last quarter to this quarter, I would tell you it really does not relate to the US and Canada.

  • It relates to both receivables and inventory outside of the US and Canada, as well as some FX impact quarter over quarter.

  • But it's mostly about those receivables outside of the US and Canada.

  • But it's implied already, and not to be forgotten, that we pulled a lot of receivables in inventory out in 2014 as we ended the year.

  • And certainly in our original budget guidance, we had a pretty healthy level of receivables and inventory continuing to come out on ag and turf, as we seek to under produce the retail environment through the year.

  • So we have underproduced year to date.

  • And we would continue, especially as we go into the back half of the year, will be underproducing the retail environment and continuing to bring those field inventories down, both on new as well as providing some additional support that way for our dealers on used equipment.

  • When you think about C&F -- remember we talked about it early on.

  • Much of that increase -- some of that is because of higher sales, of course, so I don't want to imply there isn't any increase in field inventories.

  • But much of that has to do with the change in some of the terms, and we think that will drive some higher levels of receivables.

  • And really, the reduction you saw in the quarter had more to do with a refinement of what we think that impact will be from those terms changes versus really any kind of significant expectation in terms of a change in actual field inventory.

  • So that's really what's driving most of that as we look towards the end of the year.

  • David Raso - Analyst

  • But to my question, just so I'm clear on the take away, is this forecast to set you up going into 2016, that whatever we think retail will be, you expect to produce in line with retail?

  • Tony Huegel - Director of IR

  • Our expectation for 2015 is certainly to produce under, with the hope that in 2016 we will be able to produce to retail next year.

  • Now again, that's making a lot of assumptions on what 2016 would be, as well.

  • But what I don't want to imply is that, as you look at that reduction in receivables and inventory, that there is any kind of signaling of what 2016 may or may not be; because again, that change was not related to the US and Canada.

  • David Raso - Analyst

  • Totally understand.

  • I just want to make sure the spirit of that forecast is to set you up into 2016, where there isn't necessarily more inventory reduction.

  • The spirit is to enter 2016.

  • Tony Huegel - Director of IR

  • That has been our expectation all year and that has not changed.

  • David Raso - Analyst

  • Thank you so much, I appreciate it.

  • Tony Huegel - Director of IR

  • Thank you.

  • Next caller?

  • Operator

  • Next question comes from Steve Fisher of UBS Securities.

  • Steve Fisher - Analyst

  • Bigger picture on ag: we're still seeing most ag markets down around the world.

  • But looking forward, give us your sense for which ag market you think has the best potential to turn positive first and why.

  • Tony Huegel - Director of IR

  • That's a tough question at this point.

  • And actually, I think, if you look at the US and Canada market, for example -- and I think it really implies the overall commodity markets in general.

  • If you talk to our Chief Economist, he would say we're really in a year-to-year type of mode right now.

  • And as frustrating as it may be for people to hear, it really is about what happens this summer with the current crop that's in the ground.

  • If you're going to assume another year of better-than-average weather, where yields are above trend yields, then certainly it's going to be a challenging argument to make that 2016 would certainly improve really anywhere around the globe.

  • But if you look back at what would the implications be of trend yields, or a little less than ideal weather, or average weather, and you see below trend yields, then that story changes pretty dramatically.

  • Because we would argue that you are not -- while you certainly have ample supply of commodities and you're seeing that reflected in commodity prices, there isn't a glut of commodities either.

  • And so if you under produce demand going into -- through the 2015 crop and going into 2016, we believe prices will be very responsive to that.

  • And as cash receipts would recover in that type of environment, you would see sales begin to recover as well.

  • So that's as close to -- and I just can't pinpoint a certain geography specifically, but I would say that's probably a pretty consistent global statement that we would make.

  • Okay?

  • Steve Fisher - Analyst

  • Thank you.

  • Tony Huegel - Director of IR

  • Next caller?

  • Operator

  • Next question comes from Jamie Cook of Credit Suisse.

  • Jamie Cook - Analyst

  • Can you just comment on the order book, where we stand today versus expectations, and where we were last year by combine 7R, 8R, 9R, et cetera?

  • Thanks.

  • Tony Huegel - Director of IR

  • You bet.

  • As you think about order book, I think in general we would continue to say versus our forecast -- obviously, we're forecasting a much lower level of orders, but versus that forecast we continue to be in very good shape compared to last year, in terms of the order coverage.

  • Certainly combines at this point in the year -- with the early order program, we're well over 90% covered.

  • And the bigger question tends to be things like large tractors.

  • If you think about 7000 Series tractors, today we would be really 7000s, 8000s and 9000s for this year.

  • We're out into early October in terms of availability.

  • And these are the wheeled tractors, not track tractors, so across the board on wheeled tractors we'd be early October.

  • Last year on 7000s that would have been late August; 8000s would have also been early October, so consistent.

  • And on 9000s, it would have been mid-June in terms of availability.

  • So our order book is actually on, again, much lower order levels, or expectations, but as an availability perspective in very good shape.

  • I didn't mention the track tractors, those would also be: 8000s would be out into early October; 9000s would be in August, which would be a little bit behind where we were last year.

  • Last year, we would have been out into September.

  • Jamie Cook - Analyst

  • Great.

  • Thank you for the color.

  • Tony Huegel - Director of IR

  • Next caller?

  • Operator

  • Next question comes from Ann Duignan of JPMorgan.

  • Ann Duignan - Analyst

  • Just a clarification first if I can, just on David Raso's question?

  • Your point is that, until we get through July and August -- July and August make or break the crop.

  • Until we get through those months, we really cannot even begin to forecast what 2016 might look like.

  • I think you would agree with that.

  • Tony Huegel - Director of IR

  • Yes.

  • Ann Duignan - Analyst

  • Okay.

  • And then my real question is: if you look at this whole trend in the industry towards leasing, can you talk about the increase in your equipment leasing?

  • It was up about $1 billion, about 31% year over year.

  • Talk about the risks on residual values when those leases expire and why this trend towards leasing versus selling.

  • Tony Huegel - Director of IR

  • Sure, that's a great question.

  • Certainly, you're right; we are seeing a move towards more leasing.

  • We think some of that has to do with giving some of the lower margins customers are facing, as well as -- so again, when you purchase the equipment you tend to get a better advantage from a tax-deduction perspective.

  • So as margins are a bit lower that isn't as attractive always.

  • But then there's also questions around Section 179 and bonus depreciation; will we really have that or not?

  • So we think that's factoring into some of those decisions in terms of a move towards leasing.

  • Really, as we look at it, the key here is making sure that residuals -- and I think as you implied, making sure that residuals are valued properly, and that tends to be what we focus on.

  • As you know, we tend to be relatively conservative on the setting of residual values.

  • We continue do that to date.

  • We certainly evaluate those on a regular basis.

  • We haven't had any kind of write downs or accruals that we've had to make against the residual values of that leasing portfolio.

  • But that's really where the risk is, is it does move some risk to the financial services organization in a sense of, if residuals would drop dramatically as they come off of lease, that could create some challenges there.

  • Couple things I would point out, though, related to that is: one, while it's increasing, it's still a relatively small part of our total portfolio.

  • So just to keep that in perspective.

  • And the other thing is -- and it's one of the reasons why it's so important for us as we manage use inventories in general -- to make sure we are protective of pricing on that used equipment.

  • Not only does it help -- the value of that used equipment.

  • So it helps, certainly, our dealers, so it's supportive there.

  • But it's also supportive of the financial services organization in the sense of making sure we're protecting those residual values as we go through this downturn and as we continue to focus on moving those used equipment levels lower.

  • So it is a balancing act in terms of looking to reduce those and still being protective of those values.

  • Anyway, thank you, and we'll move on to the next caller.

  • Operator

  • Next question comes from Ross Gilardi of Bank of America - Merrill Lynch.

  • Ross Gilardi - Analyst

  • I'm just wondering if you could talk a little bit more about Brazil, Tony.

  • Soybean fundamentals seem pretty poor.

  • You have cut your price outlook there.

  • The borrowing rates are up sharply.

  • You tweaked your outlook a little bit more negative, but it doesn't seem like anything major.

  • So does the situation feel like it's still in the process of deteriorating or are you seeing any signs of stabilization at the bottom?

  • Tony Huegel - Director of IR

  • As you think about Brazil on the ag side, it's an interesting situation this year with the outlook that we have in place, because as you look at -- I would actually turn around a little bit with the soybean prices.

  • While in US dollars, certainly it's down -- and consider the impact of currency because remember Brazilian farmers sell in US dollars and then convert back to local currency.

  • So their cash receipt in local currency and their margins, because most of their inputs were purchased in local currency, and to the extent that they were purchased in US dollars, it would have been before the currency shifted last fall.

  • And so when you look at margins on the crop that was recently harvested, they're pretty attractive levels, which is in stark contrast to the outlook.

  • Really what we're seeing in our outlook is, in our view, a concern around the general economy in Brazil.

  • You're seeing that in some of the increased rates of FINAME financing.

  • So I would tell you much of that is going to be dependent on what happens as we move forward with that Brazilian economy.

  • There's still some question.

  • You'll note our slides end in June in terms of what the FINAME financing rates are, because they haven't been announced beyond that.

  • So we'll be hearing, hopefully in early June is the expectation now, not just what the FINAME financing rates will be for both PSI and Moderfrota but also what down payment levels they are going to require.

  • Will they keep Moderfrota at the 10%?

  • And as importantly, what's the overall budget?

  • Will they change that overall budget?

  • And then we'll have a much better feel for what happens as we move forward with Brazil, at least in the short term.

  • But again, I'd remind you this is about a cycle.

  • Longer term we continue to believe that we have great opportunity in Brazil as agricultural output continues to grow, as acreage continues to grow, and certainly as our market share continues to grow.

  • Next caller?

  • Operator

  • Next question comes from Eli Lustgarten of Longbow Research.

  • Eli Lustgarten - Analyst

  • Brilliant quarter, actually.

  • Can we talk a little bit about the change in construction equipment?

  • The lower sales and outlook, and what you're seeing in the marketplace?

  • I mean 2% is probably a little bit disappointing type of gains; I know there's some currency.

  • But what do you see in the marketplace, the impact of oil and gas?

  • And are we basically looking at a flattish environment for you guys for awhile?

  • Tony Huegel - Director of IR

  • Yes, I think it's important to point out, and remind you Susan pointed out, I guess, in her comments, that the reduction really is not related to the US and Canada.

  • It's more about the sales outside of the US and Canada, as well as FX.

  • Within the US and Canada, certainly we're seeing -- in those areas that are heavily influenced by energy, certainly seeing lower orders and business slowing down somewhat.

  • But the overall market continues to be fairly attractive, in terms of what we saw at the beginning of the year, as well.

  • Again, as a reminder, coming off of a very strong 2014.

  • So as you see those growth rates slow as we go into the back half of the year, remember we move into much tougher compares in that division.

  • But when you look at markets like Brazil -- and I just mentioned that in my last commentary on the ag sector -- and I would say certainly the overall business there is down significantly.

  • While we have our new facilities and we continue to look for market share increases in Brazil as we go through 2015, those market share increases just are not going to offset the impact of the overall reduction in the industry.

  • And so again, those are some of the -- probably the major reduction quarter over quarter is what our expectation is in Brazil.

  • But a variety of overseas locations really have weakened, in our view, over the quarter.

  • So that's primarily what's driving that difference.

  • Eli Lustgarten - Analyst

  • But you're able to hold profitability?

  • Tony Huegel - Director of IR

  • Profitability has not -- as you look at that, profitability has not changed.

  • We're still forecasting the same 11% margin.

  • Okay?

  • Eli Lustgarten - Analyst

  • Thank you.

  • Tony Huegel - Director of IR

  • Let's move on to the next caller.

  • Thank you, Eli.

  • Operator

  • Next question comes from Nicole DeBlase of Morgan Stanley Investment Research.

  • Nicole DeBlase - Analyst

  • So my question is around the competitive environment.

  • I guess what are you guys seeing on the pricing front out there, both with respect to new and used equipment?

  • I think Vishal asked the question, but I'm not sure if that part of it got answered.

  • And then, not just ag, but also if you're seeing any increase in competitive pricing within construction?

  • Tony Huegel - Director of IR

  • Yes, competitive pressure certainly.

  • We talked about that with the ag and turf division, and it's not a surprise given the level of inventories that our competition has.

  • And as a reminder, we went into the year on large ag, as you look at inventory as a percent of sales, about half of where our competition was.

  • We continue to say, on large ag equipment, that our inventory levels are, as a percent of sales, about half of what the rest of the industry would be.

  • But certainly, that puts pressure, because those inventories need to come down and so you do see some pricing pressure.

  • There's a variety of methods that they may choose to use to do that, and certainly we continue to see that.

  • We talked about it last year in construction and forestry, both on our dealer sales as well as with the independent rental business, a lot of pricing pressure.

  • And I would certainly tell you, year over year, that pricing pressure has not reduced.

  • Now we still continue to forecast, even in that environment, a 2 point price realization; that's for the enterprise, but I would tell you both divisions are contributing to that, both ag and construction.

  • And so, while it's a tough environment, we continue to focus on bringing value to customers that enable us to get some of that price realization.

  • Nicole DeBlase - Analyst

  • Okay, thank you.

  • Tony Huegel - Director of IR

  • Thank you.

  • Next caller?

  • Operator

  • Next question comes from Rob Wertheimer of Vertical Research Partners.

  • Rob Wertheimer - Analyst

  • I'm trying to understand North American row crop inventory; and I totally get that the industry is twice as high as you, I do.

  • But industry dealer inventory, I think in units, is up year over year.

  • I think (inaudible) are up year over year in units for row crops specifically, and sales I think at retail are down like 20.

  • I'm trying to understand why isn't your inventory down?

  • Forgetting the industry is worse, why isn't your inventory down, because I thought everything was matched to a farmer?

  • So maybe there is just a pulse I'm not understanding or something like that.

  • And then how do you get to the down 40 if it seems like you're down 20 or less for the first six months?

  • Tony Huegel - Director of IR

  • So as you think about row crop tractors, I think the first thing to keep in mind is the data that's made public is 100-horsepower and above for AEM data.

  • And we would view, in terms of row crop tractors, that breakdown to be more 180- to 200-horsepower and above.

  • So when you look at the AEM data it gets clouded, because you have our 6000 Series tractors in those numbers; you have some of our 5000 Series tractors in those numbers and certainly those are tied much more closely to the livestock industry.

  • We talked about year over year seeing some strength in livestock, and so that does cloud that picture.

  • And I would point out, those 6000 Series tractors come from Germany.

  • And so, while we talk about building to retail order, that is on large ag.

  • So that would be our 7000s, 8000s, and 9000s, and that certainly is the case on those.

  • So I think that's part of what is causing maybe some of the confusion.

  • The other thing to keep in mind, too, is what's reported in AEM is what inventory the dealer owns at the end of the month and so you do get some distortion.

  • Not all of that is inventory or stock at the dealer.

  • You can have retail sold inventory -- or tractors that are marked as retail sold -- pounded in those numbers.

  • So from the day it ships from our factory until it's delivered to the customer, it does get reported as dealer inventory.

  • Again, that can distort things.

  • And I'd also caution any time -- and we talked about this for years -- to be very careful about looking at any single month.

  • And especially this year, as you look at year-over-year comparisons through the second quarter, remember last year our 7000 Series tractors and 8000 Series tractors were converting to final Tier 4. And so you had different levels of inventory as you prepared for that transition and certainly as you came out of that transition.

  • So it can distort the year-over-year comparison.

  • So we would continue to tell you, from a new inventory level perspective, we're quite comfortable.

  • In large ag we continue to have the lowest levels in the industry and that's not expected to change as we go through the year.

  • Now again, that being said, as we talked about earlier, we are underproducing retail, which we think will help lower inventories even further as we go through the year.

  • Raj Kalathur - SVP & CFO

  • Rob, this is Raj.

  • Let me add a couple of points.

  • So if you just step back, think of the industry environment we are facing, what we have done with respect to new and used inventories, we are facing, as you know, the deepest downturn in North American large ag equipment industry in 25 years.

  • And as Tony mentioned, we've been working on our both used and new.

  • Now on used combine volumes, our position today is less than where our used combine volumes were a year from now, a year before, and two years before.

  • So we have confidence that we will work down our row crop used inventory as well.

  • And as for the new row crop equipment sold to the corn and soybean producers in the US and Canada, we take the 7000 and 8000 Series tractors.

  • In the first half of this year, our shipments in the US and Canada came down with the decline in retail and a lot further, as well.

  • We actually undershipped retail sales by over 20% in the first half.

  • We are forecasted to undership retail for the second half as well.

  • So the point I'm trying to make is we are managing our inventories aggressively, while at the same time, and as Tony mentioned, keeping the long term in mind.

  • So thanks for the questions.

  • Tony Huegel - Director of IR

  • Next caller?

  • Rob Wertheimer - Analyst

  • Thank you.

  • Appreciate it.

  • Operator

  • Next question comes from Mike Shlisky of Global Hunter Securities.

  • Michael Shlisky - Analyst

  • I wanted to touch on Brazil as well, especially on your combine shipments.

  • Some of the data coming out, it sounds like your shipments were actually down quite a bit in the second quarter here.

  • But I was wondering if you could maybe comment on your Company's retail sales versus shipments in Brazil and whether they have been in line with your expectations for the quarter.

  • Tony Huegel - Director of IR

  • Actually, that's a good point.

  • When you think about the information that's available publicly in Brazil -- as a reminder, that is shipments, not retail sales.

  • While we certainly have continued to push for the industry to move to retail sales, others in the industry haven't been supportive of that change and so it can distort things.

  • We would tell you that certainly from a retail sales perspective, things are moving forward as we would have expect.

  • We continue to take market share.

  • It's showing I think even in the shipment numbers, but certainly from a retail sales perspective our market shares continue to grow in Brazil, especially on tractors.

  • And so we feel pretty comfortable with where we're at on inventories, as well as the retail sales from a market share perspective in Brazil.

  • Operator

  • Next question comes from Seth Weber of RBC Capital Markets.

  • Emily McLaughlin - Analyst

  • Good morning.

  • This is Emily McLaughlin on for Seth.

  • Just wanted to see if you guys had any update to some of the countries in Europe; are any better or worse than what you were thinking three months ago?

  • Tony Huegel - Director of IR

  • I think probably, if you look at Europe, maybe the most noteworthy thing is you're starting to see at least some glimmers of hope from just a general economy perspective in some countries.

  • As you look at the ag industry, we didn't change the overall outlook and I would tell you, from a country-by-country perspective, really not any kind of significant changes.

  • It's a year that's really moving forward fairly consistently with what we had anticipated early on.

  • So again, just not really much noteworthy in terms of a year-over-year change.

  • Emily McLaughlin - Analyst

  • Okay, great, thank you.

  • Tony Huegel - Director of IR

  • Next caller?

  • Operator

  • Next question comes from Larry De Maria of William Blair & Company.

  • Larry De Maria - Analyst

  • Just curious -- you guys have talked a lot about MyJohnDeere.com and JDLink over the last couple years.

  • How did the MyJohnDeere.com platform do this planting season?

  • Have they been collecting data from farmers?

  • Are they using it or blocking the data collection?

  • And related to that, how did the new high speed planter do this year into planting season versus expectations?

  • Thanks.

  • Tony Huegel - Director of IR

  • Unfortunately, I'll have to take just -- I'll take the first question.

  • As you think about the MyJohnDeere.com, certainly it is being used; things have gone well with that from our perspective.

  • Obviously, we continue to work with our customers to improve that process.

  • But it is online and it is gathering data, and I think that it's mostly being used, obviously, to gather prescription information and download into the machines, given that it's more planting season.

  • And certainly, we'll use that -- would expect customers to use that on the back half of the year as they gather harvesting information as well.

  • So, again, we think that it's off to a good start and feel pretty confident that's going to be a real value enhancer for our customers as we move forward.

  • Raj Kalathur - SVP & CFO

  • Larry, this is Raj.

  • I'll also add that we watch the metrics on MyJohnDeere.com, the number of crop acres and other things like that.

  • So far it's actually -- we are very encouraged by the results we are seeing.

  • Larry De Maria - Analyst

  • Okay, great.

  • Could you put some numbers to that in terms of acreage that it's being used on?

  • Tony Huegel - Director of IR

  • At this point we have not disclosed any kind of acreage that's covered or anything along that line.

  • Next caller?

  • Operator

  • Next question comes from Brian Sponheimer of Gabelli & Company.

  • Brian Sponheimer - Analyst

  • Just one clarification on the guidance, it's inclusive of the gain on the landscapes business, right?

  • The net income increase is inclusive of the gain on the sale?

  • Tony Huegel - Director of IR

  • On the sale of the insurance.

  • Brian Sponheimer - Analyst

  • I'm sorry, the insurance, rather, yes.

  • Tony Huegel - Director of IR

  • The crop insurance.

  • Brian Sponheimer - Analyst

  • Crop insurance, rather.

  • Tony Huegel - Director of IR

  • Yes, it is.

  • Brian Sponheimer - Analyst

  • I'm just curious about, from a planning -- what type of weather is really the base point for how you do your planning?

  • And what's the plus/minus and what would constitute a good year or a bad year as it relates to how you see the next 6 to 12 months shaping up?

  • Tony Huegel - Director of IR

  • Yes, I would tell you -- first of all, I want to make sure I point out, by the way, that gain was implied in our forecast last quarter as well for the year.

  • Brian Sponheimer - Analyst

  • Okay, thank you.

  • Tony Huegel - Director of IR

  • And so that wasn't necessarily a full change as we go into the rest of the year.

  • So the other thing -- at this point, you assume average weather, you assume trend yield until you get data that can potentially change that.

  • And so we would continue to use trend yield in our internal forecasting at this point, recognizing that you can certainly see variation from that.

  • We'll start adjusting that as we go through the summer and see weather develop.

  • Brian Sponheimer - Analyst

  • All right.

  • Thanks, Tony.

  • Tony Huegel - Director of IR

  • Thank you.

  • The next question will have to be the last question we can take for the call.

  • Operator

  • Your last question today comes from Brett Wong of Piper Jaffrey and Company.

  • Brett Wong - Analyst

  • Thanks for fitting me in here at the end, Tony.

  • Appreciate it.

  • Just wondering -- I understand there's a lot of uncertainty around what 2016 will look like, and if we do have a strong crop this year, pressuring a potential recovery.

  • What other levers can you pull in order to support margins?

  • Tony Huegel - Director of IR

  • Yes, certainly, we would continue to look at -- from a cash perspective, our CapEx would be one area we continue to look at, although we did pull that down quite a bit.

  • You continue to look at options with SA&G and R&D.

  • We've talked about when C&F went through their super-trough in 2009.

  • When you get into levels that you didn't anticipate, you tend to also find levers that you didn't necessarily anticipate.

  • And depending on the perspective, we kept R&D pretty flat year over year in our outlook and so that would be something you would continue to look at.

  • And that, as we've said all along, that's something you balance in terms of long-term needs.

  • That wouldn't be a necessarily desirable lever, but we would continue to look at those things that we could pull out as we go through the year.

  • But I would also point out, if you see a large incremental drop, that creates challenges given where our capacity, where our facilities are at today in terms of percent of capacity utilization.

  • But, again, we certainly, as we look at the outlook for next year, unless you're going to argue for better-than-average weather, it's hard to argue that you're going to see a significant drop in commodity prices, given the strength in demand that we continue to see on commodities.

  • So that would be one area I would make sure to remind people.

  • Okay.

  • With that, we will conclude the call.

  • I think that it important maybe to step back a little bit, too, and think about the year that we're forecasting.

  • As you look at our guidance for 2015, and put that in perspective -- in a historical perspective, as you look at what we're forecasting for equipment operations, net sales; as you look at what we're forecasting for cash flow from operations in equipment operations, as well as our EPS overall, it puts us in a top-five year in all three of those categories in terms of what this guidance provides.

  • And when you put that in context of where our largest business -- where the end markets went this year in terms of the significant crop, we think that's really demonstrating again the power of the overall portfolio, the strength of that SVA model, and our ability to continue to drive very solid earnings, even in lower end markets.

  • With that, we'll be around for the rest of the day to take any additional questions you may have.

  • Thank you for participating.

  • Operator

  • This does conclude today's conference.

  • All parties may disconnect at this time.