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Operator
Good morning, and welcome to Deere & Company First Quarter Earnings Conference Call.
(Operator Instructions)
I would now like to turn the call over to Mr. Josh Jepsen, Director of Investor Relations.
You may begin.
Joshua Jepsen
Hello.
On the call today are Raj Kalathur, our Chief Financial Officer; Ryan Campbell, Vice President and Corporate Controller; and Brent Norwood, Manager, 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 current outlook for fiscal 2018.
After that, we'll respond to your questions.
Please note that slides are available to complement the call this morning.
They can be accessed at our website at www.johndeere.com/earnings.
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 expressed written consent of Deere is strictly prohibited.
Participants in the call, including the Q&A section -- 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 Quarterly Earnings and Events.
Brent?
Brent Norwood
With the announcement of our first quarter earnings, John Deere has started out 2018 on a positive note.
Net income for the quarter was affected by upfront charges from U.S. tax reform legislation, which we believe will reduce the company's overall tax rate and be beneficial in the future.
Backing out this legislative change, adjusted earnings were $430 million on sharply higher sales.
We have increased our 2018 sales and adjusted net income forecast as a result of our confidence in present market conditions and in our ability to fulfill customer demand.
Now, let's take a closer look at our first quarter results in detail beginning on Slide 3. Net sales and revenues were up 23% to $6.9 billion.
For the quarter, Deere reported a net loss of $535 million or $1.66 per share.
During this period, the company incurred charges of $965 million related to recent U.S. tax reform legislation.
Excluding this charge, adjusted net income was $430 million or $1.31 per share.
The charges included an estimated onetime write-down of net deferred tax assets totaling $715 million.
Additionally, Deere incurred an estimated onetime charge of $262 million on the repatriation of foreign earnings, which will likely be paid out over the next 8 years.
Both charges were partially offset by a favorable reduction in the annual effective tax rate of $12 million.
On Slide 4, total worldwide equipment operations' net sales were up 27% to $5.974 billion.
Currency translation was positive by 3 points.
The impact of acquisitions was 5 points.
Turning to a review of our individual businesses, starting with Agriculture & Turf on Slide 5. Net sales were up 18% in the quarter-over-quarter comparison, primarily driven by higher shipment volumes and the favorable effect of currency translation.
For the quarter, Deere experienced increased demand across key markets.
Though sales gains were moderated by supply chain and logistic challenges, progress is already being made to address these issues and our suppliers and factories expect to catch up over the course of the year.
Operating profit was $387 million, up 78% from $218 million last year.
The increase was a result of higher shipment volumes and lower warranty expenses, partially offset by higher production costs.
Last year's results included a gain on the sale of SiteOne and costs associated with a voluntary employee-separation program.
Ag and turf operating margins were 9.1% in the quarter.
Excluding the impact of onetime adjustments such as the SiteOne gain and the voluntary employee-separation program expenses, incremental margins were 32% compared with the first quarter of 2017.
Before we review the industry sales outlook, let's look at fundamentals affecting the Ag business.
On Slide 6, despite increasing demand, global grain and oilseeds stocks-to-use ratios are forecast to remain at elevated levels in 2017 and '18 as abundant crops have offset strong demand around the world.
Corn, soybeans and stocks-to-use ratios are expected to decline in '17-'18 as global demand outpaces production.
Conversely, wheat's stocks-to-use ratio continues to increase to its highest level in almost 2 decades.
Slide 7 outlines U.S. farm cash receipts.
2018 farm cash receipts are estimated to be $372 billion, approximately 1% lower than 2017.
Crop cash receipts are projected to decline modestly as gains from oil crops are offset by declines in feed crops.
Receipts from livestock are expected to remain roughly flat year-over-year, with higher quantities compensating for price declines.
Lastly, government payments represent the largest year-over-year decline owing to lower guaranty prices in 2018.
Our ag economic outlook for the EU 28 is on Slide 8. GDP is expected to grow moderately for the year, though noneconomic and geopolitical risks remain elevated.
While overall arable farm margins remain slightly below long-term averages, conditions differ by region, with some areas, such as Northwest Europe, showing signs of improvement in 2018.
Margins for the dairy segment remain above long-term averages, though rising production may pressure prices throughout the year.
Sentiment remains positive for beef producers.
However, pork prices are weakening due to rising supplies.
Shifting to Brazil, on Slide 9. The chart on the left displays the crop value of agricultural production, a good proxy for the health of agribusiness in Brazil.
Ag production is expected to decrease about 2% in 2018 in U.S. dollar terms due to record production in 2017 and a revision to trend yields in 2018.
In local currency, the value of production is forecast to be down about 1%.
On the right side of the slide, you will see the eligible rates for ag-related government-sponsored finance programs.
While rates for Moderfrota remain at 7.5% for small and midsized farmers and 10.5% for large farmers, the grace period for financing was extended to 14 months in December.
This allows growers to capture 2 harvest seasons before making equipment payments.
This enhancement to financing terms demonstrates the government's ongoing commitment to agriculture and is driving continued improvement in farmer confidence.
Our 2018 ag and turf industry outlooks are summarized on Slide 10.
Industry sales in the U.S. and in Canada are forecast to be up approximately 10% for the year.
Despite range-bound commodity prices, the industry is experiencing stronger replacement demand for large equipment as customers express their equipment demand in terms of need versus want.
Replacement demand is reflected in the results of our combine early order program, which ended up in double digits from last year, and in the large tractor order book, which continues to run ahead of last year.
The EU 28 industry outlook is forecast to be up about 5% in 2018 as a result of above-average margins in dairy and livestock as well as improved outlooks in key markets such as France and the U.K.
In South America, industry sales of tractors and combines are projected to be flat to up 5% for the year.
This is being driven mainly by demand in Argentina, which continues to benefit from the favorable -- from favorable policy effects, strong fundamentals and pent-up demand.
Shifting to Asia, sales are expected to be relatively unchanged from 2017.
Turning to another product category.
Industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat to up 5% in 2018.
Deere expects to outpace the industry as a result of new product introductions.
Putting this all together, on Slide 11.
Fiscal year 2018 Deere sales of worldwide ag and turf equipment are now forecast to be up approximately 15%, including about 3 points of positive currency translation.
The Ag and Turf division operating margin is forecast to be about 13.5% for the year, up roughly 1 point from 2017.
This implies incremental margins of just under 35%, excluding the impact for onetime adjustments, such as the sale of SiteOne, the voluntary employee-separation program and the acquisition of Blue River Technology.
Now, let's focus on Construction & Forestry, on Slide 12.
Net sales were up 57% compared to the first quarter in 2017, primarily driven by strong demand for construction and forestry equipment as well as by the acquisition of Wirtgen, which closed on December 1 of last year.
Operating profit was $32 million, which included an operating loss for Wirtgen of $92 million.
The loss was attributable to the unfavorable effects of purchase accounting and acquisition costs.
C&F operating margins were 1.8% for the quarter, but 8.4% excluding Wirtgen.
Moving to Slide 13.
The economic indicators affecting the construction and forestry industries continue to be supportive of equipment demand.
GDP growth is forecast to be solid, continuing the positive trend seen in the U.S. and Canada through much of 2017.
Housing demand is growing, but sales remain constrained by supply due to 35-year low inventories for new and existing single-family homes.
Along with growing wages and job growth, these factors underpin our outlook for growing housing starts.
Single-family home -- single-family housing starts are strong across all regions in the U.S. Single-family homes require extensive earthmoving and lumber content, which are important drivers of earthmoving and forestry equipment.
In 2018, construction investment is forecast to grow 2.2%, up from the previous forecast of 1.4%.
The increase is being led by oil and gas and residential activity.
Oil prices are forecast to average above $58 a barrel for the year.
That's important because oil and gas-related construction activity tends to slow when oil prices are below $50, but picks up when prices are above that level.
In addition, machinery rental utilization rates continue improving and rental pricing continues to gain positive traction.
Deere's outlook is also reflected in a strong order book and positive trends in retail sales.
Moving to the C&F outlook, on Slide 14.
Deere's Construction & Forestry sales are now forecast to be up about 80% in 2018 as a result of stronger demand for equipment as well as the acquisition of Wirtgen.
The revenue forecast includes about $3.2 billion in sales attributable to the acquisition.
The forecast for global forestry markets is up about 5% as a result of improvement in sales in the U.S. and Canada and strong demand for cut-to-length products in Europe.
C&F's full year operating margin is now projected to be about 7.5%, which includes the negative impact of purchase accounting and acquisition costs from Wirtgen.
Excluding Wirtgen, C&F projects margins to be approximately 11%, which is up from our previous guidance of 10.5%.
For the full year in 2018, Wirtgen is expected to be operating profit-neutral as purchase accounting and acquisition expenses completely offset operating profit for the year.
On a stand-alone basis, Wirtgen is forecast to deliver operating margins between 15% and 16% in 2018.
Beyond 2018, operating margins are estimated in the 12% to 13% range, including purchase accounting adjustments.
Let's move now to our Financial Services operations.
Slide 15 shows the provision for credit losses as a percentage of the average owned portfolio.
At the end of January, the annualized provision for credit losses was 2 basis points, reflecting the continued excellent quality of our portfolios.
The financial forecast for 2018, shown on the slide, contemplates a loss provision of about 22 basis points, 3 basis points lower than our previous forecast.
This would put loss provisions for the year just below the 10-year average of 25 basis points and the 15-year average of 27 points.
Moving to Slide 16.
Worldwide Financial Services net income attributable to Deere & Company was $425 million in the first quarter versus $114 million last year.
For the full year in 2018, net income is forecast to be about $840 million, up from the previous forecast.
The higher results for the quarter and the higher full year forecast are primarily due to a benefit from the recent U.S. tax reform legislation and, to a lesser extent, a higher average portfolio and lower losses on leases.
Beyond 2018, effective tax rates for John Deere Financial are forecast to be between 24% and 26%.
Slide 17 outlines receivables and inventories.
For the company as a whole, receivables and inventories ended the quarter up $4.1 billion.
About $350 million of the change relates to currency translation.
In the C&F division, the increase is largely attributable to Wirtgen, while for Ag, the increase is due to higher sales as well as pipeline replenishment.
By the end of fiscal year 2018, receivables and inventories are expected to increase about $1.7 billion from 2017 levels driven by the inclusion of Wirtgen as well as the higher sales across the company.
Slide 18 shows cost of sales as a percentage of net sales.
Cost of sales for the first quarter was 78.8%.
Our 2018 cost of sales guidance is about 75% of net sales, unchanged from our previous guidance.
When modeling 2018, keep these unfavorable impacts in mind: higher production costs and higher incentive compensation costs.
On the favorable side, we expect price realization of about 1 point and a more positive product mix.
Now, let's look at some additional details.
With respect to R&D expense, on Slide 19, R&D was up approximately 14% in the first quarter.
Currency translation had an unfavorable impact of 2 points, while another 5 points related to the acquisitions of Wirtgen and Blue River Technology.
Our 2018 forecast calls for R&D to be up about 20%, with acquisition-related activities accounting for 9 points of the increase and currency translation for 1 point.
The balance of the R&D increase relates to strategic investments in large ag and precision ag that help drive growth for these key areas.
Moving now to Slide 20.
SA&G expense for the equipment operations was up 8% in the first quarter with acquisition-related activities, the voluntary employee-separation program and currency translation accounting for most of the change.
Our 2018 forecast for SA&G expense is up approximately 23%.
Excluding acquisition-related expenses, SA&G is forecast to be up about 2% in 2018.
Turning to Slide 21.
The equipment operations tax rate was 422% in the first quarter primarily due to the impact of recent U.S. tax reform legislation, as noted earlier.
For the remainder of the year, the effective tax rate is expected to be in the range of 25% to 27%, which implies a full year effective tax rate of approximately 62%.
Beyond fiscal year 2018, Deere's effective tax rate is projected to be between 25% and 27%.
On a long-term basis, recent tax reform legislation is expected to be beneficial to Deere's financial outlook.
Slide 22 shows our equipment operations history of strong cash flow.
Cash flow from equipment operations is now forecast to be about $4.4 billion in 2018.
The company's financial outlook is on Slide 23.
Second quarter equipment sales are forecast to be up 30% to 40% over last year.
Our full year outlook now calls for net sales to be up about 29%, which includes about 1 point of price realization.
Finally, our full year 2018 net income forecast is now about $2.1 billion.
Excluding the effect of the U.S. tax reform legislation, adjusted net income is forecast to be about $2.85 billion using a 29.5% tax rate, which assumes no tax reform impact.
I will now turn the call over to Raj Kalathur for closing comments.
Raj?
Rajesh Kalathur - Senior VP & CFO
Thanks, Brent.
Before we respond to your questions, let me share a few thoughts in the first quarter and our expectations for the rest of the year.
First, it's noteworthy that Deere closed the Wirtgen deal on December 1, representing the largest transaction in Deere's 181-year history.
Wirtgen has continued to perform in line with expectations since the purchase agreement was signed in May of last year.
Our teams are making good progress on the integration front and are working on synergy opportunities in the areas of sales, cost reduction and technology.
We are maintaining a positive outlook for the year, and the underlying fundamentals continue to be strong and Wirtgen's global order book shows a double-digit increase over 2017.
Though Wirtgen probably won't contribute to Deere's reported profits in 2018 due mainly to the effects of purchase accounting, it will make a meaningful cash contribution to our results over the course of the year.
Second, as the agricultural equipment cycle improves, it is being helped by a reduction in used-equipment inventories and by the impact of replacement demand driven by customers' need for new equipment.
Deere's Ag and Turf business is benefiting from this situation and is on track to deliver incremental margins in the 30-plus percent range for the year.
Now, this type of financial performance is particularly impressive considering the headwinds of material cost inflation and increased investments in R&D that we are planning.
Regarding our ability to meet demand, we are working closely with our suppliers and logistics providers as they adjust to present conditions.
We remain confident in our ability to fulfill customer demand over the course of the year.
That confidence is reflected in our increased financial guidance.
As noted, we have raised our sales forecast by 7 points to up 29%.
Our adjusted net income forecast has been raised to $2.85 billion versus $2.6 billion previously.
As a final note, we are encouraged by the improving outlook for equipment demand across our business -- across our businesses and look forward to delivering continued strong performance in 2018 and beyond.
Joshua Jepsen
Now, we're ready to begin the Q&A portion of the call.
The operator will instruct you on the polling procedure.
(Operator Instructions) Operator?
Operator
(Operator Instructions) Our first question today is from Jerry Revich from Goldman Sachs.
Jerry David Revich - VP
Raj, can you just build our confidence on the ability to ramp up with the supply chain?
Clearly, with the guidance increase, do you feel like there's been progress made over the past couple of months?
Maybe just give us some granularity in terms of how many key components you're monitoring today versus a couple of months ago and just give us some context in terms of how broad-based were the supply chain issues you mentioned and just more context on what's improving there would be great.
Rajesh Kalathur - Senior VP & CFO
Yes, Jerry.
The underlying issues are related to availability of labor and freight that you probably read about in the media in general, okay?
So if you think about the types of components that are being impacted, these are wiring harnesses, where there's a lot of labor required.
And with any such interruptions, essentially, with time, it gets better.
If you think about where we are coming from, from the lower levels of volumes we have had in '16 to up in the single-digit range and, now, we are ramping up even further in the high teens for our core business, that takes -- while a lot of suppliers have the physical capacity, it takes time for them to actually put the people in place and get them trained and have them working in a synchronized fashion.
So it's just a matter of time.
And as we know from the past, this takes a little bit of time.
That's why we said that we were confident enough to increase our full year forecast knowing fully well that this is going to be addressed over the second quarter and third quarter.
Josh?
Jerry David Revich - VP
So, it sounds like the second quarter -- just to be clear, Raj, the second quarter, you folks laid out a pretty wide range.
So, it sounds like based on your comment, though, you're confident that the performance improves in the second quarter?
Rajesh Kalathur - Senior VP & CFO
So, Jerry, most -- yes, performance improves substantially in the second quarter.
I'm going to say most of the catching up will be done and we are also having a substantial increase in the second quarter, all of those will be met, but there will be some elements that will go into the third quarter.
Okay?
Joshua Jepsen
Jerry, what I'd add there is there is significant amount of prioritization done there as you've got seasonal products that are more important to get out in Q2.
So, where we've been able to, we've flattened our production schedule to accommodate this demand.
And as Raj said, confident in our execution over the course of the year.
Operator
Our next question is from Timothy Thein from Citi Research.
Timothy Thein - Director and U.S. Machinery Analyst
Maybe, Raj, just your updated thoughts in terms of capital allocation.
And specifically as it relates to the dividend, the current rate of [240] basically implies like an $8 number based on your payout targets and yet you're on pace to generate earnings more than 10% higher than that.
So, maybe just an update specifically as it relates to the dividend and then maybe your capital allocation update more broadly.
Rajesh Kalathur - Senior VP & CFO
Okay, Tim.
Now, let me go overall.
Our cash flow from operations this year is going to be about $4.4 billion and this clearly brings your question in front.
Now, first, as we have said before, our focus in the first quarter was to meet all the requirements for a smooth working transaction.
The first quarter is also usually when our working capital cash requirements are the highest.
Now that we have managed through 1Q requirements, we can look at the next steps.
And next, we also talked about we'll look at opportunities with the U.S. tax reform.
So, we have time until we file our 2017 taxes, which will be due in late July or early August of 2018, to contribute to our pension plans and get a 35% deduction.
While we do not have any current requirement for pension contributions as our plans are well-funded, we're looking at this opportunistically and may consider some contributions in fiscal '18.
Beyond that, you're right, our cash use priorities remain the same in [mid-single A], which we think are some very good steps, our growth investments and dividends and repurchases.
But just like the dividends, Tim, to your question, we try to keep our dividends between 25% and 35% of in-cycle earnings.
And if you include the cash earnings from Wirtgen, yes, we will be below the 25% level.
So, this will receive considerable attention for the next few quarters from us.
So, from a share repurchase standpoint and, as you said before, it's an [essential] use of cash, and we are keen to ensure that we are adding value to our longer-term-minded investors with any share repurchases.
So on dividends, again, yes, it's something that we will be looking at very closely in the next couple of quarters.
Operator
Our next question is from Joe O'Dea from Vertical Research Partners.
Joseph O'Dea - VP
Could you talk about your views just on construction and forestry cycle?
When you look at the underlying legacy business ex-Wirtgen, you're setting up for a very strong year in 2018.
Just how you're thinking about that relative to where we've come from and then moving beyond that and whether some of the restocking this year push -- pulls forward a little bit of extra demand?
Joshua Jepsen
Yes, Joe.
When you think about C&F, I mean, obviously the underlying conditions continue to be very strong.
We're seeing that activity in our dealerships.
We're seeing it with the rental business and in what we look to rental utilization, which continues to be strong.
And really, when you step back and look at that inventory and receivable build in the C&F business, that's largely Wirtgen.
There's a small amount that is C&F-related.
So we're really, from a field inventory perspective, stepping up a little bit, but that's really coming off of what had been decade-long lows of field inventories that were drawn down pretty aggressively in '16 and then again in '17.
But I think as we look at the industry overall, continued strong demands across multiple segments, not just oil and gas, but also in the nonenergy-producing regions that continue to be attractive in driving investment in the business.
Rajesh Kalathur - Senior VP & CFO
And, Joe, I will add a couple of statistics for your benefit.
If you look at the orders you have gotten for the first 13 weeks of this fiscal year, it's about 40% higher than the same 13 weeks last year and our order bank will be almost double.
It's actually more than double where we were at this point last year.
So, very strong order book and order bank and very strong end market demand for these products.
Operator
Our next question is from David Raso from Evercore ISI.
David Michael Raso - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst
Just trying to reconcile, now we have the margin guide for the segments.
You're basically implying your segment operating profit is up about $1.1 billion year-over-year, but you're implying your net income is only up $700 million.
So, I'm trying to reconcile that gap -- or maybe $100 million from higher interest expense, but that's still about $1 billion on EBIT, but only $700 million on net income.
And even if you tax-effect it, we're still off here by a couple hundred million dollars, $0.60, $0.70 of earnings on the implied EPS.
So, can you reconcile that gap?
Why is that gap so wide all of a sudden between your EBIT growth and your net income growth?
Ryan D. Campbell - VP & Comptroller
David, it's Ryan.
A couple of things I'd ask you to think about is, one, it's early in the year and given all the challenges that we faced and while we still feel confident that we'll be able to work through the -- we're seeing some inflation headwinds and other things that are coming at us.
And so as we thought about $285 million as the pro forma net income number, we're contemplating all of those things in there.
So you might not be able to perfectly reconcile everything, but at this point in the year, given where we are and given all the things that we're seeing in the marketplace, $285 million is the number that we're comfortable with.
David Michael Raso - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst
No.
I appreciate that, but, I mean, you're not reflecting that in the segment guide.
So I'm just -- I mean, basically you're -- it looks like you're putting about 50 bps of cushion in your net income number of margin that you're not putting in the segment margin, right?
So I'm just -- so that's all basically as there's -- look, you have your thoughts on the segments and you kind of gave a little more of a conservative, how that rolls back down to the net income.
Is that a fair...
Ryan D. Campbell - VP & Comptroller
I'd say -- David, I'd say that's fair.
David Michael Raso - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst
Okay.
And lastly, real quick, sort of a plug-in, is that Wirtgen, what you're giving for second quarter sales guide and what you did in the first quarter guide, it implies a slowdown in the second half.
Like, basically, you're saying second quarter's $1.16 billion on revenue.
We know we have the first quarter now, so also on the back half, it's only run rating like $840 million, $850 million a quarter in revenue, a big step-down from 2Q.
Anything to be thoughtful on about that?
Or is that just you wanted to keep the full year working rev guide just sort of where it was and will update it later?
Ryan D. Campbell - VP & Comptroller
Yes.
So, we kept the full year of Wirtgen.
Keep in mind that for this quarter, there's only one month of Wirtgen activity and so we're forecasting 10 months this year of Wirtgen activity.
And so we really only have one month.
I would say that their business -- that you'll have a little bit of seasonality in their business starting at the beginning of the calendar year over the next few months, but essentially, there's nothing really to read into that.
We've kept Wirtgen consistent x currency and purchase accounting.
And just keep in mind, we've got 10 months this year.
David Michael Raso - Senior MD, Head of Industrial Research Team & Fundamental Research Analyst
No.
I hear you.
It's just the second quarter at $1.16 billion to all of a sudden dropping down.
That's all I was asking.
Operator
Our next question is from Jamie Cook from Crédit Suisse
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
A clarification and then just a question.
Just to be clear, your guidance -- your net income guidance of $2.850 billion does not assume the lower tax rate in the remaining year.
So is the real net income guide $3.065 billion?
And why aren't we assuming the lower tax rate in the remaining quarters?
And then just my second question, is there any way you can quantify how much the supply chain issues or production issues impacted the first quarter and what's implied for the rest of the year?
Brent Norwood
Yes, Jamie.
When you think about the tax rate, that $2.85 billion contemplates the 29.5%.
So you're right in that, the rest of your forecast is in that 25% to 27% range.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
Okay, but why aren't we assuming the 25% to...
Ryan D. Campbell - VP & Comptroller
Jamie, it's Ryan.
What we tried to do with the pro forma is keep it somewhat pure to kind of how we would have looked at the business if tax reform never happened.
So that produced the 29.5% that we calculated the pro forma with.
We came at 32%.
And there's been some discretes that have come through that now we're thinking 29.5%.
Certainly, as tax reform comes through, we're going to get a lower rate over time.
And if you then could see in the slides, where we're forecasting the lower rate.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
Okay, okay.
Yes, and then just a second question on the supply chain.
Like any impact -- can you quantify any impact to the quarter?
What's implied in the remaining 2 quarters, I guess?
Brent Norwood
Not a clear quantification, Jamie, but obviously, you see what -- from our guidance perspective what we expected to do on the top line in 1Q versus where we ended up.
That's really the driver of that miss.
And then as you look forward to the rate overall in terms of our sales, that's not -- that includes obviously the catch-up as well as what we're seeing from additional demand.
Rajesh Kalathur - Senior VP & CFO
So, Jamie, as Josh mentioned, we guided 38% in 1Q and end at 27%.
Can't think of all of it as -- almost all of it as cost by supply chain.
Because the end market demand is actually growing on us, not the other way around.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
Okay.
And just to be clear, I'm assuming the supply chain issues were all ag, right?
Rajesh Kalathur - Senior VP & CFO
It was on both sides.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
Both sides.
It -- was one more concentrate versus the other?
Rajesh Kalathur - Senior VP & CFO
I would say, you think of it as where would logistics make a bigger difference, where would labor availability make a bigger difference on a supply base.
You have to think about the type of supplier more than our segments with respect to where the impact was.
Okay?
Operator
Our next question is from Nicole DeBlase from Deutsche Bank
Nicole DeBlase
So forgive me if I'm just like, I'm completely confused by the way you guys are doing the net income guidance versus the tax rate issue.
So the pro forma 29.5% does not include any impact of U.S. tax reform., correct?
So your full year guidance, the $2.85 billion, essentially that increase that you had versus the $2.6 billion is coming completely from operations.
Is that fair?
Brent Norwood
Operations and just a little bit of tax.
Because in the original opening budget guidance, we guided to about a 32% tax rate.
Based on some discretes that have happened, that would have happened irrespective of tax reform, the number's 29.5%.
Nicole DeBlase
Okay.
And then, I guess, Wirtgen, you guys increased the ongoing operation margin guidance.
I think before, you were saying 11% to 12%, and now you're saying 12% to 13%.
So what's driving that?
Is that higher synergies over time?
Is it just that the underlying business is better than you expected?
What -- why is it higher?
Brent Norwood
No, we haven't baked in any synergies right now, although we're certainly confident that we're going to get them.
That's purely purchase accounting.
And so what you saw, Wirtgen, for this year, has a little bit of higher purchase accounting, driven by an increased step-up than what we expected to inventory.
Then that step-up increase in inventory which comes through the P&L this year, there's lower step-up related to amortization of intangibles.
So you see that on an ongoing run rate that, that amortization is lower.
So that's the only difference that you're seeing there.
Operator
Our next question is from Ann Duignan from JP Morgan.
Ann P. Duignan - MD
My question is around, maybe, if you could talk about the impact of tax changes, both to your own businesses as well as to maybe the way dealers will operate and farmers will operate.
Particularly, I'm thinking about the changes around the like-for-like assets and what that might do to purchasing patterns in the field?
Joshua Jepsen
Yes, Ann, when we -- obviously, from a company perspective, long term, this isn't official.
There are charges here that occurred in year 1, but long term from a Deere perspective, favorable.
As we think about customers, each individual customer and their situation is different.
We say by and large, this has been viewed favorably as we've talked to customers.
But every situation varies.
And I'd say, from a dealer perspective, it's very much the same.
As you get into some of the details, whether it's like-kind exchanges or 100% expensing, there are puts and takes.
It really varies on how their business is set up and how they operate.
So it's really hard to kind of broad-brush that with what does this mean for all customers, overall all dealers.
But generally, the feedback we've gotten so far is positive.
And I'd point out there's still revisions and components of this tax bill that are being written or contemplating changes; 199 is an example.
And as those play out, we'll have a better feel, but right now, we feel like generally positive.
Rajesh Kalathur - Senior VP & CFO
And with respect to -- just adding to what Josh said, if you think about the improvements in Section 179 that was good for the customers broadly.
Implying about like-kind exchange, but that's offset by 100% expensing.
it's a positive for the customers overall.
Other positives like in state taxes.
And if 199A stays as is, that can be a huge positive in terms of additional cash for our customers in the U.S. So we're always believe as long as the customers add more cash, that we think is beneficial to our business long term.
So generally, we feel this is positive broadly.
Ann P. Duignan - MD
Would you expect any changes in how purchasing decisions are made, maybe more purchases, less leasing?
Would that be a potential outcome?
And then I'll leave it there.
Joshua Jepsen
Yes, we think there could be a drive to more purchasing as there are more known benefits of purchasing, whereas in the past few years, there is uncertainty to the tax benefit of purchasing.
Particularly when 179, for example, was not being extended or is an annual basis.
Operator
Our next question is from Andy Casey from Wells Fargo Securities
Andrew Millard Casey - Senior Machinery Analyst
I was wondering if you could give a little bit more color on the R&D expense as a percent of sales.
It went up a couple of points.
You mentioned the large ag and precision ag projects.
Was that all of it?
Or was there something else in there?
Joshua Jepsen
No, that's right, Andy.
The -- really, the change there is related to some additional investments in R&D and really focused, as Brent pointed out, in precision ag and large ag.
We think [of it as] important as we think about looking forward to not only gain share but also drive margins.
Andrew Millard Casey - Senior Machinery Analyst
Okay.
And then on the inventory and accounts receivable outlook for ag and turf, and you had a big build in the quarter.
You explained that.
Now you're also looking for a $50 million reduction for the year, despite the strengthening markets.
How should we view that $50 million reduction?
Is that just pipeline fill at the end of the year in '17, carried through into Q1 and you expect to normalize?
Or how should we look at that?
Joshua Jepsen
Yes, I think we view it as really finishing relatively flat for the year.
And one thing to think about too at this point, we have less visibility out as we go further through the year and we start to do our spring seasonal EOPs and that kind of thing for our spring products.
That's when we have a lot more visibility into how that looks as you go 4Q into 1Q of the following year.
Operator
Our next question is from Rob Wertheimer from the Melius Research.
Robert Cameron Wertheimer - Founding Partner, Director of Research & Research Analyst of Global Machinery
Could you please just talk a bit about combine health, Early Order Program, et cetera?
And then I wonder if you could comment on whether there's, outside of turf, any market share gains built into your forecast?
Joshua Jepsen
Yes, as you think about the combine EOP, it did come in strong, so up double digits.
And that was on the back of what we saw up double digits on our spring seasonal products.
So I think continued strength there.
And then you see that build in our forecast from our net sales increase.
And really what we're seeing there is -- and it was mentioned earlier, but the replacement demand in the way that we're -- customers are talking about replacement demand and what's driving that and that's been a big question, what is driving replacement demand?
We're seeing that come through really a few different areas.
Wanting and feeling the need to upgrade technology, getting improved productivity and be able to hit shorter, whether it's planting, spraying or harvest windows, the warranty period and really staying within their warranty or the extended warranty and release overall comfort level with kind of where their machines at, I think as we've talked to dealers as they've done kind of winter off-season refurbishments, they've noted that this equipment has put more age on.
The further we get from those -- further away we get from those years of 2011, '12, '13 there's putting a lot more wear and tear and hours on that equipment.
So I think that's what's kind of manifesting itself here in some of this improved replacement demand.
And then outside of EOPs, our large tractor order book, year-over-year, were out, we're further ahead than we would have been last year on a higher schedule.
And so for example, if you look at 8R tractors, we're out 6 weeks further than we would have been last year.
9R tractors, booked wheel, for 8R wheel and 9R wheel would be out for 4 weeks.
So we've got quite a bit of strength there that we're seeing as a result of that.
Operator
Our next question is from Steve Volkmann from Jefferies
Stephen Edward Volkmann - Equity Analyst
I'm just kind of thinking conceptually here, I guess, you raised your top line organic guidance by about 5 points, but you kind of left the cost of goods sold flat in that scenario.
And is -- does that just reflect sort of the increased material cost and the increases in incentive comp?
Or how should I think about that?
Joshua Jepsen
Yes, I think that's fair.
You do have, as we talked about -- mentioned earlier, we've seen some favorable mix, which has been positive.
But then you do have the rising material costs as well as some freight costs that are impacting that.
And then to a lesser extent, incentive comp as well.
So, I think -- the way you laid that out is fair.
Stephen Edward Volkmann - Equity Analyst
Okay.
All right, fair enough.
And then, I'm sorry, I'm just struggling with this tax thing relative to what you're forecasting.
Does the model that you're giving us assume the 25% to 27% in 2, 3 and 4Q?
Ryan D. Campbell - VP & Comptroller
No, it does not.
This is Ryan.
It doesn't.
So the model that we have that produces the $2.85 billion is based on the 29.5% full year as if tax had not happened.
Stephen Edward Volkmann - Equity Analyst
All right.
But it did happen.
And so it's going to be in the 25% to 27% per year (inaudible) Q1.
Ryan D. Campbell - VP & Comptroller
That's right.
So, you could take -- I mean, if you were kind of thinking through what that would mean, take the 29.5% and put it down to the 25% to 27% range.
And then you'd get kind of the ongoing impact of that.
Operator
Our next question is from Mike Shlisky from Seaport Global.
Michael Shlisky - Director & Senior Industrials Analyst
It seems super important that you've got these issues with your logistics solved.
Like right now to kind of meet your sprayer and planter and other equipment shipments for the very early spring.
Can you kind of bucket for us, maybe, how far along are you inning-wise and getting these issues resolved?
And is there any risk of cancellations of orders that might not come back this year, if you don't have things to the -- kind of dealer and farmer on time?
Joshua Jepsen
Yes, I think at this point, Mike, we feel confident that we're going to meet -- we'll be able to meet this demand over the course of the year.
And again, to your point on time-sensitive things, that's where we're really focused on prioritizing and making sure those seasonal products, spring seasonal products, for example, that they take priority over other things that are -- their use season is further out.
So I think that's the focus, and I'd say we've been obviously working on that throughout the course of the first quarter and continue to, obviously, place a lot of time and resources to working through that.
Rajesh Kalathur - Senior VP & CFO
And, Mike, this is something that's impacting the industry broadly and not just us.
So it's something to factor in as well if you think about the demand, lost sales, et cetera.
Operator
Our next question is from Steven Fisher from UBS.
Steven Fisher - Executive Director and Senior Analyst
Within the 15% sales growth forecast that you have for the ag business this year, what assumptions do you have for small- and medium-duty ag versus the large ag?
And last quarter, you thought you were about 90% of mid-cycle overall with obviously a much earlier position in the large ag.
But it sounds like large ag is now advancing more.
So where do you think that metric falls out as you contemplate the end of 2018?
Joshua Jepsen
Yes, may be starting at kind of the latter part there.
When we think of kind of where we are from, say, a (inaudible) perspective, we'd say, we're closer, much closer to that mid-cycle number than we were a quarter ago.
Obviously, you've got the construction side above that and on the ag side below there.
So, I think that's -- we are continuing to see strength -- continued strength in this small-like business, which has really been strong for the last few years.
And then as you mentioned starting to see large ag grow.
And when you think about that, kind of in that framework, you still have large ag in North America well below mid-cycle and really much closer to our lower ends of what we would consider kind of the trough side, so lots of potential upside there as we come off very low levels.
Steven Fisher - Executive Director and Senior Analyst
And just to clarify and -- within the 15%, do you have anything assumed to be declining, like either on the smaller- or medium-duty side?
Joshua Jepsen
No, we would have -- we would see growth across all of those categories.
Rajesh Kalathur - Senior VP & CFO
So, most of the regions now, as we have shown in our forecast, are either flat or up and we would expect the small ag and large ag are both up.
And as Josh mentioned, if you take large ag on a worldwide basis, we are still well below what we would say mid-cycle.
If you take this large ag in North America and it's close to the trough that we talk about, and when we say trough 80%, 100%,120%, it's closer to the trough in terms of large ag in North America.
Thank you.
Operator
Our next question is from Mic Dobre from Baird.
Mircea Dobre - Senior Research Analyst
To a couple of questions earlier, you basically said you pretty much assume some conservatism below operating income versus what you've guided a segment.
Obviously on your tax rate, you're assuming that 29.5% rather than the actual rate.
When I am looking at the divergence between what you're guiding for operating cash, you're raising that by $600 million.
Your net income is raised by $250 million.
What I'm trying to understand is does that operating cash flow assumption in guidance embed those 2 other elements of conservatism?
Or is there something else that we need to be aware of here?
What's the divergence, $600 versus the $250?
Rajesh Kalathur - Senior VP & CFO
Yes, let me clarify in terms of how we get to the cash flow.
That might help you here, okay?
So if you look at our cash from operations last year, it was about $2.4 billion.
This year, we are saying it's going to be about $4.4 billion for the full year '18.
So the biggest component, of course, is the increase in net income on our -- on an adjusted basis, the pro forma.
It's about $650 million from last year to this year.
And then you have $300 million in additional dividends from John Deere Financial this year due to tax reform, okay.
And there's another $300 million on a pretax basis.
There's an OPEB contribution that we made at the end of 2017 fiscal year, okay.
And then there's about $200 million that was from SiteOne impact on net income last year that's not in income this year.
So, that actually is a better income this year than last year.
And then we also have included in that about $300 million in cash from Wirtgen, which is not in the net income numbers, okay.
So that gives you an idea of how we go from the $2.4 billion to $4.4 billion.
I think the same, the 50-50 forecast we have should apply on both sides, the income and cash flow.
Mircea Dobre - Senior Research Analyst
Right, Raj.
But I'm just talking about your -- the adjustment to your previously provided guidance for the year, the $400 million change.
That's what I'm interested in.
Rajesh Kalathur - Senior VP & CFO
Yes, that would be the net income increase and, of course, the additional dividends from John Deere Financial this year due to the tax reform.
So, those would be the 2 components and just the increase from our previous guidance till now.
Operator
Our next question is from Joel Tiss from BMO.
Joel Gifford Tiss - MD & Senior Research Analyst
Just -- can you talk quickly about the -- your ag, your maybe large ag shipments in North America versus the retail demand?
What -- how that shapes out for 2018?
Joshua Jepsen
Yes, Joel.
We're shipping -- or producing in line with retail demand on the large ag side by and large.
So no departure from kind of where we've been, where we ended 2017, producing that in line with demand, which is where we want to be and continue to be able to run at pretty lean field inventory levels.
Joel Gifford Tiss - MD & Senior Research Analyst
Okay.
Great.
And then on Wirtgen, can you just give us kind of the early read, purchasing synergies, sharing the footprint across their distribution in your existing and ability to move product into your existing dealerships and different things like that?
That can kind of help us understand behind the scenes some of the opportunities you might have longer term.
Joshua Jepsen
Yes, I think right now when we look at that, we -- we'd obviously -- and as we commented on earlier, Raj made the comment, that we're still early, but feel good about the synergies from a cost perspective and technology.
And then the -- definitely do you see opportunities from a sale side and really identifying those.
I think the approach there is going to be much more of a pull.
And when I say that I mean the Wirtgen sales organization's pulling the Deere product that it's the best fit for them and their customers into their channels and not a push of, "Here's our entire portfolio, take all of that now."
Rajesh Kalathur - Senior VP & CFO
And, Joel, to add to what Josh just said, we've set EUR 100 million in synergies over 5 years.
And a lot -- 90% of that was from the cost side.
We are still focused on that and confident we will do over that.
Now we're getting even more excited about some of the opportunities on the sales side, given Wirtgen organization is pulling some of these synergies now.
For example, in Mexico City, Wirtgen had a -- I mean, it goes both ways there.
In Mexico City, for example, Wirtgen had a dealer, and that's now possibly going to be our C&F dealer too.
In West Virginia, where they had a -- Wirtgen actually had a gap in their territory, we have a very strong dealer.
That dealer is going to take on the Wirtgen contract as well.
So the sale side is seeing some more momentum than we had and the technology side is another one that's -- some of the technologies we bring, especially on the ISG side, the engineer has been working side as field have very good potential, and they're pulling some of those types of synergies too.
Thank you for the question.
Operator
Our next question is from Seth Weber from RBC Capital Markets.
Seth Robert Weber - Analyst
I wanted to ask about pricing.
I think the first quarter was expected to be up 2%.
I think you came in around flat.
Is there anything you'd kind of highlight there?
And then your full-year guidance for up 1%, does that include positive pricing in both segments?
Joshua Jepsen
Yes.
So when we think about pricing, you're right.
We had forecast about 2%.
We came in about flat in the first quarter and some of this is just timing quarter-over-quarter and how this plays out.
I think importantly, as we think about the price, the full year remains at 1 point.
I think what we're seeing -- what we've seen impact us is we compensate our dealers based on their performance and their market share, and strong market share gains in 2017, when we reflect that into our plans for 2018, we've seen that move up, and that has played an impact.
But overall, we'd say that's really a positive thing because we're driving share gain.
Seth Robert Weber - Analyst
Okay.
And then just for the full-year guide, do you expect both segments to be positive?
Joshua Jepsen
So, what I would say is we're still seeing a very competitive environment in C&F and have not necessarily seen those pressures alleviate over the last quarter, still a very challenging market from that perspective.
Operator
And our next question is from Stanley Elliott from Stifel.
Stanley S. Elliott - VP and Analyst
A quick question.
I noticed that the government kind of construction investment piece took down a -- kind of moved down pretty significantly.
I would have thought that that's a big driver for the Wirtgen business, which you actually took up.
Could you kind of help talk around why there the lowered investment on the government side, and then kind of what's driving that outperformance for Wirtgen?
Joshua Jepsen
Yes, the Wirtgen change from $3.1 billion to $3.2 billion is just FX, no change to the underlying business there.
And that government investment is North America specific, which is from a Wirtgen perspective, the Americas are 25%.
So, it's not as material to the Wirtgen business as it would, say, to our C&F business, which is by and large, more North American.
So, I think that's probably the biggest disconnect.
If you think about how to connect those dots.
Operator
And our final question today is from Jerry Revich from Goldman Sachs.
Jerry David Revich - VP
Can you talk about -- in Brazil, there's been a regulatory changeover within the past year.
Can you just comment on how that impacted your production schedule in calendar '17, and how you expect the production ramp to look over the course of '18?
Joshua Jepsen
Yes.
So it's -- the emissions change happened last January.
And really, in leading up to that, we didn't necessarily build inventory ahead of that.
We were building -- as you may recall November, December, there was strong demand.
We were seeing the early stages of the recovery there.
So, we were really building just to meet demand at that point.
So, we didn't have a significant overproduction that we then bled off.
I'd say we built that pretty much in line, or as close to in line as we could, based on the strong demand.
And I think as you -- as we go into this year, we'd see, I think, more of the same there, in terms of our plans.
There have been -- there was the -- as Brent mentioned, the grace period got extended from 12 months to 14 months from the FINAME financing.
That took effect in January but was announced earlier.
So, you did see a bit of a pause in terms of retail activity, as folks could wait a few weeks in order to get that 2 months of additional grace period.
But we don't feel like that changes or shifts at all the actual underlying demand economics for the farmers continue to be strong, so we feel very positive there.
Rajesh Kalathur - Senior VP & CFO
Thank you.
Joshua Jepsen
All right, well that wraps up our call today.
We appreciate everyone's participation and will be available for any calls or questions.
Thank you.
Operator
Thank you.
And this does conclude today's conference.
You may disconnect at this time.