使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good morning, and welcome to John Deere & Company Second Quarter Earnings Conference Call.
(Operator Instructions) I'd now like to turn over the call to Mr. Josh Jepsen, Director, Investor Relation.
Thank you.
You may begin.
Joshua Jepsen
Thanks, Angela.
Hello.
Also on the call today are Raj Kalathur, our Chief Financial Officer; Max Guinn, President of the Construction & Forestry Division; Ryan Campbell, Vice President and Comptroller; and Brent Norwood, Manager, Investor Communications.
Today we'll take a closer look at Deere's second quarter earnings, then spend some time talking about our markets and 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 on 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 session, agree that their likeness and remarks in all media maybe 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 may include financial measures that are not in conformance with accounting principles generally accepted in United States of America, 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 Norwood
Today, John Deere reported higher earnings for the second quarter.
It was another strong performance, helped by a broad-based improvement in market conditions and a favorable customer response to our innovative products.
Farm machinery sales are making solid gains in markets throughout the world, while construction equipment sales continue to move sharply higher.
Now let's take a closer look at our second quarter results in detail beginning on Slide 3. Net sales and revenue were up 29% to $10.72 billion.
Net income attributable to Deere & Company was $1.208 billion, or $3.67 per share.
The results for the quarter included a favorable net adjustment to provisional income taxes of $174 million.
Excluding this item, adjusted net income was $1.034 billion.
On Slide 4, total worldwide equipment operations net sales were up 34% to $9.747 billion.
Currency translation was positive by 3 points.
The impact of acquisitions was 12 points.
Turning to a review of our individual businesses, starting with agriculture and turf on Slide 5. Net sales were up 22% in the quarter-over-quarter comparison, primarily driven by higher shipment volumes and the favorable effect of currency translation.
Operating profit was $1.056 billion, up 27% from the same quarter last year, excluding the impact from the sale of SiteOne.
Operating margins for the quarter were 15%.
Results benefited from higher shipment volumes, partially offset by higher R&D as well as increases in production costs, comprised largely of higher freight and material costs.
It's also important to note that over the quarter, Deere has made progress addressing supplier and logistics challenges, ensuring that products reach customers in a timely manner.
Before we review the industry sales outlook, let's look at fundamentals affecting the ag business on Slide 6. Corn and soybeans stocks-to-use ratios are expected to decline in response to increasing global demand and drought conditions in Argentina, which have lowered the country's corn and soybean production by roughly 25% and 33%, respectively.
While wheat stocks-to-use ratio remains close to its highest level in almost 2 decades, stocks are projected to decline modestly in 2018.
Slide 7 outlines U.S. farm cash receipts.
2018 farm cash receipts are estimated to be $375 billion, roughly flat with 2017.
Rough cash receipts are projected to be on par with last year as increased commodity prices are partially offset by lower forecast production.
Receipts from livestock are also flat due to strong domestic and export demand, offset to an extent by growing supply and lower prices.
While global trade concerns weigh on farmers, overall sentiment is holding as commodity prices move upward and equipment demand shows broad-based improvement.
Our ag economic outlook for the EU 28 is on Slide 8. Despite a late start to the season, crops are in fair condition, and the crop value of production is expected to increase in 2018.
Overall, arable farm margins remain slightly below long-term averages, although conditions differ by region.
Some areas, such as Northwest Europe, are showing signs of improvement in 2018.
Margins for the dairy segment remain above long-term averages, though rising production may pressure prices later in the year.
Shifting to Brazil on Slide 9. The chart on the left displays the value -- displays the crop value of agricultural production, a good proxy for the health of agri business in Brazil.
The value of ag production is now expected to be about the same as last year, with a record soybean harvest being partially offset by soft sugar prices.
On the right side of the slide, you will see eligible rates for ag-related government-sponsored finance programs.
Rates for Moderfrota through June are shown below and are less favorable than the prevailing policy interest rate for the region.
However, customers are anticipating lower rates in July, and therefore, shifting purchases into the second half of the year.
This shift in sales is evident in a strong order book, which is up from last year.
While the 2017-'18 season began with soft industry fundamentals, farmer confidence has increased dramatically for the second half of the season, as corn and soybean margins have benefited from rising commodity prices, record production and favorable FX movements.
Our 2018 ag and turf industry outlooks are summarized on Slide 10.
Industry sales in the U.S. and Canada are forecast to be up approximately 10% for the year.
Replacement demand continue to drive sales as customers cite the need for increased productivity, updated technology and equipment within its warranty period.
Replacement demand is reflected in the results of our 2018 combine Early Order Program, which increased by double digits from the previous year.
Similarly, our large tractor order book now extends into October.
The EU 28 industry outlook is forecast to be up about 5% in 2018, unchanged from previous guidance.
In South America, industry sales of tractors and combines are projected to be flat to up 5% for the year.
This is primarily driven by strong industry fundamentals in Brazil, which is offsetting weakness in Argentina caused by drought conditions experienced in the first half of the year.
The region as a whole continues to deliver excellent operating results, as Deere extends its market-leading position and achieves strong financial performance.
Shifting to Asia, industry sales are expected to be relatively unchanged from 2017, though strong demand for tractors in India is driving improved results for the region.
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.
Putting this all together on Slide 11, fiscal year 2018 Deere sales of worldwide ag and turf equipment are now forecast to be up about 14%, including about 1 point of positive currency translation.
The ag and turf division's operating margin is forecast to be about 12.5% for the year, up roughly 2 points from 2017, after excluding the gains on the sale of SiteOne.
Importantly, the impact of higher freight and material cost is being addressed through continued structural cost reductions and future pricing actions.
Now let's focus on construction and forestry on Slide 12.
Net sales for the quarter were up 84% compared with last year, driven by strong demand for construction and forestry equipment as well as by the acquisition of Wirtgen, which closed on December 1 of 2017.
Second quarter operating profit was $259 million, benefiting from higher shipment volumes as well as the inclusion of Wirtgen.
However, Wirtgen's overall profit contribution has been limited due to the unfavorable effects of first year purchase accounting associated with the transaction.
C&F operating margins were 9.6% for the quarter, but 12% excluding Wirtgen.
At this point, I'd like to welcome Max Guinn, President of Deere's construction and forestry business, to the call.
He will provide comments on the conditions in C&F and an update on the Wirtgen acquisition.
Max?
Max A. Guinn - President of Worldwide Construction & Forestry Division
Thank you, Brent.
Good morning, everybody.
We're on Slide 13.
Let me start off by saying the economic environment for the construction, forestry and roadbuilding industries looks good, and it continues to support increased demand for new and used equipment.
For the year, U.S. GDP is forecast to grow at 2.7%.
That's above the 20-year average.
Meanwhile, housing demand remains solid with housing starts expected to be 1.3 million units for 2018.
That's a result of inventories of new and existing homes that are available for sale being at 36-year lows that provides the foundation for continued growth in new home construction.
In 2018, construction investment is forecast to grow 2.9%, led by increased activity in oil and gas and by residential construction.
Oil prices, we had forecast to be $63 a barrel for the year.
That's a price that's comfortably above breakeven economics for U.S. shale oil producers, and it supports continued drilling and production growth.
Obviously, prices have progressed further and faster than we expected, so we're likely going to update that forecast.
That's good news though.
In addition, machinery rental utilization rates continue improving and rental pricing is gaining positive traction.
These positive economic factors are also reflected in a strong order book and resulting in significant orders that are already being placed for 2019.
So let's move to Slide 14 and an update on the newly acquired Wirtgen Group.
Wirtgen is the global leader in road construction equipment.
The acquisition greatly enhances Deere's exposure to global transportation infrastructure.
That's a segment we view as faster growing and less cyclical than the broader construction market.
Global transportation investment this year is forecast to grow 6%, driving increased demand for road construction equipment, such as milling machines, rollers and asphalt pavers.
Those are all products in which Wirtgen maintains a market-leading position globally.
Importantly, transportation spending in -- is solid in core regions such as the U.S. and Europe and continues to see double-digit growth in China and India.
Both of those are key growth markets for Wirtgen due to a market-leading position.
Turning to company performance.
Wirtgen continues to meet our high expectations through its relentless focus on market share and operating excellence.
The current order book is very strong.
Operating margins are expected to exceed 16% when excluding the impact of purchase accounting.
Integration is well underway with the joint Deere Wirtgen team working towards the synergy target of EUR 100 million by 2022.
I'm pleased to see -- to say that we see a clear path to achieving that level of savings and that timing.
And obviously, we'll continue to seek out other value-enhancing opportunities as integration activities continue.
As we learn more about Wirtgen's business, we are increasingly finding opportunities to leverage the 2 distribution channels.
Just 2 examples, in the U.S., Deere's channel was able to fill a coverage gap for Wirtgen in West Virginia, while the opposite was true in a Mexico City territory.
We anticipate further opportunities to leverage the 2 channels as integration progresses.
For fiscal year 2018, Wirtgen is forecast to produce $3.2 billion in revenue.
Remember, that represents 10 months of ownership.
Additionally, we now project that Wirtgen will contribute $100 million in operating profit for the year, even with the unfavorable impact of acquisition cost and purchase accounting.
Importantly, Wirtgen is generating strong positive cash flow in the current fiscal year.
Beyond 2018, Wirtgen operating margins are estimated to be in the 13% to 14% range, and that includes purchase accounting adjustments.
So finally, I want to shed a little light on what things look like for the overall C&F business for the rest of the year.
We're moving to Slide 15.
Deere's construction and forestry sales are now forecast to be up about 83% in 2018 as a result of stronger demand for equipment as well as the acquisition of Wirtgen.
As we said earlier, the revenue forecast includes about $3.2 billion in sales attributed to the acquisition.
The forecast for global forestry markets is up 10% as a result of improvement in sales in the U.S. and Canada and strong demand for cut-to-length products in Europe and Russia.
C&F's full year operating margin is now projected to be about 8.5%.
That includes the negative impact of purchase accounting and acquisition cost from Wirtgen.
Excluding Wirtgen, C&F projects operating margins to be about 11%.
That operating profit guidance is partially driven by pricing actions that we're taking now and will take effect in the second half of the year.
We expect to offset material cost inflation and allow for continued margin growth in future quarters.
I'll turn it back over to Brent.
Brent Norwood
Let's move now to our financial services operations.
Slide 16 shows the provision for credit losses as a percentage of the average owned portfolio.
At the end of April, the annualized provision for credit losses was 9 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 21 basis points, 1 basis point lower than our previous forecast.
This will put loss provisions for the year just below the 10-year average of 25 basis points on the 15-year average of 27 points.
Moving to Slide 17.
Worldwide financial services net income attributable to Deere & Company was $104 million in the second quarter, roughly flat with last year.
The results for the quarter included $33 million of net tax reform-related charges arising from the remeasurement of deferred tax assets and deemed earnings repatriation.
For the full year in 2018, net income is forecast to be about $800 million.
Excluding the impact for the previously mentioned tax reform-related items, adjusted net income is forecast to be $571 million.
Beyond 2018, effective tax rates for John Deere Financial are forecast to be between 24% and 26%.
Slide 18 outlines receivables and inventories.
For the company as a whole, receivables and inventories ended the quarter up $4.8 billion.
About $200 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.
By the end of fiscal year 2018, receivables and inventories are expected to increase about $2 billion from 2017 levels, driven largely by the inclusion of Wirtgen as well as the higher sales across the company.
Slide 19 shows cost of sales as a percentage of net sales.
Cost of sales for the second quarter was 75.2%.
Our 2018 cost of sales guidance is about 76% of net sales, up 1% from previous guidance.
When modeling 2018, keep these unfavorable impacts in mind: higher production cost, such as freight and material cost, and higher incentive compensation cost.
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 20, R&D was up 28% in the second quarter.
Currency translation had an unfavorable impact of 2 points, while another 10 points is 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 activity 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 21.
SA&G expense for the equipment operations was up 24% in the second quarter, with acquisition-related activities, incentive compensation and currency translation accounting for most of the change.
Our 2018 forecast for SA&G expense is up about 18%.
Excluding acquisition-related expenses, SA&G is forecast to be up about 2% in 2018.
Turning to Slide 22.
The equipment operations tax rate was 8% in the second quarter, primarily due to the favorable adjustment of $207 million arising from tax reform-related net deferred tax asset remeasurement and deemed earnings repatriation.
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 about 56%.
Beyond fiscal year 2018, Deere's effective tax rate is projected to be between 25% and 27%.
Slide 23 shows our equipment operations history of strong cash flow.
Flow from the equipment operations is now forecast to be about $3.8 billion in 2018 compared to previous guidance of $4.4 billion.
The decrease in forecast relates to an anticipated payment of $1 billion towards pension and OPEB liability net of taxes.
The company's financial outlook is on Slide 24.
Third quarter equipment sales are forecast to be up approximately 35% compared with the same quarter last year.
Our full year outlook now calls for net sales to be up about 30%, which includes about 1 point of price realization and 1 point for positive currency translation.
Finally, our full year 2018 GAAP net income forecast is now about $2.3 billion.
The full year net income forecast includes charges of $803 million resulting from tax reform-related net deferred tax asset remeasurement and deemed earnings repatriation.
Excluding the impact of these items, adjusted net income is forecast to be about $3.1 billion.
It is important to note the previous adjustment -- the previous adjusted net income guidance of $2.85 billion excluded the benefit of the lower tax rate in order to compare to our opening budget guidance given in November of 2017.
This quarter's guidance only excludes the remeasurement of deferred tax assets and deemed earnings repatriation, but includes the benefit of the ongoing lower tax rate.
I will now turn the call over to Raj Kalathur for closing comments.
Raj?
Rajesh Kalathur - Senior VP & CFO
Before we respond to your questions, let me share a few thoughts on the second quarter and our expectations for the rest of the year.
First, important to note, we are seeing strong demand across geographical region for both ag and turf and C&F divisions.
Replacement demand continues to drive equipment sales in large ag as customers express their need for increased precision and productivity enabled by our latest technologies.
For C&F, as you heard from Max, on economic indicators such as GDP growth, housing starts and rising oil prices are generating robust equipment demand, which is reflected in a healthy order book for the remainder of 2018 stretching into 2019.
Second, although the economic environment is largely positive for demand, there are some supply-side headwinds to overcome.
Material and freight costs have exceeded our forecast for the year, due largely to inflation in U.S. steel prices and a tight market for logistics providers.
As Max indicated, we are executing pricing actions for the C&F business that will take effect over the remainder of the year.
Importantly, these actions should cover material inflation projected for the C&F division.
For ag and turf, we generally utilize early order programs for seasonal equipment and an advanced order book for our large tractor products.
Orders are typically backed by retail customers.
As a result, we typically implement price increases on an annual basis and have a strong history of price utilization over an extended period.
As we set prices for the next model year, we will take into consideration not only the additional value that we bring to our customers, but also overall market conditions, including inflationary pressures.
At this time, we are confident that our actions, both in making structural cost reductions and in model year '19 prices, will more than offset inflation through 2019.
Lastly, the strong levels of demand we're experiencing across our 2 equipment divisions will result in excellent cash flow generation for the year.
Note that we have resumed share repurchases in the second quarter.
We also anticipate funding our pension and OPEB liabilities up to $1 billion over the course of the third quarter in order to take advantage of the previous tax rate of 35%.
Additionally, it's our desire to maintain a dividend payout ratio that targets 25% to 35% of mid-cycle earnings and can be sustained through the cycle.
Based on our performance in the previous cycle and the inclusion of Wirtgen, further dividend increases will be under consideration during the remainder of this year.
Overall, we are encouraged by the outlook for improving demand in 2018, and we'll continue to work on delivering strong results for the remainder of the year.
Josh?
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) As a reminder, Max Guinn, President of C&F, is here with us available for questions as well.
Operator?
Operator
(Operator Instructions) Our first question comes from Jamie Cook with Crédit Suisse.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
I guess, 2 questions.
One, Raj, I was hoping that you could elaborate a little more on the supply chain issues in the quarter in terms of were they the same issues versus last quarter?
And what's embedded in the guide for the remaining back half of the year?
And then my second question is sort of longer-term thinking about margins in the ag business.
I mean, it sounds like based on what you're saying, given you're going after pricing actions inflation and assuming the market hold up, should we still -- as we look past the next 2 quarters, should we still be able to generate above-average incrementals for the ag business, given we're still well below normalized levels?
Rajesh Kalathur - Senior VP & CFO
Jamie, I think we'll take the second one first.
We do anticipate strong margins going into the future in ag.
So none of that has changed, okay?
So it is -- the constraints we are facing are more short-term.
And as we described, it's purely steel inflation and also logistics inflation.
With respect to your question on supply issues, it's actually improved very nicely.
Availability issues are less of a concern now than it was just a couple of months back.
Joshua Jepsen
Yes.
The only thing I'd add there is, we saw our most significant issues we experienced really in the February time frame.
And we've seen improvement since there as we continue to x-ray -- execute and get product out to dealers and customers.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
But my question is, do the supply chain issues constrain your top line at all, I guess, for the back half of 2019?
That's what I'm trying to figure out.
Joshua Jepsen
No.
I think when you look at that, we've actually -- you think about both of our divisions, you saw volume actually improved slightly from the previous guidance.
Operator
Our next question comes from Jerry Revich with Goldman Sachs.
Jerry David Revich - VP
I'm wondering if you can talk about how much of the annual raw material cost inflation did we see play out in the second quarter because of the standard cost accounting?
Can you just give us a rough sense of what proportion of the full year inflation we recognized in 2Q versus what's expected in the back half?
And can you just flesh out the drivers of the better incremental margins in the back half?
I'm assuming it's the -- standard cost accounting is a big driver, but maybe you can expand on that a bit more for the ag and turf business.
Joshua Jepsen
Yes.
Thanks, Jerry.
I think when you think about ag and turf, in the second quarter, it was more of an impact of freight.
So as we were trying to make sure we were getting products out to our dealers and customers, we had higher levels of freight -- premium freight, expedited freight as we're working through some of those supply issues.
And when you pivot to the back half of the year, that's when you start to see the material come through more so.
So it's a combination.
I'd say, second quarter was more freight, the back half of the year, you see more on the materials side.
As you think about the margins for that business, the second half of the year for ag and turf does have more large ag than we typically would have in a usual year or a typical year.
As a result of that, you see better margins, and you also see improved pricing as a result of more large ag in the second half.
So that is favorable.
Jerry David Revich - VP
And Josh, sorry, just a clarification.
On the premium freight in 2Q, why are we assuming there's no premium freight in the back half?
Have you already seen premium freight down significantly since quarter-end?
Can you just flesh that out, please?
Joshua Jepsen
We do expect to see elevated freight, and it's really as a result of demand and rates moving up.
So we have that in there as well.
I'd say in the back half, you got more weighted to material than freight though.
Operator
Next question comes from Mig Dobre with Baird.
Mircea Dobre - Senior Research Analyst
Want to talk a little bit about Wirtgen, if we can.
A couple of things.
I'm trying to understand within SG&A exactly, what is this reduction in cost from acquisition-related activity?
And how does this all relate to your increased profitability guidance for Wirtgen?
Joshua Jepsen
Yes.
So when you think about SA&G, really, as we're incorporating that into our business, you have a little bit of movement amongst those where those costs are classified.
So largely, that's really adjusting and making changes to their forecast as we incorporate them into our process.
As you think about the improvement from 0 operating profit to about $100 million, it's about 2/3 related to purchase accounting changes and adjustments and about 1/3 related to operational performance.
So there is some improvement in the underlying business, but the majority is adjustments to purchase accounting.
Operator
Next question comes from Adam Uhlman with Cleveland Research.
Adam William Uhlman - Partner & Senior Research Analyst
I was wondering if we could circle back to the pricing commentary for ag and turf.
It sounds like large tractors are -- lead times are already out to October.
So you would have to be putting in some price increases here pretty soon.
Could you maybe talk through the magnitude of the increases that you're considering at this point?
And maybe just flesh out like how much incremental productivity, material cost savings that you think that you would also have to offset higher steel costs next year.
Joshua Jepsen
Yes.
So on the pricing side, as we think about model year '19, we do have -- we'll start Early Order Programs here in a few weeks for seasonal products.
So planters, sprayers, those type of things will come out.
As we think about pricing, it's pretty early to talk about in general -- in total what we think that's going to be, varies product to product.
Given where we're at in the year, we do, as Raj mentioned, expect the pricing that we are going to take for 2019 to be more than offsetting the inflationary pressures we're seeing in '18 and '19.
Adam William Uhlman - Partner & Senior Research Analyst
Do you think you need more than the 2% that you're guiding to for the second half of 2018?
Joshua Jepsen
I think it's fair to assume that our -- what we've done the last few years, we're going to be higher than that as a result of that.
Operator
Next question comes from Joe O'Dea with Vertical Research.
Joseph O'Dea - Principal
Raj, you commented on dividend under consideration and increases there.
With respect to just how strong the cash balance is now and the strength, what do you need to gain a little bit more comfort on stepping up on the repurchase front?
Rajesh Kalathur - Senior VP & CFO
Okay.
So our cash use priorities have not changed.
They are the same.
One of the things we said earlier is, we are taking advantage of the 35% tax rate, which will not last after fiscal 2017 tax filing, okay?
So that's the pension, OPEB.
And otherwise, it's a mid-singly growth investments with organic, inorganic and dividends and finally share repurchases.
That's the priority order that we have articulated and we work towards.
On the dividends, like you said, we are looking at 25%, 35% of mid-cycle earnings.
We have seen -- given the strong performance we have seen in the recent downturn and considering the growth we anticipate in the future, that's under consideration.
Increasing dividends is under consideration.
Share repurchases, which is your question, is a residual use of cash, and you will notice that we did start buying back shares.
And generally, we think about longer-term-minded investors and the value it brings to longer-term-minded investors.
So you'll see us buy back more shares when there is a larger gap between the intrinsic value of a short-term-minded investor versus a longer-term-minded investor, okay?
So we have, of course, as you mentioned, ample firepower in terms of the cash generation that we're going to have this year.
And going forward, do all of our cash priorities justice.
Operator
Next question comes from Rob Wertheimer with Melius Research.
Robert Cameron Wertheimer - Founding Partner, Director of Research & Research Analyst of Global Machinery
Just a quick question on Wirtgen.
It seems you took up sales outlook for construction, not for Wirtgen.
Is there any reason that those products shouldn't follow the heavy construction industry?
Is there any destock you're doing or anything else you're doing in that?
And what explains it otherwise?
Max A. Guinn - President of Worldwide Construction & Forestry Division
No.
There's nothing to be read into that, I don't believe.
I mean, we think the initial forecast we provided is solid and it does reflect considerable growth in Wirtgen's business, and they're executing quite well.
Joshua Jepsen
Yes.
Only thing I'd add there, Rob, too, as if we look at the backlog, backlog is up double-digit strong.
And again, that's off of what was a very strong 2017 as well.
Operator
Next question comes from Ross Gilardi with Bank of America Merrill Lynch.
Ross Paul Gilardi - Director
I first wanted to ask about that -- the pension contribution, the $1.1 billion.
I mean, given that you did that partly to take advantage of the higher tax rate, should we assume $1 billion bump to cash flow from ops next year?
Because I'd imagine that the contribution wouldn't be as large.
And then can you just talk a little bit about -- like the persistent weakness we've seen in the AEM data for tractors of 100 horsepower and above.
I know you guys classify high-horsepower tractors as 200 and above.
So I'm wondering if that weakness we keep seeing in the data is really more in the midsize segment, which is less of a driver for you.
Rajesh Kalathur - Senior VP & CFO
Yes.
I'll take the first one.
In terms of the $1 billion in pension, OPEB, yes, it's clearly opportunistic and taking advantage of that 35% tax rate.
We have said our pension plans are well funded.
They do -- we do not have any mandatory contribution requirements.
And this is -- you can think of this as pulling forward some of our pension contributions into this year to take advantage of 35%.
So in that perspective, you should not see this continue in the next year and so on, unless we see another opportunity to take advantage of by giving you some high returns.
Otherwise, it's going to be working capital requirements and sales growth.
Those are the types of things that will impact the cash flow, as you know.
Ryan D. Campbell - VP & Comptroller
Maybe just -- this is Ryan, maybe just to add to that.
On the $1 billion, the impact to operating cash flows this year is net of tax.
And so that's $650 million.
So it's the $1 billion minus the 35% rate that we'll get the deduction on that.
Joshua Jepsen
Yes.
Related to AEM, I think you're right.
100 plus is a very large category.
So you're talking utility tractors, midsized tractors and then large row-crop tractors.
So the mix there is wide when you think about what portion is high horsepower.
I'd say, month-to-month, this can be lumpy.
We've certainly seen weather and timing be adjusted.
As we look at this, particularly the rest of the year, we're confident in our ability to execute and believe we're going to see retails as we look at our retail order book is very full, really strong position, as Brent mentioned earlier.
Our large tractor retail order books are out into the October time frame.
So we feel really good about the order book.
And the expectation that we're going to see retails maybe slightly shifted in terms of seasonality versus normal.
But that will continue to come through.
Operator
Next question comes from Ann Duignan with JPMC.
Ann P. Duignan - MD
Can you guys talk a little bit about how you balance new equipment sales versus the risk of getting back into a used equipment slot?
And in particular, can you address it in light of the fact that you are pressing your dealers to take back more of the off-leased equipment under their balance sheets?
I mean, how do you balance -- it's great to have new equipment sales.
It's great to have replacement demand.
But how do we avoid getting back into the used equipment glut again?
Joshua Jepsen
Yes, Ann.
I think when we think about used, we've been focused on this for a number of years.
You think about throughout the downturn, we're down.
Used equipment is down about 36% from the peak.
That's pretty much where we were a quarter ago.
So we've made great, great strides.
And you look across the product categories and we feel like we're in good shape.
And we are at used equipment levels we haven't seen since 2012 or before.
So a lot of great work done by our dealers and our sales teams to manage that inventory.
Row-crop tractors, we say we still got a little bit of work to do, but in better shape than we've been in the past.
I think as we balance that, it's continuing to make sure we're managing that used inventory levels that we're not seeing that grow and rise.
And as you think about lease returns, lease returns -- and when you think about the whole universe of used inventory only equate to about 5% of the total.
So it's not a huge amount.
We're certainly focused on it and want to work on it.
And we're working with our dealers to make sure they are engaged in managing those returns.
So that focus hasn't changed.
Working proactively with our dealers and customers, as we know, leases are maturing, to work through those.
But I think we feel good about where we're at.
And definitely, as used inventories come down, we're seeing used prices strengthen, stabilize and start to strengthen, which helps there as well.
Operator
Next question comes from Andy Casey with Wells Fargo Securities.
Andrew Millard Casey - Senior Machinery Analyst
Couple questions on Wirtgen.
You now expect about $100 million operating profit for the year, pretty much unchanged revenue that in the second half implied as about 6% margin.
First, what drove the increased operating profit outlook from prior expectations for, I think, about neutral contribution?
And second, can you help us understand how to bridge the 6% second half implied margin outlook for the longer term 13 to 14?
I guess, the core of that question is, should we expect the purchase accounting adjustments outside of the ongoing amortization to be complete by the end of this fiscal year?
Joshua Jepsen
Yes.
So on the operating margin from 0 to about $100 million, 2/3 of that's really purchase accounting adjustments as we continue to work through that on the integration side.
The other 1/3 is really operational improvements.
As you think about the full year, so now we're talking about 3% to 4% operating margin for the full year.
We -- you'd expect to see improvements from what we've done now, kind of building in terms of operating profit throughout the rest of the year to go from where we started.
Obviously, negative in the first quarter to be at about $100 million at the end of the year.
Ryan D. Campbell - VP & Comptroller
I think your -- this is Ryan.
Your question on going the biggest component of purchase accounting this year is the inventory step-up.
And that will come through the P&L over the -- it's come through the P&L to date and it will come through kind of over the balance of this year.
Next year, we should be clean with that, and you're just looking at the amortization of the intangibles.
That bridges you from the plus or minus 4% or 5% margins this year up to that 13%, 14% range.
Operator
Next question comes from Mike Shlisky with Seaport Global.
Michael Shlisky - Director & Senior Industrials Analyst
I wanted to ask about the turf business, if I could.
I'm seeing some other companies on the wholesale side, even some of the retail outlets, they have noted kind of slow start to the spring season due to the weather in March and April.
I was hoping you could comment on kind of what Deere experienced in Q2 here in its turf business?
And I think that's kind of reversed here very recently.
I also wanted to ask, last quarter -- I think last couple of quarters, you actually did mention that Deere expects to gain share in turf.
But this quarter, that language was not in your comments.
So I wondered if you could kind of tell us what has changed there.
Joshua Jepsen
Yes.
Thanks, Mike.
I think when you think about turf, the weather, the late spring that we had has impacted that in the quarter.
I think we've seen a turn in the weather.
So there's still I think belief that you can catch that up given the turn in the weather and improvements we're seeing.
So I think there's still confidence that, that can be achieved.
I think the commentary in terms of Deere outperforming, no change in terms of our expectations on that.
I wouldn't read into that.
Operator
Next question comes from Steven Fisher with UBS.
Steven Fisher - Executive Director and Senior Analyst
In terms of the ag revenue guidance, the implied revenue growth is about 9% in the second half of the year, with a little bit of help from currency.
So how did you approach that guidance since the 9% would be a slowdown from the first half?
Is that conservative?
Or are there some weaker pieces you have to assume in there?
Because it sounds like your overall commentary on ag is actually fairly positive.
Joshua Jepsen
Yes, Steve.
I think we -- as we look at the year, I mean, I -- we took up the full year if you -- when you look at kind of organic for the division.
It'd have been up 12% for the year.
A quarter ago, now up 13%.
So our -- I wouldn't say there's an embedded conservatism or weakness there.
I mean demand is very strong, and we're seeing that in our order book.
So I think as we look at the full year, we feel good about demand.
Customer demand, whether it's in North America, South America or Europe, we're seeing that demand and feel good about the year.
Steven Fisher - Executive Director and Senior Analyst
And so is the slowdown, is that just comps, or -- I...
Joshua Jepsen
Yes.
I think it's really just seasonal.
Operator
Next question comes from Joel Tiss with BMO.
Joel Gifford Tiss - MD & Senior Research Analyst
I wonder if you can talk a little bit about the warranty issue in the CNF business.
You just mentioned it, and I just wanted to see what it was all about.
Max A. Guinn - President of Worldwide Construction & Forestry Division
I don't think we did mention anything on warranty, Joel.
Joshua Jepsen
What you were referring to, Joel?
Joel Gifford Tiss - MD & Senior Research Analyst
Just in the slides, that was the warranties were a little bit of a negative factor in the profitability.
All right.
I can follow up later.
Joshua Jepsen
Let's follow up off-line.
I'm not sure, but we're checking.
Joel Gifford Tiss - MD & Senior Research Analyst
And then in the -- on your slide on the global stocks-to-use, the corn stocks-to-use is dropping quite a bit as we go out toward the end of the year.
And I just wondered what's underneath that?
Are you taking out some of the Chinese corn that's been decaying?
Joshua Jepsen
Yes.
So just quick, that warranty is actually favorable.
So quarter-over-quarter, Q2 '18 versus Q2 '17, we're seeing that warranty is a favorable item, not negative.
Stocks-to-use, that is really a story of what's going on with demand and slightly lower production for the year.
So there's no exclusion there in terms of stocks, just the tightness we're seeing there as demand is strong and you're projecting a little bit lower production for the year.
Operator
Next question comes from Emily McLaughlin with RBC.
Emily Gretchen McLaughlin - Associate VP
Just a couple of questions.
So your March and April retail sales versus the industry for the U.S. and Canada were a little bit soft.
Just wondering if you had any color on that.
And then secondly, we are a little surprised you didn't raise your South America forecast just given the strong order books you mentioned and FINAME being a little more favorable in the back half.
Joshua Jepsen
Yes.
So on the retail sales, as we mentioned, the month-to-month, there's -- there can be movement there.
Our view is we've got -- we feel very confident in our order book and the position of those retail orders.
So we feel good about the full year and then the -- what we'd expect to see second half of the year in terms of retail.
As you think about South America, basically, we had a little bit of a shift.
A quarter ago, we said strength in Argentina in -- flat to up a little bit in Brazil.
We're seeing that shift now with the drought in Argentina, so a little bit of weakness there but improved sentiment in Brazil.
So I mean, I think those were kind of the puts and takes.
But to your point, we do feel good about Brazil demand.
The farmer economics are strong from a margin perspective confidence.
FX has -- the real's weakened, which helps the margin side of the business for those farmers.
And then as it relates to FINAME, we still haven't had the announcement of what we expect for that program for the second half of this year and the first half of next year.
So the program that would take effect in 1 July.
Expectations are that you'll see more attractive rates.
And as a result, you're seeing customers wanting their deliveries in July and August.
But that remains to be seen.
Operator
Next question comes from Courtney Yakavonis with Morgan Stanley.
Courtney Yakavonis - Research Associate
Just a quick -- another quick question on Wirtgen.
I think you had guided to this quarter adding about 16% to equipment ops.
And it came in only at 12%, and I know you kept the guidance for the year.
So I just wanted to understand was that related to the supply chain issues?
Or was there some other timing discrepancy?
And kind of how we should think about modeling it seasonality wise in next year, into 2019?
Joshua Jepsen
Yes.
So full year maintained.
I think what we have here is a little bit of timing.
And keep in mind there, as they own a lot of their distribution, we're trying to forecast not just sales to dealers but also from a retail perspective.
So I think as we work through that seasonality, it's taking a little bit of time but no concern on the full year.
Max A. Guinn - President of Worldwide Construction & Forestry Division
It just reflects the maturing process.
Wirtgen's process is for forecasting, were quite a bit different than ours.
There are a lot of entities involved, and they had not traditionally done a monthly forecast.
So it's a transition issue.
It's not an issue at all for the full year.
Courtney Yakavonis - Research Associate
Okay.
So is it safe to say that the majority of that was related to their distribution in Europe as opposed to the U.S.?
Rajesh Kalathur - Senior VP & CFO
It's just a...
Max A. Guinn - President of Worldwide Construction & Forestry Division
It's just a forecasting process.
Joshua Jepsen
Yes.
No specific geography.
Max A. Guinn - President of Worldwide Construction & Forestry Division
No geography.
Operator
Next question comes from Stanley Elliott with Stifel.
Stanley Stoker Elliott - VP & Analyst
You mentioned the C&F order book extending out to 2019.
Could you give a little commentary?
Is that kind of normal expectations?
Is that a shift with more production-class equipment that you've been focusing on or Wirtgen?
Or what's really driving that order book out there?
Max A. Guinn - President of Worldwide Construction & Forestry Division
Well, it's definitely a shift towards the upper end.
And I would say that both dealers and customers are hungry for equipment.
We see some of our largest customers accelerating their purchasing plans for 2019 to make sure that they're prepared to be able to execute work that they have on their books.
So demand is really, really strong, and it's very strong on the big end, if that answers your question.
Stanley Stoker Elliott - VP & Analyst
That does.
And you mentioned a couple of things on the distribution side in West Virginia, Mexico.
Is there anything you could share in terms of how the synergies are coming together either in Europe, Asia, anything along those lines between the Wirtgen and the Deere businesses?
Max A. Guinn - President of Worldwide Construction & Forestry Division
Yes.
It's going to take some time.
But I can tell you that we're answering questions on a daily basis from Wirtgen customers in geographies where we're not present in C&F about when we're going to be there.
And we're excited about those opportunities but we're also realistic.
It's not just a matter of taking orders and shipping equipment, but it's making sure that we have the support mechanisms in place and can really take care of those customers the way we know they expect to be taken care of.
So there is lots of opportunity in front of us.
It's going to take a little bit of time.
Operator
Next question comes from Jerry Revich with Goldman Sachs.
Jerry David Revich - VP
Yes.
Raj, I'm wondering if you could talk about the cadence of ag and turf pricing you're expecting in the next couple of years based on the product pipeline and also in past 5 years, I think, you realized an average 2.5% annual price increase due to features upgrades.
And I'm wondering if we should be thinking about the next couple of years based on the product lineup any differently at all.
Obviously, this year was different from that trend line, so any comments there would be helpful.
Rajesh Kalathur - Senior VP & CFO
Jerry, in terms of the pricing, of course, you will appreciate we'll not be able to tell you exactly how much or exactly when.
But I think the pointers we provided are: as we come with the model year '19, we mentioned that around 1 June, we'll be taking some of the orders for model year '19.
And then almost 1 August, we start producing the model year '19.
Now those are the times you'll be thinking about price increases, not only for, like you said, some of the value addition that we'll bring in these products, but also looking at the inflationary aspects.
So we do have a healthy model year '19 from that regard.
It's going to be like the '18s, and '19s are going to be there.
And if you see our R&D investments and the innovation we are adding, you should expect that to even get better.
So our opportunity to get pricing is still going to be pretty positive, given that importance we place in development and research and especially on innovative ideas coming out in the precision ag sector.
Joshua Jepsen
Yes.
I think I'd add there.
I think it's important -- as you think about precision ag investments that we've made, we didn't pull R&D down significantly during the downturn.
So those are products that will be coming.
And then you think about investments we're making now in things like incorporating Blue River and that -- those technologies, machine learning, automation into our product portfolio, that will be coming out in the future as well.
Operator
Next question comes from Larry De Maria with William Blair.
Joshua Jepsen
Larry, you there?
Lawrence Tighe De Maria - Co-Group Head of Global Industrial Infrastructure
Sorry about that.
Yes, I'm here.
Sorry.
Your principal competitor noted that they might be a bit more aggressive on price, given where their margins are.
Just curious if what you're seeing and if you're willing to give up some share on price, and as of playing out into 2019 where you're starting to take some orders.
And then secondly, bigger picture Europe, just curious where you think we are in the cycle.
We're seeing some mixed sentiment indicators over there.
And curious if you think this is a peak level or for just kind of back-to-normal Europe, which kind of bounces around at certain levels.
Joshua Jepsen
Yes.
I mean, starting on the Europe side, I -- as we look at kind of historically where we've been, we'd say, we're still below replacement demand levels.
So it's a market that doesn't see as wide a fluctuation.
So we didn't -- haven't seen high highs or low lows there.
But we would say, when we look at the industry, particularly for combines but also for tractors, we're still below what we consider kind of normal replacement demand.
Rajesh Kalathur - Senior VP & CFO
Yes.
On the pricing in general, we think more longer term, the prospective pricing.
That's why we think about the value add and ability to gain more pricing or earn more pricing from our customers.
We don't think about pricing in a short-term mentality.
This also gives us loyalty with customers longer term.
So it's philosophically how we think about pricing.
Lawrence Tighe De Maria - Co-Group Head of Global Industrial Infrastructure
So the order book that's stretching into next year has new pricing or price increases in it?
I just want to be clear on that.
Max A. Guinn - President of Worldwide Construction & Forestry Division
I think your question was about C&F pricing.
Is that right?
Lawrence Tighe De Maria - Co-Group Head of Global Industrial Infrastructure
Yes.
That's correct.
Max A. Guinn - President of Worldwide Construction & Forestry Division
Yes.
Okay.
We didn't hear that at the beginning.
I guess I'd start off by saying this will be the first year in several years when we have not generated a net cost reduction internally based on some really strong focus on cost reduction.
So we're going to take the pricing actions we feel are appropriate in the second half to be able to keep our margins improving, as I said earlier.
I don't think -- we don't have any reason to give up share due to price, I don't believe.
I think we can earn a good share and manage our pricing well.
Joshua Jepsen
The thing to point out there, too, on the C&F side, when you look at that business, ex Wirtgen, we're running about a 30% incremental margin for the year.
So we feel good about that.
Operator
Next question comes from David Raso with Evercore ISI.
David Michael Raso - Senior MD & Head of Industrial Research Team
Max, for your C&F growth, pull out Wirtgen, do you expect after this second quarter where ex Wirtgen sales were up low 20%, the third quarter to be similar kind of growth?
Just so I understand the cadence for the core business.
Or do you think it slows on comps?
Then I have a follow-up.
Max A. Guinn - President of Worldwide Construction & Forestry Division
So it's similar, David.
No, we don't see any slowdown there.
David Michael Raso - Senior MD & Head of Industrial Research Team
That's what I thought.
So I'm just trying to figure we have the rough idea of C&F organic.
We have the Wirtgen for third quarter.
Then to hit the full company sales guidance for the third quarter, that means A&T sales growth for the third quarter has to be about, call it, 16%, right?
That's how you get to the full company's 35% sales guidance for the third quarter.
But if you do that, that implies the fourth quarter A&T is almost giving you 0 growth to hit your full year of sales guide for A&T of 14%.
And just given all your color on the order book and so forth, I just want to make sure we understand, are you trying to imply the fourth quarter A&T revenue growth is almost 0?
Or is that just a, call it, conservatism in the sales guide?
That is a -- that's the math.
Joshua Jepsen
I mean, I think your math's reasonable.
I think when you think about the fourth quarter, the thing that would not be reflected there is, we haven't started our EOPs for the spring seasonal products yet.
And those we do, if you think about planters and sprayers, will come in.
And you start to build those really in the fourth quarter as you're building those for the spring seasonal delivery.
So I think that's the piece that where we don't have visibility yet.
Combines, we do.
Large tractors, we do.
Those spring seasonal products, we don't have that visibility yet, and I think that's what you see there.
David Michael Raso - Senior MD & Head of Industrial Research Team
So basically, I mean, the order book right now in ag, just from some things you've said, field work we've done.
I mean, clearly, the order book is not suggesting fourth quarter should be flat.
Those are just sort of a raise your hands and not try to make a call in the fourth quarter, but you're not really trying to leave us thinking the fourth quarter's flat on the A&T sales.
Is that a fair summary?
Joshua Jepsen
I think that's fair.
Like I said, we'll obviously -- when we get to the third quarter, we'll have more visibility into those Early Order Programs.
But again, I'd reiterate strong what we see for combines throughout the year, large tractors into October.
So that remains firm.
Okay.
Well, thanks.
We are at the top of the hour.
So we will go ahead and end the call.
And we'll be available for callbacks the rest of the day.
Thank you.
Operator
Thank you for your participation in today's conference.
Please disconnect at this time.