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 Deere & Company Fourth Quarter Earnings Conference Call.
(Operator Instructions) I would now like to turn the call over to Mr. Josh Jepsen, Director of Investor Relations.
Thank you.
You may begin.
Josh Jepsen - Head of IR
Hello.
Also on the call today are Raj Kalathur, our Chief Financial Officer; John Lagemann, Ag and Turf, Senior Vice President of Sales and Marketing for the Americas; Ryan Campbell, Vice President and Corporate Controller; and Brent Norwood, Manager, Investor Communications.
Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2019.
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 express written consent of Deere is strictly prohibited.
Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking statements concerning the company's plans and projections for the future that are subject to important risks and uncertainties.
Additional information concerning factors that should cause -- 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 the United States of America, GAAP.
Additional information concerning these metrics, 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 - Manager of Investor Communications
John Deere had another solid quarter with contributions from both our equipment operations and financial services group.
The strong performance has enabled significant investment in new products, services and technologies as well as a return of $1.8 billion to shareholders through both dividends and share buybacks.
In agricultural markets, replacement demand continues to drive sales activity for our early order programs, while construction equipment sales benefited from increased construction investment and a healthy order book.
Now let's take a closer look at our year-end results for 2018 beginning on Slide 3. For the full year, net sales and revenues were up 26% to $37.358 billion, while net sales for equipment operations were up 29% to $33.351 billion.
Net income attributable to Deere & Company was $2.368 billion or $7.24 per diluted share.
The results for the year included an unfavorable net adjustment to provisional income taxes of $704 million.
Excluding this item, adjusted net income was $3.073 billion.
Slide 4 shows the results for the fourth quarter.
Net sales and revenues were up 17% to $9.4 billion.
Net income attributable to Deere & Company was $785 million or $2.42 per diluted share.
The results for the quarter included a favorable net adjustment to provisional income taxes of $37 million.
Excluding this item, adjusted net income was $748 million.
On Slide 5, total worldwide equipment operations net sales were up 18% to $8.3 billion.
Price realization in the quarter was positive by 2 points.
Currency translation was negative by 3 points.
The impact of Wirtgen was 11 points.
Turning to a review of our individual businesses starting with agriculture and turf on Slide 6. Net sales were up 3% in the quarter-over-quarter comparison, primarily driven by higher shipment volumes and price realization, partially offset by the negative impact of currency.
Operating profit was $567 million, down 5% from the same quarter last year as the benefit of increased volumes and price realization were balanced by higher production cost, currency headwinds and increased R&D expense.
Operating margins for the quarter were 10.1%.
Before we review the industry sales outlook, let's look at some fundamentals affecting the ag business.
Slide 7 outlines the U.S. principal crop cash receipts, an important indicator for equipment demand.
Through 2019, principal crop cash receipts are estimated to be about $120 billion, roughly flat with 2018.
Record yields and higher prices for corn are forecasted to offset softness in soybean prices.
Additionally, improved prices for cotton and wheat continue to be supportive of crop cash receipts as well.
It's also important to note that the receipts include about $4 billion, representing the first tranche in the USDA aid distributed to farmers.
To date, just under $1 billion has already been paid out in 2018.
On Slide 8, corn stocks-to-use ratio is expected to decline in response to increasing global demand and drought conditions experienced during the first crop in Argentina, which lowered the country's corn production by roughly 25%.
Wheat stocks-to-use ratio is projected to decline in 2018 in response to intensifying drought conditions in Europe, Australia and the Black Sea region.
As a result, U.S. farmers are seeing increasing export demand for the year.
Conversely, soybeans stocks-to-use ratio is forecast to build in response to higher-than-expected yields in the U.S. and the ongoing trade dispute between the U.S. and China.
Over the last 6 months, there has been much uncertainty as to how China would source soybeans and where displaced U.S. exports would go.
While trade flow patterns are still in process of rerouting, it is possible that we could see Brazil, Argentina and Paraguay shift majority of their exports to China in addition to a drawdown of Chinese stocks and use of protein substitutions.
In that scenario, the U.S. soybean exports would likely increase to the former trading partners of South America and result in some building of stocks in 2018.
We expect farmer sentiment continue to be fluid as trade flow patterns continue to adjust.
At this point, I'd like to welcome to the call John Lagemann, the Ag and Turf Senior Vice President of Sales and Marketing for the Americas.
He will provide comments on the current environment for ag in North and South America as well as the 2019 industry outlook for the ag and turf division.
John?
John D. Lagemann - SVP of A&T Sales & Marketing – Americas & Australia
So thanks, Brent.
Moving on to Slide 9, let's focus on the current backdrop for North American large ag, including farmer sentiment, replacement demand and the status of our 2019 early order programs.
Over the past several months, I traveled extensively meeting with both dealers and farmers and I've had a chance to discuss general business conditions and their outlook for next year.
In the U.S., overall, both farmer and dealer sentiment remains cautiously optimistic.
While there is uncertainty in the soybean market, there is optimism around improved fundamentals, that Brent just referenced, in the corn, wheat and cotton markets.
In addition, we're seeing notable excitement from dealers and customers in our core Midwest markets concerning the 2018 crop, where there are record yields in both corn and soybeans.
Dealers believe this crop will positively influence equipment demand for 2019.
But despite this optimism, it is also important to acknowledge the ongoing uncertainty the industry faces regarding unresolved global trade issues.
While many farmers believe these issues will be resolved before next year's harvest, there is no doubt trade concerns have had an impact on farmer sentiment over the last several months.
Now let's talk specifics on the industry and the reasons for our constructive view for 2019, which reflect the following 4 aspects: number one, we are in a replacement market; number two, replacement demand has been augmented by today's precision ag technology; number three, our approach in delivering this technology is uniquely and seamlessly integrated; and finally, the initial response to our 2019 early order programs has been supportive of our view.
Now let's take a closer look at these drivers.
First, it is still a replacement market.
That's because the fleet age has reached its highest point since 2013 and customers are increasingly citing a need for newer equipment due to hours and the age on their machines.
Further to the second point, we see evidence that replacement demand is being amplified by the latest precision technology with many examples across our entire large ag portfolio.
And through the course of my conversations with customers the last few months, it is clear these advanced technologies are driving operational efficiencies and the tangible economic values.
Also evident in the growth of our advanced technologies is the critical role being provided by Deere's proprietary and foundational precision technologies such as guidance, telematics, on-board computing and our digital operations center, all of which represent up to 20 years of investment.
These foundational elements serve as key enablers for our latest advanced technologies, and the combination creates a most differentiated and integrated solution in the marketplace.
Deere's advantage in this area is further enhanced by the unmatched capabilities of our dealer organization delivering these solutions.
Let's start with product support, which is fundamental to our strategy because it ensures our customers get the most performance and uptime from their equipment.
Perhaps the best example is a feature we call John Deere Connected Support, which allows us to remotely help customers monitor their equipment through integrated telematics.
We deployed this strategy 2 years ago and it is now included in the base package for all of our self-propelled large ag equipment.
Through John Deere Connected Support, we deploy Expert Alerts, which route predictive maintenance alerts through Deere systems to the local dealer.
This allows dealers to proactively contact customers before a predicted failure occurs and expedite the repair.
This is just one example, but in general, our dealers are centralizing their service capabilities so they could take full advantage of the technology we bring to the equipment in order to prevent downtime and maximize our customers' equipment investments.
Overall, our dealers also play a critical role in the adoption of precision ag by our customers.
Many of our large ag dealers now employ certified agronomists and are beginning to mainstream precision ag expertise across their dealerships with the intent of helping customers plan and execute their agronomic decisions.
Importantly, our dealers are making significant investments in both product support and precision ag capabilities.
Deere's advantage in this area distinguishes our channel in the industry.
Furthermore, we firmly believe a successful precision ag strategy requires a substantial investment from both the OEM and the channel as well as significant collaboration between these 2 parties, and we are committed to doing just that.
I came across, an example, of why this is so important just last month when visiting with a very large Midwestern farmer who is, in fact, in the process of converting from a multicolored fleet to all green.
He cited the economic advantages of utilizing an all-green fleet across his entire production system from planting, spraying and harvesting, all leveraging the same integrated technology and seamless data platform.
And equally as important for this customer was the local dealer's ability to supply and support the advanced technologies of this entire fleet.
This example also highlights how our strong dealer network has been critical in facilitating replacement demand seen in '18 and continuing into 2019 with the latest results of our early order programs, which I will speak to now.
In September, the final phase of the planter and sprayer early order program concluded with orders up mid-single digits over 2018.
In addition to higher volume year-over-year, the program included a healthy price increase that resulted in materially higher take rates for advanced precision features like ExactApply on sprayers and ExactEmerge planters, which were up significantly from last year.
Moving to our Combine early order program.
Results through Phase 2 are mixed with volume ending up in the U.S. but down in Canada, largely due to a delayed harvest and some other weather-related issues.
Importantly, adoption rates for premium features like Active Yield and Combine Advisor were both higher than last year.
Overall, replacement demand continues to drive order activity, and we are pleased with the initial response to our early order programs.
Furthermore, the 2019 large tractor order book is building and currently running into the second quarter.
Customer demand to date supports our expectations of a continued gradual recovery for large ag equipment in North America, which is still closer to trough volumes than mid-cycle.
Key to this gradual recovery is either the continuation of trade flow readjustments, which we've seen already some progress in or a trade resolution between the U.S. and China.
Turning to Slide 10.
I'd like to elaborate on Deere's journey in Brazil and provide insights into the current environment.
Deere began its Brazilian operation in 1979 with a 20% acquisition of SLC and the production of combines only.
By the 1990s, we foresaw the country's enormous ag potential and began investing heavily in the region, launched our financial operations and established the region's preeminent dealer channel.
Over the last decade, Deere has tripled its tractor market share and now enjoys the leading brand position.
We've also localized the complete soybean production system portfolio, including tractors, planters, sprayers and combines, while achieving very attractive margins.
Further augmenting this complete production system portfolio is our best-in-class distribution channel and Deere's latest precision ag offerings, which also lead the industry and further widen our competitive advantage.
After recently traveling to Brazil this month and visiting with both dealers and customers, I can report the environment in Brazil is quite positive with farmer sentiment boosted by recent election results and the outlook for expanding acreage.
Despite some modest near-term pressure on freight and input prices, we remain very optimistic on the region's long-term prospects and we'll continue to execute our product, technology and channel strategy.
By region, our 2019 ag and turf industry outlooks are summarized on Slide 11.
Industry sales in the U.S. are forecast to be flat to up 5% for 2019.
As I mentioned already, expectations for the year are largely driven by replacement demand as customers need to update their aged fleets and upgrade to more efficient technologies.
Further supporting new equipment demand, used inventories are down over 1/3 from their peak in 2014, while pricing has remained stable with good low-hour Deere machines selling quickly and bringing strong prices.
As mentioned, Midwest dealers are reporting the high yields of this fall's crop should have a positive impact on equipment demand, particularly as customers begin reviewing their tax scenarios.
For our small ag segment, compact tractors show a strong order book for 2019, driven by a healthy economy and GDP growth.
This is helping to offset softness for our livestock and dairy customers, although the order bank for utility tractors and round balers has been very solid.
Moving on to the EU 28.
The industry outlook is forecast to be flat in 2019, where strength in the U.K. and France is offsetting weather-related challenges in Northern Germany and Scandinavia.
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 solid industry fundamentals in Brazil, which is benefiting from a positive reaction to the political election, commodity price premiums and expanding acreage opportunities.
However, growth in Argentina is likely to remain challenged in the near term as the country battles high inflation and political uncertainty.
Shifting to Asia.
Industry sales are expected to be flat to down slightly as key growth markets begin to cool.
Lastly, industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat to up 5% in '19 based on the general economic factors mentioned earlier.
Putting all of this together on Slide 12.
Fiscal year 2019 Deere sales of worldwide ag and turf equipment are now forecast to be up approximately 3%, which includes a negative currency impact of about 2 points.
Furthermore, we anticipate sales in '19 to mirror a similar quarterly seasonality as we saw in 2018.
The ag and turf's division operating margin is forecast to be up approximately 12.5%.
I'll now turn it back over to Brent.
Brent Norwood - Manager of Investor Communications
Now let's focus on construction and forestry on Slide 13.
Net sales for the quarter of $2.7 billion were up 65% compared with last year, driven by strong demand for construction and forestry equipment as well as by the acquisition of Wirtgen, which contributed 45% of the positive improvement.
Fourth quarter operating profit was $295 million, largely benefiting from the Wirtgen acquisition, higher shipment volumes and net price realization, partially offset by higher production costs.
C&F operating margins were 10.8% for the quarter, but 10.9% excluding Wirtgen.
Moving to Slide 14.
The economic environment for the construction, forestry and road building industries look solid and continue to support increased demand for new and used equipment.
For 2019, U.S. GDP and total construction investment are forecast to grow, while housing starts and oil activity remain at supportive levels for equipment demand.
Importantly, our U.S. customer base remains quite optimistic on next year's prospects, citing backlogs extending through much of the year.
Lastly, global transportation investment this year is forecasted to grow about 5%, driving increased demand for road construction equipment, such as milling machines, rollers and asphalt pavers, which are all important product lines for Wirtgen.
These positive economic indicators are reflected in the strong order book, which is now extending about 6 months into 2019.
Moving to C&F outlook on Slide 15.
Deere's construction and forestry sales are now forecast to be up about 15% in 2019 as a result of stronger demand for equipment as well as an additional 2 months of ownership of Wirtgen.
The net sales forecast includes about $3.8 billion attributable to Wirtgen.
The forecast for global forestry markets is up about 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 projected to be about 12%.
Excluding Wirtgen, C&F projects operating margins to be about 11.5%.
With regards to Wirtgen, integration continues to go as planned and the business is enjoying healthy backlogs and performing to the high end of our expectations.
Operating margins are now forecast to be about 14% for 2019.
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.
The financial forecast for 2019, shown on the slide, contemplates a loss provision of about 17 basis points, 4 basis points higher than 2018.
This would put loss provisions for the year below the 10-year average of 23 basis points and the 15-year average of 24 basis points.
Moving to Slide 17.
Worldwide financial services net income attributable to Deere & Company was $261 million in the fourth quarter.
The results for the quarter included $109 million of net tax reform-related charges arising from the remeasurement of deferred tax assets and deemed earnings repatriation.
Excluding tax reform-related items, adjusted net income in the fourth quarter was $153 million, up about 19% compared to the same quarter last year.
For the full year in 2019, net income is forecast to be about $630 million.
Slide 18 outlines receivables and inventories.
For the company as a whole, receivables and inventories ended the year up $3.5 billion.
In the C&F division, the majority of the increase is attributable to Wirtgen as well as a higher order book and production schedule for 2019.
For ag, the increase is due to better inventory positioning with our supply base and continued demand for small ag products, which require adequate inventory to sales ratios.
Moving to Slide 19.
Cost of sales for the fourth quarter was 76% of net sales and our 2019 guidance is about 75%, down 2 points from 2018.
R&D was up about 18% in the fourth quarter and forecast to be up 6% in 2019 or 4% when excluding Wirtgen from the results.
The increase in 2019 primarily relates to strategic investments in precision ag as well as next-generation new product development programs for large ag product lines.
SA&G expense for the equipment operations was up 8% in the quarter and 15% for the full year on a reported basis.
The year-over-year increase is mostly attributable to the impact of acquisitions.
Our full year 2019 SA&G forecast is -- forecast expense is up about 7% or 4% excluding Wirtgen.
Turning to Slide 20.
The equipment operation tax rate was 34% in the fourth quarter, which included an unfavorable adjustment of $72 million arising from tax reform.
For 2019, Deere's full year effective tax rate is projected to be between 25% and 27%.
Slide 21 shows our equipment operation's history of strong cash flow.
Cash flow from the equipment operations is now forecast to be about $4.8 billion in 2019, up from $3.3 billion in 2018.
Keep in mind that 2018 cash flow included about $1.4 billion in voluntary contributions to pension and OPEB.
The company's financial outlook is on Slide 22.
Our full year outlook now calls for net sales to be up about 7%.
Guidance includes about 3 points of price realization and 2 points related to an additional 2 months of Wirtgen ownership.
On the negative side, we expect currency to be about a 2-point headwind next year.
With respect to cost inflation, we anticipate the price realization forecast in 2019 will offset both material cost and freight inflation experienced in 2018 as well as any additional increases forecasted in 2019.
Finally, our full year 2019 GAAP net income forecast is now about $3.6 billion.
I will now turn the call over to our Raj Kalathur for closing comments.
Raj?
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
Before we respond to your questions, I'd like to share some thoughts on capital allocation, Deere's ongoing strategy and the long-term tailwinds underpinning our business outlook.
First, it's important to note that continued demand for both ag and construction equipment has resulted in excellent cash flow generation and allowed us to increase the capital return to shareholders.
In 2018, the company returned almost $1.8 billion through an increased dividend and a repurchase of approximately $950 million in stock.
In 2019, we are forecasting a strong $4.8 billion in cash flow from operations.
These measures reflect our optimism on the future prospects for the end markets we serve.
With regard to our dividend, we aim to maintain a 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, we will consider further dividend increases in fiscal year 2019.
Second, in our recent review of the John Deere strategy, we revised our 2022 financial aspirations to reflect our higher expectations for the business.
As a result, we raised our mid-cycle operating margin target from 12% to 15% and modified our operating asset turn aspiration to keep us focused on managing assets effectively.
These goals reflect our continued drive to make further improvements and overcome headwinds such as currency or inflation.
Also, the new goals incorporate Wirtgen's potential contribution and will keep us focused on a successful integration.
Furthermore, Deere has a good track record of achieving higher levels of performance, so we are confident the company will quickly drive towards these new aspirations.
Importantly, incentive compensation is aligned to these higher goals as you may have already noticed in our last proxy.
Lastly, although global agricultural markets continue to face uncertainty over trade, the underlying fundamentals and tailwinds remain intact.
It's important to keep in mind that global demand for grains continue to grow even as trade flows adjust to accommodate changes in government policy and forecasts show demand outpacing supply for the '18/'19 season.
We are encouraged by the level of replacement demand driving sales at the present time and believe our business will continue to benefit from a gradual recovery in the North American large ag market and the rapid adoption of precision technologies.
As a result, we look forward to delivering strong results in 2019 and beyond.
Josh Jepsen - Head of IR
Now we're ready to begin the Q&A portion of the call.
(Operator Instructions) Shirley?
Operator
(Operator Instructions) Our first question comes from Tim Thein with Citigroup.
Timothy Thein - Director and U.S. Machinery Analyst
Just coming back, Raj, on what you just finished with in terms of the updated goals, specifically the 15% at mid-cycle operating margin target.
The company is -- I don't think has ever hit that just in any year in the past.
So maybe just -- obviously, the inclusion of Wirtgen adds a different component to the sales and profit mix from what you've had historically.
But maybe if you can just give us some kind of -- a little more color in terms of what helps to give you confidence in the company's ability to hit that mid-cycle margin target just in terms of the maybe changes to the cost structure, et cetera.
So that's my question.
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
Sure, Tim.
One, we talked about technology investments we've been making the last few years, precision ag is an example.
These types of technologies and solutions and the products that come out of these have significant value to the customers, and such products should allow us to not only generate higher revenues, higher share but also much higher margins given the kind of value this will generate for the customer.
That's one.
The second would be John talked about Connected Support.
These type of technologies that we are incorporating now will help us develop a much higher share of the aftermarket business going forward, okay?
This -- you have to work with the channel, and you heard about the investments the channel is making and we are making to enable that.
And third, you mentioned Wirtgen, and I think the synergies from Wirtgen in both -- on the cost side and the sales side and some of the growth prospects there will also allow us to improve our margins.
And four, the example would be just all the journey that we can do internally in terms of improving efficiency and effectiveness of our operations just leveraging digitalization, for example, okay?
A small thought would be in shared services and accounting to use robotic process automation.
There's so many places we intend to actually use such digitalization technologies to improve effectiveness and efficiency.
And finally, one example -- the other example, we will continue to work on direct material cost reduction, indirect material cost reduction and so on that will also yield an additional opportunity for us to improve margins.
So those are the types of things we are envisioning.
There will be a lot more like that, so thank you.
Operator
Our next question comes from Jamie Cook with Credit Suisse.
Jamie Lyn Cook - MD, Sector Head of United States Capital Goods Research, and Analyst
A couple of questions.
One, just on -- can you comment on the ag margins in the quarter?
They were, I think, a little light relative to what you guys have guided.
And also, the margins for the full year for ag for '19 at 12.5%, I think, the implied incrementals are mid- to high 20s, which is a little lighter than I think we were thinking, so if you could provide color on that.
And then my follow-up question is just on the pricing front for 2019.
I understand the full -- it's 3%, but can you help us get some better clarity on what -- how we should think about ag versus construction?
Josh Jepsen - Head of IR
Yes.
Jamie, when we look at the ag margins, and I think it's really a similar story kind of what we saw in 2018 as well as the guide for 2019, FX was a significant headwind in the fourth quarter.
We're seeing that carry through into 2019.
So -- and when you think about kind of the full year of 2018, about 12.1%, ex FX, that's about 12.5%, so we saw some drag there.
Similarly, as we look at 2019, FX is about a 0.5 point drag on our ag margins, so that's been a pretty significant impact over where we were forecasting a quarter ago.
I think as you think about '19, the other components, FX, the biggest piece, we do have the impact of R&D and SA&G.
Really, R&D focused on some of the things that John and Raj has mentioned in terms of precision ag as well as next-generation large ag products that we think, over the long term, help us achieve those ambition, goals in terms of margins as well as growing share.
So I think those are the major puts and takes.
Embedded in that guide, as you noted, is the price realization that we've talked about.
So we're 3% next year for the equipment operations in total, both divisions really participating.
So we talked a lot about pricing on large ag, John alluded to it.
We've seen that on our early order programs and our order books that are available now so we feel good about that and our ability to offset the material and freight cost inflation we've seen in '18 and '19.
And on the construction side, we put through some discount reductions.
So we took additional action there that went into effect in November to get price realization on the construction side of the business.
And I think it's important to note there, we also expect that we're going to get price that offsets the material and cost inflation we're seeing on that side.
So I think that's probably the -- how we're looking at '19 overall from a margin and price perspective.
Operator
Our next question comes from Seth Weber with RBC Capital Markets.
Seth Robert Weber - Analyst
For Raj, I guess, maybe just going back to the capital allocation.
As you noted, cash from ops is going to be up 50% or so this year.
I mean, is the increase in buyback that you did in the fourth quarter, is it -- do you feel like that that's a decent run rate for us to be thinking about going forward for -- through 2019?
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
Seth, I think we used the same cash used for the R&D to be able -- used in the past.
And first, we maintained a mid-single A rating throughout the cycle.
We have a strong balance sheet right now to support it.
And second, as you know, we'll invest in growth both organic and inorganic.
You've seen us invest in very promising technologies like in precision ag.
We also invested very selectively in adding to areas like crop care.
The type of companies today that gain the market position are importantly new capabilities, so you'll see us continue to do some of those.
And then you'll also notice that we've increased dividend by 15% in May 2018 to $0.69 per quarter.
We plan to keep the dividends at 25% to 35% of mid-cycle earnings.
And as our mid-cycle earnings go up, we'll continue to consider increases.
As mentioned earlier, we'll be considering further increases in fiscal '19.
And finally, share repurchases.
We'll definitely consider -- if there is cash left, and you said $4.8 billion, that should leave a lot of cash, but we'll also be very opportunistic about it with our purchases and time it appropriately in the cycle and we tend to look at the long-term shareholders benefit when we repurchase shares.
Now with $4.8 billion, the forecast for next year and the current level of share prices, we think it will be a very good value in terms of share repurchase consideration from a longer-term shareholder perspective.
I think I'll limit it to that right now, Seth.
Seth Robert Weber - Analyst
Okay.
So just, I mean, obviously over the last 2 quarters, the cadence has picked up fairly materially from where it had been.
So it seems like a natural progression -- it seems like this may be your kind of how you're thinking about the run rate going forward, that's all I'm asking.
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
I think it's a good statement you make.
Operator
Our next question comes from Ann Duignan with JPMorgan.
Ann P. Duignan - MD
I guess my question is for John.
I'm just curious, frankly, your outlook for cash receipts by commodity.
What are you contemplating in terms of planted acres by major crop?
And same question I kind of asked CNH with the North Dakota, South Dakota guide, you've got 12 million acres of soybeans this year with no export program.
Is it conceivable that they rotate completely out of beans next year and into other crops?
I'm just curious what your thoughts are, John, and what you're hearing out there in the Midwest in terms of planted acres by major crop.
Josh Jepsen - Head of IR
Ann, this is Josh, I'll start, and then John will add on.
I mean, I think as we think about the major crops, I mean, certainly, a lot of eyes on what this forecast, this harvest is going to look like, what happens in South America.
I think by and large, as we think about the crop cash receipts, we're seeing -- certainly seen the benefit of the improvements in corn, cotton and wheat this year in North America.
And that probably does drive some shift in acreage out of soybeans, but probably not all to one commodity, some to corn, some to wheat.
I think, importantly, as you go to South America, at least what we're -- what our expectations are now is you see a shift out of corn into cotton.
So I think there's going to be a lot of puts and takes as we think about this globally and how farmers make their decisions and think about this from their specific economics as we start planning for next year.
John D. Lagemann - SVP of A&T Sales & Marketing – Americas & Australia
Yes.
And Ann, thanks for the question.
This is John.
I think it's highly dependent upon where it is.
I think in those areas that can grow corn successfully and have grown corn successfully, you'll probably see somewhat of a shift to corn.
But I think the point that Josh made about South America is important because in my conversation is down there, the folks that plant second crop, which is a significant piece of the Brazilian ag business, they're leaning heavily towards cotton because of the current conditions.
And that's going to, we think, provide a buffer on any increased corn here in the U.S. And we're seeing early estimates, corn maybe up 3 million to 4 million acres in the U.S., so I'll end with my answer to that.
Operator
Our next question comes from Andy Casey with Wells Fargo Securities.
Andrew Millard Casey - Senior Machinery Analyst
I wanted to go back to Jamie's question a little bit.
You've been dealing with elevated production cost in ag and turf during 2018.
Do those -- first, do those dissipate in 2019?
And then the higher R&D and SA&G that you're looking to incur in 2019, should we view that as partially precision ag market development that really should come back in terms of future payback?
Josh Jepsen - Head of IR
Yes.
Thanks, Andy.
I mean, I think, you're right.
I mean, the couple of components of higher production cost in '18, certainly, material and freight that we've seen.
As we look at '18 versus '19, we saw a bigger impact in '18 than we are foreseeing in '19.
And then when you think about R&D and SA&G, you're exactly right.
I mean, the large portion of the R&D is focused on precision ag as well as next-generation large ag products.
And then SA&G, there is a significant component there that is related to our customer product support technologies and capabilities and really working seamlessly with our dealer to deliver those solutions, so that's a piece.
You've also got down smaller than that, some things like incentive comp, some marketing type of -- things like that, but those will be the biggest items.
Operator
Our next question comes from Jerry Revich with Goldman Sachs.
Jerry David Revich - VP
I'm wondering, can you expand on your comments on used inventories in the prepared remarks?
So we're hearing about rise in used inventories off of a low level for combines and for excavator product line, specifically.
So can you just talk about what you're seeing in the channel and your comfort level on the construction equipment outlook, strong production growth next year within the context of inventories starting to rise off of a low base but certainly starting to rise?
Josh Jepsen - Head of IR
Yes.
Thanks, Jerry.
I think when we -- starting maybe on used on both sides of the business, I think large ag used, we're down 1/3 from the peak of the market.
I think, importantly, we feel good about inventory levels and we've seen prices stabilize, so I think that's been positive.
On the construction side, we've also continued to see used inventory come down because of the tightness in terms of supply.
We've actually seen a number of our dealers putting used into their rental fleets to leverage those machines they have to be able to drive that.
So I don't think on the construction side we've seen any product category be particularly concerning or an issue there.
John, on the used side?
On the...
John D. Lagemann - SVP of A&T Sales & Marketing – Americas & Australia
I think you nailed it on the ag side.
We're off 1/3 as you said.
It's really the lowest point it's been over the last 4 years and I think we're in a comfortable zone if you look at inventory ratios, so I really have nothing else to add
Jerry David Revich - VP
And that includes combines, John?
John D. Lagemann - SVP of A&T Sales & Marketing – Americas & Australia
Correct.
Operator
Next question comes from David Raso with Evercore.
David Michael Raso - Senior MD & Head of Industrial Research Team
A quick clarification first, though.
The John Deere strategy, the bumping up the operating margins, was there any change to your view of mid-cycle revenues in that analysis?
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
So David, as we think through this, we look at '18 through '22, and these are forecasted numbers for the future.
And as our business expands, you would expect approximate 7-year average to expand as well in terms of sales.
So our modeling of mid-cycle has not changed in this process, okay?
So you would expect '18 to '22 some growth in the mid-cycle.
David Michael Raso - Senior MD & Head of Industrial Research Team
Just -- I mean, just if you even account for that Wirtgen bump up to the margin, you sort of just bumped up your implied EPS mid-cycle by almost $2.
And just making sure I understand, was that maybe because you lower the revenue assumption so the margin bump is less powerful?
But to be clear, you're saying you didn't change your view of mid-cycle revenues?
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
We didn't change our -- I think we didn't change our process to calculate mid-cycle revenue, okay?
The mid-cycle revenues will change based on what we post on a yearly basis.
David Michael Raso - Senior MD & Head of Industrial Research Team
To be clear, did they go down, I guess, Raj?
If you held them where they were, adding about 200 to 250 bps of core margin improvement, so again, exclude the Wirtgen benefit because it's a higher margin business, it does appear you bumped up your implied EPS mid-cycle by almost $2.
I just want to make sure we understand that is the idea.
Or no, did you lower the revenue assumption while raising the margins so the benefits aren't quite as much?
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
I think, David, I think this is kind of a -- it might be an endless answer here, answer and question.
But we're not going to talk about exactly what the change in EPS is on a year-by-year basis, but what we are not assuming any lower revenues in this process like we said...
David Michael Raso - Senior MD & Head of Industrial Research Team
That's all I need to clarify.
Rajesh Kalathur - Senior VP, CFO & Chief Information Officer
Precision ag is going to bring -- things like precision ag, they're going to bring new products additional growth.
Wirtgen brings additional growth.
There are technologies that we talked about brings more growth on the aftermarket side like the customer support pieces we've talked about.
So this looks at additional growth opportunities and thereby, additional margin opportunities
David Michael Raso - Senior MD & Head of Industrial Research Team
All right.
So real quick, my question is on the guide for ag and turf for the year.
You're saying organic sales up 5%.
But when you back out pricing, it's almost implying volumes are almost not up at all.
And given your end-market outlooks and you, obviously, sure sounded confident in your ability to outgrow the market given all the technology benefits you have.
Just trying to understand why we're assuming volumes globally for your business barely up at all in this guidance?
That's my only question.
Josh Jepsen - Head of IR
Yes.
David, I mean, I think as you look across those -- the guidance in ag, largely flat, flat to up 5%.
And I think as John has pointed out, there is uncertainty there and I think just recognition it's early.
And we want to make sure that we're not getting ahead of ourselves there, but I think I wouldn't read too much into that on top of that.
And you have -- we have the FX headwind that we talked about that's significant on the top line.
Operator
Our next question comes from Joe O'Dea with Vertical Research Partners.
Joseph O'Dea - Principal
Just looking for any insight on where we stand on the farm aid payments you've talked about how much has been paid, so far, on the first tranche.
But what's your visibility is into any announcement on the second tranche?
And so the timing of that, the amount of that and then how that might be spread across commodities?
Josh Jepsen - Head of IR
Thank, Joe.
I mean, I think, as you've noted, there's been conversations that if -- there's expectations that could come out December, a similar amount.
I think -- probably, importantly, as we think about that, we're seeing, as noted, some of that payment come out quicker.
So the expectation, we see some of that come through maybe more here in the next month or 2 on the first tranche, so we'll see the timing of that.
But announcement in December, you could see that in the first couple of months then of calendar '19.
Operator
Our next question comes from Courtney Yakavonis with Morgan Stanley.
Courtney Yakavonis - Research Associate
Just wanted to get some clarification on the margin guidance for A&T and for C&F next year.
Do those -- how much headwind are you guys assuming from the Section 232 and 301 tariffs?
And are you assuming the 25% goes into effect?
Josh Jepsen - Head of IR
Yes.
Great question, Courtney.
So I think when you think about steel overall, we're seeing higher -- we saw a bigger impact in 2018 than we do in 2019.
A couple of things at play there.
As you think about hot rolled coil on the ag side of the business, our fourth quarter is kind of where we saw the higher level of steel pricing.
And we've actually -- that's what we forecast as we look into 2019, so we're at a more elevated steel level.
As it comes down, as is forecast, that would be beneficial.
On the C&F side, plate steel has actually been higher and we've not really seen that move a whole lot.
So that's a -- that's in our forecast, but it appears to look like it will stay at higher levels throughout the year.
So I mean, '18, '19 all in.
'18 is a little bit higher.
We're seeing that impact in '19.
I think importantly, we're getting price in both divisions to offset that inflation.
As you think about the 301 tariff, so we've estimated about $100 million to $125 million for the enterprise across the year in 2019, and that's at the 25% level.
And what our teams would tell you is they're working really hard on -- with suppliers and negotiations to try to beat that number.
But that's what we got embedded in the forecast, it's about $100 million to $125 million.
Operator
Our next question comes from Mig Dobre with Baird.
Mircea Dobre - Senior Research Analyst
Just want to talk about C&F a little bit.
You talked about order book extending 6 months into 2019.
Can you frame that?
And then on your implied core growth of 12%, can you help us understand how you're thinking about Wirtgen versus your legacy construction business?
Josh Jepsen - Head of IR
Yes.
So I think when we think about the order book, yes, so we're talking about we've got 6 months of orders in hand.
That's well beyond what we typically run somewhere a month to less than 2 on a regular basis.
So quite a bit more visibility and that's really just based on orders we're seeing come in, the backlog of work that our contractors have.
Because I think when we step back and look at the economic indicators affecting that industry, they're still supportive if you think about I guess -- I mentioned the backlog.
Housing has been -- continue to be supportive, and so I think that's been positive.
Rental utilization, rental rates have been strong.
So I think that's what is driving and informing that outlook.
As we think about legacy C&F versus Wirtgen, I think Wirtgen, as we talked about, and I think Brent mentioned about $3.8 billion of sales next year, so solid growth.
Healthy backlog there.
Underlying that is about 5% growth expectation in global transportation, road transportation spending, so I think that's positive as well.
So I think all of those factors kind of economic drivers are what would be informing -- forming the forecast there and we feel good about where that's at right now.
Operator
Our next question comes from Steve Fisher with UBS.
Steven Fisher - Executive Director and Senior Analyst
Wondering if you could talk about the 30% increase in CapEx, roughly, that you're planning for 2019.
What's in that?
How tied is that to some of the things you mentioned on R&D?
And how much maybe incremental depreciation is flowing through 2019 net income as a result of that higher CapEx?
Josh Jepsen - Head of IR
Yes.
Steve, when we think about CapEx, it's really -- it is, as you noted, a similar story to R&D in that we're focused on advancing our capabilities in precision ag, large ag products, the next generation.
I think, in our view, we've got an opportunity to extend our leadership position and continue to move forward there.
So that's really what we're doing and I think those will be the biggest component of that increased spend.
Steven Fisher - Executive Director and Senior Analyst
Is there a big incremental to -- go ahead.
Josh Jepsen - Head of IR
Sorry.
Go ahead, Steve.
Steven Fisher - Executive Director and Senior Analyst
Yes.
I was just going to ask a clarification about the incremental depreciation flowing through into 2019 net income as a result of that 30% increase.
Josh Jepsen - Head of IR
Yes.
I mean, I think we're up, it's up less than $100 million.
If you look at Slide 26, it's about $75 million of increased D&A next year.
Operator
Our next question comes from Rob Wertheimer with Melius Research.
Robert Cameron Wertheimer - Founding Partner, Director of Research & Research Analyst of Global Machinery
My question is just on the volume contribution from precision ag features and options.
How much is that contributing to volume this year?
And do you have any comment because we don't know penetration rates overall, what the potential contribution of that feature set is, whether it's a 10% increase in your volumes or 5% or 20% or what?
Josh Jepsen - Head of IR
Rob, we haven't sized that exactly.
What I'd tell you is it is impactful when we think about things like ExactEmerge and ExactApply.
We're seeing those up, up significantly from a take rate perspective over a year ago.
And in some cases, 50% increase in the take rates there.
Similarly on the combine side where we're seeing Combine Advisor and Active Yield be extremely high penetration rates and adoption.
So we haven't -- and so it's difficult to decide what does that mean towards our top line, but we think it is part of the impact there.
And it also helps our ability to get price because of the value and the economic value we create for the customers.
And I'll let John...
John D. Lagemann - SVP of A&T Sales & Marketing – Americas & Australia
Yes.
And I think that's the main thing.
It's -- because it's really integrated into the product, I think it's hard to measure the incremental value of it, but it really helps sell the value of the product.
So I think that's the main perspective.
Josh Jepsen - Head of IR
Yes.
So I think, Rob, that doesn't probably answer your question perfectly.
But I think, at this point, we say it is impactful.
And as noted by our investments in R&D and capital, we think it will continue to be more important as we go forward.
Operator
Your next question comes from Chad Dillard with Deutsche Bank.
Chad Dillard - Research Associate
Just wanted to dig into the inventory increase that you saw exiting the year for '18.
I just wanted to understand the mix between large and small ag and then how you're thinking about Deere inventories as you begin 2019.
And then secondly, maybe if you can just comment on how you're seeing the deal channel evolve and then how you're expecting that to exit the year?
Josh Jepsen - Head of IR
Yes.
Thanks, Chad.
When we think about the working capital and where we ended the year, up where we had expected earlier this year.
I'd say it's really driven by a few things.
Like, one, is the kind of timing in weather.
So later harvest has certainly impacted some of the timing of when we would expect things to retail, so I think that's been a significant impact.
You've also got small ag there where we're building inventory.
It's important in terms of the customer purchase patterns that we got inventory to sales and availability throughout the year, so I think that's a piece.
And then, lastly, we're in a much better position with our supply base now than where we were a year ago.
So where last year, we did not have as much parts and component availability.
And this year, we're in a much better position.
It allows us to go into '19 producing more effectively and efficiently as we move forward.
But I'll ask John to add his comments.
John D. Lagemann - SVP of A&T Sales & Marketing – Americas & Australia
Yes.
I think I'll add 2 things, Josh.
Number one, the small tractor and small ag is a strategic play for us because of the focus we're putting on that market.
And I think on the large ag piece, it's really timing.
And the reason I say that is because when you look at November retail sales, frankly, they are up significantly over 2018.
So I think the late harvest made it more of a timing issue.
So we're very encouraged by the early sales in November as we look at 2019.
Josh Jepsen - Head of IR
Yes.
Chad, I think, overall, to your comment of kind of where do we end with field inventory, I think that's where we feel like at 100-horsepower plus for combines, slightly higher inventory sales to where we were a year ago.
I think as John pointed out, we think some of that is just timing of when those retails are occurring.
Operator
The last question comes from Ross Gilardi with Bank of America Merrill Lynch.
Ross Paul Gilardi - Director
So the feedback from our dealer survey last week, that Deere is gathering $2,000 to $3,000 of annual subscription revenue from customers, if not more on a cumulative basis from all of your various precision ag technologies.
Last quarter, you talked about 130,000 connected ag machines.
So if you just multiply $3,000 of sub-revenue times 130,000 machines, you get to nearly $400 million in revenue.
And then if you -- some of these things you seem to be charging activation fees.
You've got other hardware revenue streams.
Is it unreasonable to think that precision ag is a $500 million revenue business for Deere today, if not larger at substantially higher margins than the rest of the company?
And where are you accounting for that subscription revenue base?
Is it in your 300 basis points of pricing or is it somewhere else?
Josh Jepsen - Head of IR
Yes.
Thanks, Ross.
I think I'd say, big picture right now, we know we're not at the level where we want to break that out in terms of that business.
And one, it's particularly -- it's not easy to break out because of the integration, but we do think it's really important.
I think as we go forward, we'll continue to dig into that and provide more color.
But at this point, you really -- you do see that when you think about monetization in the base equipment, in premium features and then in those subscriptions.
So we think it's a significant opportunity to create value for customers and we think, as we do that, we're going to be able to participate in that value.
Ross Paul Gilardi - Director
Where is this sub-revenue, Josh?
Is it buried inside of just your volumes or is it in the pricing?
Or is it on top of the pricing, the 300 basis points of pricing that you're forecasting this year?
Josh Jepsen - Head of IR
Yes.
It's really a combination.
There's components of the hardware that would be in base and there's other things that would come through premium features, so it's a little bit of a mix.
It's not as clean as just one simple line item.
All right.
Well, thanks, everyone.
We appreciate your participation.
I hope everyone has a happy Thanksgiving and we'll be available today for call backs.
Take care.
Operator
Thank you.
And this does conclude today's conference.
We thank you for your participation.
At this time, you may disconnect your lines.