強鹿 (DE) 2019 Q3 法說會逐字稿

完整原文

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.

  • Welcome to John Deere & Company Third Quarter Earnings Conference Call.

  • (Operator Instructions.]

  • I'd now like to turn over the call to Mr. Josh Jepsen, Director of Investor Relations.

  • Thank you.

  • You may begin.

  • Josh Jepsen - Head of IR

  • Hello and good morning.

  • Also, on the call today are Ryan Campbell, our Chief Financial Officer; Luke Chandler, Chief Economist; and Brent Norwood, Manager, Investor Communications.

  • Today, we'll take a closer look at our third 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 on our website at 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 may be stored and used as part of the earnings call.

  • This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties.

  • Additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.

  • This call may also include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP.

  • Additional information concerning these measures including reconciliations to comparable GAAP measures included in the release and posted on our website at www.johndeere.com/earnings under Quarterly Earnings & Events.

  • Brent?

  • Brent Norwood - Manager of Investor Communications

  • John Deere completed the third quarter with results reflecting a higher degree of uncertainty over the agricultural sector in North America.

  • Concerns over market access, near-term demand for commodities and weather continue to challenge the industry and have partially overshadowed the heightened outlook for farm incomes in the U.S. Meanwhile, some foreign markets such as Brazil have shown continued signs of strength and strong crop production, and increased exports have benefited from local industry.

  • In Construction & Forestry, in-market demand remains strong, resulting from broad-based industry drivers such as GDP growth, oil and gas activity and infrastructure investments.

  • With order books extending through most of the fourth quarter, the division is on track for a solid finish to the year.

  • Now let's take a look -- let's take a closer look at our third quarter results beginning on Slide 3. Net sales and revenue were down 3% to $10 billion.

  • Net income attributable to Deere & Company was $899 million or $2.81 per diluted share.

  • The results included a favorable benefit to the provision for income taxes due to U.S. tax reform.

  • Excluding this item, adjusted net income was $867 million or $2.71 per diluted share.

  • On Slide 4, total worldwide equipment operations net sales were down 3% to $8.969 billion.

  • Price realization in the quarter was positive by 3 points, while currency translation was negative by 2 points.

  • Turning to a review of our individual businesses, starting with Agriculture & Turf on Slide 5. Net sales were down 6% on a quarter-over-quarter comparison primarily driven by lower shipment volumes and the negative impact of currency translation, partially offset by positive price realization.

  • Operating profit was $612 million, resulting in a 10.3% operating margin for the division.

  • The year-over-year decline was due to lower shipment volumes, higher production costs and the unfavorable effects of foreign currency exchange, partially offset by positive price realization.

  • At this point, I'd like to welcome to the call our chief economist, Luke Chandler, to discuss the fundamentals affecting the ag business.

  • Luke?

  • Luke Chandler - Chief Economist

  • Thanks, Brent.

  • Good morning all.

  • 2019 is proving to be a mixed year for global agriculture.

  • Increasing demand, some higher prices and government support programs are helping to offset the uncertainties caused by trade disputes, weather setbacks and disease disruptions.

  • As shown on Slide 6, global stocks of major grain and oilseeds are forecast to fall 3% in 2019/'20.

  • Major farm economies around the world are expected to be mostly on par or slightly improved in 2019 year-over-year.

  • While ongoing market access issues have been detrimental to North American farmer confidence, increased export opportunities emerged for farmers in other parts of the world, notably Brazil and Argentina.

  • Turning now to take a closer look at some of the key agricultural economies around the world, beginning with the United States where 2019 has been a volatile one for farmers, particularly, though, in the Corn Belt.

  • The U.S. row crop sector started the year with the USDA forecasting corn ending stocks at the highest level in over 30 years, soybean ending stocks at near record levels and the smallest amount of wheat acreage planted in U.S. history.

  • As the planting season progressed, cold spring temperatures and the wettest 12-month period in U.S. history brought flooding and record planting delays across major corn and soybean growing regions.

  • The result was heightened uncertainty around row crop production.

  • This uncertainty was reflected in the USDA's latest estimates released this past Monday, which surprised the market, particularly the forecast of national corn production.

  • It is worth remembering that there is quite a lot of times remaining in the growing season.

  • In addition to some improvement in prices earlier in the summer, the USDA in May of 2019 announced the second round of the market facilitation program, or MFP, which includes up to $14.5 billion in direct payments to U.S. farmers.

  • Higher levels of uncertainty regarded final planted and harvested acreage, yields and MFP details have contributed to wide swings in farmer sentiment throughout the season.

  • Looking ahead to the rest of the crop season, trade uncertainty continues to dampen sentiment across the U.S. farm economy.

  • That said, the impact of the second round of MFP payments leads to forecast for U.S. farm cash receipts in 2019, as shown on Slide 7, although the full benefit of higher receipts on industry demand may be somewhat delayed or dampened by the current uncertain environment.

  • Up north of the border, the Canadian farm economy continued to be challenged by lower farm income in 2018 and the overhang of an ongoing trade dispute with China.

  • Wheat prices continue to be pressured by abundant global supplies, while canola growers face ongoing Chinese restrictions on imports.

  • As a result, Canadian major crop area and cash receipts are expected to decline yet again this year, and Canadian farmers are proceeding cautiously with new equipment investments even though balance sheets remain solid.

  • On a positive note, this year's crop is benefiting from late-season rains after a dry start to the season, modestly improving the near-term farmer sentiment.

  • Moving down to South America.

  • As shown on Slide 8, the 2018, '19 season marked a record year for combined corn and soy production.

  • Rising global demand for grains and oilseeds is also driving the export forecast to record high levels, encouraging prospects for next season as well.

  • In Brazil, the 2019 value of production in local currency for key grains and oilseeds and sugarcane is expected to be nearly 10% higher than last year.

  • Brazilian farmers are seeking to capitalize on expanded trade opportunities, not only in soybeans but also in meat products, with exports of beef, pork and poultry all tracking higher on a year-over-year basis.

  • From an equipment demand perspective, the budget shortfall for the Moderfrota credit line posed industry demand earlier in the year.

  • However, the budget has since been replenished for the new crop year.

  • Overall, the 2019/'20 harvest plan is viewed as supportive for the ag sector and equipment demand.

  • Meanwhile, Argentinian farmers -- sorry, meanwhile, Argentinian farm conditions have rebounded strongly from last season's historic drought.

  • The value of 2019 production is expected to be over 30% higher year-over-year.

  • While ag fundamentals remain solid, political uncertainty creates a challenging environment for Argentine financial markets more generally.

  • Still in the southern hemisphere, widespread drought in Australia continues to be the dominant issue shaping the farm economy down under.

  • On the East Coast, drought is expected to result in a third consecutive below-average winter grain crop, albeit southern growing regions have improved from last year.

  • Cotton production is also expected to be significantly lower this year due to constrained water allocations.

  • Conditions on the West Coast has held up much better in recent seasons, and farmers here will be looking to spring rains to finish off this season's winter grain crop.

  • In the EU, the macroeconomic outlook remains clouded by ongoing uncertainty regarding Brexit and whether a deal will be reached between the U.K. and the EU before the October 31 deadline.

  • In the EU agricultural economy, conditions are mixed across Europe, with grain production expected to recover from last season's drought-affected crop.

  • USDA's latest forecast has wheat production up over 10% despite challenges like excessively high temperatures and a lack of rainfall in parts.

  • Poor ag markets like France are expected to rebound as a result, although the outlook has been tempered by the ensuing lower prices.

  • Looking at the important EU dairy sector, farm incomes, which were strained last year in drought conditions, are expected to benefit from a combination of largely stable prices and lower feed costs in 2019.

  • Moving over to the Black Sea region.

  • The current harvest outlook is more favorable than last year, with production forecast to be up 3.5% in Russia and nearly 16% in the Ukraine.

  • Wrapping up, while we do see some improvement in farm economies in most major producing regions in 2019, the backdrop of continued higher uncertainty and volatility is expected to weigh on the outlook for the ag machinery sector.

  • By region, our 2019 ag and turf industry outlooks are summarized on Slide 9.

  • Ag industry sales in the U.S. and Canada are forecast to be flat for 2019, with the decrease in guidance reflecting the previously mentioned uncertainty in the market.

  • Moving to the EU 28, and the industry outlook is also forecast to be flat in 2019 as the production recovery is tempered by somewhat lower small grain prices.

  • In South America, industry sales of tractors and combines are projected to be flat to up 5% for the year, with strength in Brazil balanced by slowness in Argentina due to the previously mentioned political and economic uncertainty.

  • Shifting to Asia.

  • Industry sales are expected to be flat to slightly down as key markets -- sorry, as key growth markets slow modestly.

  • Lastly, industry sales of turf and utility equipment in the U.S. and Canada are projected to be flat to up 5% in 2019 based on solid macroeconomic factors, notably continued consumer confidence.

  • I will now turn the call back to Brent Norwood.

  • Brent?

  • Brent Norwood - Manager of Investor Communications

  • Thanks, Luke.

  • Before moving to the 2019 Ag & Turf forecast, I'll provide an update on the first phase of our 2020 planter and sprayer early order program.

  • As we've already mentioned, planting was significantly delayed this season as persistent rains kept farmers out of the fields for weeks.

  • As a result, planting was still underway during the first phase of our early order program, which negatively impacted early sales progress.

  • Consequently, we believe this year's Phase 1 results are less indicative of the overall program since many sales may push to Phases 2 or 3. Given that context, Phase 1 orders for planters exceeded our expectations with units flat compared to last year.

  • Importantly, the overall sales value was higher due to an uptick on take rates for our most advanced technology and larger planters, both driving increased equipment prices.

  • More than ever, this season underscores the immense value of speed and precise placement of seed while planting.

  • Anecdotally, we heard many examples of customers who were able to plant thousands of acres over a tight 3-day window due solely to the use of our ExactEmerge planter.

  • These anecdotes, combined with the increased take rates from our early order program, illustrate customer willingness to make investment when the value proposition is strongest.

  • As for the Phase 1 results of our sprayer program, orders varied significantly between the U.S. and Canada.

  • And the program's overall order book ended down double digits in the first phase compared to last year.

  • As previously mentioned, conditions in Canada remained challenged due to adverse weather conditions, both last season and this season as well as FX weakness and trade barriers on canola.

  • With the skew of Canadian equipment mix towards larger, highly featured machines, its impact on the first phase was significant.

  • Sprayer volumes were also down in the U.S. but to a lesser extent than in Canada.

  • The U.S. results were negatively impacted by a tough year-over-year comp to 2018 and the late spraying this season.

  • It's important to note that customers were just beginning to spray near the end of Phase 1 of our early order program, driving customers to defer order activity until gaining further clarity on this year's crop.

  • Moving on to our Ag & Turf forecast on Slide 10.

  • Fiscal year 2019 sales of worldwide ag and turf equipment are now forecasted to be up approximately 2%, which includes a negative currency impact of about 2 points.

  • Our full year operating margin forecast is now 10.5% to reflect the previously discussed uncertainty lingering in the U.S. as well as the broadly unfavorable market conditions in Canada.

  • Additionally, the negative margin impact of currency is about 1 point for the year.

  • Now let's focus on Construction & Forestry on Slide 11.

  • Net sales of about $3 billion were up 1% primarily due to positive price realization for the quarter partially offset by the negative impact of currency translation.

  • Operating profit was $378 million, benefiting from increased price realization and the lower impact of Wirtgen purchase accounting, partially offset by a less favorable product mix.

  • Moving to Slide 12.

  • The economic drivers for the division continue to remain supportive of equipment demand for the year.

  • For 2019, while growth in total construction investment and housing starts has slowed, both remain at overall supportive of levels for equipment demand.

  • Meanwhile, oil and gas activity continue at solid levels, with oil prices firmly in the 50s and 60s.

  • And infrastructure investments are continuing at the state and local level.

  • Furthermore, equipment rental utilization remains high, while rental rates continue to grow into 2019.

  • Importantly, CapEx budgets from the independent rental companies continue at levels supportive of further equipment demand.

  • Lastly, global transportation investment this year is forecasted to grow at about 5%, so growth rates vary by market.

  • The overall positive economic indicators are reflected in a healthy order book, which now extends through most of the fourth quarter.

  • Moving to the C&F outlook on Slide 13.

  • Deere's Construction & Forestry 2019 sales are now forecast to be up about 10% compared to last year driven by strong demand for equipment as well as an additional 2 months of ownership of Wirtgen.

  • Wirtgen's 2019 sales are forecasted to be about $3.2 billion as certain geographies have slowed in recent months.

  • The global forestry market forecast is expected to be flat to up 5% with growth coming primarily from cut-to-length products in Europe and in Russia.

  • C&F's full year operating margin is projected to be about 11%, with Wirtgen margins in line with the overall division.

  • Let's move now to our Financial Services operation.

  • Slide 14 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 18 basis points.

  • The current forecast puts loss provision below the 10-year average and below the 15-year average as well.

  • Moving to Slide 15.

  • Worldwide Financial Services net income attributable to Deere & Company was $175 million in the third quarter.

  • For the full year in 2019, net income forecast is now $620 million compared to previous guidance of $600 million.

  • The higher forecast contemplates a lower tax rate.

  • Slide 16 outlines receivables and inventory.

  • For the company as a whole, receivables and inventories ended the quarter up about $1.1 billion.

  • In the C&F division, the third quarter increase is a result of a higher order book and production schedule, while the full year rise is largely attributable to a historically low field inventory position at the start of 2019.

  • It's worth noting that our forecasted inventory-to-sales ratio is in line with historic averages.

  • For Ag, the quarter's increase is due to recent weakness in Canada and deferred retail demand in Brazil as customers anticipated the new FINAME program.

  • By the end of year, we forecast $100 million increase in inventory and receivables.

  • Moving to Slide 17.

  • Cost of sales for the third quarter was 77% of net sales.

  • And our 2019 guidance is about 77%, in line with 2018 results.

  • R&D was up about 4% in the third quarter and forecasted to be up 6% in 2019 or 5% when excluding Wirtgen.

  • The year-over-year increase in 2019 primarily relates to strategic investments in precision ag as well as next-generation large ag products.

  • SA&G expense for the equipment operations was down 2% in the quarter and projected to be up about 4% for the full year.

  • The decrease in guidance relates in part to a decrease in incentive compensation.

  • Turning to Slide 18.

  • The third quarter included a $24 million benefit to the provision for income taxes resulting in a 21% tax rate for the period.

  • The full year effective tax rate is now projected to be between 23% and 25%.

  • Slide 19 shows our equipment operations' strong cash flow.

  • Cash flow from the equipment operations is now forecast to be about $3.4 billion in 2019.

  • The reduced guidance reflects a potential $300 million voluntary contribution to our OPEB plan.

  • Company's financial outlook is on Slide 20.

  • Our full year outlook now calls for net sales to be up about 4%, which includes about 3 points of price realization and 1 point related to an additional 2 months of Wirtgen ownership.

  • On the negative side, we expect currency to be about a 2 point headwind for the full year.

  • Finally, our full year 2019 net income is now forecast to be $3.2 billion.

  • I will now turn the call over to Ryan Campbell for closing comments.

  • Ryan?

  • Ryan D. Campbell - Senior VP & CFO

  • Thanks, Brent.

  • Before we respond to your questions, I'd first like to discuss our use of cash priorities and then provide some perspective on our financial performance given the persistent uncertainty in the market.

  • Like near-term fluctuations in end markets, our use of cash priorities remain the same, we continue to generate strong cash flow throughout the cycle.

  • Importantly, our capital allocation decisions continue to first support our A rating while also ensuring that we effectively fund operating and growth needs.

  • Next, we'll maintain a dividend payout ratio that targets 25% to 35% of mid-cycle earnings and can be sustained through the cycle.

  • Note that we've increased our dividend by 25% over the last 2 years and that further increases will be under consideration as we demonstrate progress to our increased profitability goals.

  • Lastly, during the quarter, we repurchased $400 million of stock, and we'll continue to buy when we can create value for long-term shareholders.

  • Now regarding our financial performance.

  • It's important to note that we've significantly invested in next-generation large ag products and accelerated our precision ag initiatives, all the while diversifying our Construction and Forestry division through the Wirtgen acquisition.

  • Additionally, we increased our infrastructure spending to gain efficiencies and modernize systems that enhance our dealer and customer engagement.

  • Beginning in 2017, momentum has built in our ag business, and the initial part of our 2019 early order program, which occurred in December of 2018, indicated an acceleration of replacement demand.

  • As such, we took the steps required to meet the projected incremental demand.

  • Unfortunately, North American customer sentiment has since deteriorated, not only due to uncertainty over market access but also due to weather and the demand impact of African swine fever.

  • As these challenges persist, we are now beginning more aggressive actions on our cost structure to create a more efficient and nimble organization.

  • These actions, which will involve organizational efficiency, a footprint assessment and an increased focus on investments with the most opportunity for differentiation, are in support of our aspiration to achieve 15% structural operating profits by 2022 and will position us to capitalize upon the resumption of replacement demand growth.

  • Josh Jepsen - Head of IR

  • Thanks, Ryan.

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

  • (Operator Instructions) Angela?

  • Operator

  • (Operator Instructions) Our first question comes from Rob Wertheimer with Melius Research.

  • Robert Cameron Wertheimer - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis

  • Question is really as you look into your potential cost savings plan, you've also had a nice focus on innovation and maybe a spending policy on innovation.

  • So could you talk about the next really 2 or 3 years on R&D?

  • I mean are you seeing more and more projects that can generate a good return for you and, therefore, maybe keep that spend high and the cuts are in other areas?

  • Maybe just balance that aspect.

  • Josh Jepsen - Head of IR

  • Yes.

  • Thanks, Rob.

  • This is Josh.

  • I'll start.

  • I think as we think about this and as Ryan noted, we'll see a continued focus on those things that we think drive the most differentiation and most value creation for our customers.

  • And you've really seen -- saw that over the last few years as we've been investing in things like Blue River Technology and features that we've been bringing out over the last couple of years on the precision side, whether it's ExactEmerge or ExactApply, which Brent mentioned earlier, and things like Combine Advisor.

  • So I think the ability to focus and prioritize there will be a key tenet of how we operate going forward.

  • Ryan D. Campbell - Senior VP & CFO

  • And Rob, this is Ryan.

  • We've made significant investments in the building blocks to be able to deliver incremental value to our customers through the use of technology in precision agriculture, and we'll continue to do that.

  • What I would say, we're early.

  • We're delivering measurable value today, but the opportunity, the more we work on it, the opportunity, in our minds, continues to grow.

  • So we'll continue to have that be a priority for us.

  • At the same time, we're going to look at our global customers and work to find more efficient ways to deliver our products and services so that we can satisfy their needs as well.

  • Operator

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

  • Seth Robert Weber - Analyst

  • Josh, last quarter, you guys talked about potentially taking production down about 20% in some of the larger facilities.

  • Can you just kind of recalibrate us where you're at, kind of where third quarter was and then what you're thinking for fourth quarter relative to third quarter?

  • Josh Jepsen - Head of IR

  • Yes.

  • Maybe just to kind of clear up, I think that was probably not as clear as it could have been.

  • As we think about -- the back half of the year, that comment was back half of the year versus back half of 2018.

  • So continue to expect that we will produce less and then -- than we did in 2018 and similar to what we commented a quarter ago.

  • I think importantly, maybe for a little more clarity, as we think about large tractors, we will underproduce retail demand for large tractors in North America by a mid-single digit.

  • So no significant change to where we were a quarter ago, but that continues to be our expectation.

  • Operator

  • 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 cost improvement initiatives that you're looking for are improving supply chain performance and on-time deliveries.

  • And just update us if you wouldn't mind on how the expediting fees and costs shook out this quarter compared to what we had seen earlier this year.

  • Josh Jepsen - Head of IR

  • From a quality perspective, we've definitely seen the challenges, the disruptions, delinquencies have come down significantly.

  • We're in better and better shape there, so operating more effectively and efficiently.

  • I think you've seen as it relates to premium freight, we talked about some acute issues we had seen on small tractors.

  • As we had noted, we expected those to carry into the third quarter, which they did.

  • But they've abated, and we don't -- do not expect to see those as we go forward.

  • I think by and large, the situation much improved.

  • As you think about cost savings moving forward, I think the opportunities there are as we move from getting parts in, which was a significant challenge as we ramped in '18 into early '19, really shift to how can we spend more time on structural material cost reduction, which we typically have over time.

  • Operator

  • Next 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.

  • Just based on what you guys said about -- I guess comment on how you're feeling about channel inventory, specifically on the large ag side as we approach 2020 and whether we'll be in a position in 2020 to produce in line with retail demand given the underproduction in the back half of the year.

  • And then I guess my second question, just the numbers on construction are obviously good this quarter, and it sounds like you have good visibility but there are some concerns that there's excess inventory on the construction side, too.

  • So can you just talk about what you're seeing from your perspective?

  • Josh Jepsen - Head of IR

  • Yes.

  • So field inventory overall, I think, is really a question.

  • I mean as you think about large ag in North America, we talked about -- I did just mention the mid-single-digit underproduction for large tractors.

  • I think what we expect is, particularly in the U.S., that what we're -- the actions we're taking would allow us to produce to retail demand.

  • Canada, as noted, there's a little more weakness there.

  • So that's a spot that we need to work through further, so that would maybe a bit -- take a bit longer.

  • But in the U.S., we will say we are positioned to do so.

  • As you think about where we're at from a field inventory perspective in Construction, as Brent mentioned, we've still got on average a couple of months of order coverage, which is really in line with where we traditionally run.

  • So those replenishment times have shortened, and that's -- we say that's a positive thing, which also helps in our ability to react to changing market dynamics.

  • So we still intend to build field inventory during the year, as we've talked about, coming off of historical lows.

  • But that's -- the ability to be quicker on our replenishment allows us to be adjusting more quickly as needed.

  • So we'll continue to watch that market and make changes while we go forward.

  • Operator

  • Next question comes from Steven Fisher with UBS.

  • Steven Fisher - Executive Director and Senior Analyst

  • What do you see as the biggest changes that are driving the $100 million net income guidance reduction?

  • And then I think your sales guidance suggests Q4 sales growth year-over-year, both in Ag and Construction.

  • And can you talk about kind of what would be driving actual growth in the fourth quarter?

  • Josh Jepsen - Head of IR

  • Yes.

  • So when we think about Ag in the fourth quarter, really, biggest impact there is in South America and Brazil, in particular, as we see some growth in that market, particularly as we start to prepare for 1Q, so spring season in Brazil in 1Q.

  • There's a little bit of small tractors as well just from a year-over-year perspective where last year, we were trying to build inventory.

  • And we had a stronger 3Q and a little bit weaker 4Q in '19 as it's a little bit flatter, so those 2 areas.

  • And then there is a little bit of impact as you think about cash receipts improving and some MFP payments that Luke talked about where we can see some incremental demand.

  • We don't think that's large by any means but could be beneficial.

  • On the C&F side, it's -- I'd say it's more -- we've got the building inventory that we expected to see and then a plan for throughout the year that drives the up from a fourth quarter perspective there.

  • Ryan D. Campbell - Senior VP & CFO

  • This is Ryan.

  • When you're thinking about the guide down by $100 million, there's some volume in there, both -- in both divisions.

  • There's also a little bit of incremental discount spend, particularly as it relates to the Canada market.

  • But what I would say about that is overall, we're still expecting 3% price realization.

  • So those are really some of the moving pieces that took us from 3.3% to 3.2%.

  • Operator

  • Our next question comes from Ann Duignan with JPMorgan.

  • Ann P. Duignan - MD

  • You know there's higher losses on your operating lease residuals in the quarter, and also other assets on the balance sheet on the FinCo rose 33% year-over-year, suggesting the more used equipment is being returned onto your books.

  • In the meantime, you're talking about 3% pricing on new equipment.

  • So can you talk about whether new pricing is getting wiped out as farmers buy used equipment and not willing to pay for technology?

  • Or even vice versa, they're willing to pay for technology on the used market but that's just cannibalizing used values on equipment that doesn't have technology.

  • I mean what's going on there?

  • And are we really talking about a 3% gross price if you take in the losses on operating residuals into account?

  • Josh Jepsen - Head of IR

  • Yes.

  • So I think -- I mean as you think about used values in particular for large ag, we are seeing them be pretty stable, and I think maybe importantly, good condition, late model year are actually fetching a premium.

  • And there continues to be a demand for technology, whether it's new -- as we mentioned on the EOPs, we're seeing strong adoption.

  • And I think what we're seeing, and we're hearing this directly from customers, is technology impact is most important as you're going through challenging conditions.

  • So the willingness to invest in technology certainly is there.

  • We're seeing the benefits as we deal with shorter windows to execute jobs in the field.

  • And that's present, I'd say, both on new and used.

  • So I think that's -- there's not a lot of differentiation there between those 2.

  • Yes.

  • And as you think about your initial comment on the operating lease losses noted in the quarter, so as you think about when we get lease returns that come back through John Deere Financial, we remarket those back to our dealer channel.

  • So certainly, the uncertainty we're seeing from a customer perspective is impacting the environment right now.

  • And we've, as we have in the past, decided to move some aged inventory in order to not carry that for another -- to another new season.

  • And as a result of that, we've seen some pressure on recovery rates, and that's what's reflected here in the quarter.

  • I think as we go forward, we continue to be really mindful of what's coming due and how do we work with the customers and the dealers to best manage that.

  • And maybe one thing worth noting there is as we look forward, we actually see less lease maturities in the forward-looking 12 months than we have in the most recent 12 months.

  • So we'll continue managing that and be mindful of what we're doing there.

  • Operator

  • Next question comes from Andy Casey with Wells Fargo Securities.

  • Andrew Millard Casey - Senior Machinery Analyst

  • My question is really the pathway from where you seem to be guiding margins in 2019, somewhere in the low to mid-9% range to the goal to be at 15% mid-cycle operating margins by 2022.

  • The margin headwinds that you had through 2019 appear to be dissipating similar to the FX headwind called out for Ag & Turf.

  • If you exclude those headwinds, could you help us with what 2019 margin would have looked like?

  • I guess I'm just trying to understand, over the next couple of years, should we expect a pretty healthy margin snapback in 2020 absent those headwinds?

  • Or is the gap closer to goal, about 15% more weighted to 2021?

  • Josh Jepsen - Head of IR

  • Yes.

  • Thanks, Andy.

  • Yes, and you're right.

  • I mean if you look at our Ag & Turf division for the year, the combination of FX and mix are a little more than 1.5 points of margin drag in 2019.

  • So that is a significant component there.

  • And then as we talked about, quite a bit of the material and the premium freight has been a drag as well on margins.

  • I think as we look forward and as we talked about in the past, in the fourth quarter, we expect material to improve and be favorable.

  • Similarly, in response to Jerry's question, we don't expect to see the heightened level of premium freight that we have for the first 3 months of the year.

  • So those are all things that we would expect to see improvement.

  • And then to Ryan's comments, as we move forward, we're continuing to look to take actions to deliver improved margin.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • So cost reduction is going to be a component of that, not only in 2020 but as we go forward through 2022.

  • The other things remain the same that we are accelerating and feel really good about is the adoption of precision ag and what we can do from a differentiated value perspective for our customers, our ability to grow our aftermarket parts and services business and successful integration of Wirtgen.

  • All of those things are the recipe to get us from where we are today to the aspirational target of that 15% in 2022.

  • Operator

  • Our next question comes from Ashish Gupta with Stephens.

  • Ashish Ravi Gupta - Research Analyst

  • Just a clarification on the order book in Ag.

  • I think last quarter, so it would be May, you talked about it being out to September, which would be roughly 4 months.

  • And now you kind of -- it seems like talking about 4Q mostly covered, which would sort of imply roughly 2 months, be consistent with sort of the uncertainty commentary.

  • But I just want to kind of clarify if that's the right way to think about it.

  • Josh Jepsen - Head of IR

  • Yes.

  • So the mostly covered was in reference actually to Construction & Forestry where we've got about 2 months on average there in the construction book.

  • As you think about large tractors, that's where we're well into November, if you look at both 8000 or 9000 series tractors.

  • So we've got further coverage there, again, albeit on a lower schedule.

  • But we've got, I'd say, pretty similar visibility to what we did a quarter ago.

  • Operator

  • Our next question comes from Joe O'Dea with Vertical Research Partners.

  • Joseph O'Dea - Principal

  • Josh, how do you think about the diversion trends that you're seeing in the EOP so far?

  • And maybe I know it's early days, but just kind of out of the gate, what you're seeing in combines to try to understand what the underlying demand level is and indications heading into next year where it sounds like planters good trends but highly technology-oriented and then sprayers seeing the drag there?

  • I'm just trying to understand how you guys are sort of parsing through that to think about the direction of demand.

  • Josh Jepsen - Head of IR

  • Yes.

  • This is a great question, Joe.

  • I mean, I think as Brent mentioned, EOP started in June.

  • Historically, when we started in June, that's because the planting season is over.

  • So with that backdrop, planting occurring well into June.

  • We think the first phase may not be as good as an indicator of what to expect in the year to come as we it would in the past because of the level of uncertainty there.

  • Sprayers, really a tale of 2 markets.

  • And as Brent mentioned, Canada down more significantly, and that's impactful because of the high level of technology as well as the size of machines you see in Canada that are typically ordered there.

  • So that's impactful.

  • The U.S., maybe one dynamic that's a little bit different for the U.S. even though we were -- we're down double digits but feel a little bit better there is ag service providers make up nearly 1/3 of the industry, and a bit delayed precision obviously not doing really any spraying or much spraying at all in May and limited amounts in June.

  • So anecdotally, I think the conversations there is that they deferred and then delayed some of their CapEx decisions until we get a little bit deeper into the season.

  • So I think that's been -- that's kind of played out over time.

  • So we'll continue to see what Phase 2 looks like for those programs, but I think the positive news is customers' willingness to invest in technology where they can see the value and positive outcomes.

  • And in addition to that, you look at what we saw on ExactEmerge, growth in our take rates there similar on ExactApply, so continues to progress.

  • As it relates to combines, still really early.

  • We're 2 weeks in, so we'll continue to monitor that and provide some insight as we get to the fourth quarter.

  • That program kicked off in the first part of this month and runs through January.

  • So we'll see how that evolves as we go forward.

  • Operator

  • Our next question comes from David Raso with Evercore ISI.

  • David Michael Raso - Senior MD & Head of Industrial Research Team

  • I know you just went through a lot right there.

  • But I'm trying to understand, with 1 quarter to go, when you target year-end inventory and receivables, it's making a statement about the next year's assumed demand profile.

  • Can you help us a bit with what kind of demand profile did you bake into your assumption for those year-end inventory targets?

  • Josh Jepsen - Head of IR

  • If you think about Ag & Turf in particular, there's 2 things that really impact where we're ending and then think about what changed from our previous guide.

  • I mean one is some weakness that we've seen in Canada, that's represented there and a little bit higher inventory and receivables.

  • And then the other piece would be Brazil.

  • And as we look forward to the first quarter in that market and the expectations there, given some of the factors Luke mentioned in terms of strong margins, really strong crop, that we expect translates to some positive end market changes there.

  • Operator

  • Our next question comes from Stephen Volkmann with Jefferies.

  • Stephen Edward Volkmann - Equity Analyst

  • So my question is around pricing, and the 3 points of prices is pretty impressive.

  • And I guess I'm just trying to figure out, I think you try not to capture mix, so things like ExactEmerge and sort of the value there is not in the 3%, if I'm not mistaken.

  • And I'm just curious how you can push that much price and what the outlook might be as we sort of go out a little bit further.

  • Josh Jepsen - Head of IR

  • As it relates to price, you're right in your commentary that, that is like-for-like and does not include features or things that would be added on.

  • So that's fair.

  • So those kind of things would show up in mix and not in our price realization.

  • So that's correct.

  • Yes, as you think about price, I think kind of how and why are we able to get it, I think it's really being able to deliver value to the customers and understanding the agronomic inputs and outcomes that we're able to deliver.

  • And I think, we had a number of customers talk about it, the ability with ExactEmerge, for example, to plant 3,000 acres in 3 days and the only 3 days of good weather they had.

  • That's a really big advantage to be able to have that and execute that.

  • And that's a different -- can be the difference between get the crop at all versus not.

  • As you think about going forward, we've averaged over the last decade on our equipment operations about 2.5 points of price.

  • And as we look forward, I think we've been higher this year than the net average, probably get closer and closer to that average as we step forward.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • What I'd say, I mean as we think about the total value of our production system with respect to the equipment, the technology and the service and support that our dealer network can provide makes us feel comfortable that there's significant incremental value that we can continually add for our customers.

  • And so that's how we think about pricing.

  • As Josh said, when something new comes out, it doesn't come into pricing, but updates or year-over-year comparisons to things that have already been out, that does come into pricing.

  • But that overall total value that we can bring with the product, the technology and the service and support that our dealers can provide give us comfort that our pricing is well within bounds and, as Josh indicated, is within our historical ranges.

  • Operator

  • Next question comes from Chad Dillard with Deutsche Bank.

  • Chad Dillard - Research Associate

  • So just wanted to circle back on the cost savings.

  • I just want to get a sense for like what the potential order of magnitude it could be, how are you splitting that between each business line.

  • And also just like the time frame to enact and hit the full run rate.

  • And then secondly, just a question on the low-horsepower tractors.

  • Just want to get a sense for your comfort with BP channel inventory and how you're thinking about production versus retail demand.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • This is Ryan.

  • So on the cost side, we're not ready to provide that level of detail.

  • What I would say is we've taken targeted actions already in the third quarter.

  • We've got some contemplated in the fourth quarter.

  • The total of those are relatively small at this point.

  • They would total about $25 million in costs.

  • We're prepared to provide an update with our fourth quarter earnings call as we give our 2020 outlook and what those might mean to 2020 and going forward.

  • What I'd just say is it's an acknowledgment the cost reduction is going to be just a larger component of our path from today's margins to the 15% aspirational margins that we have at mid-cycle in 2022.

  • Josh Jepsen - Head of IR

  • Yes.

  • And maybe just a follow-on relative to contractor inventory.

  • I think -- broadly, I think we feel good and comfortable with where we're at from an inventory level and we're pretty much aligned -- or in line with where the industry is.

  • And we continue to see strong end market demand there really driven by general economic conditions in the U.S., in particular.

  • Operator

  • Our next question comes from Mig Dobre with Baird.

  • Mircea Dobre - Associate Director of Research and Senior Research Analyst

  • And just to follow up on that, can you help me understand if the cost actions that you're talking about are sort of driven by the changes in the end markets' expected production volumes, et cetera?

  • Or this is more structural in nature, longer-term planned?

  • And maybe the second part of my question is on Wirtgen.

  • I'd love an update there and maybe your view on margin here because it seems to me like your outlook for margins has ticked down some.

  • And I'm wondering how we should be thinking about this business going forward.

  • Josh Jepsen - Head of IR

  • Thanks, Mig.

  • I'll start on Wirtgen.

  • Yes.

  • So I mean if you think about Wirtgen overall, really strong third quarter, which we expected.

  • We talked about that.

  • So essentially, about 16% margin.

  • And if you kind of take out purchase accounting last year, that's actually similar margins on slightly lower sales level.

  • So feel good about the way that business has performed.

  • Margins did come in some for the full year, really driven by changes in mix in their business as we've seen some shifts as well as underproduction on a couple of their brands as we align order fulfillment strategies as part of our integration.

  • So as we are going to underproduce and are underproducing to some extent this year, that is affecting their margins.

  • But -- so we think that's the right thing to do to position ourselves for going forward there.

  • So I mean in summary at Wirtgen, strong margin performance in the quarter, continue to feel really good about that business, confidence in the EUR 125 million of synergies.

  • And we continue marching down that path and provide updates as we go.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • On the cost reduction side, the plans are really focused on longer-term structural changes in our cost structure as opposed to lever pulling given where we are in the cycle.

  • But more to come in our fourth quarter earnings call for that.

  • Operator

  • Our next question comes from Courtney Yakavonis with Morgan Stanley.

  • Courtney Yakavonis - Research Associate

  • Just a quick clarification on the $25 million you talked about being out of the third and fourth quarter.

  • Is that a run rate?

  • And is that currently embedded in the $100 million guidance reduction?

  • And then secondly, when you talk about early orders, you talked about them being flattened units because of precision ag, can you give us any more granularity on whether the uptake of things like ExactEmerge are continuing to see a step function higher?

  • Or is it roughly at the same 35% level and just grinding incrementally higher?

  • Josh Jepsen - Head of IR

  • Yes.

  • On the EOP side, we saw it move from kind of that 1/3 of planters going with ExactEmerge up to around 40%.

  • And not just ExactEmerge, but we're also seeing these larger planters.

  • So you think about wheat bigger planters and more highly featured.

  • Both of those things are contributing to that value being up, as Brent noted.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • On the cost side, those are onetime costs.

  • I wouldn't conclude that that's a run rate, and it is embedded in the $100 million reduction in guidance that we've had.

  • Operator

  • Our next question comes from Larry De Maria with William Blair.

  • Lawrence Tighe De Maria - Co-Group Head of Global Industrial Infrastructure

  • Just curious, does your outlook contemplate the USDA report just came out?

  • And did that change your thinking at all since it came out?

  • Because it sounds like you still expect farmers to use some of their MFP cash to buy equipment in your fiscal fourth quarter, so I'm guessing not, so maybe it plays out over time.

  • And secondly, where do you guys stand on planted acreage and yields now?

  • I don't know if you differ from where expectations are.

  • Luke Chandler - Chief Economist

  • Yes.

  • So maybe I'll start with the fundamental part of the question with regard to planted acreage and yield.

  • And obviously, what the USDA released on Monday surprised the market, particularly on the corn, I'd say more harvested areas than planted and certainly the yield.

  • So the limit down moving in corn prices got a lot of people by surprise.

  • So that's kind of what we have at the moment to work with.

  • I guess what we would say is that there's still a long way to go in this growing season.

  • Obviously, we've had a lot of abnormal weather with the delayed planting.

  • There's a lot of variability in crop progress from the western side of the Corn Belt, whereas it's looking a lot better across the eastern side where there's a lot more variability.

  • Obviously, the later planting development opens up windows for early crops and those sorts of thing.

  • So -- and certainly, history shows that final yield numbers can vary relatively significantly from mid-August estimates.

  • So the methodology that the USDA uses changes as we go through the crop season and as we get into harvest and we get some actual harvest data, we might see that changing as we go forward.

  • So we'll be obviously watching that closely, and that will be important in terms of what it means for final production and that crucial ending stocks number.

  • Josh Jepsen - Head of IR

  • And I think, Larry, when you think about kind of the MFP impact, certainly, I mean farmer to farmer, you get very different situations in terms of the size and health of their crop, whether or not they market the grain in May, June and prices ran up.

  • So there's a lot of dynamics, I think, that will impact if and when they use some of that from a cash receipt perspective.

  • Luke Chandler - Chief Economist

  • Yes.

  • I guess just to add onto that, Josh, like the MFP has really been a shot in the arm for U.S. farmers.

  • When you think about the cash receipts, it provides a boost for 2019.

  • So it leaves it to its highest level since 2014.

  • And it certainly helps given some of the issues that we've got with trade uncertainties and the impact that we've seen this week on commodity prices.

  • So some of them will have been able to benefit from marketing old crop stocks as what were some of the highest prices we had in 5 years earlier in the year have been able to market forward at higher prices as well.

  • And obviously, we'll wait to see what it means for equipment demand given the uncertain conditions we have.

  • Operator

  • The next question comes from David Raso with Evercore ISI.

  • David Michael Raso - Senior MD & Head of Industrial Research Team

  • If you addressed it, I apologize, I missed it.

  • Your implied construction equipment margins for the fourth quarter, I mean, on a year-over-year basis, it looks like a pretty solid decline despite sales are up.

  • And if I missed something that explains why the margin performance would all of a sudden erode like that, my apologies.

  • But can you explain why that's the case?

  • Josh Jepsen - Head of IR

  • Yes.

  • You're saying in the fourth quarter?

  • David Michael Raso - Senior MD & Head of Industrial Research Team

  • Yes.

  • The margin guide for the full year is 11%, I believe, correct?

  • So that implies, I don't know, 9.6% or something in that nature for the fourth quarter.

  • And that'd be down year-over-year despite sales up 6%.

  • And just given that you're having pretty strong run of margins, I wasn't sure if something was changing on incentives for dealers or mix or something I'm missing.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • David, it's Ryan.

  • I think mix is a component of that.

  • The other aspect of that is Construction has a different material commodity footprint.

  • And so the overall benefit that we're projecting to see in the fourth quarter on material costs, part of that is positive in Ag.

  • Construction is still not yet seeing that benefit.

  • The other thing is pricing.

  • Our pricing comparison gets a little bit tougher.

  • There were some actions that we took in the fourth quarter of last year that improved our pricing, so the comparison gets a little bit tougher in the fourth quarter for Construction.

  • Those are really the puts and takes associated with the margin performance that we're projecting for the fourth quarter in Construction.

  • Operator

  • Our last question comes from Jerry Revich with Goldman Sachs.

  • Jerry David Revich - VP

  • I'm just wondering if we can expand conceptually on the cost reduction opportunity and the buckets of savings because as we look at the manufacturing footprint that you folks have pretty streamlined already, big tooling upgrade on the Tier 4 transition as well.

  • So can you just help us understand the major buckets of opportunity as we're talking about improving the cost structure further from here in a bit more context?

  • If you don't mind, obviously, we'll get more detailed numbers next quarter as you mentioned, but any qualitative comments would be helpful.

  • Josh Jepsen - Head of IR

  • Yes.

  • So I think Ryan kind of laid out the 3 areas in terms of kind of organizational efficiency.

  • I think the second one, as you think about footprint, I think there, we are a single source for a lot of our products on a global basis.

  • So we feel good about our capacity.

  • So start to look at how do we make sure we're focusing and prioritizing on those things that add most value for our customers.

  • And then -- those really will be the 2 most important areas.

  • Ryan D. Campbell - Senior VP & CFO

  • Yes.

  • Jerry, it's right.

  • We're not ready to break out those buckets, although it's all 3 that we're going to focus on.

  • And fourth quarter, we'll provide an update on where we are, what it means to 2020 and kind of our view towards margin improvement all the way up to 2022 to hit our aspirational targets.

  • Josh Jepsen - Head of IR

  • Well, thank you, Jerry.

  • Thanks, everyone.

  • We appreciate it.

  • We will be around, so please reach out if you've got questions.

  • And have a good weekend.

  • Thank you.

  • Operator

  • Thank you for your participation in today's conference.

  • Please disconnect at this time.