Q4 2019 Earnings Call
Good morning, and welcome to Darrin Company fourth quarter earnings Conference call. Your lines have been placed on to listen only until the question and answer session of today's conference I would now like to turn the call over to Mr., Josh Jepson director of Investor Relations. Thank you you may begin.
Thanks Julie.
Also on the call today, our Ryan Campbell, our Chief Financial Officer.
John argument senior Vice President AG, and turf sales and marketing and brand Norwood manager Investor Communications.
They will take a closer look at your fourth quarter earnings and spend some time talking about our marketing for an outlook for fiscal 2020 after that we'll respond to your questions.
First the reminder.
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Looking comments concerning the company's plans and projections for the comp 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 Exchange Commission.
This call May include financial measures that are non conformance with accounting principles generally accepted in the United States of America gap.
Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website, John Deere Dot Com flush earnings under quarterly earnings event.
Brent.
John Deere completed the fourth quarter with a strong finish in retail sales for both divisions, while uncertainty lingers in the U.S. AG market replacement demand and increased adoption of precision technology will continue to be critical factors for 2020.
As North American farmers work through trade issues and adverse weather conditions sentiment in Brazil remains stable offsetting weakness in other south American markets such as Argentina.
And the construction and Forestry division retail demand remained steady in markets benefit from generally positive economic conditions at the same time dealers are cautiously managing inventory levels to ensure their ability to meet current demand, while maintaining flexibility as activity fluctuate.
Now, let's take a closer look at our year end results for 2019, beginning on slide three.
For the full year net sales and revenue were up 5% to 39.258 billion, while net sales for equipment operations were up 5% to 34.886 billion.
Net income attributable to different company was 3.253 billion or $10.15 per diluted share.
The results included a favorable benefit of 68 million to the provision for income taxes duty U.S. tax reform. Excluding this item adjusted net income was 3.185 billion or $9 in 94 cents per diluted share.
Slide four shows the results for the fourth quarter.
Net sales and revenue were up 5%.
9.896 billion.
Net income attributable to different company was 722 million or $2.27 per diluted share.
The results included a favorable benefit of 41 million to the provision for income taxes due to U.S. tax reform. Excluding this item adjusted net income was 681 million or $2.14 per diluted share.
On slide five total worldwide equipment operations net sales were up 4% to 8.7 billion in the fourth quarter.
Price realization in the quarter was positive by three points, while currency translation wasn't negative by two points.
Point I'd like to welcome to the call John Lagon Senior Vice President of AG, and turf sales and marketing to discuss the fundamentals affecting the AG John .
Thanks, Brett and good morning all.
Let's start with quarter's results on slide six.
Net sales were up 3% in the quarter over quarter comparison, primarily driven by strong price realization and slightly higher volumes.
Operating profit was 527 million, resulting in a 9.2% operating margin for the division.
The year over year decline was largely due to higher production cost that's CNG in the unfavorable effects of foreign currency exchange, partially offset by positive price realizations.
Importantly, our north American large AG business finished the quarter with strong retail sales, putting us in an excellent inventory position for the start of 2020 .
In the U.S., the large tractor and combined inventory to sales ratio is the lowest it's been since 2014, which puts us in a good position to produce inline with retail demand for North America large AG in 2020.
Now turning to slide seven let's take a closer look at some of the fundamentals affecting the agricultural economy.
It's been a euro uncertainty for corn to soybean growers in the U.S.
In addition to continue trade uncertainty in near term demand concerns stemming from Africa, swine flavor and unusually wet spring delayed planting this season, which ultimately resulting in fewer corn and soybean acres for the year.
Compounding matters further difficult weather conditions. This fall have significantly delay harvest, which is now the slowest the four flawless on record for core.
The combination of these factors have pressured green supplies for the year.
More specifically despite these lower levels of supply overall green consumption increase for the period contributing to a decline in the stocks to use ratio for both corn and soybeans and in turn higher year over year prices for both commodities in 2019.
The weak global stocks to use ratio is expected to rise again in 2019 as production increases in Russia, and Ukraine more than offset dryness in Argentina and Australia.
Ending stocks for 2019 reflect record high levels for global wheat inventories.
Now slide eight outlines U.S. foreign cash receipts.
2019, foreign cash receipts are estimated to increase about 2% year over year to 395 billion.
While net cash income is estimated to be up around 7% to 113 billion.
The increase in crop cash receipts and income is largely attributed to the market facilitation payments from the U.S.D.A.
What's your expected to contribute approximately 17 billion to the U.S. farm economy. This year.
As they complete their harvest far worse, well assess their individual situations to determine how best to allocate the year over year increase in receipts.
And income.
Before our before addressing our industry outlook on slide nine I'd like to first provide a high level overview on the state of the North American AG industry.
Despite uncertainty from trade.
Weather and assets, we are still in a replacement market.
That if anything is becoming more amplified let me explain.
First of all while this uncertainty has slowed replacement rates in both 2018 and 19.
And long term freight resolution is still clearly desired.
We do see some evidence the U.S. farmer sentiment is beginning to improve as farmers acclimate over time to planning and a more uncertain trade environment.
Secondly.
The fleet age in the U.S. has reached its highest point in over a decade.
And our 2020 outlook anticipates, even further aging of this fleet.
This supports our view that many U.S. customers will reach a point, where they simply need to replace their equipment and with that impact a gradual recovery of the equipment investment cycle will resume.
Its customers make decisions to upgrade their operations.
Lastly, in addition to the advanced age of the fleet the impact of precision technology is further driving these replacement decisions.
Throughout this prolonged period of uncertainty farmers have continued to invest in technologies that deliver high ROI and operational efficiencies and there is no doubt that are old product introductions. In this area of precision AG technology have had a distinct impact on the finance.
Actual and operational performance of our customers.
And never was that more evident than this year as our customers use these technologies to better manage the adverse weather conditions I mentioned earlier.
This impact of technology has also been very apparent in the result of our early order programs.
Well, we have seen increased take rates for precision features compared to last year.
And speaking of our early order programs. The final phase of the planter of Sprayer ERP concluded in October .
Mixed results on a unit basis.
Early orders for planters finished up single digits with take rates for exact emerge technology up again significantly for fiscal year 20.
Sprayer orders were down low double digits.
With the U.S. results down single digits in Canada orders were down significantly more.
It's also important to note that the first phase of these programs.
What's significantly impacted by the late planting this season.
And that orders for the subsequent two phases were up quite significantly on a year over year basis.
Our coal mine early order program completed the first of three phases in October .
The results down double digits similar to our crop LP. The results of the first phase were negatively impacted by lower activity in Canada.
As well as the delayed harvest that I mentioned earlier.
Given the late harvest this year as program may be more backend weighted towards phases, two and three.
Also due to strong take rates in 2018, and 19 combined advisor was moved into the base model for 2020.
Indicating a significant adoption of this game changing feature.
Our tractor Orderbook currently extends through the end of March.
Which is well ahead of last year.
The strong order book is largely attributable to a mid year model change as we transition to the all new aydar tractor featured at Agra Technica This year.
More specifically our current order back reflects a sell out of the current model as we begin taking orders for the new eight are starting in December .
Well talk more about this new eight or as the year progresses, but simply put it is the most technologically advanced tractor, we've ever made and loaded with our latest precision technologies.
This new model will feature upgrades and guidance connectivity and user experience, while enabling further electrification of associated implements.
Yeah that initial reaction to these features has been very positive for both customers and dealers.
We intend to begin production during the third quarter.
With that context, let's turn to our 2020 AG and turf industry outlook on slide nine.
AG industry sales in the U.S. in Canada are forecast to be down about 5% for 2020.
With the year over year decline reflective of a cautious environment.
Concerning the U.S. market, it's worth noting that we've made some adjustments to our leasing operations to address recent losses in the U.S. portfolio.
Although the overall used equipment market continues to be quite stable.
Our lease return rates remain at elevated levels.
At the same time, we've taken actions to reduce our matured lease inventory, which put downward pressure on our recovery rates in the wholesale market and contributed to the difficult to the disclosed impairment.
But.
To address this situation going forward, we have taken the following actions.
First we have adjusted lease residual values to better reflect the current environment.
Next we have announced changes to our leasing program that will include a risk sharing mechanism with our dealers to ensure alignment.
And lastly, we will realign our performance in incentive structures in order to increase dealer collaboration and our collective remarketing efforts.
In summary, we have taken significant actions to enhance our position with our current leasing portfolio and our overall leasing strategy going forward.
In terms of our current portfolio, we have reduced mature lease inventory during 2019 and are now turning that inventory much faster.
Regarding or leasing strategy going forward.
The changes I highlighted should provide for greater efficiency and managing the overall portfolio, while remaining competitive in the marketplace.
And these changes will enable us to better leverage the strength of our dealer organization.
By allowing them to control the inventory in their own area of responsibility.
This in turn will also support their evolution of promoting production systems versus individual products.
Because they can better manage their customers trade cycles.
We received a variety of feedback from our dealers, but many of our strongest dealers view these changes as quite positive.
They also see them as an obvious evolution to our leasing strategy that reflects the growing importance of leasing to the overall industry.
Now moving onto the E U 28.
The industry outlook is forecast to be flat in 2020.
Most regions impacted from last year's drought are expected to recover with favorable production for the year.
Furthermore, the outlook for the dairy sector remains stable.
In South America industry sales of tractors and combines are projected to be flat for the year.
Sentiment in Brazil remains very stable.
With high levels of grain production combined with healthy producer margins and restored liquidity in the financing market.
Driving a positive outlook.
However, other Latin American markets, like Mexico, and to a greater extent Argentina.
Face near term challenges due to the potential for adverse policy impacting the AG sector.
Shifting to Asia industry sales are expected to be flat with growth in India offset by slowness in China.
Lastly, industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat in 2020 based on stable general economic factors.
Now moving onto the agriculture forecast on slide 10.
Fiscal year 2020 sales of worldwide AG and turf equipment are now forecasted to be down between five and 10%.
Which includes expectations of two points of positive price realization and currency headwind of about one point.
Also note that our sales forecast does contemplate producing below retail demand for some small AG products in 2020.
Our full year operating margin forecast is ranging between 10, and a half and 11.5% I will now turn the call back over to Brent Norwood Route.
Now, let's focus on construction and forestry on slide 11.
Sales of 2.947 billion were up 8%, primarily due to shipment volumes and positive price realization for the quarter.
Operating profit was 261 million benefiting from increased shipment volumes and price realization offset by higher production cost essay NGL kinetic in a negative mix.
Similar to the AG Division.
Also finished 2019 with strong retail activity keeping inventory to sales ratio within a desirable range.
Moving to Cnf outlook on slide 12.
Construction and forestry 2020 sales are forecast to be down between 15 between 10 and 15% compared to last year.
Year over year decline driven mostly by a mid single digit underproduction to retail volumes versus a building of inventory in 2019.
The book remains healthy and back within our historical 30 to 60 day replenishment window, while the overall industry activity remained steady.
Global Forestry market forecast is expected to be flat with growth coming from products in Europe offsetting declines in the U.S. and Russian markets.
Cnf full year operating margin is projected to be between nine and a half to tenant a half percent with road building margins higher than the overall division.
Let's move now to our financial services operations on Slide 13.
Worldwide financial services, and net income attributable to different company was 90 million in the fourth quarter and 539 million for the full year the provision for credit losses as a percentage of the average owned portfolio with seven basis points for 2019.
Fourth quarter results were negatively impacted by a 77 million pretax impairment charge relating to the operating lease portfolio.
As John mentioned earlier, we've already implemented measures to adjust the lease program going forward and ensure stronger to ensure stronger dealer alignment for remarketing returns machines on future leases.
For fiscal year 2020, net income is forecast to be 600 million, which contemplates attach rate of 24% to 26%.
Vision for credit losses in 2020 is forecast at 19 basis points.
Like 14 outlines receivables and inventories.
For the company as a whole trade receivables and inventories ended the year.
52 million, which was well below our forecast as a decrease in the AG division was offset by increases in CNS.
Enough division the full year rise is largely attributable to building some field inventory after historically low position at the start of 2019.
In AG.
Decrease is mainly attributable to a strong finish in retail sales and underproduction in large AG in 2019.
Moving to slide 15.
Cost of sales for the fourth quarter and the full year was 77% them that sales our guidance for 2020 is about 76% down a point year over year.
R&D was up about 4% in the fourth quarter and 8% for the full year and our and our forecast for 2020 is down 2% from 2019 levels.
That's a angie expense for the equipment operations was up 8% in the quarter and 3% for the full year.
Our next year's forecast is down 3% from 2019.
Turning to slide 16.
The fourth quarter included a $41 million benefits the provision for income taxes, and other favorable discrete adjustments, resulting in a 9% tax rate for the period.
Full year 2019 rate of 20% included a 68 million dollar benefit related to tax reform adoption for 2020, the full year effective tax rate is now projected to be between 24% to 26%.
Slide 17 shows our equipment operations cash flow.
Cash flow from the equipment operations is now forecast to be in a range of 3.1 to 3.5 billion in 2020.
The guidance reflects a potential 300 million dollar voluntary contribution to our OPEB plans.
Finally, the company's fiscal year 2020, net net income outlook is on slide 18.
Our full year outlook calls for net income to be between 2.7 and 3.1 billion.
I'll now turn the call over to Ryan Campbell for closing comments Ryan.
Before we respond to your questions I'd first like to offer some closing thoughts on 2019, and then provide an update to some key initiatives we have underway in 2020.
In summary, 2019 was a challenging year with respect to losses in our lease portfolio and managing through mid year production cuts in large AG. However, the measures we've taken position us with greater flexibility to respond to market conditions in the future.
As mentioned during our comments, we've taken actions during the last half of 2019 to reduce our inventory position and address the performance of our lease book.
Specifically as it relates to U.S. large AG, we enter 2020 with the lowest inventory to sales ratio over the past several years, allowing us to produce roughly in line with retail demand in this important market.
Our leasing the changes we are making to our programs will enhance the long term sustainability of our leasing business model.
Now as we shift our focus towards 2020 and beyond we've recently launched some key initiatives to help us better execute our strategy.
As we mentioned during the third quarter earnings call, we initiated plans to create a leaner and more efficient organization with an increased focus on the areas of our business that provide the greatest potential for differentiation differentiated customer value.
Throughout the remainder of fiscal 2019, we completed targeted measures to streamline operations in headcount incurring costs of 30 million.
These initial actions in 2019, where the start of a broader effort to produce a more agile organization that enables quicker responses to changing market conditions.
This initiative will also place a greater emphasis on the acceleration of our precision technologies and aftermarket strategies.
In line with these objectives today, we announced a broader voluntary separation program for eligible salary employees. The cost of the fiscal year 20 program is approximately 140 million and contributes to an annualized savings run rate of approximately 150 million when combined with the initiatives.
Taken in 2019.
Furthermore, we are undertaking an assessment of our overseas footprint as we work to serve our customers more efficiently.
We will provide updates on our plans throughout the year during our quarterly earnings calls.
As a result of these actions we intend to drive the following outcomes.
First.
Streamlined organizational structure with reduced layers reset to focus on delivering technology and innovation at an increasingly rapid pace.
Second these actions will drive capital allocation decisions that further prioritize markets products and services with the highest potential for differentiation as well as advance our solutions offerings focused on improving customer outcomes throughout their production systems.
Lastly will accelerate our capture of aftermarket parts and services, leveraging our dealer channel and unique tools, such as connected support and expert alerts.
In addition, we'll continue to focus on the successful integration of Bergen and realization of synergies, while leveraging their market position and road building to offer customers a more complete solutions.
As a final note we acknowledge the uncertain environment. We are operating in however, we take these strategic measures as the beginning steps to reshape our organization and capitalize on the tremendous opportunities in front of us, particularly as it relates to precision technologies.
No we're ready to begin the Q in a portion of the call operator will instruct you on the pulling procedure in consideration of others in our hope to a more if you to participate in the call. Please limit yourself to one question Julie.
Thank you if he would like to ask your question. Please press Star one you will be prompted to record your first and your last name. Please unmute your phone when recording your name and to withdraw your question Press Star Channel. Our first question comes from Stephen Volkmann with Jefferies. Your line is open.
Oh, Hi, good morning, guys.
Morning.
I guess I'll just kick it off which is a little bit of color on your AG outlook. Please so when I look at your various geographic outlooks, mostly flat U.S. downsize I don't come up with anything close to net sales downsized and especially with a little bit of price.
Oh wins, so I guess, obviously your Underproducing I think you may have mentioned in small AG, but I was surprised to hear you say that you think you're kind of where do you need to be in large AG. It just seems like a pretty big Delta between your sales and your end market forecast. So maybe just a little color there. So a question.
Yeah, I think Steve I think as you think about those you're right. Most most geographies flat, while we're down about five in the U.S. in Canada I think what we see there is certainly the impact that that was mentioned in terms of underproducing on the small AG side of the business. We expect the retail environment continues to be pretty stable.
And that we would continue to perform well there, but as we've gotten to a better inventory levels. There. We realize we can optimize those inventory levels and will underproduce as a result, as we as we make that make that work I think the other part of thinking about the range is just a recognizing the uncertainty in the environment and maybe a little bit.
She is a as we see some of the delays related to the harvest season, Oh, pushing back some of the activity in our you'll be.
Yes, Josh, but I'd like to make it clear that our product portfolio has never been better we like our go to market strategies. In we're certainly we're certainly not polo, losing market share from that perspective, So we feel very bullish about our share position going forward.
Thanks will go and go to our next question.
Your next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, Good morning, I guess, just two questions one on on the restructuring the 140 million just to be clear is that included in net income GAAP guide and when do you expect you realise one phase G over what timeframe and then I just might my second question.
Josh is on the implied Decrementals for the total company, but I guess in particular on the AG side, they look very healthy considering <unk>.
Sales decline so I'm, just trying to get comfort with what's implied in that decremental margin <unk> restructuring price cost freight Collins from last year. If you could just give some broader color there. Thank you.
Yeah, I'll start I mean, yes, we would say the the programs are I mentioned, we would have embedded in our guidance today. So that's that's included a in terms of the costs and the run rate savings.
Do you think about AG and turf for next year.
The Big question in your comment on our we seen material material prices steel prices improve we are seeing those come through is starting to improve now maybe a little bit tempered by the fact that we underproduce in the back half of 19, and our production lower going into 2020, so not maybe as big of a benefit.
But we are seeing those prices come down I think the other thing.
On as you think about our margins is we are seeing a higher pension costs, a little bit higher incentive compensation that are that are impacting us and then some overhead as we bring in new product programs. So we introduced a couple of new products that Agra Technica. So we'll be we're in the process of bringing those in so there is some some in.
Overhead spend as we as we.
Integrate those and launch those in the year.
Anything.
Yeah.
Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
If you could just update us on on the take rates for precision planting and some other key products I guess, we're hearing the field a lot of momentum in soybeans in particular, so it sounds like that could be a multi hundred million dollar revenue tailwind 20 versus 19, but I'm wondering if you could comment on the exact pay credits and maybe on that revenue tailwind.
Estimate thanks.
I think sherri, yeah, so as as mentioned by John .
We've seen continued growth there. So if we look at exact emerge for example, we were.
And last year that numbers in the upper Thirtys near 40, as we come through the early order program.
And I think this past season.
The challenges with the wet conditions has been.
The best Test case for why that technology is particularly valuable.
Shorter windows that we need to execute those jobs is really really important.
You know exact apply we're seeing kind of very similar take rates two years ago, which are somebody in the fortys.
And then combine adviser.
We moved into base equipment. So that's a that's a significant move you think about.
The duration, which we've seen that adopt very quickly. So that's three years to go in base.
And.
So we feel really good about that on top of that what we're seeing from our tractors is on our some of our precision packages that are tractors can take a we've seen pretty significant gross or eight our tractor see has seen a jumped to about 50% take rate on our command center auto track guidance, which includes ROE sense in some other functions. So.
We're seeing that really across the portfolio anything you mentioned John I'd, just like to augment this this last year the weather I've never seen the weather conditions more adverse and really more unpredictable and.
The exact to merge technology proved to be really a game changer when you consider that.
One or two days could make a difference whether a guy got as crop it or not and it really it really proved itself and then I think on the combined advisor.
I think about some of the some of the conditions that they face. This fall I think the ability to set those those settings and then have them automatically set into field proved to be really really valuable and then on the premium Activations, Josh I think that just shows the the precision piece of the technology here and how important.
It is when you consider inch by inch accuracy. So, but this year has proven to be a very solid year from a way to augment what they really do.
Hey, Gerry Jerry it's Randy just.
A quick.
I thought on that took over a decade for us to move auto track a from a feature an option into a base machines.
We think about adoption and precision technologies. Some perspective common adviser. This is your three and we're moving into base.
So you'll hear thing I'd add there on the precision side as we're seeing continued growth and engaged acres. So we are.
North of 165 million engaged acres. So that is that has grown and not just in North America, but we're seeing that grow overseas as well Brazil's a market, where we've seen significant growth. There. So we feel really good about the trajectory of those take rates, particularly as we introduce those features in other geographies like South America, but on top of that what we're seeing from the ops.
Center and folks engaging with those digital tools to plan monitor analyze their operations.
Thank you. Thanks, we'll go to our next question.
Question comes from Rob Wertheimer with millions research your line is open.
Hi, Thanks, and good morning, just one quick one on the voluntary separation that is I guess more U.S.C.
International.
I understand correctly future costs out you will work through and talk through the rest of the year as one of the National side, and then I know, it's hard to talk about things that are costs related but well that puts you in a good position or is this a multiyear journey that you're kind of kicking off a cost.
Yeah, Rob Thanks for the question I'd say give me. This is certainly is strategic in nature, and I'd say not not a one or two quarter event. So I think over overtime will continue kind of executing on this on this path in terms of.
Looking at our cost structure, but then also how do we best in most efficiently serve our customers all over the world. So I think we'll as we continue to execute on the plans as Ryan mentioned, we're undergoing assessment will will provide updates, but I think that's a that's a little bit.
Hey, Rob the trend. It this is I would view it as a journey to reshape our portfolio and our business towards the areas that we've talked about with respect to where we can differentiate.
More than than potentially other areas and that and that's really you know with production systems agriculture precision agriculture and aftermarket.
Thank you Rob will go go head to our next question.
Our next question comes from make domain with Baird. Your line is open.
Hi, Good morning, everyone I I just want to go back to Steve's initial question on your AG and turf outlook.
I guess I'm, having a bit of hard time understanding exactly what's implied in terms of inventory de stocking or.
For the smaller.
And can you maybe put this in perspective, I mean from what I recall this is less than half the overall segment and we're talking about <unk>.
<unk> billion and a half Clos fourth of a headwind or at least on my math in 2020, and correct me if I'm wrong and.
Why is this happening now and again, some some some framework and some context would be helpful.
Yes, I think big I think when you think about that I mean, we are we are seeing the large AG market come down so and so it's not small like alone. So we are seeing topline there the benefit of the actions. We took last years, we're able to produce in line.
With that with at retail demand such positive, but still you know it's at a lower level.
You think about the small AG side.
And what we're doing there on the the underproduction to pull those inventory levels down that's really a as we think about where do we need to be in the selling season and what are those inventory to sales ratios and roughly we're talking about probably a you know about a 10 point reduction of those inventory to sales ratios on where where we want to be so there's some movement there but that is that is.
The biggest portion of the a underproduction and Josh as this in under 40 horsepower tractors specifically.
Yes, no I'd say more broadly so essentially 100 horsepower and below so you're talking about compact utilities plus utilities.
You know Josh.
We've made some pretty significant improvements to the overall order fulfillment process on small tractors and frankly with those changes were confident that we can bring the inventory down.
As you mentioned, so I think its a.
Combination of factors.
Thanks Mick.
Your next question.
Next question comes from Joe a day with vertical research your line is open.
Hi, good morning, with respect to the 15% segment margin targets can you talk about the bridge to those targets at this point how much of that is volume dependent how much of that is things is that you control.
Yes, I think first and foremost in either the things that we're working on regardless of end markets and that's that's precision AG.
Aftermarket opportunities its activities on the cost structure.
Executing and integrating Burke and in our synergy there. So those are I'd say the big piece of what we see the the margin improvement coming from a as we think about what does the end market do you know we're not contemplated a huge swing back in terms of improvement for example for for large AG.
And so just following up on that I mean, you're down this year I would say 20 may 18, 2019, probably more reflective of normalized demands. This 15% margin targets really with respect to normalized demand and so this year would be below that just 2020 would be below that just to be clear.
Yeah, our massive put us just below 90% of mid cycle from an AG perspective overall.
Okay. Thank you.
Thanks, Joe Good our next question.
Our next question comes from Andy Casey with Wells Fargo Securities. Your line is open.
Thanks, Good morning.
Question on the 2020 outlook is should we think that is more truncated the second half unusual because it kind of sounds like you expect demand to start out slowly, it's probably going to take some time to realize benefit from the voluntary separation to kick in and then you have comps that that should get a little bit easier in the second half given then.
Dettori correction that should it this year.
Andy that that's fair I would say, there's there's more of that impact in the first first part of the year certainly as you think about some of the cost so the underproduction and you're right. The comps would get a little would be more favorable in the in the back part of the year, where we did significant under production in 2019 and large AG Mandy.
The voluntary separation costs.
We'll be incurred in the first quarter the benefits obviously, we'll go throughout the throughout the year and then full year run rate benefits will be in the following year.
Okay. Thanks, and then a follow up just just a clarification on the series eight our production starting in Q3.
Does that impact the first half production rates at all for the existing aydar.
We're effectively I mean, we've got the the schedule laid out and we've sold out as Bret mentioned in his comments or John mentioned, we've sold out that that level of production that we have so so thats full so it really doesn't impact what we what we would.
Execute on in the first half of of the year.
Okay. Thank you.
Thanks, Andy go ahead to our next question.
Next question comes from Steven Fisher with you'd be asked your line is open.
Thanks, Good morning, just a couple of things on the construction side of the business. What is your retail expect your expectation for 2020, if I missed it and how does the 1% price assumption for 20 compare to what you achieved the 19 and then just wondering if to what extent, you're starting to see any competitive pricing in the.
Segment as things start to soften there. Thanks.
Thanks, Steve Yes, so when you think about Cnf on price as we talked about or is it was in our press release, you were expecting about a point of price in 2020 that compares to about three in a in 2019.
As we as we discussed throughout this year you know Cnf did three for the full year that was much more front end loaded where we took some price actions at the end of 18 in the early 19. So we saw a lot of that come through and in the early part of the year, but strong strong price performance given where we've been now you have certainly that's a market where we will always.
Watch, what's going on I understand you're not necessarily the price leader. So we'll continue to to monitor what we've seen going on from a competitive perspective, but we think we're we're able to deliver that 1%, which is a good thing for that business.
And the retail expectation overall for construction.
Yeah.
We expect we took retail to be down around 5% and certainly a as.
As noted we will we will do some underproduction a mid single digit underproduction in construction in North America as we align.
Inventories and in that business.
Terrific. Thank you. Thank Steve go ahead and go to our next question.
Thank you. My next question comes from David Raso with Evercore ISI. Your line is helping hi. Thank you first a clarification up maybe I missed it a AG and turf high horsepower did you under produce retail in the second half of 19.
Talk about a quarter or so ago.
Was that the case.
We did we did so for the full year, we talked about a quarter ago. We said we were going to for the full year high horsepower in North America, we were going to under produce a mid single digit we actually ended up underproducing by a high single digit as a result of executing the production plans, but then also strong retail to close out the year.
Well, that's I'm trying to understand if if you're producing at retail next year, you think high horsepower is generally.
Okay, I mean, I know, it's within the guide of downtime for U.S., Canada, though it sounds more on the smaller side I'm trying to understand why your production wouldn't be up.
A year following you are under producing.
Put even more pressure on the amount of under production in the low horsepower to make the math work.
Can you just square that up for us if you're producing at retail for high horsepower and 21, it's your production up from 19.
I think the so retails lower first off we can go from 1920 retail is lower and we're going to produce to that level, but that that levels lower than than where we would have been in.
You know that level is lower just when we compare the years 19 to 20 so.
We're going to produce in line.
Even after the under production that we did in 19.
But if you are under producing by high single digit 19, even if retails down three or four at a high horsepower your production will be up.
Because you were under producing more year ago I'm, just I think would just putting a lot of pressure on a huge under production and low horsepower to make this math logical and I just want to make sure we level set your high horsepower production would appear to be up.
And your retail environment coming off of how you Wonder produced and that's just the math I'm, just making sure I understand we all.
Level set leaving the call.
Yeah, I put out what I'd tell you is is we are.
The lower retails that we see in 20 versus versus 19, producing that that is still at a lower level than what we saw in fiscal 19.
Okay. We can talk offline and then be lastly, the cadence or how you see the sales playing out for the year I know you don't give quarterly guidance, but it but any sense of the cadence of the implied total sales down about nine how do you see it or even break it up whatever you choose I mean, I think I think when you think about when you think about 20, it's probably a little bit lighter in the first half as we've talked about you know we got some of the.
Under production.
Some of those things on small track small AG small tractors in particular that impact the first the first half of the year, So I'd say, a little bit lighter first half versus second half.
Okay. Thank you very much thanks, David will go and go to the next question.
Thank you. Our next question comes from Ashish.
Stephens Your line is open.
Hi, Thanks, so much I have a question that a clarification.
Do you think there's the demand pull forward for the eight are resulting in the sell out and then just to clarify in the large character order book.
I think last year in the fourth quarter.
This call you said it was the large truck order book was extended versus last year, but I thought last year. You said it was out through the fiscal second quarter and I think you'd said through March this year. So if you could just clarify that'd be great.
Yes, So I think we would say there's an impact of the model changeovers, certainly and I think that's.
Brent and John and I have comment on that in terms of that has impacted where where.
You know orders are and we're not taken or so certainly we do expect some orders have come in.
On the existing model. So I think that's that's a component I think about where we are in relation to last year.
Eight 8000 series 9000 series were a month or two to two months further out in terms of availability.
But that can be variable on what's the underlying production schedule right. So that's not absolute when we compare those but we are further out we have more visibility this year than we do than we did a year ago at this time.
You know Josh.
And as we as we planned our transition strategy. We had intended to do this to to sell out the current model and then transition to the new model and I can tell you that there's there's demand on the current model since it's sold out but theres a lot of excitement on the new was actually the transition is going just as we had planned.
And then sorry, just a quick follow up so I think you had said that you expect.
Some downtime in the third quarter related to.
The model changeover.
So should we expect production to be lower and some versus the is there going to be different seasonality.
I mean, there's there's probably a.
A little bit of impact, but I don't think it's significant I wouldn't say significant as that changeover happens really kind of at the end of.
Our second quarter into the beginning of our third so I don't think it would impact a meaningfully are kind of seasonal shifts there are seasonal splits.
Great. Thank you.
Thanks, well go to our next question.
Yes. Our next question comes from Seth Weber with RBC capital markets. Your line is open.
Hey, good morning, guys on construction, maybe just on the work in business. It sounds like your messaging. The you know it's really the the U.S. business, that's gonna be weaker but it feels like it's working it's been a little bit softer than we expected I mean can you just give us kind of a walk around and what you're seeing in the regions for the work in business and.
You kind of alluded to margins being above segment average, but you know our margins kind of where you would expect them to be at this point or are you pushing still pushing synergies there.
We're still more upside on margins to calm thanks.
I think so yes, I mean, certainly we think the opportunity on synergies is yet to come.
Theres a lot of working we feel good about that 125 million euro.
But but we're not we haven't seen a lot of that making its way through a from a from a margin perspective, yet, but I would say is on some of those synergies are having some impact a. Good example is you know we talked about that this year of integration integrating order fulfillment.
So this year Vered can did do some underproduction.
Birkin models as well as Vogel of models.
Which which have been impactful in terms of their margin performance. So that's that's impacted their margin as we did do some underproduction to rightsize inventory there.
And some models in some markets.
So there that that had had an impact on unbroken margins for the year I think as you just as you look around the globe. There you know North America has been pretty steady from a road building perspective, Europe has been relatively stable kind of flat maybe little bit of caution in a market like UK on Brexit.
You know I think if you look at emerging markets in other markets, that's probably where we're seeing more of the weakness China, we've talked about places like Argentina, Turkey, where we've seen more more incremental weakness so.
Still feel really good about the business really good about the integration and synergy opportunities.
And continue to find more opportunities to you know to leverage and work together. So we say you know on track certainly we took some steps with a with the with the underproduction. This year. We've got some factory start up going on that's driven some some inefficiencies but feel good about the future there.
Okay guys. Appreciate thank you bye access will go to our next question.
Yes. Our next question comes from Courtney Jack Avantas with Morgan Stanley . Your line is open.
Hi, Thanks, guys.
I appreciate the color you gave on on some of the steps you're taking.
On on the Finco to reduce losses on operating leases that can you just talked a little bit about how much you adjusted down the residual values.
And also it sounded like this was primarily.
It's primarily in the division, but was there any impact on seeing are on CNS.
Operating leases residual values and and then also does any of this equipment.
Precision AG or any of the more advanced features or is this something just an aging.
Correct.
Yeah. Thank you.
I'll start there I mean, I think you think about as our lease terms have gotten longer they tend to be between three and four years. So you've got a little bit you know a little bit you're not talking about brand new equipment.
As you think about which divisions. It we see we saw it across both divisions and maybe even if you just go back to we made some changes to our lease book in 2016.
Where we we reduced residual values, we encourage longer term leases.
And we saw some of that benefit we saw the benefit in 17, we saw in 18 as well.
As we got into the latter half of 19 are we talking to the market uncertainty impacting the recovery rates as we were remarketing. This equipment back through the wholesale channels. So that resulted in some of the impairment that we that we disclosed.
And then the changes that that John mentioned today. So there's been a combination of those things that have that have impacted this but we are we have seen in both divisions. So it's not a just one division or the other.
But we have not made major changes to the Rvs me, we've we've we've tweaked a little bit to fit the market, but not major changes.
Okay got you and then just on the comment that you're rolling on Monday advisor into your pricing I think you gave a 2% pricing.
Spraying in key.
You know how should we thinking how should we be thinking about that is that like for like equipment.
Or will there will be an additional mix impact from something like how much.
You know not necessarily in an upsell anymore.
In this first year when it moves in base it will still be coming through mix not in our price realization number.
It would not have been in the comparable model last year.
Okay.
Thanks, Gordon will go and go to our next question.
Thank you. Our next question comes from Ann Duignan with Jpmorgan. Your line is open.
Hi, good morning.
I could that kinda out quite at that strong dollar is not listed as one of the headwinds facing you got to agriculture, but I'm not going assets.
I'm going ask why where are you overproduced, saying in the small horsepower sector in the under <unk> hundred horsepower and how much inventory do you have to reduce and now that you end up spending or overproducing.
Yeah, and I would say well I think as we as we look at that business. We were building inventory to get to a desired inventory level to meet a really retail demand and meet the needs of those customers the way those customers by those is.
Effectively on simple you walk into a dealership on a Saturday you went to walk away with with the tractor that day. So over the last couple of years, we've been growing to get to that sustained inventory to sales level and I think as John mentioned earlier.
As we have looked at that we've gotten to that level, we've identified opportunities really to optimize those those levels of inventory, while still being little meet the customer needs. So it's really about us getting a little more efficient and having a little bit better information as we've gotten to those levels to be able to execute you'd mentioned giant and once again, we made and we made some some pretty significantly.
Improvements to the overall order fulfillment process. So we're we're confident we can respond quicker to retail demand. So I think the word optimization is spot on Josh alright. Thanks. Thanks, then well go and go to one dollar.
Yes.
Next question comes from Tim Thein. Your line is open with Citigroup.
Great. Thanks, John .
I'm wondering if there are way to quantify how much.
For AG and turf how much of the forecast is made up essentially.
As of year on estimates versus orders in hand, and the speed of the question is.
Normally at this time, just given the delayed harvest.
Presumably there's there's less of.
Dealer visibility that dealers have and then turn it you have so is there a way to again just quantify.
Again, I think any ballpark numbers in terms of.
This pointed to yield we normally have X percent visibility and that's the balance is just our own estimate in terms of how we're in rates play out over over the coming months.
Yeah, I think I'll start this is Josh I think.
Certainly the though the weather and the delayed harvest has impacted ERP combines in particular certainly.
We we would acknowledge we have less visibility there because of the delayed seasonality that we're seeing.
And Thats, let us probably be a little more cautious in terms of how we're viewing the market and our and our overall guide as a result of that now I think you know tractors. Good visibility as we mentioned really driven more by some of the the changeover and product.
But those would be the key things I would mention on its John to that and you don't I'd like to I'd like to repeat the Tom on me and my opening comments that with this weather situation being so unique.
There's a pretty good possibility that our early order program on timelines will be back ended.
We don't know that yet so that's why we're a little cautious, but we think theres a good chance of that as farmers complete through harvest and assess their income situation.
We think there could be so some of your in buying but we don't know that yet.
Yeah, Okay, and maybe just like you there John a quick follow up in terms of you mentioned earlier.
From the standpoint of replacement demand in the fleet being the oldest it's been in awhile and I'm. Assuming this is whether that you're talking about that we're seeing is is putting some additional pressure on the fleet are you seeing that manifested in terms of higher reconditioning bills and in service in park activity.
Dealers in terms of maybe up a bit more visibility that you have that hey, maybe we are getting closer to the point, where youre going to see more new based buying or is it just more anecdotal I think thats a great question and in fact, we are seeing good growth in the aftermarket our dealers or you know reporting part sales growth a absorb.
Option.
Growth et cetera. So we are seeing some some larger bills as they as they come through the system and we think are connected support approach the that Ryan alluded to we think that's going to really help the dealer being proactive with some of those service opportunity. So yes as the fleet ages, we are seeing some pretty good sales growth on the aftermarket.
One of the business.
Alright, Thanks, Tim will go ahead.
To our next question.
Our next question comes from Ross Gilardi with Bank of America. Your line is helping.
Hi, Good morning, guys. Thanks for squeezing me and I wanted to ask another question about combine adviser and make and not a standard option.
Only after three years [laughter], what you're doing at the same time phase one of your order book is down double digit.
And what I'm trying to get at.
You know is there a risk at the very short term decision that's going to remove your ability to go back and price in the future for this this pretty valuable option when the market recovers the reality that you're going to have to give us give away a lot of these technologies in the based models to drive adoption, particularly some of your competitors seem to be stepping up their game and really focus.
Thanks, a lot more heavily on precision agriculture.
Yeah, I think I think maybe one thing there to call out is when something goes into base, it's not free a feature moves into base based price moves up with it. So we don't we don't give up that that that pricing opportunity or margin that goes with that.
You know and we were seeing take rates a increase to the point, where we needed to do that but because it's a fundamental improvement to the overall come by the way. It functions. So we think that's a positive the way we've transitioned that into base so quickly.
[laughter], whereas the top of the hours so that'll be our last question. We appreciate all the interest and will be around a two to answer questions. Thanks, everyone Happy Thanksgiving.
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