Q1 2020 Earnings Call

Good morning, and welcome to Dhiren Company first quarter earnings Conference call. Your lines have been placed on 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.

Hello, Good morning.

We call today are Ryan Campbell, our Chief Financial Officer Bread Norwood manager Investor Communications.

Today, we'll take a closer look and years first quarter earnings and spend some time talking about our markets in our current outlook for fiscal 2020. After that we'll respond. Your question. Please note. The slides are available to complete the call. This morning and can be accessed on our website, John Deere Dotcom site earnings.

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

This call May include financial measures that are not in conformance with accounting principles generally accepted in United States of America.

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Right.

John Deere completed the first core with a solid performance in seeds early signs of stabilization for the U.S. AG industry.

Since the mid improved at some point at some progress was made addressing market access for U.S. farmers through the passage of U.S. LMCA and the phase one trade agreement with China.

Meanwhile, markets, such as Brazil got off to a slower start even as underlying fundamentals and been production remains high.

At the same time markets for our construction and Forestry Division slowed Deboning results as a division take actions to manage inventory levels and adjust to lower levels of demand.

Now, let's take a closer look at our first quarter results beginning on slide three.

Enterprise net sales and revenues were down 4% to about 7.6 billion, while net sales for equipment operations were down 6% to to about 6.5 billion.

Net income attributable to different company was up 4% to 517 million or one dollar and 63 cents per diluted share.

The results included a pre tax expense of 127 million relating to the voluntary employee separation program conducted during the quarter.

Moving moving onto review of our individual businesses will first start with agriculture in terms on slide four.

Sales were down 4% in the quarter over quarter comparison, primarily driven by lower shipment volumes and the impact of currency translation, partially offset by positive price realization.

Price realization in the quarter was positive by three points, what currency translation was negative by a point.

Operating profit.

It's 373 million, resulting in an 8.3% operating margin for the division.

The year over year increase was primarily due to positive price realization and lower production costs, partially offset by lower volume as well as a $78 million a charge relating to the voluntary employee separation program.

Before reviewing our industry outlook will first provide commentary on the regional dynamics impacting AG markets and your operations around the globe starting on slide five.

In the U.S. farmer sentiment began to show early signs of stabilization during the quarter as uncertainty surrounding market access abated with the passage of U.S.M.C.A. and the signing of the phase one trade agreement with China.

Additionally, U.S. farm cash receipts are expected to increase in 2020 aided in part by the recently announced third tranche of market facilitation payments, which totaled 3.6 billion further enhancing farmer liquidity.

Well market access certainly hasn't improved sentiment.

Farmers will likely remain cautious until AG exports to China begin to flow.

Given the seasonality for so we've been demand exports to China are unlikely to increase significantly until harvest season.

As a result, we do not expect significant changes in the replacement cycle during fiscal year 2020.

Furthermore, at this point in the year many of our large AG products are already sold ahead via early order programs that have now closed.

Despite limited changes to the current replacement cycle, we were encouraged by the results of the final two phases of our combine early order program.

After a slow start this stronger finish resulted in overall program orders ending up low single digits in the U.S. well down double digits in Canada in.

In total the program ended down a high single digit on a unit basis, but down just a low single digit on a revenue basis due to price increases.

Meanwhile, our tractor order book for fiscal year 2020 is healthy with a strong sold ahead position, indicating a positive reception to our newly redesigned aydar featuring an industry first fully integrated for track option for a rigid frame row crop tractor.

The strong order book reflects in part measures. We took during 2019 to manage field inventory, allowing us to produce in line with retail sales in 2020, which is currently still our plan.

Moreover, the actions we took in 2019 resulted in desirable field inventory to sales ratios.

That are significantly below the rest of the industry and we'll continue to manage new equipment inventory tightly throughout the year.

Meanwhile, large AG used inventory levels are in their healthiest position in years, which is supportive of a stable price environment for used equipment.

In contrast to the U.S., our field inventories so considerably lower than last year remain elevated in Canada.

This is due to challenging industry conditions, namely existing trade barriers on Canadian canola and a declining exchange rate.

Net farm income is expected to increase this year, but we'll still be below long term averages.

As a result, we don't see much change on the equipment replacement cycle in 2020, and we'll focus on.

And we'll focus on continuing to reduce our field inventories. So that we can more closely matched production to retail sales in 2021.

Shifting to South America in Europe on slide six.

Record soybean production and favorable exchange rates continue to drive very favorable producer margins in Brazil. This year.

These healthy soybean dynamics, coupled with an improving outlook for sugar prices have improved overall fundamentals for the country in 2020.

Despite these sound fundamentals farmers are somewhat cautious regarding equipment investment as the impact of shifting trade dynamics have yet to be determined.

Brazilian farmers were also anticipating further clarity and possibly better terms on government sponsored financing for farm equipment, which contributed to lower retail sales at the end of 2019 and lower shipments through the beginning of 2020.

On that note in late January the government announced a new financing program that will begin the transition to one subsidized market based rates for AG equipment.

This development should provide greater clarity on funding options for farmers and potentially support stronger equipment sales for the second half of the year.

Meanwhile, sentiment in Argentina remains subdued as farmers are just a higher export taxes on corn and soybeans on a positive note. This year's crop is very strong and margins are expected to be positive even in the face of higher taxes.

Moving on to Europe, even.

Even though results for winter crop conditions have been mixed overall excellent and but fundamentals have mostly improved year over year as the north region is recovering from last year's drought.

Margins in dairy and livestock remain supportive, while we prices continue above breakeven levels.

But despite the modest improvement in fundamentals sentiment does remain soft.

Concerning deere's operations within Europe, we continue to drive greater degrees of optimization and focus to our business.

Over the last few months, we've began work on rationalizing the operations of our sales branches and shifting more resources to our frontline selling efforts.

We're also concentrating our product portfolio towards large AG with a deeper focus on precision technologies and we are accelerating the implementation of our dealer up tomorrow strategy in the region more closely to what we have done in North America to ensure our channel it appropriately scaled and optimized in order to deliver.

And support higher degrees of technology in the coming years.

With that context, let's turn to our 2020 AG and turf industry outlook on slide seven.

Unchanged from last quarter, we expect AG industry sales in the U.S. and Canada to beat down about 5% for 2020, reflecting a stable environment in the U.S. offset by more challenging conditions in Canada.

Moving onto Europe, the industry outlook is forecast to be flat in 2020 as 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 our projected to be flat for the year.

Fundamentals in Brazil remain positive as as a result of high levels of Green production combined with healthy producer margins and restored liquidity in the financing market. However, other Latin American markets like Mexico into a greater extent, Argentina. These 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.

Moving onto our AG and turf forecast on slide eight.

Fiscal year 2020 sales of worldwide AG and turf equipment are still forecasted to be down between 5% to 10% which include expectations of two points of positive price realization and a currency headwind of about a point.

It's important to note that our sales forecast continues to contemplate producing below retail demand for small tractors in 2020.

For the division's operating margin our full year forecast is ranging between 10, and a half and 11.5% unchanged from last quarter.

Additionally, when modeling the full year keep in mind that some of our large AG production schedules include lower shipment volumes in the second quarter due to factory changeovers, resulting from the introduction of the new eight our series tractor in a limited production build of the New X series combined.

Now, let's focus on construction and forestry on slide nine.

For the quarter net sales of about 2.044 billion were down 10%, primarily due to lower shipment volumes and the impact of currency translation, partially offset by positive price realization.

Operating profit moved lower year over year to 93 million, primarily due to lower shipment volumes as well as 24 million in expenses relating to the voluntary employee separation program.

On the positive price realization and currency benefited profit for the quarter.

Let's turn to our 2020 construction and forestry industry outlook on slide 10.

Construction equipment industry sales in the U.S. and Canada are forecast to be down between 5% to 10%, reflecting mixed economic indicators and elevated levels of field inventory.

For the year employment GDP and housing starts all remain stable drivers of demand, while oil and gas capex and rental capex are mostly down year over year.

Moving onto global Forestry, we now expect the industry difficult to decline, 5% to 10% this year with the U.S. and Canada markets declining more than the rest of world as lumber and pulp prices soften in North America.

Moving to the Cnf outlook on slide 11.

Deeres construction and forestry 2020 sales are still forecast to be down between 10% to 15% compared to last year.

The year over year decline is driven mostly by a mid single digit underproduction to retail construction equipment volumes compared to building inventory to compare to the building as inventory in 2019.

The order book remains within our historical 30 to 60 day replenishment window and is consistent with our outlook.

Our net sales guidance for the year include expectations of about one point of positive price realization and a currency headwind of about one point.

For the division's operating margin our full year forecast is ranging between 9.5% to 10.5% unchanged from last quarter.

Let's move now to our financial services operations on Slide 12.

Worldwide financial services net income attributable to different company was 137 million in the first quarter.

For fiscal year 2020, net income forecast remains 600 million, which contemplates a tax rate between 24 and 26%.

Provision for credit losses in 2020 is forecast at 18 basis points, reflecting a high degree of credit quality within our current portfolio.

Slide 13 outlines our guidance for net income our effective tax rate and operating cash flow.

Before reviewing the components of our guidance, it's worth noting that we're monitoring the corona virus situation and working closely with the Chinese provincial authorities, primarily focused on the wellbeing of our employees and a safe returned to production.

In terms of overall exposure the biggest potential impacted your is in relation to the supply base that serves our international operations.

Situation situation remains fluid and we are working closely with our suppliers and logistics providers.

Our full year outlook for net income remained unchanged and is forecast to be in a range of 2.7 to 3.1 billion with an effective tax rate projected to be between 20% to 24%.

Cash flow from the equipment operations forecast is also unchanged and expected 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 OPEB plans.

I'll now turn the call over to Ryan Campbell for closing comments Brian.

Thanks Brent.

Before we respond to your questions.

I like to offer some thoughts on current market conditions in AG and revisit some of the key initiatives we have underway in 2020.

After a year of uncertainty in 2019, we're encouraged by early signs of stabilization evident in the beginning of 2020.

We view the signing of the phase one trade agreement with China, and the passage of U.S.M.C.A. as important first steps toward removing some of the uncertainty that has weighed on producers sentiment over the last year.

Continued positive sentiment will be dependent in part upon a pickup in U.S. exports agricultural goods to China.

Over the last quarter, we were pleased with the conclusion of our combined early order program and the progress made on our large tractor order book.

Brent noted orders for our combined program ended up in the U.S.

We are finding that despite periods of high uncertainty customers continue to invest in products and services that drive economic value.

Customers are increasingly opting for solutions that offer the highest levels of productivity driving a better outcome for their operations and higher average selling prices for us.

We view this as evidence that we can drive growth and our financial results even in periods. When the number of units we sell is flat to slightly down.

Now shifting our focus to 2020 and beyond.

Let me discuss some key initiatives to help us better execute our strategy.

During our C. S analyst day, John May lead us as priorities as CEO.

First priority.

Focus our capital allocation on investments that one intensify our precision AG leadership.

To.

Expand our aftermarket and retrofit business and three.

Kresa emphasis on products and markets that have the greatest opportunity for differentiation.

Our second priority involves orienting our cost structure, including both our organizational design and footprint to create a more agile company to best capitalize on the significant opportunity in front of us.

To that end, we conducted a voluntary separation program during the first quarter as a step towards achieving greater degrees of agility.

Over the course of the year, we'll pursue additional opportunities pertaining to our overseas footprint and organizational design.

We believe the resulting organization will be more efficient and better equipped to respond to dynamic market conditions.

As we have indicated we will provide updates on these initiatives during our quarterly earnings calls as decisions are made.

No we're ready to begin the Q and a portion of the call. The operator will instruct you on the pulling procedure in consideration of others in our hope to allow more of you to participate please limit yourself to one question. If you have additional questions. We ask that you rejoin the queue.

Yes.

Thank you we will now begin the question and answer session, if you'd like to ask a question or make a comment. Please press star one make sure your phone isn't needed in record your name to introduce your question and you May press star to withdraw that request. My first question or comment comes from Jerry Revich from Goldman Sachs. Your line is open.

Hi, good morning, everyone.

Right I'm wondering if you just expanding on your last comment in terms of organizational structure and.

The opportunity said from a realignment.

And if I'm wrong. There. Thank you folks are set up as a.

Interest organizational structure with.

Very heavy emphasis on shared services and so when we've seen these transitions in the past.

Towards direct regional responsibility there has been really significant benefit at the margin line pretty quickly. So how should we think about to your transition here as an organization compared to what we've seen from others that have had similar transition from.

Matrix to.

Regional responsibilities that that you outlined here.

Yes.

Just a question you know, we're still going through the analysis of what it might look like and.

And what I would point to is you know when we talked to see us and we talked about.

It's from mid cycle margins from 12 and.

10%.

At about 1% would come from a cost structure certainly the voluntary separation program that we just execute it is a component of that the Bergen synergies as a component of that and then the footprint and kind of the re characterization of the organizational design will be the rest of that and so if you think about one point.

I would be over 300 million.

We took about well get about 120 million in savings from the voluntary separations programs. We did in 2019 in 2020, the Bergen synergies a 125 million Euro you get about a similar amount for the rest of it. So we're early yet we'll we'll talk as we make those decisions, but that's how we would characterize it at this point.

Well I know ultimate opportune, you said good could it be bigger than that I guess when we've seen these changes in the past we've seen something closer to 300 basis points of margin improvement is that what's your benchmarking shows or is it too soon to talk about numbers of that size until we.

We're further along.

I think too soon to talk about that we'd still pointed to the numbers that we talked about to give us a 15% as we get through it will certainly provide updates on our quarterly calls.

Thank you.

We'll go ahead and go to our next question.

Thank you. Our next question or comment is from Joe O'dea from vertical research. Your line is open.

Hi, good morning, everyone.

You touched on seasonality of China purchasing of USA commodities, but as we think about getting into the fall and post the phase one agreement.

How are you thinking about that level of activity, whether that should return to a pre trade dispute type of purchasing whether it will be stronger that just based on your evaluation of the phase one agreement.

Joe Thanks for the question I think you know certainly still early I think you know rent alluded to we're at a period of time, where typically now you see the purchases move to South America coming back to North America kind of post our harvest time. So we think there there is some some some time legs there.

I think the real question is.

As we think about how do we do we get to a larger number of purchases and some of the numbers that have out there are roughly two times, what we what we've done kind of historically on historical averages. So I think it's still early to determine exactly what that looks like and also what commodities make that up.

Play play a pretty big role is it.

Continued purchases of soybeans or do we see other commodities things like a poor.

Ethanol and others come into into the trade that necessarily haven't always been there haven't been significant so I think a lot of a lot of questions still there in terms of how that comes through.

As well as you know a in the near term with Corona virus and some of the things that have slowed just overall activity in China, what impact does that have you know on their ability to to make those purchases.

Got it thank you thanks, Joe.

Thank you our next question or comment comes from Stephen Volkmann from Jefferies. Your line is open.

Hi, good morning, everybody.

This year.

I wanted to dig in a little bit to your view of the AG margins. Obviously, they came in quite a bit better than I think some of US expected here in the first quarter and frankly, it's a little tough to kind of hold them down into the level of leaves given in terms of guidance for the full year.

You know when we think about to the tailwind from the headcount reductions savings and probably some kind of mix improvement I would assume it maybe a little bit more production to retail versus last year.

Are there some headwinds that we should be thinking about that kind of offset some of those benefits or.

Is that.

Maybe somewhat of a conservative outlook or Weve skewing towards the higher end of the margin range or something just a little more color on how you're thinking about that.

Yes, Steve given you're right first of all I think that we're pleased with where the first quarter came in a you know margins up on lower sales I think that's positive as we think what the full year I think a few things that we are constantly one.

He is still early you know we're watching the situation in China with Corona virus closely as well as in Brazil, where as we've noted we've started the year a little bit slower retail activity. You know our view there is that picks up its more back half loaded, but but that's something we'll watch pretty closely one other thing.

As we think about first quarter versus the rest of your you know the first quarter. We we had nearly three points of price realization.

Our full year is about two points.

So not as much expected there from from from that perspective, so overall not not a change in or in a range and we think it's there's there's still a lot of moving pieces and feel like that that's prudent maybe one thing to call out in particular, as we think about the second quarter and Brent alluded to it.

His comments.

Our second quarter, we have a few I think.

Maybe unusual seasonal impacts.

In the quarter, one we see much lower cotton sales in Twoq you have this year because they came through one or the first quarter. So that's really just timing of production.

Also we have new product transition in a Waterloo for brand new eat our tractor as well as limited production builds for our new combined.

The result of those two things a we'll we'll certainly impact what were what we're able to produce and shipped during the month.

And then one last thing to think about fusion as we think about for the virus and some of those impacts one of the things that we've thought about is the impact on our supply base, there and the ability to get parts to our to our operations internationally. So we've we've actually in our second quarter included about $40 million of cost.

Of expedited freight.

To to make sure that we're able to.

I have that availability to to get parts into the operations. So that that will all of those things result, and probably a lighter topline and margin line for QQ than what weve seasonally wouldn't see.

Yes, right maybe over just to summarize we certainly feel good about the performance and the first quarter, but you know there's a few moving pieces for the rest of year and it's too early for us to to change our range at this point.

Okay. That's helpful. I appreciate guys.

Thanks, Good and go to our next question.

Thank you. Our next question comes from Tim dying from Citigroup. Your line is open.

Oh, Thank you, yeah, and first Josh Thanks for the disclosures in this line.

But just to continue along that that that training thought in terms, it's the second quarter.

Obviously, the historically the higher seasonal quarter from a margin perspective. The is it the factors you just outlined at our those enough to.

Does that change this year, such that third quarter and you think is higher than the second from a margin perspective or I again, recognizing you don't give quarterly margin guidance, but just has to make sure we understand kind of the magnitude of those impacts yeah, I'd say more similar no between those two than the difference that we've seen in them.

Yes.

So okay to Q3, Q kind of close to on par with one another's correct, yeah. Okay, alright, thanks, a lot the thanks.

And go to our next question.

Next question or comment comes from Jamie Cook from Credit Suisse. Your line is open.

Hi, Good morning, I'm just following on to Steves question on the AG margins again I agree with his thoughts that they have got seems conservative you did it.

Also talk about some of the actions you're taking in Europe with an X. I'm wondering if there's any costs associated with that or how much that's sort of incrementally Fannie weighing on the AG margins relative to how I think about margins in South America already you asked for AG.

So that's my first question I guess my second question on the flip side on the construction margins were a little weaker than I would've expected understanding you kept your margin. The same just sort of your confidence level. There. If there was anything in particular that weighed on the construction margins in the first quarter. Thank you.

So on the AG side sort in the AG side, I mean, I think the as we think about Europe. Some of the things we've already done we can execute on in Fourq you.

19 in one Q so.

As we stand today with where we're at.

Nothing additional to call out if we do further action.

Yeah as Ryan mentioned, we'll we'll lay those out and talk through those but nothing major.

Contemplated right now.

As you think about construction and construction in the quarter, we had lower margins.

The vault voluntary separation expenses, you know 24 million have an impact and then you know lower volume unfavorable mix and then just be under production component.

Our or really the biggest drivers of that lower margin in the in the quarter.

Maybe just the context ends we think about the full year and what do we see there.

We do expect to see mix improve as we go through the year as we as we expect.

Our construction North American construction equipment.

Mix will improve as we as we under produce less throughout the balance of the year.

In addition to that road building.

Which is more seasonally skewed.

As a bigger portion of our total cnf business. This year and is much more heavily weighted there's seasonality to twoq and Threeq you in the year think those are probably the biggest the biggest drivers on on the construction side from margin perspective.

We'll go ahead and thank you our next question. Thanks, Jamie.

Thank you. Our next question or comment is from she scooped up from Stephens. Your line is open.

Hi, good morning, Thanks for taking the question appreciated the color on the supply chain impact in the cost you guys are budgeting for the second quarter.

Just wondering if you can maybe expand on.

Thank you said that the components you make in China for other international markets I'm, just wondering if there's any supply chain.

Type impacts that can be that could come over time with the virus running too.

Japan and South Korea.

Yeah. So when we think about kind of the impacts and potential impacts.

The Corona virus is kind of two to two components like a that we mentioned in your one is direct exposure you know our sales into the China market, that's relatively small for our AG and turf business and for our traditional business.

Building, though as as a bigger exposure there. So road building in China will tend to be 10% to 15% of their overall sales. So.

More of an impact there we did we did see some reduction in the in their topline as a result of the though the lack of activity in that market over the last month or so so we have seen some of that impact.

So that's one the second component is on supply chain and we've got suppliers in China that supply.

You know our operations across the globe. So those are the suppliers were watching closely we're working through our supply management teams working really diligently to understand where each of those are and the process to either you know are they produce in or when are they going to begin to produce so so that's something we're we're watching and monitoring closely there.

To that as I mentioned, that's where we did go ahead and set up a in get capacity to expedite free.

Just two or to make sure we can try to get those parts.

To to our facilities during the quarter.

But if we were made in sort of a extended shut down or see impact from.

Quarantining, and South Korea, or Japan, do you see any impact there and.

I guess I should ask also do you have.

Other component suppliers you can leverage.

Engines in Europe or U.S.

Yeah, I mean first I'd say, it's still really fluid and read very early this is day to day, you know shifting in terms of what's what's going on so.

As we move forward, we'll we'll certainly update but that's kind of what we know today.

And.

As always our supply management teams are always looking at opportunities to resource and lever suppliers that have multiple up multiple locations.

So we're working through all of those all those potential opportunities.

Thanks, Ashish will go and go to our next question.

Thank you. Our next question or comment is from Andy Casey from Wells Fargo. Your line is open.

Thanks, Good morning, everybody.

Question on on cash flow I mean, you had a really good.

First quarter.

In terms of cutting the outflow relative to last year on the operating cash line you didn't really change the.

Full year guidance I'm wondering.

No.

Hey, what.

What do you expect for the balance of the air in terms of working capital and then B.

And then really keep pace with the share repo and I'm wondering if.

That's a signal that you're you're going to keep it dampened for the balance of the air or will that reaccelerate.

Yeah from a cash flow perspective, we maintain the range Oh, we are focused on managing inventory and receivables. We felt really good progress as you noted in the first quarter.

I think overall I'd say, it's early in the year, we didn't adjust our topline ranges nor our net income range those prudent given even just a three months in.

That we that we maintain that from a from a cash flow perspective, Andy. This Ryan we took inventory out throughout the balance of 19, so that inventory reduction evens out over time, a significant in the first quarter, but it evens out although we do still projected inventory reduction with respect to the buyback which is around one.

Third million for the first quarter. That's in line with our historical average you typically first quarter is a use of cash for us as we build some working capital up so nothing to read into that as it's right in line with what we've done historically in the first quarter.

Okay. Thank you. Thanks, Sandy will go into our next question I.

Our next question or comment is from David Raso from Evercore ISI. Your line is open hi. Thank you I'm just trying to do a margin walk for AG and turf for the year. If we just think of the rest of the or the price cost what are you baking in for for the year on price cost for AG or the next nine months.

It would be it would be favorable.

No. It's Josh said, we did we did about three and price the first quarter full year is to so there's an impact of that going through the rest of the year, so price cost still favorable but less favorable than the first quarter well I'm just trying to figure price cost was 197 positive for the first quarter.

Yeah, the price change and the production cost change the rest of the your implied pricing is another $340 million or so do you think your cost go back up as I'm, just trying to get the walk here from you're implying something about the decrementals on the volume declines the rest of the year.

But the savings from the separation costs within this division. The next nine months roughly should offset incremental freight in the second quarter.

That's right away thinking about those two moving parts separation savings versus a 40 million.

Freight cost from Corona virus in Twoq.

Yeah, well I think it maybe a little or their little more than trying to just compare.

One or two components I mean overall as Ryan said price points of price for the full year material and freight or favorable for us in 2020 and that includes the additional already 40 million. So still still favorable we do have a couple of things that would be going against us their incentive.

It is higher in the year pension costs in open costs are higher in the year. So there are some some moving pieces there that that impact the overall net net there.

And related to that same question the under production for the year in AG and turf has that changed at all from three months ago be at high horsepower versus low horsepower magnitude any color there would be appreciated. Thank you.

Yeah, No no change in terms of the expectations of how we produce a relative to two retail or or year over year.

So large AG still roughly in line small AG underproduction.

Thank you thanks, David.

And go to our next question.

Our next question or comment comes from Nick del break from Baird. Your line is open.

Thank you a good morning, I'm going back to construction can you maybe help us understand sort of what's baked into your guidance in terms of Earth moving versus a road building and I'm kind of curious here as you do you think about your Earth moving business.

Do you think about the second quarter and beyond that what point in time do you think you're going to be in a position where you can produce a little closer to retail demand is this.

Maybe late in 2020 or more of a 2021 thing.

Yeah. Thanks, Mick I think when we think about was construction and forestry and if we look at kind of North American construction equipment, which I think is where you're.

A question really lies.

His fruit for that for the balance of the year, we will underproduce retail demand.

It's more front half loaded up certainly the first quarter, you're going to produce more significantly than we will the balance of the year. So you know as I mentioned, a little bit talking about mix or in that business improving over the year. That's a result of.

Less underproduction of that CE.

North American construction equipment.

During the <unk> remain remaining quarters of the year.

And as road building down more or less than a segment average guidance.

Yes.

Can you quantify that.

Yeah, I mean, it's a 5% or less.

Okay. Thank you.

Thanks, We'll go next question what are next question. Our next question or comment is from Chad Dillard from Deutsche Bank. Your line is helping.

Hi, good morning, guys.

Turning to.

So just wanted to go back to the question of small AG and just wonder understand where did a retail cells.

End up versus your expectations that first quarter and same question on on the underproduction order that end up versus your initial expectations.

And how are you thinking about you know when a you'll be able to produce in line with retail is it is it and later in 2020 or are we thinking about what it longer.

Secondly, I'm just love to get some some comments on how you're seeing and new eight our adoption unfold.

Any indication on you know penetration uptick a uptake from the farmers.

Yeah, so as it relates to small tractors in North America.

It's probably best to look at this on the full year given seasonality.

We are as Ryan mentioned, we expect to Underproduce.

Retail demand.

20 and contractors.

And that hasn't changed all around 15% for the year. So that's that's.

The plan that we're executing two and we think that puts us in a really solid position from an inventory to choose to sales perspective, when we when we end the year. Yeah. So we would project 2021, we're producing in line with retail and that business.

As it relates overall you know eight are the new aydar, we've seen a good order activity there.

We are were ordered out further than we were a year ago, that's a little bit misleading just in that were impacted by the transition time as we move change the factory over to produce producing the new model.

But I think we've seen really really positive response to to the eight our you know in particular the news for track option.

As than particularly well received and lots of lots of interest in activity there for what that machine delivers so.

We'll get about that.

Okay. Thank you well go to our next question.

Thank you. Our next question or comment comes from Handbag, then from JP Morgan Your line is helping.

Hi, good morning, I, if we could switch back to the fundamentals I'm curious to hear your thoughts on the strength that we out versus the dollar means up 40% year to date.

And what you think that might do to U.S. exports as we go forward to add a couple that with that they Argentinian peso and maybe the AG and that Ukraine, and the corn side at persist at the present, a reality being site.

What are your thoughts in terms of FX and strong dollar had an impact it has done competitiveness of U.S. agriculture.

Yes, so I think.

Certainly we've seen deterioration, particularly in South America and around the peso what has been.

Going on there so you know that does.

In fact competitiveness, particularly the short term.

It also benefits profitability for those producers in those markets as well. So you know there's there's a puts and takes a both of those I mean, I think importantly, as we think about this from from our perspective is you know where are.

The the fact that we continue to see demand rowing consumption of Greens growing and there are only a few places that produce these greens, particularly soybeans in math.

At scale and at relatively low cost of production so.

We think those places are the U.S., Brazil, Argentina to a lesser extent, so we think theres going to be the need for those grains.

Because those are really going places that are coming from so certainly.

Timing wise there there can be advantages won or lost as if that's moves, but I think big picture, we step back for like the demand for Green and the fact that these are only grown in a few places at scale is an important.

Thing two to three goal.

And along those lines, just I'm bridge that again.

Well I want to farmers be spending money now than they ever.

Favorable financing has gotten to disappear midyear.

Yeah. So I mean, I think the well we talked about a little bit I think the some of the caution there has been around trade and you see you see a a significant shift.

In China's purchase pattern I think that's pause the mark a little bit and I think we saw this over the over you know, particularly the end of last year in into this year, a little bit of the concern on on financing I think one of the things we've seen as the government came out and talked about phenomena. As we go forward I think that help eliminate some of the be concern.

As Weve now talking about a program that begins to transition to to less subsidization or less interest rate equalization.

Referred to in the market.

And getting through more of a have a free market system and I think a couple of things that support that one is we've seen pretty low interest rates the benchmark rate in Brazil.

That's very low levels, which has been positive so that certainly helps.

And our largest customers in Brazil for quite some time have had access to tubing.

Private bank financing so.

We actually believe longer term as we as we begin this transition that that this will create more stability in the market and less volatility in the in the AG machinery sector because it.

We will be more driven by actual demand and not financing availability or or the like.

As it relates maybe one other note on Brazil lots of folks look at the shipment numbers coming out of Brazil.

And on to that and you know as as earlier noted someone made the comment you know we've seen weakness as you noted wire, we see more activity and one one thing that we have seen as we've looked at that market and you look at by horsepower split their segments, there's been a pretty big distinctions really been occurring over the last three years, where we're seeing.

Hi horsepower and then and then they're reporting Thats above 130 horsepower has been growing whereas you've seen lower horsepower.

Has been declining year on year.

Year to date, we're seeing the lower horsepower ranges down double digits.

Well were up.

In the high horsepower side. So you know there there are few dynamics, there, but certainly the growth in high horsepower and technology.

We see as very positive.

Over the last few years, that's certainly helped to drive the market share gains, we've seen and we think that continuing trend.

Helps us in particularly as you start to deliver more and more precision AG into the market. So long answer, but I think that's you know some of how we're viewing the Brazilian market will go and jumped to our next question.

Thank you. Your next question or comment comes from Seth Weber from RBC. Your line is helping.

Hi, Good morning. This is brendan on for Seth I like to touch on the higher losses on the lower residual insight you called this out last quarter as well so I'd like to get a ask if you think that you've lowered them to a sufficient enough level, where kind of be less headwind going forward and then if you could talk to weather the lower residuals you were saying.

How is that on your AG equipment, your construction equipment or both.

Yeah, Thanks credit.

So we noted losses in GDP in the quarter, a an operating leases.

Year over year, just for context does a little bit under $10 million or just the size that in terms of what we saw primarily those losses came in through our Cnf Division really as a result, two things a little bit of pressure on the overall use environment CNS with higher inventories that it puts some downward pressure on prices and then we did take some action during.

The quarter two to move aged inventory, a and had relatively significant reductions of our of our mature at least inventory. There that that was that was of an older vintage. So those are the things we saw there from an AG and turf perspective.

Portfolio was pretty stable, where recoveries, we didn't see much change and return rates actually.

Proved a little bit for us in the quarter. So we're really early on now as we start to think about the changes we made a quarter ago, but very very focused on working with our dealers through the process of retaining more of those whose lease maturities programs in place to to incentivize or both.

Dealers and customers to engage in managing that that inventory.

But at a much higher level.

With that will go and go to our next question.

Our next question or comment is from Joel Tiss from BMO. Your line is helping.

Hey, guys hasn't gone.

I, just wonder or maybe I'll blue two quick ones together, how far can can farmers go before they start replacing their equipment like do you have any history on what the longest kind of drought of buying has been and then and then on the focus side.

Contemplating exiting whole geographies like bigger chunks or is this just more like tweaking and looking you know a little more granularly. Thank you.

Yeah, maybe start answering your second question I think when we think about there I'd say, it's much more focused in terms of.

Products and markets how can we best serve those customers have you do that in an efficient way, while also delivering the customer experience that they expect and deserve than that we want to deliver so I think it's more targeted bend, and saying, you know entire geography or or or product form, but being thoughtful in terms of how can we best serve those customers.

Yeah, maybe it's a little more on how we go to market as opposed to which markets we're going into.

Okay and as it as it pertains to the age of.

We or you know how long can someone go.

Until you see a you know purchases were in the U.S. in particular, we think about age of fleet. We're now pushing pass kind of what had been the historically blur equilibrium you know going back to say 2000. So we're on high horsepower tractors and combines and we're pushing beyond the point that we've kind of.

Ran at a through really the early two thousands. So we think were there in terms of the drivers replacement demand and on top of that technology in productivity.

To to see more of that that activity I think the the uncertainty we've been dealt with over the last 18 months.

As a pause a lot of that but I think you were talking to dealers talking to our team I mean, certainly theres appetite and interest there.

And when we can deliver not only productivity, but cost reduction missing about overall.

You know for for a farmer a there's there's there's value there, Canada, maybe a little bit different situation, where we see the age of that fleet is a little younger and as a result.

And Brian alluded to this in his comments, maybe a little bit further out two to some of the replacement just given that market didn't did not cycle as as much down or up.

So we saw in the U.S.

Thanks Joel.

Go ahead and go to our next question.

Our next question or comment comes from Courtney knock a bonus from Morgan Stanley. Your line is open.

I think I've sort of question maybe first if you guys can just talk about the pricing expectations I think pricing was a little bit better than we'd expected in the first quarter and you did raise it for the year, but stones and find the right. So it's not worth so maybe can you just talk about where were you saw the strength.

Quarter, and why it should decelerate intact for the remainder of the or and then secondly, I'm on the back in the last question.

I think when you talked about North America large AG industry outlets sustain it down five it definitely sounds like U.S., it's a little bit better than you originally expecting in Canada is a little bit worse. So when you have been talking about you know no change in in the equipment replacements catch all.

Maybe first I just wanted to make sure that that was saying that the pause that you thought happened last year, it's going to continue into 2020, and then I think you've historically talked about.

Not in commodity prices.

Well, you think that commodity prices, what can talk to completion schedule.

And if you can just kind of give us some type of framework for where commodity prices down before you start to see that replacement Scott.

Thanks.

Yeah. So I think you as you think about the down five and large AG in North America, you, you're exactly right and that.

We see probably a little bit of improvement on the U.S. side and weaker in the Canada side. So that is that's that's a very fair, we talked for and talk a little bit about what we saw U.S. versus Canada on combines we see kind of a similar.

Similar impact as we look at large tractors from and from an order book perspective. So those are.

So that's kind of the dynamic where that we've seen there.

As you think about price and how the quarter.

For Cnf, we expect a point, we got about a point in the first quarter and we expect that for the year.

AG side, a little bit stronger price in the first quarter than our full year, especially saw some improvement in overseas markets.

So that's a that was.

On the margins helped us a little bit probably pushed us a little bit above what what we had expected coming into into the quarter.

And then lastly.

On the commodity prices and impact on replacement.

Yeah. So I mean, I think you know the.

Easing of trade pensions and opening up a market access we think is really important that's the first step I think importantly, I think folks want to see a green actually flowing green actually moving purchases occurring and we think thats, particularly important I mean as you think about.

Absolutely prices.

Weve.

I don't believe that you know in the range of 350, corn and you know in $9. So soybeans can drive replacement demand that's supportive of replacement demand. So Oh I think the if we actually start to see Greens move I think that provides a little more.

Competent in terms of the access actually being there.

And we think is supportive of replacement demand.

So we'll go ahead and go to our next question. Thanks Gordon.

Our next question or comment comes from Ross Gilardi from Bank of America Your line itself.

Thanks for squeezing me in guys.

<unk>.

I got cut off for a couple of minutes. So hopefully nobody already asked this but could you clarify what the the year on year swing and dealer inventories was and in AG and turf just reason being if you look at your retail sales, it's hard to tell what the number residents with tally that it looks like it's it's down.

More than the you know the 4% revenue decline you had in the quarters any any color. There I would appreciate I'm, just trying to get out whether or not you know dealer restocking contributed meaningfully to.

The to maybe less than expected revenue declined in Q1.

Yeah, I think when we look at inventory to sales are in particular, we look at kind of 100 horsepower and above.

Year over year it came down.

From say 30, 831 and combines we saw come down as well I think overall from a a from a small tractor perspective, we're.

Were relatively in line with the industry and you know maybe down a little bit from where we were a year ago, but I think overall I'd say you know we me.

Continue to feel good about you know where where we are from a large AG perspective in the plans to execute for for a small for small tractors.

Okay. Thank you. Thanks, So I think we have time for one more question.

Thank you and our last question comes from Jerry Revich from Goldman Sachs. Your line is open.

Hi, Thanks for taking the follow up I'm wondering if you could talk about the margin improvement plans for Cnf, specifically, so a lot of what we've spoken about precision that again.

The pricing is really focused on on the AG part of the equation I'm wondering if you just have a little bit of a discussion on opportunities for the see upside beyond the FERC in synergies to get closer to about 50% corporate target.

[noise] yeah. Thanks, Jerry I mean, I think you know maybe at high level and we think about 15% you know that is.

The margin level, we expect to deliver our businesses may not all be exactly that number but all contributing to to getting there is probably an important distinction, but as we think about our construction business.

And in particularly as we add in road building, which we feel like has a strong margin profiles well it gives us an opportunity I.

I think from a technology perspective, we do we do see opportunities to be able to leverage some of the things that we've done on a and our AG business.

Into into our construction business. So we think there's there is opportunities that had and create value there for four customers, which is an important point and that's further out but but we think there's there's opportunity. There I'd say you know today very very focused on managing the business managing inventories integrating birkin and delivering on the synergy.

Okay. That's it would be the near term focus areas.

Okay. Thank you yeah, maybe one last thing and we talked about at at our analyst at CES is you know the aftermarket opportunity.

And retrofit and I think in particularly in construction you know the ability to.

Take care of that product over the lifecycle from a parts and service perspective, leveraging telematics and those sorts of things that we have today.

We think can can deliver deliver margin opportunity for <unk> for all of our businesses as we go forward.

Thanks, Thank you.

Well that concludes our call. We appreciate all the interest Oh, please reach out if you've got question. Thank you.

That concludes today's conference call. Thank you for your participation you may disconnect at this time.